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, 2002
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 number of shares outstanding of the registrant's Class A common stock as of
June 7, 2002 was 28,911,976.
CONVERA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets
April 30, 2002 (unaudited) and January 31, 2002.....................................3
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three months ended April 30, 2002 and 2001..........................................4
Consolidated Statements of Cash Flows (unaudited)
Three months ended April 30, 2002 and 2001..........................................5
Notes to Consolidated Financial Statements..........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................18
PART II. OTHER INFORMATION
Items 1. - 6. ...................................................................................19
Signatures ...................................................................................20
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
April 30, 2002 January 31, 2002
ASSETS (Unaudited)
-------------------- --------------------
Current Assets:
Cash and cash equivalents............................ $ 23,856 $ 17,628
Short term investments............................... 25,322 40,087
Accounts receivable, net of allowance for doubtful
accounts of $2,136 and $2,115, respectively...... 7,802 9,468
Prepaid expenses and other .......................... 2,138 2,715
-------------------- --------------------
Total current assets........................... 59,118 69,898
Equipment and leasehold improvements, net of accumulated
depreciation of $11,219 and $10,493, respectively.... 4,516 4,425
Other assets.............................................. 3,807 3,754
Goodwill and other intangible assets...................... 3,574 29
-------------------- --------------------
Total assets................................... $ 71,015 $ 78,106
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 2,990 $ 3,054
Accrued expenses..................................... 7,496 7,553
Accrued bonuses...................................... 1,954 2,144
Restructuring reserve................................ 1,511 1,621
Deferred revenues.................................... 3,666 3,729
-------------------- --------------------
Total current liabilities...................... 17,617 18,101
Restructuring reserve, net of current portion............. 1,976 2,129
-------------------- --------------------
Total liabilities.............................. 19,593 20,230
-------------------- --------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock Class A, $0.01 par value, 100,000,000
shares authorized; 29,877,828 and 28,969,334
shares issued, respectively; 28,877,828 and
27,969,334 shares outstanding, respectively...... 289 280
Treasury stock at cost, 1,000,000 shares............. (2,310) (2,310)
Additional paid-in capital........................... 1,053,461 1,050,053
Accumulated deficit.................................. (999,039) (989,429)
Accumulated other comprehensive loss................. (979) (718)
-------------------- --------------------
Total shareholders' equity....................... 51,422 57,876
-------------------- --------------------
Total liabilities and shareholders' equity $ 71,015 $ 78,106
==================== ====================
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,
2002 2001
-------------------- ---------------------
Revenues:
Software.............................................. 4,573 4,606
Maintenance........................................... 1,720 1,719
-------------------- ---------------------
6,293 6,325
-------------------- ---------------------
Cost of revenues:
Software.............................................. 2,570 5,712
Maintenance........................................... 503 465
-------------------- ---------------------
3,073 6,177
-------------------- ---------------------
Gross margin: 3,220 148
-------------------- ---------------------
Operating expenses:
Sales and marketing................................... 6,065 8,830
Research and product development...................... 3,580 8,698
General and administrative............................ 2,537 2,964
Restructuring charge.................................. 847 -
Incentive bonus payments due to employees............. (138) 6,100
Amortization of goodwill and other intangible assets.. 40 36,592
Acquired in-process research and development.......... 126 -
-------------------- ---------------------
13,057 63,184
-------------------- ---------------------
Operating loss............................................ (9,837) (63,036)
Interest income, net...................................... 227 1,754
-------------------- ---------------------
Net loss before income taxes.............................. (9,610) (61,282)
Income tax benefit........................................ - 2,464
-------------------- ---------------------
Net loss.................................................. $ (9,610) $ (58,818)
==================== =====================
Basic and diluted net loss per common share............... $ (0.34) $ (1.24)
Weighted-average number of common shares outstanding
- basic and diluted.................................. 28,526,373 47,568,570
Other comprehensive loss:
Net loss.............................................. (9,610) (58,818)
Foreign currency translation adjustment............... (261) (7)
-------------------- ---------------------
Comprehensive loss........................................ $ (9,871) $ (58,825)
==================== =====================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended April 30,
2002 2001
-------------------- --------------------
Cash Flows from Operating Activities:
Net loss................................................ $ (9,610) $ (58,818)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation...................................... 569 556
