UNITED STATES
FORM 10-Q
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(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended August 31, 2002 | ||
| OR | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission File Number: 0-26880
VERITY, INC.
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Delaware
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77-0182779 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
894 Ross Drive
Indicate by check mark whether 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 such filing requirements for the past 90 days.
Yes x No o
The number of shares outstanding of the Registrant’s Common Stock, $0.001 par value, was 34,697,117 as of September 30, 2002.
VERITY, INC.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
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Item 1.
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Financial Statements (unaudited) | 3 | ||||
| Condensed Consolidated Balance Sheets — As of August 31, 2002 and May 31, 2002 | 3 | |||||
| Condensed Consolidated Statements of Operations — For the Three Months Ended August 31, 2002 and August 31, 2001 | 4 | |||||
| Condensed Consolidated Statements of Cash Flows — For the Three Months Ended August 31, 2002 and August 31, 2001 | 5 | |||||
| Notes to Condensed Consolidated Financial Statements | 6 | |||||
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||||
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk | 26 | ||||
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Item 4.
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Controls and Procedures | 26 | ||||
| PART II. OTHER INFORMATION | ||||||
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Item 1.
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Legal Proceedings | 27 | ||||
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Item 2.
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Changes in Securities and Use of Proceeds | 27 | ||||
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Item 3.
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Defaults upon Senior Securities | 27 | ||||
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Item 4.
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Submission of Matters to a Vote of Security Holders | 27 | ||||
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Item 5.
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Other Information | 27 | ||||
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Item 6.
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Exhibits and Reports on Form 8-K | 28 | ||||
| Signature | 29 | |||||
| Certifications | 30 | |||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITY, INC.
ASSETS
| August 31, | May 31, | |||||||||
| 2002 | 2002 | |||||||||
| (unaudited) | ||||||||||
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Current assets:
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||||||||||
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Cash and cash equivalents
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$ | 14,384 | $ | 23,251 | ||||||
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Short-term investments
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119,958 | 130,672 | ||||||||
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Trade accounts receivable, net
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17,278 | 20,961 | ||||||||
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Deferred tax assets
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2,636 | 3,114 | ||||||||
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Prepaid and other
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4,724 | 5,497 | ||||||||
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Total current assets
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158,980 | 183,495 | ||||||||
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Property and equipment, net
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6,100 | 6,625 | ||||||||
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Long-term investments
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108,548 | 91,433 | ||||||||
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Deferred tax assets
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16,597 | 16,597 | ||||||||
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Total assets
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$ | 290,225 | $ | 298,150 | ||||||
| LIABILITIES | ||||||||||
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Current liabilities:
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||||||||||
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Accounts payable
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$ | 4,796 | $ | 5,749 | ||||||
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Accrued compensation
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9,537 | 10,376 | ||||||||
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Other accrued liabilities
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2,724 | 2,779 | ||||||||
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Deferred revenue
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12,271 | 14,981 | ||||||||
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Total current liabilities
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29,328 | 33,885 | ||||||||
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Contingencies (Note 6)
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| STOCKHOLDERS’ EQUITY | ||||||||||
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Common stock, $0.001 par value:
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Authorized: 200,000 shares
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Issued and outstanding: 35,208 shares as of
August 31, 2002; and 35,775 shares as of May 31, 2002
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35 | 36 | ||||||||
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Additional paid-in capital
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244,048 | 250,133 | ||||||||
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Retained earnings
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13,514 | 12,133 | ||||||||
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Additional other comprehensive income
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3,300 | 1,963 | ||||||||
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Total stockholders’ equity
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260,897 | 264,265 | ||||||||
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Total liabilities and stockholders’ equity
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$ | 290,225 | $ | 298,150 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
VERITY, INC.
