SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 THREE MONTHS ENDED JUNE 30, 2002 | ||
| OR | ||
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 001-15681
______
WEBMETHODS, INC.
(Exact Name of Registrant as Specified in its Charter)
| DELAWARE | 54-1807654 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 3930 PENDER DRIVE, FAIRFAX, VIRGINIA | 22030 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (703) 460-2500
______
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 7, 2002, 50,915,830 shares of the registrant’s Common Stock, par value $.01 per share, were issued and outstanding.
1
WEBMETHODS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2002
TABLE OF CONTENTS
| Part I | Financial Information | |
| Item 1 | Financial Statements | |
| Condensed Consolidated Financial Statements | ||
| Condensed Consolidated Balance Sheets as of | ||
| June 30, 2002 (unaudited) and March 31, 2002 | ||
| Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) - | ||
| Three months ended June 30, 2002 and 2001 | ||
| Condensed Consolidated Statements of Cash Flows (unaudited) - | ||
| Three months ended June 30, 2002 and 2001 | ||
| Notes to Condensed Consolidated Financial Statements (unaudited) | ||
| Item 2 | Management’s Discussion and Analysis of Financial | |
| Condition and Results of Operations | ||
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | |
| Part II | Other Information | |
| Item 1. | Legal Proceedings | |
| Item 2 | Changes in Securities and Use of Proceeds | |
| Item 6 | Exhibits and Reports on Form 8-K | |
| (a) Exhibits | ||
| (b) Reports on Form 8-K |
2
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
WEBMETHODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| JUNE 30, | MARCH 31, | |||||||||
| 2002 | 2002 | |||||||||
| unaudited | ||||||||||
| (In thousands, except share data) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 118,492 | $ | 98,497 | ||||||
Marketable securities available for sale |
83,365 | 113,345 | ||||||||
Accounts receivable, net of allowance of $3,585 and
$3,685 |
40,555 | 46,417 | ||||||||
Prepaid expenses and other current assets |
8,234 | 7,516 | ||||||||
Total current assets |
250,646 | 265,775 | ||||||||
Property and equipment, net |
15,993 | 17,181 | ||||||||
Marketable securities available for sale |
5,174 | — | ||||||||
Goodwill and acquired intangibles, net |
29,838 | 29,838 | ||||||||
Other assets |
10,702 | 11,269 | ||||||||
Total assets |
$ | 312,353 | $ | 324,063 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 10,876 | $ | 15,105 | ||||||
Accrued expenses |
15,337 | 16,170 | ||||||||
Accrued salaries and commissions |
11,232 | 15,594 | ||||||||
Deferred revenue |
39,005 | 37,298 | ||||||||
Current portion of capital lease obligations |
5,023 | 2,699 | ||||||||
Total current liabilities |
81,473 | 86,866 | ||||||||
Capital lease obligations, net of current portion and
other |
1,284 | 1,765 | ||||||||
Long term deferred revenue |
13,141 | 19,888 | ||||||||
Total liabilities |
95,898 | 108,519 | ||||||||
Commitments and contingencies |
||||||||||
Stockholders’ equity: |
||||||||||
Common stock, $0.01 par value; 500,000,000 shares
authorized; 50,800,194 and 50,477,383 shares issued and
outstanding |
508 | 505 | ||||||||
Additional paid-in capital |
512,623 | 510,281 | ||||||||
Deferred stock compensation and warrant charge |
(13,753 | ) | (14,875 | ) | ||||||
Accumulated deficit |
(282,986 | ) | (279,864 | ) | ||||||
Accumulated other comprehensive gain (loss) |
63 | (503 | ) | |||||||
Total stockholders’ equity |
216,455 | 215,544 | ||||||||
Total liabilities and stockholders’ equity |
$ | 312,353 | $ | 324,063 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
WEBMETHODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| THREE MONTHS ENDED JUNE 30, | ||||||||||||
| 2002 | 2001 | |||||||||||
| (in thousands, except share and per share data) | ||||||||||||
Revenue: |
||||||||||||
License |
$ | 28,669 | $ | 36,804 | ||||||||
Professional services |
8,202 | 9,691 | ||||||||||
Maintenance |
10,810 | 8,902 | ||||||||||
Total revenue |
47,681 | 55,397 | ||||||||||
Cost of revenue: |
||||||||||||
License |
135 | 701 | ||||||||||
Professional services and maintenance: |
||||||||||||
Stock based compensation |
76 | 192 | ||||||||||
Other professional services and maintenance costs |
10,267 | 12,399 | ||||||||||
Total cost of revenue |
10,478 | 13,292 | ||||||||||
Gross profit |
37,203 | 42,105 | ||||||||||
Operating expenses: |
