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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
MARCH 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
1-15681
webMethods, Inc.
(Exact name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization) |
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54-1807654
(I.R.S. Employer
Identification No.) |
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3877 Fairfax Ridge Road, South Tower, Fairfax, Virginia
(Address of Principal Executive Offices) |
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22030
(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
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 x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
Yes x No o
As of September 30, 2004, there were 53,101,682 shares of
the registrant’s Common Stock outstanding. The aggregate
market value of such shares held by non-affiliates of the
registrant, based upon the closing sale price ($5.32) of such
shares on the Nasdaq National Market for such date, was
approximately $226,314,700. Shares of the registrant’s
Common Stock held by each executive officer and director of the
registrant, and by each entity publicly reporting that it owns
5% or more of the outstanding shares of the registrant’s
Common Stock, have been excluded, as such persons may be deemed
to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for any other purpose.
As of June 10, 2005, there were outstanding 53,371,621
shares of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement to be used in
connection with the registrant’s 2005 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this Form 10-K to the extent stated. That Proxy Statement
will be filed within 120 days of registrant’s fiscal
year ended March 31, 2005.
WEBMETHODS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I
This Annual Report on Form 10-K 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 webMethods’ software and services,
(ii) statements of the plans, objectives or expectations of
webMethods, Inc. or its management, including the development or
enhancement of software, development and continuation of
strategic partnerships and alliances, contributions to
webMethods’ revenue by its business partners,
implementation and effect of sales and marketing initiatives by
webMethods, financial results of webMethods, Inc. and its
subsidiaries, financial results within geographic or specific
vertical markets and the allocation of resources to those
markets, predictions of the timing and type of customer or
market reaction to sales and marketing initiatives, the ability
to control expenses, anticipated cost savings or expense
reduction strategies, future hiring, webMethods’ business
strategy and the execution on it and actions by customers and
competitors, (iii) statements of future economic
performance or economic conditions, the continuation of patterns
identified as trends or seasonal occurrences or the impact of
recent or anticipated 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 reflected in 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 this Item 1 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.
OVERVIEW
webMethods is a leading provider of business integration and
optimization software. Our solutions enable organizations to
deliver strategic applications to the business faster while
allowing them to understand what is happening with their
business in real-time and to predict what can be expected to
happen. webMethods calls this Business Process
Productivitytm.
We use the term “Business Process Productivity” to
describe the desire of organizations to increase the efficiency
of their activities, improve the ability of the enterprise to
adapt to changing market conditions, and create competitive
advantage through a focus on the business processes that run
their organizations. We believe that our primary offering, the
webMethods
Fabrictm
product suite, is the only business integration and optimization
suite on the market developed specifically to address the
diverse and comprehensive requirements to achieve business
process productivity.
webMethods Fabric gives customers the ability to integrate,
assemble, and optimize their mission critical business
processes. webMethods Fabric does this by helping organizations
link their enterprise software applications and databases,
connect electronically with their trading partners, automate and
optimize the business processes that span these systems and
interfaces, and implement software
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applications that provide people with the information and
capabilities necessary to run the business more effectively.
Customer benefits include:
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eliminating significant costs from the organization’s
information technology environment, |
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automating and streamlining interactions with their customers
and suppliers, |
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becoming more competitive by capturing more market share in
terms of increased revenue from new and existing customers, |
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gaining more timely access to information to make better
decisions about the business, and |
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allowing staff to focus their attention on higher value business
activities. |
webMethods Fabric builds upon our history as a leader and
innovator in the business integration market. Introduced in
October 2004, the webMethods Fabric product suite unifies the
enterprise application integration (“EAI”) and
business-to-business (“B2B”) capabilities for which
webMethods is widely known, with our existing Business Process
Management (“BPM”) and workflow functionality and the
Business Activity Monitoring (“BAM”), portal, and Web
services technologies we acquired in October 2003. We believe
that by integrating these particular capabilities into a single
product suite, taking advantage of synergies between different
elements of the solution, and merging the products to provide a
seamless user experience, we have created a unique offering in
the marketplace. By combining best-of-breed capabilities into
one platform, we offer customers the ability to lower their
total cost of ownership and to streamline the overall
implementation process relative to using different stand-alone
software products.
webMethods Fabric is based on a Service-Oriented Architecture
(“SOA”) foundation. SOA enables organizations to
extend the value of their existing IT assets, transforming them
into reusable components that can be applied to new business
needs. Customers who want “true SOA” need the
infrastructure software to provide an integrated approach to the
creation, organization, management, and security of Web
services. webMethods Fabric incorporates an integrated registry
and management, as well as security, for Web services. Our
approach offers an alternative to custom software development,
helping our customers deliver software applications to the
business faster and with less risk, while real-time monitoring
and patent-pending analytics gives organizations the insight
necessary for achieving continuous process improvements in their
business.
In addition to our webMethods Fabric product suite, we have a
strategy to combine our software capabilities, professional
services, strategic partnerships, and domain expertise into
well-defined solutions that address specific horizontal and
vertical industry problems. Our first planned solutions are in
the areas of payment and lending processing in the financial
services industry, integration in the retail industry and
regulatory compliance requirements impacting many organizations.
We market and sell our products and solutions primarily to the
largest 2,000 corporations worldwide (the “Global
2000”) and major government agencies. In our fiscal year
ended March 31, 2005, we added approximately 145 new
customers, with no single customer accounting for more than 10%
of our revenue in any quarter of that fiscal year. As of
March 31, 2005, we had approximately 1,300 customers around
the world, distributed across our target verticals in
manufacturing, process industries (such as chemicals, oil and
gas, life sciences, metals, paper and plastics), financial
services, consumer goods manufacturing and retail, government
and telecommunications.
STRATEGY
Our goal is to be the provider of choice for business
integration and optimization solutions in our target industries
and markets, and to establish webMethods as the benchmark for
companies in our class.
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We believe that our strategy enables us to achieve these
objectives. The key elements of this strategy include the
following:
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Focus on Customer Success. A core part of our strategy is
to ensure that customers are successful with our solutions. We
invest in resources and programs to improve our customers’
success by reducing the time needed to deploy our software,
minimizing long-term cost of ownership, and maximizing their
return on investment for their integration projects. We attempt
to accomplish this by working closely with customers to
understand their business needs, timelines, and associated
project risks, and supporting them to ensure they achieve their
goals. As a measure of success, we track the number of customer
projects that go into production. Ensuring that our customers
successfully implement our software in a timely manner enables
them to achieve a greater return on their investment and, in
many cases, encourages them to purchase additional software for
other projects. We believe that having satisfied customers who
are willing to serve as references for prospective customers in
our sales efforts is a significant competitive advantage. |
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Extend the Value of Integration Solutions to Business
Users. The role of integration software and solutions has
historically been viewed as technical in nature and the
principal domain of Information Technology personnel. However,
through our investments and innovation in BPM and BAM, we are
increasingly able to demonstrate and deliver value that directly
touches business users within the enterprise. Through our
integration and BPM capabilities, we are able to not only link
systems together, but transparently integrate the human
workflows involved in the business processes that span these
systems. BAM provides real-time visibility into these business
processes, giving users the ability to track key performance
indicators of their business, as well as to anticipate
exceptions requiring their attention. Together, BPM and BAM
support a continuous process improvement cycle, with BPM
providing the means to maximize process efficiencies and BAM
providing the feedback necessary to enhance an
organization’s processes. We believe that our BPM and BAM
capabilities differentiate webMethods and provide us with
important new selling opportunities with new and existing
customers. |
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Value Based Selling. In order to successfully market and
sell software and service solutions to global organizations, we
have implemented a value based sales methodology that focuses on
the measurement and attainment of the business value being
created by our solutions. This methodology allows us to work
with our customers and prospects during the early stages of the
sales cycle to identify the projects that would provide the most
payback, or return on investment, to the individual lines of
business. We then involve the business users in defining the
ways the identified business process is to be improved or
optimized. We often conduct a proof of concept, which allows the
business owner to experience the proposed solution. This sales
methodology enables us to build the business case or value to be
attained from our proposed solution. Our Professional Services
organization then provides an implementation plan targeted at
the achievement of this value. This methodology allows our
customers to understand the various cost components of the
proposed solutions and the anticipated value they can receive by
deploying it. |
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Provide the Most Compelling Solution. We believe that we
offer one of the broadest and most comprehensive business
integration solutions currently available on the market. We have
used a strategy of internal product development complemented
with strategic technology acquisitions to round out our
offerings. Furthermore, our approach has been to integrate our
various product capabilities into a single, unified platform. We
believe that while each one of our products individually brings
value and shows technical leadership, it is the combination of
these capabilities in one solution that differentiates us from
our competition. |
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Continued Leadership in Web Services and Service-Oriented
Architecture. We believe that Web services will play an
increasingly important role in integration solutions, and that
support for related standards and SOA is an important
requirement for success. webMethods was an early pioneer in the
use of SOA for integration, as evidenced by our proposal to the
World Wide Web Consortium (“W3C”) in 1997 to
standardize the way that applications interact across the
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service-oriented and XML-based protocols. We believe that we
have successfully built upon this heritage with our continued
involvement in various Web services standards bodies, our
acquisition in October 2003 of a unique Web services management
framework developed by The Mind Electric, and ongoing product
innovation in the area of Web services quality-of-service
monitoring. webMethods has been recognized as a leader in Web
services by industry analysts, and we currently serve on the
Board of Directors of the Web Services Interoperability
organization (“WS-I”). |
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Partner with Major Systems Integrators. We continue to
expand and strengthen our alliances with major system
integrators to increase our sales and services leverage. We have
established a series of formal alliance relationships with major
system integrators such as Accenture, Atos Origin, BearingPoint,
Capgemini, CGI-AMS, Computer Sciences Corporation
(“CSC”), Crowe Chizek, Deloitte, Electronic Data
Systems Corporation (“EDS”), Hewlett-Packard
(“HP”) and Tata Consulting Services (“TCS”).
Many of these partners have established formal webMethods
practices, increasing the number of webMethods-trained resources
available to assist our customers in their implementations of
our solutions. As a result of this expanded knowledge-base, as
well as implementation successes on which the systems integrator
partner and webMethods have worked jointly, these alliances form
a virtual extension of our direct sales force. This results in
the third-party introduction and subsequent endorsement of
webMethods’ solutions in opportunities of which we may not
otherwise be aware, or with customers or prospects of the
partner with which we may not otherwise already be engaged. |
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Leverage Strategic Software and Other Vendor
Partnerships. We have relationships with enterprise
application software and other vendors, such as Global eXchange
Services (“GXS”), Oracle Corporation (including both
the Peoplesoft and JD Edwards product lines), SAP AG and Siebel
Systems, whereby they embed a limited-use implementation of
webMethods’ software into their solutions and/or resell
components of our product line. As a result, customers who
license products in which our software is embedded receive
access to our technology. We believe these customers are good
candidates to purchase additional webMethods software, and that
our association with the major enterprise application vendors
distinguishes us from many of our competitors, providing us with
an incumbency advantage that positions webMethods as the lowest
risk option for customers of these software products. |
PRODUCTS
webMethods Fabric™
Our primary offering is webMethods Fabric, a unified business
integration and optimization product suite that we introduced in
October 2004. webMethods Fabric combines into a single offering
our existing product capabilities and features as well as
previously acquired technologies. These include the EAI and B2B
capabilities for which webMethods is widely known, our existing
BPM and workflow functionality, and the technologies that we
acquired in October 2003, which were comprised of a Web services
deployment and management framework (from The Mind Electric),
advanced BAM functionality (from The Dante Group), and a
development environment (from the DataChannel assets owned by
Netegrity), that allows end-users to build and deploy
portal-based applications.
webMethods Fabric’s capabilities combine those of our four
foundation product groupings: Enterprise Services Platform, BPM,
BAM and Composite Application Framework.
Enterprise Services Platform
The webMethods Enterprise Services
Platformtm
is the foundation of the webMethods Fabric product suite.
Conceptually, it serves as the basis by which systems are
integrated and made available as business
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services, which can then be linked together into new business
processes or assembled into new software applications. The key
capabilities of the webMethods Enterprise Services Platform
include the following:
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Proven business integration functionality (derived from
our previous flagship offering, the webMethods Integration
Platform) that provides customers a unified XML-based
environment for addressing both application-to-application and
business-to-business integration scenarios, including the
ability to connect reliably to a variety of legacy systems and
packaged applications, communicate securely across firewalls,
perform data transformations and mappings, and manage a
community of trading partners. |
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An extensive library of adapters that provides customers
a standard mechanism for integrating applications that have
proprietary programming interfaces, such as those from vendors
like Oracle Corporation, SAP AG and Siebel Systems. Using
adapters, developers do not have to learn the technical
intricacies of each interface; instead, they have a graphical
interface for configuring the operations to be performed against
a software application. An adapter development kit simplifies
the creation of custom adapters for software applications that
are not supported within our broad library of adapters. |
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Support for a wide range of electronic commerce
protocols, enabling customers to integrate their information
systems with those of their customers and business partners and
automate inter-company interactions, such as purchasing and
procurement, supply chain management, and vendor-managed
inventory. Supported protocols and e-business standards include
EDI, EDIINT (AS1, AS2, and AS3), RosettaNet, CIDX, PIDX, FIX,
SWIFT, and ebXML. |
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High performance messaging middleware that serves as the
communications layer for webMethods Fabric, and enables the
real-time, event-driven interactions needed for BAM and other
high-volume applications that require reliable message delivery
and a scalable publish/subscribe architecture capable of
processing thousands of messages per second. A Java Message
Service (“JMS”)-compliant interface is also available. |
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webMethods Glue™, a light-weight, high-performance Web
services environment for creating standards-compliant Web
services from Java. Using webMethods Glue, developers are able
to make existing Java objects accessible as Web services without
having to modify existing Java logic, or incurring the
complexity and overhead of implementing these services on a J2EE
platform. |
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Web services enablement and management features that
allow customers to make existing software application functions
available as standard Web services, and then to manage the
deployment of those services — and any other Web
services in the environment, irrespective of where they
originate, with enterprise-class quality of service. The Web
services management capabilities, which are provided by the
product called webMethods
Servicenettm,
include a UDDI-based service registry, security, load balancing,
fail-over, and unique predictive monitoring enabled by
webMethods’ patent-pending BAM technology. |
Business Process Management (“BPM”)
webMethods’ BPM offerings have capabilities that facilitate
the design, deployment, and monitoring of processes that involve
interactions between computer systems as well as people. Some
business processes are automated, requiring minimal manual
intervention (often only to address exception situations),
whereas other types of business processes, such as loan or
claims processing, are primarily manual in nature.
webMethods’ BPM offerings support both scenarios. By
providing an easy-to-use process modeling environment that
shields users from the underlying software applications and
technical complexity, webMethods’ BPM offerings make it
feasible for non-technical staff to play a productive role in
defining business processes. The visual design environment
allows customers to create workflow solutions, including the
associated user interfaces for presenting users with tasks and
information, with minimal software coding effort.
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Business Activity Monitoring (“BAM”)
webMethods’ BAM offering has capabilities that are based on
a patent-pending technology that provide customers with a
real-time view into key business performance indicators (for
example, order processing time), and the ability to be alerted
proactively when results deviate from established norms (for
instance, if orders start taking longer than normal to process).
The integration between webMethods’ BPM and BAM
capabilities means there is minimal incremental effort for the
user to identify which metrics to monitor for a given business
process. webMethods’ BAM offering further reduces the
effort on the part of the user by automatically monitoring
certain pre-identified metrics and using statistical analysis to
establish normal patterns of behavior. This allows the system to
alert the user to an exception to such patterns of behavior,
through a unique feature called “fingerprinting”,
enabled once the system observes current readings drifting away
from previously-seen ranges. The advantage of our approach is
that users are not required to define limits manually, and the
system automatically adjusts thresholds based on actual data
(for example, accommodating variations in order processing time
depending on the time of day). The real-time nature of these
capabilities enables customers to anticipate exceptions,
allowing them to respond quickly and, potentially, to avoid
impact to the business. The ability to do root-cause analysis is
a further decision-making aid, helping customers determine the
specific factors causing a deviation in a monitored business
process metric.
Composite Application Framework (“CAF”)
The webMethods Composite Application
Frameworktm
enables customers to assemble new applications from the services
and resources made available by the webMethods Enterprise
Services Platform. The webMethods CAF provides an alternative to
coding traditional client/server or Web applications from
scratch and is especially advantageous when there is an
inventory of existing business components from which to assemble
new software applications. The webMethods
Portaltm
serves as the primary delivery channel for these composite
software applications, allowing people — both inside
and outside the organization — to be provided with
personalized, secure, access to the application functionality,
information, and business processes that are relevant to their
job function or relationship to the organization.
SERVICES
webMethods offers a range of professional services to assist our
customers both during the initial deployment of our products and
thereafter to address our customers’ needs through the
entire project lifecycle. Our professional services consultants
are located throughout the Americas, Europe/ Middle East/ Africa
(“EMEA”), Japan and Asia Pacific regions, allowing us
to provide localized, on-site support across our global customer
base. Our services include “jump start” packages and
full project implementations; advisory services, including
architecture and performance assessments, and services
concerning SOA strategy or best practices with regard to the
establishment of integration competency centers; product
training; and ongoing outsourced maintenance and operational
support. We may provide these services directly or augment the
efforts of a systems integration partner. Our professional
services organization has developed GEAR, an integration
methodology derived from our experience and specific to our
products. GEAR provides customers with best practices, project
templates, white papers, and other tools. Together, these
resources assist in gathering requirements, capturing the scope
of the project, defining the architecture, implementing a
solution, and rolling out the finished system.
We offer training and continuing education to help ensure the
success of our customer implementations. We provide a mix of
classroom, onsite, and online training designed to best meet our
users’ requirements. We have regularly scheduled courses
covering our entire product line and more than 20 key topics of
interest to developers, administrators, and business analysts.
We offer our customers a variety of support and maintenance
plans designed to meet their specific needs, including the
option of 24-hour coverage, seven days per week. We have
established a “follow-the sun” support model with
major support centers in Virginia and California in the United
States, and in
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Australia, Japan and the Netherlands. Our resellers and
distributors generally provide initial software support to their
customers, and we provide secondary support on more complicated
issues. Our customers and partners also have access to the
webMethods
Advantagetm
extranet, which provides access to software, product
documentation, discussion groups, implementation guides,
technical advisories and access to our customer service
management system that allows individuals to submit and monitor
the status of any technical issues.
SALES AND MARKETING
We license our software and sell our services primarily through
our direct sales organization. Secondary sales channels include
our strategic software vendor partners, major systems
integrators with whom we have strategic alliances, other
partners and distributors. In Japan and our Asia Pacific region
and, to a lesser extent, in EMEA and the Americas, we also
license our software through resellers who may also sell our
consulting and implementation services. We have relationships
with a number of resellers or distributors with expertise in
certain industry sectors or countries in which we do not
currently have a significant number of direct sales personnel.
We license our software primarily on a perpetual basis.
Our direct sales organization consists of sales representatives
and pre-sales consultants supported by personnel with experience
within the industries we target. At March 31, 2005, our
sales and marketing personnel serving North America were located
in our headquarters in Fairfax, Virginia, and in approximately
25 other offices in the United States and Canada. At that date,
our sales and marketing personnel in EMEA were located in nine
countries, and our sales and marketing personnel in Japan and
our Asia Pacific region were located in Australia, Japan and six
other countries. Information on revenue we derived from our
Americas, EMEA, Japan and Asia Pacific operations, as well as
long lived assets located in those geographic regions, is
included in Note 18 of the Notes to Consolidated Financial
Statements of webMethods, Inc., included elsewhere in this
report. We expect to continue expanding our sales and marketing
group through targeted recruitment of qualified individuals.
Our sales efforts are focused on customers, prospective
customers and business partners in manufacturing, process
industries (such as chemicals, oil and gas, life sciences,
metals, paper and plastics), financial services, consumer goods
manufacturing and retail, government and telecommunications.
The sales cycle for our software typically ranges from 90 to
270 days. A prospective customer’s decision to use our
products may involve a substantial financial commitment, which
may require a significant evaluation period and approval from or
by the customer’s senior management. A customer’s
decision to license certain of our products may also involve
significant user education and deployment costs, as well as
substantial involvement of the customer’s personnel. Due to
the nature of our business, we have no inventory.
We have experienced quarterly fluctuations in our operating
results and anticipate fluctuations in the future. In the past
we have experienced certain general seasonal factors, from time
to time, such as when revenue in our second fiscal quarter
(ending September 30) has been positively impacted by
budgeting cycles of the US Government, and has been negatively
impacted because businesses often defer purchase decisions
during summer months. In addition, revenue in our third fiscal
quarter (ending December 31) has been positively impacted
by the end-of-year budgeting cycles of many Global
2000 companies, and revenue in our fourth fiscal quarter
(ending March 31) has been positively impacted, as revenue
in our first fiscal quarter (ending June 30) has been
negatively impacted, by the annual nature of our sales
compensation plans. Quarterly revenue and operating results
depend on the volume and timing of orders received, which may be
affected by large individual transactions that sometimes are
difficult to predict.
PRODUCT DEVELOPMENT
We pursue a judicious mix of internal development, technology
acquisition, and strategic partnerships to allow us to offer a
compelling and differentiated solution. This strategy has at
times allowed us to bring capabilities to market more quickly
than some competitors who rely solely on internal development.
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We focus our ongoing product development efforts on a
combination of enhancing, broadening, and deepening the
functionality of our core products to address new industries,
marketplaces, geographies and software alliances as well as
bringing about innovations to meet emerging opportunities. In
October 2004, we introduced webMethods Fabric, unifying our
existing product capabilities with the technologies which we
acquired in October 2003. We have dedicated a significant amount
of effort to integrating our various product capabilities to
realize the vision of webMethods Fabric as a unified product
suite. Our research and development expenses, including
stock-based compensation, were $44.5 million,
$45.0 million and $47.5 million in our fiscal years
ended March 31, 2005, 2004 and 2003, respectively.
We maintain our primary development centers in Fairfax, Virginia
and Sunnyvale, California and have additional development teams
in Denver, Colorado and Seattle, Washington. In 2004, we
established a development center in Bangalore, India.
PARTNERS AND STRATEGIC RELATIONSHIPS
We believe that our strategic alliances with systems integrators
constitute a significant advantage over some of our competitors.
We work closely with several major systems integrators including
Accenture, Atos Origin, BearingPoint, Capgemini, CGI-AMS, Crowe
Chizek, CSC, Deloitte, EDS, HP and TCS to support our
customers’ integration needs and to expand the resources
available to implement our software. We invest in education to
assist our partners in staying knowledgeable in, and proficient
with, our software products and solutions. We believe that our
investment in these relationships is important because our
partners’ promotion of our products as the most appropriate
solution for their clients augments our direct sales force.
In November 2004, we announced a strategic partnership with
Global eXchange Services (“GXS”), a leading global
integration services provider, whereby the two companies agreed
to jointly develop, market and resell end-to-end integration
solutions based on our respective technologies and services.
Through our combined offerings, enterprises utilizing GXS’
managed services will be able to extend the capabilities of the
webMethods Fabric product suite more readily to their business
partners, providing a deeper level of integration and shared
visibility to streamline interactions between the organizations.
We believe that our relationship with GXS may help us more
effectively reach markets that we do not directly target, while
providing prospective customers with an additional means for
evaluating our technology as an embedded component of the GXS
service.
We also believe that our other strategic relationships represent
an advantage over our competition. We utilize our original
equipment manufacturer partnerships with enterprise application
software vendors, such as Oracle Corporation, SAP AG and Siebel
Systems, as a differentiator when selling to a prospective
customer that owns or plans to purchase products from these
companies in which a license-limited version of our software may
be embedded or utilized. We believe that this provides us with
an incumbency advantage for many of the new business
opportunities in which we compete. We expect to continue to
benefit from these relationships through our partners’
indirect promotion of our products.
We have a relationship with Informatica to resell their
PowerAnalyzer business intelligence product to provide
management dashboards and reporting capabilities which
complement the real-time monitoring functionality included in
our BAM solution.
We believe our partners influenced, directly or indirectly, a
significant portion of our license revenue during the fiscal
year ending March 31, 2005 and in prior fiscal years, and
we expect this to continue in future periods.
Under certain partnership arrangements, we may share license
fees derived from joint selling opportunities with our partner;
in these instances, we record the net license revenue we
receive. In systems integrator and other partnership
arrangements, we may pay a sales assistance fee to a partner who
performs or assists in certain sales activities, which we
include in our sales and marketing expenses, and that fee
usually is paid once payment from the joint customer of license
fees is received. Under certain partnerships with our enterprise
application software vendor partners, the partner may embed or
otherwise
8
utilize our software with their applications under limited use
licenses for a license fee or royalty fee, which we include in
our license revenue.
COMPETITION
The market for our software and services is extremely
competitive and subject to rapid change. While we believe that
we have a compelling offering in the webMethods Fabric product
suite, broad integration experience, expertise in trading
partner integration and management, a track record of
innovation, and are a recognized leader in Web services, we
compete with numerous other providers of integration software
products. Our competitors include BEA Systems, Inc.,
International Business Machines Corporation (“IBM”),
Microsoft Corporation, SAP AG, SeeBeyond Technology Corporation,
Sterling Commerce Inc., TIBCO Software, Inc. and a wide range of
companies associated with the capabilities that we offer. We may
encounter additional competition from other emerging companies.
In addition, we may face pricing pressures from our current
competitors and new market entrants in the future. We believe
that the competitive factors affecting the market for our
software and services are numerous and the specific importance
of any one of these factors varies significantly for each
specific customer environment. These competitive factors include
product functionality and features; performance and price; ease
and cost of product implementation; vendor and product
reputation; quality of customer support services; financial
strength; customer training and documentation; and quality of
professional services offerings. Although we believe that our
software and services currently compete favorably with respect
to such factors, we may not be able to maintain our competitive
position against current and potential competitors.
Some of our current and potential competitors have longer
operating histories, significantly greater financial, technical,
product development and marketing resources, greater brand
recognition and larger installed customer bases than we do. Our
present or future competitors may be able to develop software
similar to or even superior in functionality to what we offer,
some may be able to adapt more quickly than we do to new
technologies, evolving industry trends or new customer
requirements, or devote greater resources to the marketing,
design and development, and sale of their products than we do.
Accordingly, it is possible that we may not be able to compete
effectively in our markets, which may harm our business and
operating results. If we are not successful in developing new
software and enhancements to our existing software or in
achieving customer acceptance, our gross margins may decline,
and our business and operating results may suffer.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success is heavily dependent upon the technological and
creative skills of our personnel and how successfully we can
safeguard their efforts in developing and enhancing our software
and related technology through the protection of our
intellectual property rights, brand name, and associated
goodwill. We depend upon our ability to develop and protect our
proprietary technology and intellectual property rights to
distinguish our software from our competitors’ products. We
rely on a combination of confidentiality agreements,
confidentiality procedures and contractual provisions, as well
as trade secret, copyright, trademark and patent laws, to
establish and protect our proprietary rights and accomplish
these goals.
For example, we take measures to avoid disclosure of our trade
secrets, including, but not limited to, requiring all employees
and certain consultants, customers, prospective customers, and
others with which we have business relationships to execute
confidentiality agreements that prohibit the unauthorized use
and disclosure of our trade secrets and other proprietary
materials and information. Further, we enter into license
agreements with our customers, business partners, resellers and
distributors that limit the unauthorized access to, use and
distribution of our software, documentation and other
proprietary information. Our license agreements with our
customers, business partners, resellers and distributors impose
restrictions on the use of our technology, including prohibiting
the reverse engineering or de-compiling of our software, impose
restrictions on the licensee’s ability to utilize the
software and provide for specific remedies in the event of a
breach of these restrictions. We also restrict access to our
source code. While some of our license agreements require us to
place the source code for our software in escrow
9
for the benefit of the licensee, these agreements generally
provide these licensees with a limited, non-exclusive license to
use this code in the event we cease to do business without a
successor or there is a bankruptcy proceeding by or against
webMethods; certain agreements may provide that the licensee can
use the escrowed source code if we fail to provide the necessary
software maintenance and support.
We also seek to protect our technology, software, documentation
and other proprietary information under the copyright, trademark
and patent laws. We assert copyright in our software,
documentation and other works of authorship, and periodically
register copyrights with the U.S. Copyright Office in qualifying
works of authorship. We assert trademark rights in and to our
name, product names, logos and other markings that are designed
to permit consumers to identify our goods and services. We
routinely file for and have been granted trademark protection
from the U.S. Patent and Trademark Office for qualifying marks.
