ITEM 1. Business
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 expectations, beliefs, intentions or strategies regarding the future of Convera Corporation ("Convera" or the "Company.") All forward-looking statements included in this report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The 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; 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. 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.
OVERVIEW
Convera designs, develops, markets, implements and supports search, retrieval and categorization software that enables customers to more effectively integrate, navigate and collaborate on enterprise information--including text, audio, images and video - irrespective of language. This capability is offered through a family of products based on two core applications: RetrievalWare(R) and Screening Room(R). Convera's software often serves as the information management infrastructure for intranet deployments and Web sites in order to enable information intensive business processes such as enterprise information portals, knowledge management, customer relationship management, enterprise resource planning, video content management, human resource management, sales force automation, supply chain management and e-learning. Convera also offers professional implementation services to ensure Convera products integrate seamlessly into customer environments, as well as training, consulting and maintenance services to facilitate full implementation and optimal use of its technologies.
Convera maintains an extensive portfolio of patented and proprietary technologies. Its core technologies include: advanced computational linguistics and semantic networking that leverage lexical knowledge using built-in knowledge bases to search not only for specific word meanings, but also for related terms and concepts; Adaptive Pattern Recognition Processing ("APRP") that identifies patterns in digital data, providing the capability to build content-based analysis and retrieval applications for any type of digital information; and intelligent real-time video analysis that detects scene changes as they occur. In combination, these core technologies form the foundation on which Convera builds its products.
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.
All references in this Form 10-K to financial results for the Company for the period prior to December 21, 2000 reflect the historical financial results of Excalibur and its subsidiaries.
The Company can be contacted via email at invest@convera.com and visited at its web site, www.convera.com. Information on the Convera web site is not part of this Form 10-K.
Business Strategy
The Company licenses its software products directly to commercial businesses and government agencies throughout North America, Europe and other parts of the world and 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. Convera conducts international sales activities through Convera Technologies International, Limited ("CTIL"), its wholly owned subsidiary in the United Kingdom, and CTIL offices in Germany and France.
CONVERA PRODUCTS
PRODUCTS
Convera develops, markets, licenses, services and supports the Convera RetrievalWare suite of multimedia search solutions for corporate intranets, Internet e-commerce, online publishing and the OEM market. Products include:
RetrievalWare(R); Visual RetrievalWare(R); RetrievalWare(R) FileRoom; RetrievalWare(R) WebExpress; Internet Spider; RetrievalWare(R) SDK; RetrievalWare(R) Synchronizers Screening Room(R); and Video Analysis Engine.
RetrievalWare(R)
RetrievalWare employs an advanced modular approach and is an enabling technology for many information intensive business applications, including intranet enterprise portals, Web publishing and e-commerce applications. Offering what the Company believes to be unsurpassed scalability and accuracy, RetrievalWare is a comprehensive software solution that enables government agencies and commercial organizations to integrate all enterprise information through a single point access, intuitively interact with and navigate that information to retrieve needed answers, and effectively collaborate on retrieved information as the basis for prosecuting mission-critical tasks. By utilizing multi-mode searching built around Convera's proprietary APRP and semantic network technologies, RetrievalWare empowers users to find mission critical data across multiple data types from a common user interface.
With Convera's semantic networks and natural language processing, users easily find needed information. RetrievalWare incorporates syntax, morphology and the actual meaning of words. The baseline semantic network in the English language version was created from complete dictionaries, a thesaurus and other reference sources, giving users a built-in knowledge base of 500,000 word meanings, 50,000 language idioms and 1.6 million word associations. Users submit plain English queries that are automatically expanded to include related terms and concepts, thereby increasing the likelihood that highly relevant content will be returned. The software recognizes words at the root level, idioms and the multiple meanings of words. This approach eliminates the costs associated with defining keywords, building topic trees, establishing expert rules and sorting and labeling information in database fields. RetrievalWare also supports specialized semantic networks for legal, medical, finance, engineering and other disciplines.
APRP identifies patterns in digital information. In text applications, it provides fuzzy searching with a high degree of precision and recall, giving end users the ability to retrieve even approximations of search queries with a high degree of confidence that all of the requested information will be returned regardless of errors in spelling or the existence of inconsistencies in the data which may be caused by poor quality of optical character recognition processes. The software works at high speed and supports the rapid development of multi-language text-retrieval systems.
RetrievalWare supports more than 200 document formats stored on file servers, in groupware systems, relational databases, document management systems, intranets and the Internet. RetrievalWare provides real time profiling which enables users to create and save Real Time Agent Queries (Profiles) that will automatically collect incoming documents of interest. The RetrievalWare Profiling Server filters, stores and distributes incoming data from any source including real-time news feeds, relational databases, paper repositories and the RetrievalWare Internet Spider.
RetrievalWare 7.0, released in March of 2002, provides the industry's first enterprise search product to offer multimedia and cross-lingual search as off-the-shelf product features. By providing users with a single product that simultaneously searches and organizes all data types (such as text, video, image and audio files) in multiple languages from a single user interface, customers do not have to buy and piece together several disparate systems to manage multiple data types and languages. RetrievalWare also provides greater ease of use by delivering a higher level of interoperability with enterprise applications using XML and by providing easy integration into the Microsoft(R) ...NET environment.
RetrievalWare provides access to both unstructured and structured information across enterprise networks, workgroup LANs, and intranets. The software may be deployed on a single server or on any number of physical servers. RetrievalWare server solutions can be run on multiple platforms including leading UNIX and Windows NT platforms.
The RetrievalWare product family includes the following components:
Visual RetrievalWare
Leveraging the APRP technology, Visual RetrievalWare is a visual retrieval engine and a comprehensive image processing library and programmer's toolkit that enables the development of client/server systems that automatically index and retrieve digital images. Applications range from electronic shopping and digital libraries to document imaging and positive identification. Users can search for visual information directly from their intranet, a corporate database, the Internet, or other sources using images or video clips as clues. Visual data is reduced to a searchable index that is typically less than 10% of the size of the original image and is automatically recognized based on its shape, color and texture. Users submit queries using examples of visual data or by authoring a visual clue with a graphical product. Based on the shape, color and texture of the visual clue, a list of similar or exact matches is returned. The product delivers its advanced retrieval capabilities in an open, flexible, scalable and secure architecture and is designed to be easy to implement and ready for extension.
RetrievalWare FileRoom
RetrievalWare FileRoom is built on RetrievalWare technology and is an optional component to allow loading, indexing, viewing and managing scanned documents, images and text. Users access the FileRoom through a hierarchy consisting of FileRoom documents, where each tier in the hierarchy is a container for storing documents. Users can directly view the scanned image of a retrieved document from the FileRoom. Graphs, diagrams, handwritten notations and signatures in the retrieved document are immediately accessible. "Fuzzy" searching capabilities provided by APRP give users a high level of confidence that their queries will return all of the requested information regardless of the quality of Optical Character Recognition ("OCR") data. Document-level security lets organizations control user access at the fileroom (library), cabinet, drawer, folder and document level.
RetrievalWare WebExpress
RetrievalWare WebExpress is a stand-alone search and retrieval tool designed for online service providers and content-rich Web sites. The Company believes that RetrievalWare WebExpress offers superior search accuracy, performance and scalability, supporting high numbers of concurrent users searching large and heterogeneous document collections.
Internet Spider
Internet Spider is a multimedia, high-performance Web spider/crawler for augmenting the retrieval capabilities of Convera RetrievalWare, for stand-alone use, or for integration with other applications. In addition to HTML-based Web pages, Internet Spider also retrieves word processing, PDF and multimedia assets including audio, video and images. It is highly configurable and multi-threaded and can provide deep, broad and repetitive crawling. Users who want immediate notification when items of interest arrive can post Agent Profiles to pull links to related documents to their desktops. Components can be deployed on multiple machines for optimum performance and bandwidth.
RetrievalWare SDK
The RetrievalWare SDK (Software Developer's Kit) is a comprehensive set of tools for building advanced search-based solutions. At its core is a highly scalable, distributed client/server architecture. Independent server processes maximize the efficiency and reliability of document loading, indexing and query handling, and support security and encryption/decryption features. Dedicated server processes enable integration of text search and relational database ("DBMS") storage capabilities through an open DBMS gateway. The client environment is optimized for the development of graphical interfaces using industry standard tools such as Java and Visual Basic. RetrievalWare delivers Visual Basic custom controls, remote procedure calls and open server capabilities as well as engine-level, high-level and client/server application program interfaces ("APIs"). These features speed the development of systems that can support thousands of users and contain custom functionality.
RetrievalWare Synchronizers
RetrievalWare Synchronizers provide document-level security for users to search the contents of multiple native repositories from a single point of access including Lotus Notes, Microsoft Exchange, Documentum EDMS 98, FileNET Panagon, native file systems and relational database management systems.
Screening Room is a comprehensive solution for video asset management providing scalable access, search and retrieval of video assets, both analog and digital, from any desktop. It provides for real-time capturing, encoding, analyzing, cataloging, browsing, searching and retrieving of video, as well as related captured text (closed captions or speech-to-text conversions) and metadata, over corporate intranets/extranets. Designed to manage video content in Internet portal and corporate intranet environments, Screening Room also supports media, broadcast and entertainment video asset management solutions. It enables users to easily capture analog or digital video, automatically create an intelligent video storyboard, and play it back in any of the industry's standard video file formats. Screening Room users then can automatically browse, search and retrieve precisely what video clips they are looking for without having to play or watch the video in its entirety.
