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(Address
of principal executive offices) (Zip
Code)
Registrant's
telephone number, including area code: (703) 761 -
3700
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Class A Common Stock, $0.01 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes No ü
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes
No ü
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to the filing requirements for
the past 90 days. Yes ü No
__
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ü
Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,”“accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer Accelerated
Filer Non-Accelerated
Filer ü
Smaller reporting company ü
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No ü
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 31, 2009 (based on the closing sales price as reported on
the NASDAQ Global Market System) was $3,466,036.
The
number of shares outstanding of the registrant's Class A common stock as of
April 9, 2010 was 53,501,183.
The
statements contained in this annual report on Form 10-K 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 (“Exchange Act”), including without
limitation statements about the expectations, beliefs, intentions or
strategies regarding the future of Convera Corporation (hereinafter
referred to as “Convera,” the “Company,”“we,”“us” and “our” through this
document). Words such as “expects,”“intends,”“plans,”“projects,”“believes,”“estimates,” and similar expressions are used to identify
these forward-looking statements. These include, among others, statements
regarding our future expectations, performance, plans and prospects as
well as assumptions about future events. All forward-looking statements
included in this annual report are based on information available to us on
the date hereof, and we assume no obligation to update any such
forward-looking statements. The forward-looking statements contained
herein involve risks and uncertainties discussed under the heading “Risk
Factors” below. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of such
factors, including those set forth in this annual
report.
Convera
Corporation 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. Convera previously provided vertical search services to
trade publishers. Convera’s technology and services were designed to help
publishers build a loyal online community and increase their internet
advertising revenues.
As the
global economic downturn deepened in early and mid 2009 and our stock price
continued to fall, in an effort to curtail continuing losses, preserve cash and
maximize value for our stockholders, the board of directors (the “Board”) and
management of Convera developed a plan of dissolution and liquidation (the “Plan
of Dissolution”), after reviewing our business and financial conditions and
long-term prospects and considering various alternatives. On September 22, 2009
our majority stockholders approved the Plan of Dissolution by written consent
providing for our complete dissolution and liquidation. On December31, 2009the Company filed a Definitive Information Statement on Schedule 14C
with the Securities and Exchange Commission with respect to, among other things,
the Plan of Dissolution. The Information Statement was mailed to
stockholders on January 8, 2010.
On
January 29, 2010, the Company’s Board authorized the filing of a Certificate of
Dissolution according to the Plan of Dissolution. The Plan of Dissolution
contemplates the orderly sale of the Company's remaining assets and the
discharge of all outstanding liabilities to third parties and, after the
establishment of appropriate reserves, the distribution of all remaining cash to
stockholders. Additionally, the Company set the record date of
February 8, 2010 for an initial liquidating distribution and declared an initial
liquidating cash distribution of $0.10 per share to stockholders as of the
record date. Immediately after the close of market on February 8,2010, the Company closed its stock transfer books and the trading of its stock
on the NASDAQ Stock Market ceased at the same time. Accordingly,
February 8, 2010 is the record date for all stockholder distributions by the
Company.
After the
close of market on February 8, 2010, the Company filed a Certificate of
Dissolution with the Delaware Secretary of State, pursuant to the Plan of
Dissolution. The description of the terms and conditions of the Plan
of Dissolution in our current report on Form 8-K filed on June 4, 2009 and a
copy of the Plan of Dissolution filed as Exhibit 2.2 thereto are incorporated
herein by reference.
On
February 9, 2010, in connection with the Plan of Dissolution, the Company
completed a merger (the “Merger”) of its wholly-owned subsidiaries B2BNetSearch,
Inc., a Delaware corporation (“B2B”), and Convera Technologies, LLC, a Delaware
limited liability company (“Technologies”), with and into VSW2, Inc., a Delaware
corporation and an indirect wholly-owned subsidiary of Vertical Search Works,
Inc., a Delaware corporation (“VSW”) and a parent company of Firstlight Online
Limited, a U.K. company (“Firstlight”). The Merger was conducted
pursuant to an Amended and Restated Agreement and Plan of Merger (the “Merger
Agreement”) dated as of September 22, 2009 by and among Convera, B2B,
Technologies, VSW, and certain related parties. Upon the completion
of the Merger, Convera and the pre-Merger VSW shareholders each own 33.3% and
66.7% of the total outstanding common stock of VSW, respectively. The
description of the terms and conditions of the Merger Agreement in our current
report on Form 8-K filed on September 28, 2009 and a copy of the Merger
Agreement filed as Exhibit 2.1 thereto are incorporated herein by
reference.
Upon the
closing of the Merger on February 9, 2010, all the employees of Convera resigned
from Convera and joined VSW. Patrick C. Condo also ceased to be the
President and Chief Executive Officer of Convera upon the closing of the Merger,
pursuant to a Transition Agreement by and between Convera and Mr. Condo dated
May 29, 2009. The description of the terms and conditions of
Mr. Condo’s Transition Agreement in our current report on Form 8-K filed on
June 4, 2009 and a copy of the Transition Agreement filed as Exhibit 10.1
thereto are incorporated herein by reference.
Matthew G. Jones remains the only officer of the Company after the
Merger. Pursuant to a Transition Agreement between Convera and
Mr. Jones dated April 22, 2010, Mr. Jones will continue to serve
the Company as Chief Financial Officer in his capacity as a consultant, not an
employee, of the Company. On May 18, Mr. Jones was also appointed the
acting Chief Executive Officer of the Company by the Board of Directors. The
description of the terms and conditions of Mr. Jones’ Transition Agreement
in our current report on Form 8-K filed on April 27, 2010 and a copy
of the Transition Agreement filed as Exhibit 10.1 thereto are incorporated
herein by reference.
For
all periods before the Board authorized the filing of the Certificate of
Dissolution on January 29, 2010, the Company’s financial statements are
presented on a going concern basis of accounting. As required by generally
accepted accounting principles, the Company adopted a liquidation basis of
accounting immediately after the close of business on January 29, 2010.
Under the liquidation basis of accounting, assets are stated at their
estimated net realizable value and liabilities are stated at their
estimated settlement amounts, which estimates will be periodically
reviewed and adjusted as
appropriate.
At
January 31, 2010, the Company’s net assets in liquidation aggregated $10.6
million, or $0.20 per share based upon 53,501,183 shares of common shares
outstanding at January 31, 2010, compared to net assets of $22.7 million,
or $0.42 per share based upon 53,501,183 shares of common stock
outstanding at January 31, 2009. Included in that total is an
amount representing the operating business related assets and liabilities
which were contributed by the Company to B2B and Technologies and
subsequently included in the Merger. The net value of those assets and
liabilities at January 31, 2010 is estimated at net realizable value and
represents the estimated net realizable value of the Company’s 33.3%
investment in VSW. All other assets are presented at estimated net
realizable value on an undiscounted basis. The amount also includes a
reserve for future estimated general and administrative expenses and other
costs during the liquidation. Estimated net realizable value reflects
economic changes and various other changed circumstances over recent
months. There can be no assurance that these estimated values will be
realized. Such amount should not be taken as an indication of the timing
or amount of future distributions to be made by the Company, if
any.
Further
liquidation distributions, if any, will be made in cash or in kind,
including in stock or ownership interests in VSW and remaining assets of
the Company. The timing and amount of interim liquidating distributions
and final liquidating distributions will depend on the amount of the
Company’s existing cash, the amount of liabilities, the timing of the
payment or satisfaction of liabilities, the amount of proceeds the Company
will receive upon the sale of the Company’s remaining assets, primarily
intangible assets (intellectual property), which is not expected to be
significant, and the extent to which reserves for current or future
liabilities are required. Accordingly, there can be no assurance that
there will be any liquidating distributions prior to a final liquidating
distribution.
Convera’s
common stock stopped trading on the NASDAQ stock market after February 8,2010 upon the filing of the Certificate of
Dissolution. However, the common stock continues to be traded
on Pink Sheets. Pink Sheets is not a stock
exchange. Rather, it is an electronic quotation system operated
by Pink OTC Markets that displays quotes from broker-dealers for
over-the-counter (OTC) securities. Convera is headquartered at
1919 Gallows Road, Vienna, VA22182. Our main
corporate telephone number is (703)
761-3700.
As of
January 31, 2010 and 2009, Allen Holding, Inc., together with Allen &
Company Incorporated, Herbert A Allen and certain related parties (collectively
“Allen & Company”) beneficially owned approximately 42% of the voting power
of Convera and currently hold one seat on the Board of Directors, and would
therefore be able to influence the outcome of matters requiring a stockholder
vote.
Convera
provided vertical search services to trade publishers. Our technology and
services were designed to help publishers build a loyal online community and
increase their internet advertising revenues. With the use of our vertical
search services, our customers could create search engines customized to meet
the specialized information needs of their audience by combining publisher
proprietary content with an authoritative subset of the World Wide Web. The
result was a more relevant and comprehensive search experience for the user
designed to drive traffic to the publishers’ websites.
Revenues
for our vertical search services were generated under two different pricing
models that were determined at the time that the contract with the publisher was
executed. These pricing models resulted in us either receiving a percentage of
the publishers’ advertising revenues earned by the search sites or from selling
a fixed quantity of searches executed on the search site each month for a fixed
monthly fee. Many of our ad share contracts with publishers also contained
minimum fees that we were entitled to receive until website advertising revenue
generated by the publishers’ search sites exceeded these minimum amounts. We
could also generate revenues from hosting publisher websites and from providing
technical staff training. We offered professional services to customize
publisher websites and optimize search engines, as well as website monetization
consulting. Our Converanet service, which was launched in December 2008, was
designed to drive traffic to our publisher sites also generates revenues from
selling advertising on its site.
The first
publisher search site using our vertical search services was launched in
November 2006. Our sales and marketing efforts targeted the top 50
business-to-business publishers in both the United States and United Kingdom,
with the goal of building the largest collection of search-based professional
user websites on the internet.
SEGMENT
AND GEOGRAPHIC AREA FINANCIAL INFORMATION
While
operating under the going concern basis of accounting we had one reportable
segment. Prior to our agreement on March 31, 2007 to sell the assets
of the Enterprise Search business to FAST, we operated under two reportable
segments: the Enterprise Search segment and the vertical search segment
(previously entitled our Excalibur web hosting product). Revenue,
expenses and cash flows related to the Enterprise Search business have been
reflected as discontinued operations in the Consolidated Statements of
Operations and of Cash Flows.
Three
customers accounted for a total of 54% of the revenues generated in the period
from February 1, 2009 to January 29, 2010, accounting for 30%, 13%
and 11%, respectively. Two customers accounted for a total of 66% of the
revenues generated in the year ended January 31, 2009, accounting for 47% and
19%, respectively. One customer accounted for 82% of total revenue during the
year ended January 31, 2008.
Our
revenues were earned principally from customers located in the United States and
in the United Kingdom. For geographic area revenues and long-lived
assets information, see Note 14, “Segment Reporting” in the Notes to
Consolidated Financial Statements.
EMPLOYEES
We
had 30 employees at January 31, 2010. All employees resigned on
or as of February 9, 2010 upon the Merger and joined VSW. See
Item 1A. “Risk Factors” for a discussion of some of the risks we face
related to our former employees.
AVAILABLE
INFORMATION
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after such material is filed with, or furnished to, the
SEC are available on the SEC’s website (http://www.sec.gov).
In addition to the other
information contained in this Form 10-K, you should carefully read the
following risk factors. The Plan of Dissolution involves significant risks
and uncertainties, including, without limitation, the risk factors
identified below. The risks and uncertainties described below are not the
only risks and uncertainties we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial also may
impair our dissolution and the amount and timing of any distributions to
stockholders. If any of the following risks actually occur, the
ultimate value of distributions to stockholders could decline
substantially. Additionally, if any of the following risks
actually occur, the value of the shares of VSW’s common stock we received
in the Merger may decline substantially. The discussion below and
elsewhere in this report also includes forward-looking statements, and
actual events may differ substantially from those discussed in these
forward-looking statements as a result of the risks discussed
below.
Our
stockholders may be liable to our creditors for part or all of the amount
received from us in dissolution if reserves are inadequate.
We
established a contingency reserve of $3,000,000 in cash designed to
satisfy any additional claims and obligations that may arise. Although our
board of directors believes such reserve is adequate for payment of our
known and unknown liabilities, any contingency reserve may not be adequate
to cover all of our obligations and claims against us due to the
uncertainty of unknown liabilities. Under Delaware law, if we fail to
create an adequate contingency reserve for payment of our claims and
obligations during the three-year period after we file the Certificate of
Dissolution, each of our stockholders could be held liable for payment to
our creditors of such stockholder’s pro rata share of amounts owed to
creditors in excess of the contingency reserve. The liability of any of
our stockholders would be limited to the amounts previously received by
such stockholder in dissolution from us and from any liquidating trust or
trusts. Accordingly, in such event, a stockholder could be required to
return part or all of the distributions previously made to such
stockholder, and a stockholder could receive nothing from us under the
Plan of Dissolution. Moreover, if one of our stockholders has paid taxes
on amounts previously received, a repayment of all or a portion of such
amount could result in a situation in which a stockholder may incur a net
tax cost if the repayment of the amount previously distributed does not
cause a commensurate reduction in taxes payable in an amount equal to the
amount of the taxes paid on amounts previously
distributed.
The
amount of operating expenses incurred by the Company during its winding down may
be higher than expected.
The
Plan of Dissolution contemplates the orderly sale of the Company's
remaining assets and the discharge of all outstanding liabilities to third
parties and, after the establishment of appropriate reserves, the
distribution of all remaining cash to stockholders. The amount
of operating expenses incurred by the Company during its winding down may
be higher than expected. If the expenses to operate the Company
in accordance with the Plan of Dissolution are higher than expected, the
amount of cash to be ultimately distributed to stockholders may be
reduced.
Our
company and Firstlight have had a history of operating losses prior to the
Merger and VSW will likely incur future losses after the Merger; if such losses
occur and VSW is unable to achieve profitability, the value of its stock, which
we received in the Merger, will likely suffer.
As
of January 31, 2010, we had an accumulated deficit of approximately $1.2
billion. We have operated at a loss for each of the past three fiscal
years. For the fiscal years ended January 31, 2010, 2009 and 2008 our net
losses were approximately $12.4 million, $22.6 million and $9.1 million,
respectively. Our loss from continuing operations for the fiscal years
ended January 31, 2010, 2009 and 2008 was $12.4 million, $22.6 million and
$27.0 million, respectively. We expect that VSW will continue the trend of
significant operating losses and uses of cash until the revenue base for
its vertical search services and editorial related advertising grows to
sufficient levels to support its expenses. Firstlight has also operated at
a loss for each of the past three fiscal years. For the fiscal years ended
December 31, 2008, 2007 and 2006, Firstlight’s net losses were
approximately $2.6 million, $3.0 million and $3.7 million, respectively.
Accordingly, we cannot assure you that VSW will generate the revenues
required to achieve or maintain profitability in the future or that the
value of its common stock will be material. VSW’s failure to achieve and
sustain its profitability will negatively impact the market value of its
common stock.
VSW
may need additional capital. If VSW cannot raise capital when needed or cannot
raise capital at reasonable terms, its business and financial conditions may be
materially impacted; if VSW is able to raise additional capital through equity
financing, our ownership of VSW may be diluted.
In
order to maintain its operation and pursue business strategies, VSW may
require additional financing if the internally generated revenues are not
sufficient for such purpose, which funding may not be available to VSW on
favorable terms, if at all. The availability of such financing is further
limited by the recent tightening of the global credit markets, and the
lack of investors’ confidence in the equity markets. If VSW is not able to
obtain financing when needed or on reasonable terms, its business and
financial condition may be materially negatively impacted and thus, the
value of our ownership interest in VSW may be materially diminished. If
VSW is able to obtain financing through equity issuance, our (and our
stockholders’) existing ownership of VSW may be
diluted.
The
current credit and financial market conditions have had a negative impact on
global business environment and may exacerbate certain risks affecting the
business of VSW.
The
credit and financial markets have experienced unprecedented volatility,
stress, illiquidity and disruption around the world recently and may
continue to experience such difficulties. Many of our customers have
encountered and may continue to encounter much uncertainty and risks due
to the weakened business environment and credit availability, particularly
in the publishing area. As a result, these customers may be unable to
satisfy their contract obligations, may delay payment, or may delay
purchasing VSW’s services, which could negatively affect the business and
financial performance of VSW. In addition, the weakened business
environment has adversely impacted and may continue to adversely impact
sales of on-line ads, which could negatively affect any business and
general performance. If VSW’s business or financial performance is
negatively affected, the net realizable value of our ownership interest in
VSW may be materially diminished.
VSW
will be in an extremely competitive market, and if it fails to compete
effectively or respond to rapid technological change, its revenues and market
share will be adversely affected.
The
search industry is characterized by intense competition, rapid
technological changes, changes in customer requirements and emerging new
market segments. VSW’s competitors will include many companies that are
larger and more established and have substantially more resources than VSW
and may include start-ups as well. Potential competitors to VSW may
establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of the
markets which VSW intends to serve. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
In
order for VSW’s strategy to succeed, it must provide vertical search
services that meet the needs of the business-to-business and specialized
publishing companies. VSW will need to invest significant resources in
research and development to provide the publishers with leading-edge
search technology to help them deliver unique value to their online
community and increase online advertising revenues. To effectively
compete, VSW will need to continually improve its service offerings and
innovate by introducing new services that are responsive to the needs of
its users. The development efforts required for this are expensive. If
these developments do not generate substantial revenues, VSW’s business
and results of operations will be adversely affected and thus, the value
of our ownership interest in VSW may be materially diminished. We cannot
assure you that VSW will successfully develop any new products or
services, complete them on a timely basis or at all, achieve market
acceptance or generate significant revenues with
them.
VSW
currently depends on a few customers for substantially all of its revenues. The
loss of, or a significant reduction in orders from, any one of these customers
could significantly reduce VSW’s revenues and harm its operating
results.