We currently hold a trademark registration in the United States
for the “webMethods”, “B2B Integration
Server” and “Glue” marks and a trademark
registration in certain other countries and the European Union
for the “webMethods” mark. We have a patent issued in
the United States and several patent applications pending for
technology related to our software. We may file additional
patent applications in the United States or other countries in
the future.
Despite our efforts to protect our proprietary rights,
contractual provisions, licensing restrictions and existing laws
and remedies afford us only limited protection. The steps we
have taken to protect our proprietary rights and intellectual
property may not be adequate to deter misappropriation of our
technology, and the protections we have may not prevent our
competitors from developing products with functionality or
features similar to our software. The use by others of our
proprietary rights could materially harm our business.
It is possible that the copyrights, trademarks or patent held by
us could be challenged and invalidated. For example, we cannot
be certain that the patent we hold, those that we have applied
for, if issued, or our potential future patents will not be
successfully challenged. Further, we cannot be certain that we
will be able to develop proprietary products or technologies
that are patentable, that any patent issued to us will provide
us with any competitive advantage or that the patents of others
will not seriously limit or harm our ability to do business.
We may not be able to detect unauthorized use of our proprietary
information or take appropriate steps to enforce our
intellectual property rights effectively, and the use by others
of our proprietary rights could materially harm our business.
Policing the unauthorized use of our products and other
proprietary rights is difficult and expensive, particularly
given the global nature and reach of the Internet. Effective
protection of our intellectual property rights may be limited in
certain countries as the laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of
the United States. For more information regarding our
proprietary rights, see “Factors That May Affect Future
Operating Results — If we are unable effectively to
protect our intellectual property, we may lose a valuable asset,
experience reduced market share, or incur costly litigation to
protect our rights.”
Despite our efforts to protect our proprietary rights, parties
may breach confidentiality agreements or other protective
licenses and contracts into which we have entered, and we may
not be able to enforce our rights effectively in the event of
these breaches. There can be no assurance that we will be able
to prevent unauthorized attempts to copy or reverse engineer
aspects of our software, to subvert our license key mechanisms
or to obtain and use information that we regard as proprietary.
Further, unauthorized parties may attempt to copy or otherwise
obtain and use software or technology that we consider
proprietary, and third parties may attempt to develop similar
technology independently. It is possible that our competitors
will adopt similar product or service names, impeding our
ability to protect our intellectual property and possibly
leading to customer confusion. The unauthorized reproduction or
other misappropriation of our proprietary technology could
enable third parties to benefit from the technology developed by
us without paying for it.
The software industry is characterized by the existence of a
large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other
intellectual property rights. We believe that software
developers in our market will increasingly be subject to
infringement claims as
10
the number of products in different software industry segments
overlap. Although we attempt to avoid infringing known
proprietary rights of third parties in our product development
efforts, third parties have claimed that the use of our software
in certain situations infringed on their intellectual property
rights. Third parties may in the future claim that we have
infringed on their intellectual property rights (including those
intellectual property rights currently existing or developed in
the future) or that the use our software in certain situations
infringes on their intellectual property rights. We may
increasingly be subject to infringement claims as the number of
products and competitors in our industry grows and
functionalities of products overlap. Furthermore, former
employers of our current and future employees may assert that
their employees have improperly disclosed confidential or
proprietary information to us.
Expensive litigation may be necessary in the future to enforce
our intellectual property rights. We have been, and may in the
future be, subject to legal proceedings and claims for alleged
infringement by us or our licensees of third-party proprietary
rights, such as copyrights, trademarks, patents or trade
secrets, from time to time in the ordinary course of our
business. While we do not currently believe that any of our
software, documentation, copyrights, trademarks, patents, or
other proprietary rights infringe the proprietary rights of
third parties, third parties have claimed, and may in the future
claim, that we have infringed their current or future products,
technology or intellectual property rights or that use of our
software in certain situations may infringe on their
intellectual property rights. Any infringement claims, with or
without merit, brought by such third parties may be
time-consuming, result in costly litigation, prevent product
shipment, cause delays, distract us from managing our business
or require us to enter into royalty or licensing agreements
which are not advantageous to us, any of which could materially
harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties, and is commonly
quite expensive.
Parties making claims against us could secure substantial
damages, as well as injunctive or other equitable relief that
could effectively block our ability to license our software in
the United States or abroad. Such a judgment could materially
harm our business. In the event an infringement claim against us
was successful and we could not obtain a license on acceptable
terms, license a substitute technology or redesign to avoid
infringement, our business would be harmed materially. In
addition, parties making these claims may be able to obtain an
injunction, which could prevent us from selling our software in
the United States or abroad. Any of these results could harm our
business materially.
For more information regarding our proprietary rights, see
“Factors That May Affect Future Operating
Results — Third-party claims that we infringe upon
their intellectual property rights may be costly to defend and
could damage our business.”
In addition, we license technology from third parties that is
incorporated into our software, and we bundle technology from
third parties with our software. We also incorporate into our
software certain “open source” software code or
software tools, the use of which in commercial software
products, such as ours, may be prohibited or restricted now or
in the future. Any significant interruption in the supply or
support of any technology we license from third parties, or our
inability to continue to use “open source” software in
our products, could adversely affect our business, unless and
until we can replace the functionality provided by the licensed
technology or “open source” software. Our use of
licensed technology or “open source” software could
cause our products to infringe the intellectual property rights
of others, causing costly litigation and the loss of significant
rights.
CORPORATE INFORMATION
webMethods, Inc. was organized in Delaware in 1996. We completed
our initial public offering in February 2000. In August 2000,
webMethods, Inc. acquired Active Software, Inc., a publicly-held
software company that developed and delivered enterprise
application integration software. In February 2001, we acquired
IntelliFrame Corporation, its workflow technology and its
research and development team. In October 2003, we acquired The
Mind Electric, Inc., The Dante Group, Inc. and certain assets of
Data Channel from Netegrity. References to
“webMethods,” “we,” “us” or
“our” include webMethods, Inc. and its subsidiaries
unless a statement specifically refers to webMethods, Inc. Our
executive offices are located
11
at 3877 Fairfax Ridge Road, South Tower, Fairfax, Virginia
22030, and our main telephone number is (703) 460-2500. We
operate in a single segment of software and related services.
AVAILABLE INFORMATION
Our internet address is www.webMethods.com. Our Investor
Relations page of our web site provides a link to a service
giving access to our securities filings as soon as reasonably
practical after we electronically file with the Securities and
Exchange Commission (“SEC”) our annual reports,
quarterly reports, current reports and any amendments to those
reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and as soon as
reasonably practical after any of our directors or executive
officers electronically file with the SEC any reports pursuant
to Section 16 of the Securities Exchange Act of 1934. We do
not charge for access to and viewing of those filings. Other
information on our Investor Relations page and our web site is
not part of this Form 10-K or any other webMethods
securities filing unless specifically incorporated. In addition,
our reports, proxy statements and other information are filed
with the SEC through the SEC’s Electronic Data Gathering,
Analysis and Retrieval system and are publicly available through
the SEC’s site on the World Wide Web, at
www.sec.gov. All statements made in any of our securities
filings, including all forward-looking statements or
information, are made as of the date of that document in which
the statement is included, and we do not assume or undertake any
obligation to update any of those statements or documents unless
we are required to do so by law.
EMPLOYEES
As of March 31, 2005, we employed approximately 833
full-time employees. These included approximately 239 in sales
and marketing, 204 in professional services and technical
support, approximately 263 in research and development and
approximately 127 in other administrative areas, including
accounting, finance, human resources, facilities and information
technology. Our future success will depend in part on our
ability to attract, retain and motivate highly qualified
technical and management personnel, for whom competition is
intense. From time to time, we have employed, and will continue
to employ, independent contractors and consultants to support
research and development, marketing and sales, and business
development. Our employees generally are not represented by a
collective bargaining agreement, although employees in certain
of our international subsidiaries have claimed membership in
trade unions or sought to invoke union representation in certain
personnel matters; we have never experienced a strike or similar
work stoppage. We consider relations with our employees to be
good.
EXECUTIVE OFFICERS OF WEBMETHODS
Our executive officers and their ages and positions as of
May 31, 2005 are as follows:
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| Name |
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Age | |
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Position |
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| |
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David Mitchell
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|
40 |
|
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President and Chief Executive Officer |
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Richard Chiarello
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|
52 |
|
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Executive Vice President, Worldwide Operations |
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Mary Dridi
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44 |
|
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Executive Vice President and Treasurer |
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Douglas W. McNitt
|
|
|
40 |
|
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General Counsel, Executive Vice President and Secretary |
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Kristin Weller Muhlner
|
|
|
34 |
|
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Executive Vice President, Product Development |
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Mark L. Wabschall
|
|
|
49 |
|
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Senior Vice President, Finance and Chief Accounting Officer |
David Mitchell began his career at webMethods in December
1997 as Vice President, Sales and served as Vice President,
Worldwide Sales from September 1999 through December 1999. He
served as Chief Operating Officer from January 2000 to October
2004, as President since January 2001 and as Chief Executive
Officer since October 2004. Throughout his tenure at webMethods,
Mr. Mitchell has played a major role in all facets of our
business and in overseeing webMethods’ global sales
organization, as well as our marketing, industry solutions,
business development, and customer service operations. Prior to
joining
12
webMethods, Mr. Mitchell held a variety of executive
positions at various companies, including serving from 1993 to
1995 as President and Chief Executive Officer of VYCOR
Corporation, which was acquired in 1995 by McAfee Software.
Mr. Mitchell holds a B.S. in Marketing from Virginia
Commonwealth University.
Richard Chiarello joined webMethods in April 2004 as
Executive Vice President, Worldwide Operations. From October
2002 to 2004, he served as Senior Vice President, Worldwide
Sales, of Siebel Systems, Inc., where he managed all aspects of
the company’s worldwide sales operations. From December
1998 to September 2002, he served as President of ATL LLC
Consulting, a private sales consulting company founded by
Mr. Chiarello to serve clients in the information
technology industry. He also served as President and Chief
Operating Officer of AMC Computer Corporation, a hardware and
professional services company, from October 2000 to June 2001.
From December 1985 to December 1998, Mr. Chiarello held
several sales, marketing and executive management positions at
Computer Associates International, Inc., the most recent of
which was Executive Vice President and General Manager,
Worldwide Sales and Channels. Prior to joining Computer
Associates International, Inc., Mr. Chiarello served in a
variety of sales positions with IBM Corporation from 1977 to
1985. Mr. Chiarello holds a B.A. from Queens College in New
York and has completed executive management training in the IBM
Management Training program and with Babson Business School,
Boston, Massachusetts.
Mary Dridi joined webMethods in May 1998 as Chief
Financial Officer and Treasurer. She became an Executive Vice
President in January 2002. She resigned as Chief Financial
Officer in May 2005. From July 1991 to April 1998, she served as
the Controller and Vice President of Finance for SRA
International, Inc., an information technology company. From
1987 to 1991, Ms. Dridi served as the Director of Finance at
Geostar Corporation, a mobile satellite communications company.
From 1983 to 1987, Ms. Dridi provided audit and other
business services with the accounting firm of Peat Marwick.
Ms. Dridi holds a B.S. in Commerce and Accounting from the
University of Virginia.
Douglas W. McNitt joined webMethods in October 2000 as
General Counsel, became an Executive Vice President in January
2002, and became Secretary in May 2003. Mr. McNitt served
in various capacities, including Senior Counsel and Assistant
General Counsel for America Online, Inc. during his service
there from December 1997 to September 2000. From May 1996 to
December 1997, he was an associate with the law firm of Tucker,
Flyer & Lewis, a professional corporation, and was an
associate with the law firm of McDermott, Will & Emery from
April 1994 to May 1996. Mr. McNitt holds a B.A. from
Stanford University and a J.D. from Notre Dame Law School.
Kristin Weller Muhlner joined webMethods as Vice
President of Professional Services and Customer Care in
September 1998. She became Vice President of Product Development
in January 2000, Senior Vice President of Product Development in
October 2001 and Executive Vice President of Product Development
in March 2003. From 1994 to September 1998, Ms. Muhlner
served as Senior Manager for Deloitte & Touche Consulting
Group, where she participated in the development of their
enterprise resource planning (ERP) implementation
methodology. Ms. Muhlner holds a B.A. in Economics from
Rhodes College.
Mark L. Wabschall, a Certified Public Accountant, joined
webMethods as Senior Vice President, Finance in July 2004 and
became Chief Accounting Officer in May 2005. He served as Vice
President, Finance for Innovative Technology Application, Inc.,
a diversified technology firm, from 2003 to 2004, and he served
as President of Delphi Business Solutions, LLC, a financial
consulting firm from 2000 to 2003. From 1994 to 2000, he held
senior financial and operational management positions with the
Baan Company, including Senior Vice President of Operations,
Vice President of Investor Relations and Chief Financial Officer
of the Americas. He also served as an audit partner with Arthur
Andersen, a major international public accounting firm.
Mr. Wabschall holds a B.S. in Business Administration from
the Ohio State University.
13
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You should consider the following risks and uncertainties when
evaluating our statements in this report and elsewhere.
webMethods is subject to risks and uncertainties in addition to
those described below, which, at the date of this report, we may
not be aware of or which we may not consider significant. Each
of these factors may adversely affect our business, financial
condition, results of operation or the market price of
webMethods’ common stock, and investors may potentially
lose all or part of their investment.
Our quarterly revenue — especially the amount of
license revenue we recognize in a
quarter — and operating results could
fluctuate, which could significantly affect the market price of
webMethods’ common stock.
Our quarterly operating results have fluctuated in the past and
are likely to do so in the future. A significant reason for
these fluctuations is variation in the level of our quarterly
revenue — especially the amount of license revenue we
recognize in a quarter — which is difficult to predict
with certainty and which varies depending on a number of
factors. These fluctuations may cause quarter-to-quarter or
year-to-year comparisons of our financial results not to be
reliable indicators of our future revenue, license revenue or
operating results. If our quarterly or annual total revenue,
license revenue or operating results fail to meet the guidance
we provide publicly or the expectations of investors or
securities analysts, there could be a material adverse effect on
the market price of webMethods’ common stock. Our quarterly
operating results have varied substantially in the past and may
vary substantially in the future depending upon a number of
factors, including:
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• |
changes in demand for our software products and services; |
| |
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• |
the timing and terms of large transactions with customers; |
| |
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• |
the spending environment for business integration and
optimization solutions; |
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• |
competitive pressures; |
| |
| |
• |
fluctuations in the revenue and license revenue of our
geographic regions; |
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• |
our ability to execute on our business strategy and sales
strategies; |
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• |
a low number of quota bearing sales representatives experienced
with our solutions, software products and sales processes; |
| |
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• |
the timing and amount of revenue from acquired technologies or
businesses; |
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• |
the amount and timing of operating costs; |
| |
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• |
delays in the availability of new products or new releases of
existing products; |
| |
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• |
costs of legal compliance, including compliance with the
Sarbanes-Oxley Act of 2002 and regulatory requirements and
investigating or resolving pending or threatened legal claims;
and |
| |
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• |
changes that we may make in our business, operations and
infrastructure. |
In addition, economic conditions and other events beyond our
control, such as economic uncertainties, geopolitical
developments or uncertainties, travel limitations, terrorist
acts and other major, unanticipated events may have significant
negative impact on our quarterly revenue, license revenue or
operating results and delay our ability to return to and
maintain profitability on a basis determined in accordance with
accounting principles generally accepted in the United States
(“GAAP”). If our quarterly total revenue, license
revenue or operating results are adversely impacted for any
reason, that could have a material adverse effect on the market
price of webMethods’ common stock.
We generally close a substantial number of license transactions
in the last month of each quarter, which makes it difficult to
predict with certainty the level of license revenue we will have
in any quarter until near to, or after, its conclusion. Our
operating expenses, which include sales and marketing, research
14
and development and general and administrative expenses, are
based on our expectations of future revenue and are relatively
fixed in the short term. If total revenue or license revenue
falls below our expectations in a quarter and we are not able to
quickly reduce our spending in response, our operating results
for that quarter could be significantly below the guidance we
provide publicly or expectations of investors or securities
analysts. As a result, the market price of webMethods’
common stock may fall significantly.
If we fail accurately to forecast our future total
revenue, license revenue or operating results, we may not
satisfy the expectations of investors or securities
analysts.
We forecast our future total revenue and license revenue and
operating results based upon information from our sales
organization, finance and accounting department and other groups
within our organization. The information on which our forecasts
are based reflect expectations of future performance, beliefs
regarding continuation of trends and anticipated future
achievements, which involve elements of speculation and are
subject to a number of risks and uncertainties that we attempt
to articulate for investors and securities analysts. We may fail
to accurately forecast our future total revenue or license
revenue due to a number of factors, including changes in
customer demand, economic conditions, the timing and terms of
large transactions with customers, competitive pressures,
fluctuations in the total revenue and license revenue of our
geographic regions, our ability to execute on our business
strategy and sales strategies, a low number of quota bearing
sales representatives experienced with our solutions, software
products and sales processes, the timing and amount of revenue
from acquired technologies or businesses, delays in the
availability of new products or new releases of existing
products, changes that we may make in our business, operations
and infrastructure, seasonal factors or major, unanticipated
events.
We also may experience delays or declines in expected total
revenue or license revenue due to patterns in the capital
budgeting and purchasing cycles of our current and prospective
customers, purchasing practices and requirements of prospective
customers, including contract provisions or contingencies they
may request, changes in demand for our software and services,
changes that we may make in our business or operations, economic
uncertainties, geopolitical developments or uncertainties,
travel limitations, terrorist acts or other major unanticipated
events. These periods of slower or no growth may lead to lower
total revenue or license revenue or both, which could cause
fluctuations in our quarterly operating results. In addition,
variations in sales cycles may have an impact on the timing of
our recognition of license revenue, which in turn could cause
our quarterly total revenue and operating results to fluctuate.
To successfully sell our software and services, we generally
must educate our potential customers regarding their use and
benefits, which can require significant time and resources. Any
misperception by us in the needs of our customers and
prospective customers or any delay in sales of our software and
services could cause our revenue and operating results to vary
significantly from our prior public forecasts. Any failure to
achieve our prior public forecasts could cause us to fail to
satisfy the expectations of investors or securities analysts,
which could have a significant adverse effect on the market
price of webMethods’ common stock.
The market price of webMethods’ common stock
fluctuates as a result of factors other than our quarterly total
revenue, license revenue and operating results, including
actions taken by or performance of our competitors, estimates
and recommendations of securities analysts, industry volatility
and changes to accounting rules.
The market price for webMethods’ common stock has
experienced significant fluctuation over the years and may
continue to do so. From our initial public offering in February
2000 until June 13, 2005, the closing price of
webMethods’ stock on the Nasdaq National Market has ranged
from a high of $308.06 to a low of $3.96. In addition to our
quarterly total revenue, license revenue or operating results,
this volatility in the market price for webMethods’ common
stock may be affected by a number of other factors, including:
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• |
the overall volatility of the stock market, particularly the
stock prices of software and technology companies; |
15
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• |
fluctuation in the levels of total revenue, license revenue and
operating results of competitors; |
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• |
changes in securities analysts’ estimates and
recommendations with respect to webMethods’ common stock or
our industry; |
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• |
rapid developments within our industry; and |
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• |
changes to accounting rules. |
If any of these market or industry-based factors has a
significant negative impact on the market price for
webMethods’ common stock, investors could lose all or part
of their investment, regardless of our actual operating
performance.
Our markets are highly competitive, and we may not compete
effectively.
The markets for business integration solutions, SOA
capabilities, BAM and BPM solutions and CAF capabilities are
rapidly changing and intensely competitive. There are a variety
of methods available to integrate software applications, monitor
and optimize business processes and workflows, provide SOA,
enable Web services and provide customers the capabilities to
run, manage and optimize their enterprise. We expect that
competition will remain intense as the number of entrants and
new technologies increases. We do not know if our markets will
widely adopt and deploy our SOA technology, our webMethods
Fabric product suite or other solutions we offer or have
announced. If our technology, software and solutions are not
widely adopted by our markets or if we are not able to compete
effectively against current or future competitors, our business,
operating results and financial condition may be harmed.
Our current and potential competitors include, among others,
large software vendors; companies that develop their own
integration software or Web services technology; business
integration software vendors; electronic data interchange
vendors; vendors of proprietary enterprise application
integration; vendors of portal products; and application server
vendors. We also face competition from providers of various
technologies to enable Web services. Further, we face
competition for some aspects of our software and service
offerings from major system integrators, both independently and
in conjunction with corporate in-house information technology
departments, which have traditionally been the prevalent
resource for application integration. In addition, application
software vendors with whom we have or had strategic
relationships sometimes offer competitive solutions or may
become or are competitors. Some of our competitors or potential
competitors may have more experience developing technologies or
solutions competitive with ours, larger technical staffs, larger
customer bases, more established distribution channels, greater
brand recognition and greater financial, marketing and other
resources than we do. Our competitors may be able to develop
products and services that are superior to our solutions, that
achieve greater customer acceptance or that have significantly
improved functionality or performance as compared to our
existing solutions and future software and services. In
addition, negotiating and maintaining favorable customer and
strategic relationships is critical to our business. Our
competitors may be able to negotiate strategic relationships on
more favorable terms than we are able to negotiate or may
preclude us from entering into or continuing strategic
relationships. Many of our competitors may also have
well-established relationships with our existing and prospective
customers. Increased competition may result in reduced margins,
loss of sales, decreased market share or longer sales cycles or
sales processes involving more extensive demonstrations of
product capabilities, which in turn could harm our business,
operating results and financial condition.
Economic conditions could adversely affect our revenue
growth and cause us not to achieve our forecasts of license
revenue and total revenue.
Our ability to achieve revenue growth and profitability of our
business depends on the overall demand for business integration
and optimization software and services. Our business depends on
overall economic conditions, the economic and business
conditions in our target markets and the spending environment
for information technology projects, and specifically for
business integration and optimization solutions, in those
markets. A weakening of the economy in one or more of our
geographic regions, unanticipated major
16
events and economic uncertainties may make more challenging the
spending environment for our software and services, reduce
capital spending on information technology projects by our
customers and prospective customers, result in longer sales
cycles for our software and services or cause customers or
prospective customers to be more cautious in undertaking larger
license transactions. Those situations may cause a decrease in
our license revenue and total revenue. A decrease in demand for
our software and services caused, in part, by a continued
weakening of the economy, domestically or internationally, may
result in a decrease in our revenue and growth rates. In that
event, we could fail to achieve our prior public forecasts of
revenue and operating results or otherwise fail to satisfy the
expectations of investors or securities analysts, which could
have a significant adverse effect on the market price of
webMethods’ common stock.
We rely on strategic alliances with major system
integrators and other similar relationships to promote and
implement our software.
We have established strategic relationships with system
integration partners and others. These strategic partners
provide us with important sales and marketing opportunities,
create opportunities to license our solutions, and greatly
increase our implementation capabilities. We also have similar
relationships with resellers, distributors and other technology
leaders. During our fiscal year 2005, our systems integrator
partners directly or indirectly influenced a significant portion
of our license revenue, and we expect that leverage to continue
in future periods. If our relationships with our strategic
business partners diminish or terminate or if we fail to work
effectively with our partners or to grow our base of strategic
partners, resellers and distributors, we might lose important
opportunities, including sales and marketing opportunities, our
business may suffer and our financial results could be adversely
impacted. Our partners often are not required to market or
promote our software and generally are not restricted from
working with vendors of competing software or solutions or
offering their own solutions providing similar capabilities.
Accordingly, our success will depend on their willingness and
ability to devote sufficient resources and efforts to marketing
our software and solutions rather than the products of
competitors or that they offer themselves. If these
relationships are not successful or if they terminate, our
revenue and operating results could be materially adversely
affected, our ability to increase our penetration of our markets
could be impaired, we may have to devote substantially more
resources to the distribution, sales and marketing,
implementation and support of our software than we would
otherwise, and our efforts may not be as effective as those of
our partners, which could harm our business, our operating
results and the market price of webMethods’ common stock.
We have a history of operating losses, and our failure to
achieve and sustain profitability may impact our prospect of
achieving our growth targets and may have a material adverse
effect on the market price of webMethods’ common
stock.
During much of our history, we have sustained losses from
operations. For a number of reasons described in other factors
listed here, we may not be able to achieve our anticipated
levels of total revenue and license revenue or to control our
operating expenses, which could prevent us from achieving our
forecasts of operating results, including returning to and
sustaining profitability on a GAAP basis. That situation could
have a material adverse effect on the market price of
webMethods’ common stock. Further, the expensing of stock
options in the future could add significant costs that may
impede or delay our ability to return to and maintain
profitability on a GAAP basis. If we do not generate sufficient
revenue to achieve and maintain income from operations, our
growth could be limited unless we are willing to incur operating
losses that may be substantial and are able to fund those
operating losses from our available assets or, if necessary,
from the sale of additional capital through public or private
equity or debt financings.
17
The Sarbanes-Oxley Act of 2002 requires that we undertake
periodic evaluations of our internal control over financial
reporting, which may identify material weaknesses that could
harm our reputation and impact the market price of
webMethods’ common stock.
The Sarbanes-Oxley Act of 2002 requires that our management
establish and maintain internal control over financial reporting
and periodically assess the effectiveness of our internal
control over financial reporting and report the results of such
assessment. Our management recently assessed the effectiveness
of our internal control over financial reporting at
March 31, 2005 and concluded, based upon their assessment,
that our internal control over financial reporting was effective
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. We cannot predict the outcome of our
assessments in future periods. If our management concludes in
the future that our internal control over financial reporting is
not effective due to material weakness, we expect that we must
then change our internal control over financial reporting to
remediate such material weakness. In that situation, investors
and stock analysts may lose confidence in the reliability of our
financial statements, we may not be successful in effecting the
necessary remediation and we may be subject to investigation or
sanctions by regulatory authorities. We also expect that we will
continue to identify areas of internal control over financial
reporting that require improvement, and that we will continue to
enhance processes and controls to address those issues, which
will involve additional expense and diversion of
management’s time and may impact our results of operations.
Our disclosure controls and procedures and our internal
control over financial reporting may not be effective to detect
all errors or to detect and deter wrongdoing, fraud or improper
activities in all instances.
While we believe we currently have adequate internal control
over financial reporting, our management does not expect that
our disclosure controls and procedures or our internal control
over financial reporting will prevent all errors and fraud. In
designing our control systems, management recognizes that any
control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance of achieving
the desired control objectives. Further the design of a control
system must reflect the necessity of considering the
cost-benefit relationship of possible controls and procedures.
Because of inherent limitations in any control system, no
evaluation of controls can provide absolute assurance that all
control issues and instances of wrongdoing, if any, that may
affect our operations have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty, that breakdowns can occur because
of simple error or mistake and that controls may be circumvented
by individual acts by some person, by collusion of two or more
people or by management’s override of the control. The
design of any control system also is based in part upon certain
assumptions about the likelihood of a potential future event,
and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Because of the inherent limitations in
cost-effective control systems, misstatements due to error or
wrongdoing may occur and not be detected. Over time, it is also
possible that controls may become inadequate because of changes
in conditions that could not be, or were not, anticipated at
inception or review of the control systems. Any breakdown in our
control systems, whether or not foreseeable by management, could
cause investors to lose confidence in the accuracy of our
financial reporting and may have an adverse impact on the market
price for webMethods’ common stock.
If we fail to attract and retain key executive officers
and other key personnel who are essential to our business, our
ability to execute effectively on our business strategy or our
results of operations or financial condition may be adversely
affected.
Our success depends upon the continued service of key employees
who are essential to our business, including our executive
officers. None of our current executive officers or key
employees is bound by an employment agreement for any specific
term. In October 2004, our former chairman and chief executive
officer, Phillip Merrick, resigned, and David Mitchell became
our President and CEO and a member of our Board of Directors. In
May 2005, our former chief financial officer, Mary Dridi,
resigned from that
18
position, and we are currently conducting a search for a new
chief financial officer. We are uncertain as to the ultimate
impact of these departures; however, the loss of any key
executive officers or key employees could potentially impede our
ability to execute effectively on our business strategy and
could also potentially harm our operating results or financial
condition. Our future success will also depend in large part on
our ability to attract and retain qualified executives and
experienced technical, sales, professional services, marketing
and management personnel.
Third-party claims that we infringe upon their
intellectual property rights may be costly to defend and could
damage our business.