Provision for doubtful accounts................... 100 1,992
Amortization of goodwill and other intangibles.... 40 36,592
In-process research and development............... 126 -
Deferred tax benefit.............................. - (2,464)
Changes in operating assets and liabilities net of
effects from acquisition:
Accounts receivable............................... 459 (2,359)
Prepaid expenses and other assets................. 1,914 (1,436)
Accounts payable, accrued expenses and accrued
bonuses...................................... (1,098) (16,245)
Restructuring reserve............................. (263) -
Deferred revenues................................. (82) 1,069
-------------------- --------------------
Net cash used in operating activities................... (7,845) (8,623)
-------------------- --------------------
Cash Flows from Investing Activities:
Proceeds from maturities of investments, net............ 14,789 20,490
Purchases of equipment and leasehold improvements....... (467) (1,535)
Acquisition of business, net of cash acquired........... 129 (520)
-------------------- --------------------
Net cash provided by investing activities............... 14,451 18,435
-------------------- --------------------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock, net......... - 151
Proceeds from the exercise of stock options............. 9 232
-------------------- --------------------
Net cash provided by financing activities............... 9 383
-------------------- --------------------
Effect of Exchange Rate Changes on Cash...................... (387) 149
-------------------- --------------------
Net Increase in Cash and Cash Equivalents.................... 6,228 10,344
Cash and Cash Equivalents, beginning of period............... 17,628 37,061
-------------------- --------------------
Cash and Cash Equivalents, end of period..................... $ 23,856 $ 47,405
==================== ====================
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Convera Corporation ("Convera" or the "Company") was established through the
combination on December 21, 2000 of the former Excalibur Technologies
Corporation ("Excalibur") and Intel Corporation's ("Intel") Interactive Media
Services ("IMS") division (the "Combination"). The Combination was accounted for
using the purchase method of accounting.
Convera principally earns revenues from the licensing of its software products
directly to commercial businesses and government agencies throughout North
America, Europe and other parts of the world and also distributes its software
products through license agreements with value-added resellers, systems
integrators, OEMs and other strategic partners. The Company's technology may
also be customized and deployed to commercial businesses.
The Company's operations are subject to certain risks and uncertainties
including, but not limited to: the dependence upon the timing of the closing on
sales of software licenses; actual and potential competition by entities with
greater financial resources, experience and market presence than the Company;
rapid technological changes; the success of the Company's product marketing and
product distribution strategies; the risks associated with acquisitions and
international expansion; the need to manage growth; the need to retain key
personnel and protect intellectual property; the effect of general economic
conditions on demand for the Company's products and services; possible
disruption in commercial activities caused by terrorist activity and armed
conflict, such as changes in logistics and security arrangements, and the
availability of additional capital financing on terms acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
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,
2002. 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 these
interim periods. The results of operations for the three-month period ended
April 30, 2002 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 2003.
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.
Principles of consolidation
The consolidated financial statements include the accounts of Convera and its
wholly owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
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.
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 Company incurs shipping and handling costs, which are recorded in cost of
revenues.
Reclassifications
Certain amounts presented in the prior years' financial statements have been
reclassified to conform with the current period presentation.
(3) RECENT PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 be accounted for under
the purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives will continue to be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment.
In-process research and development will continue to be written off immediately.
Under the provisions of SFAS No. 142, any impairment loss identified upon
adoption of this standard is recognized as a cumulative effect of a change in
accounting principle. Any impairment loss incurred subsequent to initial
adoption of SFAS No. 142 is recorded as a charge to current period earnings.
Goodwill that arises from acquisitions that occur subsequent to June 30, 2001
will not be amortized. The Company adopted SFAS No. 142 in the current fiscal
quarter. As the Company's goodwill balance from business combinations completed
prior to the adoption of SFAS No. 141 was immaterial, the adoption of SFAS 142
did not have a material impact on the Company's financial condition or results
of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of APB No. 30,
"Reporting Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and is effective
for the Company in the current fiscal quarter. The adoption of the pronouncement
did not have a material impact on the Company's financial condition or results
of operations.