For
the year ended December 31, 2009, Firstlight’s two largest customers
accounted for approximately 55% of its sales. VSW continues to depend on a
few customers for substantially all of its revenues. The loss
of, or a significant reduction in orders from, any of these customers
could significantly reduce VSW’s revenues and harm its operating
results.
VSW
will depend in part on international sales, particularly in the United Kingdom,
and any economic downturn, changes in laws, changes in currency exchange rates
or political unrest in the United Kingdom or in other countries could have a
material adverse effect on VSW’s business.
Significant
revenues related to Convera’s previous business, which has been merged
into VSW, and a portion of revenues related to Firstlight’s business have
been derived from publishers in the United Kingdom. For the year ended
January 31, 2010, Convera’s total revenue derived from international sales
was approximately $0.2 million, representing approximately 21% of its
total revenue. For the year ended January 31, 2009, Convera’s total
revenue derived from international sales was approximately $1.0 million,
representing approximately 76% of total revenue. For the year ended
December 31, 2009, Firstlight’s total revenue derived from sales outside
the United States was approximately $471,000, representing approximately
24% of its total revenue. For the years ended December 31, 2008 and 2007,
Firstlight’s total revenue derived from sales outside the United States
were approximately $187,000 and $445,000, respectively, representing
approximately 6% and 19% of its total revenue,
respectively.
Convera’s
international operations and sales have historically exposed it to longer
accounts receivable and payment cycles and fluctuations in currency
exchange rates. International sales had been made mostly from its U.K.
subsidiary until its closure in January 2009 and are typically denominated
in British pounds. As of January 31, 2010, approximately 7% of Convera’s
total consolidated accounts receivable were denominated in British pounds.
Since exchange rates vary, those results when translated may vary from
expectations and adversely impact overall expected profitability. VSW will
also offer its services internationally and therefore expose itself to
similar risks.
VSW’s
international operations may expose it to a variety of other risks that
could seriously impede its financial condition and growth. These risks
include the following:
·
potentially
adverse tax consequences;
·
difficulties
in complying with regulatory requirements and
standards;
·
trade
restrictions and changes in
tariffs;
·
import
and export license requirements and
restrictions;
·
regulations
on the operation of the internet in certain countries;
and
·
uncertainty
of the effective protection of our intellectual property rights in certain
foreign countries.
If
any of these risks described above materialize, VSW’s international sales
could decrease and our foreign operations could
suffer.
The
planned business model of VSW is new to both businesses and may not attract the
planned turnover or generate sustainable profits.
Until
recently, Convera offered its customers its services for an agreed upon
time period in return for an agreed upon monthly charge or a share of
advertising revenues. Firstlight offered its services only in return for a
percentage of advertising revenues. The marketing and pricing
considerations of Firstlight differ greatly from those of a subscription
model. The cash flow characteristics are also different. The new pricing
model for the combined business has not been finalized and we expect it to
evolve over the first several months after the effectiveness of the
Merger. However, VSW presently intends to offer the combined ad-serving,
vertical search and micro-site service in return for a share of
advertising revenues with an initial down-payment from the publisher,
where possible. There can be no assurance that VSW’s pricing model will be
widely accepted by current and new customers and, therefore, VSW may
experience a decrease in the demand for its products and services, which
would harm its results of operations and cash
flows.
An
unfavorable outcome may result from pending or potential legal proceedings,
which could in the future materially and adversely affect VSW’s financial
position, results of operations or cash flows in a particular
period.
Firstlight
is involved in a litigation with its former minority shareholder, Jamara
Holdings Limited, and such entity’s chief operating officer and
shareholder, Brett Campbell Bailey. Although Firstlight believes these
legal proceedings have no merit, the outcome of litigation may be
uncertain and the costs associated with defending any litigation may have
negative financial and other effects on VSW’s financial position, results
of operations or cash flows in a particular
period.
If
we decide to distribute shares of VSW’s common stock, our stockholders may be
required to hold any such shares that are distributed to them for an indefinite
period of time.
In
accordance with securities laws, we may not distribute shares of VSW’s
common stock to our stockholders prior to the one year anniversary of the
consummation of the Merger. In addition, the VSW shares subject to
distribution are required to be registered. Upon receipt of written notice
from us to VSW, VSW is required to use its best efforts to prepare and
file, at its own cost, a registration statement on Form 10 with the SEC
prior to the date of such distribution, registering VSW’s common stock
under the Exchange Act and to cause such common stock to be listed on the
NASDAQ Global Market or such other exchange as approved by us and to make
other filings required by law.
Although
VSW is required to use its best efforts to register and list its common
stock before such shares are distributed to our stockholders, there can be
no assurance that such registration and listing will be completed and no
certainty when the registration and listing will become effective, if
ever. As a result, our stockholders may be required under securities laws
to hold their shares of VSW common stock for an indefinite period of time
as “restricted securities” within the meaning of Rule 144 under the
Securities Act. As restricted securities, such shares may be resold only
pursuant to an effective registration statement or under the requirements
of Rule 144 or other applicable exemption from registration under the
Securities Act and as required under applicable state securities
laws.
Allen & Company exercises voting
control over a significant percentage of our outstanding shares, and our other
stockholders may not have an effective say in any matters upon which our
stockholders vote.
As of
January 31, 2010, Allen & Company beneficially owned approximately 42% of
our voting power and would therefore be able to influence the outcome of matters
requiring a stockholder vote. These matters could include offers to
acquire us and elections of directors. Allen & Company may have interests
which are different than the interests of our other stockholders.
Legislative actions and potential new
accounting pronouncements are likely to impact our future financial position or
results of operations.
Future
changes in financial accounting standards may cause adverse, unexpected revenue
fluctuations and affect our financial position or results of operations. New
pronouncements and varying interpretations of pronouncements have occurred with
frequency in the past and may occur again in the future and as a result we may
be required to make changes in our accounting policies. Compliance with new
regulations regarding corporate governance and public disclosure may result in
additional expenses. As a result, we intend to invest reasonably
necessary resources to comply with evolving standards, however, such resources
are very limited due to the dissolution of our company and the departure of our
employees, and such investment may result in increased general and
administrative expenses and a diversion of management time.
Our
internal controls may not be sufficient to achieve all stated goals and
objectives.
Our
internal controls and procedures were developed through a process in which our
management applied its judgment in assessing the costs and benefits of such
controls and procedures, which, by their nature, can provide only reasonable
assurance regarding the control objectives. The design of any system of internal
controls and procedures is based in part upon various assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
We do not
own any real property. We presently share office space of approximately
4,800 square feet leased by VSW at 1919 Gallows Road, Suite 1050, Vienna, VA22182.
From time
to time, our company is engaged in litigation resulting from the ordinary course
of our business. There is no pending material litigation to which we are a party
or to which any of our property is subject.
Item
5. Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our Class
A common stock was listed on the NASDAQ Global Market under the symbol “CNVR”
until the close of the market on February 8, 2010, when Convera was delisted in
connection with its filing of a Certificate of Dissolution and the trading
ceased.
The
following table sets forth the high and low sale prices for our Class A common
stock on the NASDAQ Global Market for the period from February 1, 2008 through
January 31, 2010. The number of stockholders of record of our Class A
common stock as of January 31, 2010 was 779. There were no shares of
our Class B common stock, $0.01 par value, issued or outstanding at January 31,2010. An initial cash distribution of $0.10 per share was declared on
January 29, 2010 and made on February 16, 2010 to stockholders of record on
February 8, 2010. February 8, 2010 is the record date for all further
distributions of the Company.
The
following graph is a comparison of the cumulative total return to stockholders
of our Class A common stock at January 31, 2010 since January 31, 2005 to the
cumulative total return over such period of (i) the NASDAQ Stock Market-U.S.,
and (ii) the Standard & Poor's Information Technology Index, assuming an
investment in each of $100 on January 31, 2005 and the reinvestment of
dividends.
Recent Sales of Unregistered
Securities; Uses of Proceeds from Registered Securities
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with our Consolidated
Financial Statements and the Notes to those statements included elsewhere in
this Annual Report on Form 10-K.
Plan
of Dissolution
As the
global economic downturn deepened in early and mid 2009 and our stock price
continued to fall, in an effort to curtail continuing losses, preserve cash and
maximum value for our stockholders, the Board and management of Convera
developed the Plan of Dissolution, after reviewing our business and financial
conditions and long-term prospects and considering various alternatives. On
September 22, 2009 our majority stockholders approved the Plan of Dissolution by
written consent providing for our complete dissolution and
liquidation. On December 31, 2009the Company filed a Definitive
Information Statement on Schedule 14C with the SEC with respect to, among other
things, the Plan of Dissolution. The Information Statement was mailed to
stockholders on January 8, 2010.
On
January 29, 2010, the Company’s Board authorized the filing of the Certificate
of Dissolution according to the Plan of Dissolution. The Plan of Dissolution
contemplates the orderly sale of the Company’s remaining assets and the
discharge of all outstanding liabilities to third parties and, after the
establishment of appropriate reserves, the distribution of all remaining cash to
stockholders.
The
Company contemplates that within three years after the stockholders approval of
the Plan of Dissolution, any remaining assets and liabilities will be
transferred into a liquidating trust for the benefit of our stockholder if not
already distributed to our stockholders. The liquidating trust would continue in
existence until all liabilities have been settled, all remaining assets have
been sold and proceeds distributed and the appropriate statutory periods have
lapsed.
On
February 9, 2010, in connection with the Plan of Dissolution, the Company
completed the Merger of its wholly owned subsidiaries, B2B and Technologies,
with and into VSW2, an indirect wholly-owned subsidiary of VSW, and a parent
company of Firstlight. The Merger was conducted pursuant to the
Merger Agreement dated as of September 22, 2009 by and among Convera, B2B,
Technologies, VSW, and certain related parties. The description of
the terms and conditions of the Merger Agreement in our current report on Form
8-K filed on September 28, 2009 and a copy of the Merger Agreement filed as
Exhibit 2.1 thereto are incorporated herein by reference.
On
January 29, 2010the Company set the record date of February 8, 2010 for an
initial liquidating distribution and declared an initial liquidating cash
distribution of $0.10 per share to stockholders as of record date on the record
date. Immediately after the close of market on February 8, 2010, the
Company closed its stock transfer books and the trading of its stock on the
NASDAQ Stock Market ceased at the same time. Accordingly, February 8, 2010
is the record date for all further distributions of the Company.
For all
periods before the Board authorized the filing of the Certificate of Dissolution
on January 29, 2010, the Company’s financial statements are presented on the
going concern basis of accounting. As required by generally accepted accounting
principles, the Company adopted the liquidation basis of accounting immediately
after the close of business on January 29, 2010.
Under the
liquidation basis of accounting, assets are stated at their estimated net
realizable values and liabilities are stated at their estimated settlement
amounts, which estimates will be periodically reviewed and adjusted.
Uncertainties as to the precise net value of our non-cash assets and the
ultimate amount of our liabilities make it impracticable to predict the
aggregate net value that may ultimately be distributable to stockholders.
Claims, liabilities and future expenses for operations will continue to be
incurred with execution of the plan. These costs will reduce the amount of net
assets available for ultimate distribution to stockholders. Although we do not
believe that a precise estimate of those expenses can currently be made, we
believe that available cash is adequate to provide for our obligations,
liabilities, operating costs and claims, and to make cash distributions to
stockholders. If available cash is not adequate to provide for our obligations,
liabilities, operating costs and claims, estimated future distributions of cash
to our stockholders will be reduced.
Based on
our projections of estimated operating expenses and liquidation costs as of
January 31, 2010, the Company reported in the accompanying financial statements
that its net assets in liquidation aggregated $10.6 million, or $0.20 per share
based upon 53,501,183 shares of common stock outstanding at January 31,2010. An initial distribution of $0.10 per share was made on February16, 2010 to stockholders of record on February 8, 2010. The valuation of assets
at their net realizable value and liabilities at their anticipated settlement
amounts necessarily requires many estimates and assumptions. In addition, there
are substantial risks and uncertainties associated with carrying out the
liquidation of the Company’s existing operations. The valuations presented in
the accompanying Statement of Net Assets in Liquidation represent estimates,
based on present facts and circumstances, of the net realizable values of assets
and costs associated with the implementation of the Plan of
Dissolution.
As
disclosed above, the Company completed the Merger of its wholly-owned
subsidiaries B2B and Technologies with and into VSW2, an indirect wholly-owned
subsidiary of VSW. Included in the valuation of assets is an amount
representing the operating business related assets and liabilities which were
included in the Merger. The net value of those assets and liabilities is
estimated as net realizable value and represents the estimated net realizable
value of the Company’s 33.3% investment in VSW. The actual values and costs are
expected to differ from the amounts shown herein and could be greater or lesser
than the amounts recorded. Convera is currently disputing a $0.8 million breach
of contract claim by AT&T Corp. and may be subject to other litigation
arising in the past normal course of business, the outcome of which is not
presently known. An unfavorable outcome of the litigation may reduce
cash available for distribution to stockholders. In addition, we may be subject
to final examination by taxing authorities; thus any calculated gain over the
cost basis of the liquidated assets not offset by our net operating loss
carryforwards may vary from ultimate amounts, which may cause our final
distributions to change perhaps significantly. Accordingly, it is not possible
to predict the aggregate amount that will ultimately be distributable to
stockholders and no assurance can be given that the amount to be received in
liquidation will equal or exceed the net assets in liquidation per share in the
accompanying Statement of Net Assets in Liquidation.
Although
our Board has not established a firm timetable for further liquidating
distributions, the Board intends to, subject to contingencies inherent in
winding up our business, make such distributions as promptly as practicable and
periodically as we convert our remaining assets to cash and pay our remaining
liabilities and obligations subject to law. Further liquidation
distributions, if any, will be made in cash or in kind, including in stock or,
ownership interests in, subsidiaries of the Company and remaining assets of the
Company. The timing and amount of interim liquidating distributions and final
liquidating distributions will depend on the timing and amount of proceeds the
Company will receive upon the sale of the remaining assets and the extent to
which reserves for current or future liabilities are required. Accordingly,
there can be no assurance that there will be any liquidating distributions prior
to a final liquidating distribution.
During
the liquidation of our assets, the Board may authorize the Company to pay any
brokerage, agency and other fees and expenses of persons rendering services,
including accountants and tax advisors, to the Company in connection with the
collection, sale, exchange or other disposition of the Company’s property and
assets and the implementation of the Plan of Liquidation.
Overview
of Business (Going Concern Basis)
We
previously provided vertical search services to trade publishers. Our
technology and services helped publishers to build a loyal online
community and increase their internet advertising
revenues. Utilizing our vertical search services, our customers
could create search engines customized to meet the specialized information
needs of their audience by combining publisher proprietary content with an
authoritative subset of the Web. On March 31, 2007, we agreed
to sell the assets of our Enterprise Search business for $23.0 million in
cash to Fast Search and Transfer, Inc. (“FAST”). This transaction closed
on August 9, 2007 with FAST assuming certain obligations of the business
and retaining certain employees serving its Enterprise Search customers.
Accordingly, revenues and expenses and cash flows related to the
Enterprise Search business for the periods prior to this transaction
closing have been reflected as discontinued operations in the accompanying
Consolidated Statements of Operations and of Cash Flows. See
further discussion in Note 3, “Discontinued Operations” in the Notes to
Consolidated Financial Statements.
Our
principal source of revenue was provided through sales of our vertical
search services to the websites of publishers of trade business and
specialist publications. Our vertical search technology was a hosted
application sold as a service to the publishers. We generated
our revenues from contracts based on search volume or by receiving a
percentage of publishers’ advertising revenues earned by the search sites.
Many of our contracts with publishers contained monthly minimum fees that
we were entitled to receive until website advertising revenue generated by
the publishers’ search sites exceeded those monthly minimum
amounts. Revenues were also generated from hosting publisher
web sites and from providing technical staff training. We offered
professional services to customize publisher web sites and optimize search
engines, as well as web site monetization
consulting.
We
utilized an AT&T facility to host our vertical search
services. This facility, located in Dallas, Texas, operated
under a master hosting arrangement that expires in July 2010 with an
annual option for an extension of an additional 12 months. We
also maintained a hosting facility in San Diego, CA, which was vacated on
January 31, 2008 in an effort to appropriately scale our hosting
infrastructure. The AT&T hosting agreement and the assets housed there
were transferred with the remainder of our operating assets and
liabilities to B2B and included in the
Merger.
Recently Issued Accounting
Standards
In
July 2009, the Financial Accounting Standards Board (“FASB”) issued a
statement that modifies the GAAP hierarchy by establishing only two levels of
GAAP, authoritative and nonauthoritative accounting literature. Effective July
2009, the FASB ASC, also known collectively as the “Codification,” becomes the
single source of authoritative U.S. accounting and reporting standards
applicable for all non-governmental entities, with the exception of guidance
issued by the Securities and Exchange Commission. The Codification does not
change current U.S. GAAP, but changes the referencing of financial standards and
is intended to simplify user access to authoritative U.S. GAAP, by providing all
the authoritative literature related to a particular topic in one place. It is
organized by topic, subtopic, section, and paragraph, each of which is
identified by a numerical designation. The Codification is effective for
the Company’s financial statements for the quarter ended October 31, 2009. All
accounting references have been updated, and therefore Statement of Financial
Accounting Standard (“SFAS”) references have been replaced with ASC references.
As the Codification is not intended to change or alter existing GAAP, it did not
have an impact on the Company’s results of operations and financial
position.
In April
2009, the FASB issued accounting standards under ASC 820 “Fair Value Measurements and
Disclosures”, (previously FASB Staff Position
(“FSP”) FAS 157-4). ASC 820 provides guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly
decreased. This also includes guidance on identifying circumstances that
indicate a transaction is not orderly. This standard emphasizes that even if
there has been a significant decrease in the volume and level of activity for
the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. Implementation of this standard was effective for interim and annual
reporting periods ending after June 15, 2009, and is applied prospectively. The
implementation of this standard did not have a material effect on the Company’s
results of operations and financial position.
