million compared to $9.3 million in the corresponding period last year. Sales and marketing expenses represented 35% of total revenues for the six months ended July 31, 2005 compared to 70% of total revenues for the six months ended July 31, 2004. This decrease in sales and marketing expenses is again the result of decreased personnel-related costs and reduced marketing programs expenditures.
Reported research and product development costs decreased 61% to $1.4 million in the current quarter versus $3.6 million for the comparable year-ago period. During the first fiscal quarter of 2006, the Company adopted FAS 86 (which requires capitalization of software development costs once technological feasibility has been achieved) related to the Company’s Web indexing initiative as previously discussed. FAS 86 governs the practice by which newly developed technology (e.g., software in this case), is accounted for once technological feasibility has been achieved. Convera’s Web indexing initiative was determined to have reached technological feasibility with the attainment of a one billion-page Web index as announced on January 31, 2005. Based on this achievement, the Company began capitalizing software development costs during the first fiscal quarter of 2006 and will continue to do so until such time as the new product becomes commercially available. At the time of commercial availability, capitalization of the Web indexing related research and product development costs will cease and amortization of the capitalized costs will commence over the products estimated useful life, which has not yet been determined. Accordingly, the Company capitalized approximately $2.4 million and $4.7 million in research and product development costs during the three and six-month periods ended July 31, 2005, respectively. Absent the adoption of FAS 86, research and product development costs would have increased 5% in the current quarter and 7% during the six-month period ended July 31, 2005 versus the comparable year-ago periods. As reported, research and product development costs as a percentage of total revenues were 18% in the current quarter versus 72% in the second quarter of last year. For the six months ended July 31, 2005, research and development costs as reported decreased 58% to $3.1 million from $7.3 million in the comparable period last year, representing 24% and 55% of total revenues, respectively. These decreases compared to last year for both the three and six month periods are due solely to the adoption of FAS 86.
General and administrative expenses increased 14% to $2.9 million in the current quarter versus $2.5 million in the second quarter of last year, representing 37% and 49% of total revenues, respectively. For the six months ended July 31, 2005, general and administrative expenses increased 5% to $5.2 million versus $4.9 million in the corresponding year-ago period, representing 40% and 37% of total revenues, respectively. The increase in general and administrative expenses is primarily due to increased costs related to the Company’s ongoing Sarbanes-Oxley compliance activities, executive severance obligations, and legal expenses.
Net interest income increased to approximately $75,000 for the second quarter of the current fiscal year, compared to approximately $30,000 in the second quarter of the prior fiscal year. For the six months ended July 31, 2005, net interest income increased to approximately $100,000 versus approximately $68,000 in the same period last year. The increase in both periods is a result of higher interest rate yields on a higher cash balance, offset by interest payments associated with the debt facility.
Liquidity and Capital Resources
The Company’s combined balance of cash, cash equivalents and short-term investments at July 31, 2005 as compared to January 31, 2005 is summarized below (in thousands).
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| | July 31, 2005 | | January 31,
2005 | | Change | |
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Cash and cash equivalents | | $ | 44,889 | | $ | 17,766 | | $ | 27,123 | |
Investments | | | 71 | | | 71 | | | — | |
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Total | | $ | 44,960 | | $ | 17,837 | | $ | 27,123 | |
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During the six months ended July 31, 2005, the Company used cash of $5.5 million to fund operating activities, compared to $10.5 million used in the same period last year. The net loss of $2.5 million was offset by non-cash charges totaling approximately $1.9 million including depreciation of approximately $1.1 million, amortization of developed technology of $0.1 million, and amortization of deferred stock compensation of $0.7 million. Increases to accounts receivable used $3.8 million, while decreases to prepaid expenses and other assets provided $0.9 million. Payments against the restructuring reserve used $0.8 million while decreases to accounts payable, accrued expenses, accrued bonuses and deferred revenues used cash of $1.3 million. As stated above, during the six months ended July 31, 2004, $10.5 million was used to fund operating activities. The net loss of $11.8 million was offset by non-cash charges totaling $1.5 million, including depreciation of $0.7 million, amortization of developed technology of $0.1 million, and amortization of deferred stock compensation of $0.7 million. Cash was provided by a decrease in accounts receivable of $0.3 million as well as a decrease in prepaid expenses and other assets of $0.2 million. Increases to accounts payable, accrued expenses, accrued bonuses and deferred revenues provided $0.4 million while decreases to the restructuring reserve and long-term payables used cash of $0.4 million and $0.9 million respectively.
