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 Registrants Common Stock, $0.001 par value, was 36,838,593 as of March 31, 2004.
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 | |||
4 | ||||
5 | ||||
Notes to Condensed Consolidated Financial Statements | 6 | |||
Item 2. | Managements 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
PART I. FINANCIAL INFORMATION
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
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
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 | ) | ||||
Net cash provided by (used in) financing activities |
3,838 | (16,352 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
687 | 815 | ||||||
Net decrease in cash and cash equivalents |
98,904 | (1,833 | ) | |||||
Cash and cash equivalents, beginning of period |
85,672 | 23,251 | ||||||
Cash and cash equivalents, end of period |
$ | 184,576 | $ | 21,418 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 6 | $ | 14 | ||||
Cash paid for income taxes |
$ | 1,278 | $ | 775 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
1. Interim Financial Data
The unaudited condensed consolidated financial statements for Verity, Inc. (the Company or Verity) as of February 29, 2004 and for the three and nine months ended February 29, 2004 and February 28, 2003 have been prepared on the same basis as the Companys 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 Companys annual financial statements contained in the Companys Annual Report on Form 10-K for the year ended May 31, 2003.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Managements estimates, judgments and assumptions are continually evaluated based on available information and experience; however, actual amounts could differ from those estimates. Certain prior period balances have been reclassified to conform to current period presentation.
The consolidated financial statements include the accounts of Verity, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The Companys balance sheet as of May 31, 2003 was derived from the Companys audited financial statements, but does not include all disclosures necessary for the presentation to be in accordance with generally accepted accounting principles.
2. Accounting for Computation of Net Income Per Share and Stock-Based Compensation
Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and potential common shares outstanding during the period. Dilutive potential common shares consist of in-the-money stock options. In-the-money options are those for which the exercise price is lower than the average market price of the Companys common stock during the period. For the three months ended February 29, 2004, and February 28, 2003, 7,358,512 and 9,304,261 anti-dilutive weighted potential shares have been excluded from the diluted net income per share calculation. For the nine months ended February 29, 2004, and February 28, 2003, 9,300,186 and 12,493,809 anti-dilutive weighted potential shares have been excluded from the diluted net income per share calculation.
The Company accounts for stock-based employee compensation arrangements under compensatory plans using the intrinsic value method, which calculates compensation expense based on the difference, if any, on the date of the grant, between the fair value of the Companys stock and the option exercise price.
Generally accepted accounting principles require companies who choose to account for stock option grants using the intrinsic value method to also determine the fair value of option grants using a stock option pricing
6
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
model such as the Black-Scholes model and to disclose the impact of fair value accounting in a note to the financial statements. The impact of recognizing the fair value of option grants and stock grants under the Companys employee stock option and stock purchase plans as an operating expense would have reduced the Companys net income to a net loss, as follows (in thousands, except per share amounts):
Three Months Ended |
Nine Months Ended |
|||||||||||||||
February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 |
|||||||||||||
Net income |
||||||||||||||||
Net income as reported |
$ | 4,756 | $ | 3,658 | $ | 10,214 | $ | 7,402 | ||||||||
Deduct: Total SFAS 123 stock-based employee compensation expense, net of related tax effects |
(11,259 | ) | (14,536 | ) | (38,593 | ) | (47,575 | ) | ||||||||
Net loss pro forma |
$ | (6,503 | ) | $ | (10,878 | ) | $ | (28,379 | ) | $ | (40,173 | ) | ||||
Earnings per share |
||||||||||||||||
Net income per share basic as reported |
$ | 0.13 | $ | 0.11 | $ | 0.27 | $ | 0.21 | ||||||||
Net loss per share basic pro forma |
$ | (0.17 | ) | $ | (0.31 | ) | $ | (0.75 | ) | $ | (1.15 | ) | ||||
Net income per share diluted as reported |
$ | 0.12 | $ | 0.10 | $ | 0.26 | $ | 0.20 | ||||||||
Net loss per share diluted pro forma |
$ | (0.17 | ) | $ | (0.31 | ) | $ | (0.75 | ) | $ | (1.15 | ) | ||||
Number of shares used in basic as reported calculation |
37,942 | 34,739 | 37,675 | 34,995 | ||||||||||||
Number of shares used in diluted as reported calculation |
40,568 | 37,833 | 39,902 | 36,765 | ||||||||||||
Number of shares used in basic and diluted pro forma calculation |
37,942 | 34,739 | 37,675 | 34,995 | ||||||||||||
The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for each respective period:
Three Months Ended |
Nine Months Ended | |||||||
February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 | |||||
Stock Option Plans |
||||||||
Expected volatility |
84% | 80% | 89% | 80% | ||||
Risk-free interest rate |
2.85% | 2.14% | 2.11% | 2.83% | ||||
Expected life |
4.09 years | 3.25 years | 4.06 years | 2.88 years | ||||
Expected dividend yield |
0.00% | 0.00% | 0.00% | 0.00% | ||||
Stock Purchase Plan |
||||||||
Expected volatility |
70% | 80% | 76% | 90% | ||||
Risk-free interest rate |
1.14% | 1.56% | 1.38% | 1.93% | ||||
Expected life |
1.00 year | 1.00 year | 1.00 year | 1.00 year | ||||
Expected dividend yield |
0.00% | 0.00% | 0.00% | 0.00% |
7
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
3. Investments
As of February 29, 2004 and May 31, 2003, available-for-sale securities consist of the following (in thousands):
February 29, 2004 |
May 31, 2003 | |||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Fair Value |
Amortized Cost |
Gross Unrealized Gains |
Fair Value | |||||||||||||
Short-Term |
||||||||||||||||||
Corporate |
$ | 16,735 | $ | 148 | $ | 16,883 | $ | 48,592 | $ | 788 | $ | 49,380 | ||||||
Government |
9,000 | 7 | 9,007 | 1,000 | 13 | 1,013 | ||||||||||||
Other |
2,000 | | 2,000 | 2,600 | | 2,600 | ||||||||||||
Total short-term |
$ | 27,735 | $ | 155 | $ | 27,890 | $ | 52,192 | $ | 801 | $ | 52,993 | ||||||
Long-Term |
||||||||||||||||||
Corporate |
$ | 4,564 | $ | 8 | $ | 4,572 | $ | 14,031 | $ | 290 | $ | 14,321 | ||||||
Government |
51,865 | 78 | 51,943 | 95,965 | 413 | 96,378 | ||||||||||||
Other |
| | | 1,375 | 5 | 1,380 | ||||||||||||
Total long-term |
56,429 | 86 | 56,515 | 111,371 | 708 | 112,079 | ||||||||||||
Total investments |
$ | 84,164 | $ | 241 | $ | 84,405 | $ | 163,563 | $ | 1,509 | $ | 165,072 | ||||||
4. Deferred Purchase Payment
On December 17, 2002, the Company completed the purchase of certain assets and obligations of Inktomi Corporations enterprise search software business. Of the total purchase price, the Company deferred $3.0 million in order to secure Inktomis indemnification obligations under the Purchase Agreement. On June 17, 2004, the Company is obligated to pay Inktomi an amount equal to the sum of (1) $3.0 million plus (2) simple interest thereon calculated from the December 17, 2002 through the date of payment at an annual rate of 1.5%. The Company has the right to withhold or deduct from the deferred payment amount any sum that may be owed to it by Inktomi pursuant to Inktomis indemnification obligations under the Purchase Agreement. The Company believes the likelihood of indemnification is remote.
At February 29, 2004, the deferred purchase payment plus accrued interest was categorized as a short-term liability as the payment was due within twelve months of this date. At May 31, 2003, the deferred purchase payment was categorized as a long-term liability as the payment was due greater than twelve months from this date.
8
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
5. Comprehensive Income
Comprehensive income 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, such as foreign currency translation gains and losses and unrealized gains and losses on available-for-sale securities that are reflected in stockholders equity instead of net income. The following table sets forth the calculation of comprehensive income (in thousands):
Three Months Ended |
Nine Months Ended | |||||||||||||
February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 | |||||||||||
Net Income |
$ | 4,756 | $ | 3,658 | $ | 10,214 | $ | 7,402 | ||||||
Foreign currency translations gain |
384 | 842 | 612 | 1,729 | ||||||||||
Unrealized gain (loss) on available-for-sale securities, net of tax |
168 | (187 | ) | (761 | ) | 321 | ||||||||
Comprehensive income |
$ | 5,308 | $ | 4,313 | $ | 10,065 | $ | 9,452 | ||||||
6. Business Segment
Substantially all of the Companys revenues result from the sale of the Companys software products and related services. Accordingly, the Company considers itself to be in a single reporting segment, specifically the license, implementation and support of its software. The Companys chief operating decision-making group reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance.
The Company also has sales and marketing operations located in the Netherlands, the United Kingdom, France, Germany, South Africa, Mexico, Australia, Japan and a development and technical support operation in Canada. Foreign branch and subsidiary revenues consist primarily of maintenance and consulting services and are being allocated based on foreign branch and subsidiary location. Disclosed in the table below is geographic information for any individual country comprising greater than 10% of the Companys total revenues or greater than 10% of the Companys long-lived assets. Rest of world (ROW) includes Australia, Canada, Japan, Mexico and South Africa.
Three Months Ended |
Nine Months Ended | |||||||||||
February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 | |||||||||
(in thousands) | ||||||||||||
Revenues: |
||||||||||||
USA |
$ | 19,138 | $ | 17,270 | $ | 56,267 | $ | 45,557 | ||||
United Kingdom |
4,096 | 3,902 | 9,783 | 9,417 | ||||||||
Other Europe |
4,947 | 5,440 | 13,160 | 14,191 | ||||||||
ROW |
2,360 | 1,232 | 6,832 | 3,580 | ||||||||
Consolidated |
$ | 30,541 | $ | 27,844 | $ | 86,042 | $ | 72,745 | ||||
9
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
February 29, 2004 | |||
(in thousands) | |||
Long-lived assets: |
|||
USA |
$ | 28,168 | |
Europe |
393 | ||
Canada |
674 | ||
Other ROW |
17 | ||
Consolidated |
$ | 29,252 | |
Long-lived assets of geographic areas are those assets used in the Companys operations in each area.