In
April 2009, the FASB issued accounting standards under ASC 825 “Financial
Instruments” (previously FASB Staff Position (“FSP”) SFAS No. 107-1 and
Accounting Principles Board (“APB”) Opinion No. 28-1) which extend the
annual financial statement disclosure requirements for financial instruments to
interim reporting periods of publicly traded companies. The new standards were
effective for interim and annual reporting periods ending after June 15,2009. The implementation of these standards during the second quarter
of Fiscal Year 2010 did not have a material effect on the Company’s results of
operations and financial position.
In
May 2009, the FASB issued accounting standards under ASC 855 “Subsequent
Events” (previously SFAS No. 165) and an amendment in February 2010, which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855, as
amended, specifically requires an SEC filer to evaluate and disclose subsequent
events through the date that the financial statements are issued. The
new standards were effective for interim and annual periods ended after
June 15, 2009 and the amendment is effective for interim or annual periods
ending after June 15, 2010. The implementation of these standards did not have a
material effect on the Company’s results of operations and financial
position.
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. For a
comprehensive discussion of our significant accounting policies, see Note 2 in
the accompanying consolidated financial statements included in this Form
10-K. As of January 31, 2010 we did not have any material ownership
interest in any entities that are not wholly owned and consolidated
subsidiaries, although we subsequently own 33.3% of the equity interest of VSW
upon the closing of the Merger on February 9, 2010. The preparation of these
financial statements requires us 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. We base
those estimates 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.
We
believe the following accounting policies reflect the more significant judgments
and estimates used in the preparation of this discussion of our financial
condition and results of operations.
Basis
of Presentation
Liquidation Basis of
Accounting
With the
authorization of the filing of the Certificate of Dissolution by the Board, the
Company adopted the liquidation basis of accounting effective as of the close of
business on January 29, 2010. The liquidation basis of accounting will continue
to be used by the Company until such time that the Plan of Dissolution is
terminated. Under the liquidation basis of accounting, assets are stated at
their estimated net realizable value and liabilities are stated at their
estimated settlement amounts, which estimates will be periodically reviewed and
adjusted as appropriate. A Statement of Net Assets in Liquidation and a
Statement of Changes in Net Assets in Liquidation are the principal financial
statements presented under the liquidation basis of accounting. The valuation of
assets at their net realizable value and liabilities at their anticipated
settlement amounts represent estimates, based on present facts and
circumstances, of the net realizable values of assets and the costs associated
with the implementation of the Plan of Dissolution based on the assumptions set
forth below. The actual values and costs associated with the implementation of
the Plan of Dissolution are expected to differ from the amounts shown herein
because of the inherent uncertainty and will be greater than or less than the
amounts recorded. Such differences may be material. In particular, the estimates
of the Company’s costs will vary with the length of time it operates under the
Plan of Dissolution. Accordingly, it is not possible to predict the aggregate
amount or timing of future distributions to stockholders, as long as the plan is
in effect, and no assurance can be given that the amount of liquidating
distributions to be received will equal or exceed the estimate of net assets in
liquidation presented in the accompanying Statements of Net Assets in
Liquidation.
Valuation
Assumptions
Under the
liquidation basis of accounting, the carrying amounts of assets as of the close
of business on January 29, 2010, the date the Board authorized the filing of the
Certificate of Dissolution, were adjusted to their estimated net realizable
values and liabilities, including the estimated costs associated with
implementing the Plan of Dissolution, were adjusted to estimated settlement
amounts. Such value estimates were updated by the Company as of January 31,2010. The following are the significant assumptions utilized by management in
assessing the value of assets and the expected settlement amounts of liabilities
included in the Statements of Net Assets in Liquidation at January 31,2010.
Net Assets in
Liquidation
The
majority of the net assets in liquidation at January 31, 2010 was highly liquid
and did not require adjustment as their estimated net realizable value
approximates their current book value. Cash, accounts receivable and other
assets are presented at face value. The Company’s remaining asset is the value
of the operating assets and liabilities that were contributed in the Merger.
This asset represents the expected net realizable value of the Company’s 33.3%
investment in VSW after the completion of the Merger.
The
Company engaged Hempstead & Co., Inc. to assess the liquidation value of the
Company’s 33% interest in VSW as of January 31, 2010. In its fairness
opinion dated May 29, 2009, Hempstead assessed the value indication associated
with a one-third equity interest in VSW based upon the discounted cash flows
methodology. Specifically, under a discounted cash flows methodology, the value
of a company’s stock is determined by discounting to present value the expected
returns that accrue to holders of such equity. Projected cash flows for VSW were
based upon projected financial data prepared by our management. Estimated cash
flows to equity holders were discounted to present value based upon a range of
discount rates, from 25% to 35%. This range of discount rates is reflective of
the required rates of return on later-stage venture capital investments.
Accordingly, in the Merger Agreement, the parties assigned a going concern
valuation of $7.0 million to the shares of VSW to be received by
Convera. Using liquidation value standards and applying a lack of
marketability discount, lack of control discount, a provision for the cost of
selling the interest as well as the additional cash contribution expected to be
made by Convera to the $7.0 million going concern valuation, resulted in a
liquidation value or net realizable ownership value of $1.9 million as of
January 31, 2010. This amount is reflected on the Consolidated Statement of Net
Assets in Liquidation as the $0.2 million estimated net realizable value of
operating assets and liabilities contributed in Merger and $1.7 million of cash
contributed concurrent with the Merger included in cash and cash equivalents as
of January 31, 2010.
Reserve for Estimated Costs during
the Liquidation Period
Under the
liquidation basis of accounting, the Company is required to estimate and accrue
the costs associated with implementing and completing the Plan of Dissolution.
These amounts can vary significantly due to, among other things, the costs of
retaining personnel and others to oversee the liquidation, including the cost of
insurance, the timing and amounts associated with discharging known and
contingent liabilities and the costs associated with cessation of the Company’s
operations including an estimate of costs subsequent to that date (which would
include reserve contingencies for the appropriate statutory periods). As a
result, the Company has accrued the projected costs, including corporate
overhead and specific liquidation costs of severance and staff transition
bonuses, professional fees, and other miscellaneous wind-down costs, expected to
be incurred during the projected period required to complete the liquidation of
the Company’s remaining assets. These accruals will be adjusted from time to
time as projections and assumptions change.
The
following is a summary of the changes in the Reserve for Estimated Costs during
the Liquidation Period: (in
thousands)
For all
periods before the Board authorized the filing of the Certificate of Dissolution
on January 29, 2010, the Company’s financial statements are presented on the
going concern basis of accounting. Such financial statements reflect the
historical basis of assets and liabilities and the historical results of
operations related to the Company’s assets and liabilities for the period from
February 1, 2009 to January 29, 2010 and the fiscal years ended January 31, 2009
and 2008.
Revenue
from our vertical search service offering consisted of hosted services,
professional services and advertising revenue shares. Our vertical
search services revenues were recognized in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB 104) “Revenue Recognition”. We
evaluate vertical search services arrangements that have multiple deliverables,
in accordance with Emerging Issues Task Force (“EITF”) Abstract Issue No. 00-21
“Revenue Arrangements with
Multiple Deliverables.” Judgment is required in interpreting a
revenue contract to determine the appropriate accounting for the
transaction. Multiple deliverable arrangements that contain elements
that do not qualify as separate units of accounting were recognized ratably over
the term of the hosting arrangement. Our vertical search service
contracts typically included advertising share revenue agreements, and may
include monthly contract minimum service fees. Monthly contract
minimums and other hosting fees or set-up fees were recognized ratably over the
term of the hosting agreement. Advertising share revenues were
recognized when earned under the provisions of the hosting
agreement. Revenue from training and professional services was
recognized when the services are performed. In addition, in all
cases, to recognize revenue we needed to assess whether the price was fixed and
determinable, whether persuasive evidence of an arrangement existed, whether the
service had been delivered and whether collection of the receivable was
reasonably assured.
Provision for Doubtful
Accounts
A
considerable amount of judgment was required in assessing the ultimate
realization of individual accounts receivable balances and determining whether a
provision for doubtful accounts is warranted. Our determination was
based on an analysis of our historical collection experience and our portfolio
of customers taking into consideration the general economic environment as well
as the industry in which we operate. To the extent we did not
recognize deterioration in our customers’ financial condition in the period it
occurs, or to the extent we did not accurately estimate our customers’ ability
to pay, the amount of bad debt expense recognized in a given reporting period
was impacted. At January 29, 2010, we determined that a provision for
estimated losses resulting from the inability of our customers to make the
required payments of $91,000 was required. A provision for doubtful accounts of
$165,000 was required at January 31, 2009.
Impairment of Long-Lived
Assets
We
evaluated all of our long-lived assets for impairment in accordance with the
provisions of ASC 360, “Property, Plant, and
Equipment.” ASC 360 requires that we review our long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable based on expected
undiscounted cash flows attributable to that asset. This review requires
significant judgments both in assessing events and circumstances as well as
estimating future cash flows. Should events indicate that any of our
assets are impaired, the amount of such impairment will be measured as the
difference between the carrying value and the fair value of the impaired asset
and the impairment will be recorded in earnings during the period of such
impairment. The determination of fair value is inherently an estimate and
requires significant judgment. See Note 4, “Impairment of Long-Lived Assets” in
the accompanying consolidated financial statements included in this Form 10-K
for information about the impairment charges we have taken.
Software Development
Costs
Our
software development costs were accounted for in accordance with ASC 350 “Intangibles – Goodwill and
Other”. We expensed costs incurred in the preliminary project stage and,
thereafter, we capitalized permitted costs incurred in the development or
acquisition of internal use software. Certain costs such as research
and development, maintenance and training were expensed as incurred.
Amortization of the capitalized costs was performed on a straight-line basis
over the estimated use life of the asset. No software development
costs have been capitalized in fiscal year 2010.
We follow
the provisions of ASC 740, “Income Taxes”. Under the
asset and liability method of ASC 740, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax laws and tax rates in each jurisdiction where we operate, and
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. We calculate estimated income taxes
in each of the jurisdictions in which we operate. This process involves
estimating actual current tax expense along with assessing temporary differences
resulting from differing treatment of items for both book and tax
purposes.
We record
a valuation allowance to reduce our 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 we may be required
to adjust our valuation allowance against our deferred tax assets, resulting in
a benefit or a charge to income in the period such determination is made. As of
January 29, 2010, we had recorded a full valuation allowance against the net
deferred tax asset. It is unlikely that this valuation will change as the
Company will lose the net operating loss carryforwards upon its
liquidation.
Significant
judgment is required in evaluation our uncertain tax positions and determining
the valuation allowance applied to deferred tax assets. We have concluded that
there are no uncertain tax positions requiring recognition in our consolidated
financial statements.
Stock-Based
Compensation
On
February 1, 2006, we adopted the provisions of and accounted for stock-based
compensation in accordance with ASC 718, “Share-Based Payment” that
addresses the accounting for stock-based compensation. ASC 718
requires that stock based compensation be accounted for using a fair value based
method. We use the Black-Scholes-Merton (“Black–Scholes”) option pricing model
to determine the fair value of stock-based awards under ASC 718. We are required
to make significant judgments and estimates in the application of ASC 718, in
particular with regards to forfeiture rates, volatility and expected life
assumptions. If any of the assumptions used in the Black-Scholes
model change, stock based compensation expense could differ materially in the
future from that recorded in the current period.
Results
of Operations (Going Concern Basis)
For all
periods before the Board authorized the filing of the Certificate of Dissolution
on January 29, 2010, the Company’s financial statements are presented on the
going concern basis of accounting. Such financial statements reflect the
historical basis of assets and liabilities and the historical results of
operations related to the Company’s assets and liabilities for the period from
February 1, 2009 to January 29, 2010 and the fiscal years ended January 31, 2009
and 2008. References to fiscal year 2010 or fiscal 2010 refer to the period of
February 1, 2009 to January 29, 2010
For
the fiscal year 2010 total revenues were $0.8 million compared to total
revenues of $1.3 million in fiscal year 2009. The net loss for fiscal 2010
was $12.4 million or $(0.23) per common share, compared to a net loss of
$22.6 million or $ (0.42) per common share in fiscal year
2009.
For
the fiscal year ended January 31, 2008, total revenues from continuing
operations were $1.1 million. The loss from continuing operations for
fiscal 2008 was $27.0 million, or $(0.51) per common share. The net loss
of $9.1 million or $(0.17) per common share in fiscal year 2008 includes a
$17.9 million gain from the sale of discontinued operations or $0.34 per
share.
The
following chart summarizes the components of revenues and the categories of
expenses on a going concern basis, including the amounts expressed as a
percentage of total revenues, for the fiscal year 2010 and the fiscal years
ended January 31, 2009 and 2008, respectively (dollars in
thousands):
Components
of Revenue and Expenses (Going Concern Basis)
Hosted
vertical search services revenue for fiscal year 2010 decreased by 40% to $0.8
million from $1.3 million for fiscal year 2009. This decrease is due
to an overall decrease in the number of customers served and the vertical search
sites in production generating revenue. During fiscal year 2010 there
were 16 sites in production generating revenue, compared to 22 revenue
generating sites in fiscal year 2009.
As of
January 29, 2010, there were a total of 57 Convera supported websites in
production compared to 51 such sites at January 31, 2009. Revenue from
international operations is generated from publishers located primarily in the
United Kingdom. International revenues were $0.2 million in the period ended
January 29, 2010 and were $1.0 million in the year ended January 31,2009.
Three
customers accounted for a total of 54% of the revenues generated in the period
ended January 29, 2010, accounting for 30%, 13% and 11%, respectively. Two
customers accounted for a total of 66% of the revenues generated in the year
ended January 31, 2009, accounting for 47% and 19%, respectively. One customer
accounted for 82% of total revenue during the year ended January 31,2008.
Operating
Expenses:
Cost
of Revenues
Our
hosted services cost of revenue decreased 63% to $2.6 million for the fiscal
year 2010 from $7.0 million for the fiscal year 2009. This decrease includes a
$2.0 million decrease in depreciation expense due to taking impairment charges
in the prior fiscal year and a $1.7 million decrease in personnel-related
expenses due to reductions in headcount. Cost of revenues decreased 28% to $7.0
million for fiscal year 2009 from the fiscal year 2008, due principally to a
$1.8 million decrease in hosting costs related to the closing of the San Diego
hosting center and $1.3 million decrease in compensation expense resulting from
restructuring actions and consulting expense due to lower foreign language
translation requirements in fiscal 2009 offset by $0.4 million increase in
depreciation and software maintenance costs related to software licenses
acquired and placed into service after January 31, 2008. Cost of revenue
headcount decreased to an average of six for fiscal year 2010 from an average of
17 for fiscal year 2009.
Sales
and Marketing
Sales and
marketing expense decreased 73% to $0.9 million for fiscal year 2010 from $3.3
million for fiscal year 2009. The decrease in sales and marketing expense
includes a $2.2 million decrease in personnel-related costs due to restructuring
actions in fiscal year 2009 and $0.2 million decrease in marketing program costs
due to less marketing efforts. Fiscal year 2009 expenses decreased 14% to 3.3
million from fiscal year 2008 due to decreased marketing program efforts, sales
commission and facility costs stemming from restructuring and downsizing of the
U.K. office in early fiscal 2009. Sales and marketing head count decreased to an
average of four for fiscal year 2010 from an average of eight for fiscal year
2009.
Research
and Development
Research
and product development costs decreased 48% to $2.4 million for fiscal year 2010
from $4.7 million for fiscal year 2009. The decrease in research and product
development costs is principally due to a $2.1 million decrease in
personnel-related costs stemming from restructuring actions taken in the prior
fiscal year. Research and product development costs for fiscal year 2009
remained level at $4.7 million due to a combination of $0.4 million increase in
personnel related costs and a $0.3 million increase in stock compensation
expense, offset in part by a $0.3 million decrease in facilities cost stemming
from the restructuring actions taken in 2008 and a $ 0.2 million decrease in
consulting costs due to reduced language translation requirements in fiscal
2009. Research and development headcount decreased to an average of eight for
fiscal year 2010 from an average of 23 for fiscal year 2009.
General
and administrative expense decreased 23% to $5.4 million for fiscal year 2010
from $7.0 million for fiscal year 2009. The decrease includes a $1.8 million
reduction in personnel-related costs due to lower staffing levels, a $.3 million
decrease in accounting fees and $0.2 million decrease in depreciation and other
corporate expenses offset by a $0.7 million increase in legal fees related to
the Merger. For fiscal year 2009, general and administrative expense decreased
37% to $7.0 million from fiscal year 2008 due to a $2.1 million reduction in
third-party legal fees related to the settlement of lawsuits in fiscal 2008 as
well as a $0.7 million reduction in costs related to a settlement fee paid to
DSMCi in fiscal 2008. Additionally, consulting expenses decreased
$0.3 million, accounting fees were reduced $0.7 million and there was a $0.8
million decrease in compensation costs resulting from lower staffing levels,
offset by a $0.7 million increase in stock compensation expense. General and
administrative headcount decreased to an average of 11 for fiscal year 2010 from
an average of 16 for fiscal year 2009.
Impairment
of long-lived Assets
During
the quarter ended January 31, 2009, an analysis of our Ad server and related
hosting group identified several asset impairment indicators. These
indicators included failure to achieve forecasted operating results, the lack of
significant new contracts and the general economic downturn that slowed
investment in online publishing. These conditions and events
indicated that the carrying value of this asset group, consisting primarily of
network hosting equipment and related software, was not recoverable.
Accordingly, we completed an impairment test in accordance with our
accounting policy for this asset group, which resulted in an impairment charge
of $3.1 million for the year ended January 31, 2009. To determine the amount of
the impairment charge, we were required to make estimates of the fair value of
the assets in this group, and these estimates were based on the use of the
income approach to determine the fair value of the software and a third party
appraisal for the equipment.
