| CONVERA CORP Item 1A Risk Factors An investment in our common stock involves substantial risks and uncertainties and our actual results and future trends may differ materially from our past performance due to a variety of factors, 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 business operations |
| If any of the following risks actually occur, our business, results of operations and financial condition would suffer |
| In that event, the trading price of our common stock could decline, and our stockholders may lose part or all of their investment in our common stock |
| The discussion below and elsewhere in this report also includes forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements as a result of the risks discussed below |
| We have had a history of operating losses and will likely incur future losses; if our losses continue and we are unable to achieve profitability, our stock price will likely suffer |
| We have operated at a loss for each of the past three fiscal years |
| These losses include expenditures associated with selling software products, further developing software products during these years and developing our Excalibur Web offering |
| We expect that our losses will continue for the foreseeable future as we continue to invest in Excalibur and these other programs and, accordingly, we cannot assure you that we will be able to achieve or maintain profitability in the future |
| Our failure to achieve and sustain our profitability will negatively impact the market price of our common stock |
| Our ability to achieve profitability is highly dependent on our Excalibur Web offering and if Excalibur fails to achieve market acceptance we will be unable to grow our business and achieve profitability |
| We have expended significant financial resources, as well as management attention, on Excalibur and expect that our expenditures on Excalibur will continue to be significant |
| We believe that our future profitability will depend on our ability to successfully market, and achieve market acceptance for, Excalibur, our Web offering |
| The degree of market acceptance of Excalibur will depend upon a number of factors, including: · the advantages of Excalibur over competing products; · our ability to innovate and develop new features for Excalibur; · customer needs for search products; · the price and cost-effectiveness of Excalibur; and · the strength of sales, marketing and distribution support |
| We are aware of a significant number of competing well-established search products offered by companies with significantly greater financial and marketing resources than us |
| Even if Excalibur achieves market acceptance, we may not be able to maintain that market acceptance over time if competing products are introduced that are viewed as more effective or are more favorably received than Excalibur |
| If Excalibur does not achieve and maintain market acceptance, we will not be able to generate sufficient revenue to attain profitability |
| While we believe we will have sufficient funds for our operations for at least the next twelve months, it is possible that we will need additional capital during or after that time |
| We may need additional capital in the future, and it may not be available on acceptable terms, or at all, and if we do not receive any necessary additional capital, it could harm our financial condition and future prospects |
| As of March 15, 2006, our balances of cash, cash equivalents and short-term investments were approximately dlra65dtta4 million |
| We believe our current balance of cash, cash equivalents and short-term investments, combined with any funds generated from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months based upon our estimates of funds required to operate our business during such period |
| However, during or after that time, we may need to raise additional funds for the following purposes: 12 _________________________________________________________________ [33]Table of Contents · to fund our operations, including sales, marketing and research and development programs including the Excalibur Web offering; · to fund any growth we may experience; · to enhance and/or expand the range of products and services we offer; · to increase our promotional and marketing activities; or · to respond to competitive pressures and/or perceived opportunities, such as investment, acquisition and international expansion activities |
| We cannot reassure our investors that if we need additional capital that it will be available, and if so, on terms beneficial to us |
| Historically, we have obtained external financing primarily from sales of our common stock |
| To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution |
| If we are unable to obtain additional capital, we may then attempt to preserve our available resources by various methods including deferring the creation or satisfaction of commitments, reducing expenditures on our research and development programs or otherwise scaling back our operations |
| If we were unable to raise such additional capital or defer certain costs as described above, that inability would have an adverse effect on our financial position, results of operations and prospects |
| We experience quarterly fluctuations in our operating results, which may adversely affect our stock price |
| Our quarterly operating results have varied substantially in the past |
| For example, our total revenues for the four quarters of fiscal year 2006 were dlra5dtta1 million, dlra7dtta8 million, dlra4dtta5 million and dlra3dtta6 million respectively, and the price per share of our common stock during those quarters ranged from dlra3dtta92 to dlra20dtta20 |
| Our quarterly operating results are likely to continue to vary substantially from quarter to quarter in the future, due to a variety of factors including the following: · the ability of Excalibur, our new Web offering to achieve market acceptance; · the downturn in capital spending by customers as a result of general economic conditions; · the level of customer demand for our products and services, including Excalibur; · the delay or deferral of customer implementations; · the budget cycles of our customers; · seasonality of individual customer buying patterns; · an increase in competition in the software and search industries; · the size and timing of individual transactions; · the timing of new software introductions and software enhancements by us and our competitors; · changes in operating expenses and personnel; · changes in accounting principles, such as a requirement that stock options be included in compensation, which would increase our expense and have a negative effect on earnings; · the overall trend towards industry consolidation; and · changes in general economic and geo-political conditions and specific economic conditions in the computer and software industries |