We cannot be certain that our software products and services do
not infringe issued patents, copyrights, trademarks or other
intellectual property rights of third parties. Litigation
regarding intellectual property rights is common in the software
industry, and we have been subject to, and may be increasingly
subject to, legal proceedings and claims from time to time,
including claims of alleged infringement of intellectual
property rights of third parties by us or our licensees
concerning their use of our software products, technologies and
services. Although we believe that our intellectual property
rights are sufficient to allow us to market our software without
incurring liability to third parties, third parties have
brought, and may bring in the future, claims of infringement
against us or our licensees. Because our software products are
integrated with our customers’ networks and business
processes, as well as other software applications, third parties
may bring claims of infringement against us, as well as our
customers and other software suppliers, if the cause of the
alleged infringement cannot easily be determined. We have
agreed, and may agree in the future, to indemnify certain of our
customers against claims that our software products infringe
upon the intellectual property rights of others. Furthermore,
former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or
proprietary information to us. Such claims may be with or
without merit.
Claims of alleged infringement, regardless of merit, may have a
material adverse effect on our business in a number of ways.
Claims may discourage potential customers from doing business
with us on acceptable terms, if at all. Litigation to defend
against claims of infringement or contests of validity may be
very time-consuming and may result in substantial costs and
diversion of resources, including our management’s
attention to our business. In addition, in the event of a claim
of infringement, we, as well as our customers, may be required
to obtain one or more licenses from third parties, which may not
be available on acceptable terms, if at all. Furthermore, a
party making such a claim could secure a judgment that requires
us to pay substantial damages, and also include an injunction or
other court order that could prevent us from selling some or all
of our software products or require that we re-engineer some or
all of our software products. Certain customers have been
subject to such claims and litigation in the past, and we or
other customers may in the future be subject to additional
claims and litigation. We have settled one such claim and may in
the future settle any other such claims with which we may be
involved, regardless of merit, to avoid the cost and uncertainty
of continued litigation. Defense of any lawsuit or failure to
obtain any such required licenses could significantly harm our
business, operating results and financial condition and the
price of webMethods’ common stock. Although we carry
general liability insurance, our current insurance coverage may
not apply to, and likely would not protect us from, all
liability that may be imposed under these types of claims. Our
current insurance programs do not cover claims of patent
infringement.
If we are unable effectively to protect our intellectual
property, we may lose a valuable asset, experience reduced
market share or incur costly litigation to protect our
rights.
Our success depends, in part, upon our proprietary technology
and other intellectual property rights. To date, we have relied
primarily on a combination of copyright, trade secret, trademark
and patent laws, and nondisclosure and other contractual
restrictions on copying and distribution to protect our
proprietary technology. We have one patent and several pending
patent applications for technology related to our software, but
we cannot assure you that this patent is valid or that these
applications will be successful. A small number of our
agreements with customers and system integrators contain
provisions regarding the
19
rights of third parties to obtain the source code for our
software, which may limit our ability to protect our
intellectual property rights in the future. Despite our efforts
to protect our proprietary rights, unauthorized parties may copy
aspects of our software and obtain and use information that we
regard as proprietary. Competitors may use such information to
enhance their own products or to create similar technology which
directly competes with our products, potentially diminishing our
market share. In addition, other parties may breach
confidentiality agreements or other protective contracts we have
entered into, and we may not be able to enforce our rights in
the event of these breaches. Furthermore, we expect to continue
increasing our international operations in the future, and the
laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws
of the United States.
Our means of protecting our intellectual property rights in the
United States or abroad may not effectively protect our
intellectual property rights. Litigation to enforce our
intellectual property rights or protect our trade secrets could
result in substantial costs, may not result in timely relief and
may not be successful. Any inability to protect our intellectual
property rights could seriously harm our business, operating
results and financial condition.
Our business strategy contemplates possible future
acquisitions of companies or technologies that may result in
disruptions to our business, integration difficulties, increased
debt or contingent liabilities, dilution to our stockholders or
other adverse effects on future financial results.
We may make investments in, or acquisitions of, technology,
products or companies in the future to maintain or improve our
competitive position. We may not be able to identify future
suitable acquisition or investment candidates, and even if we
identify suitable candidates, may not be able to make these
acquisitions or investments on commercially acceptable terms, or
at all. With respect to potential future acquisitions, we may
not be able to realize future benefits we expected to achieve at
the time of entering into the transaction, or our recognition of
those benefits may be delayed. In such acquisitions, we will
likely face many or all of the risks inherent in integrating
corporate cultures, product lines, operations and businesses. We
will be required to train our sales, professional services and
customer support staff with respect to acquired software
products, which can detract from executing against goals in the
current period, and we may be required to modify priorities of
our product development, customer support, systems engineering
and sales organizations. Further, we may have to incur debt or
issue equity securities to pay for any future acquisitions or
investments, the issuance of which could be dilutive to our
stockholders.
Treating stock options and employee stock purchase plan
participation as a compensation expense could significantly
impair our ability to return to and sustain profitability on a
GAAP basis, and may affect our ability to attract and retain key
personnel.
The Financial Accounting Standards Board has adopted SFAS 123R,
“Share-Based Payment,” which will require us to
measure compensation cost for all share-based payments (such as
employee stock options and participation in our employee stock
purchase plan) and record such compensation costs in our
consolidated financial statements beginning in our three month
period ending June 30, 2006. We grant stock options to our
employees, officers and directors and we administer an employee
stock purchase plan (“ESPP”). Information on our stock
option plan and ESPP, including the shares reserved for issuance
under those plans, the terms of options granted, the terms of
ESPP participation, and the shares subject to outstanding stock
options, is included in Note 14 of the Notes to Consolidated
Financial Statements of webMethods, Inc. included in this
Form 10-K. Although we have not completed our evaluation of
the impact of SFAS 123R, we expect that it will have a material
adverse impact on our results of operations by increasing our
operating expenses and reducing our net income and earnings per
share, which we expect to significantly impair our ability to
return to and sustain profitability on a GAAP basis. That impact
could have a material adverse effect on the market price of
webMethods’ common stock. In addition, to the extent SFAS
123R makes it more difficult or costly to issue stock option
grants to our executive officers and employees, we may be forced
to alter our stock-based compensation plans in ways that reduce
potential benefits to our employees and impede our ability to
attract, retain and motivate executive officers and key
personnel, which could adversely affect our business.
20
If we are unable to adapt and enhance our software
products to meet rapid technological changes, to provide desired
product interfaces or to conform to new industry standards, we
could lose partners, customers and future revenue
opportunities.
We expect that the rapid evolution of business integration and
optimization software and related standards and technologies and
protocols, as well as general technology trends such as changes
in or introductions of operating systems or enterprise
applications, will require us to adapt our software and
solutions to remain competitive. Our software and solutions
could become obsolete, unmarketable or less desirable to
prospective customers if we are unable to adapt to new
technologies or standards or if we fail to adapt our products to
new platforms or provide desired product interfaces. If our
software ceases to demonstrate technology leadership, conform to
industry standards, adapt to new platforms or develop and
maintain adapters or interfaces to popular products, we may have
to increase our product development costs and divert our product
development resources to address the issues. In addition,
because our customers, prospective customers and certain
partners depend on our adapting and enhancing of our software
products to meet technological changes and to conform to new
industry standards, any failure or perceived failure by us to do
so could result in potential losses of customers, prospective
customers, partners and future revenue opportunities.
Our business may be adversely impacted if we do not
provide professional services to implement our solutions or if
we are unable to establish and maintain relationships with
third-party implementation providers.
Customers that license our software typically engage our
professional services staff or third-party consultants to assist
with product implementation, training and other professional
consulting services, and we believe our strong focus on ensuring
that our software is successfully put into production is a
strong competitive advantage and differentiator. We believe that
many of our software sales depend, in part, on our ability to
provide our customers with these services and to attract and
educate third-party consultants to provide similar services. New
professional services personnel and service providers require
training and education and take time and significant resources
to reach full productivity. Competition for qualified personnel
and service providers is intense within our industry. Our
business may be harmed if we are unable to provide professional
services to our customers to effectively implement our solutions
of if we are unable to establish and maintain relationships with
third-party implementation providers.
We may face product liability claims, damage to the
reputation of our software and a loss of revenue if our software
products fail to perform as intended or contain significant
defects.
Our software products are complex, and significant defects may
be found during the period immediately following introduction of
new software or enhancements to existing software or in product
implementations in varied information technology environments.
Internal quality assurance testing and customer testing may
reveal product performance issues or desirable feature
enhancements that could lead us to reallocate product
development resources or postpone the release of new versions of
our software. The reallocation of resources or any postponement
could cause delays in the development and release of future
enhancements to our currently available software, require
significant additional professional services work to address
operational issues, damage the reputation of our software in the
marketplace and result in potential loss of revenue. Although we
attempt to resolve all errors that we believe would be
considered serious by our partners and customers, our software
is not error-free. Undetected errors or performance problems may
be discovered in the future, and known errors that we consider
minor may be considered serious by our partners and customers.
This could result in lost revenue or delays in customer
deployment and would be detrimental to our reputation, which
could harm our business, operating results and financial
condition. If our software experiences performance problems or
ceases to demonstrate technology leadership, we may have to
increase our product development costs and divert our product
development resources to address the problems. In addition,
because our customers and certain partners depend on our
software for their critical systems and business functions, any
interruptions in operation of our software or
21
solutions could cause our customers and certain partners to
initiate warranty or product liability suits against us.
Our financial statements may in the future be impacted by
improper activities of our personnel.
As we have recently experienced with our restatements for the
fiscal year ended March 31, 2004 and the three months ended
June 30, 2004, our financial statements can be adversely
impacted by our employees’ improper activities and
unauthorized actions and their concealment of their activities.
For instance, revenue recognition depends upon the terms of our
agreements with our customers, among other things. Our personnel
may act outside of their authority, such as by negotiating
additional terms or modifying terms without the knowledge of
management that could impact our ability to recognize revenue in
a timely manner, and they could commit us to obligations or
arrangements that may have a serious financial impact to our
results of operations or financial condition. In addition,
depending upon when we learn of any such improper activities or
unauthorized actions, we may have to restate our financial
statements for a previously reported period, which could have a
significant adverse impact on our business, operating results
and financial condition. We have implemented, and are
implementing, new or additional steps to prevent such conduct,
but we cannot be certain that these new or additional controls
will be effective in deterring all improper conduct by our
personnel.
We intend to continue expanding our international sales
efforts, which could subject us to greater uncertainties and
additional risk.
We have been, and intend to continue, expanding our
international sales efforts. We have somewhat limited experience
in marketing, selling and supporting our software and services
in certain international markets. Expansion of our international
operations will require a significant amount of attention from
our management and substantial financial resources. If we are
unable to continue expanding our international operations
successfully and in a timely manner, our business and operating
results could be harmed. In addition, doing business
internationally involves additional risks, particularly: the
difficulties and costs of staffing and managing foreign
operations; the difficulty of ensuing adherence to our revenue
recognition and other policies; the difficulty of monitoring and
enforcing internal controls and disclosure controls; unexpected
changes in regulatory requirements, business practices, taxes,
trade laws and tariffs; differing intellectual property rights;
differing labor regulations; and changes in a specific
country’s or region’s political or economic conditions.
We currently do not engage in any currency hedging transactions.
Our foreign sales generally are invoiced in the local currency,
and, as we expand our international operations or if there is
continued volatility in exchange rates, our exposure to gains
and losses in foreign currency transactions may increase when we
determine that foreign operations are expected to repay
intercompany debt in the foreseeable future. Moreover, the costs
of doing business abroad may increase as a result of adverse
exchange rate fluctuations. For example, if the United States
dollar declines in value relative to a local currency and we are
funding operations in that country from our U.S. operations, we
could be required to pay more for salaries, commissions, local
operations and marketing expenses, each of which is paid in
local currency. In addition, exchange rate fluctuations,
currency devaluations or economic crises may reduce the ability
of our prospective customers to purchase our software and
services.
Because our software could interfere with the operations
of our partners’ and customers’ other network and
software applications, we may be subject to potential product
liability and warranty claims by these partners and
customers.
Our software enables customers’ and certain partners’
software applications to provide Web services, or to integrate
with networks and software applications, and is often used for
mission critical functions or applications. Errors, defects or
other performance problems in our software or failure to provide
technical support could result in financial or other damages to
our partners and customers. Partners and customers could seek
damages for losses from us, which, if successful, could have a
material adverse effect on our business, operating results or
financial condition. In addition, the failure of our software
and solutions to
22
perform to partners’ and customers’ expectations could
give rise to warranty claims. Although our license agreements
typically contain provisions designed to limit our exposure to
potential product liability claims, existing or future laws or
unfavorable judicial decisions could negate these limitation of
liability provisions. Although we have not experienced any
product liability claims to date, sale and support of our
software entail the risk of such claims. The use of our software
to enable partners’ and customers’ software
applications to provide Web services, and the integration of our
software with our partners’ and customers’ networks
and software applications, increase the risk that a partner or
customer may bring a lawsuit against several suppliers if an
integrated computer system fails and the cause of the failure
cannot easily be determined. Even if our software is not at
fault, a product liability claim brought against us, even if not
successful, could be time consuming and costly to defend and
could harm our reputation. In addition, although we carry
general liability insurance, our current insurance coverage
would likely be insufficient to protect us from all liability
that may be imposed under these types of claims.
We may not have sufficient resources available to us in
the future to take advantage of certain opportunities,
potentially harming our operating results and financial
condition.
In the future, we may not have sufficient resources available to
us to take advantage of growth, acquisition, product development
or marketing opportunities. We may need to raise additional
funds in the future through public or private debt or equity
financings in order to: take advantage of opportunities,
including more rapid international expansion or acquisitions of
complementary businesses or technologies; developing new
software or services; or responding to competitive pressures.
Additional financing needed by us in the future may not be
available on terms favorable to us, if at all. If adequate funds
are not available, not available on a timely basis, or are not
available on acceptable terms, we may not be able to take
advantage of opportunities, develop new software or services or
otherwise respond to unanticipated competitive pressures. In
such case, our business, operating results and financial
condition could be harmed.
Some provisions of the Delaware General Corporation Law,
our certificate of incorporation and our bylaws, as well as our
stockholder rights plan, may deter potential acquisition bids,
discourage changes in our management or Board of Directors and
have anti-takeover effects.
The certificate of incorporation, as amended, of webMethods and
our bylaws contain certain provisions, as does the Delaware
General Corporation Law, which may discourage, delay or prevent
a change of control of webMethods or a change in our management
or Board of Directors, including through a proxy contest. In
addition, our Board of Directors in 2001 adopted a rights plan
and declared a dividend distribution of one right for each
outstanding share of webMethods’ common stock. Each right,
when exercisable, entitles the registered holder to purchase
certain securities at a specified purchase price, subject to
adjustment. The rights plan may have the anti-takeover effect of
causing substantial dilution to a person or group that attempts
to acquire webMethods on terms not approved by our Board of
Directors. The existence of the rights plan and the other
provisions of the Delaware General Corporation Law, our
certificate of incorporation and our bylaws could limit the
price that certain investors might be willing to pay in the
future for share of webMethods’ common stock, could
discourage, delay or prevent a merger or acquisition of
webMethods that stockholders may consider favorable and could
make it more difficult for a third party to acquire us without
the support of our Board of Directors, even if doing so would be
beneficial to our stockholders.
Costs of legal investigations and regulatory compliance
matters may increase our operating expenses and impact our
operating results.
The investigation by our Audit Committee concerning certain
activities of personnel in our Japanese subsidiary, as well as
the investigation and resolution of a personnel matter, have
resulted in significant expense and management time and
attention, and we anticipate that we will incur additional
expense relating to the ongoing informal investigation by the
Securities and Exchange Commission. Further investigations or
any future legal compliance or regulatory compliance matters
could significantly increase
23
expense and demands on management time and attention, thereby
potentially adversely impacting our operating results, which
could materially impact the market price of webMethods’
common stock. In addition, we have incurred and will continue to
incur significant additional expense related to our efforts to
comply with the rules and regulations enacted pursuant to the
Sarbanes-Oxley Act of 2002.
Item 2. PROPERTIES
Our principal administrative, sales, marketing and research and
development facility is located in Fairfax, Virginia, and
consists of approximately 106,000 square feet of office space
held under a lease that expires in March 2016. We maintain
offices for sales and research and development in Sunnyvale,
California, Denver, Colorado and Bellevue, Washington and a
development center in Bangalore, India. We also maintain small
offices for sales, professional services and other personnel in
the United States in California, Colorado, Georgia, Illinois,
Indiana, Massachusetts, Michigan, Minnesota, New York, New
Jersey, North Carolina, Ohio, Pennsylvania and Texas. We
maintain offices outside the United States for sales,
professional services and other personnel in Australia, Belgium,
Canada, Hong Kong, France, Germany, Italy, Japan, Malaysia, the
Netherlands, Peoples Republic of China, Singapore, South Korea,
Spain, Sweden, Switzerland, Taiwan and the United Kingdom.
We provide customer technical support from our facilities in
Virginia and California in the United States and in Australia,
Japan and the Netherlands. We regularly evaluate the suitability
and adequacy of our existing facilities and the availability of
space for facilities in new locations, and we believe that
suitable space for new, replacement or expanded facilities, as
needed, generally will be available on commercially reasonable
terms.
Item 3. LEGAL
PROCEEDINGS
A purported class action lawsuit was filed in the U.S. District
Court for the Southern District of New York in 2001 that named
webMethods, several of our executive officers at the time of our
initial public offering (IPO) and the managing underwriters
of our initial public offering as defendants. This action made
various claims, including that alleged actions by underwriters
of webMethods’ IPO were not disclosed in the registration
statement and final prospectus for webMethods’ IPO or
disclosed to the public after webMethods’ IPO, and sought
unspecified damages on behalf of a purported class of purchasers
of webMethods’ common stock between February 10, 2000
and December 6, 2000. This action was consolidated with similar
actions against more than 300 companies as part of In Re Initial
Public Offering Securities Litigation. Claims against
webMethods’ executive officer defendants have been
dismissed without prejudice. A proposed settlement, which would
settle all claims against webMethods, has been submitted to the
court for preliminary approval. Under the proposed settlement,
the plaintiffs would dismiss and release their claims against
webMethods in exchange for a contingent payment guaranty by the
insurance companies collectively responsible for insuring the
issuers in the consolidated action and assignment or surrender
to the plaintiffs by the settling issuers of certain claims that
may be held against the underwriter defendants. We believe that
any material liability on behalf of webMethods or its executive
officers that may accrue under that settlement offer would be
covered by our insurance policies.
From time to time, webMethods is involved in other disputes and
litigation in the normal course of business.
Item 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
24
PART II
|
|
| Item 5. |
MARKET FOR REGISTRANT’S COMMON STOCK, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
webMethods’ common stock has been publicly traded on the
Nasdaq National Market under the symbol “WEBM” since
our initial public offering on February 11, 2000. The high and
low sales prices of webMethods common stock as reported by the
Nasdaq National Market during the last two fiscal years are
shown below:
| |
|
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
Year ended March 31, 2004:
|
|
|
|
|
|
|
|
|
| |
First Quarter (ended June 30, 2003)
|
|
$ |
10.91 |
|
|
$ |
8.02 |
|
| |
Second Quarter (ended September 30, 2003)
|
|
|
10.25 |
|
|
|
7.24 |
|
| |
Third Quarter (ended December 31, 2003)
|
|
|
10.15 |
|
|
|
7.41 |
|
| |
Fourth Quarter (ended March 31, 2004)
|
|
|
12.17 |
|
|
|
8.76 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
Year ended March 31, 2005:
|
|
|
|
|
|
|
|
|
| |
First Quarter (ended June 30, 2004)
|
|
$ |
10.80 |
|
|
$ |
7.85 |
|
| |
Second Quarter (ended September 30, 2004)
|
|
|
8.57 |
|
|
|
3.94 |
|
| |
Third Quarter (ended December 31, 2004)
|
|
|
7.50 |
|
|
|
5.25 |
|
| |
Fourth Quarter (ended March 31, 2005)
|
|
|
7.30 |
|
|
|
5.25 |
|
As of June 10, 2005, there were approximately 360 holders
of record, and approximately 12,600 beneficial owners, of
webMethods common stock. The number of holders of record of
webMethods common stock does not reflect the number of
beneficial holders whose shares are held by depositories,
brokers or other nominees. As of June 10, 2005, the closing
price of webMethods’ common stock was $5.07.
webMethods has never declared or paid any cash dividends on its
common stock. We currently intend to retain earnings, if any, to
support our growth strategy and do not anticipate paying cash
dividends in the foreseeable future.
25
Item 6. SELECTED FINANCIAL
DATA
The following selected historical consolidated financial data
for webMethods should be read in conjunction with the
Consolidated Financial Statements and notes thereto and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which are included
elsewhere in this report. The historical consolidated statement
of operations data for the years ended March 31, 2005, 2004
and 2003 and the historical consolidated balance sheet data as
of March 31, 2005 and 2004 are derived from the
consolidated financial statements of webMethods, which have been
audited by PricewaterhouseCoopers LLP, independent registered
public accounting firm for webMethods, and are included
elsewhere in this report. The historical consolidated statement
of operations data for the years ended March 31, 2002 and
2001 and the historical consolidated balance sheet data as of
March 31, 2003, 2002 and 2001 are derived from audited
consolidated financial statements of webMethods not contained in
this report. Historical results are not necessarily indicative
of future results.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
License
|
|
$ |
86,800 |
|
|
$ |
92,740 |
|
|
$ |
117,066 |
|
|
$ |
121,803 |
|
|
$ |
143,514 |
|
| |
Professional services
|
|
|
49,218 |
|
|
|
43,634 |
|
|
|
33,378 |
|
|
|
35,800 |
|
|
|
34,945 |
|
| |
Maintenance
|
|
|
64,583 |
|
|
|
53,167 |
|
|
|
46,310 |
|
|
|
38,393 |
|
|
|
23,498 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total revenue
|
|
|
200,601 |
|
|
|
189,541 |
|
|
|
196,754 |
|
|
|
195,996 |
|
|
|
201,957 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization of intangibles
|
|
|
2,397 |
|
|
|
1,199 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
License
|
|
|
1,252 |
|
|
|
2,211 |
|
|
|
1,937 |
|
|
|
2,335 |
|
|
|
5,189 |
|
| |
Professional services and maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
56 |
|
|
|
251 |
|
|
|
436 |
|
|
|
1,188 |
|
| |
|
Other professional services and maintenance
|
|
|
56,954 |
|
|
|
53,457 |
|
|
|
41,937 |
|
|
|
42,124 |
|
|
|
46,304 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total cost of revenue
|
|
|
60,603 |
|
|
|
56,923 |
|
|
|
44,125 |
|
|
|
44,895 |
|
|
|
52,681 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
139,998 |
|
|
|
132,618 |
|
|
|
152,629 |
|
|
|
151,101 |
|
|
|
149,276 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation and warrant charge
|
|
|
2,645 |
|
|
|
2,769 |
|
|
|
3,761 |
|
|
|
2,865 |
|
|
|
4,813 |
|
| |
|
Other sales and marketing costs
|
|
|
81,668 |
|
|
|
91,664 |
|
|
|
92,958 |
|
|
|
106,377 |
|
|
|
100,154 |
|
| |
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
15 |
|
|
|
97 |
|
|
|
12,526 |
|
|
|
12,447 |
|
| |
|
Other research and development costs
|
|
|
44,518 |
|
|
|
45,045 |
|
|
|
47,441 |
|
|
|
49,634 |
|
|
|
45,158 |
|
| |
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
7 |
|
|
|
47 |
|
|
|
433 |
|
|
|
1,640 |
|
| |
|
Other general and administrative costs
|
|
|
25,042 |
|
|
|
17,873 |
|
|
|
17,831 |
|
|
|
19,372 |
|
|
|
20,837 |
|
| |
Restructuring and related charges
|
|
|
5,849 |
|
|
|
3,920 |
|
|
|
2,155 |
|
|
|
7,243 |
|
|
|
— |
|
| |
Acquisition related expenses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34,039 |
|
| |
Amortization of goodwill and intangibles
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38,697 |
|
|
|
41,395 |
|
| |
In-process research and development
|
|
|
— |
|
|
|
4,284 |
|
|
|
— |
|
|
|
— |
|
|
|
34,910 |
|
| |
Settlement of intellectual property matter
|
|
|
— |
|
|
|
2,250 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total operating expenses
|
|
|
159,722 |
|
|
|
167,827 |
|
|
|
164,290 |
|
|
|
237,147 |
|
|
|
295,393 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(19,724 |
) |
|
|
(35,209 |
) |
|
|
(11,661 |
) |
|
|
(86,046 |
) |
|
|
(146,117 |
) |
|
Interest income
|
|
|
2,487 |
|
|
|
2,851 |
|
|
|
4,732 |
|
|
|
9,116 |
|
|
|
14,894 |
|
|
Interest expense
|
|
|
(98 |
) |
|
|
(205 |
) |
|
|
(674 |
) |
|
|
(553 |
) |
|
|
(503 |
) |
|
Other income (expense)
|
|
|
(124 |
) |
|
|
(461 |
) |
|
|
18 |
|
|
|
(26 |
) |
|
|
112 |
|
|
Impairment of equity investments in private companies
|
|
|
(1,057 |
) |
|
|
— |
|
|
|
(1,000 |
) |
|
|
(5,200 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(18,516 |
) |
|
|
(33,024 |
) |
|
|
(8,585 |
) |
|
|
(82,709 |
) |
|
|
(131,614 |
) |
|
Provision for income taxes
|
|
|
235 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(18,751 |
) |
|
|
(33,024 |
) |
|
|
(8,585 |
) |
|
|
(82,709 |
) |
|
|
(131,614 |
) |
|
Basic and diluted net loss per share
|
|
$ |
(0.35 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.17 |
) |
|
$ |
(1.67 |
) |
|
$ |
(2.81 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
53,103 |
|
|
|
52,137 |
|
|
|
51,282 |
|
|
|
49,493 |
|
|
|
46,860 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term and long-term marketable
securities available for sale
|
|
$ |
150,054 |
|
|
$ |
155,947 |
|
|
$ |
201,626 |
|
|
$ |
211,842 |
|
|
$ |
206,389 |
|
|
Working capital
|
|
|
108,340 |
|
|
|
93,692 |
|
|
|
149,424 |
|
|
|
178,909 |
|
|
|
190,722 |
|
|
Total assets
|
|
|
275,344 |
|
|
|
283,650 |
|
|
|
304,436 |
|
|
|
324,063 |
|
|
|
375,288 |
|
|
Long-term liabilities
|
|
|
9,884 |
|
|
|
7,439 |
|
|
|
7,267 |
|
|
|
21,653 |
|
|
|
25,409 |
|
|
Total stockholders’ equity
|
|
|
184,532 |
|
|
|
197,137 |
|
|
|
218,559 |
|
|
|
215,544 |
|
|
|
265,609 |
|
|
|
| Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
This item of our Annual Report on Form 10-K 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. A cautionary paragraph at the very beginning of
Item 1, “Business”, of this report provides
examples of forward-looking statements and indications of
forward-looking statements. 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 this report 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.
OVERVIEW
Background
webMethods is a leading provider of business integration and
optimization software. Our solutions enable organizations to
deliver strategic applications to the business faster while
allowing them to understand what is happening with their
business in real-time and to predict what can be expected to
happen. webMethods calls this Business Process Productivity. We
use the term “Business Process Productivity” to
describe the desire of organizations to increase the efficiency
of their activities, improve the ability of the enterprise to
adapt to changing market conditions, and create competitive
advantage through a focus on the business processes that run
their organizations. We believe that our primary offering, the
webMethods Fabric product suite, is the only business
integration and optimization suite on the market developed
specifically to address the diverse and comprehensive
requirements to achieve business process productivity.
webMethods Fabric gives customers the ability to integrate,
assemble, and optimize their mission critical business
processes. webMethods Fabric does this by helping organizations
link their enterprise software applications and databases,
connect electronically with their trading partners, automate and
optimize the business processes that span these systems and
interfaces, and implement software applications that provide
people with the information and capabilities necessary to run
the business more effectively. Customer benefits include:
|
|
|
| |
• |
eliminating significant costs from the organization’s
information technology environment, |
| |
| |
• |
automating and streamlining interactions with their customers
and suppliers, |
27
|
|
|
| |
• |
becoming more competitive by capturing more market share in
terms of increased revenue from new and existing customers, |
| |
| |
• |
gaining more timely access to information to make better
decisions about the business, and |
| |
| |
• |
allowing staff to focus their attention on higher value business
activities. |
webMethods Fabric builds upon our history as a leader and
innovator in the business integration market. Introduced in
October 2004, the webMethods Fabric product suite unifies the
enterprise application integration and business-to-business
capabilities for which webMethods is widely known, with our
existing Business Process Management and workflow functionality
and the Business Activity Monitoring, portal, and Web services
technologies we acquired in October 2003. We believe that by
integrating these particular capabilities into a single product
suite, taking advantage of synergies between different elements
of the solution, and merging the products to provide a seamless
user experience, we have created a unique offering in the
marketplace. By combining best-of-breed capabilities into one
platform, we offer customers the ability to lower their total
cost of ownership and to streamline the overall implementation
process relative to using different stand-alone software
products.
webMethods Fabric is based on a Service-Oriented Architecture
(SOA) foundation. SOA enables organizations to extend the
value of their existing IT assets, transforming them into
reusable components that can be applied to new business needs.
