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, 2001
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. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 9, 2001 (based on the closing sales price as reported on
the NASDAQ National Market System) was $67,290,180.
The number of shares outstanding of the registrant's Class A common stock as of
April 9, 2001 was 35,363,930.
The Index to Exhibits begins on Page 30
CONVERA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2001
TABLE OF CONTENTS
Page
PART I
Item 1. Business................................................................... 1
Item 2. Properties................................................................. 10
Item 3. Legal Proceedings.......................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........................ 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 12
Item 6. Selected Financial Data.................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 21
Item 8. Financial Statements and Supplementary Data................................ 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 22
Item 11. Executive Compensation .................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 28
Item 13. Certain Relationships and Related Transactions............................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 30
PART I
ITEM 1. Business
This report contains "forward-looking statements" that involve risks and
uncertainties. 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 as amended, and Section 21E of the Securities
Exchange Act of 1934 as amended, including without limitation statements
regarding 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 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 elsewhere in this report.
OVERVIEW
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 million 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. 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.
Convera designs, develops, markets, implements and supports high-performance
technologies, products, services and solutions for managing and monetizing
high-value digital content--text, images and video. Convera conducts its
business through the licensing and deployment of its digital content management
technology on customer infrastructures and to customers with branded content,
such as sports leagues, entertainment providers, news and information outlets
and training companies, that wish to outsource the management and monetization
of their high-value digital assets.
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(TM)") that
identifies patterns in digital data, providing the capability to build
content-based analysis and retrieval applications for any type of digital
information; intelligent real-time video analysis that detects scene changes as
they occur; and tamper-resistant, content protection technology that guards
digital assets against unauthorized modification, use or access. In combination,
these core technologies form the cornerstones of the Convera content management
platform on which the Company builds products and provides its end-to-end
content management and publishing service.
In September 2000, Intel and the National Basketball Association ("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. Convera will be the NBA's provider of services related to
the development and distribution of those products for the term of the services
agreement, subject to the NBA's right to authorize major telecasters and certain
other third parties to provide television broadcast enhancements and real time
distribution of NBA games.
Convera and the NBA are working together to create a hosted, end-to-end solution
that transforms video footage and other data into a searchable database of
rich-media interactive content assets and then manages those assets--archiving,
enhancing, protecting, and managing their distribution as branded NBA content
offerings--to create a new fan experience for the NBA's end-users and new
revenue opportunities for the NBA. Under this 10-year services agreement,
Convera will provide data and video integration and NBA content management,
logging, indexing and retrieval, as well as other related services. Convera will
receive in cash a percentage of NBA revenue from the sale of NBA products
subject to the services agreement, as well as a percentage of NBA revenues from
advertising and sponsorship related to the covered NBA products.
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.
Products
Convera's products enable digital content to be managed and utilized more
effectively to increase productivity or reduce expenses. They are used for
enterprise information portals, Internet e-business applications, online
publishing and by application service providers ("ASPs") and original equipment
manufacturers ("OEMs") as value-added components of their offerings. The Convera
product family enables digital content to be captured, analyzed, indexed,
cataloged, accessed, navigated, searched, secured, retrieved and published via
interconnected computer networks, and empowers individuals to locate, share and
utilize relevant information quickly, easily and intuitively. Accessible
content, or data types, include paper documents, text, databases, word
processing documents, PDF (portable document format) files, news feeds,
groupware systems, e-mails, images, audio, video and many more.
Convera's software solutions deliver capabilities for ingesting, analyzing and
encoding analog or digital video, automatic metadata extraction, speech-to-text
conversion, managing video content, video content shot selection, rough-cut
editing, edit decision list exporting, web publishing, XML encoding and export
of metadata, real-time profiling and retrospective searching, combined full-text
and database searching, word meaning-based semantic searching, fault-tolerant
pattern recognition based-searching for both text and images, statistical
searching, robust search using traditional keyword and Boolean techniques,
protecting digital content and business rules from unauthorized modification,
use or access, and rights management that govern usage by specifying persistent
rights, rules and predictable consequences, and then enforces these upon
consumer acceptance.
Convera RetrievalWare(R) features a modular architecture that enables parallel
processing on distributed, multi-threaded servers and is designed to support
very large content sets and large information systems with thousands of users.
Convera RetrievalWare(R) WebExpress is an advanced search engine designed for
use by web-driven businesses whose revenues or reputations rely on the ability
of their prospects and customers to retrieve accurate information quickly and
naturally from their web sites. Convera Screening Room(R) deploys a modular
architecture to provide secure, scalable and intuitive access to, and
re-expression and publishing capabilities for, video content over intranets,
extranets and the Internet. Convera Internet Software Integrity System ("ISIS")
encrypts high-value or sensitive digital content with a package of intelligent
agents that forms a tamper-resistant, renewable and mobile shield against
unauthorized modification, use or access, and that specifies persistent rights
and business rules governing use.
Convera offers its software solutions to information systems for workgroups,
enterprises and distributed wide area networks, including the Internet and the
World Wide Web. The Company 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.
End-to-end Content Management and Publishing Service
Built on its expertise in multimedia content management, its core technologies
in computational linguistics, image and video processing, tamper-resistant
content protection, and its feature-rich applications, Convera enables owners of
high-worth branded content to manage, publish and monetize their digital assets
through a single-stop, outsourced solution. Targeted at media rich organizations
in sports, news and information, entertainment, and training, the Company
believes that its service consolidates all of the functions content owners
require to increase utilization, Web distribution and monetization of their
media content, including ingestion and encoding, automatic metadata extraction,
archive creation, indexing and retrieval, re-expression and re-purposing,
editing support, video/data integration, content security, business model
support (ad insertion, subscriptions, pay-per-view, syndication, e-commerce),
packaging for Web distribution, cross platform formatting (56K, broadband,
wireless) and management of content distribution to the edge of the network.
Convera technology can also be deployed in the form of an end-to-end content
management and publishing service to media-rich organizations for archiving and
managing video assets, for exploiting the Internet as a distribution channel and
for generating additional revenue through alternative distribution. The Company
also offers integration services to ensure the service operates as a seamless
extension to the customers' existing content management infrastructure.
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 distributes its software products to end users through license
agreements with value-added resellers, systems integrators, OEMs, ASPs and other
strategic partners. The Company's technology may also be customized and deployed
to commercial businesses. Convera's wholly owned subsidiary located in the
United Kingdom, Convera Technologies International, Limited ("CTIL"), and CTIL
offices located in Germany, and the Company's affiliate in France, Convera
France, conduct international sales activities. Except as otherwise noted,
Convera and its subsidiaries are collectively referred to hereinafter as
"Convera" or the "Company", and for periods prior to the closing of the
Combination on December 21, 2000, the "Company" refers to Excalibur Technologies
Corporation and its subsidiaries.
The Company can be contacted via email at invest@convera.com and visited at its
web site, www.convera.com. Information on the Convera web site is not part of
this Form 10-K.
CONVERA PRODUCTS
PRODUCTS
Convera develops, markets, licenses, services and supports the Convera
RetrievalWare(R) suite of multimedia search solutions for corporate intranets,
Internet e-commerce, online publishing and the OEM market. Products include:
Convera RetrievalWare(R);
Convera RetrievalWare(R)FileRoom;
Convera RetrievalWare(R)WebExpress;
Convera Internet Spider;
Convera RetrievalWare(R)SDK;
Convera Screening Room(R);
Convera Visual RetrievalWare(R);
Convera Video Analysis Engine; and
Convera Internet Software Integrity System.
Convera's products contributed 85% of total revenues in fiscal years 2001, and
100% of total revenues in fiscal years 2000 and 1999.
Convera RetrievalWare(R)
Convera RetrievalWare(R) offers an advanced modular approach to content access
and retrieval and is an enabling technology for intranet enterprise portals, web
publishing and e-commerce applications. A high-performance, scalable and more
accurate alternative to traditional search and retrieval systems, Convera
RetrievalWare(R) is a comprehensive software solution designed for
enterprise-level content access and retrieval that empowers users to find
mission critical data across multiple data types from a common user interface.
By integrating the APRP(TM) and semantic network technologies, Convera
RetrievalWare(R) delivers superior levels of power and performance throughout
the entire information management process, from data capture and indexing to
searching, retrieval and dissemination.
With Convera's semantic networks, users can easily and automatically find
required information by using all of the power and richness of natural language
processing. Convera RetrievalWare(R) 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. Convera RetrievalWare(R) also supports
specialized semantic networks for legal, medical, finance, engineering and other
disciplines.
APRP(TM) 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.
Convera RetrievalWare(R) supports more than 200 document formats stored on file
servers, in groupware systems, relational databases, document management
systems, intranets and the Internet. Convera RetrievalWare(R) 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(R) Profiling Server filters, stores and distributes incoming data
from any source including real-time news feeds, relational databases, paper
repositories and the RetrievalWare(R) Internet Spider.
The latest version of Convera RetrievalWare(R), RetrievalWare(R) 6.8, was
released in the fourth quarter of fiscal year 2001. Version 6.8 is a significant
enhancement to the product that includes compatibility with Microsoft Windows
2000 and upgrades to support the latest version of other significant server
operating systems, database management systems and groupware products. In
addition to the substantial compatibility upgrades, RetrievalWare(R) 6.8
includes a newly engineered user interface, which is the principal component
customers see when using the product. The new interface incorporates human
factors findings that the Company believes will increase use and acceptance of
RetrievalWare(R). The RetrievalWare(R) Internet Spider released with version 6.8
supports the HTTPS/SSL standard, which enables customers to index data stored on
secure web sites. In addition, RetrievalWare(R) 6.8 includes support for
searching additional non-English languages and improved tools for developers
using the Java programming language to integrate search into their web sites and
applications.
Convera RetrievalWare(R) 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. Convera RetrievalWare(R) server solutions can be run on multiple
platforms including leading UNIX and Windows NT platforms.
The Convera RetrievalWare(R) product family includes the following components:
Convera RetrievalWare(R) FileRoom
Convera RetrievalWare(R) FileRoom is built on Convera RetrievalWare(R)
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(TM) 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.
Convera RetrievalWare(R) WebExpress
Convera RetrievalWare(R) WebExpress is a stand-alone search and retrieval tool
designed for online service providers and content-rich web sites.
RetrievalWare(R) WebExpress offers superior search accuracy, performance and
scalability, supporting high numbers of concurrent users searching large and
heterogeneous document collections.
Convera Internet Spider
Convera Internet Spider is a multimedia, high-performance web spider/crawler for
augmenting the retrieval capabilities of Convera RetrievalWare(R), for
stand-alone use, or for integration with other applications. In addition to
HTML-based web pages, Convera 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.
Convera RetrievalWare(R) SDK
The Convera RetrievalWare(R) 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. Convera RetrievalWare(R)
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.
Convera RetrievalWare(R) Synchronizers
Convera RetrievalWare(R) 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.
Convera Screening Room(R)
Convera Screening Room(R) 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, Convera Screening
Room(R) 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(R) 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.
Convera Screening Room(R) combines the APRP(TM) technology for video analysis
with Convera RetrievalWare(R)'s indexing capabilities. Convera Screening Room(R)
consists of four components: Screening Room(R) Capture, Screening Room(R) Edit,
Screening Room(R) Browse and Screening Room(R) Video Asset Server. Screening
Room(R) 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(R) 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(R) 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 2.2, the latest version of Convera Screening Room(R), was released in
the fourth quarter of fiscal year 2001. Screening Room(R) 2.2 includes features
in the areas of video format support, database support, data import and export,
video logging and encoding, metadata logging and storage, and scheduling. Key
features include support for encoding and playback of MPEG 2, a format that
makes it possible to transmit broadcast-quality video over computer networks;
improved interface and options for capturing video; expanded options for
importing and exporting video assets and metadata; ability to encode video in
several formats simultaneously in a distributed configuration; and the ability
to simultaneously populate multiple repositories with XML data during video
capture and loading.