(4) ACQUISITION
On March 7, 2002, the Company acquired 100% of the outstanding capital stock of
Semantix Inc., a private Canadian software company specializing in cross-lingual
processing and computational linguistics technology, for 900,000 shares of
restricted Convera common stock and approximately $24,000 in cash. The
acquisition of Semantix is expected to help Convera derive greater revenues
through the direct sales of language modules to new and existing customers. In
addition, the Semantix acquisition broadens the linguistic capabilities of the
Convera RetrievalWare(R) search and retrieval technology, specifically in the
areas of cross-lingual search and the continued development of language
capabilities to support the needs of specialized vertical markets, such as the
government intelligence community. Semantix Inc. became a wholly owned
subsidiary of Convera under the name Convera Canada, Inc.
This acquisition has been accounted for using the purchase method of accounting,
and the results of operations of Convera Canada, Inc. have been included in the
Company's consolidated statement of operations from the date of acquisition. The
preliminary purchase price was determined to be approximately $4,403,000, which
included liabilities assumed of approximately $748,000 and approximately
$224,000 of transaction and direct acquisition costs. The shares issued to
Semantix Inc. as consideration were valued based on the average market price of
Convera stock from March 5, 2002 through March 11, 2002, or two business days
before and after the date the terms of the acquisition were agreed to and
announced, which was March 7, 2002. The purchase price was preliminarily
allocated to the assets acquired based on their estimated fair values on the
acquisition date as follows (in thousands):
Tangible assets acquired $ 663
Developed technology 1,346
Acquired in-process research and development 126
Goodwill 2,268
------------
Total purchase price $ 4,403
============
Developed technology is being amortized on a straight-line basis over five
years. To determine the fair market value of the developed technology the
Company used the relief from royalty method, which uses the amount of royalty
expense the Company would have incurred if the developed technology was licensed
in an arms length transaction instead of purchased. The acquired in-process
research and development ("IPRD") of $126,000 was expensed immediately since the
related technology had not reached technological feasibility as of the date of
the acquisition. To determine the value of the IPRD the discounted cash flow
method was used which entails a projection of the prospective cash flows to be
generated from the sale of the technology over a discrete period of time and
discounted at a rate in order to calculate present value. The remainder of the
purchase price minus the tangible assets acquired and the intangible assets
created was allocated to Goodwill. Goodwill is not being amortized but is being
reviewed annually for impairment in accordance with SFAS 142.
(5) RESTRUCTURINGS
On February 22, 2002, the Company announced that it was aligning its operations
around key vertical markets. In connection with this reorganization, the Company
reduced its workforce by 61 employees worldwide, including 24 individuals from
the engineering group, 16 from the sales group, 13 from the professional
services group, six from the marketing group and two from the general and
administrative group. As a result, the Company recorded a restructuring charge
of approximately $1,027,000 related to employee severance costs. During the
current quarter, the Company also reduced the restructuring reserve by
approximately $180,000, reflecting the payment of lower than estimated severance
amounts related to restructuring actions taken during the fiscal year ended
January 31, 2002.
The Company previously adopted restructuring plans in the second and third
quarters of fiscal year 2002. As a result of the restructuring plans, the
Company recorded approximately $8,128,000 in restructuring charges for the year
ended January 31, 2002. The restructuring charges included approximately
$1,338,000 in costs incurred under contractual obligations with no future
economic benefit to the Company, accruals of approximately $1,590,000 for
employee termination costs and approximately $5,200,000 related to future
facility losses for the offices closed in Hillsboro, Oregon and Lafayette,
Colorado. Non-cash charges of $1,769,000 related to the write-down of facility
improvements were also recorded in the fiscal year ended January 31, 2002.
