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 July 31, 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 September 6, 2001 were 35,474,824 and
12, 207,038, respectively.
CONVERA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets
July 31, 2001 (unaudited) and January 31, 2001......................................3
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three and six months ended July 31, 2001 and 2000...................................4
Consolidated Statements of Cash Flows (unaudited)
Six months ended July 31, 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. .....................................................................................21
Signatures ...................................................................................22
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 31, 2001 January 31, 2001
ASSETS (Unaudited)
-------------------- --------------------
Current Assets:
Cash and cash equivalents........................................ $ 31,807 $ 37,061
Short term investments........................................... 99,259 119,083
Accounts receivable, net of allowance for doubtful
accounts of $2,821 and $1,231, respectively................. 10,975 17,392
Prepaid expenses and other ...................................... 4,788 4,394
-------------------- --------------------
Total current assets....................................... 146,829 177,930
Equipment and leasehold improvements, net of
accumulated depreciation of $9,791 and $8,785,
respectively....................................................... 6,907 2,635
Other assets.......................................................... 889 436
Goodwill and other intangible assets.................................. 777,602 845,444
-------------------- --------------------
Total assets................................................. $ 932,227 $ 1,026,445
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 4,608 $ 3,480
Accrued expenses................................................. 6,328 2,543
Accrued bonuses.................................................. 2,615 714
Restructuring reserve............................................ 772 -
Deferred revenues................................................ 3,903 4,650
Deferred income taxes............................................ 1,233 -
-------------------- --------------------
Total current liabilities.................................. 19,459 11,387
Restructuring reserve, net of current portion......................... 1,322 -
-------------------- --------------------
Total liabilities............................................ 20,781 11,387
-------------------- --------------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock,
$0.01 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding.................. - -
Common stock Class A, $0.01 par value,
100,000,000 shares authorized; 35,414,010
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....................................... 1,100,301 1,094,192
Accumulated deficit.............................................. (188,638) (78,920)
Accumulated other comprehensive loss............................. (693) (689)
-------------------- --------------------
Total shareholders' equity................................... 911,446 1,015,058
-------------------- --------------------
Total liabilities and shareholders' equity $ 932,227 $ 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)
Three Months Ended Six Months Ended
July 31, July 31,
2001 2000 2001 2000
---------------- ----------------- ---------------- ----------------
Revenues:
Software.....................................$ 8,773 $ 9,993 $ 13,029 $ 17,505
Maintenance.................................. 1,540 1,380 3,259 3,253
---------------- ----------------- ---------------- ----------------
License-related................................ 10,313 11,373 16,288 20,758
Services....................................... - - 350 -
---------------- ----------------- ---------------- ----------------
10,313 11,373 16,638 20,758
---------------- ----------------- ---------------- ----------------
Cost of revenues:
Software.....................................$ 4,113 $ 1,663 $ 8,227 $ 2,776
Maintenance.................................. 454 317 919 734
---------------- ----------------- ---------------- ----------------
License-related................................ 4,567 1,980 9,146 3,510
Services....................................... 1,452 - 3,050 -
---------------- ----------------- ---------------- ----------------
6,019 1,980 12,196 3,510
---------------- ----------------- ---------------- ----------------
Gross margin 4,294 9,393 4,442 17,248
---------------- ----------------- ---------------- ----------------
Operating expenses:
Sales and marketing............................ 8,531 5,439 17,361 11,008
Research and product development............... 6,039 2,843 14,737 5,532
General and administrative..................... 2,245 1,217 5,209 2,547
Restructuring charges.......................... 2,933 - 2,933 -
Amortization of goodwill and other intangible
assets....................................... 36,600 29 73,192 58
Amortization of incentive bonus payments due
to employees................................. 464 - 6,564 -
---------------- ----------------- ---------------- ----------------
56,812 9,528 119,996 19,145
---------------- ----------------- ---------------- ----------------
Operating loss..................................... (52,518) (135) (115,554) (1,897)
Other income, net.................................. 863 133 2,617 228
---------------- ----------------- ---------------- ----------------
Net loss before income taxes....................... (51,655) (2) (112,937) (1,669)
Income tax benefit................................. 755 - 3,219 -
---------------- ----------------- ---------------- ----------------
Net loss........................................... (50,900) (2) (109,718) (1,669)
Dividends on preferred stock....................... - 3 - 7
---------------- ----------------- ---------------- ----------------