Total revenues outside the U.S., which are summarized in the following table, consist of export sales (shipped from the U.S. to non-U.S. locations) and sales derived from the Companys foreign operations.
Three Months Ended |
Nine Months Ended | |||||||||||
February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 | |||||||||
(in thousands) | ||||||||||||
Revenues outside the U.S.: |
||||||||||||
Export |
$ | 6,536 | $ | 6,657 | $ | 16,162 | $ | 15,937 | ||||
Foreign Operations |
4,867 | 3,917 | 13,613 | 11,251 | ||||||||
Total |
$ | 11,403 | $ | 10,574 | $ | 29,775 | $ | 27,188 | ||||
No single customer accounted for more than 10% of the Companys total revenues for the three and nine month periods ended February 29, 2004 and February 28, 2003. The percentage of total revenues derived from sales to the United States government and its agencies were:
Three Months Ended |
Nine Months Ended |
|||||||||||
February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 |
|||||||||
Percentage of total revenues |
8.7 | % | 10.2 | % | 10.0 | % | 10.2 | % |
7. Stock Repurchase Program
On June 24, 2003, the Company announced the continuation of its stock repurchase program. The continuation calls for the additional repurchase of outstanding shares of the Companys common stock up to an aggregate value of $50.0 million. For the three months ended February 29, 2004 and 2003, respectively, Verity did not repurchase shares as they were engaged in merger and acquisition discussions. Verity repurchased and retired 1,190,987 and 2,449,805 shares, valued at approximately $17.0 million and $28.6 million in the nine month periods ended February 29, 2004 and 2003, respectively. The program will terminate at the end of the fiscal year ending May 31, 2004 unless amended by the Board of Directors.
10
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
8. Restructuring Costs
During each of the nine month periods ended February 29, 2004 and February 28, 2003, the Company executed restructuring efforts designed to reduce costs and to better align its expense levels with current revenue levels and ensure conservative spending during the current period of economic uncertainty, as described below. The following table sets forth these restructuring charges:
Restructuring charges: (nine month periods ended) | February 29, 2004 |
February 28, 2003 | ||||
(in millions) | ||||||
Severance costs |
$ | 0.90 | $ | 0.72 | ||
Legal and other outside services costs |
0.07 | 0.10 | ||||
Other charges |
0.00 | 0.17 | ||||
Total restructuring charges |
$ | 0.97 | $ | 0.99 | ||
With respect to the restructuring executed during the quarter ended November 30, 2003, the Company implemented this worldwide restructuring plan to focus on reducing expenses and improving efficiency due to continued macro-economic and capital spending issues affecting the software industry. In connection with the restructuring, the Company recorded in the quarter ended November 30, 2003, a $0.97 million restructuring charge, of which approximately $0.9 million was related to severance costs associated with the reduction in the worldwide workforce by approximately 40 employees and approximately $0.07 million to legal and other outside services costs associated with the restructuring. The restructuring impacted operations in the U.S., Canada and Europe and was across all functional areas of the Company. The following tables sets forth the cash payments made and yet to be made with respect to this restructuring charge:
Workforce Reduction |
Legal and Other Outside Services |
Total |
||||||||||
(in millions) | ||||||||||||
Restructuring accrual at November 30, 2003 |
$ | 0.02 | $ | 0.03 | $ | 0.05 | ||||||
Cash payments |
(0.01 | ) | (0.01 | ) | (0.02 | ) | ||||||
Restructuring accrual at February 29, 2004 |
$ | 0.01 | $ | 0.02 | $ | 0.03 | ||||||
Of the total $0.97 million restructuring charge, approximately $0.03 million remains unpaid at February 29, 2004. Of the $0.03 million, approximately $0.01 million relates to severance costs and approximately $0.02 million to legal and other outside services costs associated with the restructuring. The unpaid amount will be paid out over the next quarter.
11
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
With respect to the restructuring executed during the quarter ended November 30, 2002, the Company recorded a $0.97 million restructuring charge, of which approximately $0.72 million was related to severance costs associated with the reduction in the worldwide workforce by 50 employees, approximately $0.10 million to legal and other outside services in connection with the restructuring and approximately $0.17 million to other costs associated with the restructuring. The restructuring impacted operations in the U.S., Canada, the U.K., Germany, France, the Netherlands, Sweden and South Africa. The following table sets forth the cash payments made and yet to be made with respect to this restructuring charge:
Workforce Reduction |
Legal and Other Outside Services |
Other |
Total |
|||||||||||||
(in millions) | ||||||||||||||||
Restructuring accrual at November 30, 2003 |
$ | 0.04 | $ | 0.00 | $ | 0.14 | $ | 0.18 | ||||||||
Cash payments |
(0.03 | ) | (0.00 | ) | (0.01 | ) | (0.04 | ) | ||||||||
Restructuring accrual at February 29, 2004 |
$ | 0.01 | $ | 0.00 | $ | 0.13 | $ | 0.14 | ||||||||
At February 29, 2004, $0.14 million of the restructuring executed during the quarter ended November 30, 2002 remains unpaid and is mostly related to a facilities lease and will be paid out ratably over the remaining life of the lease, which terminates in October 2005.
9. Business Combination
During the quarter ended February 28, 2003, the Company completed the purchase of certain assets and obligations of Inktomi Corporations enterprise search software business (Enterprise), which the Company accounted for as a purchase of a business.
The total purchase price of the acquisition of Enterprise is as follows (in thousands):
Cash |
$ | 22,000 | |
Deferred payment |
3,000 | ||
Acquisition costs |
1,826 | ||
Total purchase price |
$ | 26,826 | |
Under the purchase method of accounting, the total estimated purchase price is allocated to Enterprises net tangible and identifiable intangible assets based upon their estimated fair value as of the date of completion of the acquisition. The final purchase price is dependent on the actual cash paid and actual direct acquisition costs. Based upon the total purchase price and the independent valuation, the purchase price allocation is as follows (in thousands):
Identifiable intangible assets acquired (Useful life (years)) |
||||
Existing technology |
$ | 8,300 | ||
Patents/core technology |
2,800 | |||
Maintenance agreements |
1,800 | |||
Total amortizable intangible assets |
12,900 | |||
In-process technology |
1,200 | |||
Fair value of net liabilities assumed |
(2,419 | ) | ||
Goodwill |
15,145 | |||
Total purchase price (including transaction costs) |
$ | 26,826 | ||
12
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
The estimated future amortization expense of purchased intangible assets as of February 28, 2004 is as follows (in thousands):
Fiscal Year |
Amount | ||
2004 (remaining 3 months) |
$ | 645 | |
2005 |
2,580 | ||
2006 |
2,580 | ||
2007 |
2,580 | ||
2008 |
1,290 | ||
Total |
$ | 9,675 | |
The Companys methodology for allocating the purchase price to in-process research and development (in-process R&D) is determined through established valuation techniques in the high-technology software industry and expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist. The fair value allocation to in-process research and development was determined by identifying the research projects for which technological feasibility had not been achieved and which had no alternative future use at the acquisition date, assessing the stage and expected date of completion of the research and development effort at the acquisition date, and calculating the net present value of the cash flows expected to result from the successful deployment of the new technology resulting from the in-process research and development effort.
The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in-process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and obstacles necessary to attain technological feasibility. As of the acquisition date, Enterprise had released Ultraseek 5.0, XML Toolkit 1.0, and the latest version of Quiver to the market. Current development efforts, considered in-process R&D, were focused on Ultraseek 5.1 and XML Toolkit 2.0. There were no development efforts (that meet the criteria of in-process R&D) related to the Quiver product line as of the acquisition date. The estimated stage of completion of both Ultraseek 5.1 and XML Toolkit 2.0 was 55% complete. Total in-process R&D expense for the three and nine months ended February 28, 2003 was $1.2 million.
Of the total purchase price, the Company retained $3.0 million in order to secure Inktomis indemnification obligations under the Purchase Agreement. On June 17, 2004, the Company is obligated to pay Inktomi an amount equal to the sum of (i) $3.0 million plus (ii) simple interest thereon calculated from the December 17, 2002 through the date of payment at an annual rate of 1.5%. The Company shall have the right to withhold or deduct from the deferred payment amount any sum that may be owed to it by Inktomi pursuant to Inktomis indemnification obligations under the Purchase Agreement. The Company believes the likelihood of such indemnification is remote.
10. Subsequent Events
NativeMinds Inc.
On March 3, 2004, the Company completed its acquisition of the intellectual property, certain customer agreements and other strategic assets from NativeMinds Inc., a privately-held software company. Under the terms of the deal, the Company acquired NativeMinds technology portfolio, an integrated set of tools that
13
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
provides an interactive contact point for customer inquiries. The Company paid the purchase price of $3.8 million in cash. In addition, the Company hired nine employees from NativeMinds development, professional services and sales organizations.
Cardiff Software
On March 15, 2004, the Company completed its acquisition of Cardiff Software Inc., a privately-held software company, which management believes qualifies as a business. Cardiff technology enables the automated capture of dynamic business information. The aggregate purchase price was approximately $66 million, inclusive of cash, stock options assumed and deferred purchase payments and exclusive of estimated acquisition costs. Cardiff products include TELEform, LiquidCapture and LiquidOffice, a comprehensive suite that automates document capture, e-Forms and workflow-driven business processes.
11. Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No. 00-21 (Issue 00-21), Revenue Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of Issue 00-21 began to apply to revenue arrangements entered into in our second quarter ended November 30, 2003. The adoption of Issue 00-21 did not have a material effect on the Companys consolidated financial position, results of operations or cash flows.
In December 2003, the FASB issued (FIN) Interpretation No. 46R (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB Interpretation FIN No. 46, which was issued in January 2003. As of the effective date of FIN No. 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN No. 46R apply to those entities. There is no grandfathering of existing entities. The adoption of FIN No. 46 did not have a significant impact on the Companys consolidated financial position, results of operations or cash flow.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB No. 104 revises or rescinds portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB No. 104 did not have a significant impact on the Companys consolidated financial position, results of operations or cash flow.
On April 30, 2003, the FASB issued Statement No. 149 (Statement 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, Statement 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. Statement 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of Statement 149 did not have a material effect on the Companys consolidated financial position, results of operations or cash flows.
14
VERITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of February 29, 2004 and for the three and nine months ended
February 29, 2004 and the three and nine months ended February 28, 2003 is unaudited)
On May 15, 2003, the FASB issued Statement No. 150 (Statement 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Statement 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. The Company does not use such instruments in its share repurchase program. Statement 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. The adoption of Statement 150 did not have a material effect on the Companys consolidated financial position, results of operations or cash flows.
In July 2003, the EITF reached a consensus on Issue No. 03-05, Applicability of AICPA SOP 97-2 to Non Software Deliverables in an Arrangement Containing More Than Incidental Software. The consensus opinion in EITF No. 03-05 clarifies the guidance in EITF 00-21 and was reached on July 31, 2003. The adoption of Issue No. 03-05 did not have a material effect on the Companys consolidated financial position, results of operations or cash flows.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes, which appear in our Annual Report on Form 10-K for the fiscal year ended May 31, 2003. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly under the heading Risk Factors below.
Overview
We offer products and technology that address the business portal, e-commerce, and knowledge management markets, which we define broadly as intellectual capital management. The intellectual capital management market includes enterprise intranets and corporate portals used for sharing information within an enterprise, e-commerce sites for online selling, and extranets for business-to-business activities. Intellectual capital management solutions provide secure, personalized access to information for employees, partners, customers and suppliers, wherever that information may reside in the enterprise. We expect that for the foreseeable future we will continue to derive the largest portion of our revenues from licensing our technology for enterprise and e-commerce applications and intellectual capital management solutions.
Recent Acquisitions
Enterprise search assets of Inktomi Corporation. In December 2002, we completed the acquisition of the enterprise search assets of Inktomi Corporation (Enterprise), further expanding our product portfolio to include solutions for smaller organizations and departments within larger enterprises. In addition to addressing these markets, the acquired enterprise search software, re-branded Verity Ultraseek, is in use at a number of larger enterprises for search-only applications as well. We are continuing development and support of the Ultraseek product line, and believe that the larger enterprises in the installed base represent an upgrade opportunity to our broader intellectual capital management solutions as their needs grow. We purchased the Enterprise business for approximately $26.8 million in cash, of which $3.0 million, plus $67,500 in interest, is payable in June 2004. We expensed $1.2 million to in-process research and development (in-process R&D) upon acquisition, and have been amortizing the expense of purchased intangible assets at a rate of approximately $2.6 million per year, which we expect to continue through fiscal 2007, with the remaining $1.3 million to be amortized in fiscal 2008.
Strategic assets from NativeMinds Inc. On March 3, 2004, we completed the acquisition of the intellectual property, certain customer agreements and other strategic assets from NativeMinds Inc., a privately held software company and leading provider of integrated self-service solutions. The acquired technology portfolio, re-branded Verity Response, is an integrated set of tools that provides a single interface for internal and external customer inquiries through a natural language dialog. It includes technology that manages the interaction between a customer and a vRep, or virtual representative; the vRep Management System to track, measure and improve a vRep solution; and a set of reporting and analysis tools to help assess performance, identify content opportunities and gather valuable customer insight. Verity and NativeMinds technologies and products, in combination, will deliver highly capable, cost-efficient online customer assistance solutions.
The total estimated purchase price (including cash, deferred payments and estimated acquisition costs) will be allocated to NativeMinds net tangible and identifiable intangible assets based upon their estimated fair value as of the date of completion of the acquisition. The final purchase price is dependent on the actual cash paid of $3.8 million and actual direct acquisition costs, but we expect that it will be in the range of $3.8-$4.3 million in total.
The allocation to tangible net assets will be based on the net assets fair market value. The allocation to identifiable intangible assets will be amortized over the useful life of the individual assets. The methodology for allocating the purchase price to in-process R&D is determined through established valuation techniques in the
16
high-technology software industry and expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist.
Cardiff Software Inc. On March 15, 2004, we completed the acquisition of Cardiff Software Inc., a privately-held software company. Cardiff technology enables the automated capture of dynamic business information. Although the Cardiff corporate brand will be discontinued, we will retain the product names TeleForm®, LiquidOffice, LiquidCapture, and TeleForm® MediClaim. Support and maintenance services for existing Cardiff customers will remain in place.
Under the purchase method of accounting, the total estimated purchase price (including cash, deferred payments, stock options assumed and estimated acquisition costs) is allocated to Cardiffs net tangible and identifiable intangible assets based upon their estimated fair value as of the date of completion of the acquisition. The final purchase price is dependent on the actual cash paid and actual direct acquisition costs, but we expect that it will be in the range of $66-69 million.
The allocation to tangible net assets will be based on the net assets fair market value. The allocation to identifiable intangible assets will be amortized over the useful life of the individual assets. The methodology for allocating the purchase price to in-process R&D is determined through established valuation techniques in the high-technology software industry and expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, bad debts, income taxes and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on form 10-K for the fiscal year ended May 31, 2003.
17
Results of Operations
The following table sets forth the percentage of total revenues represented by certain items in our Condensed Consolidated Statements of Operations for the periods indicated:
Three Months Ended |
Nine Months Ended |
|||||||||||
February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 |
|||||||||
(unaudited) | (unaudited) | |||||||||||
Revenues: |
||||||||||||
Software products |
58.3 | % | 56.5 | % | 56.0 | % | 56.3 | % | ||||
Service and other |
41.7 | 43.5 | 44.0 | 43.7 | ||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | ||||||||
Costs of revenues: |
||||||||||||
Software products |
1.2 | 0.9 | 1.3 | 1.3 | ||||||||
Service and other |
10.7 | 11.7 | 11.6 | 12.5 | ||||||||
Amortization of purchased intangible assets |
2.1 | 2.4 | 2.2 | 0.9 | ||||||||
Total costs of revenues |
14.0 | 15.0 | 15.1 | 14.7 | ||||||||
Gross profit |
86.0 | 85.0 | 84.9 | 85.3 | ||||||||
Operating expenses: |
||||||||||||
Research and development |
14.2 | 18.5 | 16.9 | 20.5 | ||||||||
Marketing and sales |
39.7 | 37.9 | 41.8 | 42.3 | ||||||||
General and administrative |
8.0 | 8.8 | 9.4 | 10.5 | ||||||||
In-process research and development |
| 4.3 | | 1.6 | ||||||||
Restructuring charge |
| | 1.1 | 1.4 | ||||||||
Total operating expenses |
61.9 | 69.5 | 69.2 | 76.3 | ||||||||
Income from operations |
24.1 | 15.5 | 15.7 | 9.0 | ||||||||
Interest income, net |
3.9 | 6.5 | 4.6 | 8.1 | ||||||||
Other expense, net |
(2.0 | ) | (0.8 | ) | (0.5 | ) | (0.7 | ) | ||||
Income before provision for income taxes |
26.0 | 21.2 | 19.8 | 16.4 | ||||||||
Provision for income taxes |
10.4 | 8.1 | 7.9 | 6.2 | ||||||||
Net income |
15.6 | % | 13.1 | % | 11.9 | % | 10.2 | % | ||||
Three and Nine Month Periods Ended February 29, 2004 and February 28, 2003
Prior period financials have been reclassified to conform to presentations adopted in fiscal year 2004.
Revenues
Total revenues
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||
(dollar amounts in millions) | ||||||||||||
Three months ended |
$ | 30.5 | $ | 27.8 | $ | 2.7 | 9.7 | % | ||||
Nine months ended |
$ | 86.0 | $ | 72.7 | $ | 13.3 | 18.3 | % |
The three and nine month periods ended February 29, 2004 results include the addition of our Ultraseek product, which came from the purchase of assets and assumption of obligations of Inktomi Corporations enterprise search software business in December 2002. The three and nine month periods ended February 28, 2003 include only partial results from Enterprise as the transaction closed in our third fiscal quarter ended
18
February 28, 2003. Additionally, the nine month period ended February 29, 2004 includes a payment in the first quarter from BroadVision of past royalties in connection with the settlement of outstanding litigation, which was less than 5% of revenues in the nine-month period.
No single customer accounted for more than 10% of our total revenues for the three and nine month periods ended February 29, 2004 and February 28, 2003.
Software product revenues
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 17.8 | $ | 15.7 | $ | 2.1 | 13.2 | % | ||||||
Percentage of total revenues |
58.3 | % | 56.5 | % | ||||||||||
Nine months ended |
$ | 48.2 | $ | 41.0 | $ | 7.2 | 17.6 | % | ||||||
Percentage of total revenues |
56.0 | % | 56.3 | % |
Our software product revenues consist primarily of fees for software licenses.