The following table sets forth a summary of the restructuring charges, the
payments made against those charges and the remaining restructuring liability as
of April 30, 2002 (in thousands):
Accrued
restructuring
FY02 FY 03 costs at
restructuring restructuring Non-cash FY02 FY03 April 30,
charges charge Total charges Payments Payments 2002
----------- ---------- ----------- ---------- ------------ ----------- ----------
Employee severance
and other
termination benefits $ 1,590 $ 1,027 $ 2,617 $ (180) $ (1,361) $ (919) $ 157
Estimated costs of
facilities closing 5,200 - 5,200 (1,769) (360) (191) 2,880
Contractual
obligations....... 1,338 - 1,338 - (888) - 450
----------- ---------- ----------- ---------- ------------ ----------- ----------
Total $ 8,128 $ 1,027 $ 9,155 $ (1,949) $ (2,609) $ (1,110) $ 3,487
=========== ========== =========== =========== ============ ============ ==========
In the current quarter, the Company paid a total of approximately $1,110,000
against the restructuring accruals. As of April 30, 2002, unpaid amounts of
approximately $1,511,000 and $1,976,000 have been classified as current and
non-current accrued restructuring costs, respectively, in the accompanying
consolidated balance sheet. Remaining cash expenditures relating to employee
severance costs will be substantially paid during the second quarter of the
current fiscal year. Amounts related to contractual obligations will be paid
within one year. The Company expects to settle amounts associated with facility
closings over the remaining term of the related facility leases, which is
through February 2006.
(6) SEGMENT REPORTING
The Company has one reportable segment.
Major Customers
In the current quarter, revenues derived from sales to agencies of the U.S.
Government were approximately $1,332,000, or 21% of total revenues. In the
current quarter, no single customer accounted for 10% or more of the Company's
total revenues. During the quarter ended April 30, 2001, revenues derived from
one individual customer accounted for 18% of the Company's total revenues.
(7) INCOME TAXES
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, 2003, the
Company expects that it will generate additional NOLs for the remainder of the
year. As of April 30, 2002, the Company's deferred tax assets exceed its
deferred tax liabilities. Given the Company's inability to predict sufficient
taxable income to realize the benefits of those net deferred tax assets, the
Company has provided a full valuation allowance against such deferred tax assets
as of April 30, 2002.
The income tax benefit of $2,464,000 for the three months ended April 30, 2001
represented the reversal of a portion of the net deferred tax liability
established primarily as a result of the Combination and the contract which the
Company had with the NBA.
(8) INCENTIVE BONUS PAYMENTS
Specified former Intel employees who became Convera employees and remain
employees through September 30, 2002 will receive a payment for the excess, if
any, of the calculated aggregate gain they would have realized on forfeited
Intel stock options, based on the fair value of Intel shares at a fixed date
prior to the closing of the Combination, that would have vested between 2002 and
2005 over the calculated aggregate gain on Convera stock options as of September
30, 2002. The maximum aggregate amount that Convera could be required to pay,
assuming no aggregate gain on the Convera stock options at September 30, 2002,
is approximately $1,120,000. The Company is amortizing this amount over the
period leading up to September 30, 2002. For the three months ended April 30,
2002, the Company reversed approximately $138,000 of incentive bonus expense
previously recorded, due to a reduction in the number of former Intel employees
remaining with the Company as of April 30, 2002. As of April 30, 2002, the
Company has accrued the total bonus due to the former Intel employees of
approximately $1,120,000.
(9) 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 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,
2002 2001
-------------------- --------------------
Numerator:
Net loss..................................................... $ (9,610) $ (58,818)
Denominator:
Weighted average number of common shares outstanding - basic
and diluted.................................................. 28,526,373 47,568,570
Basic and diluted net loss per common share...................... $ (0.34) $ (1.24)
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,
2002 2001
-------------------- --------------------
Stock options.................................................... 50,464 592,421
==================== ====================
(10) SUBSEQUENT EVENTS
Restructuring
On May 22, 2002, the Company announced that it was reducing the Company's
workforce by approximately 50 employees worldwide in its continued effort to
streamline its operations. The related restructuring charges are expected to be
approximately $1,100,000, relating to employee severance costs. 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
ending July 31, 2002.
