SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 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
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 __
The numbers of shares outstanding of the registrant's Class A and Class B common
stocks, par value $0.01 per share, as of June 11, 2001 were 35,414,010 and 12,
207,038, respectively.
CONVERA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets
April 30, 2001 (unaudited) and January 31, 2001.....................................3
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three months ended April 30, 2001 and 2000..........................................4
Consolidated Statements of Cash Flows (unaudited)
Three months ended April 30, 2001 and 2000..........................................5
Notes to Consolidated Financial Statements..........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................12
PART II. OTHER INFORMATION
Items 1. - 6. ...................................................................................19
Signatures ...................................................................................20
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
April 30, 2001 January 31, 2001
(Unaudited)
-------------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 47,405 $ 37,061
Short term investments...................................... 98,594 119,083
Accounts receivable, net of allowance for doubtful
accounts of $2,079 and $1,231, respectively............ 17,559 17,392
Prepaid expenses and other ................................. 5,152 4,394
-------------------- --------------------
Total current assets.................................. 168,710 177,930
Equipment and leasehold improvements, net of
accumulated depreciation of $9,329 and $8,785,
respectively.................................................. 3,611 2,635
Other assets..................................................... 1,095 436
Goodwill and other intangible assets............................. 813,824 845,444
-------------------- --------------------
Total assets............................................ $ 987,240 $ 1,026,445
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ 5,693 3,480
Accrued expenses............................................ 10,171 2,543
Accrued bonuses............................................. 7,081 714
Deferred revenues........................................... 5,691 4,650
Deferred income taxes....................................... 1,989 -
-------------------- --------------------
Total current liabilities............................. 30,625 11,387
-------------------- --------------------
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 shares
authorized; 0 shares issued and outstanding............. - -
Common stock Class A, $0.01 par value,
100,000,000 shares authorized; 35,365,180
and 35,327,589 shares issued and 354 353
outstanding, respectively...............................
Common stock Class B, $0.01 par value,
40,000,000 shares authorized; 12,207,038
shares issued and outstanding........................... 122 122
Additional paid-in capital.................................. 1,094,574 1,094,192
Accumulated deficit......................................... (137,739) (78,920)
Accumulated other comprehensive loss........................ (696) (689)
-------------------- --------------------
Total shareholders' equity.............................. 956,615 1,015,058
-------------------- --------------------
Total liabilities and shareholders' equity $ 987,240 $ 1,026,445
==================== ====================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(in thousands, except share and per share data)
For the Three Months Ended April 30,
2001 2000
-------------------- --------------------
Revenues:
Software.............................................. $ 4,256 $ 7,511
Maintenance........................................... 1,719 1,873
-------------------- --------------------
License-related......................................... 5,975 9,384
Services................................................ 350 -
-------------------- --------------------
6,325 9,384
-------------------- --------------------
Cost of revenues:
Software ............................................. 4,114 1,113
Maintenance .......................................... 465 417
-------------------- --------------------
License-related ........................................ 4,579 1,530
Services................................................ 1,598 -
-------------------- --------------------
6,177 1,530
-------------------- --------------------
Gross margin: 148 7,854
-------------------- --------------------
Operating expenses:
Sales and marketing..................................... 8,830 5,569
Research and product development........................ 8,698 2,688
General and administrative.............................. 2,964 1,331
Amortization of goodwill and other intangible assets.... 36,592 29
Amortization of incentive bonus payments due to
employees............................................ 6,100 -
-------------------- --------------------
63,184 9,617
-------------------- --------------------
Operating loss.............................................. (63,036) (1,763)
Interest income, net........................................ 1,754 95
-------------------- --------------------