For the six months ended July 31, 2005, cash flows from investing activities used $4.8 million, of which $4.7 million was related to capitalized software development cost as required with the adoption of FAS 86. The balance was used for purchases of equipment and leasehold improvements. For the quarter ended July 31, 2004, purchases of equipment and leasehold improvements used cash of $0.8 million.
Financing activities provided cash of $37.5 million for the six months ended July 31, 2005. Approximately $28.8 million of proceeds were received through a July 2005 private placement of 6,555,556 newly-issued shares of common stock to two investors. The Company sold 5,555,556 shares directly to the Legg Mason Opportunity Trust, a series of Legg Mason Investment Trust, Inc., a registered investment company, at $4.50 per share. The other 1 million shares were purchased by an affiliate of Herbert A. Allen, a significant stockholder and director of the Company, at $4.84 per share, the market price at the time of the sale. An additional $5.0 million was secured from a March 2005, four-year, term loan financing from Silicon Valley Bank. The exercise of employee stock options provided approximately $3.9 million while approximately $87,000 was provided by the issuance of stock under the employee stock purchase plan offset by the repurchase of shares totaling $225,000. Financing activities used cash of $23,000 for the six months ended July 31, 2004. Approximately $82,000 was provided by the issuance of stock under the employee stock purchase plan, offset by repurchase of shares totaling $121,000. Approximately $16,000 was provided by the exercise of employee stock options.
At July 31, 2005 the Company’s balance of cash, cash equivalents and short-term investments was $45.0 million. The Company believes that its current balance of cash, cash equivalents and short-term investments and its funds generated from operations, if any, will be sufficient to fund the Company’s current projected cash needs for at least the next twelve months. Excluding cash acquired as part of the Combination and other acquisitions and the March 2005 credit facility, the Company has historically been entirely funded by sales of its common stock. 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 to support its operations and capital requirements. The Company has previously disclosed that it may elect to seek additional funding for its Web indexing initiative. There can be no assurance that external sources of financing will be available if required, or that such financing will be available on terms acceptable to the Company.
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Forward Looking Statements
Certain written and oral statements made by the Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including statements made in this report and other filings with the Securities and Exchange Commission. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future including statements relating to volume growth, share of sales and earnings per share growth and statements expressing general optimism about future operating results are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following are some of the factors that could cause the Company’s actual results to differ materially from the expected results described in or underlying the Company’s forward-looking statements:
The Company has had a history of operating losses and may incur future losses; if the Company is unable to achieve profitability, the Company’s stock price will likely suffer and steps which the Company may take to reduce its expenditures or preserve its existing funds could harm its sales and financial results
The Company believes that its future profitability will depend on its ability to effectively market existing and newly developed software products through a balanced multi-channel distribution network and on its ability to commercially launch its Web indexing initiative. The Company cannot assure that its costs to develop, introduce and promote enhanced or new products will not exceed its expectations, or that these products will generate revenues sufficient to offset these expenses. The Company has operated at a loss for each of the past three fiscal years. For the fiscal years ended January 31, 2005, 2004, and 2003, the Company’s net losses were approximately $19.8 million, $18.1 million, and $29.1 million, respectively. These losses include the Company’s expenditures associated with selling software products and further developing software products during these years. The Company plans to continue to invest in these programs and, accordingly, it cannot assure that its operating losses will not continue in the future. Continued losses could reduce the Company’s liquidity and negatively affect its stock price. As of July 31, 2005, the Company’s balances of cash, cash equivalents and short-term investments were approximately $45.0 million. The Company believes its current balance of cash, cash equivalents and short-term investments, combined with any funds generated from its operations and available from credit facilities will be sufficient to fund its operations for at least the next twelve months based upon its estimates of funds required to operate its business during such period. However, if, at any point, due to continued losses, the Company ceases to have sufficient funds to continue its operations, it would need to decrease its expenditures including those associated with the Web indexing initiative. As a result of any decrease in expenditures, the Company may need to terminate employees, curtail research and development programs and take other steps to reduce the amount of funds it expends in its operations. This could have a negative effect on the Company’s ability to develop product improvements or new products that will achieve market acceptance. This could in turn, have a negative impact on the Company’s sales and financial results.