Customers who want “true SOA” need the infrastructure
software to provide an integrated approach to the creation,
organization, management, and security of Web services.
webMethods Fabric incorporates an integrated registry and
management, as well as security, for Web services. Our approach
offers an alternative to custom software development, helping
our customers deliver software applications to the business
faster and with less risk, while real-time monitoring and
patent-pending analytics gives organizations the insight
necessary for achieving continuous process improvements in their
business.
In addition to our webMethods Fabric product suite, we have a
strategy to combine our software capabilities, professional
services, strategic partnerships, and domain expertise into
well-defined solutions that address specific horizontal and
vertical industry problems. Our first planned solutions are in
the areas of payment and lending processing in the financial
services industry, integration in the retail industry and
regulatory compliance requirements impacting many organizations.
We market and sell our products and solutions primarily to the
largest 2,000 corporations worldwide (the “Global
2000”) and major government agencies. In our fiscal year
ended March 31, 2005, we added approximately 145 new
customers, with no single customer accounting for more than 10%
of our revenue in any quarter of that fiscal year. As of
March 31, 2005, we had approximately 1,300 customers around
the world, distributed across our target verticals in
manufacturing, process industries (such as chemicals, oil and
gas, life sciences, metals, paper and plastics), financial
services, consumer goods manufacturing and retail, government
and telecommunications.
Restatements
On February 3, 2005, we issued a press release and
thereafter filed a Form 8-K announcing that we were
restating our financial statements for our fiscal year ended
March 31, 2004, as well as quarterly financial statements
for each of the three interim quarterly reports in that fiscal
year and for the three months ended June 30, 2004. That
announcement related primarily to the recently completed
independent investigation conducted by the Audit Committee of
our Board of Directors into certain transactions of our Japanese
subsidiary.
As a result of the investigation, our Audit Committee concluded
that improper activities of certain employees of our Japanese
subsidiary caused us to misstate revenue and expenses for the
year ended March 31, 2004 and certain quarters therein and
the three months ended June 30, 2004, as well as misstate
accounts receivable, deferred revenue, debt and certain other
items attributable to the operations of our Japanese subsidiary.
Our Audit Committee’s investigation found that the improper
activities included, among other things, engaging in improper
licensing and professional services transactions and
28
misrepresenting the transactions to our management; causing our
Japanese subsidiary to engage in undisclosed and unauthorized
borrowings; failing to record expenses and recording improper
expenses; and creating false documents in support of improper
transactions. Our Audit Committee also determined that those
employees of our Japanese subsidiary acted to conceal their
improper activities from our management.
The adjustments to the our financial statements in the
restatements fell into five general categories:
(i) adjustments to license, professional services and
maintenance revenue relating to improper activities of certain
employees of our Japanese subsidiary; (ii) adjustments to
deferred revenue with respect to certain of those revenue items
that should have been deferred and recognized as revenue in
subsequent periods; (iii) adjustments to properly record
expenses of our Japanese subsidiary in the appropriate period;
(iv) adjustments to debt (excluding the reclassification of
interest expense, which was nominal) and accounts receivable as
a result of certain unauthorized borrowings by our Japanese
subsidiary that were improperly recorded by it as collections of
receivables; and (v) elimination of a provision for tax
expense based upon estimates of the taxable income of our
Japanese subsidiary.
As a result of the foregoing, our consolidated financial
statements for the year ended March 31, 2004 and certain
quarters therein and for the three months ended June 30,
2004 and the related consolidated balance sheets as of those
dates were restated in February 2005 from amounts previously
reported. Consequently, the effects of the restatements have
been reflected in our consolidated financial statements
appearing in this Form 10-K, in “Selected Financial
Data” and in the following portions of Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and
related disclosures. We evaluate our estimates, on an ongoing
basis, including those related to allowances for bad debts,
investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ for these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect the
more significant judgments and estimates used in the preparation
of our consolidated financial statements.
Revenue Recognition
We enter into arrangements, which may include the sale of
licenses of our software, professional services and maintenance
or various combinations of each element. We recognize revenue
based on Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended, and
modified by SOP 98-9, “Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions.” SOP 98-9 modified SOP 97-2 by
requiring revenue to be recognized using the “residual
method” if certain conditions are met. Revenue is
recognized based on the residual method when an agreement has
been signed by both parties, the fees are fixed or determinable,
collection of the fees is probable, delivery of the product has
occurred, vendor specific objective evidence of fair value
exists for any undelivered element, and no other significant
obligations remain. Revenue allocated to the undelivered
elements is deferred using vendor-specific objective evidence of
fair value of the elements and the remaining portion of the fee
is allocated to the delivered elements (generally the software
license). See Note 2 of the Notes to Consolidated Financial
Statements of webMethods, Inc. included elsewhere in this report
for a more comprehensive discussion of our revenue recognition
policies. Judgments we make
29
regarding these items, including collection risk, can materially
impact the timing of recognition of license revenue.
Policies related to revenue recognition require difficult
judgments on complex matters that are often subject to multiple
sources of authoritative guidance. These sources may publish new
authoritative guidance which might impact current revenue
recognition policies. We continue to evaluate our revenue
recognition policies as new authoritative interpretations and
guidance are published, and where appropriate, may modify our
revenue recognition policies. Application of our revenue
recognition policy requires a review of our license and
professional services agreements with customers and may require
management to exercise judgment in evaluating whether delivery
has occurred, payments are fixed or determinable, collection is
probable, and where applicable, if vendor-specific objective
evidence of fair value exists for undelivered elements of the
contract. If we made different judgments or utilized different
estimates for any period, material differences in the amount and
timing of revenue recognized could result.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated
losses which may result from the inability of our customers to
make required payments to us. These allowances are established
through analysis of the credit-worthiness of each customer with
a receivable balance, determined by credit reports from third
parties, published or publicly available financial information,
customers specific experience including payment practices and
history, inquiries, and other financial information from our
customers. The use of different estimates or assumptions could
produce materially different allowance balances. If the
financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required. At March 31, 2005
and 2004, the allowance for doubtful accounts was
$1.9 million and $2.1 million respectively.
Business Combinations
We are required to allocate the purchase price of acquired
companies to the tangible and intangible assets acquired,
liabilities assumed, as well as in-process research and
development (IPR&D) based on their estimated fair values.
Such a valuation requires management to make significant
estimates and assumptions, especially with respect to intangible
assets.
Critical estimates in valuing certain of the intangible assets
include but are not limited to: future expected cash flows from
license sales, maintenance agreements, consulting contracts,
customer contracts, and acquired developed technologies and
IPR&D projects, and discount rates. Management’s
estimates of fair value are based upon assumptions believed to
be reasonable, but which are inherently uncertain and
unpredictable. Assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur.
Other estimates associated with the accounting for these
acquisitions may change as additional information becomes
available regarding the assets acquired and liabilities assumed.
Goodwill and Intangible Assets
We record goodwill and intangible assets when we acquire other
businesses. The allocation of acquisition cost to intangible
assets and goodwill involves the extensive use of
management’s estimates and assumptions, and the result of
the allocation process can have a significant impact on our
future operating results. Financial Accounting Standards Board
No. 142, “Goodwill and Other Intangible Assets”
(SFAS 142), which was issued during fiscal year 2002 and
adopted by us on April 1, 2002, eliminated the amortization
of goodwill and indefinite lived intangible assets. Intangible
assets with finite lives are amortized over their useful lives
while goodwill and indefinite lived assets are not amortized
under SFAS 142, but are periodically tested for impairment.
In accordance with SFAS 142, all of our goodwill is
associated with our corporate reporting unit, as we do not have
multiple reporting units. Accordingly on an annual basis we
perform the impairment assessment required under SFAS 142
at the enterprise level. We
30
have used the Company’s total market capitalization to
assess the fair value of the enterprise. If our estimates or the
related assumptions change in the future, we may be required to
record impairment charges to reduce the carrying value of these
assets, which could be substantial.
Acquired In-process Research and Development
Costs to acquire in-process research and development
technologies which have no alternative future use and which have
not reached technological feasibility at the date of acquisition
are expensed as incurred (see Note 12 of the Notes to
Consolidated Financial Statements of webMethods, Inc. included
elsewhere in this report).
Foreign Currency Effects
The functional currency for our foreign operations is the local
currency. The financial statements of foreign subsidiaries have
been translated into United States dollars. Asset and liability
accounts have been translated using the exchange rate in effect
at the balance sheet date. Revenue and expense accounts have
been translated using the average exchange rate for the period.
The gains and losses associated with the translation of the
financial statements resulting from the changes in exchange
rates from period to period have been reported in other
comprehensive income or loss. To the extent assets and
liabilities of the foreign operations are realized or the
foreign operations are expected to pay back the intercompany
debt in the foreseeable future, amounts previously reported in
other comprehensive income or loss would be included in net
income or loss in the period in which the transaction occurs.
Transaction gains or losses are included in net income or loss
in the period in which they occur.
Accounting for Income Taxes
Although we believe that our future taxable income may be
sufficient to utilize a substantial amount of the benefits of
our net operating loss carryforwards and to realize our deferred
tax assets, we have recorded a valuation allowance to completely
offset the carrying value of the deferred tax assets as we have
concluded that the realization of the deferred tax assets does
not meet the “more likely than not” criterion. If we
should determine that we would be able to realize our deferred
tax assets in the future in excess of its net recorded amount,
an adjustment to the deferred tax asset would increase income in
the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such
determination was made.
Restructuring and Related Charges
We have recorded restructuring and related charges to align our
cost structure with changing market conditions. These
restructuring and related charges consist of headcount
reductions, consolidation and relocation of facilities and
related impairment of fixed assets. Excess facility costs
related to the consolidation and relocation of facilities are
based on our contractual obligations, net of estimated sublease
income based on current comparable lease rates. We reassess this
liability each period based on market conditions. Revisions to
our estimates of this liability could materially impact our
operating results and financial position in future periods if
anticipated events and key assumptions, such as the timing and
amounts of sublease rental income, either change or do not
materialize.
Litigation and Contingencies
We are subject to the possibility of various loss contingencies
arising in the ordinary course of business. We consider the
likelihood of loss or impairment of an asset or the incurrence
of a liability, as well as our ability to reasonably estimate
the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that
an asset has been impaired or a liability has been incurred and
the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine
whether such accruals should be adjusted.
31
RESULTS OF OPERATIONS
The following table summarizes the results of our operations for
each of the past three fiscal years (all percentages are
calculated using the underlying data in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 31, | |
|
Percentage | |
|
March 31, | |
|
Percentage | |
|
March 31, | |
| |
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
Total revenue
|
|
|
200,601 |
|
|
|
5.8 |
% |
|
|
189,541 |
|
|
|
(3.7 |
)% |
|
|
196,754 |
|
|
Gross profit
|
|
|
139,998 |
|
|
|
5.6 |
% |
|
|
132,618 |
|
|
|
(13.1 |
)% |
|
|
152,629 |
|
|
% of total revenue
|
|
|
69.8 |
% |
|
|
|
|
|
|
70.0 |
% |
|
|
|
|
|
|
77.6 |
% |
|
Total operating expenses
|
|
|
159,722 |
|
|
|
(4.8 |
)% |
|
|
167,827 |
|
|
|
2.2 |
% |
|
|
164,290 |
|
|
% of total revenue
|
|
|
79.6 |
% |
|
|
|
|
|
|
88.5 |
% |
|
|
|
|
|
|
83.5 |
% |
|
Operating loss
|
|
|
(19,724 |
) |
|
|
(44.0 |
)% |
|
|
(35,209 |
) |
|
|
202.0 |
% |
|
|
(11,661 |
) |
|
% of total revenue
|
|
|
(9.8 |
)% |
|
|
|
|
|
|
(18.6 |
)% |
|
|
|
|
|
|
(5.9 |
)% |
|
Net loss
|
|
|
(18,751 |
) |
|
|
(43.2 |
)% |
|
|
(33,024 |
) |
|
|
284.7 |
% |
|
|
(8,585 |
) |
|
% of total revenue
|
|
|
(9.3 |
)% |
|
|
|
|
|
|
(17.4 |
)% |
|
|
|
|
|
|
(4.4 |
)% |
During fiscal year 2005, our total revenue increased to
$200.6 million from $189.5 million in fiscal year
2004. The increase in total revenue was due to increases in
professional services and maintenance revenue, partially offset
by a decrease in our license revenue. The decrease in license
revenue was due in part to a significant decrease in license
revenue in the first fiscal quarter of 2005 as many enterprises
unexpectedly became more cautious in their enterprise software
spending. The decrease in license revenue can also be attributed
in part to lower license revenue in Japan due to the disruption
caused by the internal investigation and related management
changes. During fiscal year 2004, our total revenue decreased
approximately $7.2 million to $189.5 million from
$196.8 million in fiscal year 2003 as a result of a decrease in
license revenue, which was partially offset by increases in
professional services and maintenance revenue. Our fiscal year
2004 license revenue was negatively impacted by
lower-than-anticipated Americas license revenue.
In fiscal year 2005, total revenue included a $5.5 million
positive foreign currency impact from certain international
markets, which was partially offset by a $4.3 million
negative foreign currency impact on total cost of revenue and
operating expenses, resulting in a positive impact of
$1.2 million to operating loss in fiscal year 2005. In
fiscal year 2004, total revenue included an $8.8 million
positive foreign currency impact from certain international
markets, which was partially offset by a $7.5 million
negative foreign currency impact on total cost of revenue and
operating expenses, resulting in a positive impact of
$1.3 million to operating loss in fiscal year 2004.
Our net loss decreased to $18.8 million in fiscal year 2005
from $33.0 million in fiscal year 2004 due primarily to an
increase in total revenue and a decrease in sales and marketing
expenses and other operating expenses. Our net loss increased to
$33.0 million in fiscal year 2004 from $8.6 million in
fiscal year 2003 due, primarily, to a decrease in license
revenue, an increase in professional services costs, the
addition of in-process research and development and intangibles
amortization related to the acquisitions in October 2003 and the
settlement of an intellectual property matter in March 2004.
32
Revenue
The following table summarizes webMethods’ revenue for each
of the past three fiscal years:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 31, | |
|
Percentage | |
|
March 31, | |
|
Percentage | |
|
March 31, | |
| |
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
License
|
|
$ |
86,800 |
|
|
|
(6.4 |
)% |
|
$ |
92,740 |
|
|
|
(20.8 |
)% |
|
$ |
117,066 |
|
|
Professional services
|
|
|
49,218 |
|
|
|
12.8 |
% |
|
|
43,634 |
|
|
|
30.7 |
% |
|
|
33,378 |
|
|
Maintenance
|
|
|
64,583 |
|
|
|
21.5 |
% |
|
|
53,167 |
|
|
|
14.8 |
% |
|
|
46,310 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
200,601 |
|
|
|
5.8 |
% |
|
$ |
189,541 |
|
|
|
(3.7 |
)% |
|
$ |
196,754 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes webMethods’ revenue by
geographic region for each of the past three fiscal years:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 31, | |
|
Percentage | |
|
March 31, | |
|
Percentage | |
|
March 31, | |
| |
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
Americas
|
|
$ |
119,610 |
|
|
|
4.5 |
% |
|
$ |
114,507 |
|
|
|
(14.4 |
)% |
|
$ |
133,756 |
|
|
EMEA
|
|
|
50,599 |
|
|
|
12.5 |
% |
|
|
44,965 |
|
|
|
23.7 |
% |
|
|
36,351 |
|
|
Japan
|
|
|
15,157 |
|
|
|
(2.0 |
)% |
|
|
15,472 |
|
|
|
1.3 |
% |
|
|
15,274 |
|
|
Asia Pacific
|
|
|
15,235 |
|
|
|
4.4 |
% |
|
|
14,597 |
|
|
|
28.3 |
% |
|
|
11,373 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
200,601 |
|
|
|
5.8 |
% |
|
$ |
189,541 |
|
|
|
(3.7 |
)% |
|
$ |
196,754 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total revenue increased by $11.1 million, or 6%, in
fiscal year 2005 from fiscal year 2004, and decreased by
$7.2 million or 4%, in fiscal year 2004 from fiscal year
2003. License revenue decreased by $5.9 million or 6% in
fiscal year 2005 from fiscal year 2004. Our ability to maintain
our license revenue, a major component of revenue, continued to
be impacted by the economic downturn and uncertainty in
information technology spending, particularly in the first
quarter of fiscal year 2005 as many enterprises unexpectedly
became more cautious in their enterprise software spending. In
addition, our license revenue was also impacted by our internal
investigation of our Japanese subsidiary, which caused
disruption in the business and related sales cycles in our third
fiscal quarter and, to a lesser extent, in our fourth fiscal
quarter. License revenue for fiscal year 2004 was similarly
impacted by the spending environment, as well as the impact of
our quota bearing sales representatives in the Americas being
down approximately 10% at the beginning of fiscal year 2004 and
lower-than-anticipated license revenue in the Americas,
particularly in the first half of fiscal year 2004. License
revenue included a positive foreign currency impact of
$2.8 million and $4.8 million in fiscal years 2005 and
2004, respectively, from certain international markets.
Professional services revenue increased by $5.6 million, or
13%, to $49.2 million, for fiscal year 2005 compared to
$43.6 million for fiscal year 2004. This increase was
primarily due to an increase in the volume and size of customer
engagements and to a lesser extent, a $1.1 million positive
foreign currency impact. In fiscal year 2004, professional
services revenue increased 31%, to $43.6 million, from
$33.4 million in fiscal year 2003. This increase was
primarily due to an increase in the volume and/or size of
customer engagements, the increased use of subcontractors and,
to a lesser extent, a $1.9 million positive foreign
currency impact.
Maintenance revenue increased by $11.4 million, or 22%,
from $53.2 million to $64.6 million in fiscal year
2005, and $6.9 million, or 15%, from $46.3 million to
$53.2 million in fiscal year 2004. This increase is due
primarily to the increase in customers licensing our software
and the cumulative effect of agreements for post-contract
maintenance and support, which is recognized as revenue ratably
over the term of the contract. Additionally, more customers have
moved to our 24x7 support plans given the mission critical
nature of their projects involving our software. Furthermore,
the increase in maintenance
33
revenue was partially due to a positive foreign currency impact
of $1.6 million in fiscal year 2005 and $2.1 million
in fiscal year 2004.
In fiscal year 2005, revenue from the Americas increased by
$5.1 million, or 4.5%, from $114.5 million to
$119.6 million due to increases in professional services
and maintenance revenue, which was partially offset by a
decrease in license revenue. Total revenue from EMEA, Asia
Pacific and Japan (“international revenue”) increased
$6.0 million to $81.0 million in fiscal year 2005, and
included a $5.5 million positive foreign currency impact.
International revenue accounted for 40% of our total revenue in
fiscal year 2005 as compared to 40% and 32% in 2004 and 2003,
respectively.
Gross margin
The following table summarizes our gross margin by type of
revenue for each of the past three fiscal years:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 31, | |
|
March 31, | |
|
March 31, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
License
|
|
|
96 |
% |
|
|
96 |
% |
|
|
98 |
% |
|
Professional services and maintenance
|
|
|
50 |
% |
|
|
45 |
% |
|
|
47 |
% |
|
Total revenue
|
|
|
70 |
% |
|
|
70 |
% |
|
|
78 |
% |
Our total gross margin was 70% in fiscal year 2005 as compared
to 70% in fiscal year 2004 and 78% in fiscal year 2003. The
decrease in fiscal year 2004 was primarily due to a decrease in
license revenue as a percent of total revenue, an increase in
the total cost of professional services and maintenance as
compared to fiscal year 2003 and an increase in cost of revenue
due to amortization of intangibles of $1.2 million related
to the October 2003 acquisitions.
Our cost of license revenue consists of royalties for products
embedded in our software licensed from third parties. In
addition, we acquired certain technology in fiscal year 2004
that resulted in amortization of intangibles in the amount of
$2.4 million in fiscal year 2005 and $1.2 million in
fiscal 2004, which is included in our license margin. The
increase in amortization in fiscal year 2005 is due to the full
year effect of such amortization.
Our cost of professional services and maintenance consists
primarily of costs related to internal professional services and
support personnel, and subcontractors hired to provide
implementation and support services. Our gross margin on
maintenance and services, excluding stock based compensation,
was 50%, 45% and 47% in fiscal years 2005, 2004 and 2003,
respectively. Our gross margin in fiscal year 2005 was
positively impacted by a reduction in our use of subcontractors
as well as certain nonbillable activities. Our gross profit in
fiscal year 2004 was negatively impacted by an increase in
subcontractor activity and nonbillable travel, training and
other activities, as well as an effective decrease in average
billing rates.
34
Operating expenses
The following table presents certain information regarding
webMethods’ operating expenses during each of the past
three fiscal years:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 31, | |
|
Percentage | |
|
March 31, | |
|
Percentage | |
|
March 31, | |
| |
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing*
|
|
$ |
81,668 |
|
|
|
(10.9 |
)% |
|
$ |
91,664 |
|
|
|
(1.4 |
)% |
|
$ |
92,958 |
|
|
% of total revenue
|
|
|
40.7 |
% |
|
|
|
|
|
|
48.4 |
% |
|
|
|
|
|
|
47.2 |
% |
|
Research and development*
|
|
|
44,518 |
|
|
|
(1.2 |
)% |
|
|
45,045 |
|
|
|
(5.1 |
)% |
|
|
47,441 |
|
|
% of total revenue
|
|
|
22.2 |
% |
|
|
|
|
|
|
23.8 |
% |
|
|
|
|
|
|
24.1 |
% |
|
General and administrative*
|
|
|
25,042 |
|
|
|
40.1 |
% |
|
|
17,873 |
|
|
|
0.2 |
% |
|
|
17,831 |
|
|
% of total revenue
|
|
|
12.5 |
% |
|
|
|
|
|
|
9.4 |
% |
|
|
|
|
|
|
9.1 |
% |
|
Stock based compensation and warrant charge**
|
|
|
2,645 |
|
|
|
(5.2 |
)% |
|
|
2,791 |
|
|
|
(28.5 |
)% |
|
|
3,905 |
|
|
% of total revenue
|
|
|
1.3 |
% |
|
|
|
|
|
|
1.5 |
% |
|
|
|
|
|
|
2.0 |
% |
|
Restructuring and related charges
|
|
|
5,849 |
|
|
|
49.2 |
% |
|
|
3,920 |
|
|
|
81.9 |
% |
|
|
2,155 |
|
|
% of total revenue
|
|
|
2.9 |
% |
|
|
|
|
|
|
2.1 |
% |
|
|
|
|
|
|
1.1 |
% |
|
In-process research and development
|
|
|
— |
|
|
|
(100.0 |
)% |
|
|
4,284 |
|
|
|
100.0 |
% |
|
|
— |
|
|
% of total revenue
|
|
|
0.0 |
% |
|
|
|
|
|
|
2.3 |
% |
|
|
|
|
|
|
0.0 |
% |
|
Settlement of intellectual property matter
|
|
|
— |
|
|
|
(100.0 |
)% |
|
|
2,250 |
|
|
|
100.0 |
% |
|
|
— |
|
|
% of total revenue
|
|
|
0.0 |
% |
|
|
|
|
|
|
1.2 |
% |
|
|
|
|
|
|
0.0 |
% |
|
Operating expense
|
|
$ |
159,722 |
|
|
|
(4.8 |
)% |
|
$ |
167,827 |
|
|
|
2.2 |
% |
|
$ |
164,290 |
|
|
% of total revenue
|
|
|
79.6 |
% |
|
|
|
|
|
|
88.5 |
% |
|
|
|
|
|
|
83.5 |
% |
|
|
| * |
Excludes stock based compensation and warrant charge if
applicable. |
| |
| ** |
Includes stock based compensation that would be included in
sales and marketing, research and development and general and
administrative expense and warrant charge that would be included
in sales and marketing expense. |
Our operating expenses are primarily classified as sales and
marketing, research and development and general and
administrative. Each category includes related expenses for
compensation, employee benefits, professional fees, travel,
communications and allocated facilities, recruitment and
overhead costs. Our sales and marketing expenses also include
expenses which are specific to our sales and marketing
activities, such as commissions, trade shows, public relations,
business development costs, promotional costs and marketing
collateral. Also included in our operating expenses is the
amortization of deferred stock compensation and deferred warrant
charge, restructuring and related charges, amortization of
goodwill and intangibles, settlement of intellectual property
matter and in-process research and development.
Operating expenses, excluding stock based compensation and
warrant charge, and restructuring and related charges, totaled
$151.2 million in fiscal year 2005, as compared to
$154.6 million in fiscal year 2004. The 2% decrease in
those operating expenses in fiscal year 2005 was primarily due
to our continued focus on expense management despite a
$3.0 million negative foreign currency impact and more than
$2.5 million in costs related to our internal investigation
of our Japanese subsidiary and related costs.
Operating expenses, excluding stock based compensation and
warrant charge, in-process research and development, settlement
of intellectual property matter and restructuring and related
charges, totaled $154.6 million in fiscal year 2004, a
decrease of $3.6 million, or 2%, from fiscal year 2003 due
to our continued focus on expense management despite a
$5.1 million negative foreign currency impact.
35
Sales and marketing expense, excluding stock based compensation
and warrant charge, was 41%, 48% and 47% of total revenue in
fiscal years 2005, 2004 and 2003, respectively. In fiscal year
2005, sales and marketing expense, excluding stock based
compensation and warrant charge, decreased to $81.7 million
from $91.7 million in fiscal year 2004. This decrease was
primarily due to a decrease in personnel costs and the
associated allocated overhead costs, as well as decreases in
travel expenses, marketing program costs and commission expense.
These decreases were offset by a $2.6 million increase in
expenses due to the foreign currency impact in fiscal year 2005.
In fiscal year 2004, sales and marketing expense, excluding
stock based compensation and warrant charge, decreased to
$91.7 million from $93.0 million in fiscal year 2003.
This decrease was primarily due to a decrease in personnel
costs, commission expense, travel expense and sales assistance
fees paid to partners offset by increases in marketing program
costs, professional services and recruiting expenses. In
addition, these decreases were further offset by a
$4.7 million increase in expenses due to the foreign
currency impact.
Research and development expense, excluding stock based
compensation, was 22%, 24% and 24% of total revenue in fiscal
years 2005, 2004 and 2003, respectively. In fiscal year 2005,
research and development expense, excluding stock based
compensation, was relatively flat as compared to fiscal year
2004. In fiscal year 2004, research and development expense,
excluding stock based compensation, decreased $2.4 million
primarily due to continued reduction in the use of outside
contractors and reduced personnel costs offset by an increase in
recruiting costs.
General and administrative expense, excluding stock based
compensation, as a percentage of total revenue, was 12.5%, 9%
and 9% for fiscal years 2005, 2004 and 2003, respectively. In
fiscal year 2005, general and administrative expenses, excluding
stock based compensation, increased $7.2 million from
fiscal year 2004 to $25 million in fiscal year 2005 due
primarily to costs associated with our internal investigation of
our Japanese subsidiary as well as costs associated with
Sarbanes Oxley compliance and, to a lesser extent, an increase
in personnel related costs. In fiscal year 2004, general and
administrative expense, excluding stock based compensation,
increased $42,000 from fiscal year 2003 to $17.9 million.
Stock based compensation and warrant charge was
$2.6 million, $2.8 million and $4.2 million in
fiscal years 2005, 2004 and 2003, respectively, of which
$56,000, and $251,000 was included in cost of sales in fiscal
years 2004 and 2003 respectively. Deferred stock based
compensation and warrant charge was recorded for the following
transactions:
(i) In connection with the grant of stock options to
employees and non-employee directors during the fiscal years
ended March 31, 2000 and 1999, we recorded aggregate
unearned compensation of $15.5 million, representing the
difference between the deemed fair value of our common stock at
the date of grant and the exercise price of such options.
