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 SEPTEMBER 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 (State or other jurisdiction of incorporation or organization) |
54-1807654 (I.R.S. Employer Identification No.) |
|
| 3930 PENDER DRIVE, FAIRFAX, VIRGINIA (Address of principal executive offices) |
22030 (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 November 5, 2002, 51,102,469 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 SEPTEMBER 30, 2002
TABLE OF CONTENTS
| Part I | Financial Information | |
| Item 1 | Financial Statements | |
|
Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and March 31, 2002 |
||
| Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) - Three and six months ended September 30, 2002 and 2001 | ||
| Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended September 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 | |
| Item 4 | Controls and Procedures | |
| 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
(In thousands, except share and per share amounts)
| SEPTEMBER 30, | MARCH 31, | ||||||||||
| 2002 | 2002 | ||||||||||
(UNAUDITED) |
|||||||||||
ASSETS |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 66,933 | $ | 98,497 | |||||||
Marketable securities available for sale |
103,589 | 113,345 | |||||||||
Accounts receivable, net of allowance of $3,291 and $3,685 |
41,070 | 46,417 | |||||||||
Prepaid expenses and other current assets |
9,256 | 7,516 | |||||||||
Total current assets |
220,848 | 265,775 | |||||||||
Marketable securities available for sale |
28,219 | — | |||||||||
Property and equipment, net |
15,370 | 17,181 | |||||||||
Goodwill and acquired intangibles, net |
29,838 | 29,838 | |||||||||
Other assets |
9,707 | 11,269 | |||||||||
Total assets |
$ | 303,982 | $ | 324,063 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 12,633 | $ | 15,105 | |||||||
Accrued expenses |
13,512 | 16,170 | |||||||||
Accrued salaries and commissions |
11,367 | 15,594 | |||||||||
Deferred revenue |
37,187 | 37,298 | |||||||||
Current portion of capital lease obligations |
4,595 | 2,699 | |||||||||
Total current liabilities |
79,294 | 86,866 | |||||||||
Capital lease obligations, net of current portion and other |
1,263 | 1,765 | |||||||||
Long term deferred revenue |
10,974 | 19,888 | |||||||||
Total liabilities |
91,531 | 108,519 | |||||||||
Commitments
and contingencies Stockholders’ equity: |
|||||||||||
Common stock, $0.01 par value; 500,000,000 shares authorized; 50,883,905 and |
|||||||||||
50,477,383 shares issued and outstanding |
509 | 505 | |||||||||
Additional paid-in capital |
512,889 | 510,281 | |||||||||
Deferred stock compensation and warrant charge |
(12,673 | ) | (14,875 | ) | |||||||
Accumulated deficit |
(287,867 | ) | (279,864 | ) | |||||||
Accumulated other comprehensive loss |
(407 | ) | (503 | ) | |||||||
Total stockholders’ equity |
212,451 | 215,544 | |||||||||
Total liabilities and stockholders’ equity |
$ | 303,982 | $ | 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
(In thousands, except share and per share amounts)
(UNAUDITED)
| THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||||||
| SEPTEMBER 30, | SEPTEMBER 30, | |||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||||
Revenue: |
||||||||||||||||||||
License |
$ | 26,475 | $ | 21,742 | $ | 55,144 | $ | 58,546 | ||||||||||||
Professional services |
8,584 | 9,401 | 16,786 | 19,092 | ||||||||||||||||
Maintenance |
11,103 | 9,594 | 21,913 | 18,496 | ||||||||||||||||
Total revenue |
46,162 | 40,737 | 93,843 | 96,134 | ||||||||||||||||
Cost of revenue: |
||||||||||||||||||||
License |
525 | 651 | 660 | 1,352 | ||||||||||||||||
Professional services and maintenance: |
||||||||||||||||||||
Stock based compensation |
76 | 129 | 152 | 321 | ||||||||||||||||
Other professional services and maintenance costs |
10,668 | 9,968 | 20,935 | 22,367 | ||||||||||||||||
Total cost of revenue |
11,269 | 10,748 | 21,747 | 24,040 | ||||||||||||||||
Gross profit |
34,893 | 29,989 | 72,096 | 72,094 | ||||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing: |
||||||||||||||||||||
Stock based compensation and warrant charge |
983 | 434 | 1,953 | 1,666 | ||||||||||||||||
Other sales and marketing costs |
22,592 | 24,109 | 46,902 | 54,309 | ||||||||||||||||
Research and development: |
||||||||||||||||||||
Stock based compensation |
40 | 6,715 | 59 | 10,205 | ||||||||||||||||
Other research and development costs |
11,821 | 12,110 | 24,100 | 25,409 | ||||||||||||||||
General and administrative: |
||||||||||||||||||||
Stock based compensation |
23 | 52 | 44 | 139 | ||||||||||||||||
Other general and administrative costs |
4,228 | 4,711 | 8,293 | 10,614 | ||||||||||||||||
Restructuring costs |