The Company experiences quarterly fluctuations in its operating results, which may adversely affect its stock price
The Company’s quarterly operating results have varied substantially in the past. For example, the Company’s total revenues for the last four quarters were $7.8 million, $5.1 million, $6.3 million, and 6.1 million, respectively, and the price per share of its common stock during those quarters ranged from $2.17 to $8.83. The Company’s quarterly operating results are likely to continue to vary substantially from quarter to quarter in the future, due to a variety of factors including the following:
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| • | the downturn in capital spending by customers as a result of general economic conditions; |
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| • | reduced customer demand for the Company’s products and services; |
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| • | the delay or deferral of customer implementations; |
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| • | the budget cycles of the Company’s customers; |
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| • | seasonality of individual customer buying patterns; |
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| • | an increase in competition in the software industry; |
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| • | the size and timing of individual transactions; |
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| • | the timing of new software introductions and software enhancements by the Company and its competitors; |
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| • | continued success in technological advances and development including the Web indexing initiative; |
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| • | changes in operating expenses and personnel; |
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| • | changes in accounting principles, such as a requirement that stock options be included in compensation, which would increase the Company’s expense and have a negative effect on earnings; |
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| • | the overall trend towards industry consolidation; and |
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| • | changes in general economic and geo-political conditions and specific economic conditions in the computer and software industries. |
In particular, the Company’s period-to-period operating results have historically been significantly dependent upon the timing of the closing of significant license agreements. Because purchasing the Company’s software products often requires significant capital investment, its customers may defer or decide not to make their purchases. This means sales can involve long sales cycles of six months or more. The Company derives a significant portion of its revenues from sales to agencies of the U.S. Government, and, therefore, the budget cycle of the U.S. Government impacts the Company’s total revenues. In certain financial quarters, the Company may derive a significant portion of its revenues from a single customer. For example, revenues derived from one customer accounted for approximately 19% of the Company’s total revenues for the first six months of fiscal year 2006. The Company has historically recorded a significant portion of its total quarterly license revenues in the third month of a quarter, with a concentration of these revenues occurring in the last half of that third month. The Company expects these revenue patterns to continue. Despite these uncertainties in the Company’s revenue patterns, it bases its operating expenses upon anticipated revenue levels, and the Company incurs these expenses 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 addition, steps which the Company has taken or may take in the future to control operating expenses may hamper its development, sales and marketing efforts and, ultimately, its operating results. For instance, the Company aligned its resources through a number of restructurings during fiscal years 2002 through 2005 to attempt to focus on markets that have been consistently successful for it. These restructurings were intended to streamline the Company’s professional services, customer support and sales organizations by reducing the number of its employees, improve the productivity of each of those organizations and reduce management personnel and other overhead costs in its marketing, development and administrative organizations. However, the loss of key personnel in such restructurings and any severance and other costs incurred in such restructurings could negatively affect the Company’s quarterly operating results and adversely affect its stock price.
