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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the quarterly period ended February 29, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the transition period from              to             

 

Commission File Number: 0-26880

 

 

VERITY, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware   77-0182779
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

894 Ross Drive

Sunnyvale, California 94089

(408) 541-1500

(Address, including zip code, and telephone number, including area code of principal executive offices)

 

 

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 ¨

 

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes x    No ¨

 

The number of shares outstanding of the Registrant’s Common Stock, $0.001 par value, was 36,838,593 as of March 31, 2004.

 

Table of Contents

VERITY, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

          Page
PART I.  FINANCIAL INFORMATION
Item 1.    Financial Statements    3
     Condensed Consolidated Balance Sheets — As of February 29, 2004 and May 31, 2003    3
    

Condensed Consolidated Statements of Operations — For the Three Month Periods Ended February 29, 2004 and February 28, 2003, and the Nine Month Periods Ended February 29, 2004 and February 28, 2003

    4
    

Condensed Consolidated Statements of Cash Flows — For the Nine Month Periods Ended February 29, 2004 and February 28, 2003

    5
     Notes to Condensed Consolidated Financial Statements    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    16
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    36
Item 4.    Controls and Procedures    37
PART II.  OTHER INFORMATION
Item 1.    Legal Proceedings    38
Item 2.    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    38
Item 3.    Defaults upon Senior Securities    38
Item 4.    Submission of Matters to a Vote of Security Holders    38
Item 5.    Other Information    38
Item 6.    Exhibits and Reports on Form 8-K    38
Signature    39

 

2

Table of Contents

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

VERITY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data, unaudited)

 

    

February 29,

2004

   

May 31,

2003

ASSETS              

Current assets:

              

Cash and cash equivalents

    $ 184,576    $ 85,672

Short-term investments

      27,890      52,993

Trade accounts receivable, net of allowance for doubtful accounts of $1,393 and $1,540

      22,926      22,597

Deferred tax assets

      3,847      3,916

Prepaid and other assets

      5,871      4,719
    
  

Total current assets

      245,110      169,897

Property and equipment, net

      3,982      5,168

Long-term investments

      56,515      112,079

Deferred tax assets

      17,494      18,176

Intangible assets, net

      9,675      11,610

Goodwill

      15,145      15,145

Other assets

      450      460
    
  

Total assets

    $ 348,371    $ 332,535
    
  
LIABILITIES              

Current liabilities:

              

Accounts payable

    $ 5,664    $ 5,541

Accrued compensation

      9,406      8,518

Income tax payable

      4,981      3,493

Deferred purchase payment

      3,054      —  

Other accrued liabilities

      834      1,457

Deferred revenue

      18,898      18,874
    
  

Total current liabilities

      42,837      37,883
    
  

Deferred purchase payment

      —        3,021
    
  

Total liabilities

      42,837      40,904
    
  
STOCKHOLDERS’ EQUITY              

Common stock, $0.001 par value:

              

Authorized: 200,000 shares; issued and outstanding: 38,205 shares as of February 29, 2004; and 37,560 shares as of May 31, 2003

      38      38

Additional paid-in capital

      268,483      264,645

Other comprehensive income

      3,025      3,174

Retained earnings

      33,988      23,774
    
  

Total stockholders’ equity

      305,534      291,631
    
  

Total liabilities and stockholders’ equity

    $ 348,371    $ 332,535
    
  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

Table of Contents

VERITY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)

 

     Three Months Ended
     Nine Months Ended
  
    

February 29,

2004

    

February 28,

2003

    

February 29,

2004

    

February 28

2003

  

Revenues:

                                 

Software products

    $ 17,795     $ 15,722     $ 48,199     $ 40,977  

Service and other

      12,746       12,122       37,843       31,768  
    
 
 
 

Total revenues

      30,541       27,844       86,042       72,745  
    
 
 
 

Costs of revenues:

                                 

Software products

      368       256       1,135       938  

Service and other

      3,260       3,268       9,936       9,088  

Amortization of purchased intangible assets

      645       645       1,935       645  
    
 
 
 

Total costs of revenues

      4,273       4,169       13,006       10,671  
    
 
 
 

Gross profit

      26,268       23,675       73,036       62,074  
    
 
 
 

Operating expenses:

                                 

Research and development

      4,346       5,147       14,581       14,935  

Marketing and sales

      12,109       10,544       35,928       30,794  

General and administrative

      2,451       2,474       8,051       7,610  

In-process research and development

      —         1,200       —         1,200  

Restructuring charge

      —         —         972       993  
    
 
 
 

Total operating expenses

      18,906       19,365       59,532       55,532  
    
 
 
 

Income from operations

      7,362       4,310       13,504       6,542  

Interest income, net

      1,174       1,826       3,955       5,890  

Other expense, net

      (610 )     (236 )     (435 )     (492 )
    
 
 
 

Income before provision for income taxes

      7,926       5,900       17,024       11,940  

Provision for income taxes

      3,170       2,242       6,810       4,538  
    
 
 
 

Net income

    $ 4,756     $ 3,658     $ 10,214     $ 7,402  
    
 
 
 

Net income per share — basic

    $ 0.13     $ 0.11     $ 0.27     $ 0.21  
    
 
 
 

Net income per share — diluted

    $ 0.12     $ 0.10     $ 0.26     $ 0.20  
    
 
 
 

Number of shares — basic

      37,942       34,739       37,675       34,995  
    
 
 
 

Number of shares — diluted

      40,568       37,833       39,902       36,765  
    
 
 
 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

Table of Contents

VERITY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

     Nine Months Ended
  
    

February 29,

2004

    

February 28,

2003

  

Cash flows from operating activities:

                 

Net income

    $ 10,214     $ 7,402  

Adjustments to reconcile net income to net cash provided by operating activities:

                 

Depreciation and amortization

      4,504       3,229  

Allowance for doubtful accounts

      (86 )     563  

Deferred income taxes

      751       3,141  

Write-off of in-process research and development

      —         1,200  

Amortization of premium on securities, net

      704       1,165  

Changes in operating assets and liabilities:

                 

Trade accounts receivable

      301       2,310  

Prepaid and other assets

      (1,049 )     1,354  

Accounts payable

      7       (665 )

Accrued compensation and other accrued liabilities

      1,508       (1,027 )

Deferred revenue

      (331 )     (2,071 )
    
 

Net cash provided by operating activities

      16,523       16,601  
    
 

Cash flows from investing activities:

                 

Acquisition of property and equipment

      (1,346 )     (1,170 )

Purchases of investments

      (489,235 )     (331,778 )

Maturity of investments

      246,017       142,547  

Proceeds from sale of investments

      322,420       211,330  

Purchase of business

      —         (23,826 )
    
 

Net cash provided by (used in) investing activities

      77,856       (2,897 )
    
 

Cash flows from financing activities:

                 

Proceeds from the sale of common stock, net of issuance costs

      20,843       12,210  

Repurchases of common stock

      (17,005 )     (28,562 )