||||||||||||
Sales and marketing: |
||||||||||||
Stock based compensation and warrant charge |
970 | 1,232 | ||||||||||
Other sales and marketing costs |
24,310 | 30,200 | ||||||||||
Research and development: |
||||||||||||
Stock based compensation |
19 | 3,490 | ||||||||||
Other research and development costs |
12,279 | 13,299 | ||||||||||
General and administrative: |
||||||||||||
Stock based compensation |
21 | 87 | ||||||||||
Other general and administrative costs |
4,065 | 5,904 | ||||||||||
Amortization of goodwill and intangibles |
— | 10,508 | ||||||||||
Total operating expenses |
41,664 | 64,720 | ||||||||||
Operating loss |
(4,461 | ) | (22,615 | ) | ||||||||
Interest income, net |
1,339 | 2,677 | ||||||||||
Net loss |
$ | (3,122 | ) | $ | (19,938 | ) | ||||||
Basic and diluted net loss per share |
$ | (0.06 | ) | $ | (0.41 | ) | ||||||
Shares used in computing basic and diluted net loss per share |
50,564,625 | 48,839,735 | ||||||||||
Comprehensive loss: |
||||||||||||
Net loss |
$ | (3,122 | ) | $ | (19,938 | ) | ||||||
Other comprehensive loss: |
||||||||||||
Unrealized gain (loss) on securities available for sale |
30 | (104 | ) | |||||||||
Foreign currency cumulative translation adjustment |
536 | 46 | ||||||||||
Total comprehensive loss |
$ | (2,556 | ) | $ | (19,996 | ) | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
WEBMETHODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| THREE MONTHS ENDED JUNE 30, | ||||||||||
| 2002 | 2001 | |||||||||
| (in thousands) | ||||||||||
Cash flows from operating activities: |
||||||||||
Net loss |
$ | (3,122 | ) | $ | (19,938 | ) | ||||
Adjustments to reconcile net loss to net
cash used in operating activities: |
||||||||||
Depreciation and amortization |
2,305 | 1,833 | ||||||||
Provision for allowance for doubtful accounts |
129 | 1,320 | ||||||||
Amortization of deferred stock compensation related to employee stock options and
non-employee stock warrants |
1,086 | 5,001 | ||||||||
Amortization of goodwill and intangibles |
— | 10,508 | ||||||||
Increase (decrease) in cash resulting from
changes in assets and liabilities: |
||||||||||
Accounts receivable |
7,084 | 6,055 | ||||||||
Prepaid expenses and other current assets |
(558 | ) | 934 | |||||||
Other non-current assets |
639 | (463 | ) | |||||||
Accounts payable |
(4,654 | ) | 486 | |||||||
Accrued expenses |
(1,068 | ) | (978 | ) | ||||||
Accrued salaries and commissions |
(3,744 | ) | (843 | ) | ||||||
Accrued ESPP |
(885 | ) | (2,331 | ) | ||||||
Deferred revenue |
(6,093 | ) | (2,763 | ) | ||||||
Net cash used in operating activities |
(8,881 | ) | (1,179 | ) | ||||||
Cash flows from investing activities: |
||||||||||
Purchases of property and equipment |
(921 | ) | (1,908 | ) | ||||||
Net sales (purchases) of marketable securities available
for sale |
24,833 | (37,210 | ) | |||||||
Net cash provided by (used in) investing activities |
23,912 | (39,118 | ) | |||||||
Cash flows from financing activities: |
||||||||||
Borrowings under leasing agreements |
2,500 | — | ||||||||
Payments on capital leases |
(653 | ) | (717 | ) | ||||||
Proceeds from exercise of stock options and
stock issued under the ESPP |
2,381 | 5,454 | ||||||||
Net cash provided by financing activities |
4,228 | 4,737 | ||||||||
Effect of exchange rate on cash and cash equivalents |
736 | 143 | ||||||||
Net increase (decrease) in cash and cash equivalents |
19,995 | (35,417 | ) | |||||||
Cash and cash equivalents at beginning of period |
98,497 | 109,713 | ||||||||
Cash and cash equivalents at end of period |
$ | 118,492 | $ | 74,296 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
WEBMETHODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of webMethods, Inc. and its subsidiaries (collectively, the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended March 31, 2002. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of the Company, and its results of operations for the interim periods set forth herein. The results for the three months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year or any future period.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2002 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. In the event the Company acquires goodwill subsequent to June 30, 2002 it will not be amortized. The Company adopted SFAS No. 142 on April 1, 2002 and, at that time, stopped amortizing goodwill that resulted from business combinations completed prior to the adoption of SFAS No. 141.