In addition to the Convera Screening Room(R) application, the Screening Room(R)
product family includes the following components:
Convera Screening Room(R) Capture (Standalone Version)
Convera Screening Room(R) 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(R) 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(R) Capture does not require purchase of the entire
Screening Room(R) 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(R) Capture is also a suitable component for sale to
OEM customers.
Screening Room(R) Capture API
The Screening Room(R) Capture API (Application Programming Interface) enables
developers to control the Screening Room(R) Capture component from another
program. The Screening Room(R) Capture API can be used to drive Screening
Room(R) Capture when that component is delivered as a part of the full Screening
Room(R) video asset management system or when the Capture component is delivered
in its standalone packaging.
Convera Visual RetrievalWare(R)
Leveraging the APRP(TM) technology, Convera Visual RetrievalWare(R) 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.
Convera Video Analysis Engine ("VAE")
Convera 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(TM) 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.
Convera Internet Software Integrity System ("ISIS")
The Convera Internet Software Integrity System is a software solution that
protects content and enforces usage rights for the online distribution of
premium digital content such as music, video and books. This solution is
designed for developers of content distribution platforms. It uses both standard
encryption and patented tamper-resistant software technology to provide strong,
persistent content protection to ensure the content stays protected through
every link in the content distribution value chain (up to and including the
end-user). The encryption technology transforms the content into an unreadable
form by unauthorized users. The tamper-resistant software technology ensures
only authorized, protected decryption of the content by hiding critical code,
keys and other secrets from observation, and detecting attempts to break
security mechanisms. The combination of these technologies in ISIS thwarts
illicit copying, use and redistribution of digital content.
The Internet Software Integrity System includes client and server-side
components as well as tools. The tools package the content for protected
distribution. The client-side security components act like unique locks and keys
for each user to access the protected content. The client components enforce
usage rules such as allowing the user to access the content only on a particular
PC and to copy the content only a certain number of times. These components are
manufactured in large volume, typically one unique component per user. By
creating unique security components for each user, ISIS reduces the value of a
successful attack on each component thus reducing the incentive to break the
system and preventing any global breaks. The server-side components manage the
distribution and updating of the client-side components. The server periodically
updates or "renews" the client-side components in order to reduce further the
value and incentive of breaking the security system.
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 Windsor, 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 employee 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 basis. The Company conducts training
seminars at its offices in Vienna, Virginia; Carlsbad, California; and Windsor,
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.
CONVERA END-TO-END CONTENT MANAGEMENT AND PUBLISHING SERVICE
Convera's technology can also be 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. The service
incorporates Convera's core technologies and capabilities in content
acquisition, content management, content security and content publishing to
provide a consolidated platform for managing and publishing media content.
Revenue derived from the deployment of Convera's technology in this manner
accounted for 15% of total consolidated revenues in fiscal year 2001.
Convera's end-to-end content management and publishing capability enables
owners of high-worth branded content to manage, publish and monetize their
digital assets through a single-stop, outsourced solution. Targeted at media
rich organizations in sports, news and information, entertainment, and training,
the service consolidates all of the functions content owners require to increase
utilization, Web distribution and monetization of their media content, including
ingestion and encoding, automatic metadata extraction, archive creation,
indexing and retrieval, re-expression and re-purposing, editing support,
video/data integration, content security, business model support (ad insertion,
subscriptions, pay-per-view, syndication, e-commerce), packaging for Web
distribution, cross platform formatting (56K, broadband, wireless) and
management of content distribution to the edge of the network.
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, and on the sale of Convera's end-to-end service directly to
end user customers. The Company's targeted customer groups include the world's
largest corporations, government agencies and other institutions, large computer
systems integrators, Web-driven businesses, and media-rich organizations such as
sports leagues, news and information providers, entertainment organizations and
training companies.
Members of the North American sales team are located throughout the United
States and Canada, and the majority of the overseas sales team is located in the
United Kingdom. The Company typically licenses its Convera RetrievalWare(R) and
Convera Screening Room(R) products to end users as either an enterprise-wide or
work-group level solution, licenses its Convera ISIS product to OEM customers
and third party software vendors who distribute through their own sales
channels, and offers its end-to-end content management and publishing service to
end users for monthly fees or in some cases through royalty payments as a
percentage of revenue.
Marketing efforts focus on building brand awareness and establishing demand for
the Company's products and end-to-end content management and publishing service,
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. Through the web site, prospective
customers can learn about the suite of Convera products and conduct online
demonstrations of products, while 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 primary technologies are its semantic network processing
techniques, proprietary adaptive pattern recognition processing software
(APRP(TM)) and patented tamper-resistant software for protecting digital
content.
Convera's semantic network leverages lexical knowledge at the highest level,
offering a system that will search for specific word meanings enriched by
related terms and concepts. With semantic networks, users find information using
natural language processing. Semantic networks incorporate syntax, morphology
and the actual meaning of words as defined by published dictionaries and other
reference sources.
APRP(TM) consists of software architecture for processing digital information to
extract patterns in the primary types of computerized data: text, image, audio
and video. The system provides high-speed pattern recognition that can be used
to store, categorize, retrieve and refine data. The processing of digital
patterns provides users with a way to store and use computerized data faster
with more flexibility and with fewer data storage requirements than competing
systems. The Company's pattern recognition methods use neural computing
techniques to process data in a non-algorithmic, parallel fashion by generating
responses to input data. Systems utilizing these methods are unlike traditional
computer systems and are now being used in areas where traditional systems have
been inefficient, such as natural language, machine vision, robotics, pattern
matching and signal recognition. Neural computing systems are "trained" by
processing data, not by programming. Once the system has extracted patterns from
the digital data, these patterns can be sorted, labeled and used to make
decisions.
Convera's patented tamper-resistant content protection technologies work
together as a package of intelligent agents that encrypts digital assets and
establishes a renewable and mobile shield against unauthorized modification,
access and use. In addition, the technologies can specify persistent rights and
business rules that govern usage of the protected content and stipulate three
layers of authorization: user, content and device on which the content will be
consumed.
The Company's research and development program focuses on enhancing and
expanding the capabilities of its Convera RetrievalWare(R), Screening Room(R)
and ISIS products to address additional markets and market requirements, and on
exploring and applying its proprietary technologies in new areas such as media
asset management and multimedia content retrieval, for example. The Company
believes the market is emerging for search products that can index and retrieve
unstructured text and multimedia data types. To that end, the Company is
evaluating a multimedia server architecture which would provide integrated
multimedia search and retrieval.
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 $13.0 million, $9.5 million and $8.3
million, respectively, in the fiscal years ended January 31, 2001, 2000 and
1999.
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 brand names
and Company name. The Company has three patents and eight 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. The Company competes in multiple
markets, including the traditional information retrieval and content management
market segments as well as the emerging market segment for digital rights
management. These market segments have current and potential competitors who are
larger and more established than the Company and have significantly greater
financial, technical, marketing and other resources than the Company. In the
information retrieval and content management market segments, the Company
considers its principal competitive advantages to be the architecture,
extensibility to multiple data types and performance of its content management
applications. The Company also believes the superior language handling and
content publishing capabilities of its products are competitive advantages. In
the emerging market for digital rights management, the Company considers its
competitive advantages to be the tamper-resistance, persistence, renewability
and mobility of its content protection technologies and the comprehensive
content management, business model support and Internet distribution
capabilities of its end-to-end service.
Compared to its primary competition, the Company believes its applications
provide users with: (1) more accurate results due to the semantic network and
APRP(TM) technologies, (2) an environment that is more scalable due to the
distributed search architecture, and (3) more comprehensive search capabilities
due to the ability to search multiple types of data. The Company believes its
content protection technologies provide users a high level of confidence that
only authorized users will access protected content due to the encryption and
tamper-resistance technologies; and the Company's end-to-end service provides
users with a reliable outsource solution due to the integration of all necessary
content acquisition, management, enhancement, security and distribution
technologies into a one-stop solution.
The Company competes with numerous companies depending on the target market for
its products. Most often, the Company 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, and competes with
InterTrust Technologies Corporation, RealNetworks, Inc., Microsoft and
ContentGuard Holdings, Inc. to provide digital rights management solutions to
OEM and third-party vendor accounts. Convera believes it is the first to
consolidate the capabilities offered by its various competitors into a
single-source. 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
As a result of the Combination in fiscal year 2001, the Company changed the
structure of its organization to reflect one reportable segment. The Company has
restated the corresponding segment information for earlier periods presented.
Beginning in fiscal year 2000, the Company had aligned its business into two
operating segments, differentiating between text and visual product lines. The
Company's business is no longer analyzed in this manner. All of the Company's
revenues are from external customers.
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately $5.0 million, $4.4 million and $4.5 million,
respectively, in the fiscal years ended January 31, 2001, 2000 and 1999. These
revenues, expressed as a percentage of total revenues for the fiscal year, were
approximately 10%, 12% and 16%, respectively.
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 9 to the consolidated financial statements contained herein.
EMPLOYEES
The Company had 359 employees at January 31, 2001, of whom 166 were in research
and development, 107 in sales and marketing, 47 in technical support,
professional services and training and 39 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 18,700
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; Columbia, Maryland; Lafayette, Colorado; and Hillsboro,
Oregon. The company leases additional space for sales and administrative
functions in New York, New York and San Jose, California.
The Company leases space in Windsor, 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
There are no material pending legal proceedings to which the Company is a party.
Item 4. Submission of Matters to a Vote of Security Holders
The Excalibur Technologies Corporation Annual Meeting of Shareholders was held
December 21, 2000. At the meeting, Excalibur's shareholders approved the
Agreement and Plan of Contribution and Merger dated as of April 30, 2000, as
amended, by and among Excalibur, Intel, Convera and Excalibur Transitory, Inc.,
a wholly owned subsidiary of Convera (the "Merger Agreement"). For the approval
of the Merger Agreement, the vote was 12,371,358 shares for; 14,598 shares
against; and 2,150 shares abstaining. Upon completion of the Combination,
Excalibur became a wholly owned subsidiary of Convera. Excalibur's name has been
changed to Convera Technologies, Inc.
For the approval of the Convera 2000 Stock Option Plan, which was in connection
with and a condition to the Combination, the vote was 9,517,708 shares for;
2,846,342 shares against; and 24,056 shares abstaining.
For the approval of two corporate governance provisions of Convera's amended and
restated certificate of incorporation and bylaws, the vote was 12,060,647 shares
for; 323,170 shares against; and 4,289 shares abstaining.
For the election of ten members to the Excalibur board of directors for terms
expiring at the completion of the combination, or at the 2001 annual meeting if
the Combination was not approved, the vote was as follows:
Number of Shares Voted
For Withheld
Donald R. Keough: 12,049,803 338,303
Herbert A. Allen: 12,049,783 338,303
Susan K. Allen: 12,035,733 352,353
Patrick C. Condo: 12,049,733 338,353
Richard M. Crooks: 12,070,913 317,173
John S. Hendricks: 12,070,913 317,173
W. Frank King III: 12,070,888 317,198
John G. McMillian: 12,070,913 317,173
Philip J. O'Reilly: 12,070,913 317,173
Harry C. Payne: 12,070,913 317,173
For the approval of the amendment to Excalibur's 1996 Employee Stock Purchase
Plan, the vote was 12,281,164 shares for; 103,749 shares against; and 3,193
shares abstaining.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Class A 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 the Class A
common stock for the period from December 22, 2000 through January 31, 2001 and
for Excalibur common stock for the period February 1, 1999 through December 21,
2000, as reported by the National Market System of NASDAQ. The number of
shareholders of record as of January 31, 2001 was 1,021. 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 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
Fiscal 2000 (February 1, 1999 - January 31, 2000)
First Quarter.................................... $ 19 7/8 $ 8 3/4
Second Quarter................................... 17 5/16 9 9/32
Third Quarter.................................... 12 7/8 7 5/8
Fourth Quarter................................... 25 1/2 9 1/4
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, 2001
and 2000, and the statement of operations data for the fiscal years ended
January 31, 2001, 2000 and 1999 should be read in conjunction with such
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
The Combination was accounted for using the purchase method of accounting. 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.