(ii) As a result of the acquisitions of TransLink Software,
Inc., Premier Software Technology, Inc. and Alier, Inc. we
recorded a deferred stock compensation charge of
$27.9 million related to restricted stock issued to
stockholders of the acquired companies.
(iii) In connection with the acquisition of Active
Software, in August 2000, 50% of Active Software’s
remaining options vested upon consummation of the merger which
resulted in an acceleration of amortization of deferred stock
compensation.
(iv) In March 2001, we entered into an OEM/ Reseller
agreement with i2 Technologies (“i2”) and issued
a warrant which, as amended, permits i2 to
purchase 710,000 shares of our common stock at an
exercise price of $28.70 per share. The fair value of the
warrant was based on the Black-Scholes valuation model was
$23.6 million on the date of issuance, which has been
recorded as a deferred warrant charge. As part of the agreement,
i2 will pay us Original Equipment Manufacturer (“OEM”)
fees of $10.0 million over the term of the OEM/ Reseller
agreement, which will be recorded as a reduction to the deferred
warrant charge and will not be recorded as revenue. In March
2004, we amended our OEM/ Reseller agreement with i2. We
extended the term of the agreement by one year to March 2006 and
also reduced the number of required webMethods on-site resources
from 10 to 1, which resulted in a corresponding reduction
of $1.3 million in OEM fees due under the agreement. Due to
this change in the agreement, the
36
amortization of the remaining unamortized deferred warrant
charge has been changed from 4 years to 5 years to
coincide with the new payment schedule, resulting in a decrease
in the annual amortization of $757,000 from $3,402,000 to
$2,645,000. Additionally, we made changes relating to the
sharing of revenue related to maintenance.
The deferred stock compensation and warrant charge is presented
as a reduction of stockholders’ equity and is amortized
over the vesting period of the applicable equity arrangement and
is shown by expense category.
We have recorded restructuring and related charges to align our
cost structure with changing market conditions. During fiscal
year 2005, we recorded restructuring and related charges of
$5.9 million, consisting of $2.8 million for headcount
reductions and $3.1 million for excess facility costs
related to the relocation of our headquarters. The estimated
excess facility costs were based on our contractual obligations,
net of estimated sublease income, based on current comparable
lease rates. We reassess this liability each period based on
market conditions. Revisions to the estimates of this liability
could materially impact the operating results and financial
position in future periods if anticipated events and key
assumptions, such as the timing and amounts of sublease rental
income, either change or do not materialize. During fiscal year
2004, we recorded restructuring and related charges of
$3.9 million consisting of $2.2 million for headcount
reductions and $1.7 million for consolidation of facilities
and related impairment of fixed assets. The excess facility
costs were based on our contractual obligations, net of sublease
income. During fiscal year 2003, we recorded restructuring and
related charges of $2.2 million for headcount reductions.
We incurred an in-process research and development charge of
$4.3 million for fiscal year 2004. There was no in-process
research and development charge for fiscal years 2005 and 2003.
The $4.3 million charge during fiscal year 2004 consists
of: (i) a one-time charge of $3.1 million recorded in
connection with the acquisition and write-off of The Dante Group
technology and (ii) a one-time charge of $1.2 million
recorded in connection with the acquisition and write-off of The
Mind Electric technology. We also incurred a $2.3 million
charge in fiscal year 2004 related to the settlement of an
intellectual property matter.
Interest income
Interest income decreased by $364,000 or 13% to
$2.5 million for fiscal year 2005 from $2.9 million
for fiscal year 2004 due primarily to the lower average balances
of cash and marketable securities during fiscal year 2005 as
compared to fiscal year 2004 given the use of cash in connection
with the October 2003 acquisitions. For fiscal year 2004,
interest income decreased by approximately $1.9 million or
40% to $2.9 million from $4.7 million for fiscal year
2003. This decrease was primarily attributable to lower interest
rates on corporate paper, bonds and money market funds compared
to those in the same period in the prior year.
Interest expense
Interest expense is primarily due to equipment leasing
arrangements in the Americas. During fiscal year 2005, interest
expense decreased to $98,000, as compared to $205,000 for fiscal
year 2004 and $674,000 for fiscal year 2003. The decreases in
fiscal year 2004 and 2005 are due to the completion of
previously established leases and lower rates on leases
initiated during fiscal 2004.
Other income (expense), net
Other expense, net, was $124,000 for fiscal year 2005 as
compared to $461,000 in fiscal year 2004 and other income of
$18,000 in fiscal 2003. These amounts relate primarily to losses
and gains on foreign currency transactions and are primarily due
to U.S. Dollar or other non-functional currency based
contracts in EMEA and Asia Pacific and, to a lesser extent in
fiscal year 2004, to U.S. Dollar cash accounts held by
operating subsidiaries in EMEA and Japan.
37
Impairment of equity investment in private companies
We recognized an other-than-temporary decline in value of
$1.0 million in private company investments in each of
fiscal years 2003 and 2005.
Income taxes
During fiscal year 2005, our foreign subsidiaries incurred tax
expense of $235,000 that we could not offset by utilizing those
subsidiaries’ net operating losses generated in prior years.
We have recorded a valuation allowance for the full amount of
our net deferred tax assets, as the realizability of the
deferred tax assets is not currently predictable.
As of March 31, 2005, we had net operating loss
carry-forwards of approximately $230 million. These net
operating loss carry-forwards are available to reduce future
taxable income and begin to expire in fiscal year 2007. Under
the provisions of the Internal Revenue Code, certain substantial
changes in our ownership have limited the amount of net
operating loss carry-forwards that could be utilized annually in
the future to offset taxable income.
Quarterly results of operations
The following tables set forth consolidated statement of
operations data for each of the eight quarters ended
March 31, 2005, as well as that data expressed as a
percentage of the total revenue for the quarters presented. This
information has been derived from our unaudited consolidated
financial statements. The unaudited consolidated financial
statements have been prepared on the same basis as the audited
consolidated financial statements contained elsewhere in this
report and include all adjustments, consisting only of normal
recurring adjustments that we consider necessary for a fair
statement of such information. You should read this information
in conjunction with our annual audited consolidated financial
statements and related notes appearing elsewhere in this report.
Historical results may not be indicative of future results.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
License
|
|
$ |
22,190 |
|
|
$ |
25,953 |
|
|
$ |
23,851 |
|
|
$ |
14,806 |
|
|
$ |
25,679 |
|
|
$ |
25,037 |
|
|
$ |
20,850 |
|
|
$ |
21,174 |
|
| |
Professional services
|
|
|
12,763 |
|
|
|
11,854 |
|
|
|
12,077 |
|
|
|
12,524 |
|
|
|
13,091 |
|
|
|
11,210 |
|
|
|
10,460 |
|
|
|
8,873 |
|
| |
Maintenance
|
|
|
17,982 |
|
|
|
17,156 |
|
|
|
14,838 |
|
|
|
14,607 |
|
|
|
14,066 |
|
|
|
13,785 |
|
|
|
12,766 |
|
|
|
12,550 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total revenue
|
|
|
52,935 |
|
|
|
54,963 |
|
|
|
50,766 |
|
|
|
41,937 |
|
|
|
52,836 |
|
|
|
50,032 |
|
|
|
44,076 |
|
|
|
42,597 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization of intangibles
|
|
|
600 |
|
|
|
599 |
|
|
|
599 |
|
|
|
599 |
|
|
|
600 |
|
|
|
599 |
|
|
|
— |
|
|
|
— |
|
| |
License
|
|
|
135 |
|
|
|
252 |
|
|
|
245 |
|
|
|
620 |
|
|
|
588 |
|
|
|
601 |
|
|
|
555 |
|
|
|
467 |
|
| |
Professional services and maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
|
|
22 |
|
|
|
22 |
|
| |
|
Other professional services and maintenance
|
|
|
14,637 |
|
|
|
13,764 |
|
|
|
14,280 |
|
|
|
14,273 |
|
|
|
15,781 |
|
|
|
13,614 |
|
|
|
12,403 |
|
|
|
11,659 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total cost of revenue
|
|
|
15,372 |
|
|
|
14,615 |
|
|
|
15,124 |
|
|
|
15,492 |
|
|
|
16,969 |
|
|
|
14,826 |
|
|
|
12,980 |
|
|
|
12,148 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,563 |
|
|
|
40,348 |
|
|
|
35,642 |
|
|
|
26,445 |
|
|
|
35,867 |
|
|
|
35,206 |
|
|
|
31,096 |
|
|
|
30,449 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation and warrant charge
|
|
|
662 |
|
|
|
661 |
|
|
|
661 |
|
|
|
661 |
|
|
|
663 |
|
|
|
689 |
|
|
|
721 |
|
|
|
696 |
|
| |
|
Other sales and marketing
|
|
|
18,525 |
|
|
|
22,103 |
|
|
|
19,926 |
|
|
|
21,114 |
|
|
|
23,130 |
|
|
|
24,617 |
|
|
|
21,467 |
|
|
|
22,450 |
|
| |
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
10 |
|
|
|
— |
|
| |
|
Other research and development
|
|
|
11,771 |
|
|
|
10,877 |
|
|
|
10,820 |
|
|
|
11,050 |
|
|
|
11,542 |
|
|
|
11,446 |
|
|
|
10,857 |
|
|
|
11,200 |
|
| |
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
| |
|
Other general and administrative
|
|
|
8,008 |
|
|
|
7,093 |
|
|
|
4,868 |
|
|
|
5,073 |
|
|
|
4,593 |
|
|
|
4,333 |
|
|
|
4,524 |
|
|
|
4,423 |
|
| |
Restructuring and related charges
|
|
|
3,093 |
|
|
|
— |
|
|
|
2,756 |
|
|
|
— |
|
|
|
2,605 |
|
|
|
1,315 |
|
|
|
— |
|
|
|
— |
|
| |
In-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,284 |
|
|
|
— |
|
|
|
— |
|
| |
Settlement of intellectual property matter
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,250 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total operating expenses
|
|
|
42,059 |
|
|
|
40,734 |
|
|
|
39,031 |
|
|
|
37,898 |
|
|
|
44,783 |
|
|
|
46,690 |
|
|
|
37,582 |
|
|
|
38,772 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,496 |
) |
|
|
(386 |
) |
|
|
(3,389 |
) |
|
|
(11,453 |
) |
|
|
(8,916 |
) |
|
|
(11,484 |
) |
|
|
(6,486 |
) |
|
|
(8,323 |
) |
|
Interest income
|
|
|
787 |
|
|
|
615 |
|
|
|
532 |
|
|
|
553 |
|
|
|
575 |
|
|
|
549 |
|
|
|
721 |
|
|
|
1,007 |
|
|
Interest expense
|
|
|
(15 |
) |
|
|
(28 |
) |
|
|
(29 |
) |
|
|
(27 |
) |
|
|
(42 |
) |
|
|
(56 |
) |
|
|
(17 |
) |
|
|
(89 |
) |
|
Other (expense)/income
|
|
|
(92 |
) |
|
|
(27 |
) |
|
|
(116 |
) |
|
|
112 |
|
|
|
(290 |
) |
|
|
(196 |
) |
|
|
(5 |
) |
|
|
28 |
|
|
Impairment of equity investments in private companies
|
|
|
— |
|
|
|
— |
|
|
|
(1,057 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income before taxes
|
|
|
(3,816 |
) |
|
|
174 |
|
|
|
(4,059 |
) |
|
|
(10,815 |
) |
|
|
(8,673 |
) |
|
|
(11,187 |
) |
|
|
(5,787 |
) |
|
|
(7,377 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Provision for income taxes
|
|
|
40 |
|
|
|
126 |
|
|
|
65 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$ |
(3,856 |
) |
|
$ |
48 |
|
|
$ |
(4,124 |
) |
|
$ |
(10,819 |
) |
|
$ |
(8,673 |
) |
|
$ |
(11,187 |
) |
|
$ |
(5,787 |
) |
|
$ |
(7,377 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As a Percentage of Total Revenue | |
| |
|
| |
| |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
License
|
|
|
41.9 |
% |
|
|
47.2 |
% |
|
|
47.0 |
% |
|
|
35.3 |
% |
|
|
48.6 |
% |
|
|
50.0 |
% |
|
|
47.3 |
% |
|
|
49.7 |
% |
| |
Professional services
|
|
|
24.1 |
|
|
|
21.6 |
|
|
|
23.8 |
|
|
|
29.9 |
|
|
|
24.8 |
|
|
|
22.4 |
|
|
|
23.7 |
|
|
|
20.8 |
|
| |
Maintenance
|
|
|
34.0 |
|
|
|
31.2 |
|
|
|
29.2 |
|
|
|
34.8 |
|
|
|
26.6 |
|
|
|
27.6 |
|
|
|
29.0 |
|
|
|
29.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total revenue
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization of intangibles
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
1.4 |
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
— |
|
|
|
— |
|
| |
License
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
1.5 |
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
1.1 |
|
| |
Professional services and maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
0.1 |
|
| |
|
Other professional services and maintenance
|
|
|
27.6 |
|
|
|
25.0 |
|
|
|
28.1 |
|
|
|
34.0 |
|
|
|
29.9 |
|
|
|
27.2 |
|
|
|
28.0 |
|
|
|
27.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total cost of revenue
|
|
|
29.0 |
|
|
|
26.6 |
|
|
|
29.8 |
|
|
|
36.9 |
|
|
|
32.1 |
|
|
|
29.6 |
|
|
|
29.4 |
|
|
|
28.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
71.0 |
|
|
|
73.4 |
|
|
|
70.2 |
|
|
|
63.1 |
|
|
|
67.9 |
|
|
|
70.4 |
|
|
|
70.6 |
|
|
|
71.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As a Percentage of Total Revenue | |
| |
|
| |
| |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
|
Mar. 31, | |
|
Dec. 31, | |
|
Sept. 30, | |
|
June 30, | |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation and warrant charge
|
|
|
1.3 |
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
1.6 |
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.6 |
|
|
|
1.6 |
|
| |
|
Other sales and marketing
|
|
|
35.0 |
|
|
|
40.2 |
|
|
|
39.3 |
|
|
|
50.3 |
|
|
|
43.8 |
|
|
|
49.2 |
|
|
|
48.7 |
|
|
|
52.7 |
|
| |
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Other research and development
|
|
|
22.2 |
|
|
|
19.8 |
|
|
|
21.3 |
|
|
|
26.4 |
|
|
|
21.8 |
|
|
|
22.9 |
|
|
|
24.7 |
|
|
|
26.3 |
|
| |
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Other general and administrative
|
|
|
15.1 |
|
|
|
12.9 |
|
|
|
9.6 |
|
|
|
12.1 |
|
|
|
8.7 |
|
|
|
8.7 |
|
|
|
10.3 |
|
|
|
10.4 |
|
| |
Restructuring and related charges
|
|
|
5.9 |
|
|
|
— |
|
|
|
5.4 |
|
|
|
— |
|
|
|
4.9 |
|
|
|
2.6 |
|
|
|
— |
|
|
|
— |
|
| |
In-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8.6 |
|
|
|
— |
|
|
|
— |
|
| |
Settlement of intellectual property matter
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total operating expenses
|
|
|
79.5 |
|
|
|
74.1 |
|
|
|
76.9 |
|
|
|
90.4 |
|
|
|
84.8 |
|
|
|
93.4 |
|
|
|
85.3 |
|
|
|
91.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8.5 |
) |
|
|
(0.7 |
) |
|
|
(6.7 |
) |
|
|
(27.3 |
) |
|
|
(16.9 |
) |
|
|
(23.0 |
) |
|
|
(14.7 |
) |
|
|
(19.5 |
) |
|
Interest income
|
|
|
1.5 |
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.6 |
|
|
|
2.3 |
|
|
Interest expense
|
|
|
(— |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
Other (expense)/income
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
(0.5 |
) |
|
|
(0.4 |
) |
|
|
— |
|
|
|
0.1 |
|
|
Impairment of equity investments in private companies
|
|
|
— |
|
|
|
— |
|
|
|
(2.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income before taxes
|
|
|
(7.2 |
) |
|
|
0.3 |
|
|
|
(8.0 |
) |
|
|
(25.8 |
) |
|
|
(16.4 |
) |
|
|
(22.4 |
) |
|
|
(13.1 |
) |
|
|
(17.3 |
) |
|
Provision for income taxes
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
|
(7.3 |
)% |
|
|
0.1 |
% |
|
|
(8.1 |
)% |
|
|
(25.8 |
)% |
|
|
(16.4 |
)% |
|
|
(22.4 |
)% |
|
|
(13.1 |
)% |
|
|
(17.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005 we had cash, cash equivalents and
short-term and long-term securities available for sale in the
amount of $150.1 million as compared to $155.9 million
as of March 31, 2004 and $201.6 million as of
March 31, 2003. The decrease in fiscal year 2004 was due in
part to the use of $32.4 million of net cash in the
acquisitions of two businesses and the purchase of technology in
October 2003, as previously discussed.
Working capital as of March 31, 2005 improved to
$108.3 million, as compared $93.7 million as of
March 31, 2004, due primarily due to the reinvestment of
certain marketable securities which were previously long term in
nature but have now been reinvested for shorter terms.
Net cash provided by operating activities was $2.4 million
in fiscal year 2005, resulting from a net loss of
$18.8 million, offset by $12.5 million of non-cash
charges and $8.7 million of net changes in assets and
liabilities (net of acquisitions). The net changes in assets and
liabilities included a $7.0 increase in deferred revenue and a
$3.1 million increase in deferred rent related primarily to
landlord leasehold improvement allowances received in connection
with our new headquarters facility lease. Net cash used in
operating activities was $20.0 million in fiscal year 2004,
resulting from a net loss of $33.0 million and
$4.0 million of net changes in assets and liabilities (net
of acquisitions), partially offset by non-cash charges of
$17.0 million. The net changes in assets and liabilities
included a $6.7 million decrease in deferred revenue, and
the non-cash charges included $4.3 million in write-offs of
in-process research and development. Net cash used in operating
activities was $12.8 million in fiscal year 2003, resulting
from a net loss of $8.6 million and $19.8 million of
net changes in assets and liabilities (net of acquisitions),
partially offset by $15.6 million of non-cash charges.
Net cash used in investing activities was $21.2 million in
fiscal year 2005 as compared to net cash provided by investing
activities of $7.1 million in fiscal year 2004 and net cash
used in investing activities of $11.7 million in fiscal
year 2003. Cash used in investing activities in fiscal year 2005
and 2003 primarily
40
reflects purchases of property and equipment and net purchases
of marketable securities. Cash provided by investing activities
in fiscal year 2004 primarily reflects net sales of marketable
securities offset by $32.4 million in cash used for the
acquisition of businesses and technology and $2.7 million
in capital expenditures. Capital expenditures were
$8.4 million, $2.7 million, and $3.0 million in
fiscal years 2005, 2004 and 2003, respectively. The increase in
capital expenditures in fiscal year 2005 was due in part to the
increase in leasehold improvements related to our new
headquarters facility. Capital expenditures consisted of
purchases of operating resources to manage operations, including
computer hardware and software, office furniture and equipment
and leasehold improvements. Since our inception, we have
generally funded capital expenditures through the use of capital
leases and working capital.
Net cash provided by financing activities was $55,000,
$5.6 million and $4.4 million in fiscal years 2005,
2004 and 2003, respectively. These cash flows primarily reflect
net cash proceeds from exercises of stock options, net cash
proceeds from Employee Stock Purchase Plan (“ESPP”)
common stock issuances and net cash proceeds from short-term
borrowings by our Japanese subsidiary, offset by payments on
capital leases and short-term borrowings. Net cash proceeds from
exercises of stock options were $1.0 million,
$3.0 million and $2.6 million in fiscal years 2005,
2004 and 2003, respectively. Net cash proceeds from ESPP common
stock issuances were $2.0 million, $2.5 million and
$3.0 million in fiscal years 2005, 2004 and 2003,
respectively. Net cash proceeds from short-term borrowings by
our Japanese subsidiary were $3.5 million and $5.9 million
in fiscal years 2005 and 2004, respectively. Payments on
short-term borrowings by our Japanese subsidiary were
$6.1 million and $3.6 million in fiscal years 2005 and
2004, respectively. As of March 31, 2005 and 2004, our
Japanese subsidiary had, respectively, $0 and $2.6 million
in short-term borrowings outstanding. Payments on capital leases
were $0.9 million, $3.3 million and $4.9 million
in fiscal years 2005, 2004 and 2003, respectively.
As of March 31, 2005 we had a line of credit to borrow up
to a maximum principal amount of $20,000,000 with a maturity
date of April 30, 2005, which was subsequently extended to
June 30, 2005. Any borrowings under the line of credit will
bear interest at the bank’s prime rate per annum and are
limited to 80% of eligible accounts receivable. As of
March 31, 2005 there were no borrowings outstanding. In
connection with the line of credit, we have letters of credit
totaling approximately $2.6 million related to office
leases. We expect to renew the line of credit by June 30,
2005.
We believe that our existing working capital and our line of
credit will be sufficient to meet our working capital and
operating resource expenditure requirements for at least the
next twelve months. However, we may utilize cash resources to
fund acquisitions or investments in complementary businesses,
technologies or product lines.
The following table summarizes our significant contractual
obligations at March 31, 2005, which are comprised of
capital and operating leases. These obligations are expected to
have the following effects on our liquidity and cash flows in
future periods:
| |
|
|
|
|
|
|
|
|
|
| |
|
Operating | |
|
Capital | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Years ending March 31, 2006
|
|
$ |
11,431 |
|
|
$ |
502 |
|
| |
2007
|
|
|
10,124 |
|
|
|
143 |
|
| |
2008
|
|
|
6,535 |
|
|
|
— |
|
| |
2009
|
|
|
3,043 |
|
|
|
— |
|
| |
2010
|
|
|
2,741 |
|
|
|
— |
|
| |
Thereafter
|
|
|
16,372 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
$ |
50,246 |
|
|
$ |
645 |
|
| |
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
(31 |
) |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
614 |
|
|
Less current portion
|
|
|
|
|
|
|
(475 |
) |
| |
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
|
|
|
$ |
139 |
|
| |
|
|
|
|
|
|
41
We are not a party to any agreements with, or commitments to,
any special-purpose entities that would constitute off-balance
sheet financing.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2005 the Financial Accounting Standards Board issued
SFAS 154, “Accounting Changes and Error
Corrections.” This statement replaces APB 20 and
SFAS 3 and changes the requirements for the accounting for
and reporting of a change in accounting principle. APB 20
previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new
accounting principle. SFAS 154 requires retrospective
application to prior periods’ financial statements of
changes in accounting principle. Adoption of this statement is
not expected to have a material impact on our results of
operations or financial condition.
In December 2004 the FASB issued revised SFAS 123R,
“Share-Based Payment,” which sets forth accounting
requirements for “share-based” compensation to
employees and requires companies to recognize in the statement
of operations the grant-date fair value of stock options and
other equity-based compensation. We currently provide pro forma
disclosure of the effect on net income or loss and earnings or
loss per share of the fair value recognition provisions of
SFAS 123, “Accounting for Stock-Based
Compensation.” Under SFAS 123R, such pro forma
disclosure will no longer be an alternative to financial
statement recognition. SFAS 123R is effective for annual
periods beginning after June 15, 2005 and, accordingly, we
must adopt the new accounting provisions effective April 1,
2006 and recognize the cost of all share-based payments to
employees, including stock option grants, in the income
statement based on their fair values. We are currently
evaluating the impact of the adoption of SFAS 123R on our
financial position and results of operations, including the
valuation methods and support for the assumptions that underlie
the valuation of the awards. However, we currently believe that
the adoption of SFAS 123R will have a material effect on
our results of operations.
In December 2004, FASB issued SFAS 153, “Exchanges of
Nonmonetary Assets — an amendment to APB Opinion
No. 29”. This statement amends APB 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. Adoption of this
statement is not expected to have a material impact on our
results of operations or financial condition.
In December 2004, FASB Staff Position No. FAS 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP FAS 109-2”)
was issued, providing guidance under SFAS 109,
“Accounting for Income Taxes” for recording the
potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004, enacted on October 22, 2004 (the
“Jobs Act”). FSP FAS 109-2 allows time
beyond the financial reporting period of enactment to evaluate
the effects of the Jobs Act before applying the requirements of
FSP FAS 109-2. Although we have not yet completed our
evaluation of the impact of the repatriation provisions of the
Jobs Act, we do not expect that these provisions will have a
material impact on our consolidated financial position,
consolidated results of operations, or liquidity. Accordingly,
as provided for in FSP 109-2, we have not adjusted our tax
expense or deferred tax liability to reflect the repatriation
provisions of the Jobs Act.
|
|
| Item 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to a variety of risks, including changes in
interest rates affecting the return on our investments and
foreign currency fluctuations. We have established policies and
procedures to manage our exposure to fluctuations in interest
rates and foreign currency exchange rates.
Interest rate risk. We maintain our funds in money market
accounts, corporate bonds, commercial paper, Treasury notes and
agency notes. Our exposure to market risk due to fluctuations in
interest rates relates primarily to our interest earnings on our
cash deposits. These securities are subject to interest rate
42
risk inasmuch as their fair value will fall if market interest
rates increase. If market interest rates were to increase
immediately and uniformly by 10% from the levels prevailing as
of March 31, 2005, the fair value of the portfolio would
not decline by a material amount. We do not use derivative
financial instruments to mitigate risks. However, we do have an
investment policy that would allow us to invest in short-term
and long-term investments such as money market instruments and
corporate debt securities. Our policy attempts to reduce such
risks by typically limiting the maturity date of such securities
to no more than twenty-four months with a maximum average
maturity to our whole portfolio of such investments at twelve
months, placing our investments with high credit quality issuers
and limiting the amount of credit exposure with any one issuer.
Foreign currency exchange rate risk. Our exposure to
market risk due to fluctuations in foreign currency exchange
rates relates primarily to the intercompany balances with our
subsidiaries located in Australia, Canada, China, France,
Germany, Hong Kong, India, Japan, the Netherlands, Malaysia,
Singapore, South Korea and the United Kingdom. Transaction gains
or losses have not been significant in the past, and there is no
hedging activity on foreign currencies. We would not experience
a material foreign exchange loss based on a hypothetical 10%
adverse change in the price of the euro, Great Britain pound,
Singapore dollar, Australian dollar, Malaysian ringgit, South
Korean won, Canadian dollar, Chinese yuan, Indian rupee or
Japanese yen against the U.S. dollar. Consequently, we do not
expect that a reduction in the value of such accounts
denominated in foreign currencies resulting from even a sudden
or significant fluctuation in foreign exchange rates would have
a direct material impact on our financial position, results of
operations or cash flows.
Notwithstanding the foregoing, the direct effects of interest
rate and foreign currency exchange rate fluctuations on the
value of certain of our investments and accounts, and the
indirect effects of fluctuations in foreign currency could have
a material adverse effect on our business, financial condition
and results of operations. For example, international demand for
our products is affected by foreign currency exchange rates. In
addition, interest rate fluctuations may affect the buying
patterns of our customers. Furthermore, interest rate and
currency exchange rate fluctuations have broad influence on the
general condition of the U.S. foreign and global economics,
which could materially adversely affect our business, financial
condition results of operations and cash flows.
|
|
| Item 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements of webMethods are
submitted on pages F-1 through F-29 of this report.
|
|
| Item 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES |
None.
|
|
| Item 9A. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. We
maintain disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934
(the “Exchange Act”), which are designed to ensure
that information required to be disclosed in our reports filed
or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the rules and forms of the Securities and Exchange Commission,
and that such information is accumulated and communicated to our
management, including our principal executive and principal
financial officers, as appropriate to allow timely decisions
regarding required disclosure.
In designing our system of disclosure controls and procedures,
our management recognizes that our disclosure controls and
procedures, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance of achieving
the desired control objectives. Further, in designing our system
of disclosure controls and procedures, our management is
required to apply its judgment in considering the cost-benefit
relationship of possible controls and procedures.
43
Our management, including our principal executive and principal
financial officers, conducted an evaluation of the effectiveness
of our disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15 as of March 31, 2005, which included
an evaluation of disclosure controls and procedures applicable
to the period covered by this Form 10-K. Based upon that
evaluation, our principal executive and principal financial
officers concluded that, as of March 31, 2005, our
disclosure controls and procedures were effective at the
reasonable assurance level.