We saw an increase in demand for our software products in the three and nine month periods ended February 29, 2004, compared with the same periods a year ago. The increase in software product revenues during these periods is due primarily to the following:
| the increase in the number of sales transactions, as well as the average selling price; |
| increased sales to our OEM customers; and |
| the addition of sales of our Ultraseek product, which we did not have prior to our acquisition of Enterprise in December 2002. |
In addition, software product revenues from our non-Ultraseek products for the nine month period ended February 29, 2004 included the recognition of revenue in the first quarter of past royalties in connection with our confidential settlement with BroadVision relative to our outstanding litigation. This revenue accounted for less than 5% of total revenues in the nine-month period. Software product revenue for the nine-month period ended February 29, 2004 increased in percentage terms over the prior year period more than for the three month period as a result of this settlement as well as the fact that sales of our Ultraseek product occurred during a much smaller portion of the nine-month period ended February 29, 2003 than the three-month period as the acquisition closed during the three-month period ended February 29, 2003.
Service and other revenues
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 12.7 | $ | 12.1 | $ | 0.6 | 5.1 | % | ||||||
Percentage of total revenues |
41.7 | % | 43.5 | % | ||||||||||
Nine months ended |
$ | 37.8 | $ | 31.8 | $ | 6.0 | 19.1 | % | ||||||
Percentage of total revenues |
44.0 | % | 43.7 | % |
Our service and other revenues consist primarily of fees for software maintenance, consulting and training.
The increase in service and other revenues for the three month period ended February 29, 2004, compared with the same period a year ago, was due to $0.2 million in increased sales of consulting and training services and to $0.5 million in increased maintenance revenues which results primarily from maintenance contracts
19
acquired as part of the Enterprise purchase and increased maintenance contracts associated with our increase in software product revenues.
The increase in service and other revenues for the nine month period ended February 29, 2004, compared with the same period a year ago, was due to $0.8 million in increased sales of consulting and training services and to $5.2 million in increased maintenance revenues. Service and other revenues for the nine-month period ended February 29, 2004 increased in percentage terms over the prior year period more than for the three month period for the same reason cited above for software product revenues.
Costs of Revenues
Costs of software products
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 0.4 | $ | 0.3 | $ | 0.1 | 43.8 | % | ||||||
Percentage of software product revenues |
2.1 | % | 1.6 | % | ||||||||||
Nine months ended |
$ | 1.1 | $ | 0.9 | $ | 0.2 | 21.1 | % | ||||||
Percentage of software product revenues |
2.4 | % | 2.3 | % |
Costs of software products consist primarily of product media, duplication, manuals, packaging materials, shipping expenses, employee compensation expenses, royalties paid to third-party vendors, and in certain instances, licensing of third-party software incorporated in our products. We believe that costs of software products will increase in absolute dollars in the quarter ending May 31, 2004, primarily as a result of increased royalties paid to third-party software vendors and to increased costs associated with the additional revenues provided by our acquisition of Cardiff Software. Additionally, we expect an increase in the costs of software products as a percentage of software product revenues resulting from the increased royalties cost of third-party software vendors relating to Cardiffs product line, which represents a greater percentage of software product revenues than Veritys existing products.
The increase in costs of software products in absolute dollars for the three and nine month periods ended February 29, 2004, compared with the same period a year ago, was primarily attributable to an increase in costs of third party software components and from increased costs for manuals and product media associated with the product release of Verity K2 Enterprise 5.0. During the three and nine month periods ended February 29, 2004 and February 28, 2003, we did not capitalize any software development costs.
Costs of service and other
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 3.3 | $ | 3.3 | $ | 0.0 | 0.0 | % | ||||||
Percentage of service and other revenues |
25.6 | % | 27.0 | % | ||||||||||
Nine months ended |
$ | 9.9 | $ | 9.1 | $ | 0.8 | 9.3 | % | ||||||
Percentage of service and other revenues |
26.3 | % | 28.6 | % |
Costs of service and other consists of costs incurred in providing consulting services, customer training, telephone support and product upgrades to customers. Significant cost components include personnel-related and third-party contractor costs, facilities costs, travel expenses associated with training and consulting implementation services, depreciation expense and corporate overhead allocations. We believe that costs of service and other will increase in absolute dollars in the quarter ending May 31, 2004, resulting from increased revenues associated with the fiscal year-end and from additional costs of providing professional services
20
resulting from increased revenues provided by our acquisition of Cardiff Software. Historically, our last fiscal quarter has been our highest revenue quarter.
Costs of service and other in absolute dollars remained unchanged for the three month period ended February 29, 2004, compared with the same period a year ago, due to modest decreases in the costs of maintenance and training offset entirely by an increase in consulting costs, primarily commissions paid, resulting from higher total consulting revenues. The decrease as a percentage of service and other revenues, compared with the same period a year ago, results primarily from higher utilization of maintenance personnel resulting from the increased maintenance revenues on relatively unchanged absolute costs.
The increase in absolute dollars for the nine month period ended February 29, 2004, compared with the same period a year ago, was due primarily to an increase in consulting costs, as follows: a $0.2 million increase in costs associated with the use of third-party consultants in connection with an increased demand for services; and to a $0.6 million increase in compensation and other employee related expenses resulting from a slightly higher average headcount and from year-over-year salary increases, and to higher commissions paid, resulting from higher total consulting revenues. The decrease as a percentage of service and other revenues, compared with the same period a year ago, results primarily from higher utilization of maintenance personnel resulting from the increased maintenance revenues on relatively unchanged absolute costs.
Amortization of purchased intangible assets
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 0.6 | $ | 0.6 | | | ||||||||
Percentage of total revenues |
2.1 | % | 2.3 | % | ||||||||||
Nine months ended |
$ | 1.9 | $ | 0.6 | $ | 1.3 | 200 | % | ||||||
Percentage of total revenues |
2.2 | % | 0.9 | % |
During the three and nine month periods ended February 29, 2004, we amortized $0.6 million and $1.9 million, respectively, of the purchased intangible assets in connection with acquired technology, patents and maintenance agreements from our Enterprise purchase. We will record quarterly amortization expenses of $0.6 million associated with the purchased intangible assets of Enterprise over the estimated useful life of 5 years.
Amortization of purchased intangible assets will increase substantially in the quarter ending May 31, 2004, resulting from our purchase of Cardiff Software and the assets of NativeMinds.
Operating Expenses
Research and development
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
||||||||||||
(dollar amounts in millions) | |||||||||||||||
Three months ended |
$ | 4.3 | $ | 5.1 | $ | (0.8 | ) | (15.6 | )% | ||||||
Percentage of total revenues |
14.2 | % | 18.5 | % | |||||||||||
Nine months ended |
$ | 14.6 | $ | 14.9 | $ | (0.3 | ) | (2.4 | )% | ||||||
Percentage of total revenues |
16.9 | % | 20.5 | % |
Research and development expenses consist primarily of employee compensation and benefits, payments to outside contractors, depreciation on equipment used for development and corporate overhead allocations. We believe that research and development is essential to maintaining our competitive position and we will continue to make significant investments in research and development with the goal of continuing to align research and
21
development expenses with anticipated revenues. We believe that research and development expenses will increase substantially in absolute dollars in the quarter ending May 31, 2004, due to increased compensation related costs relating to additional research and development personnel we have from acquisition of Cardiff Software.
The decreases in research and development expenses in absolute dollars for the three and nine month periods ended February 29, 2004, compared with the same periods in the prior year, were primarily due to decreased compensation costs resulting from a 17% and 11% reduction, respectively, in average total headcount, related primarily to our reduction in force during the quarter ended November 30, 2003, and to not accruing additional amounts for the annual bonus for research and development personnel in the three month period ended February 29, 2004 as a result of us projecting to not meet all of our internal objectives necessary to pay a full bonus, compared with a full bonus accrual in the prior year, offset in part by the increase in personnel resulting from our acquisition of Enterprise.
Marketing and sales
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 12.1 | $ | 10.5 | $ | 1.6 | 14.8 | % | ||||||
Percentage of total revenues |
39.7 | % | 37.9 | % | ||||||||||
Nine months ended |
$ | 35.9 | $ | 30.8 | $ | 5.1 | 16.7 | % | ||||||
Percentage of total revenues |
41.8 | % | 42.3 | % |
Marketing and sales expenses consist primarily of employee compensation, including sales commissions and benefits, tradeshows, outbound marketing and other lead generation activities, public relations, travel expenses associated with our sales staff and corporate overhead allocations. We anticipate that we will continue to make significant investments in marketing and sales with the goal of continuing to align marketing and sales expenses with anticipated revenues. Consequently, we expect marketing and sales expenses will increase in absolute dollars in the quarter ending May 31, 2004, resulting from the expected increase in total revenues due to that quarter being our seasonally strongest quarter and to the addition of the Cardiff product line.
The increase in marketing and sales expenses in absolute dollars for the three month period ended February 29, 2004 compared with the same period a year ago, was due to a $1.5 million increase in sales commissions resulting from the combination of higher revenue and an increased commission payout rate, partially offset by not accruing additional amounts for the annual bonus for marketing and sales personnel in the three month period ended February 29, 2004 as a result of us projecting to not meet all of our internal objectives necessary to pay a full bonus, compared with a full bonus accrual in the prior year. We expect our sales commission payout as a percentage of total revenue to remain approximately consistent with our current fiscal year rate.
The increase in marketing and sales expenses in absolute dollars for the nine month period ended February 29, 2004, compared with the same period a year ago, was due to a $2.8 million increase in sales commissions resulting from the combination of higher revenue and an increased commission payout rate, a $1.0 million increase in compensation and other employee related expenses resulting from marginally higher average headcount and annual salary increases, a $0.7 million increase in overall marketing program spending, primarily attributable to the addition of the Enterprise product, and a $0.2 million increase in depreciation expenses.
