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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 2002
Commission File Number 000-31989
CONVERA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1987541
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 5, 2002 (based on the closing sales price as reported on
the NASDAQ National Market System) was $37,927,180.
The number of shares outstanding of the registrant's Class A common stock as of
April 5, 2002 was 28,869,334.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders are incorporated by reference into Part III.
The Index to Exhibits begins on Page 25
CONVERA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2002
TABLE OF CONTENTS
Page
PART I
Item 1. Business................................................................... 1
Item 2. Properties................................................................. 8
Item 3. Legal Proceedings.......................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders........................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 9
Item 6. Selected Financial Data.................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 22
Item 8. Financial Statements and Supplementary Data................................ 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 24
Item 11. Executive Compensation .................................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 24
Item 13. Certain Relationships and Related Transactions............................. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 25
PART I
ITEM 1. Business
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 expectations, beliefs, intentions or
strategies regarding the future of Convera Corporation ("Convera" or the
"Company.") 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 including, but not
limited to: the dependence upon the timing of the closing on sales of 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; the effect of general economic conditions on demand for
the Company's products and services; possible disruption in commercial
activities caused by terrorist activity and armed conflict, such as changes in
logistics and security arrangements, and the availability of additional capital
financing on terms acceptable to the Company. 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.
OVERVIEW
Convera designs, develops, markets, implements and supports search, retrieval
and categorization software that enables customers to more effectively
integrate, navigate and collaborate on enterprise information--including text,
audio, images and video - irrespective of language. This capability is offered
through a family of products based on two core applications: RetrievalWare(R)
and Screening Room(R). Convera's software often serves as the information
management infrastructure for intranet deployments and Web sites in order to
enable information intensive business processes such as enterprise information
portals, knowledge management, customer relationship management, enterprise
resource planning, video content management, human resource management, sales
force automation, supply chain management and e-learning. Convera also offers
professional implementation services to ensure Convera products integrate
seamlessly into customer environments, as well as training, consulting and
maintenance services to facilitate full implementation and optimal use of its
technologies.
Convera maintains an extensive portfolio of patented and proprietary
technologies. Its core technologies include: advanced computational linguistics
and semantic networking that leverage lexical knowledge using built-in knowledge
bases to search not only for specific word meanings, but also for related terms
and concepts; Adaptive Pattern Recognition Processing ("APRP") that identifies
patterns in digital data, providing the capability to build content-based
analysis and retrieval applications for any type of digital information; and
intelligent real-time video analysis that detects scene changes as they occur.
In combination, these core technologies form the foundation on which Convera
builds its products.
Convera was established through the combination of the former Excalibur
Technologies Corporation ("Excalibur") and Intel Corporation's ("Intel")
Interactive Media Services ("IMS") division. On December 21, 2000, Excalibur and
Intel consummated a business combination transaction ("the Combination")
pursuant to an Agreement and Plan of Contribution and Merger, dated as of April
30, 2000, as amended, by and among Excalibur, Intel, the Company and Excalibur
Transitory, Inc., a wholly owned subsidiary of the Company. At the completion of
the Combination, Excalibur became a wholly owned subsidiary of the Company, each
outstanding share of Excalibur common stock was converted into one share of
Class A common stock of the Company, and Intel contributed to the Company its
IMS division, intellectual property assets and other assets used by that
division, as well as $150,000,000 in cash at closing, in exchange for 14,949,384
shares of Class A common stock of the Company and 12,207,038 shares of Class B
non-voting common stock of the Company.
All references in this Form 10-K to financial results for the Company for the
period prior to December 21, 2000 reflect the historical financial results of
Excalibur and its subsidiaries.
The Company can be contacted via email at [email protected] and visited at its
web site, www.convera.com. Information on the Convera web site is not part of
this Form 10-K.
Business Strategy
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 through license agreements with
value-added resellers, systems integrators, OEMs, and other strategic partners.
The Company's technology may also be customized and deployed to commercial
businesses. Convera conducts international sales activities through Convera
Technologies International, Limited ("CTIL"), its wholly owned subsidiary in the
United Kingdom, and CTIL offices in Germany and France.
CONVERA PRODUCTS
PRODUCTS
Convera develops, markets, licenses, services and supports the Convera
RetrievalWare suite of multimedia search solutions for corporate intranets,
Internet e-commerce, online publishing and the OEM market. Products include:
RetrievalWare(R);
Visual RetrievalWare(R);
RetrievalWare(R) FileRoom;
RetrievalWare(R) WebExpress;
Internet Spider;
RetrievalWare(R) SDK;
RetrievalWare(R) Synchronizers Screening Room(R); and
Video Analysis Engine.
RetrievalWare(R)
RetrievalWare employs an advanced modular approach and is an enabling technology
for many information intensive business applications, including intranet
enterprise portals, Web publishing and e-commerce applications. Offering what
the Company believes to be unsurpassed scalability and accuracy, RetrievalWare
is a comprehensive software solution that enables government agencies and
commercial organizations to integrate all enterprise information through a
single point access, intuitively interact with and navigate that information to
retrieve needed answers, and effectively collaborate on retrieved information as
the basis for prosecuting mission-critical tasks. By utilizing multi-mode
searching built around Convera's proprietary APRP and semantic network
technologies, RetrievalWare empowers users to find mission critical data across
multiple data types from a common user interface.
With Convera's semantic networks and natural language processing, users easily
find needed information. RetrievalWare incorporates syntax, morphology and the
actual meaning of words. The baseline semantic network in the English language
version was created from complete dictionaries, a thesaurus and other reference
sources, giving users a built-in knowledge base of 500,000 word meanings, 50,000
language idioms and 1.6 million word associations. Users submit plain English
queries that are automatically expanded to include related terms and concepts,
thereby increasing the likelihood that highly relevant content will be returned.
The software recognizes words at the root level, idioms and the multiple
meanings of words. This approach eliminates the costs associated with defining
keywords, building topic trees, establishing expert rules and sorting and
labeling information in database fields. RetrievalWare also supports specialized
semantic networks for legal, medical, finance, engineering and other
disciplines.
APRP identifies patterns in digital information. In text applications, it
provides fuzzy searching with a high degree of precision and recall, giving end
users the ability to retrieve even approximations of search queries with a high
degree of confidence that all of the requested information will be returned
regardless of errors in spelling or the existence of inconsistencies in the data
which may be caused by poor quality of optical character recognition processes.
The software works at high speed and supports the rapid development of
multi-language text-retrieval systems.
RetrievalWare supports more than 200 document formats stored on file servers, in
groupware systems, relational databases, document management systems, intranets
and the Internet. RetrievalWare provides real time profiling which enables users
to create and save Real Time Agent Queries (Profiles) that will automatically
collect incoming documents of interest. The RetrievalWare Profiling Server
filters, stores and distributes incoming data from any source including
real-time news feeds, relational databases, paper repositories and the
RetrievalWare Internet Spider.
RetrievalWare 7.0, released in March of 2002, provides the industry's first
enterprise search product to offer multimedia and cross-lingual search as
off-the-shelf product features. By providing users with a single product that
simultaneously searches and organizes all data types (such as text, video, image
and audio files) in multiple languages from a single user interface, customers
do not have to buy and piece together several disparate systems to manage
multiple data types and languages. RetrievalWare also provides greater ease of
use by delivering a higher level of interoperability with enterprise
applications using XML and by providing easy integration into the Microsoft(R)
...NET environment.
RetrievalWare provides access to both unstructured and structured information
across enterprise networks, workgroup LANs, and intranets. The software may be
deployed on a single server or on any number of physical servers. RetrievalWare
server solutions can be run on multiple platforms including leading UNIX and
Windows NT platforms.
The RetrievalWare product family includes the following components:
Visual RetrievalWare
Leveraging the APRP technology, Visual RetrievalWare is a visual retrieval
engine and a comprehensive image processing library and programmer's toolkit
that enables the development of client/server systems that automatically index
and retrieve digital images. Applications range from electronic shopping and
digital libraries to document imaging and positive identification. Users can
search for visual information directly from their intranet, a corporate
database, the Internet, or other sources using images or video clips as clues.
Visual data is reduced to a searchable index that is typically less than 10% of
the size of the original image and is automatically recognized based on its
shape, color and texture. Users submit queries using examples of visual data or
by authoring a visual clue with a graphical product. Based on the shape, color
and texture of the visual clue, a list of similar or exact matches is returned.
The product delivers its advanced retrieval capabilities in an open, flexible,
scalable and secure architecture and is designed to be easy to implement and
ready for extension.
RetrievalWare FileRoom
RetrievalWare FileRoom is built on RetrievalWare technology and is an optional
component to allow loading, indexing, viewing and managing scanned documents,
images and text. Users access the FileRoom through a hierarchy consisting of
FileRoom documents, where each tier in the hierarchy is a container for storing
documents. Users can directly view the scanned image of a retrieved document
from the FileRoom. Graphs, diagrams, handwritten notations and signatures in the
retrieved document are immediately accessible. "Fuzzy" searching capabilities
provided by APRP give users a high level of confidence that their queries will
return all of the requested information regardless of the quality of Optical
Character Recognition ("OCR") data. Document-level security lets organizations
control user access at the fileroom (library), cabinet, drawer, folder and
document level.
RetrievalWare WebExpress
RetrievalWare WebExpress is a stand-alone search and retrieval tool designed for
online service providers and content-rich Web sites. The Company believes that
RetrievalWare WebExpress offers superior search accuracy, performance and
scalability, supporting high numbers of concurrent users searching large and
heterogeneous document collections.
Internet Spider
Internet Spider is a multimedia, high-performance Web spider/crawler for
augmenting the retrieval capabilities of Convera RetrievalWare, for stand-alone
use, or for integration with other applications. In addition to HTML-based Web
pages, Internet Spider also retrieves word processing, PDF and multimedia assets
including audio, video and images. It is highly configurable and multi-threaded
and can provide deep, broad and repetitive crawling. Users who want immediate
notification when items of interest arrive can post Agent Profiles to pull links
to related documents to their desktops. Components can be deployed on multiple
machines for optimum performance and bandwidth.
RetrievalWare SDK
The RetrievalWare SDK (Software Developer's Kit) is a comprehensive set of tools
for building advanced search-based solutions. At its core is a highly scalable,
distributed client/server architecture. Independent server processes maximize
the efficiency and reliability of document loading, indexing and query handling,
and support security and encryption/decryption features. Dedicated server
processes enable integration of text search and relational database ("DBMS")
storage capabilities through an open DBMS gateway. The client environment is
optimized for the development of graphical interfaces using industry standard
tools such as Java and Visual Basic. RetrievalWare delivers Visual Basic custom
controls, remote procedure calls and open server capabilities as well as
engine-level, high-level and client/server application program interfaces
("APIs"). These features speed the development of systems that can support
thousands of users and contain custom functionality.
RetrievalWare Synchronizers
RetrievalWare Synchronizers provide document-level security for users to search
the contents of multiple native repositories from a single point of access
including Lotus Notes, Microsoft Exchange, Documentum EDMS 98, FileNET Panagon,
native file systems and relational database management systems.
Screening Room is a comprehensive solution for video asset management providing
scalable access, search and retrieval of video assets, both analog and digital,
from any desktop. It provides for real-time capturing, encoding, analyzing,
cataloging, browsing, searching and retrieving of video, as well as related
captured text (closed captions or speech-to-text conversions) and metadata, over
corporate intranets/extranets. Designed to manage video content in Internet
portal and corporate intranet environments, Screening Room also supports media,
broadcast and entertainment video asset management solutions. It enables users
to easily capture analog or digital video, automatically create an intelligent
video storyboard, and play it back in any of the industry's standard video file
formats. Screening Room users then can automatically browse, search and retrieve
precisely what video clips they are looking for without having to play or watch
the video in its entirety.
Screening Room combines the APRP technology for video analysis with the indexing
capabilities of RetrievalWare. Screening Room consists of four components:
Screening Room Capture, Screening Room Edit, Screening Room Browse and Screening
Room Video Asset Server. Screening Room Capture ingests, analyzes and
storyboards analog or digital video assets, including live feeds, and extracts,
indexes and searches associated metadata such as captured text (both
closed-caption text and spoken audio content converted to text), keyframe images
of significant scenes and annotations. Screening Room Edit enables users to
browse, search, edit and annotate storyboards. In addition, users can select and
compile clips from multiple video assets to create new derivative works, export
files and metadata in industry-standard XML format, or output new rough-cut edit
segments to Edit Decision Lists ("EDLs") for import into higher-end offline
editing systems like Avid and Media 100. Screening Room Browse allows user
access to catalogs of video assets through any standard Web browser. The Video
Asset Server indexes and stores captured video assets for instantaneous
browsing, search and retrieval in a client/server environment.
Version 2.3, the latest version of Screening Room, was released in April of
2002. Among the new features are enriched video ingestion and capture
functionality, more flexible video file management capabilities, and the ability
to more tightly integrate with 3rd party asset and content management products.
In addition, Screening Room 2.3 customers now can extend their deployments to
include the search, retrieval and categorization of more than 200 proprietary
document formats through interoperability with RetrievalWare 7.0. Under
Convera's unified architecture, Screening Room 2.3 now can be joined with
RetrievalWare 7.0 to provide users with a single product that simultaneously
searches and organizes all data types (such as text, video, image and audio
files) in multiple languages from a single user interface.
In addition to the Screening Room application, the Screening Room product family
includes the following components:
Screening Room Capture (Standalone Version)
Screening Room Capture (Standalone Version) was released in the fourth quarter
of fiscal year 2001. The standalone Capture product is a separate packaging of
the Capture component of the full Screening Room system and utilizes the same
core technology. It provides the ability to log, analyze and encode video, and
save the data and video assets in a non-proprietary (XML) format. Screening Room
Capture does not require purchase of the entire Screening Room system, and
enables loading of video assets and metadata into a third party database or
content management system, or otherwise repurposing the asset. Screening Room
Capture is also a suitable component for sale to OEM customers.
Screening Room Capture API
The Screening Room Capture API (Application Programming Interface) enables
developers to control the Screening Room Capture component from another program.
The Screening Room Capture API can be used to drive Screening Room Capture when
that component is delivered as a part of the full Screening Room video asset
management system or when the Capture component is delivered in its standalone
packaging.
Video Analysis Engine ("VAE")
Video Analysis Engine is a toolkit that enables developers and programmers to
construct applications that analyze and re-purpose video content. VAE analyzes
any kind of multi-media/video asset whether it is analog or digital, allows
programmers to create multi-threaded applications and has enhanced scalability.
The toolkit is available as a Microsoft DirectShow filter or C Library
Developer's Kit. Based on the APRP technology, VAE plugs into applications,
enabling highly accurate event-change detection. VAE uses a caching technique
that compares a series of video frames based upon "event detectors" dynamically
selected by the calling program. The event detectors look for specific
occurrences in the video, triggering "event alarms" appropriate to the
developer's application. Events include cuts, fades and dissolves.
TECHNICAL SUPPORT, IMPLEMENTATION SERVICES AND EDUCATION
Convera provides technical support, or maintenance, to customers through its
technical support personnel located in the Company's Columbia, Maryland,
Carlsbad, California and Bracknell, United Kingdom facilities and through
certain product distributors. Technical support consists of bug fixes, telephone
support and upgrades or enhancements of particular software products when and if
they are released. Technical support typically is provided to customers under a
renewable annual contract. All Convera service plan customers have access to the
Convera Online Technical Support Web site that provides the latest product
information, general service updates and Web forums for technical discussions.