- ------------------------------------------------------------------------------------------------------------------------
Fiscal Years Ended January 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except per share data)
Revenues:
Software...............................$ 37,299 $ 32,649 $ 22,741 $ 17,202 $ 15,866
Maintenance............................ 6,621 5,285 5,198 5,215 4,393
-------------- ------------- --------------- ------------- -------------
License-related......................... 43,920 37,934 27,939 22,417 20,259
Services (3)............................. 7,602 - - - -
-------------- ------------- --------------- ------------- -------------
51,522 37,934 27,939 22,417 20,259
-------------- ------------- --------------- ------------- -------------
Cost of revenues:
Software .............................. 8,288 4,724 3,697 2,957 1,630
Maintenance ........................... 1,474 2,143 1,320 1,219 1,618
-------------- ------------- --------------- ------------- -------------
License-related ......................... 9,762 6,867 5,017 4,176 3,248
Services ................................ 7,846 - - - -
-------------- ------------- --------------- ------------- -------------
17,608 6,867 5,017 4,176 3,248
-------------- ------------- --------------- ------------- -------------
Gross margin................................ 33,914 31,067 22,922 18,241 17,011
-------------- ------------- --------------- ------------- -------------
Operating expenses:
Sales and marketing...................... 22,345 16,210 13,501 13,184 14,430
Research and product development......... 12,968 9,456 8,328 6,405 6,288
General and administrative............... 6,279 5,402 4,775 4,884 3,906
Amortization of goodwill & other
intangible assets (4).................. 15,672 118 111 82 -
Acquired in-process research and
development............................ 800 - - 1,284 -
Restructuring costs...................... - - - 577 -
-------------- ------------- --------------- ------------- -------------
58,064 31,186 26,715 26,416 24,624
-------------- ------------- --------------- ------------- -------------
Operating loss.............................. (24,150) (119) (3,793) (8,175) (7,613)
Interest income, net........................ 1,368 250 239 374 781
Equity in net loss of affiliate............. - - (300) (525) (341)
Write-off of investment in affiliate........ - (471) - - -
-------------- ------------- --------------- ------------- -------------
Net loss.................................... (22,782) (340) (3,854) (8,326) (7,173)
Dividends on cumulative, convertible
preferred stock............................. 10 14 14 14 14
-------------- ------------- --------------- ------------- -------------
Net loss applicable to common stock.........$ (22,792) $ (354) $ (3,868) $ (8,340) $ (7,187)
============== ============= =============== ============= =============
Net loss per common share - basic and
diluted..................................$ (1.22) $ (0.02) $ (0.29) $ (0.64) $ (0.58)
Weighted-average number of common shares
outstanding - basic and diluted.......... 18,714 14,282 13,526 12,934 12,351
Balance Sheet Data (1) (at end of period)
Cash and cash equivalents...................$ 37,061 $ 10,884 $ 5,851 $ 4,939 $ 2,685
Working capital............................. 166,543 19,288 8,006 9,748 14,566
Total assets................................ 1,026,445 30,687 19,712 20,045 26,147
Accumulated deficit......................... (78,920) (56,138) (55,798) (51,945) (43,619)
Total shareholders' equity (2).............. 1,015,058 22,305 13,174 13,098 18,563
(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) FY 2001 amortization primarily related to merger 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. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this report.
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company also offers certain
end-to-end content management and publishing services focused on branded content
owners that wish to outsource the management and monetization of their digital
assets. The Company licenses its software to end users directly and also
distributes its software products through license agreements with value-added
resellers, system integrators, original equipment manufacturers, application
service providers and other strategic partners. Revenues are provided under
software licenses with new customers and from the related sale of product
maintenance, training and implementation support services. Additions to the
number of authorized users, upgrades to newer product versions and the renewal
of product maintenance arrangements by customers pursuant to existing licenses
also provide revenues to the Company. Under software maintenance contracts,
customers are typically entitled to receive telephone support, software bug
fixes and upgrades or enhancements of particular software products when and if
they are released.
On December 21, 2000, Excalibur and Intel consummated the Combination. At the
completion of the Combination, Excalibur became a wholly owned subsidiary of
Convera, each outstanding share of Excalibur common stock was converted into one
share of Class A common stock of Convera, and Intel contributed to Convera IMS
division, intellectual property assets and other assets used by that division,
as well as approximately $155 million in cash, with $150 million 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
Convera and 12,207,038 shares of Class B non-voting common stock.
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 Combination has been 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, which is being
amortized on a straight-line basis over six years.
In connection with the Combination, the Company recorded a charge for acquired
in-process research and development ("IPRD") of approximately $800,000 in the
fiscal year ended January 31, 2001The purchased IPRD represents 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. For the
fiscal year ended January 31, 2001, the Company recorded amortization of
goodwill and other intangible assets of $15.7 million.
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 has 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 are completed by Convera, revenue and the related costs,
including profit on work performed by Convera subsequent to the acquisition,
will be recognized. 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 $700,000 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 $400,000 included in cost of software revenues. The Company
expects to complete the remaining contributed contracts during the fiscal year
ending January 31, 2002.
In September 2000, Intel and the National Basketball Association ("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. Convera and the NBA are working together to create a hosted,
end-to-end solution that transforms video footage and other data into a
searchable database of rich-media interactive content assets and then manages
those assets--archiving, enhancing, protecting, and managing their distribution
as branded NBA content offerings--to create a new fan experience for the NBA's
end-users and new revenue opportunities for the NBA.
Under this 10-year services agreement, Convera will provide data and video
integration and NBA content management, logging, indexing and retrieval, as well
as other related services. Convera will receive in cash a percentage of NBA
revenue from the sale of NBA products subject to the services agreement, as well
as a percentage of NBA revenues from advertising and sponsorship related to the
covered NBA products. The NBA will have the exclusive right to make all sales of
NBA products. The NBA products will include highlights on demand, archive
online, television broadcast enhancements and real time distribution of NBA
games over broadband networks. Convera will be the NBA's provider of services
related to the development and distribution of those products for the term of
the services agreement, subject to the NBA's right to authorize major
telecasters and certain other third parties to provide television broadcast
enhancements and real time distribution of NBA games.
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.
Results of Operations
For the fiscal year ended January 31, 2001, total revenues were $51.5 million,
an increase of 36% over total revenues of $37.9 million in fiscal year 2000. The
net loss for fiscal year 2001 was $22.8 million, or $1.22 per common share,
compared to a net loss of $0.3 million, or $.02 per share in the prior year. For
the fiscal year ended January 31, 2000, total revenues increased 36% over total
revenues of $27.9 million in fiscal year 1999. The net loss in fiscal year 1999
was $3.9 million, or $0.29 per common share.
The Company uses EBITDA (earnings before interest, taxes depreciation and
amortization) 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, 2001, the EBITDA loss was $4.0 million, or
$0.21 per common share compared to a positive EBITDA of $3.4 million, or $0.24
per common share in fiscal year 2000. For fiscal year 1999, EBITDA loss was $1.4
million, or $0.11 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, 2001
(dollars in thousands).
- ------------------------------ -------------------------------------------------------------------- --- --------- --- ---------
Increase Increase
(Decrease) (Decrease)
from from
Components of Revenue and Expenses 2000 to 1999 to
2001 2000
Fiscal years ended January 31,
2001 2000 1999
Revenues: $ % $ % $ % % %
----------- -------- ----------- -------- ---------- -------- --------- ---------
$37,299 72% $32,649 86% $22,741 81% 14% 44%
Software
Maintenance 6,621 13% 5,285 14% 5,198 19% 25% 2%
----------- -------- ----------- -------- ---------- -------- --------- ---------
43,920 85% 37,934 100% 27,939 100% 16% 36%
License-related
Services 7,602 15% -- -- -- -- -- --
----------- -------- ----------- -------- ---------- -------- --------- ---------
Total revenues $51,522 100% $37,934 100% $27,939 100% 36% 36%
----------- -------- ----------- -------- ---------- -------- --------- ---------
Expenses:
Cost of license-related
revenues $9,762 19% $6,867 18% $5,017 18% 42% 36%
Cost of services revenues 7,846 15% -- -- -- -- -- --
Sales and marketing 22,345 44% 16,210 43% 13,501 48% 38% 20%
Research and product
development 12,968 25% 9,456 25% 8,328 30% 37% 14%
General and administrative 6,279 12% 5,402 14% 4,775 17% 16% 13%
Amortization of goodwill
and other intangible
assets 15,672 30% 118 -- 111 -- 13181% --
Acquired in-process
research and
development 800 2% -- -- -- -- -- --
----------- -------- ----------- -------- ---------- -------- --------- ---------
Total expenses $75,672 147% $38,053 100% $31,732 113% 53% 20%
----------- -------- ----------- -------- ---------- -------- --------- ---------
Operating loss $(24,150) $(119) $(3,793) N/A N/A
Other income (expense), net 1,368 (221) (61) N/A N/A
----------- ----------- ----------
Net loss $(22,782) $(340) $(3,854) N/A N/A
=========== =========== ==========
Fiscal years ended January 31,
2001 2000 1999
----------- ----------- ----------
EBITDA:
Operating loss $(24,150) $(119) $(3,793)
Depreciation 1,329 1,323 1,375
Amortization of goodwill and
other intangible assets 15,672 118 111
Amortization of other assets 2,327 2,105 869
Acquired in-process research
and development 800 -- --
----------- ----------- ----------
$(4,022) $3,427 $(1,438)
EBITDA (loss) =========== =========== ==========
Revenues
Software revenues, which include amounts generated through software licensing
and implementation services, increased 14% to $37.3 million in fiscal year 2001
from $32.6 million in fiscal year 2000 and increased 44% in fiscal year 2000
from $22.7 million in fiscal year 1999. The increase in software revenues in all
periods was primarily attributable to increased sales of the Company's digital
content management 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. Each year's
increase reflects continued contributions from existing and new OEMs who have
chosen the Company as a key search component in their product offerings. During
fiscal years 2001 and 2000, OEM relationships provided approximately 18% and 33%
of total software revenues, respectively.
During the year ended January 31, 2000, the Company recognized approximately
$4.3 million in revenues 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 has 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. The Company also generated
approximately $2.8 million and $2.3 million for the years ended January 31, 2000
and 1999, respectively, from an OEM arrangement with StorageTek.
Maintenance revenues were $6.7 million in fiscal year 2001, compared to $5.3
million and $5.2 million in fiscal years 2000 and 1999, respectively. The
increase in maintenance revenue in fiscal years 2001 and 2000 was primarily
attributable to an increase in the number of RetrievalWare(R) customers.
Maintenance revenues as a percentage of total revenue has decreased each year
based primarily on the increase in revenues from OEM and other reseller
agreements that do not have as significant of a maintenance component.