| Three Months Ended | ||||||||||
| August 31, | ||||||||||
| 2002 | 2001 | |||||||||
| (unaudited) | ||||||||||
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Revenues:
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||||||||||
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Software products
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$ | 12,306 | $ | 10,267 | ||||||
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Service and other
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9,704 | 9,838 | ||||||||
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Total revenues
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22,010 | 20,105 | ||||||||
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Costs of revenues:
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Software products
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374 | 542 | ||||||||
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Service and other
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2,570 | 3,046 | ||||||||
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Total costs of revenues
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2,944 | 3,588 | ||||||||
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Gross profit
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19,066 | 16,517 | ||||||||
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Operating expenses:
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Research and development
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5,943 | 5,936 | ||||||||
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Marketing and sales
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10,204 | 14,598 | ||||||||
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General and administrative
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2,595 | 2,832 | ||||||||
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Total operating expenses
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18,742 | 23,366 | ||||||||
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Income (loss) from operations
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324 | (6,849 | ) | |||||||
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Other income, net
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1,904 | 2,870 | ||||||||
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Income (loss) before provision for (benefit
from) income taxes
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2,228 | (3,979 | ) | |||||||
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Provision for (benefit from) income taxes
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847 | (1,512 | ) | |||||||
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Net income (loss)
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$ | 1,381 | $ | (2,467 | ) | |||||
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Net income (loss) per share — basic
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$ | 0.04 | $ | (0.07 | ) | |||||
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Net income (loss) per share —
diluted
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$ | 0.04 | $ | (0.07 | ) | |||||
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Number of shares — basic
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35,548 | 35,362 | ||||||||
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Number of shares — diluted
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36,645 | 35,362 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
VERITY, INC.
| Three Months Ended | ||||||||||
| August 31, | ||||||||||
| 2002 | 2001 | |||||||||
| (unaudited) | ||||||||||
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Cash flows from operating
activities:
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||||||||||
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Net income (loss)
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$ | 1,381 | $ | (2,467 | ) | |||||
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Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
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Depreciation
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887 | 1,129 | ||||||||
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Provision for (recovery of) doubtful accounts
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139 | (123 | ) | |||||||
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Deferred income taxes
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479 | — | ||||||||
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Amortization of premium (discount) on
securities, net
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332 | (100 | ) | |||||||
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Changes in operating assets and liabilities:
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Trade accounts receivable
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4,006 | 15,167 | ||||||||
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Prepaid and other current assets
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819 | (1,531 | ) | |||||||
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Accounts payable
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(997 | ) | 730 | |||||||
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Accrued compensation and other accrued liabilities
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(979 | ) | (5,197 | ) | ||||||
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Deferred revenue
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(2,752 | ) | (3,022 | ) | ||||||
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Net cash provided by operating activities
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3,315 | 4,586 | ||||||||
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Cash flows from investing
activities:
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Acquisition of equipment and leasehold
improvements
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(361 | ) | (1,981 | ) | ||||||
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Purchases of marketable securities
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(142,038 | ) | (148,433 | ) | ||||||
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Maturity of marketable securities
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61,754 | 78,651 | ||||||||
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Proceeds from sale of marketable securities
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74,165 | 65,828 | ||||||||
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Net cash used in investing activities
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(6,480 | ) | (5,935 | ) | ||||||
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Cash flows from financing
activities:
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Proceeds from the sale of common stock, net of
issuance costs
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479 | 3,817 | ||||||||
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Repurchases of common stock
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(6,566 | ) | — | |||||||
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Net cash provided (used) by financing
activities
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(6,087 | ) | 3,817 | |||||||
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Effect of exchange rate changes on cash
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385 | (277 | ) | |||||||
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Net increase (decrease) in cash and cash
equivalents
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(8,867 | ) | 2,191 | |||||||
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Cash and cash equivalents, beginning of period
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23,251 | 12,210 | ||||||||
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Cash and cash equivalents, end of period
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$ | 14,384 | $ | 14,401 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VERITY, INC.
1. Interim Financial Data (Unaudited)
The unaudited condensed consolidated financial statements for Verity, Inc. (the “Company” or “Verity”) as of August 31, 2002 and for the three months ended August 31, 2002 and 2001 have been prepared on the same basis as the Company’s audited financial statements and, in the opinion of management, include all material adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations in accordance with generally accepted accounting principles. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission, the Company believes the disclosures made are adequate to make the information presented not misleading. The accompanying financial statements should be read in conjunction with the Company’s annual financial statements contained in the Company’s Annual Report on Form 10-K for the year ended May 31, 2002.