Management’s Report on Internal Control Over Financial
Reporting. Our management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under
the Exchange Act, which is a process designed by, or under the
supervision of our principal executive and principal financial
officers and effected by our Board of Directors, management or
other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those
policies and procedures that:
|
|
|
| |
• |
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of our assets; |
| |
| |
• |
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of our management and
directors; and |
| |
| |
• |
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements. |
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As of March 31, 2005, our management assessed the
effectiveness of our internal control over financial reporting
in accordance with Exchange Act Rule 13a-15. In making this
assessment, management used the criteria set forth in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that assessment using those
criteria, our management concluded that, as of March 31,
2005, our internal control over financial reporting was
effective. Our management’s assessment of the effectiveness
of our internal control over financial reporting as of
March 31, 2005 has been audited by PricewaterhouseCoopers
LLP, our independent registered public accounting firm, as
stated in their report appearing on page F-1 of this
Form 10-K.
Changes in Internal Control Over Financial Reporting. In
November 2004, the Audit Committee of webMethods’ Board of
Directors commenced an independent investigation concerning
allegations with respect to our Japanese subsidiary. As a result
of that investigation, we identified a material weakness in our
internal control over financial reporting with respect to our
Japanese subsidiary relating to the ineffectiveness of the
procedures relating to our Japanese subsidiary for timely
detection, deterrence and mitigation of wrongdoing and improper
activities that led to the restatement of certain of our
financial statements. That material weakness was identified in
connection with an investigation by the Audit Committee of
webMethods’ Board of Directors concerning alleged improper
activities of certain employees of our Japanese subsidiary that
caused webMethods to misstate revenue and expenses for the year
ended March 31, 2004, certain quarters therein and the
three months ended June 30, 2004, and resulted in
restatement of our financial statements for those periods.
44
To remediate the previously identified material weakness and to
reduce the risks of recurrence of such material weakness in
future periods, we implemented various steps to strengthen our
internal control over financial reporting with respect to our
Japanese subsidiary, including the following:
|
|
|
| |
• |
We placed the employees of our Japanese subsidiary who were
principally involved in the improper activities on a special
status under Japanese labor law under which they had no further
access to the offices or e-mail system of our Japanese
subsidiary and were precluded from conducting business on behalf
of the Company. We terminated the employment of those employees
principally involved in the improper activities who remained
employed by our Japanese subsidiary, and we pursued claims for
restitution as we believed appropriate. |
| |
| |
• |
We engaged an experienced financial consulting firm in Japan to
assist us in providing financial and accounting services on
behalf of our Japanese subsidiary, and we subsequently replaced
the Finance Director of our Japanese subsidiary. |
| |
| |
• |
We recommunicated to employees of our Japanese subsidiary, and
confirmed their understanding of, our policy requiring
collection and preservation of appropriate documentation that
evidences an end-user’s purchase of a license to our
software products in the quarter in which the revenue is
recognized. We reiterated this policy to all of our senior
management, sales management and finance managers. |
| |
| |
• |
We reiterated to all of our senior management, sales management
and finance managers that borrowing from banks or any third
party is strictly prohibited unless specifically authorized in
writing by certain specified executive officers of webMethods
and by the Board of Directors of the respective borrowing entity
and sought verification of compliance with this policy in
certifications collected from members of management of
webMethods and our subsidiaries each quarter. |
| |
| |
• |
We reiterated to all of our senior management, sales management
and finance managers that no employee may engage in verbal or
written side agreements, including without limitation, side
agreements that modify, cancel or agree to cancel any order or
agreement for the license of our software products from a
reseller or end-user or that modify, cancel or agree to modify
or cancel any associated account receivable without complying
with applicable procedures. We sought verification of compliance
with this policy in certifications collected from members of
management of webMethods and our subsidiaries each quarter. |
| |
| |
• |
We recruited and hired a Director, Internal Audit, who will be
developing and implementing internal audit plans and procedures
with respect our domestic and international operations. |
| |
| |
• |
We evaluated and are implementing more comprehensive procedures
for the timely detection, deterrence, and mitigation of
wrongdoing and improper activities, as well as procedures to
test compliance with our revenue recognition policy and our code
of business conduct. |
| |
| |
• |
We implemented organizational changes to clarify that persons
responsible for finance and accounting functions concerning our
Japanese subsidiary report directly to persons responsible for
finance and accounting functions in our global management team
and that persons responsible for the legal function concerning
our Japanese subsidiary report directly to persons responsible
for the legal function in our global management team. |
| |
| |
• |
We evaluated our relationships with each of our Japanese
resellers, including reviewing arrangements with them to ensure
that they are providing to us those materials required by our
revenue recognition policy. |
| |
| |
• |
We implemented new or modified procedures under which the
appropriate persons within our global management team will have
greater levels of involvement in, and oversight of,
international operations. |
45
|
|
| Item 9B. |
OTHER INFORMATION |
Not applicable.
46
PART III
The following information contained in the definitive Proxy
Statement of webMethods in connection with our 2005 Annual
Meeting of Stockholders is incorporated by reference into this
report.
|
|
| Item 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Information regarding directors of webMethods will be set forth
in the definitive Proxy Statement for webMethods’ 2005
Annual Meeting of Stockholders, and is incorporated into this
report by reference. Information regarding executive officers of
webMethods is set forth in Item 1 of this report.
We have adopted a code of business conduct and ethics that all
executive officers and management employees must review and
abide by (including our principal executive officer, principal
financial officer and principal accounting officer), which we
refer to as the webMethods, Inc. Code of Ethics. Our Code of
Ethics is available on our website at http://www.webMethods.com.
|
|
| Item 11. |
EXECUTIVE COMPENSATION |
Information regarding executive compensation will be set forth
in the definitive Proxy Statement for webMethods’ 2005
Annual Meeting of Stockholders, and is incorporated into this
report by reference.
|
|
| Item 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information regarding security ownership of certain beneficial
owners and management will be set forth in the definitive Proxy
Statement for webMethods’ 2005 Annual Meeting of
Stockholders, and is incorporated into this report by reference.
The following table provides information concerning webMethods
securities authorized for issuance under equity compensation
plans at March 31, 2005.
Equity Compensation Plan Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of securities | |
|
|
|
Number of securities remaining | |
| |
|
to be issued upon | |
|
Weighted-average | |
|
available for future issuance | |
| |
|
exercise of | |
|
exercise price of | |
|
under equity compensation | |
| |
|
outstanding options, | |
|
outstanding options, | |
|
plans (excluding securities | |
| Plan category |
|
warrants and rights | |
|
warrants and rights | |
|
reflected in column (a)) | |
| |
|
| |
|
| |
|
| |
| |
|
(a) | |
|
(b) | |
|
(c) | |
|
Equity compensation plans approved by security holders
|
|
|
17,515,400 |
(1) |
|
$ |
12.4645 |
(1) |
|
|
3,925,827 |
(1) |
|
Equity compensation plans not approved by securities holders
|
|
|
141,616 |
(2) |
|
|
45.3825 |
(2) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,657,016 |
|
|
$ |
12.7285 |
|
|
|
3,925,827 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Excludes webMethods’ Employee Stock Purchase Plan, under
which, as of March 31, 2005, a total of 5,250,000 shares of
webMethods common stock have been reserved for issuance,
1,385,586 shares had been issued at an average purchase price of
$10.5650 and 3,864,414 shares remained available for future
issuance. Also excludes an additional 2,462,195 shares of
webMethods common stock that were reserved for issuance under
the webMethods, Inc. Amended and Restated Stock Option Plan as
of April 1, 2005. |
| |
| (2) |
Consists only of shares of webMethods common stock to be issued
upon the exercise of stock options issued by Active Software
under its 1999 Stock Option Plan, its 1996 and 1996A Stock
Option Plans and its 1999 Director Option Plan, and stock
options assumed by Active Software that had been granted by the
respective company under the TransLink Software, Inc. Stock
Option Plan, Alier, Inc. |
47
|
|
|
1997 Stock Option Plan and Alier, Inc. 1996 Stock Option Plan,
all such options having been granted prior to the acquisition of
Active Software by webMethods, Inc. in August 2000. |
When webMethods, Inc. acquired Active Software in August 2000,
webMethods, Inc. assumed stock options granted by Active
Software prior to the completion of that acquisition under
Active Software’s 1999 Stock Option Plan and 1996 and
1996A Stock Option Plans. Options granted under those plans
generally had exercise prices not less than the fair market
value of Active Software’s common stock on the date of
grant, vested over 50 months and expire 10 years from
the date of grant. In connection with that acquisition,
webMethods, Inc. also assumed stock options granted by Active
Software prior to the completion of that acquisition under
Active Software’s 1999 Director Option Plan, under which
each newly elected director of Active Software was eligible to
receive an option to purchase a fixed number of shares of Active
Software common stock and each non-employee director was
eligible to receive an option to purchase a fixed number of
shares at each annual meeting of stockholders of Active Software
commencing in 2000; all such options vested immediately upon
grant and expire 10 years from the date of grant.
|
|
| Item 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Information regarding certain relationships and related
transactions will be set forth in the definitive Proxy Statement
for webMethods’ 2005 Annual Meeting of Stockholders, and is
incorporated into this report by reference.
|
|
| Item 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information regarding fees billed for services rendered by
webMethods’ independent registered public accounting firm
and related information will be set forth in the definitive
Proxy Statement for webMethods’ 2005 Annual Meeting of
Stockholders, and is incorporated into this report by reference.
48
PART IV
|
|
| Item 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K |
(a) Financial Statements: The following documents
are filed as part of the report:
|
|
|
| |
(1) |
Report of Independent Registered Public Accounting Firm |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-1 |
|
|
Consolidated Balance Sheets at March 31, 2005 and 2004
|
|
|
F-3 |
|
|
Consolidated Statements of Operations and Comprehensive Loss for
the years ended March 31, 2005, 2004 and 2003
|
|
|
F-4 |
|
|
Consolidated Statements of Changes in Stockholders’ Equity
for the years ended March 31, 2005, 2004 and 2003
|
|
|
F-5 |
|
|
Consolidated Statements of Cash Flows for the years ended
March 31, 2005, 2004 and 2003
|
|
|
F-6 |
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7 |
|
|
|
|
| |
(2) |
Financial Statement Schedules and Report Thereon |
| |
|
|
|
|
|
Schedule II — Valuation and Qualifying Accounts
|
|
|
F-28 |
|
|
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
|
|
|
F-29 |
|
(b) Exhibits. The following documents are filed or
incorporated herein by reference.
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
3.1(1) |
|
|
Fifth Amended and Restated Certificate of Incorporation of
webMethods, Inc., as amended |
| |
3.2(2) |
|
|
Amended and Restated Bylaws of webMethods, Inc. |
| |
4.1(3) |
|
|
Specimen certificate for shares of webMethods, Inc. Common Stock |
| |
4.2(4) |
|
|
Rights Agreement dated as of October 18, 2001 between
webMethods, Inc. and American Stock Transfer & Trust Company |
| |
10.2(5) |
|
|
webMethods, Inc. Amended and Restated Stock Option Plan, as
Amended |
| |
10.3(3) |
|
|
Employee Stock Purchase Plan |
| |
10.4(3) |
|
|
Indemnification Agreement entered into between webMethods, Inc.
and each of its directors |
| |
10.5(6) |
|
|
Executive Agreement entered into between webMethods, Inc. and
certain of its executive officers |
| |
10.6(7) |
|
|
Form of Stock Option Agreement for stock option grants to
employees or officers other than California residents |
| |
10.7(8) |
|
|
Form of Stock Option Agreement for stock option grants to
directors |
| |
10.8(7) |
|
|
Form of notice of grant of stock option |
| |
10.9* |
|
|
Deferred Compensation Plan for Directors, as amended |
| |
10.10(8 |
) |
|
Consulting Agreement dated October 3, 2004 between Phillip
Merrick and webMethods, Inc. |
| |
14(9) |
|
|
webMethods, Inc. Code of Ethics |
| |
21.1* |
|
|
Subsidiaries of webMethods, Inc. |
| |
23.1* |
|
|
Consent of PricewaterhouseCoopers LLP |
| |
24 |
|
|
Power of Attorney (included on signature page hereof) |
49
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
31.1* |
|
|
Rule 13a-14(a) Certification of Chief Executive Officer |
| |
31.2* |
|
|
Rule 13a-14(a) Certification of Chief Accounting Officer |
| |
31.3* |
|
|
Rule 13a-14(a) Certification of Executive Vice President |
| |
32.1* # |
|
|
Section 1350 Certification of Chief Executive Officer |
| |
32.2* # |
|
|
Section 1350 Certification of Chief Accounting Officer |
| |
32.3* # |
|
|
Section 1350 Certification of Executive Vice President |
|
|
| (1) |
Incorporated by reference to webMethods’ Form 10-K for
the year ended March 31, 2002 (File No. 1-15681). |
| |
| (2) |
Incorporated by reference to webMethods’ Form 10-Q for
the three months ended December 31, 2004 (File
No. 1-15681). |
| |
| (3) |
Incorporated by reference to webMethods’ Registration
Statement on Form S-1, as amended
(File No. 333-91309). |
| |
| (4) |
Incorporated by reference to webMethods’ Registration
Statement on Form 8-A (File No. 1-15681). |
| |
| (5) |
Incorporated by reference to webMethods’ Form 10-K for
the year ended March 31, 2003 (File No. 1-15681). |
| |
| (6) |
Incorporated by reference to webMethods’ Form 10-Q for
the three months ended June 30, 2004 (File
No. 1-15681). |
| |
| (7) |
Incorporated by reference to webMethods’ Form 8-K
dated October 2, 2004 (File No. 1-15681). |
| |
| (8) |
Incorporated by reference to webMethods’ Form 10-Q for
the three months ended September 30, 2004 (File
No. 1-15681). |
| |
| (9) |
Incorporated by reference to webMethods’ definitive proxy
statement dated July 29, 2003 (File No. 1-15681). |
| |
| * |
Filed herewith. |
| |
| # |
This item is furnished as an exhibit to this report but is not
filed with the Securities and Exchange Commission. |
(c) Financial Statement Schedule. The consolidated
financial statement schedule required by this Item is listed
under Item 15(a)(2).
| |
|
|
|
|
|
|
| |
|
Schedule | |
|
Description |
| |
|
| |
|
|
| |
|
|
II |
|
|
Valuation and Qualifying Accounts |
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are applicable, and therefore have been omitted.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Fairfax, Virginia on
June 13, 2005.
|
|
| |
|
| |
David Mitchell |
| |
President and Chief Executive Officer |
We, the undersigned officers and directors of webMethods, Inc.,
hereby severally constitute and appoint David Mitchell and Mark
Wabschall, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys,
with full power to them, to sign for us in our names in the
capacities indicated below, amendments to this report, and
generally to do all things in our names and on our behalf in
such capacities to enable webMethods, Inc. to comply with the
provisions of the Securities Exchange Act of 1934, as amended,
and call requirements of the Securities and Exchange Commission.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
/s/ David Mitchell
David
Mitchell |
|
President, Chief Executive Officer and Director
|
|
June 13, 2005 |
/s/ Mark L. Wabschall
Mark
L. Wabschall |
|
Senior Vice President, Finance and Chief Accounting Officer
(principal accounting and financial officer)
|
|
June 13, 2005 |
/s/ Mary Dridi
Mary
Dridi |
|
Executive Vice President and Treasurer
|
|
June 13, 2005 |
/s/ James P. Gauer
James
P. Gauer |
|
Director
|
|
June 13, 2005 |
/s/ R. James Green
R.
James Green |
|
Director
|
|
June 13, 2005 |
/s/ William A. Halter
William
A. Halter |
|
Director
|
|
June 13, 2005 |
/s/ Jerry J. Jasinowski
Jerry
J. Jasinowski |
|
Director
|
|
June 13, 2005 |
/s/ Jack L. Lewis
Jack
L. Lewis |
|
Director
|
|
June 13, 2005 |
/s/ Vincent J.
Mullarkey
Vincent
J. Mullarkey |
|
Director
|
|
June 13, 2005 |
/s/ Gene Riechers
Gene
Riechers |
|
Director
|
|
June 13, 2005 |
/s/ William V. Russell
William
V. Russell |
|
Non-Executive Chairman of the Board and Director
|
|
June 13, 2005 |
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
webMethods, Inc.
We have completed an integrated audit of webMethods, Inc.’s
2005 consolidated financial statements and of its internal
control over financial reporting as of March 31, 2005 and
audits of its 2004 and 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of webMethods,
Inc. and its subsidiaries at March 31, 2005 and 2004, and
the results of their operations and their cash flows for each of
the three years in the period ended March 31, 2005 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of March 31, 2005 based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of March 31, 2005,
based on criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
F-1
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS
LLP
McLean, Virginia
June 13, 2005
F-2
WEBMETHODS, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
share and per share | |
| |
|
amounts) | |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
57,209 |
|
|
$ |
75,462 |
|
| |
Marketable securities available for sale
|
|
|
78,332 |
|
|
|
44,328 |
|
| |
Accounts receivable, net of allowance of $1,862 and $2,103
|
|
|
47,326 |
|
|
|
46,741 |
|
| |
Prepaid expenses and other current assets
|
|
|
6,401 |
|
|
|
6,235 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
189,268 |
|
|
|
172,766 |
|
|
Marketable securities available for sale
|
|
|
14,513 |
|
|
|
36,157 |
|
|
Property and equipment, net
|
|
|
10,342 |
|
|
|
8,106 |
|
|
Goodwill
|
|
|
46,704 |
|
|
|
46,704 |
|
|
Intangible assets, net
|
|
|
8,390 |
|
|
|
10,787 |
|
|
Other assets
|
|
|
6,127 |
|
|
|
9,130 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
275,344 |
|
|
$ |
283,650 |
|
| |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
8,673 |
|
|
$ |
10,919 |
|
| |
Accrued expenses
|
|
|
16,506 |
|
|
|
17,084 |
|
| |
Accrued salaries and commissions
|
|
|
12,219 |
|
|
|
11,560 |
|
| |
Deferred revenue
|
|
|
43,055 |
|
|
|
36,018 |
|
| |
Short-term borrowings
|
|
|
— |
|
|
|
2,584 |
|
| |
Current portion of capital lease obligations
|
|
|
475 |
|
|
|
909 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
80,928 |
|
|
|
79,074 |
|
| |
Capital lease obligations, net of current portion
|
|
|
139 |
|
|
|
373 |
|
| |
Other long term liabilities
|
|
|
3,374 |
|
|
|
1,000 |
|
| |
Long term deferred revenue
|
|
|
6,371 |
|
|
|
6,066 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
90,812 |
|
|
|
86,513 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Common stock, $0.01 par value; 500,000,000 shares authorized;
53,346,623 and 52,746,722 shares issued and outstanding
|
|
|
533 |
|
|
|
527 |
|
| |
Additional paid-in capital
|
|
|
524,487 |
|
|
|
521,455 |
|
| |
Deferred stock compensation and warrant charge
|
|
|
(2,480 |
) |
|
|
(5,625 |
) |
| |
Accumulated deficit
|
|
|
(340,224 |
) |
|
|
(321,473 |
) |
| |
Accumulated other comprehensive income
|
|
|
2,216 |
|
|
|
2,253 |
|
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
184,532 |
|
|
|
197,137 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
275,344 |
|
|
$ |
283,650 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
License
|
|
$ |
86,800 |
|
|
$ |
92,740 |
|
|
$ |
117,066 |
|
| |
Professional services
|
|
|
49,218 |
|
|
|
43,634 |
|
|
|
33,378 |
|
| |
Maintenance
|
|
|
64,583 |
|
|
|
53,167 |
|
|
|
46,310 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total revenue
|
|
|
200,601 |
|
|
|
189,541 |
|
|
|
196,754 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization of intangibles
|
|
|
2,397 |
|
|
|
1,199 |
|
|
|
— |
|
| |
License
|
|
|
1,252 |
|
|
|
2,211 |
|
|
|
1,937 |
|
| |
Professional services and maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
56 |
|
|
|
251 |
|
| |
|
Other professional services and maintenance
|
|
|
56,954 |
|
|
|
53,457 |
|
|
|
41,937 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total cost of revenue
|
|
|
60,603 |
|
|
|
56,923 |
|
|
|
44,125 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
139,998 |
|
|
|
132,618 |
|
|
|
152,629 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation and warrant charge
|
|
|
2,645 |
|
|
|
2,769 |
|
|
|
3,761 |
|
| |
|
Other sales and marketing costs
|
|
|
81,668 |
|
|
|
91,664 |
|
|
|
92,958 |
|
| |
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
15 |
|
|
|
97 |
|
| |
|
Other research and development costs
|
|
|
44,518 |
|
|
|
45,045 |
|
|
|
47,441 |
|
| |
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock based compensation
|
|
|
— |
|
|
|
7 |
|
|
|
47 |
|
| |
|
Other general and administrative costs
|
|
|
25,042 |
|
|
|
17,873 |
|
|
|
17,831 |
|
| |
Restructuring and other related charges
|
|
|
5,849 |
|
|
|
3,920 |
|
|
|
2,155 |
|
| |
In-process research and development
|
|
|
— |
|
|
|
4,284 |
|
|
|
— |
|
| |
Settlement of intellectual property matter
|
|
|
— |
|
|
|
2,250 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total operating expenses
|
|
|
159,722 |
|
|
|
167,827 |
|
|
|
164,290 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(19,724 |
) |
|
|
(35,209 |
) |
|
|
(11,661 |
) |
|
Interest income
|
|
|
2,487 |
|
|
|
2,851 |
|
|
|
4,732 |
|
|
Interest expense
|
|
|
(98 |
) |
|
|
(205 |
) |
|
|
(674 |
) |
|
Other (expense) income
|
|
|
(124 |
) |
|
|
(461 |
) |
|
|
18 |
|
|
Impairment of equity investment in private companies
|
|
|
(1,057 |
) |
|
|
— |
|
|
|
(1,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss before taxes
|
|
$ |
(18,516 |
) |
|
$ |
(33,024 |
) |
|
$ |
(8,585 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
235 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(18,751 |
) |
|
$ |
(33,024 |
) |
|
$ |
(8,585 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(0.35 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.17 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
53,102,934 |
|
|
|
52,136,919 |
|
|
|
51,281,729 |
|
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(18,751 |
) |
|
$ |
(33,024 |
) |
|
$ |
(8,585 |
) |
| |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Unrealized loss on securities available for sale
|
|
|
(496 |
) |
|
|
(165 |
) |
|
|
(135 |
) |
| |
|
Foreign currency cumulative translation adjustment
|
|
|
459 |
|
|
|
2,306 |
|
|
|
750 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total comprehensive loss
|
|
$ |
(18,788 |
) |
|
$ |
(30,883 |
) |
|
$ |
(7,970 |
) |
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
for the years ended March 31, 2003, 2004 and 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Deferred | |
|
|
|
Accumulated | |
|
|
| |
|
|
|
|
|
Stock | |
|
|
|
Other | |
|
|
| |
|
Common Stock | |
|
Additional | |
|
Compensation | |
|
|
|
Comprehensive | |
|
|
| |
|
| |
|
Paid-in | |
|
and Warrant | |
|
Accumulated | |
|
Income | |
|
|
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Charge | |
|
Deficit | |
|
(Loss) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, March 31, 2002
|
|
|
50,477 |
|
|
$ |
505 |
|
|
$ |
510,281 |
|
|
$ |
(14,875 |
) |
|
$ |
(279,864 |
) |
|
$ |
(503 |
) |
|
$ |
215,544 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net
|
|
|
907 |
|
|
|
9 |
|
|
|
2,608 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,617 |
|
|
ESPP common stock issuances
|
|
|
383 |
|
|
|
4 |
|
|
|
2,957 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,961 |
|
|
Adjustment of deferred compensation related to forfeitures
|
|
|
— |
|
|
|
— |
|
|
|
(303 |
) |
|
|
303 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred warrant charge
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,402 |
|
|
|
— |
|
|
|
— |
|
|
|
3,402 |
|
|
Amortization of deferred stock compensation related to
restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
470 |
|
|
|
— |
|
|
|
— |
|
|
|
470 |
|
|
Compensation charge related to stock option grants to
non-employees
|
|
|
— |
|
|
|
— |
|
|
|
285 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
285 |
|
|
Proceeds from OEM fees applied to deferred warrant charge
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,250 |
|
|
|
— |
|
|
|
— |
|
|
|
1,250 |
|
|
Other comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
615 |
|
|
|
615 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,585 |
) |
|
|
— |
|
|
|
(8,585 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2003
|
|
|
51,767 |
|
|
$ |
518 |
|
|
$ |
515,828 |
|
|
$ |
(9,450 |
) |
|
$ |
(288,449 |
) |
|
$ |
112 |
|
|
$ |
218,559 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net
|
|
|
620 |
|
|
|
6 |
|
|
|
3,033 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,039 |
|
|
ESPP common stock issuances
|
|
|
360 |
|
|
|
3 |
|
|
|
2,478 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,481 |
|
|
Adjustment of deferred compensation related to forfeitures
|
|
|
— |
|
|
|
— |
|
|
|
(48 |
) |
|
|
48 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred warrant charge
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,645 |
|
|
|
— |
|
|
|
— |
|
|
|
2,645 |
|
|
Amortization of deferred stock compensation related to
restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
132 |
|
|
|
— |
|
|
|
— |
|
|
|
132 |
|
|
Compensation charge related to stock option grants to
non-employees
|
|
|
— |
|
|
|
— |
|
|
|
70 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
70 |
|
|
Compensation charge related to accelerated vesting of stock
option grants issued to employees
|
|
|
— |
|
|
|
— |
|
|
|
94 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
94 |
|
|
Proceeds from OEM fees applied to deferred warrant charge
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
Other comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,141 |
|
|
|
2,141 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(33,024 |
) |
|
|
— |
|
|
|
(33,024 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2004
|
|
|
52,747 |
|
|
$ |
527 |
|
|
$ |
521,455 |
|
|
$ |
(5,625 |
) |
|
$ |
(321,473 |
) |
|
$ |
2,253 |
|
|
$ |
197,137 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net
|
|
|
296 |
|
|
|
3 |
|
|
|
982 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
985 |
|
|
ESPP common stock issuances
|
|
|
304 |
|
|
|
3 |
|
|
|
1,998 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,001 |
|
|
Amortization of deferred warrant charge
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,645 |
|
|
|
— |
|
|
|
— |
|
|
|
2,645 |
|
|
Compensation charge payable in common stock under deferred
compensation plan for directors
|
|
|
— |
|
|
|
— |
|
|
|
52 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52 |
|
|
Proceeds from OEM fees applied to deferred warrant charge
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
|
Other comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(37 |
) |
|
|
(37 |
) |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(18,751 |
) |
|
|
— |
|
|
|
(18,751 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2005
|
|
|
53,347 |
|
|
$ |
533 |
|
|
$ |
524,487 |
|
|
$ |
(2,480 |
) |
|
$ |
(340,224 |
) |
|
$ |
2,216 |
|
|
$ |
184,532 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(18,751 |
) |
|
$ |
(33,024 |
) |
|
$ |
(8,585 |
) |
| |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
6,343 |
|
|
|
8,428 |
|
|
|
10,044 |
|
| |
|
Provision for doubtful accounts
|
|
|
244 |
|
|
|
19 |
|
|
|
384 |
|
| |
|
Impairment of equity investments
|
|
|
1,057 |
|
|
|
— |
|
|
|
1,000 |
|
| |
|
Amortization of deferred stock compensation and compensation for
accelerated vesting related to employee stock options and
non-employee stock warrant
|
|
|
2,645 |
|
|
|
2,846 |
|
|
|
4,156 |
|
| |
|
Amortization of acquired intangibles
|
|
|
2,397 |
|
|
|
1,199 |
|
|
|
— |
|
| |
|
Write off of in-process research and development
|
|
|
— |
|
|
|
4,284 |
|
|
|
— |
|
| |
|
Conversion of interest income to equity in private company
investments
|
|
|
— |
|
|
|
(257 |
) |
|
|
— |
|
| |
|
Non cash restructuring and related costs, and other
|
|
|
— |
|
|
|
473 |
|
|
|
— |
|
| |
|
Amortization of deferred rent
|
|
|
(200 |
) |
|
|
— |
|
|
|
— |
|
| |
Increase (decrease) in cash resulting from changes in
assets and liabilities, net of effect of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
(252 |
) |
|
|
(534 |
) |
|
|
4,477 |
|
| |
|
Prepaid expenses and other current assets
|
|
|
(212 |
) |
|
|
1,608 |
|
|
|
181 |
|
| |
|
Other non-current assets
|
|
|
1,956 |
|
|
|
91 |
|
|
|
551 |
|
| |
|
Accounts payable
|
|
|
(2,386 |
) |
|
|
406 |
|
|
|
(6,065 |
) |
| |
|
Accrued expenses
|
|
|
(1,064 |
) |
|
|
1,752 |
|
|
|
(1,698 |
) |
| |
|
Deferred rent
|
|
|
3,105 |
|
|
|
— |
|
|
|
— |
|
| |
|
Accrued salaries and commissions
|
|
|
529 |
|
|
|
(649 |
) |
|
|
(4,689 |
) |
| |
|
Deferred revenue
|
|
|
6,989 |
|
|
|
(6,650 |
) |
|
|
(12,562 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
2,400 |
|
|
|
(20,008 |
) |
|
|
(12,806 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Acquisition of businesses and technology, net of cash acquired
|
|
|
— |
|
|
|
(32,384 |
) |
|
|
— |
|
| |
Purchases of property and equipment
|
|
|
(8,380 |
) |
|
|
(2,744 |
) |
|
|
(2,967 |
) |
| |
Net maturities (purchases) of marketable securities
available for sale
|
|
|
(12,857 |
) |
|
|
41,274 |
|
|
|
(8,717 |
) |
| |
Repayments of investments in private companies
|
|
|
— |
|
|
|
1,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(21,237 |
) |
|
|
7,146 |
|
|
|
(11,684 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Short-term borrowings
|
|
|
3,533 |
|
|
|
5,882 |
|
|
|
— |
|
| |
Payments on short-term borrowings
|
|
|
(6,080 |
) |
|
|
(3,561 |
) |
|
|
— |
|
| |
Borrowings under capital leases
|
|
|
— |
|
|
|
— |
|
|
|
2,500 |
|
| |
Payments on capital leases
|
|
|
(937 |
) |
|
|
(3,255 |
) |
|
|
(4,932 |
) |
| |
Proceeds from exercise of stock options
|
|
|
1,037 |
|
|
|
3,039 |
|
|
|
2,617 |
|
| |
Proceeds from ESPP common stock issuances
|
|
|
2,002 |
|
|
|
2,481 |
|
|
|
2,961 |
|
| |
Proceeds from OEM fees applied to deferred warrant charge
|
|
|
500 |
|
|
|
1,000 |
|
|
|
1,250 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
55 |
|
|
|
5,586 |
|
|
|
4,396 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of the exchange rate on cash and cash equivalents
|
|
|
529 |
|
|
|
3,036 |
|
|
|
1,299 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(18,253 |
) |
|
|
(4,240 |
) |
|
|
(18,795 |
) |
|
Cash and cash equivalents at beginning of period
|
|
|
75,462 |
|
|
|
79,702 |
|
|
|
98,497 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
57,209 |
|
|
$ |
75,462 |
|
|
$ |
79,702 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
webMethods, Inc. is a leading provider of business integration
and optimization software. Our solutions enable organizations to
deliver strategic applications to the business faster while
allowing them to understand what is happening with their
business in real-time and to predict what can be expected to
happen. The Company was incorporated in Delaware on
June 12, 1996.