Foreign
Currency Translation Adjustment
As of
January 29, 2010 our investment in our U.K. and Canadian subsidiaries had been
substantially liquidated. Accordingly the amounts previously recorded
through other
comprehensive income and included as a separate component of shareholders
equity were eliminated from the cumulative translation component of shareholders
equity and recorded as a $2.0 million expense under the caption “Foreign
currency translation adjustment” in the consolidated financial statements
for fiscal year 2010. This amount
represents the cumulative translation adjustment previously related to the
conversion of the balance sheets of our foreign subsidiaries in their respective
local currency to the reporting or functional currency of Convera
Corporation.
Other
income
Other
income decreased to $44,000 for fiscal year 2010 from $1.3 million for fiscal
year 2009 due to the combined effects of a lower average cash balance and lower
interest rates as well as a $0.7 million increase in other income in fiscal year
2009 related to the delivery of a discontinued product to a U.S. government
customer. Other income decreased to $1.3 million for the year ended
January 31, 2009 from $1.8 million in the comparable period of the prior fiscal
year and includes the aforementioned $0.7 million earned from the delivery of a
discontinued product and $0.5 million of interest income.
Discontinued
operations
Discontinued
operations for the year ended January 31, 2008 included income of $17.9 million
from the net gain on the sale of the RetrievalWare enterprise search business.
The sale of RetrievalWare was completed in August 2007 and there was no business
activity or operating results from discontinued operations during the year ended
January 31, 2008.
As of
January 31, 2010, we are obligated under certain contractual arrangements to
make future payments for goods and services. These contractual obligations were
assigned to VSW in accordance with the Merger Agreement and will secure the
future rights to various assets and services to be used in the normal course of
VSW’s operations. For example, we are contractually committed to make certain
minimum lease payments for the use of property under operating lease agreements.
In accordance with applicable accounting rules, the future rights and
obligations pertaining to firm commitments such as operating lease obligations
and certain purchase obligations under contracts are not reflected as assets or
liabilities on the accompanying consolidated balance sheets.
As of
January 31, 2010, we had the following contractual obligations associated with
our lease commitments, and other contractual obligations for the periods
indicated below:
Contractual
Obligations
Payments
Due By Fiscal Period (in thousands)
Total
2011
2012-2013
Operating
leases
$
545
$
213
$
332
Other
contractual obligations
1,032
1,032
-
Total
$
1,577
$
1,245
$
332
·
Operating
lease obligations — represents the minimum lease rental payments
under non-cancelable leases, primarily for our office space and operating
equipment in various locations around the
world.
·
Other
contractual obligations — represents the principal amounts due on
outstanding contractual obligations relating to our hosting agreements
with AT&T for our vertical search product. In January 2008,
we exercised our right to terminate the contract for the San Diego hosting
facility (see further discussion in Note 4 of the consolidated financial
statements). The other contractual obligations balance includes
the termination obligation due for the San Diego hosting facility of
approximately $0.7 million, as well as 100% of the contractual obligation
for the Dallas hosting facility, although that agreement is cancelable for
a payment of 50% of the remaining balance at the time of cancellation. In
June 2009 we exercised our option to extend the AT&T Dallas hosting
facility agreement for an additional 12 months through July 31, 2010 at a
slight increase in the contractual rate that is not reflected in other
contractual obligations.
Liquidity
and Capital Resources (Going Concern Basis)
For all
periods prior to the Board’s authorization of the Certificate of Dissolution on
January 29, 2010, the Company’s financial statements are presented on the going
concern basis of accounting. Such financial statements reflect the historical
basis of assets and liabilities and the historical results of operations related
to the Company’s assets and liabilities for the period from February 1, 2009 to
January 29, 2010 and the fiscal years ended January 31, 2009 and
2008.
Our
balance of cash and cash equivalents at January 29, 2010 as compared to January31, 2009 is summarized below (in thousands).
At
January 31, 2010, our principal source of liquidity was cash of $12.7
million.
Operating
activities consumed $10.1 million in cash in fiscal 2010. The primary
use of cash from operating activities was the net loss of $12.4 million.
Non-cash expenses included depreciation and amortization expense of $0.4 million
and stock-based compensation of $0.4 million. The $2.3 million decrease in
depreciation expense during the current year is a result of the impairment
write-down to fixed assets in fiscal year 2009 combined with minimal fixed asset
purchases in the current year. The $2.5 million decrease in stock-based
compensation expense in the current year is due to the cancellation of stock
options concurrent with the headcount reduction in the current fiscal year as
well as the reduction in service-based option awards over the last two fiscal
years. Total Company headcount was 30 at January 29, 2010 compared to 56 at the
beginning of the fiscal year. The $3.1 million impairment charge recognized in
fiscal 2009 was mainly related to certain acquired software used in our vertical
search business. We recorded a $0.6 million impairment charge in fiscal 2008 due
to hosting equipment rendered idle in the termination of our hosting arrangement
for the San Diego facility.
Reductions
to accounts receivable increased operating cash flow by of $0.4 million in
fiscal 2010. We experienced aging in accounts receivable due to slower paying
publishers in fiscal 2009 resulting in a $0.8 million increase in accounts
receivable. We established a reserve of $91,000 at January 29, 2010
based on an analysis of the overall recoverability of the accounts of several
slow paying customers. A decrease in accounts payable and accrued
expenses reduced operational cash flow by $0.7 million in fiscal 2010. The
reduction in accounts payable and accrued expenses is a result of the
operational restructurings and cutbacks over the last year. An increase to
prepaid expenses and other assets reduced operating cash flow by $0.2 million
during the current year. Net cash of $1.7 million was provided by
discontinued operations in fiscal 2008.
Investing
activities in the current year included $0.1 million of proceeds from the
disposal of assets offset by $43,000 in new asset
purchases. Investing activities provided a net of $2.0 million in
cash during fiscal 2009. Proceeds of $4.0 million were collected in the
finalization and release of the funds held in escrow for the sale of the
RetrievalWare Enterprise Search Business to FAST in August 2008, offset in part
by our payment during the first quarter of fiscal 2009 of a $1.0 million working
capital adjustment related to the sale of the RetrievalWare Enterprise Search
business. Purchases of equipment totaling $1.1 million in fiscal 2009
were partially offset by the proceeds from the sale of assets of $0.1 million.
Investing activities provided $12.1 million in cash in fiscal 2008. The sale of
the Enterprise Search business provided $16.4 million, net of expense directly
related to the transaction. This was offset by $4.3 million used in purchases of
equipment and leasehold improvements. Investing activities of
discontinued operations used $4,000 in fiscal 2008.
There
were no cash flows from financing activities in fiscal year
2010. Financing activities used $28,000 for fiscal 2009 related to
the repurchase of shares upon completion of a deferred stock agreement with a
senior officer of the company in January 2009. The issuance of common
stock related to the exercise of employee stock options and deferred stock
arrangements provided a net of $0.6 million in fiscal 2008.
Inflation
We
believe that inflation has not had a material impact on the results of our
operations to date.
Item
7A. Quantitative
and Qualitative Disclosures about Market Risk
Our
market risk is principally confined to changes in foreign currency exchange
rates and potentially adverse effects of differing tax
structures. Until its closure in January 2009, international sales
were made predominantly from our U.K. subsidiary and were typically denominated
in British pounds. International revenues for the year ended January29, 2010 were 21% of total revenues. As of January 29, 2010,
approximately 7% of total consolidated accounts receivable are denominated in
British pounds. The majority of these receivables are due within 90
days of the end of fiscal year 2010, and all receivables are due within one
year. Historically, we were exposed to potential foreign currency
gains or losses resulting from intercompany accounts that were not of a
long-term nature. We were also exposed to foreign exchange rate
fluctuations as the financial results of our foreign subsidiaries were
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, 2010, approximately 7% of our cash and cash equivalents were
denominated in British pounds, EUROs and
Canadian dollars. Cash equivalents consist of funds deposited in
money market accounts with original maturities of three months or
less. We also have certificates of deposit of $76,000 and $450,000
included in other assets which are pledged to collateralize letters of credit
required for leased facilities. Given the relatively short maturity
periods of these cash equivalents, the cost of these investments approximates
their fair values and our exposure to fluctuations in interest rates is
limited.
As of
January 29, 2010 our investment in our U.K. and Canadian subsidiaries had been
substantially liquidated. Accordingly the amounts previously recorded
through other
comprehensive income and included as a separate component of shareholders
equity were eliminated from the cumulative translation component of shareholders
equity and recorded as a $2.0 million expense under the caption “Foreign
currency translation adjustment” in the consolidated financial statements for
fiscal 2010. This amount
represents the cumulative translation adjustment previously related to the
conversion of the balance sheets of our foreign subsidiaries in their respective
local currency to the reporting or functional currency of Convera
Corporation.
Item
8. Financial
Statements and Supplementary Data
Financial
statements and supplementary data are submitted as a separate section of this
Annual Report on Form 10-K.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Management’s
Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act, as amended, and for assessing the effectiveness of internal
control over financial reporting. Our management, with the participation of our
acting Chief Executive Officer and Chief Financial Officer, who is our principal
executive and accounting officer, conducted an evaluation of the effectiveness
of our internal control over financial reporting as of January 31, 2010. In
making this assessment, our management used the criteria established in Internal
Control -- Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Management has concluded that
we maintained effective internal control over financial reporting as of January31, 2010, based on the criteria established in COSO's Internal Control –
Integrated Framework.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
(b)
Changes
in Internal Control Over Financial
Reporting
There was
no change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended January 31, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
(c)
Evaluation
of Disclosure Controls and
Procedures
Our
management, with the participation of our acting Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) and determined that our disclosure controls
and procedures were effective as of January 31, 2010. The evaluation considered
the procedures designed to ensure that information required to be disclosed by
us in reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and communicated to our management as appropriate to allow timely
decisions regarding required disclosure.
(d)
Inherent
Limitations of Disclosure Controls and Internal Control Over Financial
Reporting
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Item
10. Directors,
Executive Officers and Corporate Governance
Set forth
below are the names, ages and positions of each of our directors and executive
officers.
Name
Age
Position
Ronald
J. Whittier
73
Director
Herbert
A. Allen III
42
Director
Jeffrey
White
62
Director
Matthew
G. Jones
48
Acting
Chief Executive Officer, Chief Financial Officer, Secretary and
Treasurer
The three
directors listed above, all of whom are continuing members of our Board, were
nominated and elected as directors of the Company. The term of the
directors commenced on January 29, 2010.
Business
Experience of Directors and Officers
Ronald J.
Whittier has been Chairman of the Company since the effective date of the
business combination transaction (the “Combination”) of the former Excalibur
Technologies Corporation (“Excalibur”) and Intel Corporation’s (“Intel”)
Interactive Media Services division which created the Company on
December 21, 2000 and was Chief Executive Officer from December 21,2000 through April 5, 2001. Mr. Whittier is a founder and Chairman of
TechFutures, a non-profit school, and has held that position since 1999.
Mr. Whittier formerly held the position of Senior Vice President of Intel
and General Manager of Intel’s Interactive Media Services division from 1999
until December 21, 2000. From 1995 to 1999, he was responsible for
coordinating Intel’s various activities in content, applications and authoring
tools. Prior to 1995, he held various jobs at Intel, including manager of Intel
Architecture Labs, Director of Corporate Marketing and general manager of the
Memory Products Division. Mr. Whittier joined Intel in
1970. Because of Mr. Whittier’s deep knowledge of our business and
industry as well as his detailed and in-depth knowledge of the issues,
opportunities and challenges facing us, we believe that he is an invaluable
member of our Board of Directors
Herbert
A. Allen III has been a director of the Company since January
2002. He has been President of Allen & Company LLC, an
investment banking firm and broker-dealer affiliated with Allen &
Company Incorporated, since September 2002. Prior to that, he was a
Vice-President and later an Executive Vice President and a Managing Director of
Allen & Company Incorporated since 1993. Prior to 1993, Mr. Allen
was employed by T. Rowe Price, an investment management firm, and
Botts & Company Limited, a funds management and investment company. He
is the son of Herbert A. Allen, our significant stockholder. Mr.
Allen has substantial experience in investment banking and management and is
familiar with and has designed complex capital structures
Jeffrey
White has been a director of the Company since May 2003. Since February 2003,
Mr. White has been President of Fare Play, Inc., a consulting company to
major league baseball teams. He was self-employed as a consultant from April
2002 until February 2003. From 1991 through 2002, Mr. White served as
Senior Vice President and Chief Financial Officer for Major League Baseball,
Office of the Commissioner. Mr. White is an accounting and finance
expert and has extensive experience gained through his associations with major
league baseball. As chief financial officer of Major League Baseball
he was responsible for financial, auditing, accounting, treasury, risk
management and MIS/IT functions for central baseball.
Matthew
G. Jones has been the Company’s Chief Financial Officer, Treasurer and Secretary
since July 2006. Mr. Jones was also appointed as the acting Chief Executive
Officer of the Company by the Board of Directors on May 18,2010. Mr. Jones served as the Company’s Vice
President of Finance from April 2006 until July 2006. Prior to
joining the Company in April 2006, Mr. Jones was Chief Financial Officer,
Treasurer and Secretary of Space Adventures since July 2001 and held a number of
senior financial management positions with several publicly-traded and private
companies from 1992 through 2001. Mr. Jones is a certified public
accountant with seven years of public accounting experience at Price
Waterhouse.
Other
than specified above, there are no family relationships among any of our
directors or executive officers.
For
fiscal 2011, our Audit Committee consists of Mr. Jeffrey White. The Board has
determined that Mr. White is an independent director under NASDAQ rules and he
is able to read and understand fundamental financial statements. The Board has
determined that Mr. White also qualifies as an “audit committee financial
expert” as defined by the rules of the SEC. The purpose of the Audit Committee
is to oversee our accounting and financial reporting processes and audits of our
financial statements. The responsibilities of the Audit Committee include
appointing and providing the compensation of the independent accountants to
conduct the annual audit of our accounts, reviewing the scope and results of the
independent audits, reviewing and evaluating internal accounting policies, and
approving all professional services to be provided to us by our independent
registered public accounting firm. The Audit Committee is governed by a written
charter, a copy of which is available on our website at www.convera.com. The Audit Committee met
four times during the fiscal year ended January 31, 2010.
Code of Business Conduct and
Ethics
We have
adopted a written code of conduct and ethics (the “Code”) which is applicable to
all of our officers, directors and employees, including our Chief Executive
Officer and Chief Financial Officer (collectively, the “Senior Officers”). In
accordance with the rules and regulations of the SEC and the rules of NASDAQ, a
copy of the Code has been posted on our website at www.convera.com. We intend to
disclose any changes in or waivers from the Code applicable to any Senior
Officers on our website and by filing a Form 8-K.
Section 16(a)
of the Exchange Act and regulations of the SEC thereunder require our executive
officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, to file reports of initial ownership
and changes in ownership with the SEC. Based solely on our review of copies of
such forms received by us, or on written representations from certain reporting
persons that no other reports were required for such persons, we believe that
during or with respect to the period from February 1, 2009 to January 31,2010, all of the Section 16(a) filing requirements applicable to our
executive officers, directors and ten percent stockholders were complied with on
a timely basis.
For
fiscal 2010, the members of the Compensation Committee of the Board of Directors
consisted of Messrs. Ajay Menon (Chairman), Eli Jacobs, John
Botts and Jeffrey White, each of whom also served as directors on the Board
during fiscal 2010. All Compensation Committee members were
independent nonemployee directors as defined under Rule 16b-3 of the
Exchange Act and satisfied the director independence requirements of the NASDAQ
rules and the definition of “outside director” under Section 162(m) of the
Internal Revenue Code. No special expertise in compensation matters was required
for appointment to the Compensation Committee. Given that the Company
has filed a Certificate of Dissolution and is in the process of going forward
with its Plan of Dissolution, the Company, the Company is not maintaining a
Compensation Committee for fiscal 2011. Any compensation matters that
arise until the Plan of Dissolution is completed will be addressed by the
Board.
The
Compensation Committee was responsible for all components of our executive
compensation program and for administering all stock option plans under which
stock option grants were made to our executive officers. On an annual basis, the
Compensation Committee evaluated the performance and compensation of our Chief
Executive Officer and Chief Financial Officer. The Compensation Committee was
also authorized to review and recommend the compensation of directors for
approval by the full Board. The Compensation Committee took no action to modify
director compensation in fiscal 2010.
The
Compensation Committee’s charter could be found on our website at www.convera.com by first
clicking on “About Convera” and then “Corporate Governance.” The
charter could be modified by a decision of the Compensation Committee, subject
to approval by the Board. The Compensation Committee had the authority on its
own behalf to retain outside counsel and consultants as the Committee deemed
necessary at its sole discretion to advise the Committee on matters within the
charter of the Committee and had the sole authority to approve such consultant’s
fees and other terms of engagement. The charter gave the Compensation Committee
the authority to make decisions on behalf of the Board with respect to matters
within its authority and any other duties assigned to it by the
Board. Under its charter, the Compensation Committee also had the
authority to delegate to a subcommittee of its members any of its functions,
duties and authority but has not done so.
The
Compensation Committee met quarterly in conjunction with regularly scheduled
Board meetings, and also held meetings via conference call when deemed necessary
by the Committee or its chairperson. The agendas were determined through a
collaborative process involving the Compensation Committee chairperson, the
Chairman of the Board of Directors and our Chief Executive Officer, who
sometimes were invited to attend meetings. These officers, if attending or
participating in the meeting, were typically excused from the meeting when the
Committee discusses their individual compensation or performance and during
other executive sessions of the Committee. Our outside counsel also attended the
Compensation Committee’s meetings.
Compensation Consultant/Role of
Executives
The
Compensation Committee did not retain an outside consultant in fiscal year ended
January 31, 2010.
Compensation
Philosophy
Our
current compensation arrangements, which were adopted while our management and
Board considered various options to curtail continuing losses, were designed to
retain only the necessary key and administrative personnel to carry out a plan
to preserve cash and maximize value for our stockholders. The Board ultimately
decided shareholder interests were best served by dissolving the Company and
approved our Plan of Dissolution. As a result, certain employees were
terminated and employment contracts and arrangements were modified to meet the
expected requirements of the Plan of Dissolution.