Screening Room combines the APRP technology for video analysis with the indexing capabilities of RetrievalWare. Screening Room consists of four components: Screening Room Capture, Screening Room Edit, Screening Room Browse and Screening Room Video Asset Server. Screening Room Capture ingests, analyzes and storyboards analog or digital video assets, including live feeds, and extracts, indexes and searches associated metadata such as captured text (both closed-caption text and spoken audio content converted to text), keyframe images of significant scenes and annotations. Screening Room Edit enables users to browse, search, edit and annotate storyboards. In addition, users can select and compile clips from multiple video assets to create new derivative works, export files and metadata in industry-standard XML format, or output new rough-cut edit segments to Edit Decision Lists ("EDLs") for import into higher-end offline editing systems like Avid and Media 100. Screening Room Browse allows user access to catalogs of video assets through any standard Web browser. The Video Asset Server indexes and stores captured video assets for instantaneous browsing, search and retrieval in a client/server environment.
Version 2.3, the latest version of Screening Room, was released in April of 2002. Among the new features are enriched video ingestion and capture functionality, more flexible video file management capabilities, and the ability to more tightly integrate with 3rd party asset and content management products. In addition, Screening Room 2.3 customers now can extend their deployments to include the search, retrieval and categorization of more than 200 proprietary document formats through interoperability with RetrievalWare 7.0. Under Convera's unified architecture, Screening Room 2.3 now can be joined with RetrievalWare 7.0 to provide users with a single product that simultaneously searches and organizes all data types (such as text, video, image and audio files) in multiple languages from a single user interface.
In addition to the Screening Room application, the Screening Room product family includes the following components:
Screening Room Capture (Standalone Version)
Screening Room Capture (Standalone Version) was released in the fourth quarter of fiscal year 2001. The standalone Capture product is a separate packaging of the Capture component of the full Screening Room system and utilizes the same core technology. It provides the ability to log, analyze and encode video, and save the data and video assets in a non-proprietary (XML) format. Screening Room Capture does not require purchase of the entire Screening Room system, and enables loading of video assets and metadata into a third party database or content management system, or otherwise repurposing the asset. Screening Room Capture is also a suitable component for sale to OEM customers.
Screening Room Capture API
The Screening Room Capture API (Application Programming Interface) enables developers to control the Screening Room Capture component from another program. The Screening Room Capture API can be used to drive Screening Room Capture when that component is delivered as a part of the full Screening Room video asset management system or when the Capture component is delivered in its standalone packaging.
Video Analysis Engine ("VAE")
Video Analysis Engine is a toolkit that enables developers and programmers to construct applications that analyze and re-purpose video content. VAE analyzes any kind of multi-media/video asset whether it is analog or digital, allows programmers to create multi-threaded applications and has enhanced scalability. The toolkit is available as a Microsoft DirectShow filter or C Library Developer's Kit. Based on the APRP technology, VAE plugs into applications, enabling highly accurate event-change detection. VAE uses a caching technique that compares a series of video frames based upon "event detectors" dynamically selected by the calling program. The event detectors look for specific occurrences in the video, triggering "event alarms" appropriate to the developer's application. Events include cuts, fades and dissolves.
TECHNICAL SUPPORT, IMPLEMENTATION SERVICES AND EDUCATION
Convera provides technical support, or maintenance, to customers through its technical support personnel located in the Company's Columbia, Maryland, Carlsbad, California and Bracknell, United Kingdom facilities and through certain product distributors. Technical support consists of bug fixes, telephone support and upgrades or enhancements of particular software products when and if they are released. Technical support typically is provided to customers under a renewable annual contract. All Convera service plan customers have access to the Convera Online Technical Support Web site that provides the latest product information, general service updates and Web forums for technical discussions. The Web site also provides electronic forms for opening technical support cases and suggesting product, service and Company enhancements.
The Company also provides on-site implementation and consulting services to its customers through employees and independent consultants who have been trained and certified by the Company. Implementation and consulting services are offered as a package or on a time-and-materials or fixed price basis. The Company conducts training seminars at its offices in Vienna, Virginia; Carlsbad, California; and Bracknell, UK, as well as on-site training for its customers and distribution channel partners. Training customers typically pay on a per-course basis for regularly scheduled classes and on a per-day basis for on-site or dedicated courses.
OTHER SERVICES
Convera's technologies have also been deployed in the form of an end-to-end content management and publishing service for media rich organizations wishing to manage their media content and monetize it through Internet Distribution.
On September 20, 2001, the Company announced that it had terminated an agreement with the National Basketball Association ("NBA") to provide interactive content services. On October 3, 2001, the Company announced a restructuring plan to consolidate all operations around the development, marketing, sales and support of its software products described above. The Company also announced that it was eliminating the majority of operations supporting the interactive services offerings.
MARKETING AND DISTRIBUTION
The Company's sales and marketing strategy focuses on the licensing of Convera products to customers both through a direct sales force and through strategic partners and OEMs. Members of the North American sales team are located throughout the United States and Canada, and the majority of the international sales team is located in the United Kingdom. The Company typically licenses its RetrievalWare and Screening Room products to end-users as either an enterprise-wide or work-group level solution.
Convera focuses its sales and marketing efforts on enterprises that have large, rapidly changing content collections in diverse formats and have large numbers of knowledge workers. In that regard, the Company concentrates a significant amount of sales and marketing resources on vertical markets such as government, financial services, life sciences, media and entertainment and manufacturing and technology.
Marketing efforts focus on building brand awareness and establishing demand for the Company's products and include advertising, public relations, trade show participation, direct mail and electronic marketing campaigns and telemarketing/lead management activities. The Company's home page on the World Wide Web, www.convera.com, is an integral part of its marketing and sales efforts, but information on the Company's Web site is not a part of this From 10-K. Through the Web site, prospective customers can learn about Convera's suite of products and view online demonstrations of products. Existing customers can enroll in training courses and access password-protected areas for technical and other customer support.
PRODUCT DEVELOPMENT AND ADVANCED RESEARCH
The Company's research and development program focuses on enhancing and expanding the capabilities of its RetrievalWare and Screening Room product lines to address additional markets and market requirements. Convera plans to further integrate our family of multimedia, cross-lingual search, retrieval and categorization software into a single, unified architecture. The release of RetrievalWare 7.0 and Screening Room 2.3 represents the first phase of this development effort. Over time and as the technology evolves, RetrievalWare 7.0 will remain the basic building block of this modular family of products. In addition to providing seamless access to both structured and unstructured data in the enterprise, this modular approach will simplify system administration for the customer and make it easier for Convera to update existing features and add new components such as support for new data types and taxonomies for specific vertical markets.
In March of 2002, Convera announced the acquisition of Semantix Inc., a private Canadian software company specializing in cross-lingual processing and computational linguistics technology. The acquisition of Semantix, including its engineering personnel and intellectual property, 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 RetrievalWare, 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 became a wholly owned subsidiary of Convera under the name Convera Canada Inc. Certain elements of the Company's software products are supplied to the Company by other independent software vendors under license agreements with varying terms. Pursuant to these agreements, the Company makes periodic royalty payments based on either revenues or units. The technologies acquired by the Company in this manner include word processing filters, optical character recognition engines, dictionaries and thesauri in electronic form, image and audio processing, and face and speech recognition technologies.
The Company has conducted research and product development of pattern recognition and natural language systems since 1980. Research and product development expenditures for the development of new products and enhancements to existing products were approximately $23.8, $13.0 million and $9.5, respectively, in the fiscal years ended January 31, 2002, 2001 and 2000.
PROTECTION OF PROPRIETARY TECHNOLOGY
The Company regards its software as proprietary and relies primarily on a combination of patents, copyright, trademark and trade secret laws of general applicability, employee confidentiality and invention assignment agreements, software distribution protection agreements and other intellectual property protection methods to safeguard its technology and software products. The Company also obtains trademark protection for its various product and corporate brand names and design logos. The Company has four patents and seven patent applications currently pending before the Patent and Trademark Office, each intended to protect technology-related assets of the Company. The Company also relies upon its efforts to design and produce new products and upon improvements to existing products to maintain a competitive position in the marketplace.
COMPETITION
Competition in the information technology industry in general, and the software development industry in particular, is intense. Convera competes primarily in the search, retrieval and categorization market. Within this market segment, there are current and potential competitors who are larger and more established than Convera and have significantly greater financial, technical, marketing and other resources. Convera considers its principal competitive advantages to be: (1) more accurate results due to the semantic network and APRP technologies, (2) more comprehensive results due to its ability to manage and retrieve information in multiple languages and in rich media file formats, and (3) an environment that is more scalable due to the distributed-processing architecture.
Convera competes with numerous companies depending on the target market for its products. Most often, Convera competes directly with companies such as Verity, Inc. and Autonomy, Inc. to provide search solutions to the corporate intranet, Internet e-commerce, online publishing and the OEM market. The Company primarily competes with Virage, Inc. to provide video content management solutions to Internet portals and corporate intranets. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competition will not materially adversely affect the Company's operating results and financial condition.
The Company's activities currently are subject to no particular regulation by governmental agencies other than those routinely imposed on corporate businesses and no such regulation is now anticipated.
SEGMENT INFORMATION
The Company has one reportable segment. All of the Company's revenues are from third party customers.
Revenues derived from contracts and orders issued by agencies of the U.S. Government were approximately $4.9 million, $5.0 million and $4.4 million, respectively, in the fiscal years ended January 31, 2002, 2001, and 2000. These revenues, expressed as a percentage of total revenues for the fiscal year, were approximately 14%, 10%, and 12%, respectively. For the fiscal year ended January 31, 2002, no individual customer accounted for more than 10% of the Company's total revenues.
Financial information is located in the consolidated financial statements beginning on page. Additional information related to segment reporting can be found in Note 15 to the consolidated financial statements contained herein.
EMPLOYEES
The Company had 350 employees at January 31, 2002, of whom 115 were in research and development, 133 in sales and marketing, 64 in technical support, professional services and training and 38 in finance and administration. The employees are not covered by collective bargaining agreements, and the management of the Company considers relations with employees to be good. Competition for qualified personnel within the Company's industry is intense. There can be no assurance that the Company will be able to continue to attract, hire or retain qualified personnel and the inability to do so could have a material adverse effect upon the Company's operating results and financial condition.