The Web site also provides electronic forms for opening technical support cases
and suggesting product, service and Company enhancements.
The Company also provides on-site implementation and consulting services to its
customers through employees and independent consultants who have been trained
and certified by the Company. Implementation and consulting services are offered
as a package or on a time-and-materials or fixed price basis. The Company
conducts training seminars at its offices in Vienna, Virginia; Carlsbad,
California; and Bracknell, UK, as well as on-site training for its customers and
distribution channel partners. Training customers typically pay on a per-course
basis for regularly scheduled classes and on a per-day basis for on-site or
dedicated courses.
OTHER SERVICES
Convera's technologies have also been deployed in the form of an end-to-end
content management and publishing service for media rich organizations wishing
to manage their media content and monetize it through Internet Distribution.
On September 20, 2001, the Company announced that it had terminated an agreement
with the National Basketball Association ("NBA") to provide interactive content
services. On October 3, 2001, the Company announced a restructuring plan to
consolidate all operations around the development, marketing, sales and support
of its software products described above. The Company also announced that it was
eliminating the majority of operations supporting the interactive services
offerings.
MARKETING AND DISTRIBUTION
The Company's sales and marketing strategy focuses on the licensing of Convera
products to customers both through a direct sales force and through strategic
partners and OEMs. Members of the North American sales team are located
throughout the United States and Canada, and the majority of the international
sales team is located in the United Kingdom. The Company typically licenses its
RetrievalWare and Screening Room products to end-users as either an
enterprise-wide or work-group level solution.
Convera focuses its sales and marketing efforts on enterprises that have large,
rapidly changing content collections in diverse formats and have large numbers
of knowledge workers. In that regard, the Company concentrates a significant
amount of sales and marketing resources on vertical markets such as government,
financial services, life sciences, media and entertainment and manufacturing and
technology.
Marketing efforts focus on building brand awareness and establishing demand for
the Company's products and include advertising, public relations, trade show
participation, direct mail and electronic marketing campaigns and
telemarketing/lead management activities. The Company's home page on the World
Wide Web, www.convera.com, is an integral part of its marketing and sales
efforts, but information on the Company's Web site is not a part of this From
10-K. Through the Web site, prospective customers can learn about Convera's
suite of products and view online demonstrations of products. Existing customers
can enroll in training courses and access password-protected areas for technical
and other customer support.
PRODUCT DEVELOPMENT AND ADVANCED RESEARCH
The Company's research and development program focuses on enhancing and
expanding the capabilities of its RetrievalWare and Screening Room product lines
to address additional markets and market requirements. Convera plans to further
integrate our family of multimedia, cross-lingual search, retrieval and
categorization software into a single, unified architecture. The release of
RetrievalWare 7.0 and Screening Room 2.3 represents the first phase of this
development effort. Over time and as the technology evolves, RetrievalWare 7.0
will remain the basic building block of this modular family of products. In
addition to providing seamless access to both structured and unstructured data
in the enterprise, this modular approach will simplify system administration for
the customer and make it easier for Convera to update existing features and add
new components such as support for new data types and taxonomies for specific
vertical markets.
In March of 2002, Convera announced the acquisition of Semantix Inc., a private
Canadian software company specializing in cross-lingual processing and
computational linguistics technology. The acquisition of Semantix, including its
engineering personnel and intellectual property, is expected to help Convera
derive greater revenues through the direct sales of language modules to new and
existing customers. In addition, the Semantix acquisition broadens the
linguistic capabilities of RetrievalWare, specifically in the areas of
cross-lingual search and the continued development of language capabilities to
support the needs of specialized vertical markets, such as the government
intelligence community. Semantix became a wholly owned subsidiary of Convera
under the name Convera Canada Inc. Certain elements of the Company's software
products are supplied to the Company by other independent software vendors under
license agreements with varying terms. Pursuant to these agreements, the Company
makes periodic royalty payments based on either revenues or units. The
technologies acquired by the Company in this manner include word processing
filters, optical character recognition engines, dictionaries and thesauri in
electronic form, image and audio processing, and face and speech recognition
technologies.
The Company has conducted research and product development of pattern
recognition and natural language systems since 1980. Research and product
development expenditures for the development of new products and enhancements to
existing products were approximately $23.8, $13.0 million and $9.5,
respectively, in the fiscal years ended January 31, 2002, 2001 and 2000.
PROTECTION OF PROPRIETARY TECHNOLOGY
The Company regards its software as proprietary and relies primarily on a
combination of patents, copyright, trademark and trade secret laws of general
applicability, employee confidentiality and invention assignment agreements,
software distribution protection agreements and other intellectual property
protection methods to safeguard its technology and software products. The
Company also obtains trademark protection for its various product and corporate
brand names and design logos. The Company has four patents and seven patent
applications currently pending before the Patent and Trademark Office, each
intended to protect technology-related assets of the Company. The Company also
relies upon its efforts to design and produce new products and upon improvements
to existing products to maintain a competitive position in the marketplace.
COMPETITION
Competition in the information technology industry in general, and the software
development industry in particular, is intense. Convera competes primarily in
the search, retrieval and categorization market. Within this market segment,
there are current and potential competitors who are larger and more established
than Convera and have significantly greater financial, technical, marketing and
other resources. Convera considers its principal competitive advantages to be:
(1) more accurate results due to the semantic network and APRP technologies, (2)
more comprehensive results due to its ability to manage and retrieve information
in multiple languages and in rich media file formats, and (3) an environment
that is more scalable due to the distributed-processing architecture.
Convera competes with numerous companies depending on the target market for its
products. Most often, Convera competes directly with companies such as Verity,
Inc. and Autonomy, Inc. to provide search solutions to the corporate intranet,
Internet e-commerce, online publishing and the OEM market. The Company primarily
competes with Virage, Inc. to provide video content management solutions to
Internet portals and corporate intranets. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competition will not materially adversely affect the
Company's operating results and financial condition.
The Company's activities currently are subject to no particular regulation by
governmental agencies other than those routinely imposed on corporate businesses
and no such regulation is now anticipated.
SEGMENT INFORMATION
The Company has one reportable segment. All of the Company's revenues are from
third party customers.
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately $4.9 million, $5.0 million and $4.4 million,
respectively, in the fiscal years ended January 31, 2002, 2001, and 2000. These
revenues, expressed as a percentage of total revenues for the fiscal year, were
approximately 14%, 10%, and 12%, respectively. For the fiscal year ended January
31, 2002, no individual customer accounted for more than 10% of the Company's
total revenues.
Financial information is located in the consolidated financial statements
beginning on page F-3. Additional information related to segment reporting can
be found in Note 15 to the consolidated financial statements contained herein.
EMPLOYEES
The Company had 350 employees at January 31, 2002, of whom 115 were in research
and development, 133 in sales and marketing, 64 in technical support,
professional services and training and 38 in finance and administration. The
employees are not covered by collective bargaining agreements, and the
management of the Company considers relations with employees to be good.
Competition for qualified personnel within the Company's industry is intense.
There can be no assurance that the Company will be able to continue to attract,
hire or retain qualified personnel and the inability to do so could have a
material adverse effect upon the Company's operating results and financial
condition.
Item 2. Properties
The Company's corporate headquarters facilities are occupied under a lease
agreement that expires in calendar year 2004 for a total of approximately 20,500
square feet of space in an office building located at 1921 Gallows Road, Vienna,
Virginia 22182.
The Company's principal development and customer support centers are located in
Carlsbad, California; and Columbia, Maryland. The company leases additional
space in San Jose, California and following the acquisition of Semantix,
Montreal, Canada.
The Company leases space in Bracknell, England and commercial office suites in
Paris, France, and in Munich and Frankfurt, Germany in support of its
international sales operation.
The Company believes that its facilities are maintained in good operating
condition and are adequate for its operations.
Item 3. Legal Proceedings
On November 1, 2001, DSMC, Incorporated ("DSMCI") filed a complaint against the
Company in the U.S. District Court for the District of Columbia in which it
alleged that the Company misappropriated DSMCI's trade secrets, engaged in civil
conspiracy with the NGT Library, Inc. ("NGTL"), a subsidiary of the National
Geographic Society, to obtain access to DSMCI's trade secrets, and was unjustly
enriched by the Company's alleged access to and use of such trade secrets. In
its complaint, DSMCI seeks five million dollars in actual damages and ten
million dollars in punitive damages from the Company. DSMCI subsequently amended
its complaint to add copyright infringement-related claims. The Company is in
the process of investigating the allegations and at this time believes that they
are without merit. Accordingly, the Company believes that this matter will not
have a material adverse effect on its financial position, operations or cash
flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded in the over-the-counter market and is
listed on the National Market System of the NASDAQ Stock Market under the symbol
"CNVR." As a result of the Combination, the Excalibur common stock, traded under
the symbol "EXCA," ceased to be listed on the Nasdaq National Market. In the
Combination, the Excalibur common stock was converted on a one-for-one basis
into Convera Class A common stock.
The following table sets forth the high and low sale prices for Convera common
stock for the period from December 22, 2000 through January 31, 2002 and for
Excalibur common stock for the period February 1, 2000 through December 21,
2000, as reported by the National Market System of NASDAQ. The number of
shareholders of record as of January 31, 2002 was 985. The Company has never
declared or paid dividends on its common stock and anticipates that, for the
foreseeable future, it will not pay dividends on its common stock.
High Low
Fiscal 2002 (February 1, 2001 - January 31, 2002)
First Quarter.................................... $ 18.88 $ 4.88
Second Quarter................................... 7.58 3.37
Third Quarter.................................... 4.00 2.05
Fourth Quarter................................... 4.84 2.20
Fiscal 2001 (February 1, 2000 - January 31, 2001)
First Quarter.................................... $ 45 3/8 $ 21 5/16
Second Quarter................................... 59 1/2 26 25/64
Third Quarter.................................... 70 3/16 40
Fourth Quarter................................... 58 1/2 13
Item 6. Selected Financial Data
The selected financial data presented below have been derived from the Company's
consolidated financial statements. The balance sheet data as of January 31, 2002
and 2001, and the statement of operations data for the fiscal years ended
January 31, 2002, 2001 and 2000 should be read in conjunction with such
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
All references in this Form 10-K to financial results of the Company for the
period prior to December 21, 2000 reflect the historical financial results of
Excalibur and its subsidiaries.
- --------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended January 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except per share data)
Revenues:
Software.............................. $ 26,740 $ 37,299 $ 32,649 $ 22,741 $ 17,202
Maintenance........................... 6,509 6,621 5,285 5,198 5,215
-------------- -------------- -------------- -------------- --------------
License-related......................... 33,249 43,920 37,934 27,939 22,417
Services (3)............................ 979 7,602 - - -
-------------- -------------- -------------- -------------- --------------
34,228 51,522 37,934 27,939 22,417
-------------- -------------- -------------- -------------- --------------
Cost of revenues:
Software ............................. 13,443 8,288 4,724 3,697 2,957
Maintenance .......................... 1,979 1,474 2,143 1,320 1,219
-------------- -------------- -------------- -------------- --------------
License-related ........................ 15,422 9,762 6,867 5,017 4,176
Services ............................... 3,960 7,846 - - -
-------------- -------------- -------------- -------------- --------------
19,382 17,608 6,867 5,017 4,176
-------------- -------------- -------------- -------------- --------------
Gross margin............................... 14,846 33,914 31,067 22,922 18,241
-------------- -------------- -------------- -------------- --------------
Operating expenses:
Sales and marketing..................... 32,473 22,345 16,210 13,501 13,184
Research and product development........ 23,774 12,968 9,456 8,328 6,405
General and administrative.............. 10,214 6,279 5,402 4,775 4,884
Amortization of goodwill & other
intangible assets (4)................. 98,304 15,672 118 111 82
Acquired in-process research and
development........................... - 800 - - 1,284
Incentive bonus payments due to
employees............................. 6,681 - - - -
Restructuring charges................... 8,128 - - - 577
Reduction in goodwill and other
long-lived intangible assets.......... 754,424 - - - -
-------------- -------------- -------------- -------------- --------------
933,998 58,064 31,186 26,715 26,416
-------------- -------------- -------------- -------------- --------------
Operating loss............................. (919,152) (24,150) (119) (3,793) (8,175)
Other income, net.......................... 4,191 1,368 250 239 374
Equity in net loss of affiliate............ - - - (300) (525)
Write-off of investment in affiliate....... - - (471) - -
-------------- -------------- -------------- -------------- --------------
Net loss before income taxes............... (914,961) (22,782) (340) (3,854) (8,326)
Income tax benefit......................... 4,452 - - - -
-------------- -------------- -------------- -------------- --------------
Net loss................................... (910,509) (22,782) (340) (3,854) (8,326)
Dividends on cumulative, convertible
preferred stock............................ - 10 14 14 14
-------------- -------------- -------------- -------------- --------------
Net loss applicable to common stock........ $ (910,509) $ (22,792) $ (354) $ (3,868) $ (8,340)
============== ============== ============== ============== ==============
Net loss per common share - basic and
diluted................................. $ (20.08) $ (1.22) $ (0.02) $ (0.29) $ (0.64)
Weighted-average number of common shares
outstanding - basic and diluted......... 45,349 18,714 14,282 13,526 12,934
Balance Sheet Data (1) (at end of period)
Cash and cash equivalents.................. $ 17,628 $ 37,061 $ 10,884 $ 5,851 $ 4,939
Working capital............................ 51,797 166,543 19,288 8,006 9,748
Total assets............................... 78,106 1,026,445 30,687 19,712 20,045
Accumulated deficit........................ (989,429) (78,920) (56,138) (55,798) (51,945)
Total shareholders' equity (2)............. 57,876 1,015,058 22,305 13,174 13,098
(1) The Company had no significant long-term debt for any of the periods presented.
(2) No dividends have been declared or paid on the Company's common stock.
(3) Services revenue derived from end-to-end content management and publishing service.
(4) Fiscal years 2002 and 2001 amortization primarily related to business combination with Intel's IMS division.
Item 7. 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 including, but not limited to: the dependence
upon the timing of the closing on sales of 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; the effect of general economic conditions on demand for the Company's
products and services; possible disruption in commercial activities caused by
terrorist activity and armed conflict, such as changes in logistics and security
arrangements, and the availability of additional capital financing on terms
acceptable to the Company. 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 and the provision of services in deployment of the Company's technology
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 generated from software licenses with customers and from the
related sale of product maintenance, training and implementation support
services. Additions to the number of authorized users, licenses issued for
additional products 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 upgrades or enhancements of
particular software products when and if they are released.
Convera was established through the combination of the former Excalibur
Technologies Corporation and Intel Corporation's Interactive Media Services
division. On December 21, 2000, Excalibur and Intel consummated a business
combination transaction pursuant to an Agreement and Plan of Contribution and
Merger, dated as of April 30, 2000, as amended, by and among Excalibur, Intel,
the Company and Excalibur Transitory, Inc., a wholly owned subsidiary of the
Company. At the completion of the Combination, Excalibur became a wholly owned
subsidiary of the Company, each outstanding share of Excalibur common stock was
converted into one share of Class A common stock of the Company, and Intel
contributed to the Company its IMS division, intellectual property assets and
other assets used by that division, as well as $150,000,000 in cash at closing,
in exchange for 14,949,384 shares of Class A common stock of the Company and
12,207,038 shares of Class B non-voting common stock of the Company.