Net loss applicable to common shareholders.........$ (50,900) $ (5) $ (109,718) $ (1,676)
================ ================= ================ ================
Basic and diluted net loss per common share........$ (1.07) $ (0.00) $ (2.31) $ (0.11)
================ ================= ================ ================
Weighted-average number of common shares
outstanding - basic and diluted.................... 47,621,048 14,914,918 47,595,244 14,815,400
================ ================= ================ ================
Other comprehensive loss:
Net loss.......................................$ (50,900) $ (2) $ (109,718) $ (1,669)
Foreign currency translation adjustment....... 3 (29) (4) (55)
---------------- ----------------- ---------------- ----------------
Comprehensive loss.................................$ (50,897) $ (31) $ (109,722) $ (1,724)
================ ================= ================ ================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Six Months Ended July 31,
2001 2000
-------------------- --------------------
Cash Flows from Operating Activities:
Net loss......................................................... $ (109,718) $ (1,669)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................... 1,028 697
Provision for doubtful accounts............................ 2,692 200
Amortization of goodwill and other intangibles............. 73,192 58
Amortization of incentive bonus payments due
to employees, net of cash paid.......................... 1,141 -
Restructuring charges, net of cash paid.................... 2,094 -
Write-off of investments................................... 481
Deferred tax benefit....................................... (3,219) -
Changes in operating assets and liabilities:
Accounts receivable........................................ 3,504 (1,206)
Prepaid expenses and other assets.......................... (1,071) (346)
Accounts payable and accrued expenses...................... 2,692 (499)
Deferred revenues.......................................... (724) 351
-------------------- --------------------
Net cash used in operating activities............................ (27,908) (2,414)
-------------------- --------------------
Cash Flows from Investing Activities:
Proceeds from maturities of investments.......................... 19,544 36
Purchases of equipment and leasehold improvements................ (2,293) (955)
Direct acquisition costs......................................... (899) -
-------------------- --------------------
Net cash provided by (used in) investing activities.............. 16,352 (919)
-------------------- --------------------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock, net.................. 687 165
Proceeds from the exercise of stock options...................... - 3,736
Capital contribution from Intel.................................. 5,422 -
-------------------- --------------------
Net cash provided by financing activities........................ 6,109 3,901
-------------------- --------------------
Effect of Exchange Rate Changes on Cash............................... 193 243
-------------------- --------------------
Net Increase (Decrease) in Cash and Cash Equivalents................... (5,254) 811
Cash and Cash Equivalents, beginning of period......................... 37,061 10,884
-------------------- --------------------
Cash and Cash Equivalents, end of period..............................$ 31,807 $ 11,695
==================== ====================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 of the Company for the
six-month period ended July 31, 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 $110,000,000 for the six-month
period ended July 31, 2001 and incurred cumulative losses of approximately
$27,000,000 over the last three fiscal years. The accumulated deficit at July
31, 2001 was approximately $189,000,000. 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; the
effect of general economic conditions on demand for the Company's products and
services; and the availability of additional capital financing on terms
acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
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 six-month period ended July
31, 2001 are not necessarily indicative of the results for the entire fiscal
year ending January 31, 2002.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with American Institute of
Certified Public Accountants' Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), as amended by Statement of Position 98-9, Software
Revenue Recognition, with respect to certain transactions.
Revenue from the sale of software licenses is recognized upon shipment of
product, provided that the fee is fixed and determinable, persuasive evidence of
an arrangement exists and collection of the resulting receivable is considered
probable. Software revenues include revenues from licenses, training and system
implementation services. Training and systems implementation services are sold
as part of a bundled software license agreement as well as separately to
customers who have previously purchased software licenses. When training or
systems implementation services that are not essential to the functionality of
the software are sold as part of a bundled license agreement, the fair value of
these services, based on the price charged for the services when sold
separately, is deferred and recognized when the services are performed.
Historically, the Company has not experienced significant returns or exchanges
of its products from direct sales to customers. Revenue related to customer
support agreements is deferred and recognized ratably over the term of
respective agreements. Customer support agreements generally include bug fixes,
telephone support and product upgrades on a when and if available basis. When
the Company provides a software license and the related customer support
arrangement for one bundled price, the fair value of the customer support, based
on the price charged for that element when sold separately, is deferred and
recognized ratably over the term of the respective agreement.