Convera offers its end-to-end content management and publishing services to
media-rich organizations as an outsource solution for archiving and managing
video assets, for exploiting the Internet as a distribution channel and for
generating additional revenue through alternative distribution. The Company also
offers integration services to ensure the service operates as a seamless
extension to the customers' existing content management infrastructure. Revenues
from services in 2001 were $7.6 million, reflecting the transition of and
completion of one of the contracts assigned in the Combination 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 grew 40% in fiscal year 2001 to $12.9 million from $9.2
million in fiscal year 2000 compared to 25% in fiscal year 2000 from $7.3
million in fiscal year 1999. The Company terminated its relationship with ETNV,
a Belgian Company incorporated in June 1996, to sell and market the Company's
products and services within a territory that included most of Northern Europe
and Italy, in the first quarter of fiscal year 2000. No revenues related to the
ETNV agreement were recognized in fiscal year 2000.
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately 10%, 12% and 16% of total revenues for fiscal
years 2001, 2000 and 1999, respectively. One customer accounted for 15% of
revenues during fiscal year 2001. In fiscal years 2000 and 1999, revenues
derived from one customer accounted for 12% and 11%, respectively, of total
Company revenues.
Cost of Revenues
Cost of license related revenues increased 42% to $9.8 million in fiscal year
2001 from $6.9 million in fiscal year 2000. In fiscal year 2000, cost of license
related revenues increased 36% from $5.0 million in fiscal year 1999. The
increase in both fiscal years 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 services represents the personnel and other costs incurred in connection
with performing on the Company's service related contracts. For the year ended
January 31, 2001, the cost of services primarily represents those costs incurred
in connection with the completion of the contracts accounted for using the
completed contract method of accounting.
Operating Expenses
Sales and marketing expenses increased 38% to $22.3 million in fiscal year 2001
from $16.2 million in fiscal year 2000. In fiscal year 1999, sales and marketing
costs were $13.5 million. Growth in expenditures for marketing programs and in
the number of sales and marketing personnel was responsible for the expense
increase in 2001. Sales and marketing personnel increased from 72 to 107 from
January 31, 2000 to January 31, 2001. Growth in marketing program expenses and
the opening of the new Germany sales office were responsible for the increase in
fiscal year 2000 expenses. Sales and marketing expenses were 43% of revenues in
fiscal years 2001 and 2000 compared to 48% in fiscal year 1999.
Research and product development costs increased 37% to $13.0 million in fiscal
year 2001 from $9.5 million in fiscal year 2000, representing 25% of revenues in
both periods. The fiscal year 2001 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. The fiscal year 2000
increase was largely due to expenses associated with a development contract with
StorageTek. The agreement with StorageTek was an OEM, licensing and distribution
agreement that gave StorageTek the right to integrate the Company's software
products with StorageTek equipment. The Company was responsible for the
development of new features and interfaces to the standard products covered
under the OEM portion of the agreement. Since the services were considered
essential to the functionality of the license, the OEM portion of this agreement
was recognized on a percentage of completion basis. The Company completed its
development obligations under the agreement during fiscal year 2000. Expenses
associated with this agreement were classified as research and development costs
and cost of maintenance revenues. Text and video research and development
expenses also increased in fiscal year 2000 compared to fiscal year 1999 as the
Company continued to invest in the enhancement of its RetrievalWare(R) and video
products. Research and development expenses were $8.3 million, or 30% of
revenues in fiscal year 1999.
General and administrative expenses increased 16% in fiscal year 2001 to $6.3
million from $5.4 million in fiscal year 2000, representing 12% and 14% of
revenues, respectively. The increase in fiscal year 2001 was due to growth in
personnel required to support the Company's expanding operations. The increase
in fiscal year 2000 was driven by increased corporate expenses including legal
and accounting costs. In fiscal year 1999, general and administrative expenses
were $4.8 million, or 17% of revenues.
Amortization of goodwill and other acquisition related intangible assets was
approximately $15.7 million for the year ended January 31, 2001. The majority of
this amount relates to amortization of goodwill and intangible assets related to
the Combination from the December 21, 2000 closing date to the end of the fiscal
year. This amount also includes approximately $1.0 million in amortization of
the intangible assets acquired from the NBA pursuant to the contribution
agreement. The write-off of acquired in-process research and development related
to the Combination was $0.8 million. Amortization expenses of $118,000 and
$111,000 for the years ended January 31, 2000 and 1999, respectively, related to
goodwill from an acquisition made in the second quarter of fiscal year 1998.
Total expenses for fiscal year 2001 were $75.7 million, a 99% increase from
total expenses of $38.1 million in the prior fiscal year. In fiscal year 2000,
total expenses increased by 20% from $31.7 million in fiscal year 1999. 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 and in the number of weighted
average shares outstanding related to the Combination.
The total number of employees increased from 208 at January 31, 2000 to 359 at
January 31, 2001. The Company had 201 employees at January 31, 1999.
Other income increased to $1.4 million from a loss of $0.2 million in fiscal
year 2000 and a loss of approximately $60,000 in fiscal year 1999. The increase
in fiscal year 2001 primarily represents interest income from the investment of
the $150 million contributed by Intel as part of the Combination. A charge of
$0.5 million related to the termination of the Company's agreement with
Excalibur Technologies N.V. ("ETNV") was the primary cause of the change in
other income from fiscal year 1999 to fiscal year 2000.
Liquidity and Capital Resources
The Company's combined balance of cash, cash equivalents and short-term
investments at January 31, 2001 as compared to January 31, 2000 is summarized
below (in thousands). At January 31, 2000, investments consisted of a
certificate of deposit pledged to collateralize a letter of credit.
January 31, January 31, Change
2001 2000
-------------- --------------- ----------------
Cash and cash
equivalents $ 37,061 $ 10,884 $ 26,177
Investments 119,083 178 118,905
-- ----------- --- ----------- --- ------------
Total $ 156,144 $ 11,062 $ 145,082
== =========== === =========== === ============
In fiscal year 2001, the Company's operating activities used $7.8 million of
cash. 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. The Company's operating
activities used cash of $3.0 million in fiscal year 1999. The net loss of $3.9
million was offset by non-cash charges of $2.3 million, including $1.5 million
in depreciation and amortization, $0.5 million in bad debt expense and $0.3
million for the Company's share of the net loss of ETNV and amortization of ETNV
warrants. Reductions in accounts receivable provided $2.3 million while
increases in prepaid expenses used $3.4 million. Reductions in accounts payable,
accrued expenses and deferred revenues used $0.3 million.
Investing activities contributed $27.5 million in cash in fiscal year 2001. The
Company received cash of $150 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 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. In fiscal year 1999,
investing activities provided $0.1 million. Net cash provided from the maturity
of U.S. Treasury Bills totaled $1.5 million while purchases of computer and
other equipment used $1.1 million.
Financing activities provided $6.1 million in fiscal year 2001. Approximately
$5.7 million represented proceeds from the issuance of common stock upon the
exercise of outstanding stock options, while approximately $400K 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. Financing
activities provided $3.8 million in fiscal year 1999. A private placement of
325,000 shares of common stock to an unaffiliated financial institution provided
$3.4 million, while cash of $0.4 million was provided from the exercise of
employee stock options and issuances of stock under the employee stock purchase
plan.
The number of days sales outstanding ("DSO") at January 31, 2001 was 123 days,
an increase of 17 days from January 31, 2000. Management believes that the
allowance for doubtful accounts of $1.2 million at January 31, 2001 is adequate.
As of January 31, 2001, the Company's balances of cash, cash equivalents and
short-term investments were $156 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.
As of January 31, 2001, the Company had net operating loss carryforwards
("NOLs") of approximately $80.4 million. The Company incurred a net loss of
$22.8 million for the fiscal year ended January 31, 2001. The accumulated
deficit of the Company at January 31, 2001 was $78.9 million. The realization of
the benefits of the NOLs is dependent on sufficient taxable income in future
fiscal years. Lack of future earnings, or a change in the ownership of the
Company, could adversely affect the Company's ability to utilize the NOLs.
Despite the NOL carryforwards, the Company may have income tax liability in
future years due to the application of the alternative minimum tax rules of the
Internal Revenue Code. Further, the NOLs generated prior to the Combination are
subject to the annual limitations prescribed by IRC Section 386.
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 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 large
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
EURO Conversion
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) were fixed amongst one another and became the currencies of the
EURO. The currencies of the eleven countries will remain in circulation until
mid-2002. The EURO currency will be introduced on January 1, 2002. The Company
does not expect future balance sheets and statements of earnings and cash flows
to be materially impacted by the EURO Conversion.
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 25% of total revenues in fiscal year 2001.
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, 2001, approximately 42%, 4% 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, 2001, 11% 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 primarily of U.S.
Government treasury bills, with 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
Directors of the Registrant
Name Age Position
Ronald J. Whittier 64 Chairman
Patrick C. Condo 44 President, Chief Executive Officer,
Chief Operating Officer, and
Director
Herbert A. Allen 61 Director
Andy D. Bryant 50 Director
Gerhard H. Parker 57 Director
David J. Stern 58 Director
Ronald J. Whittier has been Chairman since the effective date of the Combination
on December 21, 2000 and was Chief Executive Officer from December 21, 2000
through April 5, 2001. Mr. Whittier formerly held the position of Senior Vice
President and General Manager of Intel's Interactive Media Services division
since 1999. From 1995 to 1999, he was responsible for coordinating Intel's
various activities in content, applications and authoring tools. Prior to 1995,
he held various jobs at Intel, including manager of Intel Architecture Labs,
Director of Corporate Marketing and general manager of the Memory Products
Division. Mr. Whittier joined Intel in 1970.
Patrick C. Condo has been President, Chief Operating Officer and a director of
Convera since the effective date of the merger with Intel's IMS division on
December 21, 2000 and was appointed Chief Executive Officer on April 5, 2001.
Mr. Condo is formerly President and Chief Executive Officer of Excalibur since
November 1995 and a Director since January 1996. Mr. Condo was President of
Excalibur from May 1995 to November 1995. He became Executive Vice President of
Excalibur in January 1995 after serving as the Director of Business Development
from November 1992. From October 1987 to November 1992, Mr. Condo held several
manager level positions for Digital Equipment Corporation's Image, Video and
Voice Business Unit and Software Business Group in New Hampshire.
Herbert A. Allen has been a director of the Company since the effective date of
Combination on December 21, 2000 and was a director of Excalibur since June
2000. He has been President, Chief Executive Officer, Managing Director and a
director of Allen & Company Incorporated, a privately held investment-banking
firm for more than the past five years. He is a member of the board of directors
of The Coca-Cola Company.
Andy D. Bryant has been a director of the Company since the effective date of
the Combination on December 21, 2000. He has served as Executive Vice president
and Chief Financial and Enterprise Services Officer of Intel since December
1999. Prior to that, Mr. Bryant was Senior Vice President and Chief Financial
Officer of Intel from January 1999 to December 1999 and Vice President and Chief
Financial Officer of Intel from 1994 to January 1999. Mr. Bryant is a director
of Synopsys, a provider of high-level design automation solutions for the design
of integrated circuits, systems on a chip (SoCs) and electronic systems.
Gerhard H. Parker has been a director of the Company since the effective date of
the Combination on December 21, 2000. He has been Executive Vice President and
General Manager, New Business Group of Intel since 1998. Prior to that, Dr.
Parker was Executive Vice President and General Manager, Technology and
Manufacturing Group of Intel, from 1996 to 1998 and Senior Vice President and
General Manager, Technology and Manufacturing Group of Intel, from 1992 to 1996.
David J. Stern has been a director of the Company since the effective date of
the Combination on December 21, 2000. He has been the Commissioner of the
National Basketball Association for more than the past five years.
Executive Officers of the Registrant
Each year, the Board of Directors appoints the executive officers of the Company
to serve until the next Annual Meeting of Shareholders and until their
successors have been duly appointed and qualified. The following information
indicates the position, age and business experience of the executive officers.