The Combination was accounted for using the purchase method of accounting. The
purchase price for the IMS division was determined to be approximately $925.1
million, which included approximately $2 million in transaction costs, less
approximately $600,000 in costs to register and issue the shares. The shares
issued to Intel as consideration for the contributed assets were valued based on
the existing market price when the Combination was announced. The purchase price
was allocated to the assets acquired based on their estimated fair values on the
acquisition date. In connection with the Combination, the Company recorded
approximately $769.8 million in goodwill and recorded a charge for acquired
in-process research and development ("IPRD") of approximately $800,000 in the
fiscal year ended January 31, 2001. The purchased IPRD represented the present
value of the estimated after-tax cash flows expected to be generated by the
purchased technology, which, at December 21, 2000, had not yet reached
technological feasibility. The cash flow projections for revenues were based on
estimates of market size and growth factors, expected industry trends, the
anticipated nature and timing of product introduction and the estimated life of
the underlying technology. Estimated operating expenses and income taxes were
deducted from estimated revenue projections to arrive at estimated after tax
cash flows. Projected operating expenses include cost of sales, sales and
marketing and general and administrative expenses. The other intangible assets
acquired from Intel included certain developed technology and an existing
workforce as well as certain existing and in-process customer contracts.
The IMS division had contracts in process at the time of the Combination, which
were being accounted for using the completed contract method, and accordingly,
revenue was deferred until all remaining costs, obligations and potential risks
were insignificant and the contract deliverables were agreed to and accepted by
the customer. Convera continued to account for the existing contributed
contracts using the completed contract method of accounting. For purposes of
determining the value of these contributed contracts at the date of acquisition,
management considered the total amounts to be received under each contract. As
these contracts were completed by Convera, revenue and the related costs,
including profit on work performed by Convera subsequent to the acquisition,
were recognized. During fiscal year 2002, the Company completed all obligations
under the in-process contract assigned by the IMS division, and accordingly
recognized revenue during the year of about $1.7 million related to these
contracts. The associated costs recorded during fiscal year 2002 related to
these contracts was approximately $0.9 million. Existing contracts that were
completed prior to January 31, 2001 resulted in aggregate revenue recognition of
approximately $7.6 million recorded as services revenues and approximately $0.7
million recorded as software revenues. The associated costs recognized related
to these contracts were approximately $7.5 million included in cost of services
revenues and approximately $0.4 million included in cost of software revenues.
In September 2000, Intel and the NBA entered into a master services agreement,
which Intel contributed to Convera on December 21, 2000, for the distribution of
personalized highlights, archival material, television broadcast enhancements
and real time distribution of NBA games over broadband networks. In addition to
the services agreement, Convera entered into a contribution agreement with the
NBA, under which the NBA contributed certain intangible assets such as all of
the NBA know-how related to the creation, development, distribution, marketing
and deployment, over the Internet and broadband networks, of products using
sports and entertainment content; a database of customer profiles of NBA fans;
the right to use certain NBA personnel and a non-exclusive license to the NBA
trademark. In exchange for the contribution of these assets, Convera issued
4,746,221 shares of Class A common stock, representing 10% of the total
outstanding stock of the Company on that date.
On September 20, 2001, the Company announced that it had terminated its
agreement with the NBA to provide interactive content services. On October 3,
2001, the Company announced a restructuring plan to consolidate all operations
around the development, marketing, sales and support of its enterprise class
information infrastructure software products, RetrievalWare and Screening Room.
The Company also announced that it was eliminating operations supporting the
development of the Company's digital content security technology and interactive
services offerings and closing offices in Hillsboro, Oregon and Lafayette,
Colorado.
Following the termination of the NBA contract and the Company's change in focus,
the Company evaluated the recoverability of the intangible and other long-lived
assets including goodwill associated with the Combination and associated with
the NBA agreement. The intangible assets acquired in the Combination, including
developed technology, customer contracts and assembled workforce, were primarily
related to the interactive media services offerings. As a result of the
evaluation, the Company recorded a charge of $754.4 million in the third quarter
of fiscal year 2002 for reduction of goodwill and other long-lived assets.
On December 5, 2001, the Company reported that it purchased the 4,746,221 shares
of Convera common stock owned by the NBA for $11 million in a privately
negotiated transaction. On January 7, 2002, the Company reported that it
purchased 2,792,962 shares of Convera's voting Class A common stock and
12,207,038 shares of Convera's non-voting Class B common stock from Intel for a
total of $43 million in a privately negotiated transaction. The Company also
reported a simultaneous transaction between Allen Holding Inc. and Intel
Corporation, whereby Allen Holding Inc. purchased the remaining 12,156,422
shares of Convera Class A common stock owned by Intel, resulting in Allen
Holding Inc. beneficially owning 55.2% of the outstanding shares of Convera
Class A common stock. As a result of these transactions, Intel and the NBA hold
no ownership interest in Convera as of January 31, 2002.
All references in this Form 10-K to financial results for the Company for the
period prior to December 21, 2000 reflect the historical financial results of
Excalibur and its subsidiaries.
Critical Accounting Policies
Convera's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. For a
comprehensive discussion of the Company's accounting policies, see Note 2 in the
accompanying consolidated financial statements included in this Form 10-K.
Convera does not have any material ownership interest in any entities that are
not wholly-owned and consolidated subsidiaries of the Company. The preparation
of these financial statements 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. Management bases those estimates, including those related to
bad debts, goodwill and other intangible assets, restructuring costs, income
taxes and litigation, on historical experience and other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets, liabilities and
equity that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Convera believes the following accounting policies are critical to the
understanding of the Company's financial condition and results of operations.
Revenue Recognition
Convera's recognition of revenues requires judgment, particularly in the areas
of collectibility and whether the fee is fixed and determinable at the time the
sales are made. The Company bases its judgment on a variety of factors including
the payment and other terms of the individual customer contracts, credit history
of the customer, prior dealings with specific customers, and certain other
factors. If the Company determines that the price under the contract is fixed
and determinable, and that collectibility is assured, then the Company
recognized revenue related to the software license at the time of sale. To the
extent the Company determines that the price of a sales agreement is not fixed,
the Company delays revenue recognition until payments under the contract become
due. Alternatively, to the extent the Company determines that the collection of
payments under the contracts is not assured, the Company delays revenue
recognition until the payments under the contract are received. The revenue
associated with other elements of the contract are deferred and recognized as
those elements are delivered. Thus the assessment as to whether the fee is fixed
and determinable at the time of sale and that the fees are collectible is
critical in determining the extent the revenue recognized in a given period.
Customization work is sometimes required to ensure that the Company's software
functionality meets the requirements of its customers. In those instances where
the Company's revenues are generated from fixed price contracts related to this
customization work, then revenue is generally recognized using the percentage of
completion method based on the relationship of actual costs incurred to total
costs estimated over the duration of the contract. These estimates regarding
costs underlie the Company's determinations as to overall contract profitability
and the timing of revenue recognition. If the Company does not accurately
estimate the resources required or the scope of the work to be performed, or
does not manage its projects properly within the planned periods of time or
satisfy its obligations under the contracts, then actual results may differ from
projected results and losses on contracts may need to be recognized.
Revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause the Company's operating results to vary
significantly from quarter to quarter.
Provision for Doubtful Accounts
Convera maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of individual accounts receivable balances, including the credit
worthiness of each customer and the period in which customers' financial
condition deteriorate and they are no longer able to pay the balances owed to
Convera.
To the extent Convera does not recognize deterioration in its customers'
financial condition in the period it occurs, or to the extent Convera
underestimates its customers' ability to pay, the amount of bad debt expense
recognized in a given reporting resulting will be impacted.
Goodwill and Other Intangible Assets
Convera's acquisitions of other companies typically result in the acquisition of
certain intangible assets and goodwill. These assets are subject to impairment
to the extent the Company's operations experience significant negative results.
These negative results can be the result of Convera's individual operations or
negative trends in the Convera customer's industry or in the general economy,
which impact Convera. To the extent Convera's intangible assets or goodwill are
determined to be impaired, then these balances are written down to their
estimated fair value on the date of the impairment. Determining when an
impairment has occurred involves a significant amount of judgment. Management
bases its judgment on a number of factors including viability of the businesses
acquired, their integration into Convera's operations, the market in which those
businesses operate and their projected future results, cash flows projections,
and numerous other factors. The results reported in any given period are
impacted by management's determination as to when an impairment has occurred.
During the year ended January 31, 2002 Convera determined that the goodwill and
certain intangible assets recorded by the Company in the prior year were
impaired and Convera recorded a charge of $754 million related to that
impairment.
Deferred Taxes
Convera records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. Realization of the deferred
tax assets is principally dependent upon the achievement of projected future
taxable income. If the estimates and related assumptions change in the future,
the Company may be required to adjust its valuation against its deferred tax
assets, resulting in a benefit or a charge to income in the period such
determination is made. As of January 31, 2002, the Company has recorded a full
valuation allowance against the net deferred tax asset.
Results of Operations
For the fiscal year ended January 31, 2002, total revenues were $34.2 million, a
decline of 34% over total revenues of $51.5 million in fiscal year 2001. The net
loss for fiscal year 2002 was $910.5 million, or $20.08 per common share,
compared to a net loss of $22.8 million, or $1.22 per common share in the prior
year. For the fiscal year ended January 31, 2001, total revenues increased 36%
over total revenues of $37.9 million in fiscal year 2000. The net loss for
fiscal year 2000 was $0.3 million, or $.02 per common share.
The Company uses EBITDA (earnings before interest, taxes, depreciation,
amortization and certain other charges) as an additional measure of performance.
EBITDA is not a measurement of financial performance under accounting principles
generally accepted in the United States and should not be considered as an
alternative to net loss or as an indicator of Convera's operating performance.
The Company believes that EBITDA is widely used by analysts, investors and other
interested parties as a financial measure. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
For the fiscal year ended January 31, 2002, on an EBITDA basis and excluding
other charges of approximately $762.5 million (see below), the loss was $45.3
million, or $1.00 per common share, compared to an EBITDA loss of $4.0 million,
or $0.21 per common share in fiscal year 2001. For fiscal year 2000, EBITDA was
a positive $3.4 million, or $0.24 per common share.
The following charts summarize the components of revenues and the categories of
expenses, including the amounts expressed as a percentage of total revenues, and
EBITDA for each of the three fiscal years in the period ended January 31, 2002
(dollars in thousands).
- ------------------------------ --------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
from from
Components of Revenue and Expenses 2001 to 2000 to
2002 2001
Fiscal years ended January 31,
2002 2001 2000
Revenues: $ % $ % $ % % %
----------- -------- ----------- -------- ----------- ------- --------- ---------
Software $26,740 78% $37,299 72% $32,649 86% (28)% 14%
Maintenance 6,509 19% 6,621 13% 5,285 14% (2)% 25%
----------- -------- ----------- -------- ----------- ------- --------- ---------
License-related 33,249 97% 43,920 85% 37,934 100% (24)% 16%
Services 979 3% 7,602 15% -- -- (87)% --
----------- -------- ----------- -------- ----------- ------- --------- ---------
Total revenues $34,228 100% $51,522 100% $37,934 100% 34% 36%
----------- -------- ----------- -------- ----------- ------- --------- ---------
Expenses:
Cost of license-related
revenues $15,422 45% $9,762 19% $6,867 18% 58% 42%
Cost of services revenue 3,960 12% 7,846 15% -- -- (50)% --
Sales & marketing 32,473 95% 22,345 44% 16,210 43% 45% 38%
Research and product
development 23,774 69% 12,968 25% 9,456 25% 83% 37%
General and administrative 10,214 30% 6,279 12% 5,402 14% 63% 16%
Amortization of goodwill
and other intangible
assets 98,304 287% 15,672 30% 118 -- 527% 13181%
Incentive bonus payments
due to employees 6,681 20% -- -- -- -- -- --
Restructuring charges 8,128 24% -- -- -- -- -- --
Reduction in goodwill and
other long-lived assets 754,424 2204% -- -- -- -- -- --
Acquired in-process
research and
development -- -- 800 2% -- -- -- --
----------- -------- ----------- -------- ----------- ------- --------- ---------
Total expenses $953,380 2729% $75,672 147% $38,053 100% 1134% 53%
----------- -------- ----------- -------- ----------- ------- --------- ---------
Operating loss $(919,152) $(24,150) $(119) N/A N/A
Other income (expense), net 4,191 1,368 (221)
----------- ----------- -----------
Net loss before income taxes $(914,961) $(22,782) $(340)
Income tax benefit 4,452 -- --
----------- ----------- -----------
Net loss $(910,509) $(22,782) $(340)
=========== =========== ===========
- ------------------------------ --------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Fiscal years ended January 31,
2002 2001 2000
----------- ----------- -----------
EBITDA:
Net loss $(910,509) $(22,782) $(340)
Income tax benefit (4,452) - -
Other income, net (4,191) (1,368) 221
Depreciation 2,294 1,329 1,323
Restructuring charge 8,128 - -
Incentive bonus payments due
to employees 6,681 - -
Amortization of goodwill and
other intangible assets 98,304 15,672 118
Amortization of other assets 4,005 2,327 2,105
Acquired in-process research
and development - 800 -
Reduction in goodwill and
other long-lived
intangible assets 754,424 - -
----------- ----------- -----------
EBITDA (loss) $(45,316) $(4,022) $3,427
=========== =========== ===========
- ---------------------------------------------------------------------------------------------
Revenues
Software revenues, which include amounts generated through software licensing
and implementation services, decreased 28% to $26.7 million in fiscal year 2002
from $37.3 million in fiscal year 2001 and increased 14% in fiscal year 2001
from $32.6 million in fiscal year 2000. The decrease in software revenues for
fiscal year 2002 was due to the general downturn in the economy, which caused
certain of the Company's prospects to reevaluate and cancel or defer their
spending on information management infrastructure initiatives. The increase in
software revenues in fiscal year 2001 was primarily attributable to increased
sales of the Company's software products to larger corporations and government
organizations building intranets, sales to online service providers and
e-commerce businesses and sales to the original equipment manufacturer ("OEM")
market.
During the year ended January 31, 2000, the Company recognized approximately
$4.3 million from an OEM agreement with NCR, which provided NCR with the rights
to integrate the Company's products in the NCR TOR solution. Under this
arrangement, NCR also had the right to resell the Company's full product line.
NCR will pay the Company royalties when they resell the Company's products to
end-users. No value was assigned to the reseller arrangement since NCR was not
obligated to resell the Company's products. Thus, all of the consideration
received in connection with this contract was assigned to the integration
services. Revenues derived from the NCR agreement were approximately $1.2
million for the year ended January 31, 2001 and $0.4 million for the year ended
January 31, 2002. The Company also generated approximately $2.8 million in
fiscal year 2000 from an OEM arrangement with StorageTek.