Item 2.
Item 2. Properties
The Company's corporate headquarters facilities are occupied under a lease agreement that expires in calendar year 2004 for a total of approximately 20,500 square feet of space in an office building located at 1921 Gallows Road, Vienna, Virginia 22182.
The Company's principal development and customer support centers are located in Carlsbad, California; and Columbia, Maryland. The company leases additional space in San Jose, California and following the acquisition of Semantix, Montreal, Canada.
The Company leases space in Bracknell, England and commercial office suites in Paris, France, and in Munich and Frankfurt, Germany in support of its international sales operation.
The Company believes that its facilities are maintained in good operating condition and are adequate for its operations.
Item 3.
Item 3. 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 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market and is listed on the National Market System of the NASDAQ Stock Market under the symbol "CNVR." As a result of the Combination, the Excalibur common stock, traded under the symbol "EXCA," ceased to be listed on the Nasdaq National Market. In the Combination, the Excalibur common stock was converted on a one-for-one basis into Convera Class A common stock.
The following table sets forth the high and low sale prices for Convera common stock for the period from December 22, 2000 through January 31, 2002 and for Excalibur common stock for the period February 1, 2000 through December 21, 2000, as reported by the National Market System of NASDAQ. The number of shareholders of record as of January 31, 2002 was 985. The Company has never declared or paid dividends on its common stock and anticipates that, for the foreseeable future, it will not pay dividends on its common stock.
Item 6.
Item 6. Selected Financial Data
The selected financial data presented below have been derived from the Company's consolidated financial statements. The balance sheet data as of January 31, 2002 and 2001, and the statement of operations data for the fiscal years ended January 31, 2002, 2001 and 2000 should be read in conjunction with such consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
All references in this Form 10-K to financial results of the Company for the period prior to December 21, 2000 reflect the historical financial results of Excalibur and its subsidiaries.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The statements contained in this report that are not purely historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements about the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The forward-looking statements contained herein involve risks and uncertainties 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. 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.
Convera was established through the combination of the former Excalibur Technologies Corporation and Intel Corporation's Interactive Media Services division. On December 21, 2000, Excalibur and Intel consummated a business combination transaction 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. The purchase price for the IMS division was determined to be approximately $925.1 million, which included approximately $2 million in transaction costs, less approximately $600,000 in costs to register and issue the shares. The shares issued to Intel as consideration for the contributed assets were valued based on the existing market price when the Combination was announced. The purchase price was allocated to the assets acquired based on their estimated fair values on the acquisition date. In connection with the Combination, the Company recorded approximately $769.8 million in goodwill and recorded a charge for acquired in-process research and development ("IPRD") of approximately $800,000 in the fiscal year ended January 31, 2001. The purchased IPRD represented the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at December 21, 2000, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimates of market size and growth factors, expected industry trends, the anticipated nature and timing of product introduction and the estimated life of the underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after tax cash flows. Projected operating expenses include cost of sales, sales and marketing and general and administrative expenses. The other intangible assets acquired from Intel included certain developed technology and an existing workforce as well as certain existing and in-process customer contracts.
The IMS division had contracts in process at the time of the Combination, which were being accounted for using the completed contract method, and accordingly, revenue was deferred until all remaining costs, obligations and potential risks were insignificant and the contract deliverables were agreed to and accepted by the customer. Convera continued to account for the existing contributed contracts using the completed contract method of accounting. For purposes of determining the value of these contributed contracts at the date of acquisition, management considered the total amounts to be received under each contract. As these contracts were completed by Convera, revenue and the related costs, including profit on work performed by Convera subsequent to the acquisition, were recognized. During fiscal year 2002, the Company completed all obligations under the in-process contract assigned by the IMS division, and accordingly recognized revenue during the year of about $1.7 million related to these contracts. The associated costs recorded during fiscal year 2002 related to these contracts was approximately $0.9 million. Existing contracts that were completed prior to January 31, 2001 resulted in aggregate revenue recognition of approximately $7.6 million recorded as services revenues and approximately $0.7 million recorded as software revenues. The associated costs recognized related to these contracts were approximately $7.5 million included in cost of services revenues and approximately $0.4 million included in cost of software revenues.
In September 2000, Intel and the NBA entered into a master services agreement, which Intel contributed to Convera on December 21, 2000, for the distribution of personalized highlights, archival material, television broadcast enhancements and real time distribution of NBA games over broadband networks. In addition to the services agreement, Convera entered into a contribution agreement with the NBA, under which the NBA contributed certain intangible assets such as all of the NBA know-how related to the creation, development, distribution, marketing and deployment, over the Internet and broadband networks, of products using sports and entertainment content; a database of customer profiles of NBA fans; the right to use certain NBA personnel and a non-exclusive license to the NBA trademark. In exchange for the contribution of these assets, Convera issued 4,746,221 shares of Class A common stock, representing 10% of the total outstanding stock of the Company on that date.
On September 20, 2001, the Company announced that it had terminated its agreement with the NBA to provide interactive content services. On October 3, 2001, the Company announced a restructuring plan to consolidate all operations around the development, marketing, sales and support of its enterprise class information infrastructure software products, RetrievalWare and Screening Room. The Company also announced that it was eliminating operations supporting the development of the Company's digital content security technology and interactive services offerings and closing offices in Hillsboro, Oregon and Lafayette, Colorado.
Following the termination of the NBA contract and the Company's change in focus, the Company evaluated the recoverability of the intangible and other long-lived assets including goodwill associated with the Combination and associated with the NBA agreement. The intangible assets acquired in the Combination, including developed technology, customer contracts and assembled workforce, were primarily related to the interactive media services offerings. As a result of the evaluation, the Company recorded a charge of $754.4 million in the third quarter of fiscal year 2002 for reduction of goodwill and other long-lived assets.
On December 5, 2001, the Company reported that it purchased the 4,746,221 shares of Convera common stock owned by the NBA for $11 million in a privately negotiated transaction. On January 7, 2002, the Company reported that it purchased 2,792,962 shares of Convera's voting Class A common stock and 12,207,038 shares of Convera's non-voting Class B common stock from Intel for a total of $43 million in a privately negotiated transaction. The Company also reported a simultaneous transaction between Allen Holding Inc. and Intel Corporation, whereby Allen Holding Inc. purchased the remaining 12,156,422 shares of Convera Class A common stock owned by Intel, resulting in Allen Holding Inc. beneficially owning 55.2% of the outstanding shares of Convera Class A common stock. As a result of these transactions, Intel and the NBA hold no ownership interest in Convera as of January 31, 2002.
All references in this Form 10-K to financial results for the Company for the period prior to December 21, 2000 reflect the historical financial results of Excalibur and its subsidiaries.
Critical Accounting Policies
Convera's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. For a comprehensive discussion of the Company's accounting policies, see Note 2 in the accompanying consolidated financial statements included in this Form 10-K. Convera does not have any material ownership interest in any entities that are not wholly-owned and consolidated subsidiaries of the Company. The preparation of these financial statements 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. Management bases those estimates, including those related to bad debts, goodwill and other intangible assets, restructuring costs, income taxes and litigation, on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Convera believes the following accounting policies are critical to the understanding of the Company's financial condition and results of operations.
Revenue Recognition
Convera's recognition of revenues requires judgment, particularly in the areas of collectibility and whether the fee is fixed and determinable at the time the sales are made. The Company bases its judgment on a variety of factors including the payment and other terms of the individual customer contracts, credit history of the customer, prior dealings with specific customers, and certain other factors. If the Company determines that the price under the contract is fixed and determinable, and that collectibility is assured, then the Company recognized revenue related to the software license at the time of sale. To the extent the Company determines that the price of a sales agreement is not fixed, the Company delays revenue recognition until payments under the contract become due. Alternatively, to the extent the Company determines that the collection of payments under the contracts is not assured, the Company delays revenue recognition until the payments under the contract are received. The revenue associated with other elements of the contract are deferred and recognized as those elements are delivered. Thus the assessment as to whether the fee is fixed and determinable at the time of sale and that the fees are collectible is critical in determining the extent the revenue recognized in a given period.
Customization work is sometimes required to ensure that the Company's software functionality meets the requirements of its customers. In those instances where the Company's revenues are generated from fixed price contracts related to this customization work, then revenue is generally 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. These estimates regarding costs underlie the Company's determinations as to overall contract profitability and the timing of revenue recognition. If the Company does not accurately estimate the resources required or the scope of the work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then actual results may differ from projected results and losses on contracts may need to be recognized.
Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause the Company's operating results to vary significantly from quarter to quarter.
Provision for Doubtful Accounts
Convera maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A considerable amount of judgment is required in assessing the ultimate realization of individual accounts receivable balances, including the credit worthiness of each customer and the period in which customers' financial condition deteriorate and they are no longer able to pay the balances owed to Convera.
To the extent Convera does not recognize deterioration in its customers' financial condition in the period it occurs, or to the extent Convera underestimates its customers' ability to pay, the amount of bad debt expense recognized in a given reporting resulting will be impacted.
Goodwill and Other Intangible Assets
Convera's acquisitions of other companies typically result in the acquisition of certain intangible assets and goodwill. These assets are subject to impairment to the extent the Company's operations experience significant negative results. These negative results can be the result of Convera's individual operations or negative trends in the Convera customer's industry or in the general economy, which impact Convera. To the extent Convera's intangible assets or goodwill are determined to be impaired, then these balances are written down to their estimated fair value on the date of the impairment. Determining when an impairment has occurred involves a significant amount of judgment. Management bases its judgment on a number of factors including viability of the businesses acquired, their integration into Convera's operations, the market in which those businesses operate and their projected future results, cash flows projections, and numerous other factors. The results reported in any given period are impacted by management's determination as to when an impairment has occurred. During the year ended January 31, 2002 Convera determined that the goodwill and certain intangible assets recorded by the Company in the prior year were impaired and Convera recorded a charge of $754 million related to that impairment.