Prior to
adopting the Plan of Dissolution, the foundation of our executive compensation
program was based on principles designed to align compensation with our business
strategy, values and management initiatives. The program was implemented through
three key elements:
• attract
and retain key executives who are critical to our long-term
success;
• integrate
compensation programs which link compensation with our annual strategic planning
and measurement processes to support a performance-oriented environment;
and
• tie
meaningful compensation opportunities to the creation of additional shareholder
value.
The
Compensation Committee aimed to achieve the first element by paying executive
personnel a market base salary. Offering market base salary was designed to
provide executive personnel with the benefits of a stable base compensation that
is comparable to what they would receive from most of our competitors. The
Compensation Committee attempted to achieve the second element through the
adoption of an annual variable incentive plan, which tied annual bonus payments
to specified annual performance objectives. The Committee endeavored to
accomplish the third element by providing executive personnel with meaningful
equity compensation awards in order to align executives’ incentives with
stockholder value creation.
In prior
years, our executive compensation program included three components: (1) base
salary, (2) an incentive bonus and (3) long-term incentive compensation for our
two executive officers. Our compensation policy typically allocated a
substantial portion of the annual compensation of each executive officer to a
bonus component contingent upon our performance, as well as the individual
performance of each executive officer. Due to the poor economic
climate and in an effort to preserve cash, for fiscal year ended January 31,2010, our executive officer compensation program included only a base
salary for our two executive officers. The Compensation Committee
believed that the total compensation package must be competitive with other
companies in the industry to ensure that we would be able to retain and motivate
key executives who were critical to the completion of our corporate objectives
including the successful completion of the Plan of Dissolution. The Compensation
Committee did not employ outside consultants or utilize specific compensation
surveys in evaluating competing company compensation policies or financial
performance. Instead, the Compensation Committee members rely on their own
experience and knowledge of Convera and its industry and also consider that of
management and other Board members, in evaluating such
factors.
Base Salary. The
Compensation Committee determined the salary ranges for each of our executive
officer positions, including the Chief Executive Officer, based upon the scope,
level, and strategic impact of the position, and on the historical pay levels of
the particular executive officers, as well as information they may have had for
similarly positioned executive officers in comparable companies. Annual salary
adjustments recognized sustained individual performance by the executive, with
overall salary increase funding levels sensitive to both the individual’s and
our performance. The Compensation Committee presented the salary recommendations
for our executive officers to the Board of Directors for approval. In accordance
with NASDAQ requirements, the independent directors were required to approve
such compensation. These salary recommendations were based on the executive’s
contribution to the Company, experience and expertise. For fiscal
year 2010, no adjustments were made to executive officers’ base
salaries.
Long-Term Incentive
Compensation. In March 2008, Mr. Condo, our former President
and Chief Executive Officer, and Mr. Jones were issued 700,000 and
300,000 shares, respectively, of common stock options at an exercise price of
$1.92 per share. These shares had a three year cliff-vesting
provision and were contingent on the Company achieving revenue and EBIDTA of $25
million and $2.5 million, respectively, for the fiscal year ended January 31,2011. As a result of the dissolution of the Company the revenue and EBIDTA
contingency components of this plan will not be achieved.
Post-Termination
Protection
We had
provided for severance payments to our executive officers from time to time
through individual employment agreements with such officers. The Compensation
Committee believed these severance benefits were important to protect our
officers from being involuntary terminated prior to or after a change in control
and that the amounts provided for in such agreements were reasonable in nature.
In addition, the Compensation Committee believed that these severance benefits
aligned executive and stockholder interests by enabling the executive officers
to consider corporate transactions that were in the best interests of the
stockholders and our other constituents without undue concern over whether the
transactions would jeopardize the officers’ own employment. Information
regarding these arrangements is provided in the section “Employment Agreements
and Other Arrangements.”
In making
compensation decisions affecting the executive officers, the Compensation
Committee considered our ability to deduct under applicable federal corporate
income tax law compensation payments made to executives. Specifically, the
Compensation Committee considered the requirements and impact of
Section 162(m) of the Internal Revenue Code, which generally disallows a
tax deduction for annual compensation in excess of $1 million paid to our
named executive officers. Certain compensation that qualified under applicable
tax regulations as “performance-based” compensation was specifically exempted
from this deduction rule. The cash compensation that we paid to each of our
named executive officers during fiscal year ended January 31, 2010 was below
$1,000,000. We believe that stock options granted to our named executive
officers under our stock option plans would qualify as “performance-based
compensation” and therefore are Section 162(m)
qualified.
Accounting for
Stock-Based Compensation
On
February 1, 2007, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment”, to account for all stock grants under all of its stock
plans.
Summary Compensation
Table
The
following table sets forth all of the compensation awarded to, earned by, or
paid to our “principal executive officer” and “principal financial officer”
(collectively, our “Named Executive Officers”).
Name
and Principal Position
Year
Salary
($)
Bonus
($)
Option
Awards
($)
All
Other
Compensation
($)
Total
($)
Patrick
C. Condo
2010
480,000
—
—
36,922
(3
)
516,922
Former
President & CEO
2009
480,000
—
—
(1
)
6,150
(4
)
486,150
Matthew
G. Jones
2010
250,000
—
—
7,365
(4
)
257,365
Chief
Financial Officer
2009
250,000
50,000
—
(2
)
6,917
(4
)
306,917
(1)
During
Fiscal Year 2009 Mr. Condo was granted 700,000 performance based options
at an option price of $1.92. The vesting of these options was contingent
upon the Company achieving revenue and EBIDTA of $25 million and $2.5
million, respectively, for the fiscal year ended January 31,2011. These options were valued using the Black-Scholes option
pricing model on the grant date and the aggregate compensation expense if
all options were to vest would have been $969,000. The Company
concluded that the achievement of the performances was not probable and
accordingly has recorded the value of this award as
zero.
(2)
During
Fiscal Year 2009 Mr. Jones was granted 300,000 performance based options
at an option price of $1.92. The vesting of these options was contingent
upon the Company achieving revenue and EBIDTA of $25 million and $2.5
million, respectively, for the fiscal year ended January 31,2011. These options were valued using the Black-Scholes option
pricing model on the grant date and the aggregate compensation expense if
all options were to vest would have been $300,000. The Company
concluded that the achievement of the performances was not probable and
accordingly has recorded the value of this award as
zero.
(3)
This
amount consist of unused vacation paid out pursuant to Mr. Condo’s
transition agreement
(4)
This
amount consists of matching contributions to our 401(k)
plan.
There
were no equity or non-equity awards granted to our Named Executive Officers
during the fiscal year ended January 31, 2010.
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information regarding each unexercised option
previously awarded to our Named Executive Officers as of January 31,2010.
Stock
Options
Name
Number
of
Securities
Underlying
Unexercised
Options
Exercisable
Equity
Incentive
Plan
Awards:
Number
of Securities
Underlying
Unexercised
Unearned
Options
Option
Exercise
Price
Option
Expiration
Date
Patrick
C. Condo
100,000
—
4.38
4/27/2010
429,700
—
4.38
6/8/2011
750,000
(1
)
—
4.71
11/30/2014
—
(2
)
700,000
1.92
3/25/2018
Matthew
G. Jones
43,750
(3
)
6,250
5.51
7/18/2016
21,874
(4
)
3,126
5.58
7/24/2016
168,750
(5
)
56,250
4.44
12/6/2016
15,000
(6
)
—
3.30
8/21/2007
—
(2
)
300,000
1.92
3/25/2018
(1)
The
options vest semi-annually in eight equal installments from the 11/30/2004
grant date.
(2)
The
performance-based options have three year cliff vesting from the 3/25/2008
grant date contingent on the attainment of stated revenue and EBIDTA
goals.
(3)
The
options vest semi-annually in eight equal installments from the 7/18/2006
grant date.
(4)
The
options vest semi-annually in eight equal installments from the 7/24/2006
grant date.
(5)
The
options vest semi-annually in eight equal installments from the 12/6/2006
grant date.
(6)
The
options were fully vested at the 8/21/2007 grant
date.
All of
Mr. Condo’s stock options vested on the closing date of the merger, and Mr.
Condo may exercise vested stock options for a period 90 days after the
Merger. All of Mr. Jones’ stock options terminated on the day of the
Merger.
Our Named
Executive Officers did not have any stock awards vested in the fiscal year ended
January 31, 2010. Neither of the Named Executive Officers exercised
any options during fiscal 2010.
Potential Payments upon Termination
or Change in Control
See “Employment Agreements and Other
Arrangements” below for a discussion of the potential payments due to
each of our Named Executive Officers upon a termination or change in
control.
Employment Agreements and Other
Arrangements
On
November 14, 2005, our Board of Directors approved an employment agreement
for our President and Chief Executive Officer, Patrick C.
Condo. Mr. Condo’s employment agreement provides for an at-will
employment arrangement, under which his annual base salary is $480,000 and he is
eligible for a bonus of up to $200,000 per fiscal year based upon
performance targets to be established by our Board of Directors. In addition,
Mr. Condo’s employment agreement includes the following severance
arrangements:
(a) If
Mr. Condo’s employment is terminated without cause or he resigns for good
reason (as such terms were defined by the Board), Mr. Condo will be
entitled to 18 months of salary continuance, 1.5 times his target bonus for
the year of termination, 18 months’ accelerated vesting of all options held
by Mr. Condo and 18 months’ medical benefits coverage (either by
reimbursement, continued coverage or replacement coverage) (collectively, the
“Severance Benefits”). In addition, the 600,000 restricted stock award made to
Mr. Condo pursuant to an agreement dated May 20, 2003, as amended on
May 18, 2004 (the “Restricted Stock Award”), which otherwise vest on each
consecutive one-year anniversary of the date of grant, will vest in full upon
termination without cause and will be subject to 18 months’ additional
vesting in the event he resigns for good reason. In order for Mr. Condo to
receive the above benefits, he will be required to release us from all claims
and agree to an 18-month non-compete and non-solicitation
agreement.
(b) If
Mr. Condo is terminated without cause or resigns for good reason within
18 months following a change of control of the Company, he will receive the
same Severance Benefits described above. In addition, upon a change of control
of the Company, the unvested portion of the Restricted Stock Award will vest in
full.
On May29, 2009, we entered into a Transition Agreement with Mr. Condo, pursuant to
which Mr. Condo will transition employment from Convera to Vertical Search Works
in conjunction with the Merger Agreement. In accordance with the
Transition Agreement, Convera paid Mr. Condo, among other benefits, an aggregate
amount of $480,000 in cash in a lump sum on February 26, 2010. Mr. Condo has
signed and delivered a general release in favor of Convera and the release has
become effective. All of Mr. Condo’s stock options vested on the
closing date of the merger, and Mr. Condo may exercise vested stock options for
a period of 90 days after the merger Upon the completion of the
merger, on February 9, 2010, Mr. Condo’s previous Employment Agreement was
superseded by the Transition Agreement and Mr. Condo resigned from his positions
at Convera. A copy of the Transition Agreement is attached as Exhibit
10.14 to this report and incorporated herein by reference.
On
December 6, 2006, we entered into an at-will employment agreement with
Matthew G. Jones, whereby Mr. Jones agreed to act as our Executive Vice
President, Chief Financial Officer and Treasurer. Under his agreement with us,
Mr. Jones’ base salary is $250,000 and he is eligible for a bonus of up to
$100,000 per fiscal year, depending upon our actual performance compared to
our operating plan. The agreement provided Mr. Jones a grant of options to
purchase 225,000 shares of our common stock pursuant to our 2000 Stock
Option Plan. Mr. Jones’s options vest 12.5% every six months and such
vesting accelerates upon a change of control event affecting the Company. Under
his employment agreement, if Mr. Jones’s employment is terminated by us
(other than for reasons set forth in the agreement) or by Mr. Jones (in
circumstances where he is entitled to do so under the agreement), we shall pay
Mr. Jones any unpaid base salary, unreimbursed business expenses and
accrued vacation through the termination date, as well as a lump sum amount
equal to any bonus earned but not paid and up to one year of his then-current
base salary, with such payment vesting one month for each month that
Mr. Jones served as our Chief Financial Officer, up to the referenced one
year.
On April22, 2010, we entered into a Transition Agreement with Mr.
Jones. Pursuant to the Transition Agreement, Mr. Jones will continue
to serve the Company as CFO in his capacity as a consultant to, but not an
employee of, the Company. The scope of Mr. Jones’ consulting
services will be those normally performed by a public company chief financial
officer. Mr. Jones will report to the Company’s Board of
Directors.
According
to the Transition Agreement, starting from the date of the Merger, Convera will
pay Mr. Jones, among other benefits, an annualized compensation in the amount of
$50,000 per year, payable on a semi-monthly basis in arrears. The
compensation amount will be “grossed up” by an amount equal to the employer
portion of the Medicare tax. In addition, the Company will pay to Mr.
Jones bonus payments as follows: (i) a one-time bonus of $10,000 in the
aggregate amount in cash upon completion of the filing of the Form 10-K for
fiscal 2010 and (ii) a one-time bonus in an aggregate amount of $30,000 in cash,
each less applicable withholdings, in a lump sum upon the final liquidation of
the Company in accordance to the Plan, as long as Mr. Jones performs his
responsibilities and obligations in accordance with the Transition Agreement and
does not breach the Transition Agreement and all filings which Mr. Jones has
supervision over are made on a timely basis, as such term is defined in the
agreement, including within extended time frame as permitted by the Securities
and Exchange Commission. All of Mr. Jones’ stock options terminated
on the date of the Merger.
Mr.
Jones’ previous Employment Agreement, entered into on December 6, 2006, was
superseded by the Transition Agreement and accordingly the Company paid him an
aggregate amount of $250,000 in cash, less applicable withholdings, in a lump
sum as his transition fee on February 26, 2010. In accordance with
the Transition Agreement Mr. Jones has signed and delivered to the Company a
general release of claims in favor of the Company and related
persons. A copy of the Transition Agreement is attached as Exhibit
10.16 to this report and incorporated herein by reference.
Director
Compensation
For
fiscal 2010, each non-employee director, with the exception of Herbert A. Allen,
Herbert A. Allen III and John C. Botts (each of whom were directors during
fiscal 2010), was
paid or entitled to $4,000 for attending each meeting of the Board at which
there was a quorum, whether in person or by telephone, up to a maximum of
$20,000 per fiscal year. In addition, all directors were eligible for
reimbursement of their expenses in attending meetings of the Board. Members of
the Audit Committee were also paid or entitled to $4,000 for attending each
Audit Committee meeting for which there was a quorum, whether in person or by
telephone, up to a maximum of $20,000 per fiscal year. Further, each
non-employee director was granted options to purchase 25,000 shares of our
common stock upon becoming a director. Such options were to vest in six
semi-annual installments over three years and have a term of ten
years.
For
fiscal 2011 and going forward, Jeffrey White will be entitled to $20,000 during
the first fiscal quarter of 2011 and $10,000 for each fiscal quarter thereafter
as payment for his service on the Board and on the Audit
Committee. Ronald J. Whittier and Herbert A. Allen III have waived
their right to receive compensation for their service on the
Board.
During
the fiscal year ended January 31, 2010, and for the prior two fiscal years, we
paid Mr. Ronald J. Whittier, Chairman of the Board of Directors for fiscal
2010, a salary of $100,000 and provided Mr. Whittier with customary
employee benefits for his services to us.
Employee
directors received no additional compensation for serving on the Board of
Directors. As of January 29, 2010, there were no employees serving on
the Board.
The
following table sets forth all of the compensation awarded to, earned by, or
paid to each person who served as one of our directors during the fiscal year
ended January 31, 2010, other than a director who also served as a Named
Executive Officer.
Fees
Earned or Paid in Cash
Option
Awards
All
Other Compensation
Total
($)
($)(1)
($)
($)
Ronald
J. Whittier
100,000
-
4,000
(2)
104,000
Eli
S. Jacobs (3)
8,000
-
-
8,000
Ajay
Menon (3)
20,000
-
-
20,000
Carl
J. Rickertsen (3)
16,000
-
-
16,000
Jeffrey
White
20,000
-
-
20,000
John
C. Botts (3)
-
-
-
-
Alexander
F. Parker (3)
8,000
-
-
8,000
(1)
All
of the options held by the individuals named in this table were granted
prior to the beginning of Fiscal 2010 and, accordingly, no dollar amount
is required to be reported in respect of these options. The aggregate
number of shares of Common Stock underlying options outstanding at
January 31, 2010 for each individual named in this table were:
(a) Mr. Whittier — 925,000 shares;
(b) Mr. Jacobs — 30,834 shares;
(c) Mr. Menon — 25,000 shares;
(d) Mr. Rickertsen — 65,000 shares;
(e) Mr. White — 85,000 shares;
(f) Mr. Botts — 25,000 shares; and
(g) Mr. Parker — 25,000 shares.
(2)
This
amount consists of Company matching contributions to the 401(k)
plan.
Compensation
Committee Interlocks and Insider Participation
None of
the Compensation Committee members was one of our officers or employees or one
of our subsidiaries’ officers or employees, and none has ever been one of our
officers. No member of our Compensation Committee and none of our
executive officers have had a relationship that would constitute an interlocking
relationship with executive officers or directors of another
entity.
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the foregoing Compensation
Discussion and Analysis required by Item 402(b) of SEC Regulation S-K
with management and, based on such review and discussions, the Compensation
Committee has recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in this Annual Report on Form 10-K for the
fiscal year ended January 31, 2010.
Submitted
by the members of the Compensation Committee:
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matter
EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth certain information as of January 31, 2010, with
respect to the Company’s equity compensation plans under which shares of the
Company’s common stock may be issued.