There are no family relationships between any of the executive officers of the
Company.
Name Age Position
Patrick C. Condo 44 President, Chief Executive Officer
and Chief Operating Officer
James H. Buchanan 45 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Ciaran T. Doyle 38 Vice President, Integration Services
Kamran Khan 37 Vice President, Sales and Marketing
James Kiles 47 Chief Strategy Officer and Vice President,
Business Development
Parvinder S. Kohli 44 Vice President, Content Security Solutions
Marc S. Martin 35 Vice President, General Counsel and Secretary
David Nunnerley 44 Vice President, Content Management Products
Kenneth E. Rhodes 41 Vice President, Interactive Services Platform
See the discussion included in the preceding section for the business experience
of Mr. Condo.
James H. Buchanan was named Vice President, Chief Financial Officer, Treasurer
and Assistant Secretary in December 2000. Mr. Buchanan was the Chief Financial
Officer, Secretary and Treasurer of Excalibur since 1995. From 1991 to 1995, Mr.
Buchanan was Vice President, Controller and Treasurer of Legent Corporation, a
software development company. Prior to that, he held several financial
management positions with Norfolk Southern Corporation and PepsiCo. Mr. Buchanan
is a certified public accountant.
Ciaran T. Doyle was named Vice President, Integration Services in December 2000.
Mr. Doyle was previously Director of Entertainment Content Services at Intel
Corporation from 1998. Prior to joining Intel Corporation, Mr. Doyle was
Managing Director of Binary Interactive Solutions, Ltd., a technology strategy
consultancy company, from 1997 to 1998. From 1991 to 1997, Mr. Doyle was
Managing Director of The MultiMedia Corporation Plc, a software developer.
Kamran Khan was named Vice President, Sales and Marketing in December 2000.
Previously, Mr. Khan was Senior Vice President and General Manager, Applications
Group, of Excalibur. Mr. Khan held several sales management positions with
Excalibur from 1993 to 2000. Prior to joining Excalibur, Mr. Khan held various
positions, including regional business manager, with PAFEC Limited, a leading
firm in the United Kingdom involved with the development and implementation of
computer-aided engineering and engineering document management software systems.
James Kiles was named Chief Strategy Officer and Vice President, Business
Development in December 2000. Mr. Kiles was previously Director, Strategic
Investments at Intel Corporation from 1999 to 2000. From 1997 to 1999, Mr. Kiles
was Manager, Strategic Investments with Intel Corporation and a Senior Systems
Engineer with Intel Corporation from 1996 to 1997.
Parvinder S. Kohli was named Vice President, Content Security Solutions in
December 2000. Mr. Kohli was General Manager, Internet Security Services at
Intel Corporation from 1999 to 2000 before joining Convera. Prior to that, Mr.
Kohli served as Director, Business Development in the area of e-commerce for
Intel Corporation from 1994 to 1999.
Marc S. Martin was named Vice President, General Counsel and Secretary in
December 2000. Prior to joining Convera, Mr. Martin was Vice President, General
Counsel and Secretary of BET Interactive, LLC, an Internet content company, from
1999 to 2000. From 1998 to 1999, Mr. Martin was Vice President, Associate
General Counsel and Assistant Secretary with BET Holdings, Inc., a media and
entertainment company. From 1996 to 1998, Mr. Martin was the chief counsel of a
telecom subsidiary of Capital One Financial Corporation, a financial services
company. Prior to that, Mr. Martin was an associate with Skadden, Arps, Slate,
Meagher & Flom, a law firm.
David Nunnerley was named Vice President, Content Management Products in
December 2000. Previously, Mr. Nunnerley was Senior Vice President and General
Manager, Media Services Group, of Excalibur and was instrumental in the
development of the company's visual products since joining the company in 1996.
From 1994 to 1996, Mr. Nunnerley was Vice President of Engineering for
Videopress Software, a software company providing video delivery products and
solutions to cable companies deploying cable modems. Prior to that, Mr.
Nunnerley held various product management/marketing roles and management
positions with Digital Equipment Corporation.
Kenneth E. Rhodes was named Vice President, Interactive Services Platform in
December 2000. Prior to joining Convera, Mr. Rhodes was an engineering manager
at Intel Corporation from 1991, where he was responsible for the design and
implementation of digital video software, including systems software and
applications.
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and regulations of the SEC
thereunder require the Company's executive officers and directors, and persons
who own more that ten percent of a registered class of the Company's equity
securities, to file reports of initial ownership and changes in ownership with
the SEC. Based solely on its review of copies of such forms received by the
Company, or on written representations from certain reporting persons that no
other reports were required for such persons, the Company believes that during
or with respect to the period from February 1, 2000 to January 31, 2001 all of
the Section 16(a) filing requirements applicable to its executive officers,
directors and ten percent shareholders were complied with on a timely basis.
Item 11. Executive Compensation
Summary Compensation Table
The following table presents information concerning the compensation of the
Company's Chief Executive Officer and each of the other most highly compensated
executive officers during the 2001 fiscal year (collectively, the "Named
Executive Officers") for services rendered in all capacities to the Company for
the fiscal year ended January 31, 2001, as well as the previous two fiscal
years:
Long Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Other Securities All
Annual Restricted Under- Other
Compen- Stock lying LTIP Compen-
Name and Principal Fiscal sation Award(s) Options/ Payouts sation
Position Year Salary ($) Bonus ($) ($) ($) SARs (#) ($) ($)
- -------- ---- ---------- --------- --- --- -------- --- ---
Ronald J. Whittier 2001 42,564 (1) -- -- -- 900,000 -- --
Chairman and Chief
Executive Officer (2)
Patrick C. Condo 2001 277,757 158,957 -- -- 100,000 -- --
President and Chief 2000 275,000 102,369 -- -- 175,000 -- --
Operating Officer (2) 1999 225,000 71,281 -- -- -- -- --
James H. Buchanan 2001 250,000 130,060 -- -- 205,000 -- --
Vice President, Chief 2000 230,000 84,425 -- -- 35,000 -- --
Financial Officer, 1999 180,000 57,024 -- -- 10,000 -- --
Asst. Secretary and
Treasurer
Kamran Khan 2001 200,000 106,116 17,437 (3) -- 285,250 -- --
Vice President, Sales 2000 145,000 117,246 44,990 (4) -- 35,000 -- --
and Marketing 1999 151,438 106,733 54,644 (5) -- 5,000 -- --
David Nunnerley (8) 2001 200,000 77,442 9,594 (6) -- 293,000 -- --
Vice President 2000 180,000 68,000 18,428 (7) -- 50,000 -- --
Content Management 1999 175,038 48,428 27,260 (8) -- 15,000 -- --
Products
(1) Represents compensation paid from December 22, 2000, when Mr. Whittier
became CEO of Convera Corporation through January 31, 2001.
(2) On April 5, 2001, Mr. Condo replaced Mr. Whittier as Chief Executive
Officer.
(3) Represents expenses associated with a sales award trip, grossed up for
taxes.
(4) In connection with Mr. Khan's relocation from the United Kingdom,
payments of $28,169 were made by the Company on Mr. Khan's behalf for an
apartment in Virginia. The remainder of Other Annual Compensation
represents income tax consulting services, a payment made to Mr. Khan's
pension plan in the United Kingdom and expenses associated with a sales
award trip. All of the items were grossed up for taxes.
(5) Represents payments of $42,254 made by the Company on Mr. Khan's behalf
for an apartment in Virginia. The remainder of Other Annual Compensation
represents income tax consulting services, travel expenses for Mr. Khan's
spouse and expenses associated with a sales award trip. All of the items
were grossed up for taxes.
(6) Represents rental payments paid by the Company on Mr. Nunnerley's behalf,
grossed up for taxes.
(7) Represents rental payments and travel expenses paid by the Company on
Mr. Nunnerley's behalf, grossed up for taxes.
(8) Represents rental payments and travel expenses paid by the Company on
Mr. Nunnerley's behalf, grossed up for taxes.
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning options granted
during fiscal 2001 to the Named Executive Officers.
Potential Realizable
Value at Assumed
Individual Grants Annual Rates of
% of Total Stock Price
Options Appreciation for
Granted to Exercise Option Term (2)
---------------
Options Employees in or Base Expiration
Name Granted (#) Fiscal Year Price Date (1) 5% ($) 10%($)
- ------- ----------- ----------- ----- -------- ------ ------
Ronald J. 900,000 11.6% $20.52 12/21/10 11,614,426 29,433,236
Whittier
Patrick C. 100,000 1.3% $33.25 4/28/10 2,091,075 5,299,194
Condo
James H. 100,000 1.3% $33.25 4/28/10 2,091,075 5,299,194
Buchanan 105,000 1.3% $20.52 12/21/10 1,355,016 3,433,878
Kamran Khan 50,000 0.6% $33.25 4/28/10 1,045,537 2,649,597
235,250 3.0% $20.52 12/21/10 3,035,882 7,693,521
David Nunnerley 50,000 0.6% $33.25 4/28/10 1,045,537 2,649,597
243,000 3.1% $20.52 12/21/10 3,135,895 7,946,974
- -------------------------------------------
(1) The options listed with an expiration date of 12/21/10 vest in equal
12-1/2% increments every six months from the date of original grant. The
options listed with an expiration date of 4/28/10 vest in equal 25%
increments every six months from the date of original grant.
(2) The amounts shown are hypothetical gains that would exist for the
respective options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are mandated by
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of future increases in the price of its
Common Stock.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth, as of January 31, 2001, the number of options
and the value of exercised and unexercised options held by the Named Executive
Officers.
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options/SARS at In-the Money
Fiscal Year-End Options/SARS at
Shares (#) Fiscal Year-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable (1)
---- ------------ ------------ ------------- -----------------
Ronald J. Whittier -- -- --/900,000 --/--
Patrick C. Condo -- -- 600,000/75,000 $6,004,475/--
James H. Buchanan -- -- 220,000/180,000 $2,224,535/--
Kamran Khan -- -- 127,250/272,750 $1,162,144/--
David Nunnerley -- -- 119,500/280,500 $907,771/--
- -------------------------------------------
(1) The closing price of the Company's common stock on January 31, 2001, the
last trading day of the Company's fiscal year, was $18.813 per share.
Employment Agreements
In May 1998, Mr. Condo entered into an agreement with Excalibur under which Mr.
Condo would be paid an amount equal to twelve months of base salary plus bonus
compensation and continuation of his employee benefits for one year in the event
Mr. Condo's employment was terminated or he was removed from his position as
chief executive officer within six months following certain "change of control"
events relating to Excalibur. Such arrangement was approved by the full Board of
Directors. In connection with the formation of Convera, Mr. Condo waived all
rights to these payments to which he would have been entitled as a result of the
business combination. He simultaneously entered into an agreement with Convera
under which Mr. Condo will be paid an amount equal to twelve months of base
salary plus bonus compensation and continuation of his employee benefits for one
year in the event Mr. Condo's employment is terminated or he is removed from his
position as President of Convera Corporation within six months following change
of control events relating to Convera.
The offer of employment letter dated September 7, 1995 for James H. Buchanan,
Chief Financial Officer, Secretary and Treasurer of Excalibur, stipulated that
Mr. Buchanan would be paid an amount equal to twelve months of base salary in
semi-monthly installments should his employment be terminated by the Company
without cause. Convera assumed this employment agreement.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Messrs. Allen, Bryant and Stern,
none of whom is an officer or employee of the Company or its subsidiaries. No
member of the Compensation Committee or executive officer of the Company has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 15, 2001, information concerning the
ownership of Common Stock of the Company of (i) all persons known to the Company
to beneficially own 5% or more of the Company's Common Stock, (ii) each director
of the Company, (iii) each Named Executive Officer and (iv) all directors and
executive officers of the Company as a group.
