WEBMETHODS INC - 10-Q Quarterly Report

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

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Preferred Stock Purchase Rights

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 þ No o

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

As of August 4, 2003, there were outstanding 52,027,727 shares of the registrant’s Common Stock.

WEBMETHODS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2003
TABLE OF CONTENTS


Part I		Financial Information
Item 1		Financial Statements
		Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of
		June 30, 2003 (unaudited) and March 31, 2003
		Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) -
		Three months ended June 30, 2003 and 2002
		Condensed Consolidated Statements of Cash Flows (unaudited) -
		Three months ended June 30, 2003 and 2002
		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 6		Exhibits and Reports on Form 8-K
		(a) Exhibits
		(b) Reports on Form 8-K


			JUNE 30,			MARCH 31,
			2003			2003

			unaudited
			(In thousands, except share data)

ASSETS
Current assets:
	Cash and cash equivalents		$	98,183		$	79,702
	Marketable securities available for sale			96,751			97,079
	Accounts receivable, net of allowance of $2,399 and $2,850			32,059			43,691
	Prepaid expenses and other current assets			8,023			7,562

		Total current assets		235,016			228,034
Property and equipment, net				11,922			12,068
Marketable securities available for sale				10,455			24,845
Goodwill				29,838			29,838
Other assets				8,165			9,651

		Total assets	$	295,396		$	304,436

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	11,022		$	9,768
	Accrued expenses			14,725			14,802
	Accrued salaries and commissions			9,719			11,648
	Deferred revenue			38,384			39,649
	Current portion of capital lease obligations			1,923			2,743

		Total current liabilities		75,773			78,610
	Capital lease obligations, net of current portion and other			905			567
	Long term deferred revenue			4,610			6,700

		Total liabilities		81,288			85,877

Commitments and contingencies
Stockholders’ equity:
	Common stock, $0.01 par value; 500,000,000 shares authorized; 52,009,227 and 51,766,572 shares issued and outstanding			520			518
	Additional paid-in capital			517,300			515,828
	Deferred stock compensation and warrant charge			(8,711	)		(9,450	)
	Accumulated deficit			(295,210	)		(288,449	)
	Accumulated other comprehensive gain			209			112

		Total stockholders’ equity		214,108			218,559

		Total liabilities and stockholders’ equity	$	295,396		$	304,436

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


					THREE MONTHS ENDED JUNE 30,

					2003			2002

					(in thousands, except share and per share data)
Revenue:
	License				$	21,802		$	28,669
	Professional services					8,873			8,202
	Maintenance					12,550			10,810

				Total revenue		43,225			47,681

Cost of revenue:
		License				467			135
		Professional services and maintenance:
				Stock based compensation		22			76
				Other professional services and maintenance		11,659			10,267

				Total cost of revenue		12,148			10,478

Gross profit						31,077			37,203

Operating expenses:
			Sales and marketing:
				Stock based compensation and warrant charge		696			970
				Other sales and marketing costs		22,450			24,310
			Research and development:
				Stock based compensation		—			19
				Other research and development costs		11,200			12,279
			General and administrative:
				Stock based compensation		3			21
				Other general and administrative costs		4,423			4,065

				Total operating expenses		38,772			41,664

Operating loss						(7,695	)		(4,461	)
Interest income, net						934			1,339

				Net loss	$	(6,761	)	$	(3,122	)
Basic and diluted net loss per share					$	(0.13	)	$	(0.06	)

Shares used in computing basic and diluted net loss per share						51,804,692			50,564,625

Comprehensive loss:
				Net loss	$	(6,761	)	$	(3,122	)
				Other comprehensive gain/(loss):
				Unrealized (loss)/gain on securities available for sale		(58	)		30
				Foreign currency cumulative translation adjustment		157			536

				Total comprehensive loss	$	(6,662	)	$	(2,556	)