Plan Category
Number
of
Securities
to be
Issued
Upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights (1)
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and
Rights
Number
of
Securities
Remaining
Available
for
Future Issuance
Under
Equity
Compensation
Plans
(Excluding
Securities
Reflected
in Column (a))
Equity
compensation plans approved by stockholders:
5,459,159
$
3.68
4,737,307
Equity
compensation plans not approved by stockholders:
None
N/A
None
Total
5,459,159
$
3.68
4,737,307
(1) The
totals in this column reflect outstanding stock options, as the Company
has not granted warrants or rights to employees.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of April 30, 2010, information concerning
the beneficial ownership of all classes of our common stock of (i) all
persons known to us to beneficially own 5% or more of our common stock,
(ii) each of our directors, (iii) the Named Executive Officers and
(iv) all of our directors and executive officers as a group. Share
ownership includes shares issuable upon exercise of outstanding options that are
exercisable within 60 days of April 30, 2010.
Name
and Address of Beneficial Owner**
Amount
and Nature of
Beneficial
Ownership (1)
Percent
of Class (%)
Allen
Holding Inc.
11,728,587
(2
)
21.0
LMM
LLC
4,443,889
(3
)
7.9
Susan
K. Allen
3,170,369
(5
)
5.7
Ronald
J. Whittier
1,359,771
(6
)
2.4
Herbert
A. Allen
17,276,457
(7
)
30.9
Herbert
A. Allen III
605,787
(8
)
1.1
Eli
S. Jacobs
30,834
(9
)
*
Ajay
Menon
25,000
(10
)
*
Carl
J. Rickertsen
65,000
(11
)
*
Jeffrey
White
85,000
(12
)
*
John
C. Botts
25,000
(13
)
*
Alexander
F. Parker
25,000
(14
)
*
Patrick
C. Condo
1,430,655
(15
)
2.6
Matthew
G. Jones
8,008
*
All
directors and executive officers as a group
(11 persons)
20,936,513
(16
)
37.4
*
Represents
less than one percent of the outstanding common stock.
**
Unless
otherwise indicated, the address should be: c/o Convera Corporation, at
1919 Gallows Road, Suite 1050, Vienna, Virginia.
(1)
To
our knowledge, each person or entity listed has sole voting and investment
power as to the shares indicated, except as described
below.
(2)
Includes
shares owned by Allen & Company Incorporated (“ACI”), a
wholly-owned subsidiary of Allen Holding Inc. (“AHI”). Does not include
any shares held directly by Herbert A. Allen, Herbert A. Allen III,
Susan K. Allen, Bruce Allen and certain of their affiliates, who together
with AHI and ACI may be considered a “group,” as such term is defined by
Section 13(d) of the Securities Exchange Act of 1934
(“Section 13(d)”), and as disclosed in the Amendment No. 4 on
Schedule 13D filed by such parties with the SEC on July 14,2005. The address for AHI is 711 Fifth Avenue, NY, NY10022.
(3)
As
reported in an Amendment No. 7 to Schedule 13G filed with the
SEC by LMM, LLC and Legg Mason Opportunity Trust on December 31,2009. The address for this holder is 100 International Drive, Baltimore,
MD21202.
(4)
As
reported in an Amendment No. 6 to Schedule 13G filed with the
SEC by Ashford Capital Management, Inc. on July 8, 2009. The address for
this holder is P.O. Box 4172, Wilmington, DE19807.
(5)
Does
not include shares owned by AHI, ACI, Herbert A. Allen, Herbert A.
Allen III, Bruce Allen and certain of their affiliates, who together
with Ms. Allen may be considered a “group,” as such term is defined
by Section 13(d). The address for Ms. Allen is 711 Fifth Avenue,
NY, NY10022.
(6)
Includes
outstanding options to purchase 925,000 shares, which were
exercisable on or within 60 days of April 30,2009.
Mr.
Allen served on the Company’s Board of Directors until January 29,2010. Includes the shares held directly by AHI, ACI and Allen
SBH Investments LLC (“SBH”). Mr. Allen, a stockholder and the
President and Chief Executive Officer of AHI, the President and Chief
Executive Officer of ACI and a stockholder and the Managing Member,
President and Chief Executive Officer of SBH, may be deemed a beneficial
owner of the shares held by AHI, ACI and SBH. Mr. Allen disclaims
beneficial ownership of the securities reported to be held by AHI, ACI and
SBH, except to the extent of his pecuniary interest therein. Also includes
25,000 shares underlying outstanding stock options exercisable within
60 days of April 30, 2010 held by Mr. Allen. Does not include
shares owned by Herbert A. Allen III, Susan K. Allen, Bruce Allen and
certain of their affiliates, who together with Mr. Allen, AHI, ACI
and SBH may be considered a “group,” as such term is defined by
Section 13(d).
(8)
Includes
196,667 shares owned by Allen & Company LLC and 383,820
shares owned by HAGC Partners, L.P, as to which Mr. Herbert A.
Allen III shares voting and disposition authority. Also includes
outstanding options to purchase 25,000 shares, which were exercisable
on or within 60 days of April 30, 2010. Mr. Allen disclaims
beneficial ownership of the shares held by Allen & Company LLC,
except to the extent of his pecuniary interest therein. Does not include
shares owned by AHI, ACI, SBH, Herbert A. Allen, Susan K. Allen, Bruce
Allen and certain of their affiliates, who together with Mr. Herbert
A. Allen III may be considered a “group,” as such term is defined by
Section 13(d).
(9)
Mr.
Jacobs served on the Company’s Board of Directors until January 29,2010. Represents outstanding options to purchase
30,834 shares, which were exercisable on or within 60 days of
April 30, 2010.
(10)
Mr.
Menon served on the Company’s Board of Directors until January 29,2010. Represents outstanding options to purchase
25,000 shares, which were exercisable on or within 60 days of
April 30, 2010.
(11)
Mr.
Rickertsen served on the Company’s Board of Directors until January 29,2010. Represents outstanding options to purchase
65,000 shares, which were exercisable on or within 60 days of
April 30, 2010.
(12)
Represents
outstanding options to purchase 85,000 shares, which were exercisable
on or within 60 days of April 30, 2010.
(13)
Mr.
Botts served on the Company’s Board of Directors until January 29,2010. Represents outstanding options to purchase
25,000 shares, which were exercisable on or within 60 days of
April 30, 2010.
(14)
Mr.
Parker served on the Company’s Board of Directors until January 29,2010. Represents outstanding options to purchase
25,000 shares, which were exercisable on or within 60 days of
April 30, 2010.
(15)
Includes
outstanding options to purchase 1,179,700 shares, which were
exercisable on or within 60 days of April 30, 2010. Mr.
Condo is no longer the President and Chief Executive Officer of Convera,
pursuant to the Transition Agreement by and between Convera and Mr. Condo
dated May 29, 2009.
(16)
Includes
outstanding options to purchase 2,410,534 shares, which were
exercisable on or within 60 days of April 30, 2010. Also includes the
shares held by the entities described in footnotes (7) and (8) above
deemed to be beneficially owned by Herbert A. Allen and Herbert A.
Allen III, respectively. Includes amounts with respect to
directors that ceased to serve on the Board of Directors as of January 29,2010.
Item
13. Certain
Relationships and Related Transactions, and Director Independence
Certain
Relationship and Related Transactions
Since
February 1, 2007, there has not been, nor is there currently planned, any
transaction or series of similar transactions to which we were or are a party in
which the amount involved exceeds $120,000 and in which any director, executive
officer or holder of more than 5% of our capital stock or any member of such
person’s immediate family had or will have a direct or indirect material
interest other than agreements which are described under the caption “Executive
Compensation” and the transactions described below.
Pursuant
to the Audit Committee Charter, the Audit Committee is responsible for reviewing
and approving any transaction with an executive officer, director, principal
stockholder or any of such persons’ immediate family members or affiliates in
which the amount involved exceeds $120,000. The Audit Committee will consider
the relevant facts and circumstances available and deemed relevant, including,
but not limited to, the risks, costs and benefits to us, the terms of the
transaction, the availability of other sources for comparable services or
products.
On March31, 2007, we agreed to sell the assets of its Enterprise Search business to Fast
Search & Transfer (“FAST”) for $23.0 million. The transaction
closed on August 9, 2007, with FAST assuming certain obligations of the business
and retaining certain employees serving our Enterprise Search
customers. Allen & Company LLC, an investment banking firm
affiliated with certain of our directors, acted as a financial advisor to us
with respect to the transaction and received 1.5% of the
consideration plus expenses, which totaled $349,000. Mr. Herbert
A. Allen III is President of Allen & Company LLC and
Mr. Donald R. Keough is Chairman of Allen & Company
LLC. Mr. Herbert A. Allen is President, Chief Executive Officer,
and a director of Allen & Company Incorporated, which is affiliated
with Allen & Company LLC. Each of these individuals was a member of our
Board of Directors at the time this transaction was completed.
We
have entered into indemnification agreements with our directors and certain
officers for the indemnification of and advancement of expenses to these persons
to the fullest extent permitted by law. We also intend to enter into these
agreements with our future directors and certain future officers.
We have entered into Transition
Agreements with each of Mr. Condo, our former President and Chief Executive
Officer, and Mr. Jones. More information regarding these agreements
is available under the section entitled “Employment Agreements and Other
Arrangements.” A copy of the Transition Agreement with Mr. Condo is
attached as Exhibit 10.14 to this report and incorporated herein by
reference. A copy of the Transition Agreement with Mr. Jones is
attached as Exhibit 10.16 to this report and incorporated herein by
reference.
Director
Independence
As of
January 29, 2010, the Board consisted of three directors: Ronald J. Whittier,
Herbert A. Allen III and Jeffrey White. The Board has determined that
Jeffrey White is an independent director within the meaning of the applicable
NASDAQ rules.
The
following table shows the fees paid or accrued by us for the audit and other
services provided by our independent registered public accounting firm,
Ernst & Young LLP, for the fiscal years ended January 31, 2010 and
2009.
2010
2009
Audit
Fees(1)
$
297,500,
$
412,500
Audit-Related
Fees(2)
62,013
—
Tax
Fees(3)
—
—
All
Other Fees
—
—
Total
$
359,513
$
412,500
(1)
Audit
fees represent fees for professional services provided in connection with
the audit of our financial statement, review of our quarterly financial
statements and audit services provided in connection with other statutory
or regulatory filings.
(2)
Audit-related
fees generally include accounting advisory fees related to transactions
impacting our financial statements and auditor consents required to be
included in certain filings with the SEC.
(3)
Tax
fees principally include tax advisory fees and tax compliance
fees.
The Audit
Committee has concluded that the provision of audit-related services listed
above is compatible with maintaining the independence of Ernst & Young
LLP. The Audit Committee has the authority to pre-approve audit-related and
non-audit services not prohibited by law to be performed by our independent
registered public accounting firm and associated fees. All of the
services described above were approved by the Audit Committee in accordance with
the foregoing policy.
The
following financial statements of Convera Corporation are submitted in a
separate section pursuant to the requirements of Form 10-K, Part I, Item
8:
Index
to Consolidated Financial
Statements
Report
of Independent Registered Public Accounting
Firm
Consolidated
Statement of Net Assets in Liquidation (Liquidation
Basis)
Consolidated
Statement of Changes in Net Assets in Liquidation (Liquidation
Basis)
Consolidated
Balance Sheet (Going Concern Basis)
Consolidated
Statements of Operations and Comprehensive Loss (Going Concern
Basis)
Consolidated
Statements of Shareholders' Equity (Going Concern
Basis)
Consolidated
Statements of Cash Flows (Going Concern
Basis)
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.
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.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
Title
Date
/s/Matthew G. Jones
Matthew
G. Jones
Acting
Chief Executive Officer and Chief Financial Officer
(Principal
Executive Officer and Principal Financial Officer)
We have
audited the consolidated balance sheet of Convera Corporation as of January 31,2009, the related consolidated statements of income, retained earnings, and cash
flows for each of the two years in the period ended January 31, 2009, and the
consolidated statements of income, retained earnings, and cash flows for the
period from February 1, 2009 to January 29, 2010. In addition, we have audited
the consolidated statement of net assets in liquidation as of January 31, 2010,
and the related consolidated statement of changes in net assets in liquidation
for the period from January 29, 2010 to January 31, 2010. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. We were not engaged to
perform an audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As
described in Note 1 to the consolidated financial statements, the Board of
Directors of Convera Corporation approved a plan of liquidation on January 29,2010, and the Company commenced liquidation shortly thereafter. As a result, the
Company has changed its basis of accounting for periods subsequent to January29, 2010 from the going-concern basis to a liquidation basis.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Convera Corporation as
of January 31, 2009, the consolidated results of its operations and its cash
flows for each of the two years in the period ended January 31, 2009, and for
the period from February 1, 2009 to January 29, 2010, its consolidated net
assets in liquidation as of January 31, 2010, and the consolidated changes in
its net assets in liquidation for the period from January 29, 2010 to January31, 2010, in conformity with U.S. generally accepted accounting principles
applied on the bases described in the preceding paragraph.
Convera
Corporation (and subsidiaries, collectively, the “Company”) 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. Prior to
the Plan of Dissolution and Merger discussed below, Convera provided
vertical search services to trade publishers. Convera’s technology and
services were designed to help publishers build a loyal online community
and increase their internet advertising
revenues.
In the
third quarter of fiscal 2008, we completed the sale of our RetrievalWare
Enterprise Search Business (“Enterprise Search”) to Fast Search & Transfer
(“FAST”). FAST acquired the assets of the Enterprise Search business,
assumed certain obligations of the business and retained certain of the
employees serving its Enterprise Search customers. Prior to the FAST
transaction, we were operating under two reportable segments: Enterprise Search
and vertical search (previously entitled our Excalibur web hosting product).
Concurrent with the completion of the FAST Transaction, the remaining vertical
search business is reported as a single segment. The operations of
the Enterprise Search business have been reflected as discontinued operations in
the accompanying Consolidated Statements of Operations and of Cash Flows for the
fiscal year ended January 31, 2008. See further discussion in Note 3,
“Discontinued Operations”.
As the
global economic downturn deepened in early and mid-2009 and our stock price
continued to fall, in an effort to curtail continuing losses, preserve cash and
maximize value for our stockholders, the board of directors (the “Board”) and
management of Convera developed a plan of dissolution and liquidation (the “Plan
of Dissolution”), after reviewing our business and financial conditions and
long-term prospects and considering various alternatives. On September 22, 2009
our majority stockholders approved the Plan of Dissolution by written consent
providing for our complete dissolution and liquidation. On December31, 2009the Company filed a Definitive Information Statement on Schedule 14C
with the Securities and Exchange Commission with respect to, among other things,
the Plan of Dissolution. The Information Statement was mailed to stockholders on
or about January 8, 2010. On January 29, 2010, the Company’s Board
authorized the filing of a Certificate of Dissolution according to the Plan of
Dissolution. The Plan of Dissolution contemplates the orderly sale of the
Company’s remaining assets and the discharge of all outstanding liabilities to
third parties and, after the establishment of appropriate reserves, the
distribution of all remaining cash to stockholders. Additionally, the Company
set the record date of February 8, 2010 for an initial liquidating distribution
and declared an initial liquidating cash distribution of $0.10 per share to
stockholders as of the record date. Immediately after the close of
market on February 8, 2010, the Company closed its stock transfer books and the
trading of its stock on the NASDAQ Stock Market ceased at the same
time.
After the
close of market on February 8, 2010, the Company filed a Certificate of
Dissolution with the Delaware Secretary of State, pursuant to the Plan of
Dissolution and Liquidation previously adopted by Convera’s Board. On
February 9, 2010, in connection with the Plan of Dissolution, the Company
completed a merger (the “Merger”) of its wholly-owned subsidiaries B2BNetSearch,
Inc., a Delaware corporation (“B2B”), and Convera Technologies, LLC, a Delaware
limited liability company (“Technologies”), with and into VSW2, Inc., a Delaware
corporation and an indirect wholly-owned subsidiary of Vertical Search Works,
Inc., a Delaware corporation (“VSW”), and a parent company of Firstlight Online
Limited, a U.K. company. The Merger was conducted pursuant to an
Amended and Restated Agreement and Plan of Merger (the “Merger Agreement”) dated
as of September 22, 2009 by and among Convera, B2B, Technologies, VSW, and
certain related parties. Upon the completion of the Merger, Convera
and the pre-Merger VSW shareholders each own 33.3% and 66.7% of the total
outstanding common stock of VSW, respectively, and all operating assets and
liabilities of Convera have been transferred to VSW.
For
all the periods preceding the Board’s authorization of the filing of the
Certificate of Dissolution on January 29, 2010, the Company’s financial
statements are presented on a going concern basis of accounting. As
required by generally accepted accounting principles, the Company adopted
a liquidation basis of accounting as of the close of business on January29, 2010. Under the liquidation basis of accounting, assets are stated at
their estimated net realizable value and liabilities are stated at their
estimated settlement amounts, which estimates will be periodically
reviewed and adjusted as
appropriate.
At
January 31, 2010, the Company reported in the accompanying financial statements
that its net assets in liquidation aggregated $10.6 million, or $0.20 per share
based upon 53,501,183 common shares outstanding at January 31,2010. There can be no assurance that these estimated values will be
realized. Such amount should not be taken as an indication of the timing or
amount of future distributions to be made by the Company
As of
January 31, 2010 and January 31, 2009, Allen Holding, Inc., together with Allen
& Company Incorporated, Herbert A. Allen and certain related parties
(collectively “Allen & Company”) beneficially owned approximately 42% of the
voting power of Convera and held two seats on the Board of
Directors.