Net loss before income taxes................................ (61,282) (1,668)
Income tax benefit.......................................... 2,464 -
-------------------- --------------------
Net loss.................................................... (58,818) (1,668)
Dividends on preferred stock................................ - 3
-------------------- --------------------
Net loss applicable to common shareholders.................. $ (58,818) $ (1,671)
==================== ====================
Basic and diluted net loss per common share................. $ (1.24) $ (0.11)
Weighted-average number of common shares outstanding -
basic and diluted....................................... 47,568,570 14,713,669
Other comprehensive loss:
Net loss................................................ (58,818) (1,668)
Foreign currency translation adjustment................. (7) (26)
-------------------- --------------------
Comprehensive loss.......................................... $ (58,825) $ (1,694)
==================== ====================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended April 30,
2001 2000
-------------------- --------------------
Cash Flows from Operating Activities:
Net loss.................................................... $ (58,818) $ (1,668)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 556 297
Provision for doubtful accounts....................... 1,992 100
Amortization of goodwill and other intangibles........ 36,592 29
Amortization of incentive bonus payments due to
employees.......................................... 6,100 -
Deferred tax benefit.................................. (2,464) -
Changes in operating assets and liabilities:
Accounts receivable................................... (2,359) 874
Prepaid expenses and other............................ (1,436) 205
Accounts payable and accrued expenses................. 10,145 (703)
Deferred revenues..................................... 1,069 1
-------------------- --------------------
Net cash used in operating activities....................... (8,623) (865)
-------------------- --------------------
Cash Flows from Investing Activities:
Proceeds from maturities of investments..................... 20,490 -
Purchases of equipment and leasehold improvements........... (1,535) (601)
Direct acquisition costs.................................... (520) -
-------------------- --------------------
Net cash provided by (used in) investing activities......... 18,435
-------------------- --------------------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock, net............. 151 67
Proceeds from the exercise of stock options................. 232 1,061
-------------------- --------------------
Net cash provided by financing activities................... 383 1,128
-------------------- --------------------
Effect of Exchange Rate Changes on Cash.......................... 149 79
-------------------- --------------------
Net Increase (Decrease) in Cash and Cash Equivalents............. 10,344 (259)
Cash and Cash Equivalents, beginning of period................... 37,061 10,884
-------------------- --------------------
Cash and Cash Equivalents, end of period......................... $ 47,405 $ 10,625
==================== ====================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001
(1) THE COMPANY
The consolidated financial statements include the accounts of Convera
Corporation ("Convera") and its wholly owned subsidiaries. These entities are
collectively referred to hereinafter as the "Company." All significant
inter-company transactions and accounts have been eliminated.
Convera was established through the combination of the former Excalibur
Technologies Corporation ("Excalibur") and Intel Corporation's ("Intel")
Interactive Media Services ("IMS") division. On December 21, 2000, Excalibur and
Intel consummated a business combination transaction (the "Combination")
pursuant to an Agreement and Plan of Contribution and Merger, dated as of April
30, 2000, as amended, by and among Excalibur, Intel, the Company and Excalibur
Transitory, Inc., a wholly owned subsidiary of the Company. At the completion of
the Combination, Excalibur became a wholly owned subsidiary of the Company, each
outstanding share of Excalibur common stock was converted into one share of
Class A common stock of the Company, and Intel contributed to the Company its
IMS division, intellectual property assets and other assets used by that
division, as well as $150,000,000 in cash at closing, in exchange for 14,949,384
shares of Class A common stock of the Company and 12,207,038 shares of Class B
non-voting common stock of the Company.
The Combination was accounted for using the purchase method of accounting. All
references in this Form 10-Q to financial results for the Company for the
three-month period ended April 30, 2000 reflect the historical financial results
of Excalibur and its subsidiaries.
The Company principally earns revenues from the licensing of its software
products and the provision of services in deployment of the Company's technology
to commercial businesses and government agencies throughout North America,
Europe and other parts of the world. The Company licenses its software to end
users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers, application service providers and other strategic partners.
