SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-9747
EXCALIBUR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0278207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1921 Gallows Road, Suite 200, Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 761-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes |X| No __
As of June 8, 2000, 14,868,378 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets
April 30, 2000 (unaudited) and January 31, 2000.....................3
Consolidated Statements of Operations and Comprehensive
Loss(unaudited)
Three months ended April 30, 2000 and 1999..........................4
Consolidated Statements of Cash Flows (unaudited)
Three months ended April 30, 2000 and 1999..........................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................10
PART II. OTHER INFORMATION
Items 1. - 6. ............................................................16
Signatures ............................................................17
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
April 30, January 31,
2000 2000
ASSETS (Unaudited)
-------- --------
Current Assets:
Cash and cash equivalents........................ $ 10,625 $ 10,884
Short term investments........................... 178 178
Accounts receivable, net of allowance for doubtful
accounts of $924 and $830, respectively..... 13,124 14,254
Prepaid expenses and other ...................... 2,358 2,354
-------- --------
Total current assets....................... 26,285 27,670
Equipment and leasehold improvements, net of
accumulated depreciation of $7,875 and $7,594,
respectively....................................... 2,066 1,766
Other assets.......................................... 1,003 1,251
-------- --------
Total assets................................. $ 29,354 $ 30,687
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. 2,092 1,982
Accrued expenses................................. 1,633 2,474
Deferred revenues................................ 3,891 3,926
-------- --------
Total current liabilities.................. 7,616 8,382
Shareholders' Equity:
5% Cumulative convertible preferred stock, $0.01 par
value, preference in liquidation $10 per share plus
dividends, 1,000 shares authorized; 27 shares
issued and outstanding....................... 271 271
Common stock, $0.01 par value, 40,000 shares authorized;
14,755 and 14,646 shares issued and outstanding 147 146
Additional paid-in capital....................... 79,151 78,024
Accumulated deficit ............................. (57,807) (56,138)
Accumulated other comprehensive income (loss).... (24) 2
-------- --------
Total shareholders' equity................... 21,738 22,305
-------- --------
Total liabilities and shareholders' equity $ 29,354 $ 30,687
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(unaudited)
(in thousands, except per share data)
Three Months Ended
April 30,
200 1999
-------- --------
Revenues:
Software.......................................... $ 7,511 $ 6,527
Maintenance....................................... 1,873 1,232
-------- --------
9,384 7,759
-------- --------
Expenses:
Cost of software revenues......................... 1,142 1,023
Cost of maintenance revenues...................... 417 544
Sales and marketing............................... 5,569 3,894
Research and product development.................. 2,688 2,489
General and administrative........................ 1,331 1,278
-------- --------
11,147 9,228
-------- --------
Operating loss........................................ (1,763) (1,468)
Other income (expenses):
Interest income, net.............................. 95 58
Write-off of investment in affiliate.............. - (471)
-------- --------
Net loss.............................................. (1,668) (1,882)
Dividends on preferred stock.......................... 3 3
-------- ---------
Net loss applicable to common shareholders............ $ (1,671) $ (1,885)
======== ========
Basic and diluted net loss per common share........... $ (0.11) $ (0.14)
Weighted-average number of common shares outstanding -
basic and diluted ................................ 14,714 13,927
Other comprehensive income (loss):
Net loss.............................................. $ (1,668) $ (1,882)
Foreign currency translation adjustment........... (26) 63
-------- --------
Comprehensive loss.................................... $ (1,694) $ (1,819)
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months
Ended April 30,
2000 1999
-------- --------
Cash Flows from Operating Activities:
Net loss......................................... $ (1,668) $ (1,882)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 326 406
Bad debt expense........................... 100 40
Write-off of investment in affiliate....... - 471
Changes in operating assets and liabilities:
Accounts receivable........................ 874 (579)
Prepaid expenses and other assets.......... 205 84
Accounts payable and accrued expenses...... (703) (690)
Deferred revenues.......................... 1 165
-------- --------
Net cash used in operating activities............ (865) (1,985)
-------- --------
Cash Flows from Investing Activities:
Purchases of equipment and leasehold improvements (601) (330)
Purchase of investments.......................... - (178)
-------- --------
Net cash used in investing activities............ (601) (508)
-------- --------
Cash Flows from Financing Activities:
Gross proceeds from the issuance of common stock. 67 5,037
Proceeds from the exercise of stock options...... 1,061 999
Issuance costs in connection with private placement - (256)
-------- --------
Net cash provided by financing activities........ 1,128 5,780
-------- --------
Effect of Exchange Rate Changes on Cash.............. 79 86
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents. (259) 3,373
Cash and Cash Equivalents, beginning of period....... 10,884 5,851
-------- --------
Cash and Cash Equivalents, end of period............. $ 10,625 $ 9,224
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2000
(1) THE COMPANY
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur") and its wholly owned subsidiaries. These
entities are collectively referred to hereinafter as the "Company." All
significant intercompany transactions and accounts have been eliminated.