Deferred Taxes
Convera records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Realization of the deferred tax assets is principally dependent upon the achievement of projected future taxable income. If the estimates and related assumptions change in the future, the Company may be required to adjust its valuation against its deferred tax assets, resulting in a benefit or a charge to income in the period such determination is made. As of January 31, 2002, the Company has recorded a full valuation allowance against the net deferred tax asset.
Results of Operations
For the fiscal year ended January 31, 2002, total revenues were $34.2 million, a decline of 34% over total revenues of $51.5 million in fiscal year 2001. The net loss for fiscal year 2002 was $910.5 million, or $20.08 per common share, compared to a net loss of $22.8 million, or $1.22 per common share in the prior year. For the fiscal year ended January 31, 2001, total revenues increased 36% over total revenues of $37.9 million in fiscal year 2000. The net loss for fiscal year 2000 was $0.3 million, or $.02 per common share.
The Company uses EBITDA (earnings before interest, taxes, depreciation, amortization and certain other charges) as an additional measure of performance. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States and should not be considered as an alternative to net loss or as an indicator of Convera's operating performance. The Company believes that EBITDA is widely used by analysts, investors and other interested parties as a financial measure. EBITDA is not necessarily comparable with similarly titled measures for other companies.
For the fiscal year ended January 31, 2002, on an EBITDA basis and excluding other charges of approximately $762.5 million (see below), the loss was $45.3 million, or $1.00 per common share, compared to an EBITDA loss of $4.0 million, or $0.21 per common share in fiscal year 2001. For fiscal year 2000, EBITDA was a positive $3.4 million, or $0.24 per common share.
The following charts summarize the components of revenues and the categories of expenses, including the amounts expressed as a percentage of total revenues, and EBITDA for each of the three fiscal years in the period ended January 31, 2002 (dollars in thousands).
Revenues
Software revenues, which include amounts generated through software licensing and implementation services, decreased 28% to $26.7 million in fiscal year 2002 from $37.3 million in fiscal year 2001 and increased 14% in fiscal year 2001 from $32.6 million in fiscal year 2000. The decrease in software revenues for fiscal year 2002 was due to the general downturn in the economy, which caused certain of the Company's prospects to reevaluate and cancel or defer their spending on information management infrastructure initiatives. The increase in software revenues in fiscal year 2001 was primarily attributable to increased sales of the Company's software products to larger corporations and government organizations building intranets, sales to online service providers and e-commerce businesses and sales to the original equipment manufacturer ("OEM") market.
During the year ended January 31, 2000, the Company recognized approximately $4.3 million from an OEM agreement with NCR, which provided NCR with the rights to integrate the Company's products in the NCR TOR solution. Under this arrangement, NCR also had the right to resell the Company's full product line. NCR will pay the Company royalties when they resell the Company's products to end-users. No value was assigned to the reseller arrangement since NCR was not obligated to resell the Company's products. Thus, all of the consideration received in connection with this contract was assigned to the integration services. Revenues derived from the NCR agreement were approximately $1.2 million for the year ended January 31, 2001 and $0.4 million for the year ended January 31, 2002. The Company also generated approximately $2.8 million in fiscal year 2000 from an OEM arrangement with StorageTek.
Maintenance revenues were $6.5 million in fiscal year 2002, compared to $6.6 million in fiscal year 2001 and $5.3 million in fiscal year 2000. The slight decrease in maintenance revenues in fiscal year 2002 is attributable to the decline in license revenues this fiscal year as well as the conclusion, at the end of the second quarter this year, of a specific long term maintenance agreement that had yielded approximately $0.1 million in quarterly maintenance revenues. The fiscal year 2002 increase in maintenance revenues as a percentage of license related revenues is attributable to an increase in maintenance pricing implemented at the end of fiscal year 2001 and an overall improvement in the pursuit of maintenance renewals for existing customers. The increase in maintenance revenue in fiscal year 2001 was primarily attributable to an increase in the number of RetrievalWare customers generated during fiscal year 2001 and in the fourth quarter of fiscal year 2000.
Revenues from interactive services in fiscal year 2002 were approximately $1.0 million compared to $7.6 million in fiscal year 2001. In the third quarter of fiscal year 2002, the Company announced that it was eliminating operations supporting its interactive services offerings. The services revenue recorded in fiscal year 2001 represented the completion of one of the contracts assigned in the Combination accounted for under the completed contract method of accounting.
Revenues from international operations are provided primarily by software licenses with various European commercial and government customers and a well-established European reseller network. The Company's international sales operation, Convera Technologies International, Ltd. ("CTIL"), is headquartered in the United Kingdom, with offices in Germany and France. International revenues from CTIL declined 29% to $9.1 million in fiscal year 2002 from $12.9 million in fiscal year 2001. In fiscal year 2001, revenues grew 40% from $9.2 million in fiscal year 2000.
Revenues derived from contracts and orders issued by agencies of the U.S. Government were approximately 14%, 10% and 12% of total revenues for fiscal years 2002, 2001 and 2000, respectively. No customer accounted for more than 10% of revenues in fiscal year 2002, while one customer accounted for 15% of revenues during fiscal year 2001 and one customer accounted for 12% of revenues in fiscal year 2000.
Cost of Revenues
Cost of license related revenues, which includes cost of software revenues and cost of maintenance revenues, increased 58% to $15.4 million in fiscal year 2002 from $9.8 million in fiscal year 2001. In fiscal year 2001, cost of license related revenues increased 42% from $6.9 million in fiscal year 2000. As a percentage of total revenues, cost of license-related revenues was 45%, 19% and 18% in fiscal years 2002, 2001 and 2000, respectively. Cost of software revenues increased 62% to $13.4 million in fiscal year 2002 from $8.3 million in fiscal year 2001. Fiscal year 2001 cost of software revenues increased 75% from $4.7 million in fiscal year 2000. The increase in cost of software revenues in fiscal year 2002 is primarily attributable to an increase in the amortization of prepaid third-party royalty 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 from the increase in the number of employees in the Company's professional services group. The increase in fiscal year 2001 was related primarily to the sales volume increase and greater royalty expense associated with new features included in the Company's products that were derived from other third party software products. Cost of maintenance increased 34% to $2.0 million in fiscal year 2002 from $1.5 million in fiscal year 2001. In fiscal year 2001, cost of maintenance decreased 31% from $2.1 million in fiscal year 2000. As a percentage of maintenance revenues, cost of maintenance was 31%, 22% and 41% in fiscal years 2002, 2001 and 2000, respectively. The increase in cost of maintenance in fiscal year 2002 is attributable to an increase in personnel and related expenses in the customer support organization, while the decrease in cost of maintenance in fiscal year 2001 was due to changes implemented in the fourth quarter of fiscal year 2000 that streamlined the customer support organization, thus reducing overall costs of maintenance.
Cost of services represents the personnel and other direct costs incurred in connection with performing on the Company's interactive service related contracts. For the year ended January 31, 2002, the cost of services was approximately $4.0 compared to $7.8 million in fiscal year 2001.
Operating Expenses
Sales and marketing expenses increased 45% to $32.5 million in fiscal year 2002 compared to $22.3 million in fiscal year 2001, representing 95% and 43% of total revenues, respectively. In fiscal year 2001, sales and marketing expenses increased 38% from $16.2 million in fiscal year 2000. Sales and marketing expenses were 43% of total revenues in fiscal year 2000. The increase in sales and marketing expenses in fiscal year 2002 was due to growth in sales and marketing personnel and increased spending on marketing programs, as well as an increase in the provision for doubtful accounts. Growth in expenditures for marketing programs and in the number of sales and marketing personnel was responsible for the expense increase in 2001. The number of sales and marketing personnel increased to 133 employees at January 31, 2002 from 107 and 72 employees at January 31, 2001 and January 31, 2000, respectively.
Research and product development costs increased 83% to $23.8 million in fiscal year 2002 from $13.0 million in fiscal year 2001, representing 69% and 25% of revenues, respectively. In fiscal year 2001, research and product development costs increased 37% from $9.5 million in fiscal year 2000. Research and product development costs were 25% of revenues in fiscal year 2000. The increase in fiscal year 2002 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. The number of engineering personnel was reduced in the restructuring actions taken in the second and third quarters of fiscal year 2002, resulting in a total of 115 people employed in research and product development activities at January 31, 2002. The fiscal year 2001 expense increase was due to growth in the text and video product engineering staffs and the addition of engineering personnel in connection with the merger with Intel's IMS division. During fiscal year 2002, the Company released RetrievalWare 6.8, RetrievalWare 6.9 and RetrievalWare WebExpress 2.1. RetrievalWare 6.8 and RetrievalWare WebExpress 2.1 provided 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 enhanced search results by accommodating language changes such as new words and idioms and updated spellings. RetrievalWare 6.8 also offered a new user interface for intranet search users called SmartSearch, a new HTML-based search client that was designed to increase user productivity and reduce the time that knowledge workers spend looking for information. RetrievalWare 6.9 provided user-level and document-level security simultaneously across enterprise groupware and document management systems. Other significant enhancements to RetrievalWare 6.9 included enhanced Microsoft Exchange security, general availability of specialized medical and pharmaceutical search aids and updated platform and third party support. The Company released RetrievalWare 7.0 in March of 2002. This latest version is the first enterprise search product to offer multimedia and cross-lingual search as off-the-shelf product features. Screening Room Version 2.3 was released in April of 2002. Among the new Screening Room features are enriched video ingestion and capture functionality, more flexible video file management capabilities, the ability to more tightly integrate with 3rd party asset and content management products, and enhanced interoperability with RetrievalWare 7.0.