Amount and Nature Percent
Name and Address of Beneficial of Class
of Beneficial Owner Ownership (1) Owned Class
- ------------------- ------------- ----- -----
Intel Corporation 14,949,384 42.3% A
2200 Mission College Boulevard 12,207,038 (2) 100.0% B
Santa Clara, California 95052
NBA Media Ventures, LLC 4,746,221 13.4% A
450 Harmon Meadow Boulevard
Secaucus, NJ 07094
Allen & Company Incorporated 3,315,846 (3) 9.4% A
711 Fifth Avenue
New York, NY 10022
Ronald J. Whittier -- --
Herbert A. Allen 556,515 (4) 1.6% A
Andy D. Bryant -- --
Gerhard H. Parker -- --
David J. Stern -- --
Patrick C. Condo 626,952 (5) 1.7% A
James H. Buchanan 246,767 (6) * A
Kamran Khan 145,822 (7) * A
David Nunnerley 133,553 (8) * A
All directors and executive officers 1,709,609 (9) 4.7% A
as a group (14 persons)
* Represents less than one percent of the outstanding common stock.
(1) To the Company's knowledge, each person or entity listed has sole voting and
investment power as to the shares indicated, except as described below.
(2) The Class B common stock of Convera Corporation is non-voting stock.
(3) Does not include shares owned by Mr. Herbert A. Allen, who together with
Allen & Company Incorporated may be considered a "group," as such term is
defined by Section 13(d) of the Securities Exchange Act of 1934.
(4) Does not include shares owned by Allen & Company Incorporated, of which Mr.
Allen is President and Chief Executive Officer and as to which shares Mr. Allen
disclaims beneficial ownership. (5) Includes (a) 10,000 shares of common stock
owned beneficially but not of record upon exercise of stock options at a price
of $4.75 per share expiring November 13, 2002; (b) 15,000 shares of common stock
owned beneficially but not of record upon exercise of stock options at a price
of $4.75 per share, expiring January 4, 2004; (c) 75,000 shares of common stock
owned beneficially but not of record upon exercise of stock options at a price
of $4.75 per share, expiring December 6, 2004; (d) 100,000 shares of common
stock owned beneficially but not of record, issuable upon exercise of stock
options at a price of $4.75 per share, expiring June 2, 2005; (e) 100,000 shares
of common stock owned beneficially but not of record, issuable upon exercise of
stock options at a price of $4.75 per share expiring November 1, 2005; (f)
100,000 shares of common stock owned beneficially but not of record, issuable
upon exercise of stock options at a price of $7.63 per share expiring August 13,
2007; (g) 175,000 shares of common stock owned beneficially but not of record,
issuable upon exercise of stock options at a price of $15.00 per share expiring
December 16, 2009; and (h) 50,000 shares of common stock owned beneficially but
not of record, issuable upon exercise of stock options at a price of $33.25 per
share expiring April 28, 2010.
(6) Includes (a) 30,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$4.75 per share expiring September 13, 2005; (b) 70,000 shares owned
beneficially but not of record, issuable upon exercise of stock options of the
Company at a price of $4.75 per share expiring November 1, 2005; (c) 50,000
shares of common stock owned beneficially but not of record, issuable upon
exercise of stock options of the Company at a price of $7.63 per share expiring
August 13, 2007; (d) 10,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$6.25 per share expiring September 1, 2008, (e) 35,000 shares of common stock
owned beneficially but not of record, issuable upon exercise of stock options of
the Company at a price of $15.00 per share expiring December 16, 2009 and (f)
50,000 shares of common stock owned beneficially but not of record, issuable
upon exercise of stock options of the Company at a price of $33.25 per share
expiring April 28, 2010.
(7) Includes (a) 1,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$4.75 per share expiring August 23, 2005; (b) 30,000 shares of common stock
owned beneficially but not of record, issuable upon exercise of stock options of
the Company at a price of $4.75 per share expiring December 3, 2005; (c) 250
shares of common stock owned beneficially but not of record, issuable upon
exercise of stock options of the Company at a price of $4.75 per share expiring
February 5, 2006; (d) 15,000 shares of common stock owned beneficially but not
of record, issuable upon exercise of stock options of the Company at a price of
$4.75 per share expiring December 16, 2006; (e) 12,500 shares of common stock
owned beneficially but not of record, issuable upon exercise of stock options of
the Company at a price of $4.75 per share expiring May 7, 2007; (f) 16,000
shares of common stock owned beneficially but not of record, issuable upon
exercise of stock options of the Company at a price of $8.56 per share expiring
January 1, 2008; (g) 5,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$6.25 per share expiring August 31, 2008; (h) 15,000 shares of common stock
owned beneficially but not of record, issuable upon exercise of stock options of
the Company at a price of $16.625 per share expiring April 13, 2009; (i) 20,000
shares of common stock owned beneficially but not of record, issuable upon
exercise of stock options of the Company at a price of $15.00 per share expiring
December 16, 2009; and (j) 25,000 shares of common stock owned beneficially but
not of record, issuable upon exercise of stock options of the Company at a price
of $33.25 per share expiring April 28, 2010.
(8) Includes (a) 5,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$4.75 per share expiring September 8, 2006; (b) 25,000 shares of common stock
owned beneficially but not of record, issuable upon exercise of stock options of
the Company at a price of $4.75 per share expiring January 7, 2007; (c) 12,000
shares of common stock owned beneficially but not of record, issuable upon
exercise of stock options of the Company at a price of $8.56 per share expiring
January 1, 2008; (d) 15,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$6.25 expiring August 31, 2008; (e) 10,000 shares of common stock owned
beneficially but not of record, issuable upon exercise of stock options of the
Company at a price of $16.625 per share expiring April 13, 2009; (f) 40,000
shares of common stock owned beneficially but not of record, issuable upon
exercise of stock options of the Company at a price of $15.00 per share expiring
December 16, 2009; and (g) 25,000 shares of common stock owned beneficially but
not of record, issuable upon exercise of stock options of the Company at a price
of $33.25 per share expiring April 28, 2010.
(9) Includes 1,141,750 shares of common stock owned beneficially but not of
record, issuable upon the exercise of options to purchase common stock of the
Company.
Item 13. Certain Relationships and Related Transactions
The Company's policy is that it will not make loans to, or enter into other
transactions with directors, officers or affiliates unless such loans or
transactions are approved by a majority of the Company's independent
disinterested directors, may reasonably be expected to benefit the Company, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
Mssrs. Bryant and Parker are employed by Intel Corporation, which owns 57.1% of
the Company's outstanding common stock. Mr. Allen is President, Chief Executive
Officer, Managing Director and a director of Allen & Company Incorporated, which
owns 7.0% of the Company's outstanding common stock. Mr. Stern is Commissioner
of the National Basketball Association, which owns 10% of the Company's
outstanding common stock.
See also "Compensation Committee Interlocks and Insider Participation" above.
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 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
10.16 Office Lease (23245 NW Evergreen Parkway, Hillsboro,
Oregon) commencing March 1, 2001
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.
(3) Incorporated herein by reference to Excalibur's Proxy Statement for the
1995 Annual Meeting of Shareholders, dated October 16, 1995.
(4) Incorporated herein by reference to Excalibur's Form 10-K for the year
ended January 31, 1996, filed April 30, 1996.
(5) 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.
(b) Reports on Form 8-K.
The Company filed a Form 8-K for Item 2 on December 22, 2000, as amended on Form
8-K/A on February 9, 2001, reporting the consummation of a business combination
transaction with Intel Corporation and the consummation of a business
transaction with NBA Media Ventures, LLC and WNBA Enterprises, LLC.
Excalibur filed a Form 8-K for Item 5 on November 21, 2000, reporting financial
results for the quarter ended October 31, 2000.
Index to Consolidated Financial Statements Page
Reports of Independent Auditors and Independent Accountants F-1, F-2
Consolidated Balance Sheets
As of January 31, 2001 and 2000 F-3
Consolidated Statements of Operations and Other Comprehensive Loss
For the fiscal years ended January 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity
For the fiscal years ended January 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows
For the fiscal years ended January 31, 2001, 2000 and 1999 F-6
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 sheet of Convera
Corporation as of January 2001, and the related consolidated statements of
operations and other comprehensive income, shareholders' equity, and cash flows
for the fiscal year ended January 31, 2001. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards
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 audit
provides 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, 2001, and the consolidated results of its
operations and its cash flows for the fiscal year ended January 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 2, 2001
Report of Independent Accountants
To the Stockholders and Board of Directors of
Convera Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Excalibur Technologies Corporation and its subsidiaries at
January 31, 2000, and the results of their operations and their cash flows for
the years ended January 31, 2000 and 1999, 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 audits. We conducted our audits 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 audits provide 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
2001 2000
--------------- ---------------
Current Assets:
Cash and cash equivalents........................................ $ 37,061 $ 10,884
Short term investments........................................... 119,083 178
Accounts receivable, net of allowance for doubtful
accounts of $1,231 and $830, respectively................... 17,392 14,254
Prepaid expenses and other ...................................... 4,394 2,354
--------------- ---------------
Total current assets....................................... 177,930 27,670
Equipment and leasehold improvements, net of accumulated
depreciation of $8,785 and $7,594, respectively.................. 2,635 1,766
Other assets.......................................................... 436 986
Goodwill and other intangible assets.................................. 845,444 265
--------------- ---------------
Total assets................................................. $ 1,026,445 $ 30,687
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. 3,480 1,982
Accrued expenses................................................. 3,257 2,474
Deferred revenues................................................ 4,650 3,926
--------------- ---------------
Total current liabilities.................................. 11,387 8,382
--------------- ---------------
Commitments and Contingencies
Shareholders' Equity:
5% Cumulative convertible preferred stock, $0.01 par
value: preference in liquidation; $10 per share plus
dividends; 5,000,000 and 1,000,000 shares authorized,
respectively; 0 and 27,180 shares issued and outstanding,
respectively................................................. - 271
Common stock Class A, $0.01 par value, 100,000,000 and
40,000,000 shares authorized, respectively; 35,327,589 and
14,646,452 shares issued and outstanding, respectively....... 353 146
Common stock Class B, $0.01 par value, 40,000,000 shares
authorized; 12,207,038 shares issued and outstanding......... 122 -
Additional paid-in capital....................................... 1,094,192 78,024
Accumulated deficit ............................................. (78,920) (56,138)
Accumulated other comprehensive income (loss).................... (689) 2
--------------- ---------------
Total shareholders' equity................................... 1,015,058 22,305
--------------- ---------------
Total liabilities and shareholders' equity................... $ 1,026,445 $ 30,687
=============== ===============
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,
--------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
Revenues:
Software....................................... $ 37,299 $ 32,649 $ 22,741
Maintenance.................................... 6,621 5,285 5,198
---------------- ---------------- ----------------
License-related.................................. 43,920 37,934 27,939
Services......................................... 7,602 - -
---------------- ---------------- ----------------
51,522 37,934 27,939
---------------- ---------------- ----------------
Cost of revenues:
Software ...................................... 8,288 4,724 3,697
Maintenance ................................... 1,474 2,143 1,320
---------------- ---------------- ----------------
License-related ................................. 9,762 6,867 5,017
Services......................................... 7,846 - -
---------------- ---------------- ----------------
17,608 6,867 5,017
---------------- ---------------- ----------------
Gross margin: 33,914 31,067 22,922
---------------- ---------------- ----------------
Operating expenses:
Sales and marketing.............................. 22,345 16,210 13,501
Research and product development................. 12,968 9,456 8,328
General and administrative....................... 6,279 5,402 4,775
Amortization of goodwill and other intangible
assets........................................ 15,672 118 111
Acquired in-process research and development..... 800 - -
---------------- ---------------- ----------------
58,064 31,186 26,715
---------------- ---------------- ----------------
Operating loss....................................... (24,150) (119) (3,793)
Other income (expense), net.......................... 1,368 (221) (61)
---------------- ---------------- ----------------
Net loss............................................. (22,782) (340) (3,854)
Dividends on preferred stock......................... 10 14 14
---------------- ---------------- ----------------