The Company designs, develops, markets and supports high performance, accurate,
scalable and secure search- powered software solutions. Excalibur offers a suite
of intelligent search solutions for corporate intranets, Internet e-commerce,
online publishing, application service providers ("ASP") and the original
equipment manufacturer ("OEM") market that enables individuals to quickly
capture, analyze, index, catalog, access, navigate, retrieve, publish and share
relevant information residing on an enterprise's networks, intranets, extranets
and the Internet. The Company offers consulting, training, product maintenance
and system implementation services in support of its software products. The
Company licenses its software products directly to commercial businesses and
government agencies throughout North America, Europe and other parts of the
world and also distributes its software products to end users through license
agreements with value-added resellers, system integrators, original equipment
manufacturers, application service providers and other strategic partners.
The Company incurred a net loss of $1.7 million in the three month period ended
April 30, 2000 and has incurred cumulative losses of approximately $12.5 million
over the last three fiscal years. The accumulated deficit at April 30, 2000 was
$57.8 million. The Company's operations are subject to certain risks and
uncertainties including, among others: the dependence upon the timing of the
closing on sales of large software licenses; actual and potential competition by
entities with greater financial resources, experience and market presence than
the Company; rapid technological changes; the success of the Company's product
marketing and product distribution strategies; the risks associated with
acquisitions and international expansion; the need to manage growth; the need to
retain key personnel and protect intellectual property; and the availability of
additional capital financing on terms acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These consolidated financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements, and the notes thereto, included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.
In the opinion of management, the consolidated financial statements for the
fiscal periods presented herein include all adjustments that are normal and
recurring which are necessary for a fair statement of the results for the
interim periods. The results of operations for the three month period ended
April 30, 2000 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 2001.
<PAGE>
Revenue Recognition
Revenue from the sale of software licenses is recognized upon shipment of
product, provided that the fee is fixed and determinable, persuasive evidence of
an arrangement exists and collection of the resulting receivable is considered
probable. Software revenues include revenues from licenses, training and system
implementation services. Historically, the Company has not experienced
significant returns or exchanges of its products from direct sales to customers.
Revenue related to customer support agreements is deferred and recognized
ratably over the term of respective agreements. When the Company provides a
software license and the related customer support arrangement for one bundled
price, the fair value of the customer support, based on the price charged for
that element separately, is deferred and recognized ratably over the term of the
respective agreement.
Customization work is sometimes required to ensure that the Company's software
functionality meets the requirements of its customers. Under these
circumstances, the Company's revenues are derived from fixed price contracts and
revenue is recognized using the percentage of completion method based on the
relationship of actual costs incurred to total costs estimated to be incurred
over the duration of the contract.
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist of funds deposited in money market accounts. Consequently, the carrying
amount of cash and cash equivalents approximates fair value. The balance of
short term investments at April 30, 2000 consisted of a certificate of deposit
pledged to collateralize a letter of credit required for a leased facility.