General and administrative expenses increased 63% to $10.2 million in fiscal year 2002 from $6.3 million in fiscal year 2001, representing 30% and 12% of revenues, respectively. In fiscal year 2001, general and administrative expenses increased 16% from $5.4 million in fiscal year 2000, which was 14% of total revenues. The increase in general and administrative expenses in fiscal year 2002 is partially attributable to increased corporate expenses such as legal, insurance and accounting fees. There were also additional general and administrative personnel required to support the Company's operations during fiscal year 2002. The restructuring action taken in the third quarter of fiscal year 2002 reduced the number of general and administrative employees by seven. At January 31, 2002, the number of general and administrative personnel was 38, compared to 39 at January 31, 2001. The increase in general and administrative expense in fiscal year 2001 was due to growth in personnel required to support the Company's expanding operations.
Amortization of goodwill and other intangible assets was approximately $98.3 million for the year ended January 31, 2002 and $15.7 million for the year ended January 31, 2001. 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. The amounts also include amortization of the intangible assets acquired from the NBA pursuant to the contribution agreement. Amortization of goodwill and other intangible assets related to the Combination was stopped effective October 3, 2001, when the Company determined that such assets were impaired and wrote down the remaining unamortized balance to zero (see further explanation below). The amount of amortization recorded for the year ended January 31, 2001 primarily represented amortization associated with the Combination from the December 21, 2000 closing date to the end of the fiscal year. Amortization expense of $118,000 for the year ended January 31, 2000 related to goodwill from an acquisition made in the second quarter of fiscal year 1998.
Incentive bonus payments due to employees were approximately $6.7 million for the year ended January 31, 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 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 $1.3 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 $1.3 million as of January 31, 2002. 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.
During the second quarter of fiscal year 2002, the Company implemented a restructuring plan in response to the downturn in the economy and in conjunction with the integration of the IMS division's operations following the Combination with Intel. This restructuring resulted in a reduction of Convera's total workforce by 22 employees, including 17 individuals from the Company's engineering group and five 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.
On October 3, 2001, the Company announced an additional restructuring plan to consolidate all operations around the development, marketing, sales and support of its enterprise class information infrastructure software products, RetrievalWare and Screening Room. The Company also announced that it was eliminating operations supporting the development of the Company's digital content security technology and interactive services offerings and closing offices in Hillsboro, Oregon and Lafayette, Colorado. As a result of this restructuring, Convera's total workforce was reduced by an additional 66 employees, including 44 employees of the engineering group, 13 from the professional services and training groups, seven from the G&A group and two from the marketing group.
As a result of the restructuring plans, the Company recorded restructuring charges in the second and third fiscal quarters of fiscal year 2002 of $2.9 million and $5.2 million, respectively, for a total of $8.1 million in restructuring charges. The restructuring charges include approximately $1.3 million in costs incurred under contractual obligations with no future economic benefit to the Company, accruals of approximately $1.6 million for employee termination costs and approximately $5.2 million related to future facility losses for the offices closed in Hillsboro, Oregon and Lafayette, Colorado.
The Company paid a total of $2.6 million through January 31, 2002 against the restructuring accruals recorded in the current fiscal year. Included in the restructuring charges were approximately $1.8 million in non-cash charges representing the write-down of facility improvements. As of January 31, 2002, unpaid amounts of $1.6 million and $2.1 million have been classified as current and long-term accrued restructuring costs, respectively, in the accompanying consolidated balance sheet. Remaining expenditures relating to employee severance costs will be substantially paid during the first quarter of fiscal year 2003. Amounts related to contractual obligations will be paid within one year. The Company expects to settle charges associated with facility closings over the remaining term of the related facility leases, which is through February 2006.
The Company recorded a charge of $754.4 million in the third quarter of fiscal year 2002 for reduction of goodwill and other long-lived assets. On September 20, 2001, the Company announced that it had terminated its agreement with the NBA to provide interactive content services. The termination of this agreement led to the Company's decision to exit the interactive media services market and focus on its enterprise information infrastructure software products. Following the termination of the NBA contract and the Company's change in focus, the Company evaluated the recoverability of the intangible and other long-lived assets including goodwill associated with the Combination and associated with the NBA agreement. The intangible assets acquired in the Combination, including developed technology, customer contracts and assembled workforce, were primarily related to the interactive media services offerings. The assessment of recoverability was performed pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). Additional guidance related to goodwill impairment was provided by APB 17, "Intangible Assets."
The unamortized balance of intangible assets associated with the NBA agreement was approximately $67.3 million. Having no future economic benefit to the Company, this unamortized balance was written down to zero. As a result of the Company's shift in focus, there were no future cash flows expected to be generated from the intangible assets acquired in the Combination; thus, the unamortized balance of approximately $9.8 million related to these intangible assets was also written down to zero. Since the assets acquired from Intel were never integrated into the Company's overall operations, the goodwill associated with the Combination was evaluated for impairment along with the other intangible assets acquired from Intel. As a result, the unamortized goodwill balance of $675.9 million was written down to zero. In addition, there was an impairment charge of approximately $1.4 million to reflect the fair value of certain computer equipment and furniture to be disposed of in connection with the closing of the facilities described above.
Total expenses for fiscal year 2002 were $953.4 million compared to $75.7 million in fiscal year 2001 and $38.1 million in fiscal year 2000. The change in the net loss per share, from $1.22 in fiscal year 2001 to $20.08 in fiscal year 2002, was largely due to the reduction in goodwill and other long-lived assets charge of $754.4 million and the increase in amortization expense between the two fiscal years. The change in the net loss per share, from $0.02 per common share in fiscal year 2000 to $1.22 per common share in fiscal year 2001, was primarily due to the significant increase in amortization expense in fiscal year 2001.
The total number of employees decreased to 350 at January 31, 2002 from 359 at January 31, 2001. The Company had 208 employees at January 31, 2000.
Other Income, net
Other income increased to $4.2 million for fiscal year 2002, compared to $1.4 million in fiscal year 2001. Other income was $0.2 million in fiscal year 2000. The increase in fiscal years 2002 and 2001 was due to a higher level of invested funds resulting from the Combination.
Income Tax Benefit
The income tax benefit of $4.5 million for the year ended January 31, 2002 represents the reversal of the net deferred tax liability established as of January 31, 2001, primarily as a result of the Combination with Intel and the NBA contract. The Company has net deferred tax assets of $53,407 as of January 31, 2002. Given the Company's inability to predict sufficient taxable income to realize the benefits of its net deferred tax asset as of January 31, 2002, the Company provided a full valuation allowance against such deferred tax asset.
Liquidity and Capital Resources
The Company's combined balance of cash, cash equivalents and short-term investments at January 31, 2002 as compared to January 31, 2001 is summarized below (in thousands).
As of January 31, 2002, the Company's balances of cash, cash equivalents and short-term investments were $57.7 million. The Company believes that its current balance of cash, cash equivalents and its funds generated from operations, if any, will be sufficient to fund the Company's current projected cash needs for the foreseeable future. Prior to fiscal year 2001, the Company had primarily used cash provided by sales of its common stock to finance its operations. If the actions taken by management are not effective in achieving profitable operating results, the Company may be required to pursue additional external sources of financing in the future to support its operations and capital requirements. There can be no assurances that external sources of financing will be available if required, or that such financing will be available on terms acceptable to the Company.
The Company has the following contractual obligations associated with its lease commitments and other contractual obligations:
The number of days sales outstanding ("DSO") increased to 97 days at January 31, 2002 from 85 days at January 31, 2001. Management believes that the allowance for doubtful accounts of $2.1 million at January 31, 2002 is adequate.
Operating Activities
In fiscal year 2002, the Company's operating activities used $44.6 million compared to $7.8 million in fiscal year 2001. The fiscal year 2002 net loss of $910.5 million was offset by non-cash charges totaling $861.2 million, consisting primarily of $754.4 million from the reduction of goodwill and other long-lived assets. Non-cash charges also included amortization of $98.3 million; restructuring charges, net of cash paid, of $5.5 million; bad debt expense of $3.4 million and depreciation of $2.3 million. Cash was also provided by a reduction in accounts receivable of $4.3 million and an increase in accounts payable and accrued expenses of $1.9 million. A decrease in deferred revenues together with an increase in prepaid expenses and other used cash of $1.6 million. In fiscal year 2001, the net loss of $22.8 million was offset by non-cash charges of $18.6 million, including $15.7 million of amortization of goodwill and other intangibles, $0.8 million of acquired in-process research and development, $1.3 million of depreciation, and $0.8 million in bad debt expense. Increases in accounts receivable and prepaid expenses used $5.1 million and $1.8 million, respectively, while increases in accounts payable, accrued expenses and deferred revenues together contributed $3.3 million. The Company's operating activities used cash of $3.3 million in fiscal year 2000. The net loss of $0.3 million was offset by non-cash charges of $2.7 million, including $1.4 million in depreciation and amortization, $0.8 million in bad debt expense and $0.5 million for the write-off of the Company's investment in Excalibur Technologies N.V. ("ETNV"), a Belgian company incorporated in June 1996 for the purpose of selling and marketing the Company's products and services within a large territory including most of Northern Europe and Italy. Increases in accounts receivable used $8.7 million while increases in accounts payable and accrued expenses provided $0.6 million. Reductions in prepaid expenses and an increase in deferred revenues together provided $2.5 million.