Net loss applicable to common shareholders........... $ (22,792) $ (354) $ (3,868)
================ ================ ================
Basic and diluted net loss per common share.......... $ (1.22) $ (0.02) $ (0.29)
Weighted-average number of common shares outstanding
- basic and diluted.............................. 18,713,717 14,281,615 13,526,217
Other comprehensive loss:
Net loss......................................... (22,782) (340) (3,854)
Foreign currency translation adjustment.......... (691) 69 7
---------------- ---------------- ----------------
Comprehensive loss................................... $ (23,473) $ (271) $ (3,847)
================ ================ ================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Other
Additional Compre-hensive
Preferred Stock Common Stock Paid-in Accumulated Income
--------------- ------------
Shares Amount Shares Amount Capital Deficit (Loss) Total
------ ------ ------ ------ ------- ------- ------ -----
Balance, January 31, 1998.. 27,180 $ 271 13,178,999 $ 132 $ 64,714 $ (51,944) $ (74) $ 13,099
Private placement, net of
issuance costs............. - - 325,000 3 3,247 - - 3,250
Issuance of common stock
upon exercise of options... - - 166,815 2 533 - - 535
Issuance of common stock
for Employee Stock
Purchase Plan.............. - - 18,652 - 137 - - 137
Foreign Currency
Translation adjustment..... - - - - - - 7 7
Net loss................... - - - - - (3,854) - (3,854)
-------- ------ ------------- -------- ------------ ----------- ------- ------------
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
Foreign Currency
Translation adjustment..... - - - - - - (691) (691)
Net loss................... - - - - - (22,782) - (22,782)
-------- ------ ------------- -------- ------------ ----------- ------- ------------
Balance, January 31, 1998.. - - 47,534,627 $ 475 $ 1,094,192 $ (78,920) $ (689) $ 1,015,058
======== ====== ============= ======== ============ =========== ======= ============
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Years Ended January 31,
-------------------------------------------------
2001 2000 1999
------------ ----------- -----------
Cash Flows from Operating Activities:
Net loss $ (22,782) $ (340) $ (3,854)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 1,329 1,323 1,375
Provision for doubtful accounts....................... 828 838 493
Amortization of goodwill and other intangibles........ 15,672 118 111
Acquired in-process research and development.......... 800 - -
Equity in net loss of affiliate....................... - - 300
Write off of investment in affiliate.................. - 471 -
Changes in operating assets and liabilities, net of
effects from acquisition:
Accounts receivable................................... (5,150) (8,712) 2,349
Prepaid expenses and other............................ (1,782) 1,223 (3,425)
Accounts payable and accrued expenses................. 2,475 579 (296)
Deferred revenues..................................... 833 1,248 (35)
------------ ----------- -----------
Net cash used in operating activities................. (7,777) (3,252) (2,982)
------------ ----------- -----------
Cash Flows from Investing Activities:
Purchase of investments............................... (118,625) (178) (984)
Proceeds from maturities of investments............... - - 2,480
Purchases of equipment and leasehold improvements..... (1,792) (1,008) (1,141)
Other assets.......................................... - - (256)
Net cash acquired in acquisition of business.......... 147,953 - -
------------ ----------- -----------
Net cash provided by (used in) investing activities... 27,536 (1,186) 99
------------ ----------- -----------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock, net....... 413 4,876 3,387
Proceeds from the exercise of stock options........... 5,653 4,520 435
------------ ----------- -----------
Net cash provided by financing activities............. 6,066 9,396 3,822
------------ ----------- -----------
Effect of Exchange Rate Changes on Cash.................... 352 75 (27)
------------ ----------- -----------
Net Increase in Cash and Cash Equivalents.................. 26,177 5,033 912
Cash and Cash Equivalents, beginning of year............... 10,884 5,851 4,939
------------ ----------- -----------
Cash and Cash Equivalents, end of year..................... $ 37,061 $ 10,884 $ 5,851
============ =========== ===========
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 Corporation and its wholly-owned subsidiaries (hereinafter referred to
as the "Company" or "Convera") 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.
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 Interactive Media Services
(IMS) division, intellectual property assets and other assets used by that
division, as well as approximately $155,000 in cash, with $150,000 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. 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.
In September 2000, Intel and the National Basketball Association (NBA) entered
into 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. Convera will be the NBA's provider of services related to
the development and distribution of those products for the term of the services
agreement, subject to the NBA's right to authorize major telecasters and certain
other third parties to provide television broadcast enhancements and real time
distribution of NBA games. Convera and the NBA are working together to create a
hosted, end-to-end solution that transforms video footage and other data into a
searchable database of rich-media interactive content assets and then manages
those assets--archiving, enhancing, protecting, and managing their distribution
as branded NBA content offerings--to create a new fan experience for the NBA's
end-users and new revenue opportunities for the NBA.
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.
The Company has incurred cumulative losses of approximately $27,000 over the
last three fiscal years and the accumulated deficit of the Company at January
31, 2001 was $78,920. The Company's operations are subject to certain risks and
uncertainties including, among others: the dependence upon the timing of the
closing on sales of large software licenses; actual and potential competition by
entities with greater financial resources, experience and market presence than
the Company; rapid technological changes; the success of the Company's product
marketing and product distribution strategies; the risks associated with
acquisitions and international expansion; the need to manage growth; the need to
retain key personnel and protect intellectual property; and the availability of
additional capital financing on terms acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
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 separately, is deferred and recognized
ratably over the term of the respective agreement.
Customization work is sometimes required to ensure that the Company's software
functionality meets the requirements of its customers. Under these
circumstances, the Company's revenues are derived from fixed price contracts and
revenue is recognized using the percentage of completion method based on the
relationship of actual costs incurred to total costs estimated to be incurred
over the duration of the contract. 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
are accounted for using the completed contract method, and accordingly, revenue
is deferred until all remaining costs, obligations and potential risks are
insignificant and the contract deliverables are agreed to and accepted by the
customer. As these contracts are completed by Convera, revenue and the related
costs, including profit on work performed by Convera subsequent to the
acquisition, will be recognized. As of January 31, 2001, the Company had
recorded deferred costs and deferred revenues of $2,686 related to these
contracts.
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
$347, $3 and $112 in advertising costs for the years ended January 31, 2001,
2000 and 1999, 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 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 10.
Translation of Foreign Financial Statements
The functional currency of the Company's foreign subsidiary is the 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, 2001, 2000 and 1999.
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. The allowance for
doubtful accounts was $1,231 and $830, respectively, at January 31, 2001 and
2000. For the years ended January 31, 2001, 2000, and 1999, the Company wrote
off $428, $667, and $356, respectively, in accounts receivable against the
allowance for doubtful accounts. The provision for doubtful accounts was $828,
$838, and $493, for the years ended January 31, 2001, 2000, and 1999,
respectively.
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 $142 which is pledged to collateralize a letter
of credit required for a leased facility.
Other Investments
The Company has certain investments in public corporate equity securities that
are classified as available for sale and recorded at fair value with any
unrealized gains or losses recorded as a component of shareholders' equity. To
date, there have been no unrealized gains or losses on such securities. The
Company also has certain investments in nonpublic equity securities that are
recorded at cost, subject to net realizable value considerations.
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 asset as of January 31, 2000.
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, is being amortized on a straight line basis over periods ranging
from five to six years. Other intangible assets, including assembled workforce,
developed technology, customer contracts, and other acquired rights are carried
at cost less accumulated amortization. Amortization of other intangible assets
is charged to income on a straight-line basis over the periods estimated to
benefit, ranging from one to 12 years.
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. The Company has not recorded any provision for
impairment of its long-lived assets.
Reclassifications
Certain amounts presented in the prior years' financial statements have been
reclassified to conform with the fiscal year 2001 presentation.
Recent Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company adopted SAB 101 in the
quarter ended January 31, 2001. The adoption of SAB 101 did not have a
significant impact on the Company's financial statement and no amounts have been
restated as a result.
On March 31, 2000, the FASB issued FIN 44. FIN 44 clarifies guidance for certain
issues that arose in the application of APB 25. Some of the more significant
conclusions reached by FIN 44 include the definition of an employee, accounting
treatment of options granted to non-employee members of the board of directors,
awards granted between entities, the treatment of stock options as a result of a
change in an individual's employment status, stock option repricing and other
modifications including the term and vesting. The Company has adopted this
interpretation on the effective date of July 1, 2000. The adoption of FIN 44 did
not have a significant impact on the Company's financial statement and no
amounts have been restated as a result
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities,"
as amended in June 2000 by Statement of Financial Accounting Standards No. 138
("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires companies to recognize all derivatives as either
assets or liabilities in the balance sheet and to measure such instruments at
fair value. SFAS 133 was subsequently amended by Statement of Financial
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," and consequently, required adoption date of SFAS 133 was
delayed. The Company will adopt the provisions of SFAS 133, as amended by SFAS
138, as of February 1, 2001. That adoption is not expected to have a material
impact on the Company's financial statements.
(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 has been accounted for using the purchase method of accounting.
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
==============
Goodwill is being amortized on a straight-line basis over six years and the
other intangible assets are being amortized on a straight-line basis over
periods ranging from one to three years.
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 represents 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 following unaudited pro forma information has been prepared assuming that
the Combination and the agreement with the NBA Parties referred to in Note 1 had
taken place at the beginning of the year ended January 31, 2001 and the
beginning of the year ended January 31, 2000, respectively. The amount of the
purchase price allocated to IPRD has been excluded from the pro forma
information, as it is a non-recurring item. The pro forma financial information
is not necessarily indicative of the combined results that would have occurred
had the acquisitions taken place at the beginning of the period, nor is it
necessarily indicative of results that may occur in the future.
Pro forma information (unaudited):
Year ended January 31,
2001 2000
---- ----
Revenues $ 53,388 $ 39,502
Operating loss (161,774) (149,913)
Net loss (160,406) (150,134)
Basic and diluted net loss per common share (3.40) (3.25)
(4) PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets at January 31, 2001 and 2000 consisted
of the following:
2001 2000
---- ----
Prepaid licenses $ 2,401 $ 1,620
Prepaid other 1,993 734
----------- -----------
$ 4,394 $ 2,354
=========== ===========
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at January 31, 2001 and 2000 consisted of
the following:
2001 2000
---- ----
Computer equipment $ 9,250 $ 7,474
Office furniture 1,672 1,448
Leasehold improvements 498 438
--------- ---------
11,420 9,360
Less accumulated depreciation (8,785) (7,594)
--------- ---------
$ 2,635 $ 1,766
========== ==========
Assets acquired under capital leases included in equipment above were $50 at
January 31, 2001 and 2000. The related accumulated depreciation was $17 and $18
for fiscal years ended January 31, 2001 and 2000, respectively.
Depreciation expense for fiscal years 2001, 2000 and 1999 was $1,329, $1,323 and
$1,375 respectively.
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
Net goodwill and other acquisition-related intangibles at fiscal year ends were
as follows:
2001 2000
---- ----
Goodwill $ 770,342 $ 576
Developed technology 13,160 -
Other intangibles 77,925 -
---------- ----------
861,427 576
Less accumulated amortization (15,983) (311)
---------- ----------
$ 845,444 $ 265
========== ==========
Amortization expense for fiscal years 2001, 2000 and 1999 was $15,672, $118 and
$111 respectively.