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted loss per common share includes the potential dilution that would
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Options to purchase 3,014,602 shares of common
stock and cumulative convertible preferred stock that were outstanding at April
30, 2000 were not included in the computation of diluted loss per share as their
effect would be anti-dilutive. As a result, the basic and diluted loss per
common share amounts are identical.
Income Taxes
Deferred taxes are provided utilizing the liability method, whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
has provided a full valuation allowance against its net deferred tax asset as of
April 30, 2000 and January 31, 2000, respectively.
(3) CAPITALIZATION
During the first quarter of the current fiscal year, the Company issued 105,000
shares of common stock upon the exercise of options resulting in total cash
proceeds of $1,061,000. Additionally the Company issued 4,000 shares of common
stock to participants of the employee stock purchase plan resulting in cash
proceeds of $67,000.
<PAGE>
(4) SEGMENT REPORTING
The Company aligns its business into two operating segments. The Excalibur
Applications Group develops, markets and services the Excalibur RetrievalWare
suite of products and focuses on large corporations and government organizations
building knowledge management intranets and portals, as well as Internet based
e-commerce and online service businesses. The Excalibur Media Services Group
develops, markets and services the video product line and provides software
products and services primarily to original equipment manufacturers ("OEM") and
application service providers ("ASP") focusing on internet and intranet video
content management. Media Services Group revenues are generated primarily from
OEM and ASP transactions, which may involve development and customization by the
Company. While OEM deals are a significant component of the Applications Group
revenues, the majority of revenue is generated from licensing the RetrievalWare
suite of products directly to corporations and government organizations building
intranets and Internet based e-commerce and online service businesses.
The Company does not identify or allocate assets by operating segment.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the Applications Group and Media Services Group for the three
month periods ended April 30, 2000 and 1999. Expenses for each segment consist
of direct and allocated expenses.
Applications Group Media Services Group Total
------------------ ------------------ ------------------
Three months ended Three months ended Three months ended
April 30, April 30, April 30,
2000 1999 2000 1999 2000 1999
------------------ ------------------ ------------------
Total Revenues $ 8,661 $ 6,849 $ 723 $ 910 $ 9,384 $ 7,759
Operating
Expenses 8,160 7,027 2,987 2,201 11,147 9,228
------------------ ------------------ ------------------
Operating
Income (Loss) $ 501 $ (177) $ (2,264) $ (1,291) $ (1,763) $ (1,468)
------------------ ------------------ ------------------
Major Customers
In the current quarter, revenues derived from one customer accounted for
approximately 19% of the Company's total revenues.
(5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company believes the adoption of SFAS Nos. 133
and 137, which will be effective for the quarter ending April 30, 2001, will not
have a material effect on the financial statements.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." This bulletin, as amended by Staff
Accounting Bulletin No. 101A, establishes more clearly defined revenue
recognition criteria than previously existing accounting pronouncements and is
effective for the Company for the quarter ending July 31, 2000. The Company is
evaluating the full impact of this bulletin to determine the impact on its
financial position, results of operations and cash flows but does not anticipate
that it will have a material effect.
<PAGE>
(6) LINE OF CREDIT
The Company has available a $3,000,000 line of credit under an agreement with a
bank which expires on September 20, 2000. Up to $250,000 of borrowings may be in
the form of letters of credit. The line of credit is collateralized by
substantially all corporate assets. Borrowings under the line of credit bear
interest at the lender's prime rate (9.0% at April 30, 2000) plus up to 1%. The
agreement requires the Company to comply with certain financial covenants that
are computed on a monthly basis and prohibits additional borrowings without the
bank's approval. The Company was in compliance with all covenants at April 30,
2000. As of April 30, 2000, no borrowings were outstanding under the line of
credit.
(7) SUBSEQUENT EVENT
On May 1, 2000, the Company and Intel Corporation jointly announced an agreement
to form a new company that will enable owners of branded high-value content to
produce and securely sell their audio and video content over the Internet. The
Company will combine its entire business operations with Intel's Interactive
Media Services division, which is composed of three operating units that
includes over sixty people, several customer contracts, ten patents and
forty-five technology licenses. In addition, Intel will contribute $150 million
in cash to the new company. In exchange for these contributions, Intel will
receive 49% of the new company's voting stock and 60% of the new company's
equity on a fully-diluted basis. Excalibur shareholders and present option
holders will receive 51% of the new company's voting stock and 40% of the new
company's equity on a fully-diluted basis in exchange for their Excalibur stock.