Significant customization work is sometimes required to ensure that the
Company's software functionality meets the requirements of its customers. Under
these circumstances, the Company's revenues are derived from fixed price
contracts and revenue is recognized using the percentage of completion method
based on the relationship of actual costs incurred to total costs estimated over
the duration of the contract. Estimated losses on such contracts would be
charged against earnings in the period such losses are identified. No such
losses have been incurred on such contracts to date.
The in-process customer contracts assigned to the Company by the IMS division
were accounted for using the completed contract method, and accordingly, revenue
was 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 completed these contracts, revenue and the related costs,
including profit on work performed by Convera subsequent to the acquisition, was
recognized. The Company completed all obligations under the last remaining
in-process contract assigned by the IMS division, and accordingly recognized
revenue on that contract during the three months ended July 31, 2001.
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.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of acquisition cost over the fair value of
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 $1.0 million, or 10 % of total revenues. Revenues
derived from two individual customers each accounted for approximately 13% of
the Company's total revenues, respectively, for the quarter ended July 31, 2001.
No single customer accounted for 10% or more of the Company's revenues for the
quarter ended July 31, 2000.
(4) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives will continue to be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. In-process research and development
will continue to be written off immediately. Under the provisions of SFAS No.
142, any impairment loss identified upon adoption of this standard is recognized
as a cumulative effect of a change in accounting principle. Any impairment loss
incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge
to current period earnings. In the event the Company reports goodwill from
acquisitions subsequent to June 30, 2001, the goodwill will not be amortized.
The Company will adopt SFAS No. 142 in the first quarter of fiscal 2003 and, at
that time, will stop amortizing goodwill that resulted from business
combinations completed prior to the adoption of SFAS No. 141. With the adoption
of SFAS No. 142, the Company will eliminate annual goodwill amortization, based
on the current accounting guidelines, of approximately $129 million. The Company
is currently evaluating the provisions of SFAS No. 142 to determine the full
effect that adoption of this standard will have on its consolidated financial
statements.
(5) INCOME TAXES
In connection with the business combination with the IMS division of 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 $755,000 and $3,219,000 for the three and six months
ended July 31, 2001 represents the reversal of a portion of the net deferred tax
liability established primarily as a result of the goodwill and other intangible
assets recorded in connection with the Combination and the intangible assets
contributed to the Company by the National Basketball Association (NBA) in
exchange for shares of the Company's Class A Common Stock as part of the overall
agreements between the Company and the NBA. The Company's interim effective
income tax rate is based on management's best current estimate of the 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
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 $3,306,000. 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 $464,000 and
$1,141,000 for the three- and six-month periods ended July 31, 2001.
Additionally, 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.
(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 shareholders 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):
Three Months Ended July 31, Six Months Ended July 31,
2001 2000 2001 2000
---------------- --------------- ---------------- ---------------
Numerator:
Net loss........................................ $ (50,900) $ (2) $ (109,718) $ (1,669)
Less: Dividends on preferred stock.............. - 3 - 7
---------------- --------------- ---------------- ---------------
Net loss applicable to common shareholders... $ (50,900) $ (5) $ (109,718) $ (1,676)
================ =============== ================ ===============
Denominator:
Weighted average number of common shares
outstanding - basic and diluted.............. 47,621,048 14,914,918 47,595,244 14,815,400
Basic and diluted net loss per common share......... $ (1.07) $ (0.00) $ (2.31) $ (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:
Three Months Ended July 31, Six Months Ended July 31,
2001 2000 2001 2000
---------------- --------------- ---------------- ---------------
Convertible preferred stock........................ - 271,800 - 271,800
Stock options...................................... 10,554 1,734,260 318,676 1,673,565
---------------- --------------- ---------------- ---------------
Dilutive potential common stock................ 10,554 2,006,060 318,676 1,945,365
================ =============== ================ ===============
(8) RESTRUCTURING
On May 10, 2001, the Company announced it was restructuring its business
operations in response to the downturn in the economy and in conjunction with
the integration of the IMS division's operations following the Combination. The
restructuring resulted in a reduction of Convera's total workforce by 22
employees, including 17 individuals from the Company's engineering group and 5
individuals from the business development group. As part of this restructuring,
the Company also reduced the number of independent contractors that were working
on behalf of the Company by approximately 40 contractors and reduced the amount
of space to be used in certain of the Company's leased facilities. As a result,
the Company recorded a restructuring charge in the current fiscal quarter of
$2,933,000. The restructuring charge included approximately $458,000 in costs
incurred under contractual obligations with no future economic benefit to the
Company, accruals of approximately $409,000 for employee termination costs and
approximately $2,066,000 related to future facility losses for the idle portion
of a facility resulting from the restructuring activities. During the second
quarter, the Company paid $839,000 against costs included in the original
restructuring accrual. The Company expects to settle the remaining accrual over
the term of the related facility lease, which is through February 2006.