Maintenance revenues were $6.5 million in fiscal year 2002, compared to $6.6
million in fiscal year 2001 and $5.3 million in fiscal year 2000. The slight
decrease in maintenance revenues in fiscal year 2002 is attributable to the
decline in license revenues this fiscal year as well as the conclusion, at the
end of the second quarter this year, of a specific long term maintenance
agreement that had yielded approximately $0.1 million in quarterly maintenance
revenues. The fiscal year 2002 increase in maintenance revenues as a percentage
of license related revenues is attributable to an increase in maintenance
pricing implemented at the end of fiscal year 2001 and an overall improvement in
the pursuit of maintenance renewals for existing customers. The increase in
maintenance revenue in fiscal year 2001 was primarily attributable to an
increase in the number of RetrievalWare customers generated during fiscal year
2001 and in the fourth quarter of fiscal year 2000.
Revenues from interactive services in fiscal year 2002 were approximately $1.0
million compared to $7.6 million in fiscal year 2001. In the third quarter of
fiscal year 2002, the Company announced that it was eliminating operations
supporting its interactive services offerings. The services revenue recorded in
fiscal year 2001 represented the completion of one of the contracts assigned in
the Combination accounted for under the completed contract method of accounting.
Revenues from international operations are provided primarily by software
licenses with various European commercial and government customers and a
well-established European reseller network. The Company's international sales
operation, Convera Technologies International, Ltd. ("CTIL"), is headquartered
in the United Kingdom, with offices in Germany and France. International
revenues from CTIL declined 29% to $9.1 million in fiscal year 2002 from $12.9
million in fiscal year 2001. In fiscal year 2001, revenues grew 40% from $9.2
million in fiscal year 2000.
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately 14%, 10% and 12% of total revenues for fiscal
years 2002, 2001 and 2000, respectively. No customer accounted for more than 10%
of revenues in fiscal year 2002, while one customer accounted for 15% of
revenues during fiscal year 2001 and one customer accounted for 12% of revenues
in fiscal year 2000.
Cost of Revenues
Cost of license related revenues, which includes cost of software revenues and
cost of maintenance revenues, increased 58% to $15.4 million in fiscal year 2002
from $9.8 million in fiscal year 2001. In fiscal year 2001, cost of license
related revenues increased 42% from $6.9 million in fiscal year 2000. As a
percentage of total revenues, cost of license-related revenues was 45%, 19% and
18% in fiscal years 2002, 2001 and 2000, respectively. Cost of software revenues
increased 62% to $13.4 million in fiscal year 2002 from $8.3 million in fiscal
year 2001. Fiscal year 2001 cost of software revenues increased 75% from $4.7
million in fiscal year 2000. The increase in cost of software revenues in fiscal
year 2002 is primarily attributable to an increase in the amortization of
prepaid third-party royalty licensing costs, which have been incurred to add new
features and functionality to the Company's products, as well as an increase in
the cost of professional services resulting from the increase in the number of
employees in the Company's professional services group. The increase in fiscal
year 2001 was related primarily to the sales volume increase and greater royalty
expense associated with new features included in the Company's products that
were derived from other third party software products. Cost of maintenance
increased 34% to $2.0 million in fiscal year 2002 from $1.5 million in fiscal
year 2001. In fiscal year 2001, cost of maintenance decreased 31% from $2.1
million in fiscal year 2000. As a percentage of maintenance revenues, cost of
maintenance was 31%, 22% and 41% in fiscal years 2002, 2001 and 2000,
respectively. The increase in cost of maintenance in fiscal year 2002 is
attributable to an increase in personnel and related expenses in the customer
support organization, while the decrease in cost of maintenance in fiscal year
2001 was due to changes implemented in the fourth quarter of fiscal year 2000
that streamlined the customer support organization, thus reducing overall costs
of maintenance.
Cost of services represents the personnel and other direct costs incurred in
connection with performing on the Company's interactive service related
contracts. For the year ended January 31, 2002, the cost of services was
approximately $4.0 compared to $7.8 million in fiscal year 2001.
Operating Expenses
Sales and marketing expenses increased 45% to $32.5 million in fiscal year 2002
compared to $22.3 million in fiscal year 2001, representing 95% and 43% of total
revenues, respectively. In fiscal year 2001, sales and marketing expenses
increased 38% from $16.2 million in fiscal year 2000. Sales and marketing
expenses were 43% of total revenues in fiscal year 2000. The increase in sales
and marketing expenses in fiscal year 2002 was due to growth in sales and
marketing personnel and increased spending on marketing programs, as well as an
increase in the provision for doubtful accounts. Growth in expenditures for
marketing programs and in the number of sales and marketing personnel was
responsible for the expense increase in 2001. The number of sales and marketing
personnel increased to 133 employees at January 31, 2002 from 107 and 72
employees at January 31, 2001 and January 31, 2000, respectively.
Research and product development costs increased 83% to $23.8 million in fiscal
year 2002 from $13.0 million in fiscal year 2001, representing 69% and 25% of
revenues, respectively. In fiscal year 2001, research and product development
costs increased 37% from $9.5 million in fiscal year 2000. Research and product
development costs were 25% of revenues in fiscal year 2000. The increase in
fiscal year 2002 is largely due to the addition of a significant number of
engineering personnel in connection with the business combination with the IMS
division of Intel, as well as the Company's continued investment to enhance the
RetrievalWare and Screening Room products. The number of engineering personnel
was reduced in the restructuring actions taken in the second and third quarters
of fiscal year 2002, resulting in a total of 115 people employed in research and
product development activities at January 31, 2002. The fiscal year 2001 expense
increase was due to growth in the text and video product engineering staffs and
the addition of engineering personnel in connection with the merger with Intel's
IMS division. During fiscal year 2002, the Company released RetrievalWare 6.8,
RetrievalWare 6.9 and RetrievalWare WebExpress 2.1. RetrievalWare 6.8 and
RetrievalWare WebExpress 2.1 provided enhanced support for Java developers, a
new search interface for intranet users, added capabilities for indexing secure
content and expanded language plug-ins. Updated dictionaries in RetrievalWare
6.8 enhanced search results by accommodating language changes such as new words
and idioms and updated spellings. RetrievalWare 6.8 also offered a new user
interface for intranet search users called SmartSearch, a new HTML-based search
client that was designed to increase user productivity and reduce the time that
knowledge workers spend looking for information. RetrievalWare 6.9 provided
user-level and document-level security simultaneously across enterprise
groupware and document management systems. Other significant enhancements to
RetrievalWare 6.9 included enhanced Microsoft Exchange security, general
availability of specialized medical and pharmaceutical search aids and updated
platform and third party support. The Company released RetrievalWare 7.0 in
March of 2002. This latest version is the first enterprise search product to
offer multimedia and cross-lingual search as off-the-shelf product features.
Screening Room Version 2.3 was released in April of 2002. Among the new
Screening Room features are enriched video ingestion and capture functionality,
more flexible video file management capabilities, the ability to more tightly
integrate with 3rd party asset and content management products, and enhanced
interoperability with RetrievalWare 7.0.
General and administrative expenses increased 63% to $10.2 million in fiscal
year 2002 from $6.3 million in fiscal year 2001, representing 30% and 12% of
revenues, respectively. In fiscal year 2001, general and administrative expenses
increased 16% from $5.4 million in fiscal year 2000, which was 14% of total
revenues. The increase in general and administrative expenses in fiscal year
2002 is partially attributable to increased corporate expenses such as legal,
insurance and accounting fees. There were also additional general and
administrative personnel required to support the Company's operations during
fiscal year 2002. The restructuring action taken in the third quarter of fiscal
year 2002 reduced the number of general and administrative employees by seven.
At January 31, 2002, the number of general and administrative personnel was 38,
compared to 39 at January 31, 2001. The increase in general and administrative
expense in fiscal year 2001 was due to growth in personnel required to support
the Company's expanding operations.
Amortization of goodwill and other intangible assets was approximately $98.3
million for the year ended January 31, 2002 and $15.7 million for the year ended
January 31, 2001. The majority of these amounts relate to amortization of
goodwill and intangible assets related to the Company's business combination
with Intel's IMS division, which was accounted for using the purchase method.
The amounts also include amortization of the intangible assets acquired from the
NBA pursuant to the contribution agreement. Amortization of goodwill and other
intangible assets related to the Combination was stopped effective October 3,
2001, when the Company determined that such assets were impaired and wrote down
the remaining unamortized balance to zero (see further explanation below). The
amount of amortization recorded for the year ended January 31, 2001 primarily
represented amortization associated with the Combination from the December 21,
2000 closing date to the end of the fiscal year. Amortization expense of
$118,000 for the year ended January 31, 2000 related to goodwill from an
acquisition made in the second quarter of fiscal year 1998.
Incentive bonus payments due to employees were approximately $6.7 million for
the year ended January 31, 2002. Specified former Intel employees who became
Convera employees and remain employed through September 30, 2002 will receive a
payment for the excess, if any, of the calculated aggregate gain they would have
realized on forfeited Intel stock options, based on the fair value of Intel
shares at a fixed date prior to the closing of the merger, that would have
vested between 2002 and 2005 over the calculated aggregate gain on Convera stock
options as of September 30, 2002. The maximum aggregate amount that Convera
could be required to pay, assuming no aggregate gain on the Convera stock
options at September 30, 2002, is approximately $1.3 million. The Company is
amortizing this amount over the period leading up to September 30, 2002 and, as
such, has recorded bonus expense of approximately $1.3 million as of January 31,
2002. Additionally, in May 2001, the Company paid approximately $5.4 million in
bonuses to specified former employees of Intel that remained employed by Convera
as of April 30, 2001. These bonus payments were funded through an additional
capital contribution from Intel. The bonus amounts were contingent upon the
former Intel employees' continued employment at Convera, and the Company
recorded this bonus in operations.
During the second quarter of fiscal year 2002, the Company implemented a
restructuring plan in response to the downturn in the economy and in conjunction
with the integration of the IMS division's operations following the Combination
with Intel. This restructuring resulted in a reduction of Convera's total
workforce by 22 employees, including 17 individuals from the Company's
engineering group and five individuals from the business development group. As
part of this restructuring, the Company also reduced the number of independent
contractors that were working on behalf of the Company by approximately 40
contractors and reduced the amount of space to be used in certain of the
Company's leased facilities.
On October 3, 2001, the Company announced an additional restructuring plan to
consolidate all operations around the development, marketing, sales and support
of its enterprise class information infrastructure software products,
RetrievalWare and Screening Room. The Company also announced that it was
eliminating operations supporting the development of the Company's digital
content security technology and interactive services offerings and closing
offices in Hillsboro, Oregon and Lafayette, Colorado. As a result of this
restructuring, Convera's total workforce was reduced by an additional 66
employees, including 44 employees of the engineering group, 13 from the
professional services and training groups, seven from the G&A group and two from
the marketing group.
As a result of the restructuring plans, the Company recorded restructuring
charges in the second and third fiscal quarters of fiscal year 2002 of $2.9
million and $5.2 million, respectively, for a total of $8.1 million in
restructuring charges. The restructuring charges include approximately $1.3
million in costs incurred under contractual obligations with no future economic
benefit to the Company, accruals of approximately $1.6 million for employee
termination costs and approximately $5.2 million related to future facility
losses for the offices closed in Hillsboro, Oregon and Lafayette, Colorado.
The Company paid a total of $2.6 million through January 31, 2002 against the
restructuring accruals recorded in the current fiscal year. Included in the
restructuring charges were approximately $1.8 million in non-cash charges
representing the write-down of facility improvements. As of January 31, 2002,
unpaid amounts of $1.6 million and $2.1 million have been classified as current
and long-term accrued restructuring costs, respectively, in the accompanying
consolidated balance sheet. Remaining expenditures relating to employee
severance costs will be substantially paid during the first quarter of fiscal
year 2003. Amounts related to contractual obligations will be paid within one
year. The Company expects to settle charges associated with facility closings
over the remaining term of the related facility leases, which is through
February 2006.
The Company recorded a charge of $754.4 million in the third quarter of fiscal
year 2002 for reduction of goodwill and other long-lived assets. On September
20, 2001, the Company announced that it had terminated its agreement with the
NBA to provide interactive content services. The termination of this agreement
led to the Company's decision to exit the interactive media services market and
focus on its enterprise information infrastructure software products. Following
the termination of the NBA contract and the Company's change in focus, the
Company evaluated the recoverability of the intangible and other long-lived
assets including goodwill associated with the Combination and associated with
the NBA agreement. The intangible assets acquired in the Combination, including
developed technology, customer contracts and assembled workforce, were primarily
related to the interactive media services offerings. The assessment of
recoverability was performed pursuant to Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS 121). Additional guidance related to
goodwill impairment was provided by APB 17, "Intangible Assets."
The unamortized balance of intangible assets associated with the NBA agreement
was approximately $67.3 million. Having no future economic benefit to the
Company, this unamortized balance was written down to zero. As a result of the
Company's shift in focus, there were no future cash flows expected to be
generated from the intangible assets acquired in the Combination; thus, the
unamortized balance of approximately $9.8 million related to these intangible
assets was also written down to zero. Since the assets acquired from Intel were
never integrated into the Company's overall operations, the goodwill associated
with the Combination was evaluated for impairment along with the other
intangible assets acquired from Intel. As a result, the unamortized goodwill
balance of $675.9 million was written down to zero. In addition, there was an
impairment charge of approximately $1.4 million to reflect the fair value of
certain computer equipment and furniture to be disposed of in connection with
the closing of the facilities described above.
Total expenses for fiscal year 2002 were $953.4 million compared to $75.7
million in fiscal year 2001 and $38.1 million in fiscal year 2000. The change in
the net loss per share, from $1.22 in fiscal year 2001 to $20.08 in fiscal year
2002, was largely due to the reduction in goodwill and other long-lived assets
charge of $754.4 million and the increase in amortization expense between the
two fiscal years. The change in the net loss per share, from $0.02 per common
share in fiscal year 2000 to $1.22 per common share in fiscal year 2001, was
primarily due to the significant increase in amortization expense in fiscal year
2001.
The total number of employees decreased to 350 at January 31, 2002 from 359 at
January 31, 2001. The Company had 208 employees at January 31, 2000.
Other Income, net
Other income increased to $4.2 million for fiscal year 2002, compared to $1.4
million in fiscal year 2001. Other income was $0.2 million in fiscal year 2000.
The increase in fiscal years 2002 and 2001 was due to a higher level of invested
funds resulting from the Combination.
Income Tax Benefit
The income tax benefit of $4.5 million for the year ended January 31, 2002
represents the reversal of the net deferred tax liability established as of
January 31, 2001, primarily as a result of the Combination with Intel and the
NBA contract. The Company has net deferred tax assets of $53,407 as of January
31, 2002. Given the Company's inability to predict sufficient taxable income to
realize the benefits of its net deferred tax asset as of January 31, 2002, the
Company provided a full valuation allowance against such deferred tax asset.
Liquidity and Capital Resources
The Company's combined balance of cash, cash equivalents and short-term
investments at January 31, 2002 as compared to January 31, 2001 is summarized
below (in thousands).
