UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
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 November 13, 2003, there were outstanding 52,077,646 shares of the registrant’s Common Stock.
WEBMETHODS, INC.
| Part I | Financial Information |
|||
| Item 1 | Financial Statements |
|||
Condensed Consolidated Financial Statements |
||||
Condensed Consolidated Balance Sheets as of
September 30, 2003 and March 31, 2003 (unaudited) |
||||
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) -
Three and six months ended September 30, 2003 and 2002 |
||||
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six months ended September 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 4 | Submission of Matters to a Vote of Security Holders |
|||
| 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.
| SEPTEMBER 30, | MARCH 31, | |||||||||
| 2003 | 2003 | |||||||||
| (In thousands, except share | ||||||||||
| and per share data) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 79,075 | $ | 79,702 | ||||||
Marketable securities available for sale |
75,461 | 97,079 | ||||||||
Accounts receivable, net of allowance of $2,447 and $2,850 |
39,477 | 43,691 | ||||||||
Prepaid expenses and other current assets |
8,876 | 7,562 | ||||||||
Total current assets |
202,889 | 228,034 | ||||||||
Marketable securities available for sale |
37,659 | 24,845 | ||||||||
Property and equipment, net |
10,609 | 12,068 | ||||||||
Goodwill |
29,838 | 29,838 | ||||||||
Other assets |
8,966 | 9,651 | ||||||||
Total assets |
$ | 289,961 | $ | 304,436 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 9,880 | $ | 9,768 | ||||||
Accrued expenses |
14,441 | 14,802 | ||||||||
Accrued salaries and commissions |
11,272 | 11,648 | ||||||||
Deferred revenue |
36,898 | 39,649 | ||||||||
Current portion of capital lease obligations |
1,549 | 2,743 | ||||||||
Total current liabilities |
74,040 | 78,610 | ||||||||
Capital lease obligations, net of current portion and other |
737 | 567 | ||||||||
Long term deferred revenue |
3,806 | 6,700 | ||||||||
Total liabilities |
78,583 | 85,877 | ||||||||
Commitments and contingencies |
||||||||||
Stockholders’ equity: |
||||||||||
Common stock, $0.01 par value; 500,000,000 shares authorized; 52,057,159 and
51,766,572 shares issued and outstanding |
520 | 518 | ||||||||
Additional paid-in capital |
517,473 | 515,828 | ||||||||
Deferred stock compensation and warrant charge |
(7,984 | ) | (9,450 | ) | ||||||
Accumulated deficit |
(299,684 | ) | (288,449 | ) | ||||||
Accumulated other comprehensive income |
1,053 | 112 | ||||||||
Total stockholders’ equity |
211,378 | 218,559 | ||||||||
Total liabilities and stockholders’ equity |
$ | 289,961 | $ | 304,436 | ||||||
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 | SIX MONTHS ENDED | |||||||||||||||||||
| SEPTEMBER 30, | SEPTEMBER 30, | |||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||
Revenue: |
||||||||||||||||||||
License |
$ | 22,025 | $ | 26,475 | $ | 43,827 | $ | 55,144 | ||||||||||||
Professional services |
10,578 | 8,584 | 19,451 | 16,786 | ||||||||||||||||
Maintenance |
12,786 | 11,103 | 25,336 | 21,913 | ||||||||||||||||
Total revenue |
45,389 | 46,162 | 88,614 | 93,843 | ||||||||||||||||
Cost of revenue: |
||||||||||||||||||||
License |
555 | 525 | 1,022 | 660 | ||||||||||||||||
Professional services and maintenance: |
||||||||||||||||||||
Stock based compensation |
22 | 76 | 44 | 152 | ||||||||||||||||
Other professional services and maintenance costs |
12,403 | 10,668 | 24,062 | 20,935 | ||||||||||||||||
Total cost of revenue |
12,980 | 11,269 | 25,128 | 21,747 | ||||||||||||||||
Gross profit |
32,409 | 34,893 | 63,486 | 72,096 | ||||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing: |
||||||||||||||||||||
Stock based compensation and warrant charge |
721 | 983 | 1,417 | 1,953 | ||||||||||||||||
Other sales and marketing costs |
21,467 | 22,592 | 43,917 | 46,902 | ||||||||||||||||
Research and development: |
||||||||||||||||||||
Stock based compensation |
10 | 40 | 10 | 59 | ||||||||||||||||
Other research and development costs |
10,857 | 11,821 | 22,058 | 24,100 | ||||||||||||||||
General and administrative: |
||||||||||||||||||||
Stock based compensation |
3 | 23 | 6 | 44 | ||||||||||||||||
Other general and administrative costs |
4,524 | 4,228 | 8,947 | 8,293 | ||||||||||||||||
Total operating expenses |
37,582 | 39,687 | 76,355 | 81,351 | ||||||||||||||||
Operating loss |
(5,173 | ) | (4,794 | ) | (12,869 | ) | (9,255 | ) | ||||||||||||
Interest income, net |
699 | 913 | 1,634 | 2,252 | ||||||||||||||||
Impairment of equity investment in private company |
— | (1,000 | ) | — | (1,000 | ) | ||||||||||||||
Net loss |
$ | (4,474 | ) | $ | (4,881 | ) | $ | (11,235 | ) | $ | (8,003 | ) | ||||||||
Basic and diluted net loss per common share |
$ | (0.09 | ) | $ | (0.10 | ) | $ | (0.22 | ) | $ | (0.16 | ) | ||||||||
Shares used in computing basic and diluted net loss per common share |
52,038,339 | 50,845,878 | 51,922,154 | 50,706,018 | ||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||
Net loss |
$ | (4,474 | ) | $ | (4,881 | ) | $ | (11,235 | ) | $ | (8,003 | ) | ||||||||
Other comprehensive loss: |