The Company derives a significant portion of its revenues from sales to U.S. Government agencies which are subject to budget cuts and, consequently, a change in the size and timing of the Company’s U.S. Government contracts may materially affect the Company’s operating results
For the quarter ended July 31, 2005, total revenues derived from sales to agencies of the U.S. Government were approximately $5.5 million, representing 71% of total revenues. For the quarter ended July 31, 2004, revenues derived from sales to agencies of the U.S. Government were approximately $2.4 million, or 47% of total revenues. While the U.S. Government has at times increased spending on defense, information systems and homeland security initiatives, some government agencies have realized budget reductions which may adversely impact their purchasing decisions and timing. The Company is actively pursuing several opportunities for business with certain U.S. Government agencies. While the nature and timing of these opportunities, as well as the ability to complete business transactions related to these opportunities, is subject to certain risks and uncertainties, successful completion of any of these transactions could have a material impact on the Company’s future operating results and financial position. There can be no assurance that the Company will complete any of these potential transactions.
The Company depends on international sales, particularly in the United Kingdom, and any economic downturn, changes in laws, changes in currency exchange rates or political unrest in the United Kingdom or
25
in other countries in which the Company sells its products could have a material adverse effect on the Company’s business
For the quarter ended July 31, 2005, total revenues derived from international sales were approximately $1.6 million, representing approximately 21% of total revenues. For the quarter ended July 31, 2004, revenues derived from international sales were approximately $1.3 million, representing approximately 26% of total revenues. Most of the Company’s international sales are in the United Kingdom. The Company’s international operations have historically exposed it to longer accounts receivable and payment cycles and fluctuations in currency exchange rates. International sales are made mostly from the Company’s U.K. foreign subsidiary and are denominated in British pounds or Euros. As of July 31, 2005, approximately 15% and 6% of the Company’s total consolidated accounts receivable were denominated in British pounds and Euros, respectively. Additionally, the Company’s exposure to foreign exchange rate fluctuations arises in part from intercompany accounts in which royalties on the Company’s foreign subsidiary’s sales are charged to the Company’s foreign subsidiary and recorded as intercompany receivables on the books of the Company. The Company is also exposed to foreign exchange rate fluctuations as the financial results of the Company’s foreign subsidiary are translated into U.S. dollars in consolidation. Since exchange rates vary, those results when translated may vary from expectations and adversely impact overall expected profitability.
The Company’s international operations expose it to a variety of other risks that could seriously impede its financial condition and growth. These risks include the following:
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| • | potentially adverse tax consequences; |
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| • | difficulties in complying with regulatory requirements and standards; |
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| • | trade restrictions and changes in tariffs; |
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| • | import and export license requirements and restrictions; and |
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| • | uncertainty of the effective protection of the Company’s intellectual property rights in certain foreign countries. |
If any of these risks described above materialize, the Company’s international sales could decrease and its foreign operations could suffer.
The Company is in an extremely competitive market, and if it fails to compete effectively or respond to rapid technological change, the Company’s revenues and market share will be adversely affected
The Company’s business environment and the software industry in general are characterized by intense competition, rapid technological changes, changes in customer requirements and emerging new market segments. The Company’s competitors include many companies that are larger and more established and have substantially more resources than the Company. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the markets which the Company serves. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company’s business, financial condition or results of operations.
In order for the Company’s strategy to succeed and to remain competitive, the Company must leverage its core technology to develop new product offerings, update existing features and add new components to its current products such as support for new datatypes and taxonomies for specific vertical markets. These development efforts are expensive, and the Company plans to fund these developments with its existing capital resources, and other sources, such as equity issuances and borrowings, which may be available to it. If these developments do not generate substantial revenues, the Company’s business and results of operations will be adversely affected. The Company cannot assure that it will successfully develop any new products, complete them on a timely basis or at all, achieve market acceptance or generate significant revenues with them.
The Company designs its products to work with certain systems and changes to these systems may render its products incompatible with these systems, and the Company may be unable to sell its products
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The Company’s ability to sell its products depends on the compatibility of its products with other software and hardware products. These products may change or new products may appear that are incompatible with the Company’s products. If the Company fails to adapt its products to remain compatible with other vendors’ software and hardware products or fails to adapt its products as quickly as its competitors, the Company may be unable to sell its products.