January 31, January 31, Change
2002 2001
-------------- --------------- ----------------
Cash and cash
equivalents $ 17,628 $ 37,061 $ (19,433)
Investments 40,087 119,083 (78,996)
-------------- --------------- ----------------
Total $ 57,715 $ 156,144 $ (98,429)
============== =============== ================
As of January 31, 2002, the Company's balances of cash, cash equivalents and
short-term investments were $57.7 million. The Company believes that its current
balance of cash, cash equivalents and its funds generated from operations, if
any, will be sufficient to fund the Company's current projected cash needs for
the foreseeable future. Prior to fiscal year 2001, the Company had primarily
used cash provided by sales of its common stock to finance its operations. If
the actions taken by management are not effective in achieving profitable
operating results, the Company may be required to pursue additional external
sources of financing in the future to support its operations and capital
requirements. There can be no assurances that external sources of financing will
be available if required, or that such financing will be available on terms
acceptable to the Company.
The Company has the following contractual obligations associated with its lease
commitments and other contractual obligations:
Payments Due By Period (in thousands)
2007 and
Contractual Obligations Total 2003 2004 2005 2006 Beyond
----- ---- ---- ---- ---- ------
Operating leases 11,859 3,530 3,132 2,717 1,564 916
Other contractual obligations 450 450 0 0 0 0
The number of days sales outstanding ("DSO") increased to 97 days at January 31,
2002 from 85 days at January 31, 2001. Management believes that the allowance
for doubtful accounts of $2.1 million at January 31, 2002 is adequate.
Operating Activities
In fiscal year 2002, the Company's operating activities used $44.6 million
compared to $7.8 million in fiscal year 2001. The fiscal year 2002 net loss of
$910.5 million was offset by non-cash charges totaling $861.2 million,
consisting primarily of $754.4 million from the reduction of goodwill and other
long-lived assets. Non-cash charges also included amortization of $98.3 million;
restructuring charges, net of cash paid, of $5.5 million; bad debt expense of
$3.4 million and depreciation of $2.3 million. Cash was also provided by a
reduction in accounts receivable of $4.3 million and an increase in accounts
payable and accrued expenses of $1.9 million. A decrease in deferred revenues
together with an increase in prepaid expenses and other used cash of $1.6
million. In fiscal year 2001, the net loss of $22.8 million was offset by
non-cash charges of $18.6 million, including $15.7 million of amortization of
goodwill and other intangibles, $0.8 million of acquired in-process research and
development, $1.3 million of depreciation, and $0.8 million in bad debt expense.
Increases in accounts receivable and prepaid expenses used $5.1 million and $1.8
million, respectively, while increases in accounts payable, accrued expenses and
deferred revenues together contributed $3.3 million. The Company's operating
activities used cash of $3.3 million in fiscal year 2000. The net loss of $0.3
million was offset by non-cash charges of $2.7 million, including $1.4 million
in depreciation and amortization, $0.8 million in bad debt expense and $0.5
million for the write-off of the Company's investment in Excalibur Technologies
N.V. ("ETNV"), a Belgian company incorporated in June 1996 for the purpose of
selling and marketing the Company's products and services within a large
territory including most of Northern Europe and Italy. Increases in accounts
receivable used $8.7 million while increases in accounts payable and accrued
expenses provided $0.6 million. Reductions in prepaid expenses and an increase
in deferred revenues together provided $2.5 million.
Investing Activities
Cash flows from investing activities provided the Company $71.7 million in
fiscal year 2002. Net cash provided from the maturity of U.S. Treasury bills
provided cash of $78.7 million, while purchases of equipment and leasehold
improvements used cash of $5.6 million. The Company also used cash of $1.4
million for direct acquisition costs in connection with the Combination with
Intel. Investing activities contributed $27.5 million in fiscal year 2001. The
Company received cash of $150.0 million in connection with the Combination.
Shortly after consummation of the Combination, the Company purchased short-term
investments, in the form of United States Treasury Bills, totaling approximately
$119.0 million. Additionally, costs incurred in relation to the Combination used
$2.0 million. Equipment and leasehold improvement purchases used $1.8 million.
During fiscal year 2000, investing activities used $1.2 million principally due
to the purchase of equipment and leasehold improvements.
Financing Activities
Financing activities used $46.6 million in fiscal year 2002. The repurchase of
the Company's common stock from Intel and the NBA used $53.0 million. A capital
contribution by Intel in the amount of approximately $5.4 million was used to
fund bonus payments to specified former Intel employees that remained employed
by Convera as of April 30, 2001. Proceeds from the issuance of stock under the
employee stock purchase plan provided cash of $0.9 million during fiscal year
2002. In fiscal year 2001, financing activities provided $6.1 million.
Approximately $5.7 million represented proceeds from the issuance of common
stock upon the exercise of outstanding stock options, while approximately $0.4
million represented purchases of shares of the Company through its employee
stock purchase plan. Financing activities provided approximately $9.4 million in
fiscal year 2000. Net proceeds of $4.9 million were provided by a private
placement of 500,000 shares of common stock sold at $10.00 per share to
unaffiliated accredited investors. Cash of $4.5 million was provided from the
exercise of employee stock options and issuances of stock under the employee
stock purchase plan.
Factors That May Affect Future Results - Forward Looking Information
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 maintain and grow
demand for the Company's products and services under uncertain domestic and
international economic conditions, 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.
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 license
agreements. In this regard, the purchase of the Company's products can require a
significant 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.
In January 2002, Allen Holding, Inc. purchased the remaining 12,156,422 shares
of Convera Class A common stock held by Intel, resulting in Allen Holding, Inc.
beneficially owning 55.2% of the outstanding shares of Convera Class A common
stock as of January 31, 2002. As a result, Allen Holding Inc. beneficially owns
more than 50% of the voting power of Convera, and would therefore be able to
control the outcome of matters requiring a stockholder vote. These matters could
include offers to acquire Convera and elections of directors. Allen Holding,
Inc. may have interests, which are different than the interests of other Convera
stockholders.
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 was introduced on January 1, 2002. The EURO
conversion has not had a material impact on the Company's operations or
financial results.
Item 7A. Quantitative and Qualitative Disclosures about 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 CTIL, the Company's foreign sales subsidiary located
in the United Kingdom, along with entities established in Paris, France and
Munich, Germany, were approximately 27% of total revenues in fiscal year 2002.
International sales are made mostly from the Company's foreign subsidiary and
are typically denominated in British pounds, French Francs or German Deutsche
Marks. As of January 31, 2002, approximately 30%, 3% and 3% of total
consolidated accounts receivable were denominated in British pounds, French
Francs and German Deutsche Marks, respectively. Additionally, the Company's
exposure to foreign exchange rate fluctuations arises in part from intercompany
accounts in which royalties on CTIL sales are charged to CTIL 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
CTIL 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.
As of January 31, 2002, 10% of the Company's cash and cash equivalents balance
was included in the Company's foreign subsidiaries. Cash equivalents consist of
funds deposited in money market accounts with original maturities of three
months or less. The Company's short-term investments consist of U.S. Government
treasury bills, with original maturity dates ranging from 3 months to 6 months.
Given the relatively short maturity periods of cash equivalents and short-term
investments, the Company's exposure to fluctuations in interest rates is
limited.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data of the Company are submitted as a
separate section of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the Company will be
included in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 25, 2002 and is incorporated in this report by
reference.
Item 11. Executive Compensation
Information regarding executive compensation will be included in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
June 25, 2002 and is incorporated in this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management will be included in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on June 25, 2002 and is incorporated
in this report by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions will be
included in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 25, 2002 and is incorporated in this report by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of Form 10-K
1. Financial Statements:
The following financial statements of the Company are submitted in
a separate section pursuant to the requirements of Form 10-K, Part
I, Item 8 and Part IV, Items 14(a) and 14(d):
Index to Consolidated Financial Statements Reports of Independent
Auditors and Independent Accountants Consolidated Balance Sheets
Consolidated Statements of Operations and Other Comprehensive Loss
Consolidated Statements of Shareholders' Equity Consolidated
Statements of Cash Flows Notes to Consolidated Financial
Statements
2. Schedules Supporting Financial Statements:
All schedules are omitted because they are not required, are
inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes to the consolidated
financial statements.
3. Exhibits:
Exhibit Number and Description
3.1 Amended and Restated Certificate of Incorporation of Convera (1)
3.2 By-laws of Convera (1)
10.1 Incentive Stock Option Plan, dated April 1989 (2)
10.2 1995 Incentive Plan, dated November 1995 (3)
10.3 ConQuest Incentive Stock Option Plan, dated August 19, 1993 (4)
10.4 Office Lease (1959 Palomar Oaks Way, Carlsbad, California), commencing November 15, 1995 (4)
10.5 Amended and Restated Excalibur Technologies Corporation 1996 Employee Stock Purchase Plan (1)
10.6 Office Lease (1921 Gallows Road, Vienna, Virginia 22182), commencing May 1, 1999 (5)
10.7 Employment agreement with James H. Buchanan, dated September 7, 1995 (5)
10.8 Office lease (11000 Broken Land Parkway, Columbia Maryland), commencing June 15, 2000 (6)
10.9 Convera Stock Option Plan (7)
10.10 Form of Transferred IP License Agreement between Intel Corporation and Convera (7)
10.11 Form of IP License Contribution Agreement between Intel Corporation and Convera (7)
10.12 Form of Registration Rights Agreement between Intel Corporation and Convera (7)
10.13 Contribution Agreement, dated as of September 13, 2000 between Convera and NBA Media Ventures, LLC (1)
10.14 Form of Registration Rights Agreement between Convera and NBA Media Ventures, LLC (1)
10.15 Office Lease (1781 Fox Drive, San Jose, California), commencing January 4, 2001 (8)
10.16 Office Lease (23245 NW Evergreen Parkway, Hillsboro, Oregon) commencing March 1, 2001 (8)
10.17 Office Lease (1808 Aston Avenue, Carlsbad, Oregon) commencing November 1, 2001
10.18 Amended & Restated Convera Corporation 1996 Employee Stock Purchase Plan (9)
21.01 Subsidiaries of Convera
23.01 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.02 Consent of Ernst & Young LLP, Independent Accountants
- ----------------------
(1) Incorporated herein by reference to Convera's Form S-4 (Registration No. 333-50172) filed November 17, 2000.
(2) Incorporated herein by reference to Excalibur's Form 10-K for the year ended January 31, 1991, filed April 22, 1991.
(2) Incorporated herein by reference to Excalibur's Proxy Statement for the 1995 Annual Meeting of Shareholders,
dated October 16, 1995.
(3) Incorporated herein by reference to Excalibur's Form 10-K for the year ended January 31, 1996, filed April 30, 1996.
(4) Incorporated herein by reference to Excalibur's Form 10-K for the year ended January 31, 1999, filed April 30, 1999.
(6) Incorporated herein by reference to Excalibur's Form 10-K for the year ended January 31, 2000, filed April 28, 2000.
(7) Incorporated herein by reference to Excalibur's Form 8-K dated April 30, 2000, filed May 3, 2000.
(8) Incorporated herein by reference to Convera's Form 10-K for the year ended January 31, 2001.
(9) Incorporated herein by reference to Convera's definitive Form 14C filed, December 18, 2001.
(b) Reports on Form 8-K.
The Company filed a Form 8-K for Item 1, Change in Control of the Registrant, on
January 7, 2002. The Form 1 reported the purchase by Convera in a privately
negotiated transaction of 2,792,962 shares of Convera's voting Class A common
stock and 12,207,038 shares of Convera's non-voting Class B common stock from
Intel Corporation. The Form 8-K also reported the transaction between Allen
Holding Inc. and Intel Corporation, whereby Allen Holding Inc. purchased the
remaining 12,156,422 shares of Convera Class A common stock owned by Intel,
resulting in Allen Holding Inc. beneficially owning 55.2% of the outstanding
shares of Convera Class A common stock.
The Company filed a Form 8-K for Item 5 on December 5, 2001, reporting that
Convera purchased 4,746,221 shares of Convera common stock from the National
Basketball Association in a privately negotiated transaction.