22
General and administrative
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 2.5 | $ | 2.5 | | 0.9 | % | |||||||
Percentage of total revenues |
8.0 | % | 8.9 | % | ||||||||||
Nine months ended |
$ | 8.1 | $ | 7.6 | $ | 0.5 | 5.8 | % | ||||||
Percentage of total revenues |
9.4 | % | 10.5 | % |
General and administrative expenses consist primarily of personnel costs for finance, legal, human resources and general management, provisions for doubtful accounts, insurance, fees for external professional advisors and corporate overhead allocations. We believe that general and administrative expenses will increase in absolute dollars in the quarter ending May 31, 2004, as a result of increased costs relating to our acquisition of Cardiff Software, a portion of which are transitional in nature and non-recurring. In addition, we expect to incur incremental expenses in preparation for compliance with the requirements of the Sarbanes-Oxley Act of 2002 that first become applicable to us at our 2004 annual meeting of stockholders.
General and administrative expenses remained unchanged for the three month period ended February 29, 2004, compared with the same period a year ago, resulting from a $0.1 million decrease in employee related expenses associated with marginally lower headcount and to not accruing additional amounts for the annual bonus for general and administrative personnel in the three month period ended February 29, 2004 as a result of us projecting to not meet all of our internal objectives necessary to pay a full bonus, compared with a full bonus accrual in the prior year, offset by a $0.1 million increase in expenses for outside professional services.
The increase in general and administrative expenses in absolute dollars for the nine month period ended February 29, 2004, compared with the same period a year ago, was primarily related to a $0.5 million increase in employee related expenses, a $0.2 million increase in expenses for outside professional services, and a $0.1 million increase in corporate overhead allocations, offset by a $0.4 million decrease in bad debt expense.
In-process research and development
February 29, 2004 |
February 28, 2003 |
Dollar Change |
Change | |||||||||||
(dollars in millions) | ||||||||||||||
Three months ended |
$ | 0.0 | $ | 1.2 | $ | (1.2 | ) | nm | ||||||
Percentage of total revenues |
0.0 | % | 4.3 | % | ||||||||||
Nine months ended |
$ | 0.0 | $ | 1.2 | $ | (1.2 | ) | nm | ||||||
Percentage of total revenues |
0.0 | % | 1.6 | % |
Total in-process R&D expense of $1.2 million for the three and nine-month periods ended February 28, 2003 was attributable to the Enterprise purchase. The methodology for allocating the purchase price to in-process R&D is determined through established valuation techniques as outlined in the In-Process R&D Practice Aid published by the American Institute of Certified Public Accountants, Inc. (AICPA), as more fully discussed in Note 9 to the Financial Statements included in Item 1 of this report. We expect to incur additional in process R&D expense in the quarter ending May 31, 2004 as a result of our acquisitions of Cardiff Software and the assets from NativeMinds Inc. during the quarter.
Restructuring charge
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
||||||||||
(dollar amounts in millions) | |||||||||||||
Three months ended |
$ | 0.0 | $ | 0.0 | | | |||||||
Percentage of total revenues |
0.0 | % | 0.0 | % | |||||||||
Nine months ended |
$ | 1.0 | $ | 1.0 | | (2.1 | )% | ||||||
Percentage of total revenues |
1.1 | % | 1.4 | % |
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During each of the nine month periods ended February 29, 2004 and February 28, 2003, we executed restructuring efforts designed to reduce costs and to better align our expense levels with current revenue levels and ensure conservative spending during the current period of economic uncertainty. Of these restructuring charges, approximately $0.2 million remains unpaid at February 29, 2004, and will be paid out through October 2005.
Interest income, net
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
||||||||||||
(dollar amounts in millions) | |||||||||||||||
Three months ended |
$ | 1.2 | $ | 1.8 | $ | (0.7 | ) | (34.8 | )% | ||||||
Percentage of total revenues |
3.9 | % | 6.6 | % | |||||||||||
Nine months ended |
$ | 4.0 | $ | 5.9 | $ | (1.9 | ) | (32.3 | )% | ||||||
Percentage of total revenues |
4.6 | % | 8.1 | % |
Interest income, net consists primarily of interest income from our investments in marketable securities.
The decreases in interest income, net in absolute dollars for the three and nine month periods ended February 29, 2004, compared with the same period a year ago, were primarily due to decreasing overall yields on our portfolio of marketable securities caused by the decreasing interest rate environment, partially mitigated by a slightly higher balance of marketable securities.
Other expense, net
February 29, 2004 |
February 28, 2003 |
Dollar Change |
Change | |||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | (0.6 | ) | $ | (0.2 | ) | $ | (0.4 | ) | nm | ||||
Percentage of total revenues |
(2.0 | )% | (0.8 | )% | ||||||||||
Nine months ended |
$ | (0.4 | ) | $ | (0.5 | ) | $ | 0.1 | nm | |||||
Percentage of total revenues |
(0.5 | )% | (0.7 | )% |
Other expense, net consists of gains (losses) on our foreign currency forward contracts and from the re-measurement of intercompany balances, which are marked to market and consolidated in U.S. dollars based on prevailing foreign currency exchange rates. These changes are the result of our exposure to movements in foreign currency rate changes. The expense for the current period resulted from the devaluation of the U.S. dollar against other currencies, primarily the Canadian Dollar, the Euro, and the British Pound.
Income tax provision
February 29, 2004 |
February 28, 2003 |
Dollar Change |
% Change |
|||||||||||
(dollar amounts in millions) | ||||||||||||||
Three months ended |
$ | 3.2 | $ | 2.2 | $ | 1.0 | 41.4 | % | ||||||
Percentage of total revenues |
10.4 | % | 8.1 | % | ||||||||||
Nine months ended |
$ | 6.8 | $ | 4.5 | $ | 2.3 | 50.1 | % | ||||||
Percentage of total revenues |
7.9 | % | 6.2 | % |
Income tax provision includes U.S. and foreign income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of this difference is reported as deferred income taxes.
We expect tax savings for fiscal 2004 due to research and development tax credits to decline relative to our historical experience and expect to realize an effective tax rate of 40.0% for the fiscal year. In our first fiscal
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quarter ended August 31, 2003, we applied an effective tax rate of 38.0%. In order to realize a 40.0% year-to-date effective tax rate, we applied a 40.95% effective tax rate to the results of our second quarter ended November 30, 2003. We applied a 40.0% effective tax rate to the results of our third quarter ended February 29, 2004. We will continue to reassess the impact of our research and development expenses on our effective tax rate in future periods. In the comparative periods of fiscal 2003 we applied a 38% effective tax rate.
Liquidity and Capital Resources
As of February 29, 2004, we had $269.0 million in cash and cash equivalents and available-for-sale securities compared to $250.7 million at May 31, 2003. At February 29, 2004, our principal sources of liquidity were our cash and cash equivalents and short-term investments of $212.5 million. As of February 29, 2004, we had no outstanding debt obligations.
Nine month periods ended | February 29, 2004 |
February 28, 2003 |
|||||
(in millions) | |||||||
Net cash provided by operating activities |
$ | 16.5 | $ | 16.6 | |||
Net cash provided by (used in) investing activities |
$ | 77.9 | $ | (2.9 | ) | ||
Net cash provided by (used in) financing activities |
$ | 3.8 | $ | (16.4 | ) |
Net cash provided by operating activities was approximately $16.5 million for the nine months ended February 29, 2004 compared to $16.6 million for the 9 months period ending February 28, 2003. Cash collections were approximately $90.3 million and $81.4 million for the nine months ending February 29, 2004 and February 28, 2003, respectively. The increase in cash collections reflects a lower days sale outstanding and continued growth in revenue due to the increase in OEM business and additional revenues in the current year from Ultraseek, which was acquired in December 2002. Net cash expenditures for the nine months were $73.8 million, and $64.8 million in 2004 and 2003, respectively. The net cash expenditures consisted primarily of the following for the nine month periods ending February 29, 2004 and February 28, 2003, respectively: (i) payroll related expenditures of $44.1 million and $41.5 million, (ii) consulting service fees of $4.2 million and $3.7 million, (iii) employee travel expense expenses of $3.7 million and $3.5 million, (iv) facility related expenses of $4.1 million and $3.9 million, and (v) other cash expenditures of $17.7 million, and $12.2 million. The increase in expenditures is primarily due to variable costs, such as commissions, travel, and cost of revenues, which are directly related to our revenue growth.
Cash provided by investing activities for the nine month period ended February 29, 2004 was $77.9 million as a result of sales and maturities, net of purchases, of marketable securities of $79.2 million, less capital expenditures of $1.3 million. For the nine month period ended February 28, 2003, cash used in investing activities was $2.9 million as a result of sales and maturities, net of purchases, of marketable securities of $22.1 million, less capital expenditures of $1.2 million and $23.8 million in costs related to the purchase of the Inktomi Enterprise business.
Cash provided by financing activities for the nine month period ended February 29, 2004 was $3.8 million, due to $20.8 million in proceeds from the sale of common stock as a result of stock option exercises, offset by $17.0 million in repurchases of our common stock through our stock repurchase program. For the nine month period ended February 28, 2003, cash used by financing activities was $16.4 million, due to $12.2 million in proceeds from the sale of common stock as a result of stock option exercise, offset of $28.6 million in repurchases of our common stock through our stock repurchase program.
Our principal commitments as of February 29, 2004 consist of obligations under operating leases, totaling $8.5 million over the life of these leases.
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Under our operating leases, we have minimum rental payments as follows:
Fiscal Year Ending May 31, |
Rental Payments | ||
2004 |
$ | 834 | |
2005 |
2,794 | ||
2006 |
1,482 | ||
2007 |
1,434 | ||
2008 |
1,450 | ||
2009 |
546 | ||
$ | 8,540 | ||
On December 17, 2002, we completed the purchase of certain assets and obligations of Inktomi Corporations enterprise search software business. Of the total purchase price, we deferred $3.0 million in order to secure Inktomis indemnification obligations under the Purchase Agreement. On June 17, 2004, we are obligated to pay Inktomi an amount equal to the sum of (1) $3.0 million plus (2) simple interest thereon calculated from the December 17, 2002 through the date of payment at an annual rate of 1.5%. We have the right to withhold or deduct from the deferred payment amount any sum that may be owed to us by Inktomi pursuant to Inktomis indemnification obligations under the Purchase Agreement. We believe the likelihood of indemnification is remote.