(2) SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
Liquidation Basis of
Accounting
With the
authorization of the filing of the Certificate of Dissolution by the Board, the
Company adopted the liquidation basis of accounting effective as of the close of
business on January 29, 2010. The liquidation basis of accounting will continue
to be used by the Company until such time that the plan is terminated. Under the
liquidation basis of accounting, assets are stated at their estimated net
realizable value and liabilities are stated at their estimated settlement
amounts, which estimates will be periodically reviewed and adjusted as
appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes
in Net Assets in Liquidation are the principal financial statements presented
under the liquidation basis of accounting. The valuations of assets at their net
realizable value and liabilities at their anticipated settlement amounts
represent estimates, based on present facts and circumstances, of the net
realizable values of assets and the costs associated with carrying out the Plan
of Dissolution based on the assumptions set forth below. The actual values and
costs associated with carrying out the Plan of Dissolution are expected to
differ from the amounts shown herein because of the inherent uncertainty and
will be greater than or less than the amounts recorded. Such differences may be
material. In particular, the estimates of the Company’s costs will vary with the
length of time it operates under the Plan of Dissolution. Accordingly, it is not
possible to predict the aggregate amount or timing of future distributions to
stockholders, as long as the plan is in effect, and no assurance can be given
that the amount of liquidating distributions to be received will equal or exceed
the estimate of net assets in liquidation presented in the accompanying
Statements of Net Assets in Liquidation.
Valuation
Assumptions
Under the
liquidation basis of accounting, the carrying amounts of assets as of the close
of business on January 29, 2010, the date of the authorization of filing of
Certificate of Dissolution by the Company, were adjusted to their estimated net
realizable values and liabilities, including the estimated costs associated with
implementing the Plan of Dissolution, were adjusted to estimated settlement
amounts. Such value estimates were updated by the Company as of January 31,2010. The following are the significant assumptions utilized by management in
assessing the value of assets and the expected settlement amounts of liabilities
included in the Statements of Net Assets in Liquidation at January 31,2010.
Net Assets in
Liquidation
The
majority of the net assets in liquidation at January 31, 2010 were highly liquid
and did not require adjustment as their estimated net realizable value
approximates their current book value. Cash, accounts receivable and other
assets are presented at book value. The Company’s remaining asset is the value
of the operating assets and liabilities that were contributed to B2B and
Technologies and subsequently included in their Merger with VSW on February 9,2010. This asset represents the Company’s 33.3% investment in VSW after the
completion of the Merger and is stated at estimated net realizable
value.
The
Company utilized a business valuation expert to assess the value of its 33%
investment in VSW. The initial valuation for the Merger was based
upon the discounted cash flows methodology. Specifically, under a discounted
cash flows methodology, the value of a company’s stock is determined by
discounting to present value the expected returns that accrue to holders of such
equity. Projected cash flows for VSW were based upon projected financial data
prepared by our management. Estimated cash flows were discounted to present
value based upon a range of discount rates, from 25% to 35%. This range of
discount rates is reflective of the required rates of return on later-stage
venture capital investments. Using liquidation value standards and applying a
lack of marketability discount, lack of control discount, a provision for the
cost of selling the interest as well as the additional cash contribution
expected to be made by Convera, to the going concern Merger valuation resulted
in a discounted liquidation value or net realizable ownership
value.
Reserve for Estimated Costs during
the Liquidation Period
Under the
liquidation basis of accounting, the Company is required to estimate and accrue
the costs associated with implementing and completing the Plan of Dissolution.
These amounts can vary significantly due to, among other things, the costs of
retaining personnel and others to oversee the liquidation, including the cost of
insurance, the timing and amounts associated with discharging known and
contingent liabilities and the costs associated with cessation of the Company’s
operations including an estimate of costs subsequent to that date (which would
include reserve contingencies for the appropriate statutory periods). As a
result, the Company has accrued the projected costs, including corporate
overhead and specific liquidation costs of severance and retention bonuses,
professional fees, and other miscellaneous wind-down costs expected to be
incurred during the projected period required to complete the liquidation of the
Company’s remaining assets. These accruals will be adjusted from time to time as
projections and assumptions change.
Going
Concern Basis of Accounting
For all
periods preceding the Board’s authorization of the Certificate of Dissolution on
January 29, 2010, the Company’s financial statements are presented on the going
concern basis of accounting. Such financial statements reflect the historical
basis of assets and liabilities and the historical results of operations related
to the Company’s assets and liabilities for the period from February 1, 2009 to
January 29, 2010 and the fiscal years ended January 31, 2009 and 2008.
References to fiscal year 2010 or fiscal 2010 refer to the period of February 1,2009 to January 29, 2010
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 accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues, expenses and contingent assets and liabilities. We base
those estimates 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 could
differ from those estimates.
Revenue
Recognition
Revenue
from our vertical search service consisted of hosted services, professional
services and advertising revenue shares.
Our
vertical search services revenues were recognized using the criteria in ASC
605-10, “Revenue
Recognition”, and ASC 985-605, “Software Revenue
Recognition”, respectively. We evaluated vertical search
services arrangements that had multiple deliverables, in accordance with ASC
605-25 “Multiple Element
Arrangements.” Revenue was recognized when the services had
been performed, the price was fixed and determinable, persuasive evidence of an
arrangement existed and collection of the resulting receivable was reasonably
assured. Multiple deliverable arrangements that contained elements
that did not qualify as separate units of accounting were recognized ratably
over the term of the hosting arrangement.
Our
contracts entitled us to receive either: (1) a percentage of the advertising
revenue generated by the customer search site (“ad share revenue”) or, (2) fees
based on the search volume consumed by the customer (“search volume revenue”).
The majority of our current contracts were ad share revenue arrangements that
entitled us to receive a percentage of customer search-related advertising
revenue earned (typically between 20% and 50% of net advertising
revenues). Many of these ad share contracts also contained monthly
minimum service fees that we continued to receive until monthly website
advertising revenue generated by the publishers’ search sites exceeded these
monthly minimum amounts. Search volume contracts entitled us to receive fees
based on the search volume consumed by the customer. These arrangements
typically included a fixed monthly minimum fee based on the contracted search
volume the customer expected to consume on a monthly basis. We were entitled to
receive additional fees from customers whose monthly search volumes exceeded the
contracted amounts. Contract minimums, including both ad share and search volume
contract minimums, and other hosting fees or set-up fees were recognized ratably
over the term of the vertical search service agreement. Advertising share and
search volume revenues in excess of these minimums were recognized when earned
under the provisions of the vertical search services agreement.
Revenues
from training and professional services were recognized when the services were
performed, provided they qualified as separate units of accounting.
Deferred
revenue was recorded when payments were received in advance of our performance
in the underlying agreements.
Stock-based
Compensation
On
February 1, 2006, we adopted the provisions of and accounted for stock-based
compensation in accordance with ASC 718, “Stock Compensation”, that
addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for either: (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise’s equity instruments or that may be settled by the
issuance of such equity instruments. ASC 718 requires that
stock-based compensation be accounted for using a fair value based
method. We use the Black-Scholes-Merton (“Black–Scholes”) option
pricing model to determine the fair value of stock-option awards under ASC
718.
Product
Development Costs
Our
software development costs were accounted for in accordance with ASC 350-40
“Internal–Use
Software”. We expensed costs incurred in the preliminary project stage
and, thereafter, we capitalized permitted costs incurred in the development or
acquisition of internal use software. Certain costs such as research and
development, maintenance and training were expensed as incurred. Amortization of
the capitalized costs was on a straight-line basis over the estimated use life
of the asset.
Advertising
Our
advertising costs, which were immaterial for the period ended January 29, 2010
and the fiscal years ended January 31, 2009 and 2008, were expensed as incurred
and included with sales and marketing in the consolidated statements of
operations.
For the
period year ended January 29, 2010, other income consisted primarily of $44,000
of interest income. For the fiscal year ended January 31, 2009, other income
consisted primarily of $0.5 million of net interest income and $0.6 million
earned from satisfying an obligation for the delivery of the discontinued
product to a US government customer. For the fiscal year ended
January 31, 2008, other income primarily consisted of $1.8 million of interest
income.
Income
Taxes
We follow
the provisions of ASC 740, “Income
Taxes”. Under the asset and liability method of ASC 740,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax laws
and tax rates in each jurisdiction where we operate, and applied to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities due to a
change in tax rates is recognized in income in the period that includes the
enactment date. We calculate estimated income taxes in each of the jurisdictions
in which we operate. This process involves estimating actual current tax expense
along with assessing temporary differences resulting from differing treatment of
items for both book and tax purposes.
We record
a valuation allowance to reduce our 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 we may be required
to adjust our valuation allowance against our deferred tax assets, resulting in
a benefit or a charge to income in the period such determination is made. As of
January 29, 2010, we have recorded a full valuation allowance against the net
deferred tax asset.
Significant
judgment is required in evaluation our uncertain tax positions and determining
the valuation allowance applied to deferred tax assets. We have concluded that
there are no uncertain tax positions requiring recognition in our consolidated
financial statements.
Net
Loss Per Common Share
We follow ASC 260,
“Earnings
per Share,” for
computing and presenting per share information. Basic income or loss
per common share is computed by dividing net income or (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. For the periods presented in this report, diluted
loss per common share excludes common stock equivalent shares and unexercised
stock options as the computation would be anti-dilutive. When
discontinued operations are present, income (loss) before discontinued
operations on a per share basis represents the “control number” in determining
whether potential common shares are dilutive or anti-dilutive. A reconciliation of the net
loss available to common stockholders and the number of shares used in computing
basic and diluted net loss per share is in Note 10.
Foreign
Currency
The
functional currency of our foreign subsidiaries is their local
currency. Accordingly, assets and liabilities of our foreign
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and non-monetary assets and liabilities
are remeasured at historical rates. Revenues and expenses are
translated at average rates for the period. In accordance with ASC
830,“Foreign
Currency Matters,”, foreign currency translation adjustments are
accumulated in a separate component of shareholders’ equity. Foreign currency
transaction gains and losses arise from the remeasurement of certain
transactions denominated in a nonfunctional currency to the functional currency
and are a component of operating expenses. Historically gains or
losses realized from the remeasurement of the intercompany trading balances
between Convera and its subsidiaries have been recorded in the income statement
of the subsidiary. As of February 1, 2008, the Company determined
that it should treat these trading-account balances as permanent advances to the
subsidiaries. Accordingly, beginning February 1, 2008, the Company
began treating gains or losses related to the intercompany trading-account as
translation gains or losses and including them in other comprehensive
income.
As of
January 29, 2010, our investment in our UK and Canadian subsidiaries had been
substantially liquidated. Accordingly, the amounts previously
recorded through
other comprehensive income and included as a separate component of
shareholders’ equity were eliminated from the cumulative translation component
of shareholders’ equity and we recorded it as a $2.0 million expense under the
caption Foreign
currency translation adjustment in the consolidated financial statements
for the period ended January 29, 2010.Total foreign currency
transaction gains (losses) were approximately $3,000 and $477,000, for
the years
ended January 31, 2009 and 2008, respectively. Foreign
currency transaction gains related to the remeasurement of the intercompany
trading account balances were $261,000 for the year ended January 31,2008.
Fair
Value of Financial Instruments
The
carrying value of our financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
approximates their fair value.
Cash
and Cash Equivalents
We
consider 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 primarily backed by short-term U.S.
Government securities. Consequently, the carrying amount of cash and
cash equivalents approximates this fair value. Substantially all cash
and cash equivalents are on deposit with two major financial
institutions.
Restricted
Cash
As of
January 31, 2010the Company has $1.7 million of restricted cash that represents
the funding provided by Convera to VSW pursuant to the Merger Agreement.
Additionally, as of January 31, 2010the Company has certificates of deposit of
$76,000 and $450,000, which are pledged to collateralize letters of credit
required for leased facilities. The certificate of deposit for
$76,000 is pledged as collateral for a lease expired in December 2009. The
certificate of deposit for $450,000 is pledged to a lease commitment through
February 2010. Both certificates of deposit are included with other
assets on the consolidated balance sheet. Subsequent to the balance
sheet date and concurrent with the satisfaction of the related lease commitments
and cancellation of the letters of credit the funds from both certificates of
deposit have been released.
Long-lived
Assets
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 five
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 were charged to operations as incurred. The
cost of property and equipment retired or otherwise disposed of and the related
accumulated depreciation or amortization was removed from the accounts and any
resulting gain or loss was reflected in current operations.
We
evaluate all of our long-lived assets for impairment in accordance with the
provisions of Statement of Financial ASC 360, “Property, Plant and
Equipment,”. ASC 360 requires that long-lived assets, including property
and equipment, be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. Should events indicate that any of our assets are impaired,
the amount of such impairment will be measured as the difference between the
carrying value and the fair value of the impaired asset and the impairment will
be recorded in earnings during the period of such impairment. During
the fourth quarter of the fiscal year 2009 the Company determined that certain
assets in the Company’s web hosting asset group were impaired, and accordingly,
has recorded an impairment charge of $3.1 million in the fiscal year 2009. (See
note 4 for additional information related to impairment charges.)
We
recognized restructuring costs in accordance with ASC 420, “Exit or Disposal Cost
Obligations”.
ASC 420 generally requires the recognition of an expense and related
liability for one-time employee termination benefits at the communication date
and contract termination costs at the cease-use date. The expense and liability
are measured at fair value, which is generally determined by estimating the
future cash flows to be used in settling the liability.
Recent
Pronouncements
In
July 2009, the Financial Accounting Standards Board (“FASB”) issued a
statement that modifies the GAAP hierarchy by establishing only two levels of
GAAP, authoritative and nonauthoritative accounting literature. Effective July
2009, the FASB ASC, also known collectively as the “Codification,” becomes the
single source of authoritative U.S. accounting and reporting standards
applicable for all non-governmental entities, with the exception of guidance
issued by the Securities and Exchange Commission. The Codification does not
change current U.S. GAAP, but changes the referencing of financial standards and
is intended to simplify user access to authoritative U.S. GAAP, by providing all
the authoritative literature related to a particular topic in one place. It is
organized by topic, subtopic, section, and paragraph, each of which is
identified by a numerical designation. The Codification is effective for
the Company’s financial statements for the quarter ended October 31, 2009. All
accounting references have been updated, and therefore Statement of Financial
Accounting Standard (“SFAS”) references have been replaced with ASC references.
As the Codification is not intended to change or alter existing GAAP, it did not
have an impact on the Company’s results of operations and financial
position.
In April
2009, the FASB issued accounting standards under ASC 820 “Fair Value Measurements and
Disclosures”, (previously FASB Staff Position
(“FSP”) FAS 157-4). ASC 820 provides guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly
decreased. This also includes guidance on identifying circumstances that
indicate a transaction is not orderly. This standard emphasizes that even if
there has been a significant decrease in the volume and level of activity for
the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. Implementation of this standard was effective for interim and annual
reporting periods ending after June 15, 2009, and is applied prospectively. The
implementation of this standard did not have a material effect on the Company’s
results of operations and financial position.
In
May 2009, the FASB issued accounting standards under ASC 855 “Subsequent
Events” (previously SFAS No. 165) and an amendment in February 2010, which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855, as
amended, specifically requires an SEC filer to evaluate and disclose subsequent
events through the date that the financial statements are issued. The
new standards were effective for interim and annual periods ended after
June 15, 2009 and the amendment is effective for interim or annual periods
ending after June 15, 2010. The implementation of these standards did not have a
material effect on the Company’s results of operations and financial
position.
In the
third quarter of fiscal year 2008, we completed the sale of the RetrievalWare
Enterprise Search business to FAST for $23.0 million, including $22.1
million of cash and the assumption of approximately $0.9 million in
employee-related liabilities. FAST acquired the assets of the Enterprise Search
business, assumed certain obligations of the business and retained certain
employees serving its Enterprise Search customers. A payment of approximately
$1.0 million was made to FAST in the first quarter of the current fiscal year to
finalize the working capital adjustment stipulated in the agreement for the sale
of the RetrievalWare Enterprise Search business. The working capital adjustment
had been accrued at January 31, 2008 as an offset to the $4.0 million held in
escrow. The escrow balance was paid to Convera in August
2008.
During
the year ended January 31, 2008, we recorded a net gain on the sale of
approximately $17.9 million, net of approximately: $0.8 million of net assets
transferred to FAST, the working capital adjustment of $1.0 million and
transaction fees and other costs. Allen & Company LLC, a company
affiliated with the majority shareholder, acted as financial advisor for the
transaction and was paid a fee of 1.5% of the consideration plus expenses, which
totaled approximately $0.4 million. Due to our accumulated net
operating loss carryforwards, no federal or state income taxes for the gain on
the sale of this business were provided or otherwise required at January 31,2008.
We
entered into a transition services agreement under which we were
reimbursed for services rendered and expenses incurred related to the
transfer of finance, accounting and contracts functions of the Enterprise
Search business to FAST.
The
following table presents the summarized financial information for the
discontinued operations presented in the Consolidated Statements of Operations
(amounts in thousands):
During
the quarter ended January 31, 2009, an analysis of our Ad server and related
hosting group identified several asset impairment indicators. These
indicators included failure to achieve forecasted operating results, the lack of
significant new contracts and the general economic downturn that has slowed
investment in online publishing. These conditions and events
indicated that the carrying value of this asset group, consisting primarily of
network hosting equipment and related software, may not be recoverable.
Accordingly, we completed an impairment test in accordance with our
accounting policy for this asset group, which resulted in an impairment charge
of $3.1 million. To determine the amount of the impairment charge, we were
required to make estimates of the fair value of the assets in this group, and
these estimates were based on the use of the income approach to determine the
fair value of the software and a third party appraisal for the
equipment.
In the
fourth quarter of fiscal year 2008, we terminated our hosting agreement with
AT&T for our San Diego data center in order to appropriately scale our
hosting capabilities to our business plan. As a result of the data
center closing, the assets consisting of servers and related hosting equipment
that were previously employed at the facility, were no longer of use to our
operations. The assets were relocated to storage in our Carlsbad, CA
facility and remain classified as “held and used” for financial statement
reporting purposes. We made the determination that the asset group
was clearly impaired since the equipment became idle as a consequence of the
data center closing and was expected to remain idle for the foreseeable future,
generating no future cash flows. The estimated fair value of the
equipment, determined using a third-party appraisal, was $0.4
million. We recorded an impairment charge of $0.6 million related to
the equipment.
(5) OPERATIONAL
RESTRUCTURINGS
In the
fourth quarter of fiscal year 2009, we modified our sales process and took
action to reduce the cost structure of our sales, marketing and customer service
functions. This action resulted in reducing our sales, marketing and
customer service headcount by nine and led to the shutdown of our U.K. sales
office in January 2009. As a result of this action, the Company recorded
severance expense of approximately $403,000 for the year ended January 31, 2009.