Index to Consolidated Financial Statements Page
Reports of Independent Auditors and Independent Accountants F-1, F-2
Consolidated Balance Sheets F-3
As of January 31, 2002 and 2001
Consolidated Statements of Operations and Other Comprehensive Loss F-4
For the fiscal years ended January 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity F-5
For the fiscal years ended January 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows F-6
For the fiscal years ended January 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements F-7
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Convera Corporation
We have audited the accompanying consolidated balance sheets of Convera
Corporation as of January 31, 2002 and January 31, 2001, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity, and cash flows for each of the two years in the period ended January 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Convera
Corporation as of January 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
January 31, 2002, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 15, 2002
Report of Independent Accountants
To the Board of Directors and Shareholders of
Excalibur Technologies Corporation:
In our opinion, the accompanying consolidated statements of operations and other
comprehensive loss, shareholders' equity and cash flows present fairly, in all
material respects, the results of operations and cash flows of Excalibur
Technologies Corporation and its subsidiaries for the year ended January 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
McLean, Virginia
March 8, 2000
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of January 31,
---------------------------------------
ASSETS
2002 2001
--------------- ---------------
Current Assets:
Cash and cash equivalents........................................ $ 17,628 $ 37,061
Short term investments........................................... 40,087 119,083
Accounts receivable, net of allowance for doubtful
accounts of $2,115 and $1,231, respectively................. 9,468 17,392
Prepaid expenses and other ...................................... 2,715 4,394
--------------- ---------------
Total current assets....................................... 69,898 177,930
Equipment and leasehold improvements, net of accumulated
depreciation of $10,493 and $8,785, respectively................. 4,425 2,635
Other assets.......................................................... 3,754 436
Goodwill and other intangible assets.................................. 29 845,444
--------------- ---------------
Total assets................................................. $ 78,106 $ 1,026,445
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. 3,054 3,480
Accrued expenses................................................. 7,553 2,543
Accrued bonuses.................................................. 2,144 714
Restructuring reserve............................................ 1,621 -
Deferred revenues................................................ 3,729 4,650
--------------- ---------------
Total current liabilities.................................. 18,101 11,387
Restructuring reserve, net of current portion......................... 2,129 -
--------------- ---------------
Total liabilities.......................................... 20,230 11,387
Commitments and Contingencies
Shareholders' Equity:
Common stock Class A, $0.01 par value, 100,000,000 shares
authorized; 28,969,334 and 35,327,589 shares issued at
January 31, 2002 and 2001, respectively; 27,969,334 and
35,327,589 shares outstanding at January 31, 2002 and
2001, respectively........................................... 280 353
Common stock Class B, $0.01 par value, 40,000,000 shares
authorized; 0 and 12,207,038 shares issued and outstanding
at January 31, 2002 and 2001, respectively................... - 122
Treasury stock at cost, 1,000,000 shares......................... (2,310) -
Additional paid-in capital....................................... 1,050,053 1,094,192
Accumulated deficit ............................................. (989,429) (78,920)
Accumulated other comprehensive loss............................. (718) (689)
--------------- ---------------
Total shareholders' equity................................... 57,876 1,015,058
--------------- ---------------
Total liabilities and shareholders' equity................... $ 78,106 $ 1,026,445
=============== ===============
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
For the Fiscal Years Ended January 31,
---------------------------------------------------------
2002 2001 2000
------------------ ----------------- -----------------
Revenues:
Software....................................... $ 26,740 $ 37,299 $ 32,649
Maintenance.................................... 6,509 6,621 5,285
------------------ ----------------- -----------------
License-related.................................. 33,249 43,920 37,934
Services......................................... 979 7,602 -
------------------ ----------------- -----------------
34,228 51,522 37,934
------------------ ----------------- -----------------
Cost of revenues:
Software ...................................... 13,443 8,288 4,724
Maintenance ................................... 1,979 1,474 2,143
------------------ ----------------- -----------------
License-related ................................. 15,422 9,762 6,867
Services......................................... 3,960 7,846 -
------------------ ----------------- -----------------
19,382 17,608 6,867
------------------ ----------------- -----------------
Gross margin: 14,846 33,914 31,067
------------------ ----------------- -----------------
Operating expenses:
Sales and marketing.............................. 32,473 22,345 16,210
Research and product development................. 23,774 12,968 9,456
General and administrative....................... 10,214 6,279 5,402
Amortization of goodwill and other intangible
assets........................................ 98,304 15,672 118
Incentive bonus payments due to employees........ 6,681 - -
Restructuring charges............................ 8,128 - -
Reduction in goodwill and other long-lived
intangible assets............................. 754,424 - -
Acquired in-process research and development..... - 800 -
------------------ ----------------- -----------------
933,998 58,064 31,186
------------------ ----------------- -----------------
Operating loss....................................... (919,152) (24,150) (119)
Other income (expense), net.......................... 4,191 1,368 (221)
------------------ ----------------- -----------------
Net loss before income taxes......................... (914,961) (22,782) (340)
Income tax benefit................................... 4,452 - -
------------------ ----------------- -----------------
Net loss............................................. (910,509) (22,782) (340)
Dividends on preferred stock......................... - 10 14
------------------ ----------------- -----------------
Net loss applicable to common shareholders........... $ (910,509) $ (22,792) $ (354)
================== ================= =================
Basic and diluted net loss per common share.......... $ (20.08) $ (1.22) $ (0.02)
Weighted-average number of common shares outstanding
- basic and diluted.............................. 45,348,739 18,713,717 14,281,615
Other comprehensive loss:
Net loss......................................... (910,509) (22,782) (340)
Foreign currency translation adjustment.......... (29) (691) 69
------------------ ----------------- -----------------
Comprehensive loss................................... $ (910,538) $ (23,473) $ (271)
================== ================= =================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Other
Preferred Stock Common Stock Treasury Stock Additional Compre-
--------------- ------------ -------------- Paid-in Accumulated hensive
Shares Amount Shares Amount Shares Amount Capital Deficit (Loss) Total
------ ------ ------ ------ ------ ------ ------- ------- ------ -----
Balance, January 31, 1999. 27,180 $ 271 13,689,466 $ 137 - $ - $ 68,631 $ (55,798) $ (67) $ 13,174
Private placement, net
of issuance costs......... - - 500,000 5 - - 4,653 - - 4,658
Issuance of common stock
upon exercise of options.. - - 433,890 4 - - 4,522 - - 4,526
Issuance of common stock
for Employee Stock
Purchase Plan............. - - 23,096 - - - 218 - - 218
Foreign Currency
Translation adjustment.... - - - - - - - - 69 69
Net loss.................. - - - - - - - (340) - (340)
------ ----- ---------- ----- ---------- ------- ---------- ---------- ------- -----------
Balance, January 31, 2000. 27,180 $ 271 14,646,452 $ 146 - $ - $ 78,024 $ (56,138) $ 2 $ 22,305
Issuance of common stock
upon exercise of options.. - - 701,480 7 - - 5,653 - - 5,660
Issuance of common stock
for Employee Stock
Purchase Plan............. - - 12,252 - - - 413 - - 413
Conversion of Preferred
stock.....................(27,180) (271) 271,800 3 - - 268 - - -
Issuance of common stock
related to IMS merger..... - - 27,156,422 272 - - 922,806 - - 923,078
Issuance of common stock
to NBA.................... - - 4,746,221 47 - - 74,706 - - 74,753
Tax benefit related to
stock options............. - - - - - - 12,322 - - 12,322
Translation adjustment.... - - - - - - - - (691) (691)
Net loss.................. - - - - - - - (22,782) - (22,782)
------ ----- ---------- ----- ---------- ------- ---------- ---------- ------- -----------
Balance, January 31, 2001. - $ - 47,534,627 $ 475 - $ - $1,094,192 $ (78,920) $ (689) $1,015,058
Issuance of common stock
upon exercise of options.. - - 28,150 - - - 232 - - 232
Issuance of common stock
for Employee Stock
Purchase Plan............. - - 152,778 2 - - 700 - - 702
Capital contribution
from Intel................ - - - - - - 5,422 - - 5,422
Purchase and retirement of
common stock.............. - - (19,746,221) (197) (1,000,000) (2,310) (50,493) - - (53,000)
Translation adjustment.... - - - - - - - - (29) (29)
Net loss.................. - - - - - - - (910,509) - (910,509)
------ ----- ---------- ----- ---------- ------- ---------- ---------- ------- -----------
Balance, January 31, 2002. - $ - 27,969,334 $ 280 (1,000,000) $(2,310) $1,050,053 $(989,429) $ (718) $ 57,876
====== ===== ========== ===== ========== ======= ========== ========== ======== ===========
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Years Ended January 31,
--------------------------------------------------
2002 2001 2000
------------ ------------- -----------
Cash Flows from Operating Activities:
Net loss $ (910,509) $ (22,782) $ (340)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................ 2,294 1,329 1,323
Provision for doubtful accounts......................... 3,420 828 838
Amortization of goodwill and other intangibles.......... 98,304 15,672 118
Restructuring charges, net of cash paid................. 1,769 - -
Acquired in-process research and development............ - 800 -
Write off of investments................................ 481 - 471
Deferred tax benefit.................................... (4,452) - -
Reduction of goodwill & other long-lived assets......... 754,424 - -
Changes in operating assets and liabilities,
net of effects from acquisition:
Accounts receivable..................................... 4,256 (5,150) (8,712)
Prepaid expenses and other.............................. (695) (1,782) 1,223
Accounts payable, accrued expenses and accrued bonuses.. 3,206 2,475 579
Restructuring charges................................... 3,750 - -
Deferred revenues....................................... (896) 833 1,248
-------------- -------------- --------------
Net cash used in operating activities................... (44,648) (7,777) (3,252)
-------------- -------------- --------------
Cash Flows from Investing Activities:
Purchase of investments................................. (201,208) (118,625) (178)
Proceeds from maturities of investments................. 279,923 - -
Purchases of equipment and leasehold improvements....... (5,647) (1,792) (1,008)
Cash acquired in acquisition of business................ - 150,000 -
Direct acquisition costs................................ (1,416) (2,047) -
-------------- -------------- --------------
Net cash provided by (used in) investing activities..... 71,652 27,536 (1,186)
-------------- -------------- --------------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock, net......... 702 413 4,876
Repurchase of common stock.............................. (53,000) - -
Proceeds from the exercise of stock options............. 232 5,653 4,520
Capital contribution from Intel......................... 5,422 - -
-------------- -------------- --------------
Net cash provided by (used in) financing activities..... (46,644) 6,066 9,396
-------------- -------------- --------------
Effect of Exchange Rate Changes on Cash...................... 207 352 75
-------------- -------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents......... (19,433) 26,177 5,033
Cash and Cash Equivalents, beginning of year................. 37,061 10,884 5,851
-------------- -------------- --------------
Cash and Cash Equivalents, end of year....................... $ 17,628 $ 37,061 $ 10,884
============== =============== ==============
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(1) THE COMPANY
Operations and Organization
Convera was established through the combination of the former Excalibur
Technologies Corporation ("Excalibur") and Intel Corporation's Interactive Media
Services division (the "Combination"). The Combination was accounted for using
the purchase method of accounting. All references herein to financial results
for the Company for the period prior to December 21, 2000 reflect the historical
financial results of Excalibur and its subsidiaries.
Convera principally earns revenues from the licensing of 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 through license agreements with value-added resellers, systems
integrators, OEMs, and other strategic partners. The Company's technology may
also be customized and deployed to commercial businesses.
The Company's operations are subject to certain risks and uncertainties
including, but not limited to: the dependence upon the timing of the closing on
sales of 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; the effect of general economic
conditions on demand for the Company's products and services; possible
disruption in commercial activities caused by terrorist activity and armed
conflict, such as changes in logistics and security arrangements, and the
availability of additional capital financing on terms acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Convera
Corporation and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
Use of Estimates
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.
Revenue Recognition
The Company recognizes revenue in accordance with American Institute of
Certified Public Accountants' Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), as amended by Statement of Position 98-9, Software
Revenue Recognition, with respect to certain transactions.
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. Training and systems implementation services are sold
as part of a bundled software license agreement as well as separately to
customers who have previously purchased software licenses. When training or
systems implementation services that are not essential to the functionality of
the software are sold as part of a bundled license agreement, the fair value of
these services, based on the price charged for the services when sold
separately, is deferred and recognized when the services are performed.
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. Customer support agreements generally include bug fixes,
telephone support and product upgrades on a when and if available basis. 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 when sold separately, is deferred and
recognized ratably over the term of the respective agreement.
Significant 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 over
the duration of the contract. Estimated losses on such contracts would be
charged against earnings in the period such losses are identified. No such
losses have been incurred on such contracts to date.
The in-process customer contracts assigned to the Company by the IMS division
pursuant to the Combination in December 2000 were accounted for using the
completed contract method, and accordingly, revenue was deferred until all
remaining costs, obligations and potential risks were insignificant and the
contract deliverables were agreed to and accepted by the customer. As Convera
completed these contracts, revenue and the related costs, including profit on
work performed by Convera subsequent to the acquisition, was recognized. All
obligations under the contracts assigned by the IMS division have been
completed.
The Company incurs shipping and handling costs, which are recorded in cost of
revenues.
Research and Development Costs
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed" requires the capitalization of certain software development
costs once technological feasibility is established, which for the Company
generally occurs upon completion of a working model. Capitalization ceases when
the products are available for general release to customers, at which time
amortization of the capitalized costs begins on a straight-line basis over the
estimated product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between achieving
technological feasibility and the general availability of such software has been
short, and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
Advertising
Advertising costs are expensed as incurred. The Company incurred approximately
$195, $347 and $3 in advertising costs for the years ended January 31, 2002,
2001 and 2000, respectively.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), allows companies to account for stock-based
compensation either under the provisions of SFAS 123 or under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), as amended by FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation (an interpretation of APB
Opinion No. 25)," but requires pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company has elected to account for its stock-based compensation in
accordance with the provisions of APB 25.
Net Loss Per Common Share
The Company follows Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share," ("SFAS 128") for computing and presenting net loss per
share information. 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 excludes common
equivalent shares and unexercised stock options as the computation would be
anti-dilutive. A reconciliation of the net loss available to common stockholders
and the number of shares used in computing basic and diluted net loss per share
is in Note 12.
Translation of Foreign Financial Statements
The functional currency of the Company's foreign subsidiaries is their local
currency. Accordingly, assets and liabilities of the Company's foreign
subsidiary are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at average rates for
the period. Foreign currency translation adjustments are accumulated in a
separate component of shareholders' equity. Foreign currency transaction gains
or losses are recorded in operating expenses and were not significant for the
years ended January 31, 2002, 2001 and 2000.
Financial Instruments
The carrying value of the Company's financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts payable
and accrued expenses, approximates fair value.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
accounts receivable. Management believes that the Company's investment policy
limits the Company's exposure to concentrations of credit risk. The Company
sells its products primarily to major corporations, including distributors that
serve a wide variety of U.S. and foreign markets, and to government agencies.
The Company extends credit to its corporate customers based on an evaluation of
the customer's financial condition, generally without requiring a deposit or
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains an allowance for anticipated losses.
Valuation Accounts
Uncollectible
Accounts
Balance at Charged to Written Off,
Beginning of Costs and Net of Balance at
Period Expenses Recoveries End of Period
------------ ------------ ------------ -------------
Year Ended January 31, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,231 $ 3,420 $ (2,536) $ 2,115
Year Ended January 31, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $ 831 $ 828 $ (428) $ 1,231
Year Ended January 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 660 $ 838 $ (667) $ 831
Cash and Cash Equivalents
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. Substantially all
cash and cash equivalents are on deposit with two major financial institutions.
Short Term Investments
Highly liquid investments with maturities of one year or less are classified as
short-term investments. Short-term investments consist primarily of U.S.
Government treasury bills and are carried at amortized cost. The Company also
has a certificate of deposit for $107, which is pledged to collateralize a
letter of credit required for a leased facility.
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 for financial reporting purposes
and the amounts for income tax purposes at the tax rates expected to be in
effect when the differences reverse. 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 provided a full
valuation allowance against its net deferred tax assets as of January 31, 2002.
Equipment and Leasehold Improvements
Office furniture and computer equipment are recorded at cost. Depreciation of
office furniture and equipment is provided on a straight-line basis over the
estimated useful lives of the assets, generally three to ten years. Amortization
of leasehold improvements and leased assets are provided on a straight-line
basis over the shorter of the term of the applicable lease or the useful life of
the asset.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of property and equipment retired or otherwise disposed of
and the related accumulated depreciation or amortization are removed from the
accounts and any resulting gain or loss is reflected in current operations.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of acquisition cost over the net assets
acquired in a business combination accounted for using the purchase method of
accounting, was being amortized on a straight-line basis over six years. Other
intangible assets, including assembled workforce, developed technology, customer
contracts, and other acquired rights were carried at cost less accumulated
amortization. Amortization of other intangible assets was being charged to
income on a straight-line basis over the periods estimated to benefit, ranging
from one to 12 years. Amortization of goodwill and other intangible assets
related to the Combination was stopped effective October 3, 2001, when the
Company determined that such assets were impaired, and the remaining unamortized
balance was written down to zero. See Note 4.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived assets
including goodwill. This evaluation consists of a comparison of the carrying
value of the assets with the assets' expected future cash flows, undiscounted
and without interest costs. Estimates of expected future cash flows represent
management's best estimate based on reasonable and supportable assumptions and
projections. If the expected future cash flow, undiscounted and without interest
charges, exceeds the carrying value of the asset, no impairment is recognized.
Impairment losses are measured as the difference between the carrying value of
long-lived assets and their fair market value, based on discounted future cash
flows of the related assets.
Following the termination of the NBA contract and the Company's decision to exit
the interactive media services market, the Company evaluated the recoverability
of the intangible and other long-lived assets including goodwill associated with
the Combination and with the NBA Agreement. As of result of the evaluation, the
Company recorded a charge of $754 million in the third quarter of fiscal year
2002. See Note 4.
Reclassifications
Certain amounts presented in the prior years' financial statements have been
reclassified to conform with the fiscal year 2002 presentation.
Recent Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 be accounted for under
the purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives will continue to be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment.
In-process research and development will continue to be written off immediately.
Under the provisions of SFAS No. 142, any impairment loss identified upon
adoption of this standard is recognized as a cumulative effect of a change in
accounting principle. Any impairment loss incurred subsequent to initial
adoption of SFAS No. 142 is recorded as a charge to current period earnings. In
the event the Company reports goodwill from acquisitions subsequent to June 30,
2001, the goodwill will not be amortized. The Company will adopt SFAS No. 142 in
the first quarter of fiscal 2003 and at that time will stop amortizing goodwill
resulting from business combinations completed prior to the adoption of SFAS No.