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 including, but not limited to: the dependence
upon the timing of the closing on sales of software licenses; actual and
potential competition by entities with greater financial resources, experience
and market presence than the Company; rapid technological changes; the success
of the Company's product marketing and product distribution strategies; the
risks associated with acquisitions and international expansion; the need to
manage growth; the need to retain key personnel and protect intellectual
property; the effect of general economic conditions on demand for the Company's
products and services; the availability of additional capital financing on terms
acceptable to the Company, and possible disruption in commercial activities
caused by terrorist activity and armed conflict, such as changes in logistics
and security arrangements. 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 of $6.3 million for the quarter ended April 30, 2002 were
essentially flat when compared to the same quarter last year. The net loss for
the quarter ended April 30, 2002 was $9.6 million, or $0.34 per common share,
compared to a net loss of $58.8 million, or $1.24 per share in the same period
last year. The net loss for the first fiscal quarter last year included $42.7
million of amortization and other acquisition related expenses.
The Company uses pro forma net loss as an additional measure of performance. The
pro forma net loss excludes what the Company considers to be non-routine
charges, such as the restructuring charge that occurred in the first quarter of
this year, and amortization and other acquisition related expenses. The pro
forma net loss 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 pro forma net loss is not necessarily comparable with similarly
titled measures for other companies. The Company's pro forma net loss for the
quarter ended April 30, 2002 was $8.7 million, or $0.31 per share, compared to
$16.1 million, or $0.34 per share for the 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, for
the three months ended April 30, 2002 and 2001, respectively. (dollars in
thousands).
--------------------------------------------------------------------------------------------------------
Components of Revenues and Expenses
Three Months Ended April 30, Increase
2002 2001 (Decrease)
Revenues: $ % $ % %
-------------- --------- --------------- --------- -----------
Software 4,573 73% 4,606 73% (1)%
Maintenance 1,720 27% 1,719 27% -
-------------- --------- --------------- --------- -----------
Total revenues $6,293 100% $6,325 100% (1)%
-------------- --------- --------------- --------- -----------
Expenses:
Cost of software revenues $2,570 41% $5,712 90% (55)%
Cost of maintenance revenues 503 8% 465 7% 8%
Sales and marketing 6,065 96% 8,830 140% (31)%
Research and product
development 3,580 57% 8,698 138% (59)%
General and administrative 2,537 40% 2,964 47% (14)%
Restructuring charge 847 13% - - 100%
Incentive bonus payments due
to employees (138) (2)% 6,100 96% (102)%
Amortization of goodwill
and other
intangible assets 40 1% 36,592 579% (100)%
Acquired in-process research
& development 126 2% - - 100%
-------------- --------- --------------- --------- -----------
Total expenses $16,130 256% $69,361 1097% (77)%
-------------- --------- --------------- --------- -----------
Operating loss $(9,837) $(63,036)
Interest income, net 227 1,754
-------------- ---------------
Net loss before income taxes $(9,610) $(61,282)
Income tax benefit - 2,464
-------------- ---------------
Net loss $(9,610) $(58,818)
============== ===============
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Three Months Ended April 30,
2002 2001
-------------- ---------------
Supplemental Information:
Net loss $(9,610) $(58,818)
Restructuring charge 847 -
Incentive bonus payments due to
employees (138) 6,100
Amortization of goodwill and
other intangible assets 40 36,592
Acquired in-process research &
development 126 -
-------------- ---------------
Pro forma net loss $(8,735) $(16,126)
============== ===============
Pro forma net loss per share $(0.31) $(0.34)
============== ===============
Revenues
Software revenues, which include amounts generated through software licensing
and implementation services, were essentially flat at $4.6 million in the
current quarter compared to the same quarter last year. Software maintenance and
customer support revenues also remained flat in the current quarter compared to
the corresponding quarter last year. For each of the quarters ended April 30,
2002 and 2001, maintenance revenues were $1.7 million or 27% of total revenues.
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately 21% and 17% of total revenues for the three months
ended April 30, 2002 and 2001, respectively. In the current quarter, no single
customer accounted for 10% or more of the Company's total revenues. During the
quarter ended April 30, 2001, revenues derived from one individual customer
accounted for 18% of the Company's total revenues.