The Company incurred a net loss of approximately $59,000,000 in the three-month
period ended April 30, 2001 and incurred cumulative losses of approximately
$27,000,000 over the last three fiscal years. The accumulated deficit at April
30, 2001 was approximately $138,000,000. The Company's operations are subject to
certain risks and uncertainties including, among others: the dependence upon the
timing of the closing on sales of large software licenses; actual and potential
competition by entities with greater financial resources, experience and market
presence than the Company; rapid technological changes; the success of the
Company's product marketing and product distribution strategies; the risks
associated with acquisitions and international expansion; the need to manage
growth; the need to retain key personnel and protect intellectual property; and
the availability of additional capital financing on terms acceptable to the
Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These consolidated financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements, and the notes thereto, included in
the Company's Annual Report on Form 10-K for the fiscal year ended January 31,
2001. In the opinion of management, the consolidated financial statements for
the fiscal periods presented herein include all adjustments that are normal and
recurring which are necessary for a fair presentation of the results for the
interim periods. The results of operations for the three-month period ended
April 30, 2001 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 2002.
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 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 Convera completes these contracts, revenue and the related costs,
including profit on work performed by Convera subsequent to the acquisition,
will be recognized.
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 $142,000 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. The
Company also has certain investments in nonpublic equity securities that are
recorded at cost, subject to net realizable value considerations.
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.
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
goodwill or other intangible or long-lived assets.
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.
(3) SEGMENT REPORTING
As a result of the Company's business combination with the IMS division of Intel
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.
Major Customers
In the current quarter, revenues derived from sales to agencies of the U.S.
Government were approximately $1,100,000, or 17% of total revenues. Revenues
derived from one customer accounted for approximately 18% of the Company's total
revenues for the quarter ended April 30, 2001. In the same period last year, one
customer accounted for approximately 19% of total revenues.
(4) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 has adopted the provisions of SFAS 133, as amended by SFAS
138, on the effective date of February 1, 2001. The adoption of SFAS 133 did not
have a significant impact on the Company's financial statement and no amounts
have been restated as a result.
(5) INCOME TAXES
The Company has incurred pretax losses for the periods presented herein. As of
April 30, 2001, the Company had total deferred tax assets of approximately
$33,615,000 and total deferred tax liabilities of approximately $35,604,000,
resulting in a net deferred tax liability of $1,989,000.
In connection with the business combination with Intel and as a result of the
NBA contract, deferred tax liabilities of approximately $37,303,000 were
established relating to the differences between the book treatment and the tax
treatment of the identified intangible assets, excluding goodwill. Prior to the
consummation of these transactions, the Company had recorded a full valuation
allowance against its net deferred tax asset, which was related primarily to net
operating loss carryforwards (NOLs) generated by the Company. With the
establishment of these deferred tax liabilities, which more than offset the
existing deferred tax assets, the Company determined that the valuation
allowance that had been previously recorded was no longer necessary.
The income tax benefit of $2,464,000 for the three months ended April 30, 2001
represents the reversal of a portion of the net deferred tax liability
established primarily as a result of the Intel merger and the NBA contract. The
Company's interim effective income tax rate is based on its best current
estimate of its expected annual effective income tax rate. Based on current
projections of taxable income for the year ending January 31, 2002, the Company
expects that it will generate additional NOLs for the remainder of the year, and
that its deferred tax assets will again exceed its deferred tax liabilities at
January 31, 2002. Given the Company's inability to predict sufficient taxable
income to realize the benefits of those net deferred tax assets, the Company
expects to provide a full valuation allowance against such deferred tax assets.
As such, the remaining net deferred tax liability will be reversed to income as
an income tax benefit over the balance of the year ending January 31, 2002 to
reflect a reasonably consistent effective income tax rate for all interim
periods.
(6) ACCRUED BONUSES
On May 16, 2001, the Company paid approximately $5,423,000 in bonuses to
specified former employees of Intel that remained employed by Convera as of
April 30, 2001. These bonus payments were funded through an additional capital
contribution from Intel. Since the bonus amounts were contingent upon the former
Intel employees' continued employment at Convera, the Company recorded this
bonus in operations for the three month period ended April 30, 2001.
Additionally, specified 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, based on the fair value of
Intel shares at a fixed date prior to the closing of the merger, that would have
vested between 2002 and 2005 over the calculated aggregate gain on Convera stock
options as of September 30, 2002. The maximum aggregate amount that Convera
could be required to pay, assuming no aggregate gain on the Convera stock
options at September 30, 2002, is approximately $3,354,000. The Company is
amortizing this amount over the period leading up to September 30, 2002, and, as
such, has recorded additional bonus expense of approximately $677,000 for the
three-month period ended April 30, 2001.