Investing Activities
Cash flows from investing activities provided the Company $71.7 million in fiscal year 2002. Net cash provided from the maturity of U.S. Treasury bills provided cash of $78.7 million, while purchases of equipment and leasehold improvements used cash of $5.6 million. The Company also used cash of $1.4 million for direct acquisition costs in connection with the Combination with Intel. Investing activities contributed $27.5 million in fiscal year 2001. The Company received cash of $150.0 million in connection with the Combination. Shortly after consummation of the Combination, the Company purchased short-term investments, in the form of United States Treasury Bills, totaling approximately $119.0 million. Additionally, costs incurred in relation to the Combination used $2.0 million. Equipment and leasehold improvement purchases used $1.8 million. During fiscal year 2000, investing activities used $1.2 million principally due to the purchase of equipment and leasehold improvements.
Financing Activities
Financing activities used $46.6 million in fiscal year 2002. The repurchase of the Company's common stock from Intel and the NBA used $53.0 million. A capital contribution by Intel in the amount of approximately $5.4 million was used to fund bonus payments to specified former Intel employees that remained employed by Convera as of April 30, 2001. Proceeds from the issuance of stock under the employee stock purchase plan provided cash of $0.9 million during fiscal year 2002. In fiscal year 2001, financing activities provided $6.1 million. Approximately $5.7 million represented proceeds from the issuance of common stock upon the exercise of outstanding stock options, while approximately $0.4 million represented purchases of shares of the Company through its employee stock purchase plan. Financing activities provided approximately $9.4 million in fiscal year 2000. Net proceeds of $4.9 million were provided by a private placement of 500,000 shares of common stock sold at $10.00 per share to unaffiliated accredited investors. Cash of $4.5 million was provided from the exercise of employee stock options and issuances of stock under the employee stock purchase plan.
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.
In January 2002, Allen Holding, Inc. purchased the remaining 12,156,422 shares of Convera Class A common stock held by Intel, resulting in Allen Holding, Inc. beneficially owning 55.2% of the outstanding shares of Convera Class A common stock as of January 31, 2002. As a result, Allen Holding Inc. 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 Holding, Inc. 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 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's market risk is principally confined to changes in foreign currency exchange rates and potentially adverse effects of differing tax structures. International revenues from CTIL, the Company's foreign sales subsidiary located in the United Kingdom, along with entities established in Paris, France and Munich, Germany, were approximately 27% of total revenues in fiscal year 2002. International sales are made mostly from the Company's foreign subsidiary and are typically denominated in British pounds, French Francs or German Deutsche Marks. As of January 31, 2002, approximately 30%, 3% and 3% of total consolidated accounts receivable were denominated in British pounds, French Francs and German Deutsche Marks, respectively. Additionally, the Company's exposure to foreign exchange rate fluctuations arises in part from intercompany accounts in which royalties on CTIL sales are charged to CTIL and recorded as intercompany receivables on the books of the U.S. parent company. The Company is also exposed to foreign exchange rate fluctuations as the financial results of CTIL are translated into U.S. dollars in consolidation. As exchange rates vary, those results when translated may vary from expectations and adversely impact overall expected profitability.
As of January 31, 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 of U.S. Government treasury bills, with original maturity dates ranging from 3 months to 6 months. Given the relatively short maturity periods of cash equivalents and short-term investments, the Company's exposure to fluctuations in interest rates is limited.
Item 8.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data of the Company are submitted as a separate section of this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the Company will be included in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 25, 2002 and is incorporated in this report by reference.
Item 11.
Item 11. Executive Compensation
Information regarding executive compensation will be included in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 25, 2002 and is incorporated in this report by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and management will be included in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 25, 2002 and is incorporated in this report by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions will be included in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 25, 2002 and is incorporated in this report by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of Form 10-K
1. Financial Statements:
The following financial statements of the Company are submitted in a separate section pursuant to the requirements of Form 10-K, Part I, Item 8 and Part IV, Items 14(a) and 14(d):
Index to Consolidated Financial Statements Reports of Independent Auditors and Independent Accountants Consolidated Balance Sheets Consolidated Statements of Operations and Other Comprehensive Loss Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
2. Schedules Supporting Financial Statements:
All schedules are omitted because they are not required, are inapplicable, or the information is otherwise shown in the consolidated financial statements or notes to the consolidated financial statements.
3. Exhibits:
Exhibit Number and Description
(b) Reports on Form 8-K.
The Company filed a Form 8-K for Item 1, Change in Control of the Registrant, on January 7, 2002. The Form 1 reported the purchase by Convera in a privately negotiated transaction of 2,792,962 shares of Convera's voting Class A common stock and 12,207,038 shares of Convera's non-voting Class B common stock from Intel Corporation. The Form 8-K also reported the transaction between Allen Holding Inc. and Intel Corporation, whereby Allen Holding Inc. purchased the remaining 12,156,422 shares of Convera Class A common stock owned by Intel, resulting in Allen Holding Inc. beneficially owning 55.2% of the outstanding shares of Convera Class A common stock.
The Company filed a Form 8-K for Item 5 on December 5, 2001, reporting that Convera purchased 4,746,221 shares of Convera common stock from the National Basketball Association in a privately negotiated transaction.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders Convera Corporation
We have audited the accompanying consolidated balance sheets of Convera Corporation as of January 31, 2002 and January 31, 2001, and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the two years in the period ended January 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Convera Corporation as of January 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the two years in the period ended January 31, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia March 15, 2002
Report of Independent Accountants
To the Board of Directors and Shareholders of Excalibur Technologies Corporation:
In our opinion, the accompanying consolidated statements of operations and other comprehensive loss, shareholders' equity and cash flows present fairly, in all material respects, the results of operations and cash flows of Excalibur Technologies Corporation and its subsidiaries for the year ended January 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
McLean, Virginia March 8, 2000
CONVERA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except share and per share data)
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data)
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes.
CONVERA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share and per share data)
(1) THE COMPANY
Operations and Organization
Convera was established through the combination of the former Excalibur Technologies Corporation ("Excalibur") and Intel Corporation's Interactive Media Services division (the "Combination"). The Combination was accounted for using the purchase method of accounting. All references herein to financial results for the Company for the period prior to December 21, 2000 reflect the historical financial results of Excalibur and its subsidiaries.
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
Principles of Consolidation
The consolidated financial statements include the accounts of Convera Corporation and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with American Institute of Certified Public Accountants' Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), as amended by Statement of Position 98-9, Software Revenue Recognition, with respect to certain transactions.
Revenue from the sale of software licenses is recognized upon shipment of product, provided that the fee is fixed and determinable, persuasive evidence of an arrangement exists and collection of the resulting receivable is considered probable. Software revenues include revenues from licenses, training and system implementation services. Training and systems implementation services are sold as part of a bundled software license agreement as well as separately to customers who have previously purchased software licenses. When training or systems implementation services that are not essential to the functionality of the software are sold as part of a bundled license agreement, the fair value of these services, based on the price charged for the services when sold separately, is deferred and recognized when the services are performed.
Historically, the Company has not experienced significant returns or exchanges of its products from direct sales to customers. Revenue related to customer support agreements is deferred and recognized ratably over the term of respective agreements. Customer support agreements generally include bug fixes, telephone support and product upgrades on a when and if available basis. When the Company provides a software license and the related customer support arrangement for one bundled price, the fair value of the customer support, based on the price charged for that element 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 pursuant to the Combination in December 2000 were accounted for using the completed contract method, and accordingly, revenue was deferred until all remaining costs, obligations and potential risks were insignificant and the contract deliverables were agreed to and accepted by the customer. As Convera completed these contracts, revenue and the related costs, including profit on work performed by Convera subsequent to the acquisition, was recognized. All obligations under the contracts assigned by the IMS division have been completed.
The Company incurs shipping and handling costs, which are recorded in cost of revenues.
Research and Development Costs
Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed" requires the capitalization of certain software development costs once technological feasibility is established, which for the Company generally occurs upon completion of a working model. Capitalization ceases when the products are available for general release to customers, at which time amortization of the capitalized costs begins on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.
Advertising
Advertising costs are expensed as incurred. The Company incurred approximately $195, $347 and $3 in advertising costs for the years ended January 31, 2002, 2001 and 2000, respectively.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), allows companies to account for stock-based compensation either under the provisions of SFAS 123 or under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as amended by FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)," but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS 123 had been adopted. The Company has elected to account for its stock-based compensation in accordance with the provisions of APB 25. Net Loss Per Common Share
The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," ("SFAS 128") for computing and presenting net loss per share information. Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per common share excludes common equivalent shares and unexercised stock options as the computation would be anti-dilutive. A reconciliation of the net loss available to common stockholders and the number of shares used in computing basic and diluted net loss per share is in Note 12.
Translation of Foreign Financial Statements
The functional currency of the Company's foreign subsidiaries is their local currency. Accordingly, assets and liabilities of the Company's foreign subsidiary are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average rates for the period. Foreign currency translation adjustments are accumulated in a separate component of shareholders' equity. Foreign currency transaction gains or losses are recorded in operating expenses and were not significant for the years ended January 31, 2002, 2001 and 2000.
Financial Instruments
The carrying value of the Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, approximates fair value.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. Management believes that the Company's investment policy limits the Company's exposure to concentrations of credit risk. The Company sells its products primarily to major corporations, including distributors that serve a wide variety of U.S. and foreign markets, and to government agencies. The Company extends credit to its corporate customers based on an evaluation of the customer's financial condition, generally without requiring a deposit or collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains an allowance for anticipated losses.
Valuation Accounts
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 $107, which is pledged to collateralize a letter of credit required for a leased facility.
Income Taxes
Deferred taxes are provided utilizing the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes at the tax rates expected to be in effect when the differences reverse. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company provided a full valuation allowance against its net deferred tax assets as of January 31, 2002.
Equipment and Leasehold Improvements
Office furniture and computer equipment are recorded at cost. Depreciation of office furniture and equipment is provided on a straight-line basis over the estimated useful lives of the assets, generally three to ten years. Amortization of leasehold improvements and leased assets are provided on a straight-line basis over the shorter of the term of the applicable lease or the useful life of the asset.
Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of property and equipment retired or otherwise disposed of and the related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in current operations.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of acquisition cost over the net assets acquired in a business combination accounted for using the purchase method of accounting, was being amortized on a straight-line basis over six years. Other intangible assets, including assembled workforce, developed technology, customer contracts, and other acquired rights were carried at cost less accumulated amortization. Amortization of other intangible assets was being charged to income on a straight-line basis over the periods estimated to benefit, ranging from one to 12 years. Amortization of goodwill and other intangible assets related to the Combination was stopped effective October 3, 2001, when the Company determined that such assets were impaired, and the remaining unamortized balance was written down to zero. See Note 4.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived assets including goodwill. This evaluation consists of a comparison of the carrying value of the assets with the assets' expected future cash flows, undiscounted and without interest costs. Estimates of expected future cash flows represent management's best estimate based on reasonable and supportable assumptions and projections. If the expected future cash flow, undiscounted and without interest charges, exceeds the carrying value of the asset, no impairment is recognized. Impairment losses are measured as the difference between the carrying value of long-lived assets and their fair market value, based on discounted future cash flows of the related assets.
Following the termination of the NBA contract and the Company's decision to exit the interactive media services market, the Company evaluated the recoverability of the intangible and other long-lived assets including goodwill associated with the Combination and with the NBA Agreement. As of result of the evaluation, the Company recorded a charge of $754 million in the third quarter of fiscal year 2002. See Note 4.
Reclassifications
Certain amounts presented in the prior years' financial statements have been reclassified to conform with the fiscal year 2002 presentation.
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. 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 resulting from business combinations completed prior to the adoption of SFAS No. 141. After the reduction of goodwill and intangible assets recorded during fiscal year 2002 (see Note 4) related to the combination with Intel's Interactive Media Services Division in December 2000, the remaining goodwill balance as of January 31, 2002 is immaterial. Thus, adoption of these pronouncements is not expected to have a significant impact on the financial position or results of operations of the Company. 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 first quarter of fiscal year 2003. The Company is reviewing the provisions of SFAS No. 144 and does not anticipate that the adoption will have a material impact on the Company's financial condition or results of operations.
(3) ACQUISITIONS
On December 21, 2000, Excalibur and Intel consummated the Combination. At the completion of the Combination, Excalibur became a wholly owned subsidiary of the Company, each outstanding share of Excalibur common stock was converted into one share of Class A common stock of the Company. Intel contributed to the Company its IMS division, intellectual property and other assets used by that division, as well as approximately $155,000 in cash, with $150,000 paid at closing and the balance payable in fiscal year 2002 to fund retention bonuses to former Intel employees, in exchange for 14,949,384 shares of Class A common stock of the Company and 12,207,038 shares of Class B non-voting common stock.
The Combination was accounted for using the purchase method of accounting and accordingly, the results of operations of the IMS division have been included in the Company's financial statements from the date of acquisition. The preliminary purchase price for the IMS division was determined to be approximately $925,125, which included approximately $2,047 of transaction and direct acquisition costs less approximately $593 in costs to register and issue the shares. The shares issued to Intel as consideration for the contribution of assets were valued based on the market price when the Combination was originally announced. The purchase price was preliminarily allocated to the assets acquired based on their estimated fair values on the acquisition date as follows:
Net tangible assets acquired $ 150,711 Developed technology 9,090 Assembled workforce 4,070 Customer contracts 3,010 Acquired in-process research and development 800 Net deferred tax liabilities (12,322) Goodwill 769,766 --------------- Total purchase price $ 925,125 ===============
In connection with the Combination, the Company recorded a charge for acquired in-process research and development ("IPRD") of approximately $800 in the year ended January 31, 2001. The purchased IPRD represented the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at December 21, 2000, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimates of market size and growth factors, expected industry trends, the anticipated nature and timing of product introduction and the estimated life of the underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after tax cash flows. Projected operating expenses included cost of sales, sales and marketing and general and administrative expenses.
(4) REDUCTION IN GOODWILL AND OTHER LONG-LIVED ASSETS
The Company recorded a charge of $754 million during fiscal year 2002 for reduction of goodwill and other long-lived assets. On September 20, 2001, the Company announced that it had terminated its agreement with the National Basketball Association ("NBA") to provide interactive content services. The termination of this agreement was part of the Company's decision to exit the interactive media services market and focus on its enterprise information infrastructure software products. In connection with this shift in focus, on October 4, 2001, the Company closed facilities in Hillsboro, Oregon and Lafayette, Colorado, and all positions supporting the interactive media services offerings and the related content security technology development were eliminated.
Following the termination of the NBA contract and the Company's change in focus, the Company evaluated the recoverability of the intangible and other long-lived assets including goodwill associated with the Combination and associated with the NBA agreement. The intangible assets acquired in the Combination, including developed technology, customer contracts and assembled workforce, were primarily related to the interactive media services offerings. The assessment of recoverability was performed pursuant to Statement Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). Additional guidance related to goodwill impairment was provided by APB 17, "Intangible Assets."
The unamortized balance of intangible assets associated with the NBA agreement was approximately $67,318. Having no future economic benefit to the Company, this unamortized balance was written down to zero. As a result of the Company's shift in focus, there were no future cash flows expected to be generated from the intangible assets acquired in the Combination; thus, the unamortized balance of approximately $9,764 related to these intangible assets was written down to zero. Since the assets acquired from Intel were never integrated into the Company's overall operations, the goodwill associated with the Combination was evaluated for impairment along with the other intangible assets acquired from Intel. As a result, the unamortized goodwill balance of $675,896 was written down to zero. In addition, there was an impairment charge of approximately $1,446 to reflect the value of certain computer equipment and furniture that was either written down to fair value or disposed of in connection with the closing of the various facilities described above.
(5) RESTRUCTURINGS
On May 10, 2001, the Company adopted a restructuring plan in response to the downturn in the economy and in conjunction with the integration of the IMS division's operations following the Combination with Intel. This restructuring resulted in a reduction of Convera's total workforce by 22 employees, including 17 individuals from the Company's engineering group and five 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.
On October 3, 2001, the Company announced an additional restructuring plan to consolidate all operations around the development, marketing, sales and support of its enterprise class information infrastructure software products, Convera RetrievalWare and Convera Screening Room. The Company also announced that it was eliminating operations supporting the digital content security and interactive services business units and closing offices in Hillsboro, Oregon and Lafayette, Colorado. As a result of the restructuring in the third quarter of the current year, Convera's total workforce was reduced by an additional 69 employees, including 47 employees from the engineering group, 13 from the professional services and training groups, seven from the G&A group and two from the marketing group.
As a result of the restructuring plans, the Company recorded restructuring charges in the second and third quarters of fiscal year 2002 of $2,933 and $5,195, respectively, for a total of $8,128 in restructuring charges for the year ended January 31, 2002. The restructuring charges include approximately $1,338 in costs incurred under contractual obligations with no future economic benefit to the Company, accruals of approximately $1,590 for employee termination costs and approximately $5,200 related to future facility losses for the offices closed in Hillsboro, Oregon and Lafayette, Colorado.
The following table sets forth a summary of the restructuring charges, the payments made against those charges and the remaining restructuring liability as of January 31, 2002:
The Company paid a total of $2,609 through January 31, 2002 against the restructuring accruals recorded in the current fiscal year. Non-cash charges represent the write-down of facility improvements included in the estimated costs of facilities closings. As of January 31, 2002, unpaid amounts of $1,621 and $2,129 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 first quarter of fiscal year 2003. 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) 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 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 $1,314. The Company is amortizing this amount over the period leading up to September 30, 2002, and accordingly, recorded bonus expense of approximately $1,259 for the year ended January 31, 2002.
Additionally, on May 16, 2001, the Company paid approximately $5,422 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 the majority of this bonus in operations in the first quarter of fiscal year 2002.
(7) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at January 31, 2002 and 2001 consisted of the following:
2002 2001 ---- ---- Computer equipment $ 11,338 $ 9,250 Office furniture 2,934 1,672 Leasehold improvements 646 498 ----------- ----------- 14,918 11,420 Less accumulated depreciation (10,493) (8,785) ----------- ----------- $ 4,425 $ 2,635 =========== ===========
Assets acquired under capital leases included in equipment above were $28 and $50 at January 31, 2002 and 2001, respectively, and they were fully depreciated as of January 31, 2002. The related accumulated depreciation was $28 and $35 for fiscal years ended January 31, 2002 and 2001, respectively.
Depreciation expense for fiscal years 2002, 2001 and 2000 was $2,294, $1,329 and $1,323 respectively.
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Net goodwill and other acquisition-related intangibles at fiscal year ends were as follows:
2002 2001 ---- ---- Goodwill $ 576 $ 770,342 Developed technology - 13,160 Other intangibles - 77,925 ----------- ----------- 576 861,427 Less accumulated amortization (547) (15,983) ----------- ----------- $ 29 $ 845,444 =========== ===========
Amortization expense for fiscal years 2002, 2001 and 2000 was $98,304, $15,672 and $118, respectively.
(9) ACCRUED EXPENSES
Accrued expenses at January 31, 2002 and 2001 consisted of the following:
2002 2001 ---- ---- Accrued payroll $ 1,474 $ 1,302 Accrued facility costs 4,007 - Accrued consulting fees 917 608 Other 1,155 633 ---------- ---------- $ 7,553 $ 2,543 ========== ==========
(10) INCOME TAXES
The Components of the benefit from income taxes are as follows:
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consisted of:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Company's net deferred tax assets at January 31, 2002 and 2001 were as follows:
At January 31, 2002, the Company had net operating loss carryforwards ("NOLs") of approximately $134,600 that expire at various dates through fiscal year 2021. The use of these NOLS may be limited by Section 382 of the Internal Revenue Code as a result of the business combination with Intel. Approximately $2,100 of the NOLs relate to stock option exercises, and $6,700 relate to UK operations. The tax benefit associated with the stock option exercises will be credited to equity when and if realized.