Excalibur shareholders will receive one share of stock in the new company for
each share they hold of Excalibur. The transaction is subject to regulatory
review, approval of the stockholders of the Company and other customary closing
conditions. Details of this agreement and additional information are contained
in the Company's Form 8-K filed with the Securities and Exchange Commission
("SEC") on May 3, 2000 and other related filings with the SEC subsequently made
by the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements about the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report are based on information available to the Company on the
date hereof and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements contained herein
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this report.
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers, application service providers and other strategic partners.
Revenues are provided under software licenses with new customers and from the
related sale of product maintenance, training and implementation support
services. Additions to the number of authorized users, upgrades to newer product
versions and the renewal of product maintenance arrangements by customers
pursuant to existing licenses also provide revenues to the Company. Under
software maintenance contracts, customers are typically entitled to receive
telephone support, software bug fixes and new releases of particular software
products when and if they are released.
The Company aligns its business into two operating segments. The Excalibur
Applications Group develops, markets and services the Excalibur RetrievalWare
suite of products and focuses on large corporations and government organizations
building knowledge management intranets and portals, as well as Internet based
e-commerce and online service businesses. The Excalibur Media Services Group
develops, markets and services the video product line and provides software
products and services primarily to original equipment manufacturers ("OEM") and
third party application service providers ("ASP") focusing on Internet and
intranet video content management. Media Services Group revenues are generated
primarily from OEM and ASP transactions, which may involve development and
customization by the Company. While OEM deals are a significant component of the
Applications Group revenues, the majority of revenue is generated from licensing
the RetrievalWare suite of products directly to corporations and government
organizations building intranets and Internet based e-commerce and online
service businesses.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the Applications Group and Media Services Group for the three
month periods ended April 30, 2000 and 1999. Expenses for each segment consist
of direct and allocated expenses.
Applications Group Media Services Group
----------------------- -----------------------
Three months ended Three months ended
April 30, April 30,
2000 1999 2000 1999
--------- --------- --------- ---------
Total Revenues $ 8,661 $ 6,849 $ 723 $ 910
Operating Expenses 8,160 7,027 2,987 2,201
--------- --------- --------- ---------
Operating Income (Loss) $ 501 $ (177) $ (2,264) $ (1,291)
--------- --------- --------- ---------
<PAGE>
On May 1, 2000, the Company and Intel Corporation jointly announced an agreement
to form a new company that will enable owners of branded high-value content to
produce and securely sell their audio and video content over the Internet. The
Company will combine its entire business operations with Intel's Interactive
Media Services division, which is composed of three operating units that
includes over sixty people, several customer contracts, ten patents and
forty-five technology licenses. In addition, Intel will contribute $150 million
in cash to the new company. In exchange for these contributions, Intel will
receive 49% of the new company's voting stock and 60% of the new company's
equity on a fully-diluted basis. Excalibur shareholders and present option
holders will receive 51% of the new company's voting stock and 40% of the new
company's equity on a fully-diluted basis in exchange for their Excalibur stock.
Excalibur shareholders will receive one share of stock in the new company for
each share they hold of Excalibur. The transaction is subject to regulatory
review, approval of the stockholders of the Company and other customary closing
conditions. Details of this agreement and additional information are contained
in the Company's Form 8-K filed with the Securities and Exchange Commission
("SEC") on May 3, 2000 and other related filings with the SEC subsequently made
by the Company.
Results of Operations
Revenues
Total revenues increased 21% in the first quarter of the current year over the
first quarter last year. Software revenues (licenses and services revenues) from
Excalibur RetrievalWare increased 24% in the first quarter of the current year
to $7.0 million from $5.6 million in the first quarter of the prior year.