The Company’s operations are subject to certain risks and
uncertainties, including, among others, risks of failing to have
total revenue, license revenue or operating results within the
range of guidance the Company provides publicly or the
expectations of investors or securities analysts, and potential
exposure to litigation costs and exposures resulting therefrom;
competition with current or potential competitors that may have
more experience developing solutions competitive with the
Company’s, larger technical staffs, larger customer bases,
more established distribution channels and greater financial,
marketing or other resources; rapid technological changes;
success of the Company’s product marketing, product
development and sales strategies; risks of infringing upon
intellectual property rights of others, or having others
appropriate the Company’s technology or intellectual
property rights; risks in executing upon the Company’s
sales and other strategies; the need to attract and retain key
personnel; risks of improper activities by employees or costs of
investigating allegations of improper activities or defending
claims or investigations with respect thereto; possible warranty
or product liability claims; , and the availability of
additional capital financing on terms acceptable to the Company.
2. Summary of significant
accounting policies
|
|
|
Principles of consolidation |
The accompanying consolidated financial statements include the
accounts of webMethods, Inc. and all wholly owned subsidiaries
(collectively, the “Company”). All material
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from
these estimates.
The carrying amount of current assets and current liabilities
approximates fair value because of the short maturity of these
instruments.
|
|
|
Cash and cash equivalents |
The Company considers all highly liquid investments with
original maturities of three months or less from date of
purchase to be cash equivalents.
|
|
|
Allowance for doubtful accounts |
The Company maintains allowances for doubtful accounts for
estimated losses which may result from the inability of our
customers to make required payments to us. These allowances are
established through analysis of the credit-worthiness of each
customer with a receivable balance, determined by credit reports
F-7
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2. Summary of significant
accounting policies — (Continued)
from third parties, published or publicly available financial
information, customer-specific experience including payment
practices and history, inquiries, and other financial
information from our customers.
The Company’s marketable securities consist of corporate
bonds, commercial paper and U.S. government and agency
securities with maturities of less than two years. Securities
are classified as available for sale since management intends to
hold the securities for an indefinite period and may sell the
securities prior to their maturity. The marketable securities
are carried at aggregate fair value based generally on quoted
market prices. Gains and losses are determined based on the
specific identification method. Available for sale securities
that are reasonably expected by management to be sold within one
year from the balance sheet date are classified as current
assets.
Property and equipment are stated at cost. Depreciation is
computed on the straight-line method over the estimated useful
lives of the related assets, ranging from three to five years.
Leasehold improvements are amortized over the shorter of the
lease term or their useful life. Leased property or equipment
meeting certain criteria is capitalized and the present value of
the related lease payments is recorded as a liability.
Amortization of capitalized leased assets is computed on the
straight-line method over the term of the lease. Repairs and
maintenance are expensed as incurred. At the time of retirement
or other disposal of property and equipment, the cost and
related accumulated depreciation are removed from their
respective accounts and any resulting gain or loss is included
in operations.
Included in property and equipment is the cost of internally
developed software. In accordance with Statement of Position
(“SOP”) 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”,
eligible internally developed software costs incurred are
capitalized subsequent to the completion of the preliminary
project stage. After all substantial testing and deployment is
completed and the software is ready for its intended use,
internally developed software costs are amortized using the
straight-line method over the estimated useful life of the
software, generally up to three years.
|
|
|
Investments in private companies |
Investments in private companies in which the Company owns less
than a 20% voting equity interest and has no significant
influence are accounted for using the cost method. Included in
other assets as of March 31, 2005 and 2004, is $0 and
$1,057,000, respectively, of private company preferred stock
carried at cost. This private company was also a business
partner of the Company. The Company performs periodic reviews of
its investment for impairment. The investments in privately held
companies are considered impaired when a review of the
investees’ operations and other indicators of impairment
indicate that the carrying value of the investment is not likely
to be recoverable. Such indicators include, but are not limited
to, limited capital resources, limited prospects of receiving
additional financing, and prospects for liquidity of the related
securities. During fiscal years 2005 and 2003, the Company
recorded other than temporary write-downs of $1,057,000 and
$1,000,000, respectively, related to the impairment of the
investment in this private company.
|
|
|
Software development costs |
Software development costs, which include compensation, employee
benefits, professional fees, travel, communications and
allocated facilities, recruitment and overhead costs, are
expensed as incurred until technological feasibility has been
established, at which time such costs are capitalized until the
product is
F-8
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2. Summary of significant
accounting policies — (Continued)
available for general release to customers. The Company defines
the establishment of technological feasibility as the completion
of all planning, designing, coding and testing activities that
are necessary to establish products that meet design
specifications including functions, features and technical
performance requirements. Under the Company’s definition,
establishing technological feasibility is considered complete
after working model is completed and tested. To date, the period
between technological feasibility and general availability has
been short, and thus all software development costs qualifying
for capitalization are insignificant.
|
|
|
Goodwill and acquired intangible assets |
On April 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142
(SFAS No. 142) “Goodwill and Other Intangible
Assets,” which eliminated the amortization of goodwill and
other intangibles with indefinite lives unless the intangible
asset is deemed to be impaired. In accordance with
SFAS 142, all of our goodwill is associated with our
corporate reporting unit, as we do not have multiple reporting
units. In accordance with the SFAS No. 142, goodwill
is tested for impairment using a two-step process. The first
step is to identify a potential impairment and the second step
measures the amount of the impairment loss, if any. Goodwill is
deemed to be impaired if the carrying amount of the asset
exceeds its estimated fair value. The Company performed an
impairment test of its goodwill and determined that no
impairment of remaining goodwill existed at adoption and at
March 31, 2005.
Finite-lived intangible assets are amortized over their useful
lives and are subject to impairment tests under
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”. See Impairment of
long-lived assets accounting policy below.
|
|
|
Impairment of long-lived assets |
The Company periodically evaluates the recoverability of its
long-lived assets. This evaluation consists of a comparison of
the carrying value of the assets with the assets’ expected
future cash flows, undiscounted and without interest costs.
Estimates of expected future cash flows represent
management’s best estimate based on reasonable and
supportable assumptions and projections. If the expected future
cash flows, undiscounted and without interest charges, exceed
the carrying value of the asset, no impairment is recognized.
Impairment losses are measured as the difference between the
carrying value of long-lived assets and their fair value, based
on discounted future cash flows of the related asset.
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences of temporary differences and
income tax credits. Temporary differences are primarily the
result of the differences between the tax bases of assets and
liabilities and their financial reporting amounts. Deferred tax
assets and liabilities are measured by applying enacted
statutory tax rates applicable to the future years in which
deferred tax assets or liabilities are expected to be settled or
realized. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized. The Company has provided a full valuation allowance
against its net deferred tax asset as of March 31, 2005 and
March 31, 2004.
|
|
|
Foreign currency translations |
The functional currency for the Company’s foreign
subsidiaries is the local currency. Assets and liabilities of
the Company’s foreign operations are translated into U.S.
dollars at the exchange rates in effect at the balance sheet
date; revenue and expenses are translated using the average
exchange rates in
F-9
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2. Summary of significant
accounting policies — (Continued)
effect during the period. The cumulative translation adjustments
are included in accumulated other comprehensive income or loss,
which is a separate component of stockholders’ equity.
Foreign currency transaction gains or losses are included in the
results of operations.
The Company enters into arrangements, which may include the sale
of software licenses, professional services and maintenance or
various combinations of each element. The Company recognizes
revenue based on SOP 97-2, “Software Revenue
Recognition,” as amended, and modified by SOP 98-9,
“Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions”, SEC Staff Accounting
Bulletin (“SAB”) No. 104 “Revenue
Recognition”, and other authoritative accounting
literature. SOP 98-9 modified SOP 97-2 by requiring revenue to
be recognized using the “residual method” if certain
conditions are met. Revenues are recognized based on the
residual method when an agreement has been signed by both
parties, the fees are fixed or determinable, collection of the
fees is reasonably assured, delivery of the product has occurred
and no other significant obligations remain. Historically, the
Company has not experienced significant returns or offered
exchanges of its products.
For multi-element arrangements, each element of the arrangement
is analyzed and the Company allocates a portion of the total fee
under the arrangement to the undelivered elements, such as
professional services, training and maintenance. Revenue
allocated to the undelivered elements is deferred using
vendor-specific objective evidence of fair value of the elements
and the remaining portion of the fee is allocated to the
delivered elements (generally the software license), under the
residual method. Vendor-specific objective evidence of fair
value is based on the price the customer is required to pay when
the element is sold separately (i.e. hourly time and material
rates charged for consulting services when sold separately from
a software license and the optional renewal rates charged by the
Company for maintenance arrangements).
For electronic delivery, the product is considered to have been
delivered when the access code to download the software from the
Company’s web site and activation key, as applicable, has
been provided to the customer. If an element of the license
agreement has not been delivered, revenue for the element is
deferred based on its vendor-specific objective evidence of fair
value. If vendor-specific objective evidence of fair value does
not exist, all revenue is deferred until sufficient objective
evidence exists or all elements have been delivered.
If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due. If collectibility
is not considered probable, revenue is recognized when the fee
is collected.
License revenue: Amounts allocated to license revenue under the
residual method are recognized at the time of delivery of the
software when vendor-specific objective evidence of fair value
exists for the undelivered elements, if any, and all the other
revenue recognition criteria discussed above have been met.
Professional services revenue: Revenue from professional
services is comprised of consulting, implementation services and
training. Consulting services are generally sold on a
time-and-materials basis and include services such as
installation and building non-complex interfaces to allow the
software to operate in customized environments. Services are
generally separable from the other elements under the
arrangement since the performance of the services is not
essential to the functionality (i.e. the services do not involve
significant production, modification or customization of the
software or building complex interfaces) of any other element of
the transaction. Revenue for professional services and training
is recognized when the services are performed.
F-10
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2. Summary of significant
accounting policies — (Continued)
Maintenance revenue: Maintenance revenue consists primarily of
fees for providing when-and-if-available unspecified software
upgrades and technical support over a specified term.
Maintenance revenue is recognized on a straight-line basis over
the term of the contract.
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 years ended
March 31, 2005, 2004 and 2003 (in thousands, except per
share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net loss, as reported
|
|
$ |
(18,751 |
) |
|
$ |
(33,024 |
) |
|
$ |
(8,585 |
) |
|
Add: Stock-based compensation expense determined under intrinsic
value method
|
|
|
— |
|
|
|
202 |
|
|
|
755 |
|
|
Less: Stock-based compensation expense determined under fair
value method
|
|
|
(31,233 |
) |
|
|
(51,084 |
) |
|
|
(56,466 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss, pro forma
|
|
$ |
(49,984 |
) |
|
$ |
(83,906 |
) |
|
$ |
(64,296 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share, as reported
|
|
$ |
(0.35 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.17 |
) |
|
Basic and diluted net loss per common share, pro forma
|
|
$ |
(0.94 |
) |
|
$ |
(1.61 |
) |
|
$ |
(1.25 |
) |
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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee Stock | |
|
Employee Stock | |
| |
|
Option Plans | |
|
Purchase Plan | |
| |
|
March 31, | |
|
March 31, | |
| |
|
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Expected volatility
|
|
|
85 |
% |
|
|
95 |
% |
|
|
97 |
% |
|
|
62 |
% |
|
|
68 |
% |
|
|
87 |
% |
|
Risk-free interest rate
|
|
|
3.8 |
% |
|
|
2.9 |
% |
|
|
2.9 |
% |
|
|
3.1 |
% |
|
|
2.9 |
% |
|
|
3.0 |
% |
|
Expected life (years)
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
1.3 |
|
|
|
1 |
|
|
|
0.5 |
|
|
Expected dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
The weighted average fair value per share for stock option
grants that were awarded during the years ended March 31,
2005, 2004 and 2003 was $4.84, $6.15 and $6.14, respectively.
|
|
|
Stock-based compensation to non-employees and warrant
charge |
The Company measures expense for its non-employee stock-based
compensation and warrant charge using the fair value method.
Under the fair value method, the fair value of each option or
warrant is estimated on the date of the grant using the
Black-Scholes valuation model with the following weighted
average assumptions: risk-free interest rate at the date of
grant, expected life of the instrument, expected
F-11
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2. Summary of significant
accounting policies — (Continued)
dividends and volatility at the date of the grant. The risk-free
interest rate and the volatility are based on the expected term
of the instrument.
Basic loss per share is computed based on the weighted average
number of outstanding shares of common stock of webMethods, Inc.
Diluted loss per share adjusts the weighted average for the
potential dilution that could occur if stock options or warrants
or convertible securities were exercised or converted into
common stock of webMethods, Inc. Diluted loss per share is the
same as basic loss per share for all periods presented because
the effects of such items were anti-dilutive given the
Company’s losses.
The Company operates as a single reportable segment and will
evaluate additional segment disclosure requirements as it
expands its operations. See Note 18 for required geographic
segment information.
|
|
|
Guarantees and indemnification |
In January 2003, the Company adopted FASB Interpretation
No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” which requires that the Company
recognize the fair value for guarantee and indemnification
arrangements issued or modified after December 31, 2002, if
these arrangements are within the scope of the Interpretation.
In addition, the Company continues to monitor the conditions
that are subject to the guarantees and indemnifications, as
required under previously existing generally accepted accounting
principles, in order to identify if a loss has occurred. If the
Company determines it is probable that a loss has occurred, then
any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses
granted by the Company contain provisions that indemnify
licensees of the Company’s software from damages and costs
resulting from claims alleging that the Company’s software
infringes the intellectual property rights of a third party. The
Company has historically received only a limited number of
requests for indemnification under these provisions, and has not
been required to make material payments pursuant to these
provisions. Accordingly, the Company has not recorded a
liability related to these indemnification provisions. The
Company does not have any guarantees or indemnification
arrangements other than the indemnification clause in some of
its software licenses, indemnification agreements with the
Company’s directors and executive officers and certain
guarantees of performance by subsidiaries. The adoption of this
standard did not have a material effect on the Company’s
financial position, results of operations and cash flows.
|
|
|
Recent accounting pronouncements |
In May 2005 the Financial Accounting Standards Board issued
SFAS 154, “Accounting Changes and Error
Corrections.” This statement replaces APB 20 and
SFAS 3 and changes the requirements for the accounting for
and reporting of a change in accounting principle. APB 20
previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new
accounting principle. SFAS 154 requires retrospective
application to prior periods’ financial statements of
changes in accounting principle. Adoption of this statement is
not expected to have a material impact on our results of
operations or financial condition.
In December 2004 the FASB issued revised SFAS 123R,
“Share-Based Payment,” which sets forth accounting
requirements for “share-based” compensation to
employees and requires companies to recognize in the statement
of operations the grant-date fair value of stock options and
other equity-based
F-12
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2. Summary of significant
accounting policies — (Continued)
compensation. The Company currently provides pro forma
disclosure of the effect on net income or loss and earnings or
loss per share of the fair value recognition provisions of
SFAS 123, “Accounting for Stock-Based
Compensation.” Under SFAS 123R, such pro forma
disclosure will no longer be an alternative to financial
statement recognition. SFAS 123R is effective for annual
periods beginning after June 15, 2005 and, accordingly, the
Company must adopt the new accounting provisions effective
April 1, 2006 and recognize the cost of all share-based
payments to employees, including stock option grants, in the
income statement based on their fair values. The Company is
currently evaluating the impact of the adoption of
SFAS 123R on our financial position and results of
operations, including the valuation methods and support for the
assumptions that underlie the valuation of the awards. However,
we currently believe that the adoption of SFAS 123R will
have a material effect on our results of operations.
In December 2004, FASB issued SFAS 153, “Exchanges of
Nonmonetary Assets — an amendment to APB Opinion
No. 29”. This statement amends APB 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. Adoption of this
statement is not expected to have a material impact on our
results of operations or financial condition.
In December 2004, FASB Staff Position No. FAS 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP FAS 109-2”) was
issued, providing guidance under SFAS 109, “Accounting
for Income Taxes” for recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of
2004, enacted on October 22, 2004 (the “Jobs
Act”). FSP FAS 109-2 allows time beyond the financial
reporting period of enactment to evaluate the effects of the
Jobs Act before applying the requirements of FSP FAS 109-2.
Although the Company has not yet completed its evaluation of the
impact of the repatriation provisions of the Jobs Act, the
Company does not expect that these provisions will have a
material impact on its consolidated financial position,
consolidated results of operations, or liquidity. Accordingly,
as provided for in FSP 109-2, the Company has not adjusted its
tax expense or deferred tax liability to reflect the
repatriation provisions of the Jobs Act.
|
|
| 3. |
Related-party transactions |
An individual who is a director and stockholder and former
corporate secretary of the Company is associated with a law firm
that has rendered various legal services for the Company. For
the years ended March 31, 2005, 2004 and 2003, the Company
has paid the firm approximately $1,189,000, $1,421,000, and
$764,000, respectively. As of March 31, 2005 and 2004, the
aggregate amounts in trade accounts payable for these services
was approximately $0 and $58,000, respectively.
|
|
| 4. |
Investments in private company |
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 in repayment of the convertible debt and
converted $257,000 of interest income into additional equity. In
September 2004, the Company recorded an other-than-temporary
decline in value of $1,057,000 in this equity investment. As of
March 31, 2005 and 2004, the carrying value of the
investment in this third-party was $0 and $1,057,000,
respectively. The third party was a business partner of the
Company, and the Company incurred royalty
F-13
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
4. Investments in private
companies — (Continued)
expense of $56,000, $1,391,000 and $1,168,000 to this
third-party in the years ended March 31, 2005, 2004 and
2003 respectively.
In September 2002, the Company recorded an other-than temporary
decline in value of $1,000,000 in another one of the equity
investments the company made in a private company in 2000.
|
|
| 5. |
Concentrations of credit risk |
Financial instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and cash
equivalents, marketable securities and accounts receivable. The
Company maintains its cash and cash equivalents in bank
accounts, which, at times, may exceed federally insured limits.
The Company has not experienced any losses on such accounts.
Accounts receivable consists principally of amounts due from
large, credit-worthy companies. The Company monitors the
balances of individual accounts to assess any collectibility
issues.
The cost and estimated fair value of marketable securities,
which consist of corporate bonds, commercial paper and US
government and agency securities, by contractual maturity are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2005 | |
|
March 31, 2004 | |
| |
|
| |
|
| |
| |
|
Cost | |
|
Fair Value | |
|
Cost | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
(In thousands) | |
|
Due in one year or less
|
|
$ |
78,560 |
|
|
$ |
78,332 |
|
|
$ |
44,313 |
|
|
$ |
44,328 |
|
|
Due after one year through two years
|
|
|
14,647 |
|
|
|
14,513 |
|
|
|
36,037 |
|
|
|
36,157 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
93,207 |
|
|
$ |
92,845 |
|
|
$ |
80,350 |
|
|
$ |
80,485 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended March 31, 2005, the gross unrealized
holding loss was $362,000 and the gross unrealized holding gain
was $135,000 for the year ended March 31, 2004. The
unrealized holding gain and loss have been included in
accumulated other comprehensive income, which is a separate
component of stockholders’ equity.
|
|
| 7. |
Property and equipment |
Property and equipment consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Equipment
|
|
$ |
16,593 |
|
|
$ |
18,852 |
|
|
Software
|
|
|
8,824 |
|
|
|
6,049 |
|
|
Furniture
|
|
|
4,146 |
|
|
|
3,475 |
|
|
Leasehold improvements
|
|
|
5,450 |
|
|
|
3,104 |
|
| |
|
|
|
|
|
|
| |
|
|
35,013 |
|
|
|
31,480 |
|
|
Accumulated depreciation and amortization
|
|
|
(24,671 |
) |
|
|
(23,374 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
10,342 |
|
|
$ |
8,106 |
|
| |
|
|
|
|
|
|
During the years ended March 31, 2005 and 2004, the Company
had acquired certain equipment under capital leases. Assets
under capital leases included in equipment as of March 31,
2005 and 2004 are $1,889,000 and $5,240,000, respectively.
Related to these capital leases and included in the accumulated
depreciation and amortization is $1,243,000 and $3,859,000 at
March 31, 2005 and 2004, respectively.
F-14
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
7. Property and
equipment — (Continued)
During the years ended March 31, 2005, and 2004, the
Company paid $514,000 and $569,000, respectively for equipment
that was previously leased and fully depreciated. This purchase
occurred upon termination of the lease period.
Income tax expense was $235,000, $0 and $0 for the years ended
March 31, 2005, 2004 and 2003, respectively. The current
income tax expense for the year ended March 31, 2005 was
due to certain foreign subsidiaries incurring tax expense that
they could not offset with net operating losses generated in
prior years.
Net operating loss carryforwards (NOLs) as of March 31,
2005 are approximately $230 million which begin to expire
in 2007. Approximately $1.8 million included in the current
year NOL is related to deductions associated with stock option
exercises. The realization of the benefits of the NOLs is
dependent on sufficient taxable income in future years. Lack of
future earnings, a change in the ownership of the Company, or
the application of the alternative minimum tax rules could
adversely affect the Company’s ability to utilize the NOLs.
Pretax income from continuing operations for the years ending
March 31 was taxed in or by the following jurisdictions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Domestic
|
|
$ |
(22,214 |
) |
|
$ |
(26,435 |
) |
|
$ |
4,740 |
|
|
Foreign
|
|
|
(1,032 |
) |
|
|
(6,589 |
) |
|
|
(13,325 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(23,246 |
) |
|
$ |
(33,024 |
) |
|
$ |
(8,585 |
) |
| |
|
|
|
|
|
|
|
|
|
The tax effect of each temporary difference is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, | |
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net operating loss carryforwards
|
|
$ |
98,618 |
|
|
$ |
103,419 |
|
|
Accrued expenses
|
|
|
1,592 |
|
|
|
589 |
|
|
Deferred revenue
|
|
|
1,363 |
|
|
|
3,459 |
|
|
Accounts receivable
|
|
|
416 |
|
|
|
960 |
|
|
Impairment loss in equity investments
|
|
|
2,751 |
|
|
|
2,350 |
|
|
Property and equipment
|
|
|
589 |
|
|
|
(334 |
) |
|
Stock option compensation
|
|
|
8,475 |
|
|
|
7,473 |
|
|
Acquired intangibles
|
|
|
8,099 |
|
|
|
(1,559 |
) |
|
Research and development credit
|
|
|
9,783 |
|
|
|
8,034 |
|
|
Other
|
|
|
(581 |
) |
|
|
384 |
|
|
Valuation allowance
|
|
|
(131,105 |
) |
|
|
(124,775 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
Though management believes that future taxable income of the
Company may be sufficient to utilize a substantial amount of the
benefits of the Company’s NOLs and to realize its deferred
tax assets, a valuation allowance has been recorded to
completely offset the carrying value of the deferred tax assets
as management has concluded that the realization of the deferred
tax assets does not meet the “more likely than not”
criterion. The valuation allowance increased by
$6.3 million, $28.5 million and $5.7 million for
the years ended March 31, 2005, 2004 and 2003, respectively
..These increases were due primarily to
F-15
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
8. Income taxes —
(Continued)
changes in net operating loss carryforwards, acquired
intangibles, research and development tax credits, deferred
revenue and accrued expenses.
The provision for income taxes differs from the amount of taxes
determined by applying the U.S. Federal statutory rate to
income before income taxes as a result of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
U.S. Federal statutory rate
|
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
|
State and local taxes, net of Federal income tax benefit
|
|
|
(3.7 |
) |
|
|
(3.1 |
) |
|
|
2.5 |
|
|
Non-deductible items
|
|
|
2.2 |
|
|
|
1.1 |
|
|
|
2.1 |
|
|
Change in valuation allowance
|
|
|
44.0 |
|
|
|
44.5 |
|
|
|
34.0 |
|
|
Amortization of nondeductible goodwill
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Change in general business credit
|
|
|
(7.5 |
) |
|
|
(5.3 |
) |
|
|
(21.1 |
) |
|
Foreign rate differential
|
|
|
— |
|
|
|
(3.2 |
) |
|
|
16.5 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Effective tax rate
|
|
|
1.0 |
% |
|
|
— |
% |
|
|
— |
% |
| |
|
|
|
|
|
|
|
|
|
As of March 31, 2005, the Company had a line of credit
agreement with a bank to borrow up to a maximum principal amount
of $20 million with a maturity date of April 30, 2005.
Subsequent to March 31, 2005, the maturity date of this
operating line of credit agreement was extended until
June 30, 2005.
Borrowings under this line of credit are limited to 80% of
eligible accounts receivable. Interest is payable on any unpaid
principal balance at the bank’s prime rate. The agreement
for this line of credit includes restrictive covenants that
require the Company to maintain, among other things, a ratio of
quick assets to current liabilities, excluding deferred revenue,
of at least 1.5 to 1.0 and a quarterly revenue covenant such
that total revenue for each fiscal quarter must be at least the
greater of $35 million or 85% of the average total revenue
for the immediately preceding four fiscal quarters. As of
March 31, 2005, the Company had not borrowed against this
line of credit. In connection with the line of credit agreement,
the Company has obtained letters of credit totaling
approximately $2.6 million related to office leases.
During the year ended March 31, 2004 the Company’s
Japanese subsidiary entered into unsecured, short-term borrowing
arrangements with three Japanese financial institutions. Annual
rates of interest on the borrowings ranged from 1.4% to 2.6%
during the year. As of March 1, 2004, all financial
institution borrowings had been repaid. In March 2004, the
Company’s Japanese subsidiary borrowed $2.6 million
from a reseller, which was repaid in May 2004. During the year
ended March 31, 2005, the Company’s Japanese
subsidiary entered into additional short-term borrowings of
$3.5 million from financial institutions, which were repaid
in full in December 2004.