— | 7,243 | — | 7,243 | ||||||||||||||||
Amortization of goodwill and acquired intangibles |
— | 10,516 | — | 21,025 | ||||||||||||||||
Total operating expenses |
39,687 | 65,890 | 81,351 | 130,610 | ||||||||||||||||
Operating loss |
(4,794 | ) | (35,901 | ) | (9,255 | ) | (58,516 | ) | ||||||||||||
Interest income, net |
913 | 2,730 | 2,252 | 5,407 | ||||||||||||||||
Impairment of equity investment in private company |
(1,000 | ) | — | (1,000 | ) | — | ||||||||||||||
Net loss |
$ | (4,881 | ) | $ | (33,171 | ) | $ | (8,003 | ) | $ | (53,109 | ) | ||||||||
Basic and diluted net loss per common share |
$ | (0.10 | ) | $ | (0.67 | ) | $ | (0.16 | ) | $ | (1.08 | ) | ||||||||
Shares used in computing basic and diluted
net loss per common share |
50,845,878 | 49,348,808 | 50,706,018 | 49,095,663 | ||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||
Net loss |
$ | (4,881 | ) | $ | (33,171 | ) | $ | (8,003 | ) | $ | (53,109 | ) | ||||||||
Other comprehensive loss: |
||||||||||||||||||||
Unrealized
(loss) gain on marketable |
(260 | ) | 391 | (230 | ) | 288 | ||||||||||||||
securities
available for sale Foreign currency cumulative translation adjustment |
(209 | ) | (215 | ) | 326 | (169 | ) | |||||||||||||
Total comprehensive loss |
$ | (5,350 | ) | $ | (32,995 | ) | $ | (7,907 | ) | $ | (52,990 | ) | ||||||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
WEBMETHODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
| SIX MONTHS ENDED SEPTEMBER 30, | |||||||||
| 2002 | 2001 | ||||||||
Cash flows from operating activities: |
|||||||||
Net loss |
$ | (8,003 | ) | $ | (53,109 | ) | |||
Adjustments to reconcile net loss to net
cash used in operating activities: |
|||||||||
Depreciation and amortization |
4,835 | 3,917 | |||||||
(Recoveries) provision for allowance for
doubtful accounts |
(12 | ) | 2,009 | ||||||
Loss on disposal of equipment |
— | 574 | |||||||
Amortization of deferred stock
compensation related to employee stock
options and non-employee stock warrants |
2,208 | 12,331 | |||||||
Impairment of equity investment in
private company |
1,000 | — | |||||||
Amortization of goodwill and intangibles |
— | 21,025 | |||||||
Increase (decrease) in cash resulting from
changes in assets and liabilities: |
|||||||||
Accounts receivable |
6,549 | 22,676 | |||||||
Prepaid expenses and other current assets |
(1,604 | ) | 3,102 | ||||||
Other non-current assets |
807 | (494 | ) | ||||||
Accounts payable |
(2,871 | ) | (540 | ) | |||||
Accrued expenses |
(2,676 | ) | 3,356 | ||||||
Accrued salaries and commissions |
(4,627 | ) | (2,936 | ) | |||||
Accrued ESPP |
(141 | ) | (1,621 | ) | |||||
Deferred revenue |
(10,032 | ) | (7,241 | ) | |||||
Net cash (used in) provided by operating activities |
(14,567 | ) | 3,049 | ||||||
Cash flows from investing activities: |
|||||||||
Purchases of property and equipment |
(1,958 | ) | (3,565 | ) | |||||
Net purchases of marketable securities
available for sale |
(18,697 | ) | (17,728 | ) | |||||
Sale of investment in private company |
— | 2,000 | |||||||
Net cash used in investing activities |
(20,655 | ) | (19,293 | ) | |||||
Cash flows from financing activities: |
|||||||||
Borrowings under leasing agreements |
2,500 | — | |||||||
Payments on capital leases |
(2,070 | ) | (1,502 | ) | |||||
Proceeds from exercise of stock options
and stock issued under the ESPP |
2,606 | 6,205 | |||||||
Net cash provided by financing activities |
3,036 | 4,703 | |||||||
Effect of exchange rate on cash and cash equivalents |
622 | (310 | ) | ||||||
Net decrease in cash and cash equivalents |
(31,564 | ) | (11,851 | ) | |||||
Cash and cash equivalents at beginning of period |
98,497 | 109,713 | |||||||
Cash and cash equivalents at end of period |
$ | 66,933 | $ | 97,862 | |||||
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 and six months ended September 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, 2001 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 will 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, 2001 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 quarter and six months ended September 30, 2001 and 2002 (in thousands, except share and per share amounts):
| THREE MONTHS ENDED SEPTEMBER 30, | SIX MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
Net loss |
$ | (4,881 | ) | $ | (33,171 | ) | $ | (8,003 | ) | $ | (53,109 | ) | ||||
Adjustments: |
||||||||||||||||
Amortization of goodwill |
— | 10,360 | — | 20,842 | ||||||||||||
Adjusted net loss |
$ | (4,881 | ) | $ | (22,811 | ) | $ | (8,003 | ) | $ | (32,267 | ) | ||||
Weighted average shares-basic and diluted |
50,845,878 | 49,348,806 | 50,706,018 | 49,095,663 | ||||||||||||
Adjusted basic and diluted EPS |
||||||||||||||||