RetrievalWare revenues represented 93% of software revenues in the first quarter
of the current year compared to 86% in the first quarter last year. Software
revenues from the Screening Room product decreased 44% to $0.5 million in the
current quarter from $0.9 million in the first quarter of last year. Revenues
from Screening Room represented 7% of software revenues compared to 14% in the
first quarter last year. Total software revenues increased 15% in the first
quarter this year to $7.5 million from $6.5 million in the first quarter last
year.
The charts below summarize the components of revenues and expenses, including
the amounts expressed as a percentage of total revenues, for the three month
periods ended April 30, 2000 and 1999, and the percentage change in the amounts
between fiscal periods (dollars in thousands).
Increase/
Components of Revenue and Expenses (Decrease)
Three Months Ended April 30,
2000 1999
$ % of total $ % of total %
revenues revenues
---------------- ---------------- -----
Revenues:
RetrievalWare $ 7,011 75 % $ 5,642 73 % 24 %
Screening Room 500 5 885 11 (44)
---------------- ---------------- -----
Total Software 7,511 80 6,527 84 15
Maintenance 1,873 20 1,232 16 52
---------------- ---------------- -----
Total revenues $ 9,384 100 % $ 7,759 100 % 21 %
---------------- ---------------- -----
Expenses:
Costs of sales $ 1,559 17 % $ 1,567 20 % (1)%
Sales and marketing 5,569 59 3,894 50 43
Research and product
development 2,688 29 2,489 32 8
General and
administrative 1,331 14 1,278 16 4
---------------- ---------------- -----
Total expenses $ 11,147 119 % $ 9,228 119 % 21 %
---------------- ---------------- -----
<PAGE>
The Company primarily sells to three markets: corporations and large
organizations with intranets, on-line content providers and Internet
e-businesses, and the OEM market. The revenue increase over the first quarter of
last year was driven by sales to Internet e-businesses and on-line content
providers. The Company recognized $1.8 million in the first quarter from a
development and licensing agreement with Found.com to utilize Excalibur
RetrievalWare WebExpress for advanced search and retrieval on its e-commerce
network. In the current quarter, revenues derived from this customer accounted
for approximately 19% of the Company's total revenues. The contract was executed
in October 1999 and most of the revenue recognized to date is comprised of
license fees. There are now approximately 80 customers using Excalibur products
to power online information services and e-commerce applications. This quarter,
44% of license revenues were generated from sales to the online services market
compared to 20% in the first quarter last year. Sales to the intranet or
knowledge management market were 28% of license revenues in the first quarter
compared to 50% last year. OEM sales comprised 28% of first quarter license
revenues compared to 30% in the comparable quarter last year.
Software maintenance and customer support revenues increased 52% in the first
quarter this year to $1.9 million from $1.2 million in the first quarter last
year. The increase was attributable primarily to a non-recurring revenue amount
of approximately $0.4 million from one of the Company's maintenance contracts as
well as to increases in RetrievalWare license revenues.
Operating Expenses
Costs of sales decreased 1% to $1.6 million in the first quarter of the current
year. Costs of sales expressed as a percentage of total sales were 17% in the
current quarter compared to 20% in the first quarter last year. In absolute
dollars, costs of sales in the first quarter were about equal to last year; the
decrease in costs of sales as a percentage of total revenues compared to last
year was due to increased total revenues in the first quarter of this year
compared to last.
Sales and marketing expenses increased 43% in the quarter ended April 30, 2000
to $5.6 million from $3.9 million in the first quarter last year, representing
59% and 50% of total revenues, respectively. The increase in expenses was due to
growth in sales and marketing personnel and higher sales commissions, in line
with higher revenues this year. The Company also experienced a growth in
marketing program expenses in the first quarter as it embarked on a corporate
advertising and branding campaign.