On June 24, 2003, we announced the continuation of our stock repurchase program. The continuation calls for the additional repurchase of outstanding shares of our common stock up to an aggregate value of $50.0 million. The program will terminate at the end of the fiscal year ending May 31, 2004 unless amended by the Board of Directors. Through February 29, 2004, we repurchased and retired 1,190,987 shares of our common stock through open market transactions, at an aggregate cost of approximately $17.0 million.
We believe that our current cash and cash equivalents, interest income and cash generated from operations, if any, will provide adequate liquidity to meet our working capital and operating resource expenditure requirements through at least fiscal 2005. If the global economy weakens, our cash, cash equivalents and investments balances may decline. As a result, or if our spending plans materially change, we may find it necessary to seek to obtain additional sources of financing to support our capital needs, but we cannot assure you that a financing will be available on commercially reasonable terms, or at all.
On March 3, 2004, we completed our acquisition of the intellectual property, certain customer agreements and other strategic assets from NativeMinds Inc., a privately-held software company, in a cash deal valued at $3.8 million. The consideration was paid out of our working capital.
On March 15, 2004, we completed our acquisition of Cardiff Software Inc., a privately-held software company. The aggregate purchase price included a cash payment, net of cash received in the transaction of approximately $50 million. The cash portion of the consideration was paid out of our working capital.
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RISKS RELATING TO OUR OPERATIONS
The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not currently 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 all or part 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.
Risks Related to Our Business
Our revenues and operating results may fluctuate in future periods, which could adversely affect our stock price
The results of operations for any quarter are not necessarily indicative of results to be expected in future periods. We expect our stock price to vary with our operating results and, consequently, any adverse fluctuations in our operating results could have an adverse effect on our stock price. Our operating results have in the past been, and will continue to be, subject to quarterly fluctuations as a result of a number of factors. These factors include:
| the downturn in capital spending by customers; |
| the size and timing of orders; |
| changes in the budget or purchasing patterns of customers or potential customers, changes in foreign country exchange rates, or pricing pressures from competitors; |
| increased competition in the software and Internet industries; |
| the introduction and market acceptance of new technologies and standards in search and retrieval, Internet, document management, database, networking, and communications technology; |
| variations in sales channels, product costs, the mix of products sold, or the success of quality control measures; |
| the integration of people, operations, and products from acquired businesses and technologies; |
| changes in operating expenses and personnel; |
| changes in accounting principles, such as a requirement that stock options be included in compensation, which is widely expected to occur and may become effective as early as 2004 and, which if adopted, would increase our compensation expenses and have a negative effect on our earnings; |
| the overall trend toward industry consolidation; and |
| changes in general economic and geo-political conditions and specific economic conditions in the computer and software industries. |
Any of the factors, some of which are discussed in more detail below, could materially and adversely impact our operations and financial results, and consequently cause our stock price to fall.
Our expenditures are tied to anticipated revenues, and therefore imprecise forecasts may result in poor operating results
Revenues are difficult to forecast because the market for search and retrieval software is uncertain and evolving. Because we generally ship software products within a short period after receipt of an order, we
27
typically do not have a material backlog of unfilled orders, and revenues in any quarter are substantially dependent on orders booked in that quarter. In addition, a portion of our revenues is derived from royalties based upon sales by third-party vendors of products incorporating our technology. These revenues may be subject to extreme fluctuation and are difficult for us to predict. Our expense levels are based, in part, on our expectations as to future revenues and are to a large extent fixed in the short term. Therefore, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any significant shortfall of demand in relation to our expectations or any material delay of customer orders would have an almost immediate adverse affect on our operating results and on our ability to achieve profitability.
Demand for our products may be adversely affected if economic and market conditions deteriorate
Adverse economic conditions worldwide can contribute to slowdowns in the software information technology spending environment and would impact our business, resulting in reduced demand for our products as a result of a decrease in capital spending by our customers, increased price competition for our products and higher overhead costs as a percentage of revenues. Decreased demand for our products would result in decreased revenues, which could harm our operating results and cause the price of our common stock to fall.
Changes in effective tax rates could affect our results
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets and liabilities, and changes in U.S. or foreign tax laws or interpretations thereof.
The size and timing of large orders may materially affect our quarterly operating results
The size and timing of individual orders may cause our operating results to fluctuate significantly. Our operating results for a quarter could be materially and adversely affected if one or more large orders are either not received or are delayed or deferred by customers. A significant portion of our revenues in recent quarters has been derived from these relatively large sales to a limited number of customers, and we currently anticipate that future quarters will continue to reflect this trend. Sales cycles for these customers can be up to nine months or longer. In addition, customer order deferrals in anticipation of new products may cause our operating results to fluctuate. Like many software companies, we have generally recognized a substantial portion of our revenues in the last month of each quarter, with these revenues concentrated in the last weeks of the quarter. Accordingly, the cancellation or deferral of even a small number of purchases of our products could harm our business in any particular quarter. In addition, to the extent that the significant sales occur earlier than expected, operating results for subsequent quarters may fail to keep pace or even decline.
Our sales cycle is lengthy and unpredictable
Any delay in sales of our products and services could cause our quarterly revenue and operating results to fluctuate. The typical sales cycle of our products is lengthy, generally between six to eighteen months, unpredictable, and involves significant investment decisions by prospective customers, as well as our education of potential customers regarding the use and benefits of our products. Our customers spend a substantial amount of time before purchasing our products in performing internal reviews and obtaining capital expenditure approvals. We believe our sales cycle lengthened in 2002 and 2003 as a result of macro-economic factors and we cannot be certain that this cycle will not continue to lengthen in the future.
Our business may suffer due to risks associated with international sales
Historically, our foreign operations and export sales account for a significant portion of our annual revenues. Our international business activities are subject to a number of risks, each of which could impose unexpected costs on us that would have an adverse effect on our operating results. These risks include:
| difficulties in complying with regulatory requirements and standards; |
28
| tariffs and other trade barriers; |
| costs and risks of localizing products for foreign countries; |
| reliance on third parties to distribute our products; |
| longer accounts receivable payment cycles; |
| potentially adverse tax consequences; |
| limits on repatriation of earnings; and |
| burdens of complying with a wide variety of foreign laws. |
We currently engage in only limited hedging activities to protect against the risk of currency fluctuations. Fluctuations in currency exchange rates could cause sales denominated in U.S. dollars to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Also, these fluctuations could cause sales denominated in foreign currencies to affect a reduction in the current U.S. dollar revenues derived from sales in a particular country. Furthermore, future international activity may result in increased foreign currency denominated sales and, in this event, gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable arising from international operations may contribute significantly to fluctuations in our results of operations. The financial stability of foreign markets could also affect our international sales. In addition, income earned in various countries where we do business may be subject to taxation by more than one jurisdiction, thereby adversely affecting our consolidated after-tax earnings. We cannot assure you that any of these factors will not have an adverse effect on the revenues from our future international sales and, consequently, our results of operations.
Service and other revenues derived from foreign operations accounted for 15.8% and 15.0% of total revenues for the nine month period ended February 29, 2004, and fiscal year 2003, respectively. Our export sales consist primarily of products licensed for delivery outside of the United States. For the nine month period ended February 29, 2004 and fiscal year 2003, export sales accounted for 18.6% and 22.4% of total revenues, respectively. We expect that revenues derived from foreign operations and export sales will continue to account for a significant percentage of our revenues for the foreseeable future. These revenues may fluctuate significantly as a percentage of revenues from period to period. In addition, a portion of these revenues was derived from sales to foreign government agencies, which may be subject to risks similar to those described immediately below.
A portion of our revenues is derived from sales to the U.S. federal government, which are subject to budget cuts and, consequently, the potential loss of revenues upon which we have historically relied
Revenues derived from sales to the U.S. federal and state governments and their agencies were 10.0% and 9.8% of total revenues for the nine month period ended February 29, 2004 and fiscal year 2003, respectively. Future reductions in government spending on information technologies could harm our operating results. In recent years, budgets of many governments and/or their agencies have been reduced, causing certain customers and potential customers of our products to re-evaluate their needs. These budget reductions are expected to continue over at least the next several years.
Almost all of our government contracts contain termination clauses, which permit contract termination upon our default or at the option of the other contracting party. We cannot assure you a cancellation will not occur in the future, and any termination would adversely affect our operating results.
We must successfully introduce new products or our customers will purchase our competitors products
During the past few years, management and other personnel have focused on modifying and enhancing our core technology to support a broader set of search and retrieval solutions for use on enterprise-wide systems, over online services, over the Internet and on CD-ROM. In order for our strategy to succeed and to remain
29
competitive, we must continue to leverage our core technology to develop new product offerings by us and by our OEM customers that address the needs of these new markets or we must acquire new technology. The development of new products, whether by leveraging our core technology or by acquiring new technology, is expensive. If these products do not generate substantial revenues, our business and results of operations will be adversely affected. We cannot assure you that any of these products will be successfully developed and completed on a timely basis or at all, will achieve market acceptance or will generate significant revenues.
Our future operating results will depend upon our ability to increase the installed base of our information retrieval technology and to generate significant product revenues from our core products. Our future operating results will also depend upon our ability to successfully market our technology to online and Internet publishers who use this technology to index their published information in our format. To the extent that customers do not adopt our technology for indexing their published information, it will limit the demand for our products.