The Company’s software products are complex and may contain errors that could damage its reputation and decrease sales
The Company’s complex software products may contain errors that people may detect at any point in the products’ life cycles. The Company cannot assure that, despite its testing and quality assurance efforts and similar efforts by current and potential customers, errors will not be found. The discovery of an error may result in loss of or delay in market acceptance and sales.
The Company depends on proprietary technology licensed from third parties; if the Company loses these licenses, it could delay shipments of products incorporating this technology and could be costly
The Company’s products use some of the technology that it licenses from third parties, generally on a nonexclusive basis. The Company believes that there are alternative sources for each of the material components of technology it licenses from third parties. However, the termination of any of these licenses, or the failure of the third-party licensors to adequately maintain or update their products, could delay the Company’s ability to ship these products while it seeks to implement technology offered by alternative sources. Any required replacement licenses could prove costly. Also, any delay, to the extent it becomes extended or occurs at or near the end of a fiscal quarter, could harm the Company’s quarterly results of operations. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of the Company’s products or relating to current or future technologies, the Company cannot assure that it will be able to do so on commercially reasonable terms or at all.
Because of the technical nature of the Company’s business, its intellectual property is extremely important to its business, and adverse changes to the Company’s intellectual property would harm its competitive position
The Company believes that its success depends, in part, on its ability to protect its proprietary rights and technology. Historically, the Company has relied on a combination of copyright, patents, trademark and trade secret laws, employee confidentiality and invention assignment agreements, distribution and OEM software protection agreements and other methods to safeguard the Company’s technology and software products. Risks associated with the Company’s intellectual property, include the following:
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| • | pending patent applications may not be issued; |
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| • | intellectual property laws may not protect the Company’s intellectual property rights; |
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| • | third parties may challenge, invalidate, or circumvent any patent issued to the Company; |
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| • | rights granted under patents issued to the Company may not provide competitive advantages to it; |
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| • | unauthorized parties may attempt to obtain and use information that the Company regards as proprietary despite the Company’s efforts to protect its proprietary rights; |
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| • | others may independently develop similar technology or design around any patents issued to the Company; and |
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| • | effective protection of intellectual property rights may be limited or unavailable in some foreign countries in which the Company operates. |
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The Company depends on its key personnel, the loss of whom would adversely affect the Company’s business, and the Company may have difficulty attracting and retaining skilled employees
The Company’s success depends to a significant degree upon the continued contributions of its key management, marketing, technical and operational personnel. The Company generally does not utilize employment agreements for its key employees. The loss of the services of one or more key employees could have a material adverse effect on the Company’s operating results. The Company also believes that its future success will depend in large part upon its ability to attract and retain additional highly skilled management, technical, marketing, product development, operational personnel and consultants. Competition for such personnel, particularly software developers, professional service consultants and other technical personnel, is intense, and pay scales in the software industry have significantly increased. There can be no assurance that the Company will be successful in attracting and retaining such personnel.
The Company may not be able to use net operating loss carryforwards
As of January 31, 2005, the Company had net operating loss carryforwards of approximately $165 million. The deferred tax assets representing the benefits of these carryforwards have been offset completely by a valuation allowance due to the Company’s lack of an earnings history. The realization of the benefits of these carryforwards depends on sufficient taxable income in future years. Lack of future earnings could adversely affect the Company’s ability to utilize these carryforwards. Additionally, past or future changes in the Company’s ownership and control could limit the ability to utilize these carryforwards. Despite the carryforwards, the Company may have income tax liability in future years due to the application of the alternative minimum tax rules of the United States Internal Revenue Code.