(9) STOCK OPTION EXCHANGE PROGRAM
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 had the opportunity to cancel outstanding stock options
previously granted to them in exchange for an equal number of replacement
options to be granted at a future date. The Offer was open until 12:00 AM
Eastern Time on July 9, 2001 (the Expiration Date). The Company will grant the
replacement options on January 14, 2002 (the replacement grant date). The
exercise price of the replacement 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 was also required to exchange any options granted to him
or her during the six months preceding the Expiration Date, and to not receive
any additional option grants until the replacement grant date. The exchange
program was 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. A total of
9,251,963 options were surrendered for exchange under this program.
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 and the provision of services in deployment of the Company's technology
to commercial businesses and government agencies throughout North America,
Europe and other parts of the world. The Company licenses its software to end
users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers, application service providers and other strategic partners.
Revenues are generated from software licenses with customers and from the
related sale of product maintenance, training and implementation support
services. Additions to the number of authorized users, licenses issued for
additional products and the renewal of product maintenance arrangements by
customers pursuant to existing licenses also provide revenues to the Company.
Under software maintenance contracts, customers are typically entitled to
receive telephone support, software bug fixes and upgrades or enhancements of
particular software products when and if they are released.
Results of Operations
Total revenues decreased 9% to $10.3 million in the second quarter of the
current fiscal year from $11.4 million in the second quarter last year. The net
loss for the quarter ended July 31, 2001 was $50.9 million, or $1.07 per common
share, compared to a net loss of $2 thousand, or $0.00 per share in the same
period last year. For the six months ended July 31, 2001, total revenues were
$16.6 million, a decrease of 20% over total revenues of $20.8 million reported
for the corresponding period last year. The net loss for the first half of the
current fiscal year was $109.7 million, or $2.31 per common share, compared to a
net loss of $1.7 million, or $0.11 per common share in the same period last
fiscal 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 July 31, 2001, excluding the restructuring charge of
approximately $2.9 million, the EBITDA loss was $10.8 million, or $0.23 per
common share compared to positive EBITDA of $0.6 million, or $0.04 per common
share in the second quarter last year. For the six months ended July 31, 2001,
again excluding the restructuring charge of approximately $2.9 million, the
EBITDA loss was $29 million, or $0.61 per common share compared to an EBITDA
loss of $0.4 million, or $0.03 per common share for the comparable period 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 and six months ended July 31, 2001 and 2000, respectively.
(dollars in thousands).
--------------------------------------------------------------------------------------------------------
Components of Revenues and Expenses
Three Months Ended July 31,
2001 2000 Increase
(Decrease)
Revenues: $ % $ % %
-------------- --------- --------------- --------- -----------
$8,773 85% $9,993 88% (12)%
Software
Maintenance 1,540 15% 1,380 12% 12%
-------------- --------- --------------- --------- -----------
10,313 100% 11,373 100% (9)%
License-related
Services -- -- -- -- --
-------------- --------- --------------- --------- -----------
Total revenues $10,313 100% $11,373 100% (9)%
-------------- --------- --------------- --------- -----------
Expenses:
Cost of license-related
revenues $4,567 44% $1,980 17% 131%
Cost of services revenues 1,452 14% -- -- 100%
Sales and marketing 8,531 83% 5,439 48% 57%
Research and product
development 6,039 59% 2,843 25% 112%
General and administrative 2,245 22% 1,217 11% 84%
Restructuring charge 2,933 28% -- -- 100%
Amortization of goodwill and
other intangible assets 36,600 355% 29 -- 126,107%
Amortization of incentive
bonus payments due to
employees 464 4% -- -- 100%
-------------- --------- --------------- --------- -----------
Total expenses $62,831 609% $11,508 101% 446%
-------------- --------- --------------- --------- -----------
Operating loss $(52,518) $(135)
Other income, net 863 133
-------------- ---------------
Net loss before income taxes $(51,655) $(2)
Income tax benefit 755 --
-------------- ---------------
Net loss $(50,900) $(2)
============== ===============
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Three Months Ended July 31,
2001 2000
-------------- ---------------