If we are unable to enhance our existing products to conform to evolving industry standards in our rapidly changing markets, our products may become obsolete
The computer software industry is subject to rapid technological change, changing customer requirements, frequent new product introductions, and evolving industry standards that may render existing products and services obsolete. As a result, our position in our existing markets or other markets that we may enter could be eroded rapidly by any of these factors, including product advancements by competitors. If we are unable to develop and introduce products in a timely manner in response to changing market conditions or customer requirements, our financial condition and results of operations would be materially and adversely affected.
The life cycles of our products are difficult to estimate. Our future success will depend upon our ability to keep pace with technological developments, conform to evolving industry standards, particularly client/server and Internet communication and security protocols, as well as publishing formats such as HTML and XML, and address increasingly sophisticated customer needs. We cannot assure you that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products, or that new products and product enhancements will meet the requirements of the marketplace and achieve market acceptance.
We strive to achieve compatibility between our products and the text publication formats we believe are or will become popular and widely adopted. We invest substantial resources in development efforts aimed at achieving compatibility. Any failure by us to anticipate or respond adequately to technology or market developments could result in a loss of competitiveness or revenue. For instance, to date we have focused our efforts on integration with the Adobe PDF and Lotus Notes environments and, more recently, the Microsoft Exchange environment. Should any of these products or technologies lose or fail to achieve acceptance in the marketplace or be replaced by other products or technologies, our business could be materially and adversely affected.
We embed our basic search engine in key OEM application products and, therefore, our sales of information retrieval products depend on our ability to maintain compatibility with these OEM applications. We cannot assure you that we will be able to maintain compatibility with these vendors products or continue to be the search technology of choice for OEMs. The failure to maintain compatibility with or be selected by OEMs would materially and adversely affect our sales. Further, the failure of the products of our key OEM partners to achieve market acceptance could harm our results of operations.
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 may be detected at any point in the products life cycles. We have in the past discovered software errors in some of our products and have experienced delays in
30
shipment of products during the periods required to correct these errors. 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, diversion of development resources, injury to our reputation, or increased service and warranty costs, any of which could harm our business. Although we generally attempt by contract to limit our exposure to incidental and consequential damages, and to cap our liabilities to our proceeds under the contract, if a court fails to enforce the liability limiting provisions of our contracts for any reason, or if liabilities arise which are not effectively limited, our operating results could be harmed.
We are dependent on proprietary technology licensed from third parties, the loss of which could delay shipments of products incorporating this technology and could be costly
Some of the technology used by our products is licensed 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 result in delay in 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 you that we will be able to do so on commercially reasonable terms or at all.
Our ability to compete successfully will depend, in part, on our ability to protect our intellectual property rights, which we may not be able to protect
We rely on a combination of patent, trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. The source code for our proprietary software is protected both as a trade secret and as a copyrighted work. Policing unauthorized use of our products, however, is difficult. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources and could harm our business regardless of the outcome of the litigation.
Effective copyright and trade secret protection may be unavailable or limited in some foreign countries. To license our products, we frequently rely on shrink wrap licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of several jurisdictions. In addition, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for any such breach. We also realize that our trade secrets may become known through other means not currently foreseen by us. Notwithstanding our efforts to protect our intellectual property, our competitors may be able to develop products that are equal to or superior to our products without infringing on any of our intellectual property rights.
Our products employ technology that may infringe on the proprietary rights of third parties, which may expose us to litigation
Third parties may assert that our products infringe their proprietary rights, or may assert claims for indemnification resulting from infringement claims against us. Any such claims may cause us to delay or cancel shipment of our products, which could harm our business. In addition, irrespective of the validity or the successful assertion of claims, we could incur significant costs in defending against claims. To date, no third party has asserted such claims against us.
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We have been sued in the past and are at risk of future securities class action litigation, due to our past and expected stock price volatility
In the past, securities class action litigation has often been brought against companies following a decline in the market price of their securities. For example, in December 1999 our stock price dramatically declined and a number of lawsuits were filed against us. Because we expect our stock price to continue to fluctuate significantly, we may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert managements attention and resources, and could seriously harm our business.
If we lose key personnel, or are unable to attract additional qualified personnel, our ability to conduct and grow our business will be impaired
We believe that hiring and retaining qualified individuals at all levels is essential to our success, and we cannot assure you that we will be successful in attracting and retaining the necessary personnel. In addition, we are highly dependent on our direct sales force for sales of our products as we have limited distribution channels. Continuity of technical personnel is an important factor in the successful completion of development projects, and any turnover of our research and development personnel could harm our development and marketing efforts.
Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified sales, technical and managerial personnel. Competition for this type of personnel is intense, and we cannot assure you that we will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract, hire or retain the necessary sales, technical and managerial personnel could harm our business.
We face intense competition from companies with significantly greater financial, technical, and marketing resources, which could adversely affect our ability to maintain or increase sales of our products
The information retrieval, classification and recommendation software markets are intensely competitive and we cannot assure you that we will maintain our current position or market share. A number of companies offer competitive products addressing these markets. In the enterprise market, we compete with Autonomy, Convera, Endeca, FAST, Google, Hummingbird, iPhrase, Mercado, Microsoft, Open Text and Thunderstone, among others. Plumtree is on occasion a competitor, but is viewed primarily as our partner and customer. In the Internet/publishing market, we compete with Autonomy, Convera, Dataware, FAST, iPhrase, Lotus and Microsoft, among others. We also compete indirectly with database vendors, such as Oracle, that offer information search and retrieval capabilities with their core database products, as well as with ERP (Enterprise Resource Planning) vendors, such as SAP, that offer these capabilities as part of their overall solution.
In the future, we may encounter competition from a number of companies. Many of our existing competitors, as well as a number of other potential new competitors, have significantly greater financial, technical and marketing resources than we do. Because the success of our strategy is dependent in part on the success of our strategic customers, competition between our strategic customers and the strategic customers of our competitors, or failure of our strategic customers to achieve or maintain market acceptance could harm our competitive position. Although we believe that our products and technologies compete favorably with competitive products, we cannot assure you that we will be able to compete successfully against our current or future competitors or that competition will not harm our business.
Our recent acquisitions of the Inktomi enterprise search software assets, Cardiff Software and NativeMinds, as well as future other potential acquisitions, may have unexpected consequences or impose additional costs on us
Our business is highly competitive and our growth is dependent upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. One of the ways we may address the need to develop new products is through acquisitions of complementary businesses and technologies, such as our
32
acquisition of Inktomis enterprise search software assets, the acquisition of Cardiff Software and the acquisition of the intellectual property, certain customer agreements and other strategic assets from NativeMinds. From time to time, we consider and evaluate potential business combinations both involving our acquisition of another company and transactions involving the sale of Verity through, among other things, a possible merger or consolidation of our business into that of another entity. Acquisitions involve numerous risks, including the following:
| difficulties in integration of the operations, technologies, products and personnel of the acquired companies; |
| the risk of diverting managements attention from normal daily operations of the business; |
| accounting consequences, including changes in purchased research and development expenses, resulting in variability in our quarterly earnings; |
| potential difficulties in completing projects associated with purchased in-process research and development; |
| risks of entering markets in which we have no or limited direct prior experience and where competitors in these markets have stronger market positions; |
| the potential loss of key employees of the acquired company; |
| the assumption of known and potentially unknown liabilities of the acquired company; |
| we may find that the acquired company or assets do not further our business strategy or that we paid more than what the company or assets are worth; |
| we may have product liability associated with the sale of the acquired companys products; |
| we may have difficulty maintaining uniform standards, controls, procedures and policies; |
| our relationship with current and new employees and clients could be impaired; |
| the acquisition may result in litigation from terminated employees or third parties who believe a claim against us would be valuable to pursue; |
| our due diligence process may fail to identify significant issues with product quality, product architecture and legal contingencies, among other matters; |
| insufficient revenues to offset increased expenses associated with acquisitions; |
| inability to renew 3rd party software license agreements; and |
| market acceptance of new releases. |
Acquisitions may also cause us to:
| issue common stock that would dilute our current stockholders percentage ownership; |
| record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges; |
| incur amortization expenses related to certain intangible assets; or |
| incur large and immediate write-offs. |
We cannot assure you that our acquisition of Inktomis enterprise search software assets, the acquisition of Cardiff Software and the acquisition of the intellectual property, certain customer agreements and other strategic assets from NativeMinds, and future acquisitions will be successful and will not adversely affect our business. We must also maintain our ability to manage any growth effectively. Failure to manage growth effectively and successfully integrate acquisitions we make could harm our business.
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If we account for employee stock option and employee stock purchase plans using the fair value method, it could significantly reduce our net income and earnings per share
There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. For example, in the third quarter of fiscal year 2004, had we accounted for stock-based compensation plans using the fair-value method prescribed in FASB Statement No. 123 as amended by Statement 148, earnings per share would have been reduced by $0.29 per share and we would have reported a $0.17 loss per share. We are not currently required to record any compensation expense using the fair value method in connection with option grants to employees that have an exercise price at or above fair market value at the grant date and for shares issued under our employee stock purchase plan. On March 31, 2004, the Financial Accounting Standard Board (FASB) issued an Exposure Draft, Share-Based Payment: an amendment of FASB Statements No. 123 and 95, which would require a company to recognize the fair value of stock options and other stock-based compensation to employees for 2005 reporting periods. The proposed requirements in the Exposure Draft would be effective as of the beginning of the first fiscal year beginning after December 15, 2004 for public companies.
See Note 2 to Consolidated Financial Statements for a more detailed presentation of accounting for stock-based compensation plans.
Risks Related to Our Industry
We depend on increasing use of the Internet, intranets, extranets and portals and on the growth of electronic commerce. If the use of the Internet, intranets, extranets and portals and electronic commerce do not grow as anticipated, our business will be seriously harmed
The products of most of our customers depend on the increased acceptance and use of the Internet as a medium of commerce and on the development of corporate intranets, extranets and portals. As a result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of business customers may not adopt or continue to use the Internet as a medium of commerce. The lack of such development would impair demand for our products and would adversely affect our ability to sell our products. Demand and market acceptance for recently introduced services and products over the Internet and the development of corporate intranets, extranets and portals are subject to a high level of uncertainty, and there exist few proven services and products.