141. After the reduction of goodwill and intangible assets recorded during
fiscal year 2002 (see Note 4) related to the combination with Intel's
Interactive Media Services Division in December 2000, the remaining goodwill
balance as of January 31, 2002 is immaterial. Thus, adoption of these
pronouncements is not expected to have a significant impact on the financial
position or results of operations of the Company. In August 2001, the FASB
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of APB No. 30, "Reporting Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for the Company in the first
quarter of fiscal year 2003. The Company is reviewing the provisions of SFAS No.
144 and does not anticipate that the adoption will have a material impact on the
Company's financial condition or results of operations.
(3) ACQUISITIONS
On December 21, 2000, Excalibur and Intel consummated the Combination. At the
completion of the Combination, Excalibur became a wholly owned subsidiary of the
Company, each outstanding share of Excalibur common stock was converted into one
share of Class A common stock of the Company. Intel contributed to the Company
its IMS division, intellectual property and other assets used by that division,
as well as approximately $155,000 in cash, with $150,000 paid at closing and the
balance payable in fiscal year 2002 to fund retention bonuses to former Intel
employees, in exchange for 14,949,384 shares of Class A common stock of the
Company and 12,207,038 shares of Class B non-voting common stock.
The Combination was accounted for using the purchase method of accounting and
accordingly, the results of operations of the IMS division have been included in
the Company's financial statements from the date of acquisition. The preliminary
purchase price for the IMS division was determined to be approximately $925,125,
which included approximately $2,047 of transaction and direct acquisition costs
less approximately $593 in costs to register and issue the shares. The shares
issued to Intel as consideration for the contribution of assets were valued
based on the market price when the Combination was originally announced. The
purchase price was preliminarily allocated to the assets acquired based on their
estimated fair values on the acquisition date as follows:
Net tangible assets acquired $ 150,711
Developed technology 9,090
Assembled workforce 4,070
Customer contracts 3,010
Acquired in-process research and development 800
Net deferred tax liabilities (12,322)
Goodwill 769,766
---------------
Total purchase price $ 925,125
===============
In connection with the Combination, the Company recorded a charge for acquired
in-process research and development ("IPRD") of approximately $800 in the year
ended January 31, 2001. The purchased IPRD represented the present value of the
estimated after-tax cash flows expected to be generated by the purchased
technology, which, at December 21, 2000, had not yet reached technological
feasibility. The cash flow projections for revenues were based on estimates of
market size and growth factors, expected industry trends, the anticipated nature
and timing of product introduction and the estimated life of the underlying
technology. Estimated operating expenses and income taxes were deducted from
estimated revenue projections to arrive at estimated after tax cash flows.
Projected operating expenses included cost of sales, sales and marketing and
general and administrative expenses.
(4) REDUCTION IN GOODWILL AND OTHER LONG-LIVED ASSETS
The Company recorded a charge of $754 million during fiscal year 2002 for
reduction of goodwill and other long-lived assets. On September 20, 2001, the
Company announced that it had terminated its agreement with the National
Basketball Association ("NBA") to provide interactive content services. The
termination of this agreement was part of the Company's decision to exit the
interactive media services market and focus on its enterprise information
infrastructure software products. In connection with this shift in focus, on
October 4, 2001, the Company closed facilities in Hillsboro, Oregon and
Lafayette, Colorado, and all positions supporting the interactive media services
offerings and the related content security technology development were
eliminated.
Following the termination of the NBA contract and the Company's change in focus,
the Company evaluated the recoverability of the intangible and other long-lived
assets including goodwill associated with the Combination and associated with
the NBA agreement. The intangible assets acquired in the Combination, including
developed technology, customer contracts and assembled workforce, were primarily
related to the interactive media services offerings. The assessment of
recoverability was performed pursuant to Statement Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS 121). Additional guidance related to
goodwill impairment was provided by APB 17, "Intangible Assets."
The unamortized balance of intangible assets associated with the NBA agreement
was approximately $67,318. Having no future economic benefit to the Company,
this unamortized balance was written down to zero. As a result of the Company's
shift in focus, there were no future cash flows expected to be generated from
the intangible assets acquired in the Combination; thus, the unamortized balance
of approximately $9,764 related to these intangible assets was written down to
zero. Since the assets acquired from Intel were never integrated into the
Company's overall operations, the goodwill associated with the Combination was
evaluated for impairment along with the other intangible assets acquired from
Intel. As a result, the unamortized goodwill balance of $675,896 was written
down to zero. In addition, there was an impairment charge of approximately
$1,446 to reflect the value of certain computer equipment and furniture that was
either written down to fair value or disposed of in connection with the closing
of the various facilities described above.
(5) RESTRUCTURINGS
On May 10, 2001, the Company adopted a restructuring plan in response to the
downturn in the economy and in conjunction with the integration of the IMS
division's operations following the Combination with Intel. This restructuring
resulted in a reduction of Convera's total workforce by 22 employees, including
17 individuals from the Company's engineering group and five individuals from
the business development group. As part of this restructuring, the Company also
reduced the number of independent contractors that were working on behalf of the
Company by approximately 40 contractors and reduced the amount of space to be
used in certain of the Company's leased facilities.
On October 3, 2001, the Company announced an additional restructuring plan to
consolidate all operations around the development, marketing, sales and support
of its enterprise class information infrastructure software products, Convera
RetrievalWare and Convera Screening Room. The Company also announced that it was
eliminating operations supporting the digital content security and interactive
services business units and closing offices in Hillsboro, Oregon and Lafayette,
Colorado. As a result of the restructuring in the third quarter of the current
year, Convera's total workforce was reduced by an additional 69 employees,
including 47 employees from the engineering group, 13 from the professional
services and training groups, seven from the G&A group and two from the
marketing group.
As a result of the restructuring plans, the Company recorded restructuring
charges in the second and third quarters of fiscal year 2002 of $2,933 and
$5,195, respectively, for a total of $8,128 in restructuring charges for the
year ended January 31, 2002. The restructuring charges include approximately
$1,338 in costs incurred under contractual obligations with no future economic
benefit to the Company, accruals of approximately $1,590 for employee
termination costs and approximately $5,200 related to future facility losses for
the offices closed in Hillsboro, Oregon and Lafayette, Colorado.
The following table sets forth a summary of the restructuring charges, the
payments made against those charges and the remaining restructuring liability as
of January 31, 2002:
Accrued
Second Third restructuring
quarter quarter costs at
restructuring restructuring Non-cash January 31,
charge charge Total charges Payments 2002
Employee severance and other
termination benefits........... $ 409 $ 1,181 $ 1,590 $ - $ (1,361) $ 229
Estimated costs of facilities
closing........................ 2,066 3,134 5,200 (1,769) (360) 3,071
Contractual obligations........ 458 880 1,338 - (888) 450
------------ ------------ ----------- ----------- ------------ ------------
Total $ 2,933 $ 5,195 $ 8,128 $ (1,769) $ (2,609) $ 3,750
============ ============ =========== ============ ============ ============
The Company paid a total of $2,609 through January 31, 2002 against the
restructuring accruals recorded in the current fiscal year. Non-cash charges
represent the write-down of facility improvements included in the estimated
costs of facilities closings. As of January 31, 2002, unpaid amounts of $1,621
and $2,129 have been classified as current and long-term accrued restructuring
costs, respectively, in the accompanying consolidated balance sheet. Remaining
cash expenditures relating to employee severance costs will be substantially
paid during the first quarter of fiscal year 2003. Amounts related to
contractual obligations will be paid within one year. The Company expects to
settle amounts associated with facility closings over the remaining term of the
related facility leases, which is through February 2006.
(6) INCENTIVE BONUS PAYMENTS
Specified former Intel employees who became Convera employees and remain
employees through September 30, 2002 will receive a payment for the excess, if
any, of the calculated aggregate gain they would have realized on forfeited
Intel stock options, based on the fair value of Intel shares at a fixed date
prior to the closing of the merger, that would have vested between 2002 and 2005
over the calculated aggregate gain on Convera stock options as of September 30,
2002. The maximum aggregate amount that Convera could be required to pay,
assuming no aggregate gain on the Convera stock options at September 30, 2002,
is approximately $1,314. The Company is amortizing this amount over the period
leading up to September 30, 2002, and accordingly, recorded bonus expense of
approximately $1,259 for the year ended January 31, 2002.
Additionally, on May 16, 2001, the Company paid approximately $5,422 in bonuses
to specified former employees of Intel that remained employed by Convera as of
April 30, 2001. These bonus payments were funded through an additional capital
contribution from Intel. The bonus amounts were contingent upon the former Intel
employees' continued employment at Convera, and the Company recorded the
majority of this bonus in operations in the first quarter of fiscal year 2002.
(7) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at January 31, 2002 and 2001 consisted of
the following:
2002 2001
---- ----
Computer equipment $ 11,338 $ 9,250
Office furniture 2,934 1,672
Leasehold improvements 646 498
----------- -----------
14,918 11,420
Less accumulated depreciation (10,493) (8,785)
----------- -----------
$ 4,425 $ 2,635
=========== ===========
Assets acquired under capital leases included in equipment above were $28 and
$50 at January 31, 2002 and 2001, respectively, and they were fully depreciated
as of January 31, 2002. The related accumulated depreciation was $28 and $35 for
fiscal years ended January 31, 2002 and 2001, respectively.
Depreciation expense for fiscal years 2002, 2001 and 2000 was $2,294, $1,329 and
$1,323 respectively.
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Net goodwill and other acquisition-related intangibles at fiscal year ends were
as follows:
2002 2001
---- ----
Goodwill $ 576 $ 770,342
Developed technology - 13,160
Other intangibles - 77,925
----------- -----------
576 861,427
Less accumulated amortization (547) (15,983)
----------- -----------
$ 29 $ 845,444
=========== ===========
Amortization expense for fiscal years 2002, 2001 and 2000 was $98,304, $15,672
and $118, respectively.
(9) ACCRUED EXPENSES
Accrued expenses at January 31, 2002 and 2001 consisted of the following:
2002 2001
---- ----
Accrued payroll $ 1,474 $ 1,302
Accrued facility costs 4,007 -
Accrued consulting fees 917 608
Other 1,155 633
---------- ----------
$ 7,553 $ 2,543
========== ==========
(10) INCOME TAXES
The Components of the benefit from income taxes are as follows:
For the Fiscal Years Ended January 31,
-----------------------------------------------------------
2002 2001 2000
------------------ ------------------- ------------------
Current tax benefit
Federal $ - $ - $ -
State - - -
--------- --------- ---------
$ - $ - $ -
--------- --------- ---------
Deferred tax benefit
Federal $ 4,006 $ - $ -
State 446 - -
--------- --------- ---------
$ 4,452 $ - $ -
--------- --------- ---------
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes consisted of:
For the Fiscal Years Ended January 31,
-------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
Federal benefit at statutory rate $ (320,236) (35)% $ (7,974) (35)% $ (119) (35)%
Effect of:
State benefits, net of federal (6,022) (1)% (350) (1)% (6) (2)%
benefits
Goodwill 266,193 21 % 4,876 21 % 41 12 %
Other - 0 % 43 0 % 34 10 %
Valuation allowance 55,613 15 % 3,405 15 % 49 15 %
---------- ---------- ----------
$ (4,452) 0 % $ - 0 % $ - 0 %
=========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The Company's net deferred tax assets at January 31, 2002 and 2001 were as
follows:
2002 2001
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards,
not yet utilized $ 51,658 $ 31,282
Restructuring reserve 1,459 -
Other 2,926 2,334
---------- ---------
Total deferred tax assets 56,043 33,616
Valuation allowance (55,613) -
---------- ---------
430 33,616
--------- ---------
Deferred tax liabilities:
Acquired intangibles - (33,201)
Other (430) (415)
---------- ----------
Total deferred tax liabilities (430) (33,616)
---------- ----------
Net deferred tax assets (liabilities) $ - $ -
========== ==========
At January 31, 2002, the Company had net operating loss carryforwards ("NOLs")
of approximately $134,600 that expire at various dates through fiscal year 2021.
The use of these NOLS may be limited by Section 382 of the Internal Revenue Code
as a result of the business combination with Intel. Approximately $2,100 of the
NOLs relate to stock option exercises, and $6,700 relate to UK operations. The
tax benefit associated with the stock option exercises will be credited to
equity when and if realized.
As of January 31, 2001, the Company had deferred tax liabilities resulting from
intangible assets generated in the Combination and the NBA contribution
agreement. In fiscal year 2002 the Company recorded a reduction in goodwill and
other long-lived assets (see Note 4), which eliminated the intangible assets
that gave rise to the deferred tax liabilities. As of January 31, 2002, the
Company's deferred tax assets, which are primarily related to NOL carryforwards
generated by the Company, exceeded the deferred tax liabilities. As the Company
has not generated earnings and no assurance can be made of future earnings
needed to utilize these NOLs, a valuation allowance in the amount of the net
deferred tax asset has been recorded.
(11) CAPITALIZATION
The authorized capital stock of Convera consists of 100 million shares of Class
A voting common stock, par value $0.01 per share, 40 million shares of Class B
non-voting common stock, par value $0.01 per share, and five million shares of
cumulative convertible preferred stock, par value $0.01 per share.
During the year ended January 31, 2002, the Company announced a stock
repurchase program whereby the Company may repurchase up to $10 million of the
Company's common stock in the open market, through block trades or in privately
negotiated transactions. The timing and amount of any shares repurchased are
determined by the Company's management based on its evaluation of market
conditions and other factors. The repurchase program may be suspended or
discontinued at any time without prior notice.
Stock Repurchases
During the fourth quarter of the fiscal year ended January 31, 2002, the Company
purchased 4,746,221 shares of Class A common stock from NBA Media Ventures, LLC
("NBA"), representing the entirety of its holdings, for $11 million, or $2.31
per share. The Company also purchased a total of 15,000,000 shares of common
stock, consisting of 2,792,962 shares of Class A voting common stock and
12,207,038 shares of Class B non-voting common stock, from Intel Corporation for
$42 million, or $2.80 per share. The entirety of the Class B shares and all but
1,000,000 shares of the Class A common stock that was repurchased was retired in
the fourth quarter of fiscal year 2002. The 1,000,000 shares of treasury stock
are recorded as a $2,310 reduction to shareholders' equity in the Company's
consolidated balance sheets.
In January 2002, Allen Holding, Inc. purchased the remaining 12,156,422 shares
of Convera Class A common stock held by Intel, resulting in Allen Holding, Inc.
beneficially owning 55.2% of the outstanding shares of Convera Class A common
stock as of January 31, 2002.