EBITDA:
Net loss $(50,900) $(2)
Income tax benefit (755) --
Other income, net (863) (133)
Restructuring charge 2,933 --
Depreciation 477 344
Amortization of goodwill and
acquisition related intangible
assets 36,600 29
Amortization of other intangible
assets 1,232 401
Amortization of incentive bonus
payments due to employees 464 --
-------------- ---------------
EBITDA (loss) $(10,812) $639
============== ===============
EBITDA (loss) per common share -
basic & diluted $(0.23) $0.04
============== ===============
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Components of Revenues and Expenses
Six Months Ended July 31,
2001 2000 Increase
(Decrease)
Revenues: $ % $ % %
-------------- --------- --------------- --------- -----------
$13,029 78% $17,505 84% (26)%
Software
Maintenance 3,259 20% 3,253 16% --
-------------- --------- --------------- --------- -----------
16,288 98% 20,758 100% (22)%
License-related
Services 350 2% -- -- 100%
-------------- --------- --------------- --------- -----------
Total revenues $16,638 100% $20,758 100% (20)%
-------------- --------- --------------- --------- -----------
Expenses:
Cost of license-related
revenues $9,146 55% $3,510 17% 161%
Cost of services revenues 3,050 18% -- -- 100%
Sales and marketing 17,361 104% 11,008 53% 58%
Research and product
development 14,737 89% 5,532 27% 166%
General and administrative 5,209 31% 2,547 12% 105%
Restructuring charge 2,933 18% -- -- 100%
Amortization of goodwill and
other intangible assets 73,192 440% 58 -- 126,093%
Amortization of incentive
bonus payments due to
employees 6,564 39% -- -- 100%
-------------- --------- --------------- --------- -----------
Total expenses $132,192 794% $22,655 109% 483%
-------------- --------- --------------- --------- -----------
Operating loss $(115,554) $(1,897)
Other income, net 2,617 228
-------------- ---------------
Net loss before income taxes $(112,937) $(1,669)
Income tax benefit 3,219 --
-------------- ---------------
Net loss $(109,718) $(1,669)
============== ===============
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Six Months Ended July 31,
2001 2000
-------------- ---------------
EBITDA:
Net loss $(109,718) $(1,669)
Income tax benefit (3,219) --
Other income, net (2,617) (228)
Restructuring charge 2,933 --
Depreciation 1,033 641
Amortization of goodwill and
acquisition related intangible
assets 73,192 58
Amortization of other intangible
assets 2,871 798
Amortization of incentive bonus
payments due to employees 6,564 --
-------------- ---------------
EBITDA (loss) $(28,961) $(400)
============== ===============
EBITDA (loss) per common share -
basic & diluted $(0.61) $(0.03)
============== ===============
--------------------------------------------------------------------------------------------------------
Revenues
Software revenues, which include amounts generated through software licensing
and implementation services, decreased 12% to $8.8 million for the three months
ended July 31, 2001 from $10.0 million for the three months ended July 31, 2000.
Total software revenues for the six months ended July 31, 2001 were $13.0
million, a decrease of 26% over total software revenues of $17.5 million
reported for the corresponding period last year. The decrease in software
revenues for both the quarter and the first half of the current fiscal year
continues to be primarily attributable to the general downturn in the economy
which has caused certain of our prospects to re-evaluate and defer their
spending on content management initiatives. Software revenues for the second
quarter reflect the successful implementation of the Company's technology at a
number of customers who had selected the technology previously but did not
consummate a contract until this quarter.
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately 10% and 11.2% of total revenues for the three
months ended July 31, 2001 and 2000, respectively. In the current quarter, two
individual customers each accounted for approximately 13% of the Company's total
revenues. In the same period last year, no single customer accounted for 10% or
more of the Company's revenues.
Software maintenance and customer support revenues increased 12% in the second
quarter of the current year to $1.5 million from $1.4 million in the second
quarter last year, representing 15% and 12% of total revenues, respectively. For
the six months ended July 31, 2001, software maintenance and customer support
revenues were $3.3 million compared to $3.3 million in the same period last
year, representing 20% and 16% of total revenues respectively. The increase in
maintenance revenues on an absolute dollar basis in the current quarter and as a
percentage of total revenue in the three and six months ended July 31, 2001 is
attributable to an increase in maintenance pricing implemented at the end of the
prior fiscal year and an overall improvement in the pursuit of maintenance
renewals for existing customers.