(7) 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, including convertible preferred stock and unexercised stock
options as their inclusion in the computation would be anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per
common share (in thousands, except share and per share data):
For the Three Months Ended April 30,
2001 2000
-------------------- --------------------
Numerator:
Net loss.................................................... $ (58,818) $ (1,668)
Less: Dividends on preferred stock.......................... - 3
-------------------- --------------------
Net loss applicable to common shareholders................ $ (58,818) $ (1,671)
==================== ====================
Denominator:
Weighted average number of common shares outstanding - basic
and diluted................................................. 47,568,570 14,713,669
Basic and diluted net loss per common share..................... $ (1.24) $ (0.11)
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 Three Months Ended April 30,
2001 2000
-------------------- --------------------
Convertible preferred stock..................................... - 271,800
Stock options................................................... 592,421 1,856,747
-------------------- --------------------
Dilutive potential common stock............................. 592,421 2,128,547
==================== ====================
(8) SUBSEQUENT EVENTS
On May 10, 2001, the Company announced that it is restructuring its business
operations in response to the downturn in the economy and in conjunction with
the consolidation of operations following the Combination. As part of the
restructuring, Convera has reduced its total workforce by 22 employees,
including 17 individuals from the Company's engineering groups and 5 individuals
from the business development group. As part of this decision, the Company also
reduced the number of independent contractors that were working on behalf of the
Company by approximately 40 contractors and reduced the amount of space to be
used in several of the Company's leased facilities. The company is in the
process of finalizing the financial statement implications of this restructuring
and expects to record this amount as a charge in the quarter ended July 31,
2001.
On June 11, 2001, the Company announced a voluntary stock option exchange
program (the Offer) for its employees and directors. Under this program,
existing option holders have the opportunity, if they so choose, to cancel
outstanding stock options previously granted to them in exchange for an equal
number of new options to be granted at a future date. The Offer will expire at
12:00 AM Eastern Time on July 9, 2001 (the Expiration Date), unless the Offer is
extended. Assuming no extensions or termination of the Offer, the Company will
grant the new options on January 14, 2002 (the replacement grant date), which is
at least six months and a day after the options to be exchanged have been
cancelled. The exercise price of the new options will be equal to the closing
sale price of our common stock on the NASDAQ National Market on the business day
preceding the replacement grant date. Any option holder electing to participate
in the exchange program is also required to exchange any other options granted
to him or her during the six months before or after the Expiration Date. The
exchange program has been designed to comply with FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" and is not
expected to result in any additional compensation charges or variable plan
accounting.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The statements contained in this report that are not purely historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements about the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements contained herein
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this report.
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company 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.
Results of Operations
Total revenues decreased 33% to $6.3 million in the first quarter of the current
year from $9.4 million in the first quarter last year. The net loss for the
quarter ended April 30, 2001 was $58.8 million, or $1.24 per common share,
compared to a net loss of $1.7 million, or $0.11 per share in the same period
last year.
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 quarter ended April 30, 2001, the EBITDA loss was $18.1 million, or
$0.38 per common share compared to an EBITDA loss of $1.0 million, or $0.07 per
common share in first quarter last year.
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 the three months ended April 30, 2001 and 2000, respectively.
(dollars in thousands).