The Company’s balance sheet as of May 31, 2002 was derived from the Company’s audited financial statements, but does not include all disclosures necessary for the presentation to be in accordance with generally accepted accounting principles.
2. Computation of Net Income (Loss) and Net Income (Loss) Per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of “in-the-money” stock options. “In-the-money” options are those where the exercise price is lower than the average market price being used to determine the value. Verity’s average market price for the first quarter in fiscal year 2003 was $10.5363. All common equivalent shares have been excluded from the computation of diluted net loss per share for the three months ended August 31, 2001 because the effect would be anti-dilutive.
Basic and diluted net income (loss) per share are calculated as follows for the three months ended August 31, 2002 and 2001 (in thousands, except per share data):
| Three Months Ended | |||||||||
| August 31, | |||||||||
| 2002 | 2001 | ||||||||
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Basic:
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Weighted-average shares
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35,548 | 35,362 | |||||||
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Net income (loss)
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$ | 1,381 | $ | (2,467 | ) | ||||
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Net income (loss) per share
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$ | 0.04 | $ | (0.07 | ) | ||||
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Diluted:
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Weighted-average shares
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35,548 | 35,362 | |||||||
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Common equivalent shares from stock options
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1,097 | — | |||||||
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Shares used in per share calculation
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36,645 | 35,362 | |||||||
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Net income (loss)
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$ | 1,381 | $ | (2,467 | ) | ||||
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Net income (loss) per share
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$ | 0.04 | $ | (0.07 | ) | ||||
6
As of August 31, 2002 and August 31, 2001, zero and 10,710,540 anti-dilutive shares have been excluded from the dilutive effect of common stock equivalent shares.
3. Investments
As of August 31, 2002, available-for-sale securities consist of the following (in thousands):
| Gross | |||||||||||||
| Amortized | Unrealized | Fair | |||||||||||
| Cost | Gains | Value | |||||||||||
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Corporate commercial paper — short-term
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$ | 119,235 | $ | 723 | $ | 119,958 | |||||||
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Corporate commercial paper — long-term
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106,955 | 1,593 | 108,548 | ||||||||||
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Total investments
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$ | 226,190 | $ | 2,316 | $ | 228,506 | |||||||
At August 31, 2002, scheduled maturities of investments classified as available-for-sale are as follows (in thousands):
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Within one year
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$ | 119,958 | ||
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After one year through three years
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108,548 | |||
| $ | 228,506 | |||
As of May 31, 2002, available-for-sale securities consist of the following (in thousands):
| Gross | |||||||||||||
| Amortized | Unrealized | Fair | |||||||||||
| Cost | Gains | Value | |||||||||||
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Corporate commercial paper — short-term
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$ | 130,002 | $ | 670 | $ | 130,672 | |||||||
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Corporate commercial paper — long-term
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90,391 | 1,042 | 91,433 | ||||||||||
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Total investments
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$ | 220,393 | $ | 1,712 | $ | 222,105 | |||||||
4. Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The following are the components of comprehensive income (loss) (in thousands):
| Three Months Ended | ||||||||
| August 31, | ||||||||
| 2002 | 2001 | |||||||
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Net income (loss)
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$ | 1,381 | $ | (2,467 | ) | |||
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Foreign currency translations gain
|
721 | — | ||||||
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Unrealized gains on available-for-sale
investments, net
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616 | 710 | ||||||
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Comprehensive income (loss)
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$ | 2,718 | $ | (1,757 | ) | |||
5. Business Segment
The Company has sales and marketing operations located outside the United States in the Netherlands, the United Kingdom, France, Germany, South Africa, Mexico, Australia, a joint investment partnership in Brazil and a development and technical support operation in Canada. Foreign branch and subsidiary revenues
7
consist primarily of maintenance and consulting services and are being allocated based on foreign branch and subsidiary location.
| Three Months Ended | ||||||||||
| August 31, | ||||||||||
| 2002 | ||||||||||