Revenues from international operations are derived 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 68% for the three months ended July 31, 2001 to
$1.3 million from $4.0 million in the same quarter last year. For the six months
ended July 31, 2001, international revenues from CTIL decrease 69% to $1.8
million from $5.8 million in the comparable period last year. This decrease can
also be attributed to the overall weak market conditions, which have led to
reduced spending by many of our prospective customers.
There was no revenue recorded from the Company's interactive services offerings
in the second quarter of the current year. For the six months ended July 31,
revenues of $0.4 million were recorded from the Company's interactive services
offerings. There were no revenues recorded from interactive services offerings
in the corresponding periods last year.
Cost of Revenues
Cost of license-related revenues, which includes cost of software revenues and
cost of maintenance revenues, increased 131% to $4.6 million in the second
quarter of the current year from $2.0 million in the second quarter last year.
Cost of license-related revenues expressed as a percentage of total revenues was
44% in the current quarter compared to 17% in the second quarter last year. For
the six months ended July 31, 2001, costs of license-related revenues increased
161% to $9.1 million from $3.5 million in the first six months of last year,
representing 56% and 17% of total revenues, respectively. Cost of software
revenues increased 147% to $4.1 million in the second quarter of the current
year from $1.7 million in the second quarter last year. For the six months ended
July 31, 2001, cost of software revenues increased 196% to $8.2 million from
$2.8 million in the first six months of last year. The increase in cost of
software revenues is primarily attributable to an increase in the amortization
of prepaid third-party licensing costs, which have been incurred to add new
features and functionality to the Company's products, as well as an increase in
the cost of professional services resulting in part from the increase in the
number of employees in the Company's professional services group. Cost of
maintenance increased 43% to $0.5 million for the three months ended July 31,
2001 from $0.3 million for the three months ended July 31, 2000. For the first
six months of the current fiscal year, cost of maintenance increased to $0.9
million from $0.7 million in the first half of last fiscal year. The increase in
cost of maintenance is attributable to an increase in personnel and related
expenses in the customer support organization.
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 July 31, 2001, cost of services was $1.5 million. For the six
months ended July 31, 2001, cost of services was $3.1 million.
Operating Expenses
Sales and marketing expenses increased 57% in the quarter ended July 31, 2001 to
$8.5 million from $5.4 million in the second quarter last year, representing 83%
and 48% of total revenues, respectively. For the first half of the current
fiscal year, sales and marketing expenses increased 58% to $17.4 million from
$11.0 million for the corresponding period last year, representing 107% and 53%
of total revenues, respectively. The increase in sales and marketing expenses
was due to the increase in the provision for doubtful accounts recorded during
the first six months of this fiscal year, as well as overall growth in sales and
marketing personnel and increased spending on marketing programs.
Total research and product development costs increased 112% to $6.0 million in
the current quarter compared to $2.8 million in the same quarter last year.
Research and product development costs as a percentage of total revenues were
59% in the current quarter compared to 25% in the second quarter last year. For
the first half of the current fiscal year, research and development expenses
increased 166% to $14.7 million from $5.5 million for the corresponding period
last year, representing 90% and 27% of total revenues, respectively. The
increase is largely due to the addition of a significant number of engineering
personnel in connection with the business combination with the IMS division of
Intel as well as the Company's continued investment to enhance the RetrievalWare
and Screening Room products. During the first half of the current fiscal year,
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. In the second quarter of the current
fiscal year, the Company also released Convera RetrievalWare 6.9. This latest
version of the Company's flagship product provides user-level and document-level
security simultaneously across enterprise groupware and document management
systems. Other significant enhancements in RetrievalWare 6.9 include enhanced
Microsoft Exchange security, general availability of specialized medical and
pharmaceutical search aids and updated platform and third party support.
General and administrative expenses increased 84% for the quarter ended July 31,
2001 to $2.2 million, representing 22% of total revenues from $1.2 million, or
11% of total revenues, in the second quarter of last year. For the first half of
the current fiscal year, general and administrative expenses increased 105% to
$5.2 million from $2.5 million for the corresponding period last year,
representing 32% and 12% of revenues, respectively. The growth in general and
administrative expenses was due to increased corporate expenses such as legal,
insurance and accounting expenses. There were also additional general and
administrative personnel required to support the Company's expanding operations.