While the Company believes it will have sufficient funds for its operations for at least the next twelve months, it is possible that the Company will need additional capital during or after that time. The Company may need additional capital in the future, and it may not be available on acceptable terms, or at all, and if the Company does not receive any necessary additional capital, it could harm the Company’s financial condition and future prospects
As of July 31, 2005, the Company’s balances of cash, cash equivalents and short-term investments were approximately $45.0 million. The Company believes its current balance of cash, cash equivalents and short-term investments, combined with any funds generated from its operations and available from credit facilities will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months based upon its estimates of funds required to operate its business during such period. However, during or after that time, the Company may need to raise additional funds for the following purposes:
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| • | fund the Company’s operations, including sales, marketing and research and development programs including the Web initiative; |
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| • | fund any growth the Company experiences; |
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| • | enhance and/or expand the range of products and services the Company offers; for example, the Company may upgrade its existing products or develop new products, including products capable of searching and/or indexing the Web, and the Company may expand its training and other professional services for its products; |
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| • | increase the Company’s promotional and marketing activities; or |
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| • | respond to competitive pressures and/or perceived opportunities, such as investment, acquisition and international expansion activities. |
The Company cannot reassure its investors that if the Company needs additional capital that it will be available, and if so, on terms beneficial to the Company. Historically, the Company has obtained external financing primarily from sales of its common stock. To the extent the Company raises additional capital by issuing equity securities, its shareholders may experience substantial dilution. If the Company is unable to obtain additional capital, it may then attempt to preserve its available resources by various methods including deferring the creation or satisfaction of commitments, reducing expenditures on its research and development programs or otherwise scaling back its operations. If the Company were unable to raise such additional capital or defer certain costs as described above, that inability would have an adverse effect on the Company’s financial position, results of operations and prospects.
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The Company’s stock price may fluctuate which may make it difficult to resell shares of the Company’s stock
The market price of the Company’s common stock has been highly volatile. For example, in the first six months of fiscal year 2006, the market price per share of the Company’s common stock ranged from $3.92 to $8.83. This volatility may adversely affect the price of the Company’s common stock, and its stockholders may not be able to resell their shares of common stock following periods of volatility because of the market’s adverse reaction to this volatility. The Company anticipates that this volatility, which frequently affects the stock of software companies, will continue. Factors that could cause such volatility include:
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| • | future announcements concerning the Company or its competitors; |
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| • | quarterly variations in the Company’s operating results; |
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| • | actual or anticipated announcements of technical innovations or new product developments by the Company or its competitors; |
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| • | general conditions in the Company’s industry; |
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| • | developments concerning litigation; and |
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| • | worldwide economic and financial conditions. |
On occasion, the equity markets, and in particular the markets for software companies, have experienced significant price and volume fluctuations. These fluctuations have affected the market price for many companies’ securities and maybe unrelated to the companies’ operating performance.
The Company’s amended and restated certificate of incorporation, bylaws, ownership and Delaware law contain provisions that could discourage a third party from acquiring the Company and consequently decrease the market value of an investment in the Company’s stock
Some provisions of the Company’s amended and restated certificate of incorporation and bylaws and of Delaware law could delay or prevent a change of control or changes in the Company’s management that a stockholder might consider favorable. Any delay or prevention of a change of control or change in management could cause the market price of the Company’s common stock to decline.
Allen Holding Inc. and related parties exercise voting control over a significant percentage of the Company, and the Company’s other shareholders may not have an effective say in any matters upon which its shareholders vote
Allen Holding Inc., together with Allen & Company Incorporated, Herbert A. Allen and certain related parties, beneficially owns approximately 49% of the Company’s voting power, and would therefore be able to effectively control the outcome of matters requiring a stockholder vote. These matters could include offers to acquire the Company and elections of directors. Allen Holding, Inc., Mr. Allen and Allen & Company may have interests which are different than the interests of the Company’s other stockholders.