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


		THREE MONTHS ENDED JUNE 30,

		2003			2002

		(in thousands)
Cash flows from operating activities:
	Net loss	$	(6,761	)	$	(3,122	)
	Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
	Depreciation and amortization		2,146			2,305
	Provision for allowance for doubtful accounts		—			129
	Amortization of deferred stock compensation related to employee stock options and non-employee stock warrants		721			1,086
	Conversion of interest income into equity in private company		(257	)		—
Increase (decrease) in cash resulting from changes in assets and liabilities:
	Accounts receivable		12,266			7,084
	Prepaid expenses and other current assets		(408	)		(558	)
	Other non-current assets		778			639
	Accounts payable		1,021			(4,654	)
	Accrued expenses		(290	)		(1,068	)
	Accrued salaries and commissions		(1,527	)		(3,744	)
	Accrued ESPP		(554	)		(885	)
	Deferred revenue		(3,880	)		(6,093	)

Net cash provided by (used in) operating activities			3,255			(8,881	)

Cash flows from investing activities:
	Purchases of property and equipment		(890	)		(921	)
	Proceeds from sale of investment in private company		1,000			—
	Net sales of marketable securities available for sale		14,659			24,833

	Net cash provided by investing activities		14,769			23,912

Cash flows from financing activities:
	Borrowings under leasing agreements		—			2,500
	Payments on capital leases		(1,460	)		(653	)
	Proceeds from exercise of stock options and stock issued under the ESPP		1,491			2,381

Net cash provided by financing activities			31			4,228

Effect of exchange rate on cash and cash equivalents			426			736

Net increase in cash and cash equivalents			18,481			19,995
Cash and cash equivalents at beginning of period			79,702			98,497

Cash and cash equivalents at end of period		$	98,183		$	118,492

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

WEBMETHODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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, 2003. 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 that, 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, 2003 are not necessarily indicative of the results to be expected for the full year or any future period. Certain amounts previously reported have been reclassified to conform with current year presentation.

The Company measures compensation expense for its employee stock-based compensation using the intrinsic value method and provides pro forma disclosures of net loss as if the fair value method had been applied in measuring compensation expense. Under the intrinsic value method of accounting for stock based compensation, when the exercise price of options granted to employees is less than the fair value of the underlying stock on the grant date, compensation expense is recognized over the applicable vesting period.

The following table summarizes the Company’s results on a pro forma basis as if it had recorded compensation expense based upon the fair value at the grant date for awards consistent with the methodology prescribed in SFAS 123, “Accounting for Stock-Based Compensation,” for quarters ended June 30, 2003 and 2002:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions: Risk-free interest rates of 2.93% and 4.40% for the quarters ended June 30, 2003 and 2002, respectively; expected volatility of 97% and 125% for the quarters ended June 30, 2003 and 2002, respectively; expected life of 4 years, and no anticipated dividends.

The weighted average fair value per share for stock option grants that were awarded during the quarters ended June 30, 2003 and 2002 was $8.93 and $12.25, respectively.

The Company’s net loss per share calculation for basic and diluted is based on the weighted average number of common shares outstanding. There are no reconciling items in the numerator and denominator of the Company’s net loss per share calculation. Employee stock options and warrants of 1,709,992 and 983,975 for the quarters ended June 30, 2003 and 2002, respectively, have been excluded from the net loss per share calculation because their effect would be anti-dilutive.


		THREE MONTHS ENDED JUNE 30,

		2003			2002

		(in thousands)
Cash paid during the period for interest		$	89		$	107

Non-cash investing and financing activities:
	Equipment purchased under capital lease	$	1,006		$	27

	Conversion of debt and interest to equity in a private company	$	1,257		$	—

	Change in net unrealized gain or (loss) on marketable securities	$	(58	)	$	30

The Company conducts operations worldwide and is primarily managed on a geographic basis with those geographic segments being the Americas, Europe, Japan 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:

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.

During the quarter ended December 31, 2002, the Company recorded a restructuring charge of $2.2 million due to a further headcount reduction of approximately 43 employees or 5% of the workforce.

As of June 30, 2003 and March 31, 2003, respectively, $1.5 million and $1.8 million of restructuring charges remained unpaid. This portion primarily relates to rent on the excess facilities and will be paid over the remaining rental periods.