| In particular, our period-to-period operating results have historically been dependent upon the timing of the closing of significant license agreements |
| Since purchasing our software products often requires significant capital investment, our customers may defer or decide not to make their purchases |
| This means sales can involve sales cycles of six months or more |
| We derive a significant portion of our revenues from sales to agencies of the US Government, and, therefore, the budget cycle of the US Government impacts our total revenues |
| In certain financial quarters, we may derive a significant portion of our revenues from a single customer |
| We have historically recorded a significant portion of our total quarterly license revenues in the third month of a quarter, with a concentration of these revenues occurring in the last half of that third month |
| We expect these revenue patterns to continue |
| Despite these uncertainties in our revenue patterns, we base our operating expenses upon anticipated revenue levels, and we incur these expenses on an approximately ratable basis throughout a quarter |
| As a result, if expected revenues are deferred or otherwise not realized in a quarter for any reason, our business, operating results and financial condition would be materially adversely affected |
| 13 _________________________________________________________________ [34]Table of Contents In addition, steps which we have taken or may take in the future to control operating expenses may hamper our development, sales and marketing efforts and, ultimately, our operating results |
| For instance, we aligned our resources through a number of reorganizations during fiscal years 2002 through 2005 to attempt to focus on markets that have been consistently successful for us |
| These reorganizations were intended to streamline our professional services, customer support and sales organizations by reducing the number of our employees, improve the productivity of each of those organizations and reduce management personnel and other overhead costs in our marketing, development and administrative organizations |
| However, the loss of key personnel in such restructurings and any severance and other costs incurred in such restructurings could negatively affect our quarterly operating results and adversely affect our stock price |
| We are in an extremely competitive market, and if we fail to compete effectively or respond to rapid technological change, our revenues and market share will be adversely affected Our business environment and the search and software industries in general are characterized by intense competition, rapid technological changes, changes in customer requirements and emerging new market segments |
| Our competitors include many companies that are larger and more established and have substantially more resources than us |
| Current and potential competitors have established or 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 we serve |
| Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share |
| Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition or results of operations |
| In order for our strategy to succeed and to remain competitive, we must leverage our core technology to develop new product offerings, update existing features and add new components to our current products such as support for new datatypes and taxonomies for specific vertical markets |
| These development efforts are expensive, and we plan to fund these developments with our existing capital resources, and other sources, such as equity issuances and borrowings, which may be available to us |
| If these developments do not generate substantial revenues, our business and results of operations will be adversely affected |
| We cannot assure you that we will successfully develop any new products, complete them on a timely basis or at all, achieve market acceptance or generate significant revenues with them |
| We design our products to work with certain systems and changes to these systems may render our products incompatible with these systems, and we may be unable to sell our products Our ability to sell our products depends on the compatibility of our products with other software and hardware products |
| These products may change or new products may appear that are incompatible with our products |
| If we fail to adapt our products to remain compatible with other vendors &apos software and hardware products or fail to adapt our products as quickly as our competitors, we may be unable to sell our products |
| Our software products are complex and may contain errors that could damage our reputation and decrease sales Our complex software products may contain errors that people may detect at any point in the products’ life cycles |
| We cannot assure you that, despite our testing and quality assurance efforts and similar efforts by current and potential customers, errors will not be found |
| The discovery of an error may result in loss of or delay in market acceptance and sales |
| We derive a significant portion of our revenues from sales to US Government agencies, which are subject to budget cuts and, consequently, a change in the size and timing of our US Government contracts may materially affect our operating results For the year ended January 31, 2006, total revenues derived from sales to agencies of the US Government were approximately dlra11dtta3 million, representing 54prca of total revenues |
| For the year ended January 31, 2005, revenues derived from sales to agencies of the US Government were approximately dlra11dtta6 million, or 45prca of total revenues |