Components of Revenues and Expenses
Three Months Ended April 30,
2001 2000 Increase
(Decrease)
$ % $ % %
-------------- --------- --------------- --------- -----------
Revenues:
Software $4,256 67% $7,511 80% (43)%
Maintenance 1,719 27% 1,873 20% (8)%
-------------- --------- --------------- --------- -----------
License-related 5,975 94% 9,384 100% (36)%
Services 350 6% -- -- --
-------------- --------- --------------- --------- -----------
Total revenues $6,325 100% $9,384 100% (33)%
-------------- --------- --------------- --------- -----------
Expenses:
Cost of license-related
revenues $4,579 72% $1,530 16% 199%
Cost of services revenues 1,598 25% -- -- --
Sales and marketing 8,830 140% 5,569 59% 59%
Research and product
development 8,698 138% 2,688 29% 224%
General and administrative 2,964 47% 1,331 14% 123%
Amortization of goodwill and
other intangible assets 36,592 579% 29 -- 126,079%
Amortization of incentive
bonus payments due to
employees 6,100 96% -- -- --
-------------- --------- --------------- --------- -----------
Total expenses $69,361 1,097% $11,147 119% 522%
-------------- --------- --------------- --------- -----------
Operating loss $(63,036) $(1,763)
Interest income, net 1,754 95
-------------- ---------------
Net loss before income taxes $(61,282) $(1,668)
Income tax benefit 2,464 --
-------------- ---------------
Net loss $(58,818) $(1,668)
============== ===============
Three Months Ended April 30,
2001 2000
-------------- ---------------
EBITDA:
Net loss $(58,818) $(1,668)
Income tax benefit (2,464) --
Interest income, net (1,754) (95)
Depreciation 556 297
Amortization of goodwill and
acquisition related intangible
assets 36,592 29
Amortization of other intangible
assets 1,639 427
Amortization of incentive bonus
payments due to employees 6,100 --
-------------- ---------------
EBITDA (loss) $(18,149) $(1,010)
============== ===============
EBITA (loss) per common share - $(0.38) $(0.07)
basic & diluted
============== ===============
Revenues
Software revenues, which include amounts generated through software licensing
and implementation services, decreased 43% to $4.3 million for the three months
ended April 30, 2001 from $7.5 million for the three months ended April 30,
2000. Software maintenance and customer support revenues decreased 8% in the
first quarter of the current year to $1.7 million from $1.9 million in the first
quarter last year. The decrease in license-related revenues was primarily
attributable to the general downturn in the economy which has caused some
organizations to re-evaluate and defer their spending on content management
initiatives. As a result, a number of accounts that we expected to close in the
first quarter were put on an indefinite hold. Maintenance revenues decreased
slightly due primarily to the continued change in the mix of the Company's
revenues to more original equipment manufacturer ("OEM") agreements, which tend
to result in reduced maintenance obligations and related revenues.
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 decreased 50% for the three months ended April 30, 2001 to
$1.0 million from $2.0 million in the same period last year.
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately 17% and 9% of total revenues for the three months
ended April 30, 2001 and 2000, respectively. In the current quarter, one
customer accounted for approximately 18% of the Company's total revenues. In the
same period last year, one customer accounted for approximately 19% of total
revenues.
Revenues from the Company's interactive services offerings in the first quarter
of the current year were $0.4 million. There were no corresponding revenues from
services for the same quarter last year.
Cost of Revenues
Cost of license-related revenues increased 199% to $4.6 million in the first
quarter of the current year from $1.5 million in the first quarter last year.
Cost of license-related revenues expressed as a percentage of total revenues was
72% in the current quarter compared to 16% in the first quarter last year. The
increase in cost of sales is primarily attributable to an increase in
third-party licensing costs, the majority of which are fixed expenses planned in
advance to add new features and functionality to the Company's products, as well
as an increase in the cost of professional services resulting in part from the
increase in the number of employees in the Company's professional services
group. Cost of maintenance increased slightly to $0.5 million for the three
months ended April 30, 2001 from $0.4 million for the three months ended April
30, 2000.
Cost of services represents the personnel and other direct costs incurred in
connection with performing on the Company's service related contracts. For the
quarter ended April 30, 2001, cost of services was $1.6 million.
Operating Expenses
Sales and marketing expenses increased 59% in the quarter ended April 30, 2001
to $8.8 million from $5.6 million in the first quarter last year, representing
140% and 60% of total revenues, respectively. The increase in expenses in the
current quarter was due to an increase in the allowance for doubtful accounts,
as well as overall growth in sales and marketing personnel and increased
spending on marketing programs.
Total research and product development costs increased 224% to $8.7 million in
the current quarter compared to $2.7 million in the same quarter last year.