The Company recorded a charge in the current fiscal quarter of $2.9 million
related to a restructuring in the Company's business operations announced on May
10, 2001 in response to the downturn in the economy and in conjunction with the
integration of operations following the Combination. The restructuring resulted
in the reduction of Convera's 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 restructuring, the Company also
reduced the number of independent contractors that were working on behalf of the
Company by approximately 40 contractors and reduced the amount of space to be
used in several of the Company's leased facilities. The restructuring charge
included approximately $0.5 million in costs incurred under contractual
obligations with no future economic benefit to the Company, accruals of
approximately $0.4 million for employee termination costs and approximately $2.0
million related to future facility losses for the idle portion of a facility
resulting from the restructuring activities. During the second quarter, the
Company paid approximately $0.8 million against costs included in the original
restructuring accrual. The Company expects to settle the remaining accrual over
the term of the related facility lease, which is through February 2006.
Amortization of goodwill and other intangible assets was approximately $36.6
million for the quarter ended July 31, 2001 and $73.2 million for the first half
of the current fiscal year. The majority of these amounts relate to amortization
of goodwill and intangible assets related to the Company's business combination
with Intel's IMS division, which was accounted for using the purchase method.
These amounts also include amortization of the intangible assets acquired from
the NBA pursuant to the contribution agreement. Amortization of goodwill and
other intangible assets was approximately $29 thousand for the quarter ended
July 31, 2000 and $58 thousand for the first half of the prior fiscal year.
These amounts related to an acquisition made by the Company in May 1997 also
accounted for using the purchase method.
Amortization of incentive bonus payments due to employees was approximately $0.5
million for the quarter ended July 31, 2001 and $6.6 million for the first half
of the current fiscal year. 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 bonus expense of approximately
$0.5 million for the three-month period ended July 31, 2001 and $1.2 million for
the six-month period ended July 31, 2001. Additionally, in May 2001, the Company
paid approximately $5.4 million in bonuses to specified former employees of
Intel that remained employed by Convera as of April 30, 2001. These bonus
payments were funded through an additional capital contribution from Intel. The
bonus amounts were contingent upon the former Intel employees' continued
employment at Convera, and the Company recorded this bonus in operations.
Other Income, net
Other income, net increased to $0.9 million for the second quarter of the
current fiscal year, compared to $0.1 million in the second quarter of last
year. For the first half of the current fiscal year, other income, net increased
to $2.6 million from $0.2 million in the first half of last year. Other income,
net includes interest income, which increased to $1.4 million in the three
months ended July 31, 2001 from $0.1 million in the second fiscal quarter last
year. For the first six months of this fiscal year, interest income increased to
$3.1 million from $0.2 million in the first six months of the prior fiscal year.
The increase was due to a higher level of invested funds. For the quarter ended
July 31, 2001, the interest income was offset by the write-off of approximately
$0.5 million for equity securities whose decline in value was deemed to be
other-than-temporary and for which the net realizable value was believed to be
zero.
The income tax benefit of $0.8 million for the three months ended July 31, 2001
and $3.2 million for the six months ended July 31, 2001 represents the reversal
of a portion of the net deferred tax liability established primarily as a result
of the Intel IMS division 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 July 31, 2001 as compared to January 31, 2001 is summarized below
(in thousands).
July 31, January 31, Change
2001 2001
-------------- --------------- -----------------
Cash and cash
equivalents $ 31,807 $ 37,061 $ (5,254)
Investments 99,259 119,083 (19,824)
-- ----------- --- ----------- --- -------------
Total $ 131,066 $ 156,144 $ (25,078)
== =========== === =========== === =============
During the six months ended July 31, 2001, $27.9 million was used to fund
operating activities, compared to $2.4 million used in the same period last
year. The net loss of $109.7 million was offset by non-cash charges totaling
$77.4 million, including amortization of $73.2 million, amortization of
incentive bonus payments potentially due to employees on September 30, 2002 of
$1.1 million, bad debt expense of $2.7 million and unpaid restructuring charges
of $2.1 million. A decrease in accounts receivable and an increase in accounts
payable and accrued expenses provided $6.2 million, while a decrease in deferred
revenues and an increase in prepaid expenses and other assets used $1.8 million.