(7) ACCRUED EXPENSES
Accrued expenses at January 31, 2001 and 2000 consisted of the following:
2001 2000
---- ----
Accrued payroll $ 2,016 $ 2,098
Accrued consulting fees 608 -
Other 633 376
--------- ---------
$ 3,257 $ 2,474
========= =========
(8) INCOME TAXES
The Company incurred pretax losses for the fiscal years presented herein. There
are no income taxes provided in the accompanying consolidated statements of
operations.
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes consisted of:
2001 2000
---------------------- -----------------------
Federal benefit at statutory rate $ (7,974) (35) % $ (119) (35) %
Effect of:
State benefits, net of federal (350) (1) % (6) (2) %
benefits
Goodwill 4,876 21 % 41 12 %
Other 43 0 % 34 10 %
Valuation allowance 3,405 15 % 49 15 %
--------- ---------
$ - 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, 2001 and 2000 were as
follows:
2001 2000
------------ -------------
Deferred tax assets:
Net operating loss carryforwards,
not yet utilized $ 31,282 $ 24,569
Other 2,334 1,188
---------- ---------
Total deferred tax assets 33,616 25,757
Valuation allowance - (25,197)
---------- ----------
33,616 560
---------- ----------
Deferred tax liabilities:
Acquired intangible (33,201) -
Other (415) (560)
---------- ---------
Total deferred tax liabilities (33,616) (560)
---------- ----------
Net deferred tax assets (liabilities) $ - $ -
========== ==========
At January 31, 2001, the Company had net operating loss carryforwards ("NOLs")
of approximately $80,416 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 $31,675 of the
NOLs relate to stock option exercises. The tax benefit associated with the stock
option exercises will be credited to equity when realized.
The realization of the benefits of the NOLs is dependent on sufficient taxable
income in future fiscal years. Lack of future earnings, future changes in
ownership of the Company or the application of the alternative minimum tax rules
could adversely affect the Company's ability to utilize the NOLs.
The valuation allowance as of January 31, 2000 was reduced to $0 during the year
ended January 31, 2001 resulting from the establishment of deferred tax
liabilities in connection with the Combination and the NBA contribution
agreement. $12,322 of the reduction in the valuation allowance relates to stock
option exercises.
(9) 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 fourth quarter of the fiscal year ended January 31, 2001, the
outstanding cumulative convertible preferred stock of 27,180 shares were
converted into common stock at the rate of 10 shares of common stock per share
of cumulative convertible preferred stock. There is no cumulative convertible
preferred stock issued and outstanding as of January 31, 2001.
(10) 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,
----------------------------------------------------------
2001 2000 1999
----------------- ------------------ -----------------
Numerator:
Net loss....................................... $ (22,782) $ (340) $ (3,854)
Less: Dividends on preferred stock............. 10 14 14
----------------- ------------------ -----------------
Net loss applicable to common shareholders.. $ (22,792) $ (354) $ (3,868)
================= ================== =================
Denominator:
Weighted average number of common shares
outstanding - basic and diluted................. 18,713,717 14,281,615 13,526,217
Basic and diluted net loss per common share.........$ (1.22) $ (0.02) $ (0.29)
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,
----------------------------------------------------------
2001 2000 1999
----------------- ------------------ -----------------
Convertible preferred stock.................... - 271,800 271,800
Stock options.................................. 4,810,862 1,008,427 775,389
----------------- ------------------ -----------------
Dilutive potential common stock ........... 4,810,862 1,280,227 1,047,189
================= ================== =================
(11) 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 9,674,420 shares are
outstanding. The Company has a total of 15,601,257 shares of Class A common
stock reserved for the issuance of warrants and options.
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.
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.
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, 1998 2,631,636 $ 1.04 - 22.50 $ 7.81
Granted 249,501 5.50 - 13.88 8.10
Exercised (166,815) 1.04 - 10.38 3.20
Canceled (152,899) 4.14 - 16.02 7.94
------------ ---------------- ---------
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
========== ======= ====== =======
Options to purchase 2,148,198, 1,716,382 and 1,796,090 shares of the Company's
common stock were vested and exercisable at January 31, 2001, 2000 and 1999,
respectively, at weighted-average exercise prices of $11.84, $7.70 and $8.64 per
share, respectively.
The following table summarizes additional information about stock options
outstanding at January 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted-Average
Remaining
Contractual Weighted-Average Weighted-Average
Number of Life Exercise Number Exercise
---- --------- --------
Range of Exercise Prices Options Price Exercisable Price
------------------------ ------- ----- ----------- -----
$ 1.04 to $ 4.75 708,097 4.56 years $ 4.68 708,097 $ 4.68
$ 4.88 to $17.75 1,238,729 7.71 12.00 1,072,229 11.20
$ 18.38 to $20.52 7,045,199 9.89 20.52 8,451 20.10
$ 20.56 to $35.00 562,645 8.50 29.29 313,723 26.27
$ 35.06 to $67.19 119,750 9.45 46.00 45,698 37.57
----------- ----------- -------- ----------- --------
9,674,420 9.13 years $ 19.09 2,148,198 $ 11.84
=========== ============= ======== =========== ========
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 2001, 2000 and 1999 consistent with the method of
SFAS No. 123, the Company's net loss and loss per common share would have been
increased to the pro forma amounts indicated below.
2001 2000 1999
---- ---- ----
Net loss, as reported $ 22,782 $ 340 $ 3,854
Pro forma compensation expense 10,798 3,765 4,046
---------- ---------- ----------
Pro forma net loss $ 33,580 $ 4,105 $ 7,900
========== ========== ==========
Basic and diluted net loss per common share,
as reported ($1.22) ($0.02) ($0.29)
Basic and diluted net loss per common share,
pro forma ($1.79) ($0.29) ($0.58)
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.
2001 2000 1999
----------------- ----------------- ----------------
Expected volatility 80% 70% 65%
Risk free interest rates 5.2% to 6.5% 5.0% to 6.3% 4.5% to 5.6%
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 2001, 2000 and 1999 was $10.98, $8.55 and $4.77,
respectively.
Employee Stock Purchase Plan
In December 2000, the Excalibur shareholders approved the amendment of the
Excalibur 1996 employee stock purchase plan, 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 exercise 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, 12,252, 23,096 and 18,652 shares were purchased by employees in
fiscal years 2001, 2000 and 1999, respectively.
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 20 percent of their pre-tax salary, but not
more than statutory limits. The plan was amended in the current fiscal year 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 year ended January 31, 2001, the Company contributed
approximately $221 to the employee savings plan. No such contribution was made
in fiscal years 2000 or 1999.
(12) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company conducts its operations using leased office facilities. The leases
terminate at various dates through fiscal year 2005 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 it's
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, 2001 are as follows:
Year Ending
January 31,
2002 $ 2,654
2003 2,067
2004 1,687
2005 1,451
2006 724
--------
$ 8,583
========
Total rental expense under operating leases, net of sublease income, was
approximately $1,925, $1,700 and $1,303 in fiscal years 2001, 2000 and 1999,
respectively. The sublease income in fiscal years 1999 was $102. There was no
sublease income in fiscal years 2001 and 2000.
Other Commitments
Former Intel employees who became Convera employees will receive a payment for
the excess, if any, of the calculated aggregate gain they would have realized on
forfeited Intel stock options that would have vested between 2002 and 2005 over
the calculated aggregate gain on Convera stock options as of September 30, 2002.
The gain attributable to these employees' forfeited Intel stock options is equal
to the positive difference, if any, between (i) $61.50, representing the
approximate fair market value of the Intel stock underlying these options in May
2000 when this bonus arrangement was established, and (ii) the per share
exercise price of the forfeited Intel stock options. The maximum aggregate
amount that Convera would be required to pay, assuming no aggregate gain on the
Convera stock options at September 30, 2002 is approximately $5,600.
In addition, Convera will pay bonuses to specified former employees of Intel
that remain employed by Convera as of April 30, 2001, funded through an
additional capital contribution from Intel. These retention bonuses are
contingent on the continuing employment of the Intel employees that joined
Convera in conjunction with the Combination with Convera through April 30 2001.
These individual bonus amounts were determined based on the intrinsic value
immediately prior to the closing of the Combination of unvested Intel stock
options forfeited that would have vested in calendar year 2001 for those former
Intel employees that become employees of Convera.
As of January 31, 2001, the Company has $142 in outstanding letters of credit
required for a leased facility.
(13) SEGMENT REPORTING
As a result of the Combination in fiscal year 2001, the Company changed the
structure of its organization to reflect one reportable segment. The Company has
restated the corresponding segment information for earlier periods presented.
Beginning in fiscal year 2000, the Company aligned its business into two
operating segments, differentiating between text and visual product lines. The
Company's business is no longer monitored in this manner.
Operations by Geographic Area
The following table presents information about the Company's operations by
geographical area:
Fiscal Years Ended January 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
Sales to customers:
United States $ 36,359 $ 28,495 $ 20,336
United Kingdom 12,891 4,842 4,490
All Other 2,272 4,597 3,113
---------- ---------- ----------
$ 51,522 $ 37,934 $ 27,939
=========== =========== ===========
Long-lived assets:
United States $ 836,023 $ 2,871 $ 5,072
All Other 170 146 96
---------- ---------- ----------
$ 836,193 $ 3,017 $ 5,168
=========== =========== ===========
Major Customers
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately $5,000, $4,400 and $4,500, respectively, in the
fiscal years ended January 31, 2001, 2000 and 1999. These revenues, expressed as
a percentage of total revenues for the fiscal year, were approximately 10%, 12%
and 16%, respectively. For the fiscal year ended January 31, 2001, one customer
accounted for 15% of the Company's total revenues, and for the fiscal years
January 31, 2000 and 1999, a different customer accounted for 12% and 11% of the
Company's total revenues, respectively.
(14) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Fiscal Years Ended January 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
Supplemental Disclosures of Non-cash Investing
Activities:
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 6 100
Preferred stock converted to Class A common stock... 271 - -
(15) SELECTED QUARTERLY INFORMATION (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
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)
2000:
Revenues................................. $ 7,759 $ 9,070 $ 8,366 $ 12,739
Gross margin............................. 6,192 7,279 6,595 11,001
Operating loss........................... (1,468) (276) (1,011) 2,636
Net loss................................. (1,882) (210) (956) 2,708
Net loss applicable to common
shareholders............................. (1,885) (213) (959) 2,703
Basic and diluted loss per common stock.. $ (0.14) $ (0.01) $ (0.07) $ 0.19
Diluted income (loss) per common
shareholders............................. $ (0.14) $ (0.01) $ (0.07) $ 0.17
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 30, 2001
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 30, 2001
- ----------------------- Officer, Chief Operating Officer --------------
Patrick C. Condo and Director
(Principal Executive Officer)
/s/James H. Buchanan Chief Financial Officer, Treasurer, April 30, 2001
- ----------------------- and Assistant Secretary --------------
James H. Buchanan (Principal Financial and Accounting Officer)
/s/Ronald J. Whittier Chairman of the Board April 27, 2001
- ----------------------- --------------
Ronald J. Whittier
/s/Herbert A. Allen Director April 24, 2001
- ----------------------- --------------
Herbert A. Allen
/s/Andrew D. Bryant Director April 24, 2001
- ----------------------- --------------
Andrew D. Bryant
/s/Gerhard H. Parker Director April 23, 2001
- ----------------------- --------------
Gerhard H. Parker
/s/David J. Stern Director April 23, 2001
- ----------------------- --------------
David J. Stern