Total research and product development costs increased 8% to $2.7 million in the
first quarter of the current year compared with $2.5 million in the first
quarter last year. The growth in expenses was due to increased investment in
both the text and video product lines as the Company continued to make
enhancements to its RetrievalWare and video products. In the first quarter, the
Company announced support for the Arabic, Chinese, Dutch, Italian, Japanese and
Korean languages, making RetrievalWare one of the most comprehensive
international search products available. The Company also announced the release
of Screening Room Version 2.2. The Screening Room upgrade release provides
enhancements for video ingestion and capture, added scalability capabilities,
new user interfaces and published APIs for user customization.
General and administrative expenses increased $53,000, or 4% in the first
quarter to $1.3 million, representing 14% of total revenues in the first quarter
compared to 16% of total revenues in the first quarter of last year. The
increase in absolute dollars was attributable to higher personnel related
expenses, including salaries and travel.
Net interest income increased by $37,000, or 63%, to $0.1 million in the first
quarter of the current year due to a higher level of invested funds.
<PAGE>
Liquidity and Capital Resources
In the three months ended April 30, 2000, the Company's combined balance of
cash, cash equivalents and short-term investments decreased to $10.6 million
from $10.9 million at January 31, 2000 as summarized below (in thousands). At
April 30, 2000, investments consisted of a certificate of deposit pledged to
collateralize a letter of credit.
April 30, January 31,
2000 2000 Change
--------- --------- ---------
Cash and cash
equivalents $ 10,625 $ 10,884 $ (259)
Short-term
investments 178 178 -
--------- --------- ---------
Total $ 10,803 $ 11,062 $ (259)
========= ========= =========
During the three months ended April 30, 2000, cash of $0.9 million used to fund
operating activities was less than the net loss of $1.7 million primarily due to
a decrease in accounts receivable, prepaid expenses, and other assets of $1.1
million. A decrease in accounts payable and accrued expenses used $0.7 million.
Non-cash charges totaling $0.4 million included depreciation and amortization of
$0.3 million.
In the first quarter of the current year, the Company's investing activities
used $0.6 million due to the purchases of equipment and leasehold improvements.
Cash provided by financing activities was $1.1 million for the three months
ended April 30, 2000. Cash of approximately $1.1 million was provided from the
exercise of employee stock options and $0.1 million was provided from the
issuance of stock under the employee stock purchase plan.
The Company has available a $3,000,000 line of credit under an agreement with a
bank which expires on September 20, 2000. Up to $250,000 of borrowings may be in
the form of letters of credit. The line of credit is collateralized by
substantially all corporate assets. Borrowings under the line of credit bear
interest at the lender's prime rate (9.0% at April 30, 2000) plus up to 1%. The
agreement requires the Company to comply with certain financial covenants that
are computed on a monthly basis and prohibits additional borrowings without the
bank's approval. As of April 30, 2000, no borrowings were outstanding under the
line of credit.
The Company's balances of cash and cash equivalents at April 30, 2000 and its
funds generated from operations, if any, are expected to provide sufficient cash
to meet the Company's current projected needs for the foreseeable future.
Historically, the Company has used cash provided primarily from sales of its
common stock to fund its operations. If the Company fails to achieve its
operating plan for fiscal year 2001, the Company's balance of cash and cash
equivalents may be reduced substantially. The Company may be required to pursue
additional external sources of financing to support its operations and capital
requirements. There can be no assurance that external sources of financing will
be available to fund the Company's ongoing operations or other capital
requirements on terms acceptable to the Company.
Factors That May Affect Future Results
The Company's business environment is characterized by intense competition,
rapid technological changes, changes in customer requirements and emerging new
market segments. Consequently, to compete effectively, the Company must make
frequent new product introductions and enhancements while protecting its
intellectual property, retain its key personnel and deploy sales and marketing
resources to take advantage of new business opportunities. Future operating
results will be affected by the ability of the Company to expand its product
distribution channels and to manage the expected growth of the Company. Future
results may also be impacted by the effectiveness of the Company in executing
future acquisitions and integrating the operations of acquired companies with
those of the Company. Failure to meet any of these challenges could adversely
affect future operating results.