Revenues from international operations are derived primarily by software
licenses with various European commercial and government customers. 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 increased 60% for the three months
ended April 30, 2002 to $1.6 million from $1.0 million in the same quarter last
year. This increase in international revenues was offset by a reduction in the
commercial North American revenues compared to the same period last year.
Cost of Revenues
Cost of software revenues decreased 55% to $2.6 million in the first quarter of
the current year from $5.7 million in the first quarter last year. Cost of
software revenues as a percentage of total revenues was 41% in the current
quarter compared to 90% in the same quarter last year. The decrease in cost of
software revenues is primarily attributable to the reduction in personnel
supporting the interactive services initiative that was exited in the third
fiscal quarter of last year, as well as a decrease in amortization of prepaid
third-party licensing costs.
Cost of maintenance increased 8% to $503,000 in the current quarter from
$465,000 in the first quarter last fiscal year. As a percentage of maintenance
revenues, cost of maintenance was 29% and 27% in the quarters ended April 30,
2002 and 2001, respectively.
Operating Expenses
Sales and marketing expenses decreased 31% in the quarter ended April 30, 2002
to $6.1 million from $8.8 million in the first quarter last year, representing
96% and 140% of total revenues, respectively. The decrease in sales and
marketing expenses was due to a reduction in the amount of bad debt expense
recorded compared to the first quarter of last year, as well as to a reduction
in sales personnel.
Total research and product development costs decreased 59% to $3.6 million in
the current quarter compared to $8.7 million in the same quarter last year.
Research and product development costs as a percentage of total revenues were
57% in the current quarter compared to 138% in the first quarter last year. The
decrease is largely due to a reduction in engineering personnel and contractors
supporting the interactive services initiative exited last fiscal year. During
the current quarter, the Company released RetrievalWare 7.0 and Screening Room
2.3. RetrievalWare 7.0 provides the ability to integrate multiple information
streams and formats within a single user interface. RetrievalWare 7.0 also
provides a higher level of interoperability with enterprise applications using
XML and easier integration into the Microsoft .NET environment. Screening Room
2.3 includes a new open system architecture that enables integration with 3rd
party asset and content management products. It also provides users with greater
flexibility during the video capture process as Screening Room 2.3 users now are
given real time access to video asset metadata and they can encode any number of
video file formats in any combination of bit rates.
General and administrative expenses decreased 14% in the quarter ended April 30,
2002 to $2.5 million from $3.0 million in the first quarter of last year. The
decrease is largely due to a reduction in information technology expenses and
personnel-related costs.
During the first quarter of the current fiscal year, the Company announced that
it was aligning its operations around key vertical markets. In connection with
this reorganization, the Company reduced its workforce by 61 employees
worldwide, including 24 individuals from the engineering group, 16 from the
sales group, 13 from the professional services group, six from the marketing
group and two from the G&A group. As a result, the Company recorded a
restructuring charge of $1.0 million related to employee severance costs. During
the current quarter, the Company also reduced the existing restructuring reserve
by approximately $0.2 million, reflecting the payment of lower than estimated
severance amounts related to restructuring actions taken in the second and third
quarters of the fiscal year ended January 31, 2002.
The Company paid a total of $1.1 million against the restructuring accruals in
the current quarter. As of April 30, 2002, unpaid amounts of $1.5 million and
$2.0 million have been classified as current and long-term accrued restructuring
costs, respectively, in the accompanying consolidated balance sheet. Remaining
cash expenditures relating to employee severance costs will be substantially
paid during the second quarter of current fiscal year. Amounts related to
contractual obligations will be paid within one year. The Company expects to
settle amounts associated with facility closings over the remaining term of the
related facility leases, which is through February 2006.