Research and product development costs as a percentage of total revenues were
138% in the current quarter compared to 29% in the first quarter last year. The
increase is largely due to the addition of a significant number of engineering
personnel in connection with the Company's business combination with the IMS
division of Intel as well as increased investment in both the text and video
product lines as the Company continued to make enhancements to its RetrievalWare
and Screening Room. In the current quarter, the Company released Convera
RetrievalWare 6.8 and RetrievalWare WebExpress 2.1. These products provide
enhanced support for Java developers, a new search interface for intranet users,
added capabilities for indexing secure content and expanded language plug-ins.
Updated dictionaries in RetrievalWare 6.8 enhance search results by
accommodating language changes such as new words and idioms and updated
spellings. RetrievalWare 6.8 also offers a new user interface for intranet
search users called SmartSearch, a new HTML-based search client that is designed
to increase user productivity and reduce the time that knowledge workers spend
looking for information.
General and administrative expenses increased 123% for the first quarter ended
April 30, 2001 to $3.0 million, representing 47% of total revenues from $1.3
million, or 14% of total revenues, in the first quarter of last year. The growth
in general and administrative expenses in the current quarter was due to
increased corporate expenses such as legal expense, a substantial amount of
which relates to costs incurred in connection with a potential acquisition that
was contemplated by the Company but ultimately not consummated. There were also
additional general and administrative personnel required to support the
Company's expanding operations.
Amortization of goodwill and other acquisition related intangible assets was
approximately $36.6 million for the quarter ended April 30, 2001. The majority
of this amount relates to amortization of goodwill and intangible assets related
to the Company's business combination with Intel's IMS division. This amount
also includes approximately $2.4 million in amortization of the intangible
assets acquired from the NBA pursuant to the contribution agreement.
Amortization of incentive bonus payments due to employees was approximately $6.1
million for the first quarter ended April 30, 2001. Subsequent to quarter end,
the Company paid approximately $5.4 million in bonuses to specified former
employees of Intel that remained employed by Convera as of April 30, 2001. These
bonus payments were funded through an additional capital contribution from
Intel. The bonus amounts were contingent upon the former Intel employees'
continued employment at Convera, and the Company recorded this bonus in
operations for the three month period ended April 30, 2001. Additionally,
specified 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, based on the fair value of Intel
shares at a fixed date prior to the closing of the merger, that would have
vested between 2002 and 2005 over the calculated aggregate gain on Convera stock
options as of September 30, 2002. The maximum aggregate amount that Convera
could be required to pay, assuming no aggregate gain on the Convera stock
options at September 30, 2002, is approximately $3.3 million The Company is
amortizing this amount over the period leading up to September 30, 2002, and, as
such, has recorded additional bonus expense of approximately $0.7 million for
the three-month period ended April 30, 2001.
Net interest income increased to $1.8 million in the three months ended April
30, 2001 from $0.1 million in the comparable period last year due to a higher
level of invested funds.
The income tax benefit of $2.5 million for the three months ended April 30, 2001
represents the reversal of a portion of the net deferred tax liability
established primarily as a result of the Intel merger and the NBA contract. The
Company's interim effective income tax rate is based on its best current
estimate of its expected annual effective income tax rate. Based on current
projections of taxable income for the year ending January 31, 2002, the Company
expects that it will generate additional NOLs for the remainder of the year, and
that its deferred tax assets will again exceed its deferred tax liabilities at
January 31, 2002. Given the Company's inability to predict sufficient taxable
income to realize the benefits of those net deferred tax assets, the Company
expects to provide a full valuation allowance against such deferred tax assets.
As such, the remaining net deferred tax liability will be reversed to income as
an income tax benefit over the balance of the year ending January 31, 2002 to
reflect a reasonably consistent effective income tax rate for all interim
periods.
Liquidity and Capital Resources
The Company's combined balance of cash, cash equivalents and short-term
investments at April 30, 2001 as compared to January 31, 2001 is summarized
below (in thousands).