||||||||||||||||||||
Unrealized loss on marketable securities
available for sale |
(32 | ) | (260 | ) | (91 | ) | (230 | ) | ||||||||||||
Foreign currency cumulative translation adjustment |
877 | (209 | ) | 1,032 | 326 | |||||||||||||||
Total comprehensive loss |
$ | (3,629 | ) | $ | (5,350 | ) | $ | (10,294 | ) | $ | (7,907 | ) | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
WEBMETHODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| SIX MONTHS ENDED SEPTEMBER 30, | |||||||||
| 2003 | 2002 | ||||||||
| (in thousands) | |||||||||
Cash flows from operating activities: |
|||||||||
Net loss |
$ | (11,235 | ) | $ | (8,003 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
|||||||||
Depreciation and amortization |
4,320 | 4,835 | |||||||
Recoveries of allowance for doubtful accounts |
— | (12 | ) | ||||||
Amortization of deferred stock compensation related to employee and
non-employee stock options and non-employee stock warrants |
1,477 | 2,208 | |||||||
Impairment of equity investment in private company |
— | 1,000 | |||||||
Conversion of interest income into equity in private company |
(257 | ) | — | ||||||
Increase (decrease) in cash resulting from changes in assets and liabilities: |
|||||||||
Accounts receivable |
5,433 | 6,549 | |||||||
Prepaid expenses and other current assets |
(1,210 | ) | (1,604 | ) | |||||
Other non-current assets |
41 | 807 | |||||||
Accounts payable |
(217 | ) | (2,871 | ) | |||||
Accrued expenses |
(686 | ) | (2,676 | ) | |||||
Accrued salaries and commissions |
(637 | ) | (4,627 | ) | |||||
Accrued ESPP |
15 | (141 | ) | ||||||
Deferred revenue |
(6,537 | ) | (10,032 | ) | |||||
Net cash used in operating activities |
(9,493 | ) | (14,567 | ) | |||||
Cash flows from investing activities: |
|||||||||
Purchases of property and equipment |
(1,597 | ) | (1,958 | ) | |||||
Net sales (purchases) of marketable securities available for sale |
8,712 | (18,697 | ) | ||||||
Proceeds from the sale of investment in private company |
1,000 | — | |||||||
Net cash provided by/(used in) investing activities |
8,115 | (20,655 | ) | ||||||
Cash flows from financing activities: |
|||||||||
Borrowings under leasing agreements |
— | 2,500 | |||||||
Payments on capital leases |
(2,085 | ) | (2,070 | ) | |||||
Proceeds from exercise of stock options and stock issued under the ESPP |
1,636 | 2,606 | |||||||
Net cash (used in)/provided by financing activities |
(449 | ) | 3,036 | ||||||
Effect of exchange rate on cash and cash equivalents |
1,200 | 622 | |||||||
Net decrease in cash and cash equivalents |
(627 | ) | (31,564 | ) | |||||
Cash and cash equivalents at beginning of period |
79,702 | 98,497 | |||||||
Cash and cash equivalents at end of period |
$ | 79,075 | $ | 66,933 | |||||
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, 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 and six months ended September 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.
2. PRO FORMA STOCK BASED COMPENSATION
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 the three and six months ended September 30, 2003 and 2002 :
| THREE MONTHS ENDED SEPTEMBER 30, | SIX MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
Net loss, as reported |
$ | (4,474 | ) | $ | (4,881 | ) | $ | (11,235 | ) | $ | (8,003 | ) | ||||
Net loss, pro forma |
(16,325 | ) | (13,108 | ) | (34,583 | ) | (28,457 | ) | ||||||||
Basic and diluted net loss per common share, as reported |
(.09 | ) | (.10 | ) | (.22 | ) | (.16 | ) | ||||||||
Basic and diluted net loss per common share, pro forma |
(.31 | ) | (.26 | ) | (.67 | ) | (.56 | ) | ||||||||
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 three and six months ended September 30, 2003 and 2002, respectively; expected volatility of 97% and 125% for the three and six months ended September 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 awarded during the three months ended September 30, 2003 and 2002 was $8.84 and $8.48, respectively. The weighted average fair value per share for stock option grants awarded during the six months ended September 30, 2003 and 2002 was $8.92 and $10.66, respectively.
3. COMPUTATION OF NET LOSS PER SHARE
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 792,098 and 1,168,819 for the quarters ended September 30, 2003 and 2002, respectively, have been excluded from the net loss per share calculation because their effect would be anti-dilutive. Employee stock options and warrants of 890,435 and 1,320,340 for the six months ended September 30, 2003 and 2002, respectively, have been excluded from the net loss per share calculation because their effect would be anti-dilutive.
6
4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
| SIX MONTHS ENDED SEPTEMBER 30, | |||||||||
| 2003 | 2002 | ||||||||
| (in thousands) | |||||||||
Cash paid during the period for interest |
$ | 101 | $ | 353 | |||||
Non-cash investing and financing activities: |
|||||||||
Equipment purchased under capital lease |
$ | 1,111 | $ | 900 | |||||
Conversion of debt and interest to equity in a private company |
$ | 1,257 | $ | — | |||||
Change in net unrealized gain on marketable securities |
$ | (91 | ) | $ | (230 | ||||