During the six months ended July 31, 2000, the net loss of $1.7 million was
further impacted by an increase in accounts receivable, prepaid expenses and
other assets of $1.6 million and a decrease in accounts payable and accrued
expenses of $0.5 million. Non-cash charges totaling $0.9 million included
depreciation and amortization of $0.8 million.
The Company's investing activities provided $16.4 million in the first six
months of the current year. Net cash provided from the maturity of U.S. Treasury
Bills provided for $19.8 million while purchases of equipment and leasehold
improvements used $2.3 million. The Company also used $0.9 million related to
direct acquisition costs in connection with the business combination with
Intel's IMS division. For the six months ended July 31, 2000, the Company used
$0.9 million from investing activities related to the purchase of equipment and
leasehold improvements.
Cash provided by financing activities was $6.1 million and $3.9 million for the
six months ended July 31, 2001 and 2000, respectively. During the six months
ended July 31, 2001, Intel contributed additional capital in the amount of
approximately $5.4 million to fund bonus payments to specified former Intel
employees that remained employed by Convera as of April 30, 2001. Cash of
approximately $0.7 million and $0.2 million was provided from the issuance of
stock under the employee stock purchase plan for the six months ended July 31,
2001 and 2000, respectively. For the six months ended July 31, 2000,
approximately $3.7 million was provided from the exercise of employee stock
options.
At July 31, 2001, the Company's balance of cash, cash equivalents and short-term
investments was $131.1 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") decreased to 99 days at July 31,
2001 from 123 days at July 31, 2000. Management believes that that the allowance
for doubtful accounts of $2.8 million at July 31, 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 maintain and grow
demand for the Company's products and services under uncertain domestic and
international economic conditions, expand its product distribution channels and
to manage the expected growth of the Company. Future results may also be
impacted by the effectiveness of the Company in executing future acquisitions
and integrating the operations of acquired companies with those of the Company.
Failure to meet any of these challenges could adversely affect future operating
results.
The Company's quarterly operating results have varied substantially in the past
and are likely to vary substantially from quarter to quarter in the future due
to a variety of factors. In particular, the Company's period-to-period operating
results are significantly dependent upon the timing of the closing of 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 July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives will continue to be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. In-process research and development
will continue to be written off immediately. Under the provisions of SFAS No.
142, any impairment loss identified upon adoption of this standard is recognized
as a cumulative effect of a change in accounting principle. Any impairment loss
incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge
to current period earnings. In the event the Company reports goodwill from
acquisitions subsequent to June 30, 2001, the goodwill will not be amortized.
The Company will adopt SFAS No. 142 in the first quarter of fiscal 2003 and, at
that time, will stop amortizing goodwill that resulted from business
combinations completed prior to the adoption of SFAS No. 141. With the adoption
of SFAS No. 142, the Company will eliminate annual goodwill amortization, based
on the current accounting guidelines, of approximately $129 million. The Company
is currently evaluating the provisions of SFAS No. 142 to determine the full
effect that adoption of this standard will have on its consolidated financial
statements.
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 13% of total revenues in the second 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 July 31, 2001, approximately 31%,
3% 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 July 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.
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
- ------
Item 2. Changes in Securities None.
- ------
Item 3. Defaults upon Senior Securities None.
- ------
Item 4. Submission of Matters to Vote of Security Holders None.
- ------
Item 5. Other Information None.
- ------
Item 6. Exhibits and Reports on Form 8-K
- ------
On July 3, 2001, the Company filed a Form 8-K for Item 5, announcing that the
Company had scheduled its 2001 Annual Meeting of Stockholders for Thursday,
September 13, 2001. The Form 8-K also contained the location and time of the
meeting along with the anticipated mailing date of the Company's proxy
materials.
On August 8, 2001, the Company filed a Form 8-K for Item 5, announcing that the
Company had rescheduled its 2001 Annual Meeting of Stockholders to Friday,
October 12, 2001 at 10:00 AM at the Hyatt Regency Reston, 1800 Presidents
Street, Reston Virginia 20190. The Form 8-K also reported that the Company
expects to mail its proxy materials for the Annual Meeting on or about September
17, 2001.
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
September 14, 2001 By: /s/ Patrick C. Condo
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Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
September 14, 2001 By: /s/ James H. Buchanan
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James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)