April 30, January 31, Change
2001 2001
-------------- --------------- -----------------
Cash and cash
equivalents $ 47,405 $ 37,061 $ 10,344
Investments 98,594 119,083 (20,489)
-- ----------- --- ----------- --- -------------
Total $ 145,999 $ 156,144 $ (10,145)
== =========== === =========== === =============
During the three months ended April 30, 2001, $8.6 million was used to fund
operating activities, compared to $0.9 million used in the same period last
year. The net loss of $58.8 million was offset by non-cash charges totaling
$42.8 million, including depreciation and amortization of $37.1 million, bad
debt expense of $2.0 million and an income tax benefit of approximately $2.5
million. An increase in deferred revenues, accounts payable and accrued expenses
provided $11.2 million while an increase in accounts receivable, prepaid
expenses and other assets used $3.8 million. For the three months ended April
30, 2000, the Company's $1.7 million loss was offset by approximately $0.4
million in non-cash expenses, a decrease in accounts receivable of $0.9 million
and a decrease in prepaid expenses and other of $0.2 million. A decrease in
accounts payable and accrued expenses used $0.7 million during the three months
ended April 30, 2000.
The Company's investing activities provided $18.4 million in the first three
months of the current year. Net cash provided from the maturity of U.S. Treasury
Bills provided for $20.5 million while purchases of equipment and leasehold
improvements used $1.5 million. The Company also used $0.5 million related to
direct acquisition costs in connection with the business combination with
Intel's IMS division. For the three months ended April 30, 2000, the Company
used $0.6 million from investing activities related to the purchase of equipment
and leasehold improvements.
Cash provided by financing activities was $0.4 million and $1.1 million for the
three months ended April 30, 2001 and 2000, respectively. Cash of approximately
$0.2 million and $1.0 million was provided from the exercise of employee stock
options for the three months ended April 30, 2001 and 2000, respectively, and
$0.2 million and $0.1 million was provided from the issuance of stock under the
employee stock purchase plan for the three months ended April 30, 2001 and 2000,
respectively.
At April 30, 2001, the Company's balance of cash, cash equivalents and
short-term investments was $146 million. The Company believes that its current
balance of cash, cash equivalents and short-term investments and its funds
generated from operations, if any, will be sufficient to fund the Company's
current projected cash needs for the foreseeable future. Prior to fiscal year
2001, the Company had primarily used cash provided from 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 to support its operations and
capital requirements. There can be no assurance that external sources of
financing will be available to fund the Company's ongoing operations or other
capital requirements on terms acceptable to the Company.
The number of days sales outstanding ("DSO") increased to 145 days at April 30,
2001 from 116 days at April 30, 2000. Management believes that that the
allowance for doubtful accounts of $2.1 million at April 30, 2001 is adequate.
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.
Other Factors
EURO Conversion
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) were fixed amongst one another and became the currencies of the
EURO. The currencies of the eleven countries will remain in circulation until
mid-2002. The EURO currency will be introduced on January 1, 2002. The Company
does not expect future balance sheets and statements of earnings and cash flows
to be materially impacted by the EURO Conversion.
New Accounting Pronouncements
In June 1998, the 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 has adopted the provisions of SFAS 133, as amended by SFAS
138, on the effective date of February 1, 2001. The adoption of SFAS 133 did not
have a significant impact on the Company's financial statement and no amounts
have been restated as a result.
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 16% of total revenues in the first quarter
of the current fiscal year. 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 April 30, 2001, approximately 45%,
2% and 2% 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 April 30, 2001, 8% 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.
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
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Item 2. Changes in Securities None.
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Item 3. Defaults upon Senior Securities None.
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Item 4. Submission of Matters to Vote of Security Holders None.
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Item 5. Other Information None.
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Item 6. Exhibits and Reports on Form 8-K
- ------
On March 5, 2001, the Company filed a Form 8-K for Item 5, announcing an
agreement with ESPN Internet Group ("ESPN").
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONVERA CORPORATION
June 14, 2001 By: /s/ Patrick C. Condo
--------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
June 14, 2001 By: /s/ James H. Buchanan
---------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)