Expenses related to the action appear in the accompanying Consolidated
Statements of Operations and Comprehensive Loss as follows: Cost of revenues,
$29,000; Sales and marketing, $374,000.
Throughout
the year ended January 31, 2008, we implemented actions to restructure our
expenses. These restructuring actions were not performed pursuant to a formal
plan to restructure this business; rather, they occurred throughout the year to
focus our resources on the strategy to expand our presence in the online
publishing market. In fiscal year 2008, we reduced our workforce by
54 employees worldwide, closed facilities in Montreal, Canada and Lyon, France
and terminated our hosting agreement with AT&T for our San Diego data center
in order to appropriately scale our hosting capabilities. Total costs recognized
in connection with these efforts were approximately $2.0 million, consisting of
severance costs of $1.0 million, facility closing costs of $0.2 million and
contract termination costs of $0.8 million. During the period ended
January 29, 2010 and the years ended January 31, 2009 and 2008, we paid
approximately $31,000, $0.1 million and $1.1 million, respectively, against
these accruals.
Expenses
related to the fiscal year 2008 operational restructuring effort appear in the
accompanying Consolidated Statements of Operations and Comprehensive Loss as
follows (amounts in thousands):
Equipment
and leasehold improvements at January 31, 2010 are included in the value of the
assets contributed by the Company to B2B and Technologies and subsequently
included in their Merger with VSW. Equipment and leasehold improvements at
January 31, 2009 consisted of the following (in thousands):
2009
Computer
equipment
$
7,300
Office
furniture
2,295
Leasehold
improvements
537
10,132
Less
accumulated depreciation
(9,672
)
$
460
Equipment
and leasehold improvements are recorded at cost and have been adjusted for
impairment. Depreciation is calculated on the straight-line method
over three years for computer equipment, five years for office furniture and
over the shorter of the depreciable life or the life of the related lease for
leasehold improvements. Depreciation expense for the period February1, 2009 to January 29, 2010 and for the fiscal years 2010, 2009, and 2008 was
$0.4 million, $2.7 million and $2.6 million, respectively.
(7) ACCRUED
EXPENSES
Accrued
expenses at January 31, 2010 and 2009 consisted of the following (in
thousands):
2010
2009
Accrued
payroll and
bonuses
$
191
$
406
Accrued
audit and accounting fees
-
257
Restructuring
reserve*
-
780
Other
281
232
$
472
$
1,675
(*) The
restructuring reserve is included in “accrued liquidation costs” at January 31,2010.
(8) FAIR
VALUE MEASUREMENTS
Effective
February 1, 2008, we adopted SFAS 157, except as it applies to the
nonfinancial assets and nonfinancial liabilities subject to FSP SFAS
157-2. SFAS 157 defines fair value as a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or a liability. SFAS 157 requires that assets and
liabilities carried at fair value be classified and disclosed according to the
following three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
Level 1
- Observable inputs that reflect quoted prices for identical assets or
liabilities in active markets.
Level 2
– Inputs that are directly or indirectly observable in the
marketplace.
Level 3
- Unobservable inputs which are not supported by market data
The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.
The fair
value of our cash equivalents is based on Level 1, quoted prices in active
markets for identical assets.
The items
accounting for the difference between income taxes computed at the federal
statutory rate and the provision for income taxes consisted of (in
thousands):
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.
On August9, 2007, we completed the sale of our Enterprise Search business and recognized
income from discontinued operations of $17.9 million for the year ended January31, 2008 and a total net loss for the year of $9.1 million. No federal or state
income taxes were provided on the income generated from discontinued operations
due to the net operating loss carryforwards available for federal and state
income taxes. We offset the deferred tax provision triggered by the
gain recognized on the sale of the Enterprise Search business by the reversal of
a portion of the previously recorded valuation allowance.
We follow
the provisions of ASC 740, “Income Taxes”. As of the date
of this report there are no uncertain tax positions requiring recognition in our
consolidated financial statements. Our policy is to recognize interest and
penalties in the period in which they occur in the income tax provision
(benefit). We file income tax returns in the U.S. federal jurisdiction, various
states and local jurisdictions and in foreign jurisdictions, primarily the U.K.
and Canada. Tax years that remain subject to examination include: US federal and
state tax returns from fiscal 2005 to present; Tax returns in the U.K. from
fiscal 2006 to present and Canadian tax returns from fiscal 2005 to present. We
are not currently under audit for income taxes in any jurisdiction.
At
January 31, 2010, the Company had net operating loss carryforwards (“NOLs”) of
approximately $213 million that are expiring at various dates through fiscal
year 2028. The use of these NOLS may be limited by Section 382 of the
Internal Revenue Code as a result of equity
transactions. Approximately $28 million of the NOLs relate to stock
option exercises. Due to the substantially complete liquidation of
our UK and Canadian subsidiaries, their NOL’s have been eliminated. Upon the
complete liquidation of the Company the remaining NOL will no longer be
realizable.
As of
January 31, 2010, our deferred tax assets exceeded the deferred tax
liabilities. As we have not generated earnings and no assurance can
be made of future earnings needed to utilize these assets, a valuation allowance
in the amount of the net deferred tax assets has been recorded.
(10) CAPITALIZATION
Our
authorized capital stock 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.
We follow ASC 260 128,
“Earnings
Per Share,” for
computing and presenting net loss per share information. Basic income
or loss per common share for continuing and discontinued operations is computed
by dividing net income or (loss) available to common stockholders by the
weighted average number of common shares outstanding for the
period. Diluted loss per common share excludes common stock
equivalent shares and unexercised stock options as the computation would be
anti-dilutive for the periods presented. When discontinued operations are
present, income (loss) before discontinued operations on a per share basis
represents the “control number” in determining whether potential common shares
are dilutive or anti-dilutive. Since there is a loss from continuing operations,
potential common shares have also been excluded from the denominator used to
calculate diluted income per common share from discontinued
operations.
The
following table sets forth the computation of basic and diluted net loss per
common share for continuing and discontinued operations: (in thousands except
per share data):
Weighted
average number of common shares outstanding – basic and
diluted
53,501,183
53,328,029
53,145,955
Basic
and diluted net loss per common share from continuing
operations
$
(0.23
)
$
(0.42
)
$
(0.51
)
Basic
and diluted net income per common share from discontinued
operations
$
-
$
-
$
0.34
Basic
and diluted net loss per share
$
(0.23
)
$
(0.42
)
$
(0.17
)
Using
the treasury stock method, the following equity instruments were not
included in the computation of diluted net loss per common share because
their effect would be
anti-dilutive:
Our Stock
Option Plans authorize the granting of stock options and other forms of
incentive compensation to purchase up to 14.25 million shares of our Class A
common stock in order to attract, retain and reward key employees. Of
the total number of shares authorized for stock based compensation, options to
purchase 5,459,159 shares were outstanding as of January 31, 2010. We had a
total of 4,737,307 shares of Class A common stock reserved for the issuance of
warrants, deferred shares and options under the plans as of January 31,2010. The plans were subsequently terminated in connection with our
dissolution and no option can be issued or exercised.
Each
qualified incentive stock option has an exercise price as determined by a
committee appointed by the Board, but not less than 100% of the fair market
value of the underlying common stock at the date of grant, a ten-year term and
typically a four-year vesting period.
A
non-qualified option granted pursuant to the plans may contain an exercise price
that is below the fair market value of the common stock at the date of grant
and/or may be immediately exercisable. The term of non-qualified
options is usually five or ten years.
The total
intrinsic value of options exercised during the years ended January 31, 2010,
2009, and 2008 was none, none, and $0.4 million, respectively.
Cash
received from option exercises under all share-based arrangements for the years
ended January 31, 2010, 2009, and 2008 was $0, $0 and $0.8 million,
respectively. We had a policy of issuing new shares to satisfy share
option exercises.
Stock
Options
ASC 718,
“Share-Based Payment,”
requires the use of a valuation model to calculate the fair value of stock-based
awards. We have elected to use the Black-Scholes-Merton option-pricing model,
which incorporates various assumptions including volatility, expected life, risk
free interest rates and dividend yields. The expected volatility is based on
term-matching historical volatility. The expected life of an award is
computed using a combination of historical holding periods combined with
hypothetical holding periods on a weighted average basis. Compensation expense for
all share-based payment awards, including stock options with graded vesting, is
recognized using the straight line method over the requisite period for each
separately vesting portion of the award. As stock-based compensation expense
recognized in the Consolidated Statements of Operations is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures.
ASC 718 requires forfeitures to be estimated at the time of grant and
adjusted, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Our forfeiture rates are estimated based on historical
experience with consideration given to expected future termination rates. We
base fair value estimates and forfeiture rates on assumptions we believe to be
reasonable but that are inherently uncertain. Actual future results
may differ from those estimates.
The
following table shows the assumptions used for the grants that occurred in each
fiscal year: There were no grants during the year ended January 29,2010.
As of
January 31, 2010, no stock-based compensation costs related to stock options
were capitalized as part of the cost of an asset. As of January 31,2010 there was no unrecognized compensation cost related to stock options
expected to be recognized.
During
the third quarter of fiscal year 2009, the Company completed a transition of its
in-house option tracking software to an online option navigator and reporting
solution. The currently employed online solution utilizes a dynamic
forfeiture rate calculation that automatically adjusts the forfeiture rate of
each tranche as it approaches its vest-end date as compared to the prior method
which did not adjust the forfeiture rate until all tranches had
vested. We believe that the current approach provides a more accurate
estimate of our stock option expense. As a result of this change in
estimate, consistent with ASC 250, “Accounting Changes and Error
Corrections,”the Company recorded a onetime true-up adjustment of
$522,000 for the quarter ended October 31, 2008. This change in accounting
estimate increased the net loss by $522,000 or $0.01 per share. The impact of
this adjustment on the results of operations for the fiscal year ended January31, 2009 is as follows: Cost of revenues - $83,000; Sales and marketing -
$236,000; Research and product development - $64,000; General and administrative
- $139,000.
Performance Stock
Options:
During
the year ended January 31, 2009, 3.1 million common stock options were issued at
an exercise price of $1.92 per share to members of the senior management team.
The vesting of these options was contingent upon the Company achieving revenue
specific revenue goals for the fiscal year ended January 31, 2011. It was
determined that achievement of the underlying performance goals was not probable
and in accordance with ASC 718, no compensation expense has or will be
recorded.
Deferred Stock Compensation
Plan
Beginning
in fiscal year 2004, pursuant to our 2000 Stock Option Plan, several of our
senior officers were awarded shares of deferred stock with varying vesting
provisions. Nonvested shares of stock granted under the stock option plan were
measured at fair value on the date of grant based on the number of shares
granted and the quoted price of our common stock. Such value was
recognized as compensation expense over the corresponding service
period. Deferred stock compensation is subject to the provisions of
ASC 718 and as such is adjusted for estimated forfeitures. During the
first quarter of the fiscal year ended January 31, 2008, the employment of two
officers in the plan was terminated prior to vesting their
awards. The forfeiture of these shares represented a large percentage
of the total plan and as a result increased the forfeiture rate related to this
plan significantly. The cumulative effect of this adjustment to the
forfeiture rate resulted in a net compensation expense credit of $1.1 million,
or $0.02 per common share, recorded in the first quarter of fiscal year
2008. As of January 31, 2009 there were no shares of deferred stock
outstanding.
As of
January 31, 2009, all costs related to share-based compensation arrangements
granted under the Deferred Stock Plan had been recognized. The total
fair value of shares vested during the years ended January 31, 2009 and 2008 was
$1.7 million and $1.2 million, respectively.
The
impact on our results of operations of recording stock-based compensation
related to stock options and deferred stock for the period ended January 29,2010 and the fiscal years ended January 31, 2009 and 2008 was as follows (in
thousands):
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 us to match $0.50 on every
dollar up to the maximum of 8% of the employee’s contribution on total
compensation. For the period ended January 29, 2010 and the fiscal years ended
January 31, 2009 and 2008, the Company contributed approximately $0.1 million,
$0.2 million and $0.3 million, respectively, to the employee savings
plan.
(13) COMMITMENTS
AND CONTINGENCIES
Lease
Commitments
Immediately
before the closing of the Merger on February 9, 2010, our operating leases were
transferred to VSW. Included are the leases for facilities in
Carlsbad, CA and Vienna, VA. The leases terminate at various dates
through fiscal year 2013 with options to renew. Certain leases
provide for scheduled rent increases and require us to pay shared portions of
the operating expenses such as taxes, maintenance and repair costs. We also have
operating leases for equipment that are included in the figures
below. Future minimum rental payments under non-cancelable operating
leases as of January 31, 2010 are as follows (in thousands):
Year
Ending January
31,
Operating
Leases
2011
$
213
2012
163
2013
169
$
545
Total
rental expense under operating leases was approximately $1.1 million for the
period ended January 29, 2010, $1.3 million (net of sublease rental receipts of
$0.2 million) for fiscal year 2009 and $1.5 million for fiscal year
2008.
From time
to time, we may be a party to various legal proceedings, claims, disputes and
litigation arising in the ordinary course of business. We believe
that the ultimate outcome of these matters, individually and in the aggregate,
will not have a material adverse affect on its financial position, operations or
cash flow. However, because of the nature and inherent uncertainties
of litigation, should the outcome of these actions or future actions be
unfavorable, our consolidated statement of net assets in liquidation and
statement of changes in net assets in liquidation could be materially adversely
affected. On March 10, 2010, AT&T Corp filed a complaint with the
Supreme Court of the state of New York alleging a breach of contract by Convera
and demanding $0.8 million to remedy the breach. The dispute pertains to the
termination of our hosting agreement with AT&T for our San Diego hosting
center in the fourth quarter of fiscal 2008. We accrued the disputed amount in
fiscal year 2008 but intend to vigorously defend ourselves against the
claim.
(14) SEGMENT
REPORTING
We have
had only one reportable segment since our agreement on March 31, 2007 to sell
the assets of the Enterprise Search (RetrievalWare) business to FAST. Prior to
that date we operated under two reportable segments: the Enterprise Search
segment and the vertical search segment (previously called our Excalibur web
hosting product). Revenue, expenses and cash flows related to the
Enterprise Search business have been reflected as discontinued operations in the
Consolidated Statements of Operations and of Cash Flows for the fiscal year
ended January 31, 2008.
Operations
by Geographic Area
The
following table presents information about our operations by geographical area
(in thousands):
Three
customers accounted for a total of 54% of the revenues generated in the period
ended January 29, 2010, accounting for 30%, 13% and 11%, respectively. Two
customers accounted for a total of 66% of the revenues generated in the year
ended January 31, 2009, accounting for 47% and 19%, respectively. One customer
accounted for 82% of total revenue during the year ended January 31,2008.
Foreign
Exchange loss due to liquidation of subsidiary
-
-
-
(1,961
)
Other
income
11
13
11
8
Net
loss
$
(2,979
)
$
(3,104
)
$
(2,332
)
$
(3,971
)
Basic
and diluted loss per common share
$
(0.06
)
$
(0.06
)
$
(0.04
)
$
(0.07
)
Fiscal
Year 2009
Revenues
$
402
$
469
$
239
$
231
Operating
loss
(5,605
)
(4,571
)
(6,068
)
(7,599
)
Other
income
179
945
98
35
Impairment
of long-lived assets
-
-
3,133
Net
loss
$
(5,426
)
$
(3,626
)
$
(5,970
)
$
(7,564
)
Basic
and diluted loss per common share
$
(0.10
)
$
(0.07
)
$
(0.11
)
$
(0.14
)
(17) SUBSEQUENT
EVENT
After the
close of market on February 8, 2010, the Company filed a Certificate of
Dissolution with the Delaware Secretary of State, pursuant to the Plan of
Dissolution.
On
February 9, 2010, in connection with the Plan of Dissolution, the Company
completed the Merger of its wholly-owned subsidiaries B2B and Technologies with
and into VSW2, an indirect wholly-owned subsidiary of VSW, and a parent company
of Firstlight Online Limited, a U.K. company. The Merger was
conducted pursuant to the Merger Agreement dated as of September 22, 2009 by and
among Convera, B2B, Technologies, VSW, and certain related
parties. Upon the completion of the Merger Convera and the pre-Merger
VSW shareholders will each own 33.3% and 66.7% of the total outstanding common
stock of VSW, respectively.
Upon the
closing of the Merger on February 9, 2010, Patrick C. Condo is no longer the
President and Chief Executive Officer of Convera, pursuant to a Transition
Agreement by and between Convera and Mr. Condo dated May 29,2009. Matthew G. Jones remains the only officer of the Company after
the Merger. Pursuant to a Transition Agreement between Convera and
Mr. Jones dated April 22, 2010, Mr. Jones will continue to serve the Company as
Chief Financial Officer in his capacity as a consultant, not an employee, of the
Company. On May18, 2010, Mr. Jones was also appointed the acting Chief Executive Officer
by the Board of Directors.
(18) RELATED
PARTY TRANSACTIONS
John C.
Botts, a member of the Board of Convera, is also Chairman of United Business
Media PLC, the parent company of CMP Information LTD (“CMP”). CMP is
a customer of Convera. Sales to CMP for the period ended January 29,2010 were $86,000. Due to a contractual dispute there were no recorded sales to
CMP during the third and fourth quarters of fiscal year 2009 and $50,000 of
revenue was deferred. Excluding this deferred revenue, sales to CMP
for the year ended January 31, 2009 were $627,000. For the year ended January31, 2008, sales to CMP were $914,000. As of January 31, 2010 the
balance due from CMP was $24,000. This balance along with the entire
trade receivables balance was is included with the Estimated Value of Operating Assets and
Liabilities Contributed in the VSW Merger. As of January 31, 2009,
$377,000 (excluding deferred revenue) was due from CMP.
F
-26
Dates Referenced Herein and Documents Incorporated by Reference