<PAGE>
The Company's quarterly operating results have varied substantially in the past
and are likely to vary substantially from quarter to quarter in the future due
to a variety of factors. In particular, the Company's period-to-period operating
results are significantly dependent upon the timing of the closing of large
license agreements. In this regard, the purchase of the Company's products can
require a significant capital investment from a potential customer which the
customer generally views as a discretionary cost that can be deferred or
canceled due to budgetary or other business reasons and can involve long sales
cycles of six months or more. Estimating future revenues is also difficult
because the Company ships its products soon after an order is received and, as
such does not have a significant backlog. Thus, quarterly license fee revenues
are heavily dependent upon a limited number of orders for large licenses
received and shipped within the same quarter. Moreover, the Company has
generally recorded a significant portion of its total quarterly license fee
revenues in the third month of a quarter, with a concentration of these revenues
occurring in the last half of that third month. This concentration of revenues
is influenced by customer tendencies to make significant capital expenditures at
the end of a fiscal quarter. The Company expects these revenue patterns to
continue for the foreseeable future. Despite the uncertainties in its revenue
patterns, the Company's operating expenses are based upon anticipated revenue
levels and such expenses are incurred on an approximately ratable basis
throughout a quarter. As a result, if expected revenues are deferred or
otherwise not realized in a quarter for any reason, the Company's business,
operating results and financial condition would be materially adversely
affected.
As of January 31, 2000, the Company had net operating loss carryforwards
("NOLs") of approximately $64.7 million. The deferred tax assets representing
the benefits of the NOLs have been offset completely by a valuation allowance
due to the Company's lack of an earnings history. The Company incurred a net
loss of $1.7 million for the three months ended April 30, 2000. The accumulated
deficit of the Company at April 30, 2000 was $57.8 million. The realization of
the benefits of the NOLs is dependent on sufficient taxable income in future
fiscal years. Lack of future earnings, or a change in the ownership of the
Company, could adversely affect the Company's ability to utilize the NOLs.
Despite the NOL carryforwards, the Company may have income tax liability in
future years due to the application of the alternative minimum tax rules of the
Internal Revenue Code.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
Other Factors
EURO Conversion
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) were fixed amongst one another and became the currencies of the
EURO. The currencies of the eleven countries will remain in circulation until
mid-2002. The EURO currency will be introduced on January 1, 2002. The Company
does not expect future balance sheets and statements of earnings and cash flows
to be materially impacted by the EURO Conversion.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
<PAGE>
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company believes the adoption of SFAS Nos. 133
and 137, which will be effective for the quarter ending April 30, 2001, will not
have a material effect on the financial statements.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." This bulletin, as amended by Staff
Accounting Bulletin No. 101A, establishes more clearly defined revenue
recognition criteria than previously existing accounting pronouncements and is
effective for the Company for the quarter ending July 31, 2000. The Company is
evaluating the full impact of this bulletin to determine the impact on its
financial position, results of operations and cash flows but does not anticipate
that it will have a material effect.
Market Risk
The Company's market risk is principally confined to changes in foreign currency
exchange rates and potentially adverse effects of differing tax structures.
International revenues from ETIL, the Company's foreign sales subsidiary located
in the United Kingdom, were approximately 21% of total revenues in the first
quarter of the current year. International sales are made mostly from the
Company's foreign subsidiary and are typically denominated in British pounds.
The Company's exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which royalties on ETIL sales are charged to ETIL and
recorded as intercompany receivables on the books of the U.S. parent company.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of ETIL are translated into U.S. dollars in consolidation. As
exchange rates vary, those results when translated may vary from expectations
and adversely impact overall expected profitability.
<PAGE>
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
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Item 2. Changes in Securities None.
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Item 3. Defaults upon Senior Securities None.
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Item 4. Submission of Matters to Vote of Security Holders None.
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Item 5. Other Information None.
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Item 6. Exhibits and Reports on Form 8-K None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCALIBUR TECHNOLOGIES CORPORATION
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June 13, 2000 By: /s/ Patrick C. Condo
--------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
June 13, 2000 By: /s/ James H. Buchanan
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James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)