(12) NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net loss per
common share:
For the Fiscal Years Ended January 31,
-----------------------------------------------------------
2002 2001 2000
----------------- ------------------ ------------------
Numerator:
Net loss.......................................... $ (910,509) $ (22,782) $ (340)
Less: Dividends on preferred stock................ - 10 14
----------------- ------------------ ------------------
Net loss applicable to common shareholders....... $ (910,509) $ (22,792) $ (354)
================= ================== ==================
Denominator:
Weighted average number of common shares
outstanding - basic and diluted................... 45,348,739 18,713,717 14,281,615
Basic and diluted net loss per common share....... $ (20.08) $ (1.22) $ (0.02)
The following equity instruments were not included in the computation of diluted
net loss per common share because their effect would be antidilutive:
For the Fiscal Years Ended January 31,
-----------------------------------------------------------
2002 2001 2000
----------------- ------------------ ------------------
Convertible preferred stock....................... - - 271,800
Stock options..................................... 1,399,512 4,810,862 1,008,427
----------------- ------------------ ------------------
Dilutive potential common stock ..................... 1,399,512 4,810,862 1,280,227
================= ================== ==================
(13) EMPLOYEE BENEFIT PLANS
Stock Options
The Convera 2000 stock option plan was approved by Excalibur shareholders in
December 2000 in connection with and as a condition to the Combination. The
stock option plan authorizes the granting of stock options and other forms of
incentive compensation to purchase up to 11.25 million shares of the Company's
Class A common stock in order to attract, retain and reward key employees. In
addition, at the closing of the Combination, Convera assumed Excalibur's
existing stock option plans. The plans are administered by a Committee appointed
by the Board of Directors, which has the authority to determine which officers,
directors and key employees are awarded options pursuant to the plans and the
terms and option exercise prices of the stock options. Of the total number of
shares authorized for stock options, options to purchase 9,484,309 shares are
outstanding. The Company has a total of 13,764,443 shares of Class A common
stock reserved for the issuance of warrants and options under the plans.
Each qualified incentive stock option granted pursuant to the plans has an
exercise price as determined by the Committee but not less than 100% of the fair
market value of the underlying common stock at the date of grant, a ten-year
term and typically a four-year vesting period. A non-qualified option granted
pursuant to the plans may contain an exercise price that is below the fair
market value of the common stock at the date of grant and/or may be immediately
exercisable. The term of non-qualified options is usually five or ten years.
Upon consummation of the Combination, the Company granted options to purchase
7,028,248 shares of Class A common stock to employees with an exercise price of
$20.52 per share representing the average of the closing prices of Excalibur
common stock for the five trading days immediately preceding the closing date.
There was no compensation expense recorded in connection with these grants,
since the fair value of the Company's common stock on the date of grant was less
than the exercise price.
During the second quarter of the fiscal year ended January 31, 2002, the Company
announced a voluntary stock option exchange program (the Offer) for its
employees and directors. Under this program, existing option holders had the
opportunity to cancel outstanding stock options previously granted to them in
exchange for an equal number of replacement options to be granted at a future
date. The Offer was open until 12:00 AM Eastern Time on July 9, 2001 (the
Expiration Date). Any option holder electing to participate in the exchange
program was also required to exchange any options granted to him or her during
the six months preceding the Expiration Date, and to not receive any additional
option grants until the replacement grant date. A total of 7,241,569 options
were surrendered for exchange under this program. On January 14, 2002 (the
Replacement Grant Date), the Company granted a total of 6,248,247 shares of the
replacement options at $4.38 per share. The exercise price of the replacement
options was equal to the closing sale price of our common stock on the NASDAQ
National Market on the business day preceding the Replacement Grant Date. The
exchange program was designed to comply with FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" and did not
result in any additional compensation charges or variable plan accounting.
The following table summarizes the Company's activity for all of its stock
option awards:
Weighted-Average
Number of Options Range of Exercise Prices Exercise Price
Balance, January 31, 1999 2,561,423 $ 1.04 - 22.50 $ 8.14
Granted 675,450 7.88 - 24.00 13.60
Exercised (433,890) 3.11 - 17.02 10.43
Canceled (126,028) 4.38 - 19.13 9.36
----------- --------------- -------
Balance, January 31, 2000 2,676,955 1.04 - 24.00 9.09
=========== =============== =======
Granted 7,809,198 15.69 - 67.19 21.51
Exercised (702,179) 3.11 - 36.50 8.06
Canceled (109,554) 4.75 - 60.13 17.95
----------- --------------- -------
Balance, January 31, 2001 9,674,420 $ 1.04 - 67.19 $ 19.09
=========== =============== =======
Granted 8,711,497 2.34 - 18.81 4.71
Exercised (28,150) 4.75 - 15.00 8.24
Canceled (8,873,458) 3.80 - 67.19 19.24
----------- --------------- -------
Balance, January 31, 2002 9,484,309 $ 1.04 - 59.75 $ 5.77
=========== =============== =======
Options to purchase 3,622,523, 2,418,198 and 1,716,382 shares of the Company's
common stock were vested and exercisable at January 31, 2002, 2001 and 2000,
respectively, at weighted-average exercise prices of $6.36, $11.84 and $7.70 per
share, respectively.
The following table summarizes additional information about stock options
outstanding at January 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number Exercise
Range of Exercise Prices Options Life Price Exercisable Price
------------------------ ------- ---- ----- ----------- -----
$ 1.04 to $ 4.07 624,510 9.64 years $ 3.60 15,776 $ 2.00
$ 4.14 to $ 4.38 6,431,981 8.81 4.38 2,038,765 4.38
$ 4.40 to $ 6.75 1,233,323 5.93 4.99 850,084 4.96
$ 7.00 to $15.50 606,686 6.34 9.64 473,462 9.71
$ 15.63 to $59.75 587,809 8.07 21.04 244,436 21.60
----------- ----------- -------- ----------- --------
9,484,309 8.29 years $ 5.77 3,622,523 $ 6.36
=========== ============= ======== =========== ========
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans made in fiscal years 2002, 2001 and 2000 consistent with the method of
SFAS No. 123, the Company's net loss and basic and diluted net loss per common
share would have been increased to the pro forma amounts indicated below.
2002 2001 2000
---- ---- ----
Net loss, as reported $ 910,509 $ 22,782 $ 340
Pro forma compensation expense 10,327 10,798 3,765
---------- ---------- ----------
Pro forma net loss $ 920,836 $ 33,580 $ 4,105
========== ========== ==========
Basic and diluted net loss per common share,
as reported ($20.08) ($1.22) ($0.02)
Basic and diluted net loss per common share,
pro forma ($20.31) ($1.79) ($0.29)
The effect of applying SFAS No. 123 on pro forma net loss as stated above is not
necessarily representative of the effects on reported net loss for future years
due to, among other things, vesting period of the stock options and the fair
value of additional options in the future years.
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model. The following table shows the assumptions
used for the grants that occurred in each fiscal year.
2002 2001 2000
----------------- ----------------- ----------------
Expected volatility 90% 80% 70%
Risk free interest rates 4.2% to 4.8% 5.2% to 6.5% 5.0% to 6.3%
Dividend yield None None None
Expected lives 5 years 5 years 5 years
The weighted average fair value per share for stock option grants that were
awarded in fiscal years 2002, 2001 and 2000 was $3.38, $10.98 and $8.55,
respectively.
Employee Stock Purchase Plan
In December 2000, the Excalibur shareholders approved the amendment of the
Excalibur 1996 employee stock purchase plan ("ESPP"), now in effect for Convera.
The employee stock purchase plan is a non-compensatory plan for all active
employees and provides that participating employees may purchase common stock
each plan quarter at a purchase price equal to the lesser of 85% of the closing
price on the date of purchase or 85% of the closing price on the date of grant.
Payment for the shares is made through authorized payroll deductions of up to
10% of eligible annual compensation.
Of the 250,000 shares of Class A common stock that were reserved for issuance
thereunder, 152,778, 12,252 and 23,096 shares were purchased by employees in
fiscal years 2002, 2001 and 2000, respectively.
During the fourth quarter of the fiscal year ended January 31, 2002, the
Convera shareholders approved an amendment to the ESPP authorizing an
additional 1,000,000 shares to be reserved for issuance under the plan.
These shares are included as treasury stock as of January 31, 2002 and will be
released from the treasury as employees purchase the shares through the ESPP.
Employee Savings Plan
The Company has an employee savings plan that qualifies under Section 401(k) of
the Internal Revenue Code. Under the plan, participating eligible employees in
the United States may defer up to 100 percent of their pre-tax salary, but not
more than statutory limits. The plan was amended in the fiscal year ended
January 31, 2001 to allow the Company to match $0.50 on every dollar up to the
maximum of 8% of the employee's contribution on total compensation.
For the fiscal years ended January 31, 2002 and 2001, the Company contributed
approximately $760 and $221, respectively, to the employee savings plan. No such
contribution was made in fiscal year 2000.
(14) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company conducts its operations using leased office facilities. The leases
terminate at various dates through fiscal year 2008 with options to renew.
Certain leases provide for scheduled rent increases and obligate the Company to
pay shared portions of the operating expenses such as taxes, maintenance and
repair costs. The Company also has operating leases for equipment and its
foreign subsidiary has operating leases for automobiles that are included in the
figures below. Future minimum rental payments under non-cancelable operating
leases as of January 31, 2002 are as follows:
Year Ending
January 31,
2003 $ 3,530
2004 3,132
2005 2,717
2006 1,564
2007 and beyond 916
---------
$ 11,859
=========
Total rental expense under operating leases was approximately $3,604, $2,453 and
$1,806 in fiscal years 2002, 2001 and 2000, respectively.
Contingencies
On November 1, 2001, DSMC, Incorporated ("DSMCI") filed a complaint against the
Company in the U.S. District Court for the District of Columbia in which it
alleged that the Company misappropriated DSMCI's trade secrets, engaged in civil
conspiracy with the NGT Library, Inc., a subsidiary of the National Geographic
Society ("NGTL"), to obtain access to DSMCI's trade secrets, and was unjustly
enriched by the Company's alleged access to and use of such trade secrets. In
its complaint, DSMCI seeks five million dollars in actual damages and ten
million dollars in punitive damages from the Company. DSMCI subsequently amended
its complaint to add copyright infringement-related claims. The Company is in
the process of investigating the allegations and at this time believes that they
are without merit. Accordingly, the Company believes that this matter will not
have a material adverse effect on its financial position, results of operations
or cash flows.
(15) SEGMENT REPORTING
The Company has one reportable segment and has restated the corresponding
segment information for earlier periods presented.
Operations by Geographic Area
The following table presents information about the Company's operations by
geographical area:
Fiscal Years Ended January 31,
----------------------------------------------------
2002 2001 2000
---- ---- ----
Sales to customers:
United States $ 24,894 $ 36,359 $ 28,495
United Kingdom 5,738 12,891 4,842
All Other 3,596 2,272 4,597
----------- ----------- -----------
$ 34,228 $ 51,522 $ 37,934
=========== =========== ===========
Long-lived assets:
United States $ 7,501 $ 848,345 $ 2,871
All Other 707 170 146
----------- ----------- -----------
$ 8,208 $ 848,515 $ 3,017
=========== =========== ===========
Major Customers
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately $4,904, $5,021 and $4,400, respectively, in the
fiscal years ended January 31, 2002, 2001 and 2000. These revenues, expressed as
a percentage of total revenues for the fiscal year, were approximately 14%, 10%
and 12%, respectively. For the fiscal year ended January 31, 2002, no individual
customer accounted for more than 10% of the Company's total revenues. For the
fiscal year ended January 31, 2001, one customer accounted for 15% of the
Company's total revenues, and for the fiscal year ended January 31, 2000, a
different customer accounted for 12% of the Company's total revenues.
(16) SUBSEQUENT EVENTS
Restructuring
On February 22, 2002, the Company announced that it was aligning its operations
around key vertical markets to accelerate its path to profitability. These
actions resulted in a reduction of the Company's workforce by 60 employees
worldwide. The related restructuring charges are expected to be approximately
$1,086, relating to employee severance costs, and will be recorded in the first
quarter of fiscal 2003.
Acquisition
In March of 2002, the Company announced the acquisition of 100% of the
outstanding share capital of Semantix Inc., a private Canadian software company
specializing in cross-lingual processing and computational linguistics
technology, for 900,000 shares of restricted Convera common stock. Semantix
became a wholly owned subsidiary of Convera under the name Convera Canada Inc.
This acquisition will be accounted for using the purchase method of accounting
and the purchase price will be allocated to the fair value of the net assets
acquired. The Company is in process of performing that allocation and detailed
information related to the Semantix acquisition will be reported in the
Company's Form 10-Q for the quarter ended April 30, 2002.
(17) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Fiscal Years Ended January 31,
----------------------------------------------------
2002 2001 2000
---- ---- ----
Supplemental Disclosures of Non-cash Investing and
Financing Activities:
Retirement of common stock $ (50,690) $ - $ -
Issuance of common stock for acquisition of IMS
assets - 925,125 -
Issuance of Class A common stock in exchange for
certain contributed NBA assets - 74,753 -
Stock options exercised under deferred compensation
arrangements - 7 6
Preferred stock converted to Class A common stock - 271 -
(18) SELECTED QUARTERLY INFORMATION (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2002:
Revenues................................. $ 6,325 $ 10,313 $ 8,836 $ 8,754
Gross margin............................. 148 4,294 4,246 6,160
Operating loss........................... (63,036) (52,518) (795,619) (7,977)
Restructuring charges.................... - 2,933 5,195 -
Reduction in goodwill and other
long-lived intangible assets........... - - 754,424 -
Net loss................................. (58,818) (50,900) (793,300) (7,490)
Net loss applicable to common
shareholders........................... (58,818) (50,900) (793,300) (7,490)
Basic and diluted loss per common stock.. $ (1.24) $ (1.07) $ (16.64) $ (0.19)
2001:
Revenues................................. $ 9,384 $ 11,373 $ 12,304 $ 18,461
Gross margin............................. 7,825 9,364 9,555 7,170
Operating loss........................... (1,763) (135) (484) (21,768)
Net loss................................. (1,668) (2) (375) (20,737)
Net loss applicable to common
shareholders........................... (1,671) (5) (378) (20,738)
Basic and diluted loss per common stock.. $ (0.11) $ (0.00) $ (0.02) $ (0.69)
The Company calculated earnings per share on a quarter-by-quarter basis in
accordance with GAAP. Quarterly earnings per share figures may not total
earnings per share for the year due to the weighted average number of shares
outstanding.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CONVERA CORPORATION
By: /s/ Patrick C. Condo
-----------------------
Patrick C. Condo
Chief Executive Officer
Date: April 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/Patrick C. Condo President, Chief Executive April 25, 2002
- ----------------------- Officer, and Director --------------
Patrick C. Condo (Principal Executive Officer)
/s/Christopher M. Mann Chief Financial Officer April 26, 2002
- ----------------------- (Principal Financial Officer and --------------
Christopher M. Mann Principal Accounting Officer)
/s/Ronald J. Whittier Chairman of the Board April 24, 2002
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Ronald J. Whittier
/s/Herbert A. Allen Director April 24, 2002
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Herbert A. Allen
/s/Herbert A. Allen, III Director April 24, 2002
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Herbert A. Allen, III
/s/Robert A. Burgelman Director April 29, 2002
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Robert A. Burgelman
/s/Stephen D. Greenberg Director April 29, 2002
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Stephen D. Greenberg
/s/Eli S. Jacobs Director April 25, 2002
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Eli S. Jacobs
/s/Donald R. Keough Director April 24, 2002
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Donald R. Keough
/s/William S. Reed Director April 26, 2002
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William S. Reed