The following table presents the impact of SFAS No. 142 on net loss and net loss per share had SFAS No. 142 been in effect for the three months ended June 30, 2001 (in thousands, except share and per share amounts):
| Three months ended | ||||||||
| June 30, | ||||||||
| 2002 | 2001 | |||||||
Net loss |
$ | (3,122 | ) | $ | (19,938 | ) | ||
Adjustments: |
||||||||
Amortization of
goodwill |
— | 10,352 | ||||||
Adjusted net
loss |
$ | (3,122 | ) | $ | (9,586 | ) | ||
Weighted average
shares-basic |
50,564,625 | 48,839,735 | ||||||
Adjusted basic and diluted EPS |
$ | (0.06 | ) | $ | (0.20 | ) | ||
Reported basic and diluted EPS |
$ | (0.06 | ) | $ | (0.41 | ) | ||
There was no impairment recorded for the three months ended June 30, 2002.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. This standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard is not expected to have a material effect on the Company’s financial position or results of operations.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
| Three months ended June 30, | |||||||||
| 2002 | 2001 | ||||||||
| (in thousands) | |||||||||
Cash paid during the period for interest |
$ | 107 | $ | 122 | |||||
Non-cash investing and financing activities: |
|||||||||
Equipment purchased under capital lease |
$ | 27 | $ | 1,934 | |||||
Change in net unrealized gain or loss on marketable securities |
$ | 30 | $ | (104 | ) | ||||
6
WEBMETHODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SEGMENT INFORMATION
The Company conducts operations worldwide and is primarily managed on a geographic basis with those geographic segments being the Americas, Europe and Asia Pacific region. Revenue is primarily attributable to the region in which the contract is signed and the product is deployed. Information regarding geographic areas is as follows:
| THREE MONTHS ENDED | |||||||||
| JUNE 30, | |||||||||
| REVENUE | 2002 | 2001 | |||||||
| (in thousands) | |||||||||
Americas |
$ | 32,824 | $ | 40,366 | |||||
Europe |
9,230 | 10,810 | |||||||
Asia Pacific |
5,627 | 4,221 | |||||||
Total |
$ | 47,681 | $ | 55,397 | |||||
| AS OF | AS OF | ||||||||
| JUNE 30, | MARCH 31, | ||||||||
| LONG LIVED ASSETS | 2002 | 2002 | |||||||
| (in thousands) | |||||||||
Americas |
$ | 53,350 | $ | 55,360 | |||||
Europe |
1,539 | 1,555 | |||||||
Asia Pacific |
1,644 | 1,373 | |||||||
Total |
$ | 56,533 | $ | 58,288 | |||||
During the quarter ended September 30, 2001, the Company recorded a restructuring charge of $7.2 million, consisting of $2.5 million for headcount reductions, $4.0 million for consolidations of facilities, and $700,000 of other related restructuring charges. These restructuring charges were taken to align the Company’s cost structure with changing market conditions. The restructuring plan resulted in headcount reduction of approximately 150 employees or 14% of the workforce. The Company reduced the number of facilities by closing excess field offices and consolidating several California facilities into two locations. As of June 30, 2002 and March 31, 2002, respectively, $2.8 million and $3.0 million of restructuring charge remained unpaid. This portion primarily relates to rent on the excess facilities and will be paid over the remaining rental periods.
6. SUBSEQUENT EVENT
Subsequent to June 30, 2002, the Company renewed its line of credit agreement with a bank increasing its maximum borrowing amount from $10,000,000 to $20,000,000 with a maturity date of October 10, 2003.
| ITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Readers are advised that this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. Statements using the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “should,” “estimates,” “predicts,” “continue” and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, (i) projections of revenue, costs or expense, margins, income or loss, earnings or loss per share, capital expenditures, cash requirements or other financial items and projections regarding the market for integration software, (ii) statements of the plans or objectives of the Company or its management,