For the three months ended April 30, 2002, the Company reversed approximately
$0.1 million of incentive bonus expense previously recorded, due to a reduction
in the number of former Intel employees remaining with the Company as of April
30, 2002. Specified former Intel employees who became Convera employees and
remain employed through September 30, 2002 will receive a payment for the
excess, if any, of the calculated aggregate gain they would have realized on
forfeited Intel stock options, based on the fair value of Intel shares at a
fixed date prior to the closing of the combination with Intel's IMS division,
that would have vested between 2002 and 2005 over the calculated aggregate gain
on Convera stock options as of September 30, 2002. The maximum aggregate amount
that Convera could be required to pay, assuming no aggregate gain on the Convera
stock options at September 30, 2002, is approximately $1.1 million. The Company
has fully accrued this amount as of April 30, 2002. For the quarter ended April
30, 2001, the Company recorded approximately $0.7 million for these incentive
bonus payments. 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.
Amortization of intangible assets was approximately $40,000 for the quarter
ended April 30, 2002. This amount represents amortization of developed
technology related to the Company's acquisition of Semantix Inc., which was
accounted for using the purchase method of accounting. For the three months
ended April 30, 2001, amortization of goodwill and other intangible assets was
approximately $36.6 million related primarily 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 between the
Company and the NBA.
In connection with the acquisition of Semantix Inc., the Company recorded a
charge for acquired in-process research and development of $0.1 million in the
current quarter.
Interest Income, net
Interest income decreased to $0.2 million for the first quarter of the current
fiscal year, compared to $1.8 million in the first quarter of last year. The
decrease in interest income was largely due to a lower level of invested funds.
The income tax benefit of $2.5 million for the three months ended April 30, 2001
represents the reversal of the net deferred tax liability established primarily
as a result of the combination with Intel's IMS division and the NBA contract.
Liquidity and Capital Resources
The Company's combined balance of cash, cash equivalents and short-term
investments at April 30, 2002 as compared to January 31, 2002 is summarized
below (in thousands).
April 30, January 31, Change
2002 2002
-------------- --------------- -----------------
Cash and cash
equivalents $ 23,856 $ 17,628 $ 6,228
Investments 25,322 40,087 (14,765)
-- ----------- --- ----------- --- -------------
Total $ 49,178 $ 57,715 $ (8,537)
== =========== === =========== === =============
During the three months ended April 30, 2002, $7.8 million was used to fund
operating activities, compared to $8.6 million used in the same period last
year. The net loss of $9.6 million was offset by non-cash charges totaling $0.8
million, including depreciation of $0.6 million, bad debt expense of $0.1
million, amortization of $40,000, and in-process research and development of
$0.1 million. Cash was provided by reductions in accounts receivable of $0.5
million and prepaid expenses and other assets of $1.9 million. Decreases in
accounts payable, accrued expenses and accrued bonuses and a reduction of
deferred revenues reduced cash from operating activities by $1.2 million. The
decrease in the restructuring reserve used a net of $0.3 million. Net
restructuring charges for the quarter were $0.8 million, less payments of $1.1
million made against the reserve. During the three months ended April 30, 2001,
the Company used cash of $8.6 million to fund operating activities. 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, the accrual of incentive bonus payments due totaling $6.1 million and
an income tax benefit of $2.5 million. Increases in deferred revenues, accounts
payable and accrued expenses provided $17.3 million while increases in accounts
receivable, prepaid expenses and other assets used $3.8 million.
Cash flows from investing activities provided the Company $14.4 million during
the first quarter of the current fiscal year. Net cash provided from the
maturity of U.S. Treasury Bills provided $14.9 million while purchases of
equipment and leasehold improvements used cash of $0.5 million. Cash acquired
resulting from the purchase of Semantix Inc. was approximately $0.4 million
netted against direct acquisition costs of approximately $0.3 million. For the
quarter ended April 30, 2001 the Company's investing activities provided $18.4
million, including $20.5 million from the maturity of U.S. Treasury bills.
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.
Financing activities, specifically the exercise of employee stock options,
provided cash of $9,000 for the quarter ended April 30, 2002. For the quarter
ended April 30, 2001 financing activities provided cash of $0.4 million, of
which $0.2 million was provided by the issuance of stock under the employee
stock purchase plan and $0.2 million was provided by the exercise of employee
stock options.