| While the US Government has recently increased spending on defense, information systems and homeland security initiatives, some government agencies have realized budget reductions which may adversely impact their purchasing decisions and timing |
| We are actively pursuing several opportunities for business with certain US Government agencies |
| While the nature and timing of these opportunities, as well as the ability to complete business transactions related to these opportunities, is subject to certain risks and uncertainties, successful completion of any of these transactions could have a material impact on our future operating results and financial position |
| There can be no assurance that we will complete any of these potential transactions |
| 14 _________________________________________________________________ [35]Table of Contents As a US Government contractor, we are subject to a number of procurement rules and regulations |
| We must comply with and are affected by laws and regulations relating to the award, administration and performance of US Government contracts |
| Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business |
| In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions |
| A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts |
| We depend 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 our business For the year ended January 31, 2006, total revenues derived from international sales were approximately dlra5dtta2 million, representing approximately 25prca of total revenues |
| For the year ended January 31, 2005, revenues derived from international sales were approximately dlra7dtta5 million, representing approximately 29prca of total revenues |
| Most of our international sales are in the United Kingdom |
| Our international operations have historically exposed us to longer accounts receivable and payment cycles and fluctuations in currency exchange rates |
| International sales are made mostly from our UK subsidiary and are denominated in British pounds or Euros |
| As of January 31, 2006, approximately 6prca and 11prca of our total consolidated accounts receivable were denominated in British pounds and Euros, respectively |
| Additionally, our exposure to foreign exchange rate fluctuations arises in part from intercompany accounts in which royalties on our foreign subsidiary’s sales are charged to our foreign subsidiary and recorded as intercompany receivables on our books |
| We are also exposed to foreign exchange rate fluctuations as the financial results of our foreign subsidiary are translated into US dollars in consolidation |
| Since exchange rates vary, those results when translated may vary from expectations and adversely impact overall expected profitability |
| Our international operations expose us to a variety of other risks that could seriously impede our 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; and · uncertainty of the effective protection of our intellectual property rights in certain foreign countries |
| If any of these risks described above materialize, our international sales could decrease and our foreign operations could suffer |
| Our Excalibur Web offering relies on a third party hosting facility, and any failure or interruption in the services provided by this third party could harm our ability to operate our business and damage our reputation |
| We rely on AT&T for both our primary and back-up hosting facilities to support our Excalibur Web offering |
| We do not control the operation of these AT&T facilities and each may be subject to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures or similar events |
| These facilities may also be subject to break-ins, sabotage, intentional acts of vandalism or similar misconduct |
| Despite precautions taken at these facilities, the occurrence of a natural disaster, cessation of operations by our third-party web hosting provider or its decision to close a facility without adequate notice or other unanticipated problems at either facility could result in lengthy interruptions in our service |
| In addition, the failure by these facilities to provide our required data communications capacity could result in interruptions in our service |
| Interruptions in our service may cause us to lose revenue, cause us to issue credits or refunds and cause customers to terminate their contracts with us |
| Our business and reputation will be adversely affected if our customers and potential customers believe our Excalibur service is unreliable |
| 15 _________________________________________________________________ [36]Table of Contents We depend on proprietary technology licensed from third parties; if we lose these licenses, it could delay shipments of products incorporating this technology and could be costly Our products use certain technology that we license from third parties, generally on a nonexclusive basis |
| We believe that there are alternative sources for each of the material components of technology we license from third parties |
| However, the termination of any of these licenses, or the failure of the third-party licensors to adequately maintain or update their products, could delay our ability to ship these products while we seek to implement technology offered by alternative sources |
| Any required replacement licenses could prove costly |
| Also, any delay, to the extent it becomes extended or occurs at or near the end of a fiscal quarter, could harm our quarterly results of operations |
| While it may be necessary or desirable in the future to obtain other licenses relating to one or more of our products or relating to current or future technologies, we cannot assure that we will be able to do so on commercially reasonable terms or at all |
| Because of the technical nature of our business, our intellectual property is extremely important to our business, and adverse changes to our intellectual property could harm our competitive position We believe that our success depends, in part, on our ability to protect our proprietary rights and technology |
| Historically, we have relied on a combination of copyright, patents, trademark and trade secret laws, employee confidentiality and invention assignment agreements, distribution and OEM software protection agreements and other methods to safeguard our technology and software products |
