WEBMETHODS INC - 10-Q Quarterly Report

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 DECEMBER 31, 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 February 5, 2003, 51,656,796 shares of the registrant’s Common Stock, par value $.01 per share, were issued and outstanding.

WEBMETHODS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
TABLE OF CONTENTS


Part I		Financial Information
Item 1		Financial Statements
		Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of December 31, 2002
		(unaudited) and March 31, 2002
		Condensed Consolidated Statements of Operations and Comprehensive
		Loss (unaudited) - Three and nine months ended December 31, 2002
		and 2001
		Condensed Consolidated Statements of Cash Flows (unaudited) - Nine
		months ended December 31, 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

PART I
FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

WEBMETHODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


			DECEMBER 31,			MARCH 31,
			2002			2002
			(UNAUDITED)
ASSETS
Current assets:
	Cash and cash equivalents		$	74,264		$	98,497
	Marketable securities available for sale			116,420			113,345
	Accounts receivable, net of allowance of $2,875 and $3,685			44,656			46,417
	Prepaid expenses and other current assets			6,670			7,516


		Total current assets		242,010			265,775
Marketable securities available for sale				9,335			—
Property and equipment, net				13,435			17,181
Goodwill and acquired intangibles, net				29,838			29,838
Other assets				9,648			11,269


		Total assets	$	304,266		$	324,063


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	9,015		$	15,105
	Accrued expenses			14,469			16,170
	Accrued salaries and commissions			12,879			15,594
	Deferred revenue			39,373			37,298
	Current portion of capital lease obligations			3,747			2,699


		Total current liabilities		79,483			86,866
	Capital lease obligations, net of current portion and other			823			1,765
	Long term deferred revenue			9,208			19,888


		Total liabilities		89,514			108,519

Stockholders’ equity:
	Common stock, $0.01 par value; 500,000,000 shares authorized; 51,343,397 and 50,477,383 shares issued and outstanding			513			505
	Additional paid-in capital			514,340			510,281
	Deferred stock compensation and warrant charge			(11,630	)		(14,875	)
	Accumulated deficit			(288,606	)		(279,864	)
	Accumulated other comprehensive income (loss)			135			(503	)


		Total stockholders’ equity		214,752			215,544


		Total liabilities and stockholders’ equity	$	304,266		$	324,063

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

WEBMETHODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(UNAUDITED)


					THREE MONTHS ENDED						NINE MONTHS ENDED
					DECEMBER 31,						DECEMBER 31,

					2002			2001			2002			2001

Revenue:
	License				$	33,940		$	30,434		$	89,084		$	88,980
	Professional services					7,951			8,852			24,737			27,944
	Maintenance					11,919			9,828			33,832			28,324


		Total revenue				53,810			49,114			147,653			145,248


Cost of revenue:
	License					765			613			1,425			1,965
	Professional services and maintenance:
				Stock based compensation		65			47			218			368
				Other professional services and maintenance costs		10,409			10,050			31,344			32,417


		Total cost of revenue				11,239			10,710			32,987			34,750


Gross profit						42,571			38,404			114,666			110,498
Operating expenses:
	Sales and marketing:
				Stock based compensation and warrant charge		896			411			2,848			2,077
				Other sales and marketing costs		24,309			26,063			71,211			80,372
	Research and development:
				Stock based compensation		26			1,872			85			12,077
				Other research and development costs		12,059			12,219			36,159			37,628
	General and administrative:
				Stock based compensation		—			27			44			166
				Other general and administrative costs		4,758			4,573			13,051			15,187
Restructuring costs						2,237			—			2,237			7,243
Amortization of goodwill and acquired intangibles						—			8,876			—			29,901


		Total operating expenses				44,285			54,041			125,635			184,651


Operating loss						(1,714	)		(15,637	)		(10,969	)		(74,153	)
Interest income, net						975			1,782			3,227			7,189
Impairment of equity investment in private company						—			—			(1,000	)		—


		Net loss			$	(739	)	$	(13,855	)	$	(8,742	)	$	(66,964	)


Basic and diluted net loss per common share					$	(0.01	)	$	(0.28	)	$	(0.17	)	$	(1.36	)


Shares used in computing basic and diluted net loss per common share						51,046,792			49,574,861			50,821,804			49,255,976


Comprehensive loss:
			Net loss		$	(739	)	$	(13,855	)	$	(8,742	)	$	(66,964	)
			Other comprehensive loss:
				Unrealized gain (loss) on marketable securities available for sale		128			(373	)		(102	)		(85	)
				Foreign currency cumulative translation adjustment		414			(240	)		740			(409	)


Total comprehensive loss					$	(197	)	$	(14,468	)	$	(8,104	)	$	(67,458	)

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

WEBMETHODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)


		NINE MONTHS ENDED DECEMBER 31,

		2002			2001

Cash flows from operating activities:
	Net loss	$	(8,742	)	$	(66,964	)
	Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization		7,531			6,146
	Provision for allowance for doubtful accounts		214			2,360
	Loss on disposal of equipment		—			572
	Amortization of deferred stock compensation related to employee stock options and non-employee stock warrants		3,195			14,688
	Impairment of equity investment in private company		1,000			—
	Amortization of goodwill and intangibles		—			29,901
Increase (decrease) in cash resulting from changes in assets and liabilities:
	Accounts receivable		3,392			13,880
	Prepaid expenses and other current assets		1,039			3,736
	Other non-current assets		910			(378	)
	Accounts payable		(6,699	)		76
	Accrued expenses		(1,928	)		8,956
	Accrued salaries and commissions		(2,493	)		(155	)
	Accrued ESPP		(891	)		(2,497	)
	Deferred revenue		(10,054	)		(9,603	)


Net cash (used in) provided by operating activities			(13,526	)		718


Cash flows from investing activities:
	Purchases of property and equipment		(2,459	)		(4,642	)
	Net purchases of marketable securities available for sale		(12,515	)		(42,860	)
	Sale of investment in private company		—			2,000


	Net cash used in investing activities		(14,974	)		(45,502	)


Cash flows from financing activities:
	Borrowings under leasing agreements		2,500			—
	Payments on capital leases		(3,467	)		(2,167	)
	Proceeds from exercise of stock options and stock issued under the ESPP		4,119			8,321


Net cash provided by financing activities			3,152			6,154
Effect of exchange rate on cash and cash equivalents			1,115			(236	)


Net decrease in cash and cash equivalents			(24,233	)		(38,866	)
Cash and cash equivalents at beginning of period			98,497			109,713
Cash and cash equivalents at end of period		$	74,264		$	70,847

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

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 nine months ended December 31, 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