The Company has not yet been required to perform an assessment of its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and the Company may, during its process, encounter delays in such process or deficiencies with respect to certain internal control practices
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company will be required, beginning with its fiscal year ending January 31, 2006 or, at the latest, January 31, 2007, to include in its annual report management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the Company’s audited financial statements as of the end of its prior fiscal year. Furthermore, the Company’s independent registered public accounting firm will be required to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on its audit. The Company is in the final stages of completing the documentation of its internal controls. Due to the number of controls to be documented and examined, the complexity of the project, as well as the subjectivity involved in determining effectiveness of controls, the Company cannot be certain that it will complete its Section 404 compliance work on a timely basis or, if it does, that all of the Company’s internal controls will be considered effective. In addition, the
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guidelines for the evaluation and attestation of internal control systems have only recently been formalized, and the evaluation and attestation processes are new and untested. Therefore, the Company can give no assurances that its systems will satisfy the new regulatory requirements. If the Company fails to timely complete its Section 404 compliance work, including this assessment, or if the Company’s independent public accounting firm cannot timely attest to the Company’s assessment, the Company could be subject to regulatory sanctions and a loss of public confidence in its internal controls. Also, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or commercial relationships or cause the Company to fail to timely meet its regulatory reporting obligations. Any of these failures could have a negative effect on the trading price of the Company’s stock.
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Item 3. | Quantitative and Qualitative Disclosure 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 were approximately 21% of total revenues in the second quarter of fiscal year 2006. International sales are made predominantly from the Company’s foreign subsidiary and are typically denominated in British pounds, EUROs or U.S. Dollars. As of July 31, 2005, approximately 15% and 6% of total consolidated accounts receivable were denominated in British pounds and EUROs, respectively. The majority of these receivables are due within 90 days of the end of the second fiscal quarter, and all receivables are due within one year. Additionally, the Company is exposed to potential foreign currency gains or losses resulting from intercompany accounts that are not of a long-term nature. 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 July 31, 2005, approximately 99% of the Company’s cash and cash equivalents were denominated in U.S. dollars. The remaining balance of approximately 1% is comprised of British pounds, Euros and Canadian dollars. Cash equivalents consist of funds deposited in money market accounts with original maturities of three months or less. The Company also has a certificate of deposit for $71,000, which is pledged to collateralize a letter of credit required for a leased facility. Given the relatively short maturity periods of cash equivalents and short-term investments, the cost of these investments approximates their fair values and the Company’s exposure to fluctuations in interest rates is limited.
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Item 4. | Controls and Procedures |
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and that material information relating to the Company and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when the Company’s periodic reports are being prepared. There has been no change in the Company’s internal control over financial reporting during the quarter ended July 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II-- OTHER INFORMATION
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Item 1. | Legal Proceedings | None. |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | None. |
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Item 3. | Defaults upon Senior Securities | None. |
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Item 4. | Submission of Matters to Vote of Security Holders | |
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| The 2005 Annual Meeting of Shareholders was held July 12, 2005. The following individuals were elected to serve as the Board of Directors for terms expiring at the 2006 Annual Meeting: |
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| | Number of Shares Voted | |
| |
| |
| | For | | Withheld | |
| |
|
|
| |
| Ronald J. Whittier | 35,571,551 | | 170,016 | |
| Herbert A. Allen | 35,555,407 | | 186,160 | |
| Herbert A. Allen III | 35,560,228 | | 181,339 | |
| Patrick C. Condo | 35,563,590 | | 177,977 | |
| Stephen D. Greenberg | 35,561,121 | | 180,446 | |
| Eli S. Jacobs | 35,659,703 | | 81,864 | |
| Donald R. Keough | 35,570,251 | | 171,316 | |
| William S. Reed | 35,571,551 | | 170,016 | |
| Carl J. Rickertsen | 35,659,703 | | 81,864 | |
| Jeffrey White | 35,659,424 | | 82,143 | |
| | |
Item 5. | Other Information | None. |
| | |
Item 6. | Exhibits | |
32
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| CONVERA CORPORATION |
| |
September 12, 2005 | By: | /s/ Patrick C. Condo |
| |
|
| Patrick C. Condo |
| President and Chief Executive Officer
(Principal Executive Officer) |
| |
September 12, 2005 | By: | /s/ John R. Polchin |
| |
|
| John R. Polchin |
| Chief Financial Officer
(Principal Financial and Accounting Officer) |
33