The business of many of our customers, and consequently our ability to sell our products, would be seriously harmed if:
| use of the Internet, the Web and other online services does not continue to increase or increases more slowly than expected; |
| the infrastructure for the Internet, the Web and other online services does not effectively support expansion that may occur; or |
| the Internet, the Web and other online services do not create a viable commercial marketplace, inhibiting the development of electronic commerce and reducing the need for our products and services. |
Capacity constraints may restrict the use of the Internet as a commercial marketplace, which would restrict our growth
The Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons. These include:
| potentially inadequate development of the necessary communication and network infrastructure, particularly if rapid growth of the Internet continues; |
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| delayed development of enabling technologies and performance improvements; |
| delayed development or adoption of new standards and protocols; and |
| increased governmental regulation. |
Our ability to grow our business is dependent on the growth of the Internet and, consequently, any adverse events would impair our ability to grow our business.
Security risks and concerns may deter the use of the Internet for conducting electronic commerce, which would adversely affect the demand for our products
A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites to protect proprietary information. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the Internet for commerce and communications, resulting in reduced demand for our products, thus adversely affecting our revenues.
Security risks expose us to additional costs and to litigation
Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if we do not prevent them.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The primary objective of our investment activities is to preserve the principal while at the same time maximize yields without significantly increasing our risk. To achieve this objective, we maintain our portfolio of cash equivalents and investments in a variety of securities, including both government and corporate obligations and money market funds, none of which we hold for trading purposes. As of February 29, 2004, approximately 79% of our portfolio matures in one year or less, with the remainder maturing in less than three years. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer.
The following table presents the amounts of our cash, cash equivalents and investments that are subject to interest rate risk by year of expected maturity and average interest rates as of February 29, 2004:
FY2004 |
FY2005 |
FY2006 |
FY2007 |
Total |
Fair Value |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Cash and cash equivalents |
$ | 184,576 | | | | $ | 184,576 | $ | 184,576 | |||||||||||||||
Average interest rate |
1.0 | % | | | | 1.0 | % | 1.0 | % | |||||||||||||||
Fixed-rate securities |
$ | 10,039 | $ | 19,946 | $ | 25,895 | $ | 26,523 | $ | 82,405 | $ | 825,405 | ||||||||||||
Average interest rate |
2.5 | % | 1.6 | % | 2.3 | % | 2.4 | % | 2.2 | % | 2.2 | % | ||||||||||||
Variable-rate securities |
$ | 2,000 | | | | $ | 2,000 | $ | 2,000 | |||||||||||||||
Average interest rates |
1.2 | % | | | | 1.2 | % | 1.2 | % |
This compares to our cash equivalents and investments that were subject to interest rate risk by year of expected maturity and average interest rates as of May 31, 2003 as follows:
FY2004 |
FY2005 |
FY2006 |
Total |
Fair Value |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Cash and cash equivalents |
$ | 85,672 | | | $ | 85,672 | $ | 85,672 | ||||||||||||
Average interest rate |
1.1 | % | | | 1.1 | % | 1.1 | % | ||||||||||||
Fixed-rate securities |
$ | 50,393 | $ | 69,966 | $ | 42,113 | $ | 162,472 | $ | 162,472 | ||||||||||
Average interest rate |
4.3 | % | 2.5 | % | 2.9 | % | 3.2 | % | 3.2 | % | ||||||||||
Variable-rate securities |
$ | 2,600 | | | $ | 2,600 | $ | 2,600 | ||||||||||||
Average interest rates |
1.4 | % | | | 1.4 | % | 1.4 | % |
The total dollar value of our portfolio increased by $18.2 million from May 31, 2003 to February 29, 2004. However, between these dates, the composition of our portfolio changed significantly, as follows:
| our combined cash and cash equivalents and variable rate investments increased by $98.3 million, while our fixed-rate securities decreased by $80.1 million; and |
| although the weighted average maturity of our portfolio remained within our target levels, the composition of our portfolio changed significantly in that we decreased the amounts of fixed-rate and variable rate securities by $80.7 million and increased cash and cash equivalents by $98.9 million. The change in composition to increase cash and cash equivalents, was partly due to the anticipated cash requirements for future acquisitions. |
As a result of the decrease in the amount of fixed-rate securities, the amount of interest we earn on our portfolio as of February 29, 2004 will be more responsive to interest rate fluctuations as compared to May 30, 2003, but the value of the portfolio will be less responsive to interest rate fluctuations.
Foreign Currency Risk. We transact business in various foreign currencies, including the Euro, the British pound, the Canadian dollar, the Australian dollar, the Swedish krona, the South African rand, the Mexican peso, the Brazilian real, the Japanese yen and the Singaporean dollar. We have established a foreign currency hedging program utilizing foreign currency forward exchange contracts to offset the risk associated with the effects of
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certain foreign currency transaction exposures. Under this program, increases or decreases in our foreign currency transactions are in part offset by gains and losses on the forward contracts, so as to mitigate the possibility of foreign currency transaction gains and losses. These foreign currency transactions typically arise from intercompany transactions.
Our forward contracts generally have terms of 90 days or less. We do not use forward contracts for trading purposes. All foreign currency transactions and all outstanding forward contracts (non equity hedges) are marked to market at the end of the period with any changes in market value included in Other expense, net. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. Net foreign exchange transaction loss included in Other expense, net in the accompanying consolidated of operations was $507,000 in the nine month period ended February 29, 2004. The fair value of the foreign currency exchange contracts was not material to our consolidated financial statements.
Item 4. Controls and Procedures
Limitations on the Effectiveness of Controls. Our management, including the Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and our internal control over financial reporting will provide reasonable assurance that all errors will be detected, but does not expect that our disclosure controls and procedures or our internal control over financial reporting will provide absolute assurance that all errors will be detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Verity have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Evaluation of Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of February 29, 2004. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of February 29, 2004, to provide reasonable assurance that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and Form 10-Q.
Changes in Internal Control over Financial Reporting. During the three month period ended February 29, 2004, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Not Applicable.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Not Applicable.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits See Exhibit Index following the signature page to this report, which is incorporated by reference here.
B. Reports on Form 8-K
We filed two report on Form 8-K during the quarter covered by this report.
Date |
Item Reported On | |
December 11, 2003 | We furnished under Item 12 a press release we issued on December 11, 2003, announcing financial results for fiscal quarter ended November 30, 2003. | |
February 5, 2004 | We reported under Item 5 the signing of a definitive agreement to acquire Cardiff Software, Inc., and filed the definitive agreement under Item 7. |
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Pursuant to the requirements 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.
VERITY, INC. | ||
(Registrant) | ||
By: | /s/ STEVEN R. SPRINGSTEEL | |
Steven R. Springsteel Senior Vice President of Finance and Administration and Chief Financial Officer |
Dated: April 12, 2004
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INDEX TO EXHIBITS
Exhibit Number |
Description of Document | |
2.1 | Asset Purchase Agreement among Inktomi Corporation, Quiver, Inc., Ultraseek Corporation, Quiver Ltd. and the Company, dated November 13, 2002. (1) | |
2.2 | Amendment No. 1 to Asset Purchase Agreement among Inktomi Corporation, Inktomi Quiver Corporation, Ultraseek Corporation, Quiver Ltd. and the Company, dated December 17, 2002, amending Asset Purchase Agreement dated November 13, 2002. (1) | |
2.3 | Agreement and Plan of Merger, dated February 2, 2004, by and among the Company, Colt Acquisition Corp., Cardiff Software, Inc. and Robert Wadsworth. (2) | |
3.1 | Restated Certificate of Incorporation of the Company. (3) | |
3.2 | By-Laws. (3) | |
4.1 | Amended and Restated Rights Agreement dated August 1, 1995, as amended. (4) | |
4.2 | Form of Rights Agreement between Verity, Inc. and First National Bank of Boston dated September 18, 1996. (5) | |
4.3 | First Amendment to Rights Agreement dated as of July 23, 1999 among Verity, Inc. and BankBoston, N.A. (6) | |
10.41 | Seventh Amendment to Retainer Agreement between Regent Pacific Management Corporation and Verity, Inc. dated January 9, 2004.(7) | |
31.1 | Certification of Anthony J. Bettencourt. | |
31.2 | Certification of Steven R. Springsteel. | |
32 | Certification of Chief Executive Officer and Chief Financial Officer. |
(1) | Incorporated by reference from the exhibits with corresponding numbers from the Companys Form 8-K filed with the Securities and Exchange Commission on December 20, 2002 (Commission No. 000-26880). |
(2) | Incorporated by reference from the exhibits with corresponding names from the Companys Form 8-K filed with the Securities and Exchange Commission on February 5, 2004 (Commission No. 000-26880). |
(3) | Incorporated by reference from the exhibits with corresponding numbers from the Companys Form 10-Q for the quarter ended November 30, 2000 with the Securities and Exchange Commission on January 10, 2001. (Commission No. 000-26880). |
(4) | Incorporated by reference from the exhibits with corresponding numbers from the Companys Registration Statement (No. 33-96228), declared effective on October 5, 1995. |
(5) | Incorporated by reference from Exhibit No. 1 to the Companys Form 8-K as filed with the Securities and Exchange Commission on October 10, 1996 (Commission No. 000-26880). |
(6) | Incorporated by reference to Exhibit 99.2 from the Companys Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 1999 (Commission No. 000-26880). |
(7) | Incorporated by reference from the exhibit with corresponding numbers from the Companys Form 10-Q for the quarter ended November 30, 2003 with the Securities and Exchange Commission on January 9, 2004. (Commission No. 000-26880). |
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