At April 30, 2002, the Company's balance of cash, cash equivalents and
short-term investments was $49.2 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. If the actions taken by
management are not effective in achieving profitable operating results, the
Company may be required to pursue external sources of financing to support its
operations and capital requirements. There can be no assurance that external
sources of financing will be available if required, or that such financing will
be available on terms acceptable to the Company.
The Company has the following contractual obligations associated with its lease
commitments and other contractual obligations:
Contractual Obligations Payments Due By Period (in thousands)
2008 and
Total 2004 2005 2006 2007 Beyond
----- ---- ---- ---- ---- ------
Operating leases $8,329 $3,132 $2,717 $1,564 $853 $63
The number of days sales outstanding ("DSO") decreased to 105 days at April 30,
2002 from 145 days at April 30, 2001. Management believes that the allowance for
doubtful accounts of $2.1 million at April 30, 2002 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 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.
Allen Holding, Inc., together with Allen & Company Incorporated and Herbert A.
Allen (collectively "Allen & Company") beneficially owns more than 50% of the
voting power of Convera, and would therefore be able to control the outcome of
matters requiring a stockholder vote. These matters could include offers to
acquire Convera and elections of directors. Allen & Company may have interests,
which are different than the interests of other Convera stockholders.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
Other Factors
EURO Conversion
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) were fixed amongst one another and became the currencies of the
EURO. The currencies of the eleven countries will remain in circulation until
mid-2002. The EURO currency was introduced on January 1, 2002. The EURO
conversion has not had a material impact on the Company's operations or
financial results.
Item 2. Quantitative and Qualitative Disclosure About Market Risk
The Company's market risk is principally confined to changes in foreign currency
exchange rates and potentially adverse effects of differing tax structures.
International revenues from CTIL, the Company's foreign sales subsidiary located
in the United Kingdom, along with entities established in Paris, France and
Munich, Germany, were approximately 25% 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 or
Euros. As of April 30, 2002, approximately 21% and 8% of total consolidated
accounts receivable were denominated in British pounds and EUROS, respectively.
Additionally, the Company's exposure to foreign exchange rate fluctuations
arises in part from intercompany accounts in which royalties on 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, 2002, 10% of the Company's cash and cash equivalents balance was
included in the Company's foreign subsidiaries. Cash equivalents consist of
funds deposited in money market accounts with original maturities of three
months or less. The Company's short-term investments consist primarily of U.S.
Government treasury bills, with maturity dates ranging from three to six 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
On November 1, 2001, DSMC, Incorporated ("DSMCI") filed a complaint against the
Company in the U.S. District Court for the District of Columbia in which it
alleged that the Company misappropriated DSMCI's trade secrets, engaged in civil
conspiracy with the NGT Library, Inc. ("NGTL"), a subsidiary of the National
Geographic Society, to obtain access to DSMCI's trade secrets, and was unjustly
enriched by the Company's alleged access to and use of such trade secrets. In
its complaint, DSMCI seeks five million dollars in actual damages and ten
million dollars in punitive damages from the Company. DSMCI subsequently amended
its complaint to add copyright infringement-related claims. The Company is in
the process of investigating the allegations and at this time believes that they
are without merit. Accordingly, the Company believes that this matter will not
have a material adverse effect on its financial position, operations or cash
flows.
Item 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 March 25, 2002, the Company filed a Form 8-K for Item 5, announcing that the
Company has scheduled its 2002 Annual Meeting of Stockholders for Tuesday, June
25, 2002. The Form 8-K also reported that the Company expected to mail its proxy
materials for the Annual Meeting on or about May 17, 2002.
On March 15, 2002, the Company filed a Form 8-K for Item 5, announcing that the
Company acquired Semantix Inc., a private software technology development
company specializing in cross-lingual processing and computational linguistics
technology, for 900,000 restricted shares of Convera common stock.
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, 2002 By: /s/ Patrick C. Condo
--------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
June 14, 2002 By: /s/ Christopher M. Mann
-----------------------
Christopher M. Mann
Chief Financial Officer
(Principal Financial and Accounting Officer)