As of January 31, 2001, the Company had deferred tax liabilities resulting from intangible assets generated in the Combination and the NBA contribution agreement. In fiscal year 2002 the Company recorded a reduction in goodwill and other long-lived assets (see Note 4), which eliminated the intangible assets that gave rise to the deferred tax liabilities. As of January 31, 2002, the Company's deferred tax assets, which are primarily related to NOL carryforwards generated by the Company, exceeded the deferred tax liabilities. As the Company has not generated earnings and no assurance can be made of future earnings needed to utilize these NOLs, a valuation allowance in the amount of the net deferred tax asset has been recorded.
(11) CAPITALIZATION
The authorized capital stock of Convera consists of 100 million shares of Class A voting common stock, par value $0.01 per share, 40 million shares of Class B non-voting common stock, par value $0.01 per share, and five million shares of cumulative convertible preferred stock, par value $0.01 per share.
During the year ended January 31, 2002, the Company announced a stock repurchase program whereby the Company may repurchase up to $10 million of the Company's common stock in the open market, through block trades or in privately negotiated transactions. The timing and amount of any shares repurchased are determined by the Company's management based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time without prior notice.
Stock Repurchases
During the fourth quarter of the fiscal year ended January 31, 2002, the Company purchased 4,746,221 shares of Class A common stock from NBA Media Ventures, LLC ("NBA"), representing the entirety of its holdings, for $11 million, or $2.31 per share. The Company also purchased a total of 15,000,000 shares of common stock, consisting of 2,792,962 shares of Class A voting common stock and 12,207,038 shares of Class B non-voting common stock, from Intel Corporation for $42 million, or $2.80 per share. The entirety of the Class B shares and all but 1,000,000 shares of the Class A common stock that was repurchased was retired in the fourth quarter of fiscal year 2002. The 1,000,000 shares of treasury stock are recorded as a $2,310 reduction to shareholders' equity in the Company's consolidated balance sheets.
In January 2002, Allen Holding, Inc. purchased the remaining 12,156,422 shares of Convera Class A common stock held by Intel, resulting in Allen Holding, Inc. beneficially owning 55.2% of the outstanding shares of Convera Class A common stock as of January 31, 2002.
(12) NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net loss per common share:
The following equity instruments were not included in the computation of diluted net loss per common share because their effect would be antidilutive:
(13) EMPLOYEE BENEFIT PLANS
Stock Options
The Convera 2000 stock option plan was approved by Excalibur shareholders in December 2000 in connection with and as a condition to the Combination. The stock option plan authorizes the granting of stock options and other forms of incentive compensation to purchase up to 11.25 million shares of the Company's Class A common stock in order to attract, retain and reward key employees. In addition, at the closing of the Combination, Convera assumed Excalibur's existing stock option plans. The plans are administered by a Committee appointed by the Board of Directors, which has the authority to determine which officers, directors and key employees are awarded options pursuant to the plans and the terms and option exercise prices of the stock options. Of the total number of shares authorized for stock options, options to purchase 9,484,309 shares are outstanding. The Company has a total of 13,764,443 shares of Class A common stock reserved for the issuance of warrants and options under the plans.
Each qualified incentive stock option granted pursuant to the plans has an exercise price as determined by the Committee but not less than 100% of the fair market value of the underlying common stock at the date of grant, a ten-year term and typically a four-year vesting period. A non-qualified option granted pursuant to the plans may contain an exercise price that is below the fair market value of the common stock at the date of grant and/or may be immediately exercisable. The term of non-qualified options is usually five or ten years.
Upon consummation of the Combination, the Company granted options to purchase 7,028,248 shares of Class A common stock to employees with an exercise price of $20.52 per share representing the average of the closing prices of Excalibur common stock for the five trading days immediately preceding the closing date. There was no compensation expense recorded in connection with these grants, since the fair value of the Company's common stock on the date of grant was less than the exercise price.
During the second quarter of the fiscal year ended January 31, 2002, 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). 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. A total of 7,241,569 options were surrendered for exchange under this program. On January 14, 2002 (the Replacement Grant Date), the Company granted a total of 6,248,247 shares of the replacement options at $4.38 per share. The exercise price of the replacement options was equal to the closing sale price of our common stock on the NASDAQ National Market on the business day preceding the Replacement Grant Date. The exchange program was designed to comply with FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" and did not result in any additional compensation charges or variable plan accounting.
The following table summarizes the Company's activity for all of its stock option awards:
Options to purchase 3,622,523, 2,418,198 and 1,716,382 shares of the Company's common stock were vested and exercisable at January 31, 2002, 2001 and 2000, respectively, at weighted-average exercise prices of $6.36, $11.84 and $7.70 per share, respectively.
The following table summarizes additional information about stock options outstanding at January 31, 2002:
Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans made in fiscal years 2002, 2001 and 2000 consistent with the method of SFAS No. 123, the Company's net loss and basic and diluted net loss per common share would have been increased to the pro forma amounts indicated below.
The effect of applying SFAS No. 123 on pro forma net loss as stated above is not necessarily representative of the effects on reported net loss for future years due to, among other things, vesting period of the stock options and the fair value of additional options in the future years.
The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model. The following table shows the assumptions used for the grants that occurred in each fiscal year.
The weighted average fair value per share for stock option grants that were awarded in fiscal years 2002, 2001 and 2000 was $3.38, $10.98 and $8.55, respectively.
Employee Stock Purchase Plan
In December 2000, the Excalibur shareholders approved the amendment of the Excalibur 1996 employee stock purchase plan ("ESPP"), now in effect for Convera. The employee stock purchase plan is a non-compensatory plan for all active employees and provides that participating employees may purchase common stock each plan quarter at a purchase price equal to the lesser of 85% of the closing price on the date of purchase or 85% of the closing price on the date of grant. Payment for the shares is made through authorized payroll deductions of up to 10% of eligible annual compensation.
Of the 250,000 shares of Class A common stock that were reserved for issuance thereunder, 152,778, 12,252 and 23,096 shares were purchased by employees in fiscal years 2002, 2001 and 2000, respectively.
During the fourth quarter of the fiscal year ended January 31, 2002, the Convera shareholders approved an amendment to the ESPP authorizing an additional 1,000,000 shares to be reserved for issuance under the plan. These shares are included as treasury stock as of January 31, 2002 and will be released from the treasury as employees purchase the shares through the ESPP.
Employee Savings Plan
The Company has an employee savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating eligible employees in the United States may defer up to 100 percent of their pre-tax salary, but not more than statutory limits. The plan was amended in the fiscal year ended January 31, 2001 to allow the Company to match $0.50 on every dollar up to the maximum of 8% of the employee's contribution on total compensation.
For the fiscal years ended January 31, 2002 and 2001, the Company contributed approximately $760 and $221, respectively, to the employee savings plan. No such contribution was made in fiscal year 2000.
(14) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company conducts its operations using leased office facilities. The leases terminate at various dates through fiscal year 2008 with options to renew. Certain leases provide for scheduled rent increases and obligate the Company to pay shared portions of the operating expenses such as taxes, maintenance and repair costs. The Company also has operating leases for equipment and its foreign subsidiary has operating leases for automobiles that are included in the figures below. Future minimum rental payments under non-cancelable operating leases as of January 31, 2002 are as follows:
Year Ending January 31, 2003 $ 3,530 2004 3,132 2005 2,717 2006 1,564 2007 and beyond 916 --------- $ 11,859 =========
Total rental expense under operating leases was approximately $3,604, $2,453 and $1,806 in fiscal years 2002, 2001 and 2000, respectively.
Contingencies
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., a subsidiary of the National Geographic Society ("NGTL"), 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, results of operations or cash flows.
(15) SEGMENT REPORTING
The Company has one reportable segment and has restated the corresponding segment information for earlier periods presented.
Operations by Geographic Area
The following table presents information about the Company's operations by geographical area:
Major Customers
Revenues derived from contracts and orders issued by agencies of the U.S. Government were approximately $4,904, $5,021 and $4,400, respectively, in the fiscal years ended January 31, 2002, 2001 and 2000. These revenues, expressed as a percentage of total revenues for the fiscal year, were approximately 14%, 10% and 12%, respectively. For the fiscal year ended January 31, 2002, no individual customer accounted for more than 10% of the Company's total revenues. For the fiscal year ended January 31, 2001, one customer accounted for 15% of the Company's total revenues, and for the fiscal year ended January 31, 2000, a different customer accounted for 12% of the Company's total revenues.
(16) SUBSEQUENT EVENTS
Restructuring
On February 22, 2002, the Company announced that it was aligning its operations around key vertical markets to accelerate its path to profitability. These actions resulted in a reduction of the Company's workforce by 60 employees worldwide. The related restructuring charges are expected to be approximately $1,086, relating to employee severance costs, and will be recorded in the first quarter of fiscal 2003.
Acquisition
In March of 2002, the Company announced the acquisition of 100% of the outstanding share capital 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. Semantix became a wholly owned subsidiary of Convera under the name Convera Canada Inc. This acquisition will be accounted for using the purchase method of accounting and the purchase price will be allocated to the fair value of the net assets acquired. The Company is in process of performing that allocation and detailed information related to the Semantix acquisition will be reported in the Company's Form 10-Q for the quarter ended April 30, 2002.
(17) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(18) SELECTED QUARTERLY INFORMATION (UNAUDITED)
The Company calculated earnings per share on a quarter-by-quarter basis in accordance with GAAP. Quarterly earnings per share figures may not total earnings per share for the year due to the weighted average number of shares outstanding.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONVERA CORPORATION
By: /s/ Patrick C. Condo ----------------------- Patrick C. Condo Chief Executive Officer
Date: April 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.