In April 2000, the Company made an investment in a third-party totaling $2,000,000 of which $1,000,000 was equity and $1,000,000 was convertible debt. The Company and this third-party share a common Board member. In March 2002, the Company recorded an other-than-temporary decline in value of $200,000 in the equity investment. In June 2003, the Company received $1,000,000 as repayment of it’s convertible debt to this private company. In connection with this transaction, the Company also converted $257,000 of interest receivable into additional equity in this private company. As of June 30, 2003 and 2002, the carrying value of the investment in this third-party was $1,057,000 and $1,800,000, respectively, and the Company’s equity position, excluding conversion of the debt, was less than 4%.

The Company incurred royalty expense of $363,000 to this investment in the quarter ended June 30, 2003. The Company did not incur royalty expense to this third-party for the quarter ended June 30, 2002.

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, including the development or enhancement of software, development and continuation of strategic partnerships and alliances, implementation and effect of sales and marketing initiatives by the Company, focus on geographic or specific vertical markets and allocation of resources to them, predictions of the timing and type of customer or market reaction to those initiatives, the ability to control expenses, future hiring, the Company’s business strategy and the execution on it, and actions by customers and competitors, (iii) statements of future economic performance or economic conditions and (iv) statements of assumptions underlying other statements or statements about the Company or its business.

This quarterly report on Form 10-Q 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. 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, sufficiency of working capital and projections regarding the market for integration software, (ii) statements of the plans or objectives of webMethods, Inc. or its management, including the development or enhancement of software, development and continuation of strategic partnerships and alliances, execution of potential acquisitions of technology or companies, implementation and effect of sales and marketing initiatives by webMethods, strength of results from geographic or specific vertical markets and allocation of resources to those markets, predictions of the timing and type of customer or market reaction to those initiatives, the ability to control expenses, future hiring, webMethods’ business strategy and the execution on it and actions by customers and competitors, (iii) statements of future economic performance, economic conditions or the impact of recent changes in accounting standards and (iv) assumptions underlying any of the foregoing. In some instances, forward-looking statements can be identified by the use of the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “should,” “estimates,” “predicts,” “continue”, the negative thereof or similar expressions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our expectations or the forward-looking statements could prove to be incorrect, and actual results could differ materially from those indicated by the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including (but not limited to) those discussed in Item 1 of our Form 10-K for the year ended March 31, 2003 under the caption “Factors That May Affect Future Operating Results” and under this Item under the caption “Factors That May Affect Future Operating Results”. Achieving the future results or accomplishments described or projected in forward-looking statements depends upon events or developments that are often beyond our ability to control. All forward-looking statements and all reasons why actual results may differ that are included in this report are made as of the date of this report, and webMethods disclaims any obligation to publicly update or revise such forward-looking statements or reasons why actual results may differ.

We are a leading provider of software and services for comprehensive end-to-end integration solutions. We develop and deliver software products and provide related services that give large organizations the ability, seamlessly and in real-time, to integrate disparate information resources, to connect customers, vendors and business partners with the organization and its employees, to view and manage the connected information resources, data, business processes and human wor


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)


	THREE MONTHS ENDED JUNE 30,

	2003			2002

Net loss attributable to common shareholders, as reported	$	(6,761	)	$	(3,122	)
Net loss attributable to common shareholders, pro forma		(21,582	)		(16,353	)
Basic and diluted net loss per common share, as reported		(.13	)		(.06	)
Basic and diluted net loss per common share, pro forma		(.42	)		(.32	)


		AS OF		AS OF
		JUNE 30,		MARCH 31,
LONG LIVED ASSETS		2003		2003

		(in thousands)
Americas		$	46,366	$	47,852
Europe			2,338		2,228
Japan			728		935
Asia Pacific			493		541

	Total	$	49,925	$	51,556


		THREE MONTHS ENDED
		JUNE 30,

REVENUE		2003		2002

		(in thousands)
Americas		$	25,331	$	32,824
Europe			10,697		9,230
Japan			4,245		2,372
Asia Pacific			2,952		3,255

	Total	$	43,225	$	47,681