| Risks associated with our intellectual property, include the following: · pending patent applications may not be issued; · intellectual property laws may not protect our intellectual property rights; · third parties may challenge, invalidate, or circumvent any patent issued to us; · rights granted under patents issued to us may not provide competitive advantages to us; · unauthorized parties may attempt to obtain and use information that we regard as proprietary despite our efforts to protect our proprietary rights; · others may independently develop similar technology or design around any patents issued to us; and · effective protection of intellectual property rights may be limited or unavailable in some foreign countries in which we operate |
| We may in the future be subject to intellectual property rights claims, which are costly to defend, could require us to pay damages and could limit our ability to use certain technologies in the future |
| Companies in the software and technology industries own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights |
| We face the possibility of intellectual property rights claims against us |
| Our technologies may not be able to withstand any third-party claims or rights against their use |
| Any intellectual property claims, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management resources and attention |
| With respect to any intellectual property rights claim, we may have to pay damages or stop using technology if it is ultimately found by a court to be in violation of a third party’s rights |
| We may have to seek a license for the technology, which may not be available on reasonable terms and may significantly increase our operating expenses |
| The technology also may not be available for license to us at all |
| As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense |
| If we cannot license or develop technology for the infringing aspects of our business, we may be forced to limit our product and service offerings and may be unable to compete effectively |
| 16 _________________________________________________________________ [37]Table of Contents We depend on our key personnel, the loss of whom would adversely affect our business, and we may have difficulty attracting and retaining skilled employees Our success depends to a significant degree upon the continued contributions of our key management, marketing, technical and operational personnel |
| We generally do not utilize employment agreements for our key employees |
| The loss of the services of one or more key employees could have a material adverse effect on our operating results |
| We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled management, technical, marketing, product development, operational personnel and consultants |
| Competition for such personnel, particularly software developers, professional service consultants and other technical personnel, is intense, and pay scales in the software industry have significantly increased |
| There can be no assurance that we will be successful in attracting and retaining such personnel |
| Our stock price may fluctuate which may make it difficult to resell shares of our stock The market price of our common stock has been highly volatile |
| For example, in the fourth quarter of fiscal year 2006, the market price per share of our common stock ranged from dlra7dtta85 to dlra20dtta20 |
| This volatility may adversely affect the price of our common stock, and our stockholders may not be able to resell their shares of common stock following periods of volatility because of the marketapstas adverse reaction to this volatility |
| We anticipate that this volatility, which frequently affects the stock of software companies, will continue |
| Factors that could cause such volatility include: · future announcements concerning us or our competitors; · quarterly variations in our operating results; · actual or anticipated announcements of technical innovations or new product developments by us or our competitors; · general conditions in our industry; · developments concerning litigation; and · worldwide economic and financial conditions |
| On occasion, the equity markets, and in particular the markets for software companies have experienced significant price and volume fluctuations |
| These fluctuations have affected the market price for many companies &apos securities and may be unrelated to the companies &apos operating performance |
| We may not be able to use net operating loss carryforwards As of January 31, 2006, we had net operating loss carryforwards of approximately dlra185 million |
| The deferred tax assets representing the benefits of these carryforwards have been offset completely by a valuation allowance due to our lack of an earnings history |
| The realization of the benefits of these carryforwards depends on sufficient taxable income in future years |
| Lack of future earnings could adversely affect our ability to utilize these carryforwards |
| Additionally, past or future changes in our ownership and control could limit the ability to utilize these carryforwards |
| Despite the carryforwards, we may have income tax liability in future years due to the application of the alternative minimum tax rules of the United States Internal Revenue Code |
| Our amended and restated certificate of incorporation, bylaws, ownership and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our stock Some provisions of our amended and restated certificate of incorporation and bylaws and of Delaware law could delay or prevent a change of control or changes in our management that a stockholder might consider favorable |
| Any delay or prevention of a change of control or change in management could cause the market price of our common stock to decline |
| and related parties exercise voting control over a significant percentage of our outstanding shares, and our other shareholders may not have an effective say in any matters upon which our shareholders vote As of March 1, 2006, Allen Holding Inc, together with Allen & Company Incorporated, Herbert A Allen and certain related parties (collectively “Allen & Company”) beneficially owned approximately 43prca of our voting power, and would therefore be able to effectively control 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 |