The Company has an equipment line of credit with a leasing
company for the leasing of equipment and software. Under this
arrangement, the Company can enter into leases for equipment and
software for a period of one year from the date of the
arrangement. The interest rate under these leases is fixed at
the date of each individual lease, based on the 36-month
treasury yield plus 3.7%. Principal and interest is payable
under each lease in 36 monthly installments. At expiration
of the lease term, the Company will have the option to purchase
the equipment at fair market value. This arrangement includes a
restrictive
F-16
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
10. Lease
commitments — (Continued)
covenant that requires the Company to maintain a minimum of
$2,500,000 of cash and marketable securities. During fiscal year
2004, the Company obtained another equipment line of credit with
another leasing company for the leasing of equipment and
software. Under this arrangement, the Company can enter into
leases for equipment and software for a period of one year from
the date of the arrangement. The interest rate under these
leases is fixed at the date of each individual lease at an
interest rate of 5.95%. Principal and interest is payable under
each lease in 24 monthly installments. At expiration of the
lease term, the Company will have the option to purchase the
equipment at fair market value.
The Company leases office space in various locations under
operating leases expiring through fiscal year 2016. Total rent
expense was approximately $10,270,000, $10,287,000 and
$9,492,000 for the years ended March 31, 2005, 2004 and
2003, respectively.
Future minimum lease payments under the Company’s capital
and operating leases are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Operating | |
|
Capital | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Years ending March 31, 2006
|
|
$ |
11,431 |
|
|
$ |
502 |
|
| |
2007
|
|
|
10,124 |
|
|
|
143 |
|
| |
2008
|
|
|
6,535 |
|
|
|
— |
|
| |
2009
|
|
|
3,043 |
|
|
|
— |
|
| |
2010
|
|
|
2,741 |
|
|
|
— |
|
| |
Thereafter
|
|
|
16,372 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
$ |
50,246 |
|
|
$ |
645 |
|
| |
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
(31 |
) |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
614 |
|
|
Less current portion
|
|
|
|
|
|
|
(475 |
) |
| |
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
|
|
|
$ |
139 |
|
| |
|
|
|
|
|
|
Preferred stock
The Company’s Certificate of Incorporation, as amended,
includes 50,000,000 authorized shares of undesignated preferred
stock with a par value of $.01, none of which were outstanding
as of March 31, 2005.
Warrant
In March 2001, the Company entered into an OEM/ Reseller
agreement with i2 Technologies (i2). In connection with the
agreement the Company issued to i2 a warrant to
purchase 750,000 shares of the Company’s common
stock at an exercise price of $40.88 per share. The fair
value of the warrant based on the Black-Scholes valuation model
was $23,606,000 on the date of issuance which has been recorded
as a deferred warrant charge. As part of the agreement, i2 will
pay the Company OEM fees of $10,000,000 over the term of the
OEM/ Reseller agreement which will reduce the deferred warrant
charge. The Company received $500,000, $1,000,000 and
$1,250,000, of OEM fees from i2 during the years ended
March 31, 2005, 2004 and 2003, respectively. These fees
were recorded as a reduction to the deferred warrant charge. The
Company recorded $2,645,000, $2,645,000 and $3,402,000 of
amortization of the deferred warrant charge to sales and
marketing expense for the years ending March 31, 2005, 2004
and
F-17
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
11. Stockholders’
equity — (Continued)
2003, respectively. In April 2001, the Company signed an amended
warrant agreement which reduced the number of shares of common
stock i2 can purchase from 750,000 to 710,000 and, in addition,
reduced the exercise price per share from $40.88 to $28.70.
Based on the remeasurement of the warrant using the
Black-Scholes valuation model the fair value of the amended
warrant did not exceed the current fair value of the original
warrant. The Company did not incur an additional charge as a
result of this amendment. The fair value of the warrants granted
to i2 was estimated on the date of grant and amendment, using
the following weighted average assumptions or range of weighted
average assumption: Risk-free interest rate of 4.9%, term of
3.75 to 4 years, volatility of 114% to 159%, and no
dividends anticipated. As of March 31, 2005, 710,000
warrants remain outstanding with a remaining life of
approximately two years.
In March 2003, the OEM/ Reseller agreement was modified to
reduce the amount of OEM fees owed to webMethods related to this
agreement from $10,000,000 payable over four years to $8,750,000
payable over five years. In addition, the number of resources
committed by webMethods to i2 has been reduced as well as an
elimination of the fee previously due to i2 on certain
maintenance arrangements. Due to this change in the agreement,
the amortization of the remaining unamortized deferred warrant
charge has been changed from 4 years to 5 years to coincide
with the new payment schedule, resulting in a decrease in the
annual amortization of $757,000 from $3,402,000 in fiscal year
2003 to $2,645,000 in fiscal years 2004 and 2005.
12. Business combinations
In October 2003, the Company completed the business acquisitions
of The Mind Electric, Inc. (“TME”) and The Dante
Group, Inc. TME was a provider of software for service oriented
architectures, and The Dante Group was a provider of business
activity monitoring software.
The acquisitions of TME and The Dante Group were accounted for
under the purchase method of accounting and, accordingly, the
results of operations of each acquisition are included in the
Company’s financial statements from the date of
acquisition. As a result of these acquisitions, the Company has
recorded charges for in-process research and development and has
recorded assets related to existing technology.
In-process research and development represents in-process
technology that, as of the date of the acquisition, had not
reached technological feasibility and had no alternative future
use. Based on valuation assessments, the value of these projects
was determined by estimating the projected net cash flows from
the sale of the completed products, reduced by the portion of
the revenue attributable to developed technology. The resulting
cash flows were then discounted back to their present values at
appropriate discount rates. Consideration was given to the stage
of completion, complexity of the work completed to date, the
difficulty of completing the remaining development and the costs
already incurred. The amounts allocated to the acquired
in-process research and development were immediately expensed in
the period the acquisition was completed.
Existing technology represents purchased technology for which
development had been completed as of the date of acquisition.
This amount was determined using the income approach. This
method consisted of estimating future net cash flows
attributable to existing technology for a discrete projection
period and discounting the net cash flows to their present
value. The existing technology will be amortized over its
expected useful life of 60 months.
F-18
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
12. Business
acquisitions — (Continued)
The aggregate purchase price for these acquisitions, including
$593,000 in direct acquisition costs, has been allocated to the
assets acquired and liabilities assumed based upon their
estimated fair values at the date of acquisition as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
The Dante Group | |
|
TME | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents
|
|
$ |
90 |
|
|
$ |
3 |
|
|
$ |
93 |
|
|
Accounts receivable
|
|
|
69 |
|
|
|
116 |
|
|
|
185 |
|
|
Property and equipment
|
|
|
146 |
|
|
|
31 |
|
|
|
177 |
|
|
Other assets
|
|
|
93 |
|
|
|
7 |
|
|
|
100 |
|
|
Accounts payable
|
|
|
(32 |
) |
|
|
(580 |
) |
|
|
(612 |
) |
|
Accrued expenses and other liabilities
|
|
|
(231 |
) |
|
|
(230 |
) |
|
|
(461 |
) |
|
Deferred revenue
|
|
|
(138 |
) |
|
|
(38 |
) |
|
|
(176 |
) |
|
In-process research and development
|
|
|
3,138 |
|
|
|
1,146 |
|
|
|
4,284 |
|
|
Existing technology
|
|
|
3,530 |
|
|
|
2,379 |
|
|
|
5,909 |
|
|
Customer relationships
|
|
|
392 |
|
|
|
441 |
|
|
|
833 |
|
|
Goodwill
|
|
|
12,152 |
|
|
|
4,715 |
|
|
|
16,867 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total cash purchase price
|
|
$ |
19,209 |
|
|
$ |
7,990 |
|
|
$ |
27,199 |
|
| |
|
|
|
|
|
|
|
|
|
We determined the valuation of the identifiable intangible
assets using the income approach. The amounts allocated to the
identifiable intangible assets were determined through
established valuation techniques accepted in the technology and
software industries.
The income approach, which includes an analysis of the cash
flows and risks associated with achieving such cash flows, was
the primary technique utilized in valuing the other identifiable
intangible assets. Key assumptions included discount factors
ranging from 26% to 31%, and estimates of revenue growth,
maintenance renewal rates, cost of sales, operating expenses and
taxes. The purchase price in excess of the net liabilities
assumed and the identifiable intangible assets acquired was
allocated to goodwill.
The following unaudited pro forma supplemental table presents
selected financial information as though the purchases of TME
and The Dante Group, which may be material acquisitions for this
purpose, had been completed at the beginning of the periods
presented. The unaudited pro forma data gives effect to actual
operating results prior to the acquisition, adjusted to include
the pro forma effect of amortization of intangibles, reduction
in interest income on cash paid for the acquisitions and the
elimination of the charge for acquired in-process research and
development. The unaudited pro forma data for the year ended
March 31, 2004, includes a $1.4 million nonrecurring
compensation charge for accelerated vesting of options of The
Dante Group which occurred just prior to the transaction. These
unaudited pro forma amounts do not purport to be indicative of
the results that would have actually been obtained if the
acquisitions occurred as of the beginning of the periods
presented or that may be obtained in the future (in thousands,
except per share data):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Unaudited) | |
|
Pro forma net revenue
|
|
$ |
190,083 |
|
|
$ |
198,348 |
|
|
Pro forma net loss
|
|
|
(35,355 |
) |
|
|
(12,842 |
) |
|
Pro forma net loss per basic and diluted share
|
|
$ |
(0.68 |
) |
|
$ |
(0.25 |
) |
F-19
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
12. Business
acquisitions — (Continued)
Acquisition of technology
In October 2003, the Company acquired the portal solution
technology and certain fixed assets of DataChannel from
Netegrity for $5,278,000 in cash, including $176,000 in direct
acquisition costs. The Company also assumed deferred revenue of
$66,000 related to on-going maintenance contracts.
The acquisition of the existing portal solution technology of
$5,243,000 was recorded as purchased technology and is amortized
over the estimated useful life of 60 months. The technology
is expected to complement the Company’s existing technology
and the incremental efforts required to market the portal
solution product were minimal. The Company determined that as of
the date of the technology purchase the purchased technology had
alternative future use and had attained technological
feasibility.
13. Goodwill and intangible
assets
In connection with the adoption of SFAS 142 on
April 1, 2002, $29.8 million in goodwill, including
$991,000 in assembled workforce, favorable lease terms and
non-compete agreements, net of accumulated amortization and
deferred taxes that were reclassified to goodwill, is no longer
amortized, but is instead tested for impairment annually or
sooner if circumstances indicate that it may no longer be
recoverable.
In accordance with SFAS 142, all goodwill is associated
with the Company’s corporate reporting unit, as the Company
does not have multiple reporting units. Accordingly, on an
annual basis the Company performs the impairment assessment
required under SFAS 142 at the enterprise level, using the
Company’s total market capitalization to assess the fair
value to the enterprise. The Company performed an impairment
test of it’s goodwill and determined that no impairment of
remaining goodwill existed at adoption or as of March 31,
2005, March 31, 2004, or March 31, 2003.
The changes in the carrying amount of goodwill for the years
ended March 31, 2005 and 2004 are as follows: (in thousands)
| |
|
|
|
|
| |
|
Goodwill | |
| |
|
| |
|
Balance at March 31, 2003
|
|
$ |
29,838 |
|
|
Acquisition of The Dante Group
|
|
|
12,152 |
|
|
Acquisition of TME
|
|
|
4,715 |
|
| |
|
|
|
|
Balance at March 31, 2004
|
|
$ |
46,705 |
|
|
Balance at March 31, 2005
|
|
$ |
46,705 |
|
| |
|
|
|
As of March 31, 2005 and 2004, all of our acquired
intangible assets are subject to amortization. The following is
a summary of amortized acquired intangible assets for the dates
indicated (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of March 31, 2005 | |
|
As of March 31, 2004 | |
| |
|
| |
|
| |
| |
|
Gross | |
|
|
|
Gross | |
|
|
|
Net | |
| |
|
Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
| |
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amount | |
|
Amortization | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Existing technology
|
|
$ |
11,152 |
|
|
$ |
3,342 |
|
|
$ |
7,810 |
|
|
$ |
11,152 |
|
|
$ |
1,112 |
|
|
$ |
10,040 |
|
|
Customer relationships
|
|
|
833 |
|
|
|
253 |
|
|
|
580 |
|
|
|
833 |
|
|
|
87 |
|
|
|
746 |
|
|
Total
|
|
$ |
11,985 |
|
|
$ |
3,595 |
|
|
$ |
8,390 |
|
|
$ |
11,985 |
|
|
$ |
1,199 |
|
|
$ |
10,786 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
13. Goodwill and intangible
assets — (Continued)
Amortization expense for intangible assets was $2,397,000,
$1,199,000 and $0 for the years ended March 31, 2005, 2004
and 2003, respectively. Estimated future amortization expense of
intangible assets as of March 31, 2005, is as follows (in
thousands):
| |
|
|
|
|
|
2006
|
|
|
2,396 |
|
|
2007
|
|
|
2,396 |
|
|
2008
|
|
|
2,396 |
|
|
2009
|
|
|
1,202 |
|
| |
|
|
|
| |
|
$ |
8,390 |
|
| |
|
|
|
14. Stock based compensation
Stock incentive plan
On November 1, 1996, the Company adopted the webMethods,
Inc. Stock Option Plan (the “Plan”). The Plan is
administered by a Committee appointed by the Board of Directors,
which has the authority to determine which officers, directors
and key employees are awarded options pursuant to the Plan and
to determine the terms and option exercise prices of the stock
options.
In August 2000, the Company increased the number of shares to
20,731,000 shares of webMethods, Inc. common stock for issuance
upon the exercise of options granted under the Plan. Pursuant to
an amendment to the Plan adopted by the Board of Directors on
June 6, 2001, and approved by the stockholders of
webMethods, Inc. on September 7, 2001, the number of shares
of the webMethods, Inc. common stock available for issuance
under the Plan was increased on each of April 1, 2002, 2003
and 2004 by 2,462,195 and, subject to the Board’s
discretion, may be increased by up to the same amount each April
1 thereafter during 2005 and 2006. At March 31, 2005,
options to purchase 17,657,016 shares were outstanding.
Stock options granted pursuant to the plans have an exercise
price equal to the market price of the underlying common stock
at the date of grant, generally vest ratably over three or four
years after the date of award and generally have a term of ten
years.
F-21
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
14. Stock based
compensation — (Continued)
The following table summarizes the Company’s activity for
all of its stock option awards:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock | |
|
Range of | |
|
Weighted Average | |
| |
|
Options | |
|
Exercise Price | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
Outstanding, March 31, 2002
|
|
|
15,578,211 |
|
|
$ |
0.11 – |
|
|
$ |
161.29 |
|
|
$ |
19.77 |
|
| |
Granted
|
|
|
3,606,974 |
|
|
|
4.32 – |
|
|
|
17.82 |
|
|
|
8.93 |
|
| |
Exercised
|
|
|
(906,603 |
) |
|
|
0.11 – |
|
|
|
14.36 |
|
|
|
3.20 |
|
| |
Cancelled
|
|
|
(2,448,580 |
) |
|
|
0.11 – |
|
|
|
151.09 |
|
|
|
17.70 |
|
| |
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2003
|
|
|
15,830,002 |
|
|
$ |
0.11 – |
|
|
$ |
161.29 |
|
|
$ |
18.49 |
|
| |
Granted
|
|
|
5,598,215 |
|
|
|
7.54 – |
|
|
|
11.70 |
|
|
|
9.00 |
|
| |
Exercised
|
|
|
(620,216 |
) |
|
|
0.11 – |
|
|
|
9.08 |
|
|
|
4.90 |
|
| |
Cancelled
|
|
|
(4,016,541 |
) |
|
|
2.88 – |
|
|
|
161.29 |
|
|
|
20.44 |
|
| |
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2004
|
|
|
16,791,460 |
|
|
$ |
0.11 – |
|
|
$ |
161.29 |
|
|
$ |
15.30 |
|
| |
Granted
|
|
|
6,704,952 |
|
|
|
3.99 – |
|
|
|
10.55 |
|
|
|
7.65 |
|
| |
Exercised
|
|
|
(295,939 |
) |
|
|
0.11 – |
|
|
|
8.79 |
|
|
|
3.33 |
|
| |
Cancelled
|
|
|
(5,543,457 |
) |
|
|
3.99 – |
|
|
|
161.29 |
|
|
|
14.88 |
|
| |
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2005
|
|
|
17,657,016 |
|
|
$ |
0.11 – |
|
|
$ |
115.75 |
|
|
$ |
12.73 |
|
| |
|
|
|
|
|
|
|
|
Information regarding stock options outstanding as of
March 31, 2005 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Outstanding | |
|
Options Exercisable | |
| |
|
|
|
|
|
|
|
| |
|
| |
| |
|
|
|
Weighted Average | |
|
|
|
|
| Range of |
|
Number of | |
|
Remaining | |
|
Weighted Average | |
|
Number of | |
|
|
| Exercise Prices |
|
Shares | |
|
Contractual Life | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| $ |
0.11 |
|
|
– |
|
$ |
7.03 |
|
|
|
|
|
3,762,259 |
|
|
|
8.32 |
|
|
$ |
4.88 |
|
|
|
1,373,906 |
|
|
$ |
3.83 |
|
| |
7.05 |
|
|
– |
|
|
8.87 |
|
|
|
|
|
4,295,436 |
|
|
|
7.95 |
|
|
|
8.34 |
|
|
|
2,254,750 |
|
|
|
8.31 |
|
| |
8.89 |
|
|
– |
|
|
10.35 |
|
|
|
|
|
3,654,932 |
|
|
|
8.77 |
|
|
|
9.77 |
|
|
|
1,004,315 |
|
|
|
9.73 |
|
| |
10.37 |
|
|
– |
|
|
13.99 |
|
|
|
|
|
757,258 |
|
|
|
6.54 |
|
|
|
11.65 |
|
|
|
536,881 |
|
|
|
11.96 |
|
| |
14.27 |
|
|
– |
|
|
115.75 |
|
|
|
|
|
5,187,131 |
|
|
|
6.37 |
|
|
|
24.30 |
|
|
|
5,069,650 |
|
|
|
24.44 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
0.11 |
|
|
– |
|
$ |
115.75 |
|
|
|
|
|
17,657,016 |
|
|
|
7.67 |
|
|
$ |
12.73 |
|
|
|
10,239,502 |
|
|
$ |
16.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain options for employee and non-employee directors granted
during the years ended March 31, 2000, 1999 and 1998
resulted in deferred stock compensation as the estimated fair
value (derived by reference to contemporaneous sales of
convertible preferred stock) was greater than the exercise price
on the date of grant. The total deferred stock compensation
associated with these options was approximately $16,093,000.
This amount is being amortized over the respective vesting
periods of these options, ranging from three to four years.
Approximately $0, $202,000 and $754,000 was amortized during the
years ended March 31, 2005, 2004 and 2003, respectively,
related to these options.
Employee Stock Purchase
Plan
In January 2000, the Board of Directors approved the
Company’s Employee Stock Purchase Plan (the
“ESPP”). The ESPP became effective upon the completion
of the Company’s initial public offering on
February 10, 2000. A total of 5,250,000 shares of common
stock have been made available for issuance under the ESPP as of
March 31, 2005. The number of shares of common stock
available for issuance under the ESPP will be increased on the
first day of each calendar year during the remaining nine year
term of the ESPP by 750,000 shares of common stock.
F-22
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
14. Stock based
compensation — (Continued)
The ESPP, which is intended to qualify under Section 423 of
the IRS Code, is implemented by a series of overlapping offering
periods of 24 months’ duration, with new offering
periods, other than the first offering period, commencing on or
about January 1 and July 1 of each year. Each offering period
consists of four consecutive purchase periods of approximately
six months’ duration, and at the end of each purchase
period, the Company will make a purchase on behalf of the
participants. Participants generally may not purchase more than
4,000 shares on any purchase date or stock having a value
measured at the beginning of the offering period greater than
$25,000 in any calendar year.
The purchase price per share is 85% of the lower of (1) the
fair market value of webMethods, Inc. common stock on the
purchase date and (2) the fair market value of a share of
webMethods, Inc, common stock on the last trading day before the
offering date.
The following table summarizes shares of common stock of
webMethods, Inc. available for issuance and shares purchased as
of March 31, 2005 (in thousands).
| |
|
|
|
|
|
Balance at March 31, 2003.
|
|
|
3,028 |
|
| |
|
|
|
|
Additional authorized shares
|
|
|
750 |
|
|
Purchases
|
|
|
(360 |
) |
| |
|
|
|
|
Balance at March 31, 2004.
|
|
|
3,418 |
|
| |
|
|
|
|
Additional authorized shares
|
|
|
750 |
|
|
Purchases
|
|
|
(304 |
) |
| |
|
|
|
|
Balance at March 31, 2005.
|
|
|
3,864 |
|
| |
|
|
|
Shareholder Rights
Plan
In October 2001, the Board of Directors adopted a shareholder
rights plan, which may cause substantial dilution to a person or
group that attempts to acquire webMethods, Inc. on terms not
approved by the Board of Directors. Under the plan, webMethods
distributed one right for each share of webMethods, Inc. common
stock outstanding at the close of business on October 18,
2001. Initially, the rights trade with shares of webMethods,
Inc. common stock and are represented by webMethods, Inc, common
stock certificates. The rights are not immediately exercisable
and generally become exercisable if a person or group acquires,
or commences a tender or exchange offer to acquire, beneficial
ownership of 15% or more of webMethods common stock while the
plan is in place. Each right will become exercisable, unless
redeemed, by its holder (unless an acquiring person or member of
that group) for shares of webMethods, Inc, or of the third-party
acquirer having a value of twice the right’s then-current
exercise price. The rights are redeemable by webMethods, Inc.
and will expire on October 18, 2011.
15. Employee benefit plan
As of April 1, 1997, the Company adopted a contributory
401(k) plan covering all full-time employees who meet prescribed
service requirements. There are no required Company matching
contributions. The plan provides for discretionary contributions
by the Company. The Company made no contributions during the
years ended March 31, 2005, 2004 and 2003.
F-23
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
16. Supplemental disclosures of
cash flow information:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash paid during the period for interest
|
|
$ |
98 |
|
|
$ |
202 |
|
|
$ |
673 |
|
| |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Equipment purchased under capital lease
|
|
$ |
313 |
|
|
$ |
1,457 |
|
|
$ |
1,665 |
|
| |
Conversion of interest income into equity in private company
|
|
|
— |
|
|
|
257 |
|
|
|
— |
|
| |
Change in net unrealized gain or loss on marketable securities
|
|
|
496 |
|
|
|
165 |
|
|
|
135 |
|
|
Dante Acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of assets acquired, net of cash acquired
|
|
|
— |
|
|
|
308 |
|
|
|
— |
|
| |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Liabilities assumed
|
|
|
— |
|
|
|
(401 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
(93 |
) |
|
|
— |
|
| |
In-process research and development
|
|
|
— |
|
|
|
3,138 |
|
|
|
— |
|
| |
Existing technology
|
|
|
— |
|
|
|
3,530 |
|
|
|
— |
|
| |
Customer relationships
|
|
|
— |
|
|
|
392 |
|
|
|
— |
|
| |
Goodwill
|
|
|
— |
|
|
|
12,152 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash paid for acquisition, net of cash acquired
|
|
$ |
— |
|
|
$ |
19,119 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
TME Acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of assets acquired, net of cash acquired
|
|
$ |
— |
|
|
$ |
154 |
|
|
$ |
— |
|
| |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
— |
|
|
|
(848 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
(694 |
) |
|
|
— |
|
| |
In-process research and development
|
|
|
— |
|
|
|
1,146 |
|
|
|
— |
|
| |
Existing technology
|
|
|
— |
|
|
|
2,379 |
|
|
|
— |
|
| |
Customer relationships
|
|
|
— |
|
|
|
441 |
|
|
|
— |
|
| |
Goodwill
|
|
|
— |
|
|
|
4,715 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash paid for acquisition, net of cash acquired
|
|
$ |
— |
|
|
$ |
7,987 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
DataChannel Assets Acquired from Netegrity:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of assets acquired, net of cash acquired
|
|
$ |
— |
|
|
$ |
101 |
|
|
$ |
— |
|
| |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Liabilities assumed
|
|
|
— |
|
|
|
(66 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
35 |
|
|
|
— |
|
| |
Existing technology
|
|
|
— |
|
|
|
5,243 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash paid for acquisition, net of cash acquired
|
|
$ |
— |
|
|
$ |
5,278 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
F-24
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
17. Restructuring and related
charges
The Company has recorded restructuring and related charges to
align its cost structure with changing market conditions. During
the year ended March 31, 2005, the Company recorded
restructuring and related charges of $5.9 million,
consisting of $2.8 million for headcount reductions and
$3.1 million for excess facility costs related to the
relocation of the Company’s headquarters. The estimated
excess facility costs were based on the Company’s
contractual obligations, net of estimated sublease income, based
on current comparable lease rates. The Company reassesses this
liability each period based on market conditions. Revisions to
the estimates of this liability could materially impact the
operating results and financial position in future periods if
anticipated events and key assumptions, such as the timing and
amounts of sublease rental income, either change or do not
materialize. In connection with the lease on the new
headquarters facility, the Company received certain rent
abatements and allowances totaling approximately
$3.1 million as of March 31, 2005 and will receive
additional incentives totaling $2.0 million through
December 2007. Such rent abatements and allowances are deferred
and will be amortized as a reduction to rent expense over the
11-year term of the lease. For the year ended March 31,
2005, the Company amortized $200,000 as a reduction to rent
expense.
During the year ended March 31, 2004, the Company recorded
restructuring and related charges of $3.9 million
consisting of $2.2 million for headcount reductions and
$1.7 million for consolidation of facilities and related
impairment of fixed assets. The excess facility costs were based
on the Company’s contractual obligations, net of sublease
income.
During the year ended March 31, 2003, the Company recorded
restructuring and related charges of $2.2 million for
headcount reductions.
As of March 31, 2005 and March 31, 2004, respectively,
$4.4 million and $3.1 million of restructuring and
excess facilities related charges remained unpaid. This portion
primarily relates to rent on the excess facilities and will be
paid over the remaining rental periods.
F-25
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
17. Restructuring and related
charges — (Continued)
The following table sets forth a summary of total restructuring
and related charges, payments made against those charges and the
remaining liabilities as of March 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Excess | |
|
|
|
|
|
|
|
|
|
|
| |
|
Facilities | |
|
Excess | |
|
Excess | |
|
Severance | |
|
Impairment | |
|
|
| |
|
Santa Clara, CA | |
|
Facilities | |
|
Facilities | |
|
And Related | |
|
of Fixed | |
|
|
| |
|
and Fairfax, VA | |
|
Berkeley, CA | |
|
Fairfax, VA | |
|
Benefits | |
|
Assets | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at March 31, 2002
|
|
$ |
2,995 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,995 |
|
|
Fiscal 2003 charges
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,155 |
|
|
|
— |
|
|
|
2,155 |
|
|
Cash payments made in fiscal 2003
|
|
|
(1,296 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,101 |
) |
|
|
— |
|
|
|
(3,397 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2003
|
|
$ |
1,699 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
54 |
|
|
$ |
— |
|
|
$ |
1,753 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 charges
|
|
|
— |
|
|
|
1,508 |
|
|
$ |
— |
|
|
|
2,165 |
|
|
|
247 |
|
|
|
3,920 |
|
|
Non-cash write-down of fixed assets
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(247 |
) |
|
|
(247 |
) |
|
Cash payments made in fiscal 2004
|
|
|
(782 |
) |
|
|
(65 |
) |
|
|
— |
|
|
|
(1,470 |
) |
|
|
— |
|
|
|
(2,317 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2004
|
|
$ |
917 |
|
|
$ |
1,443 |
|
|
$ |
— |
|
|
$ |
749 |
|
|
$ |
— |
|
|
$ |
3,109 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 charges
|
|
|
— |
|
|
|
— |
|
|
|
3,093 |
|
|
|
3,012 |
|
|
|
— |
|
|
|
6,105 |
|
|
Adjustments due to revision in estimated severance and related
benefits
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(256 |
) |
|
|
— |
|
|
|
(256 |
) |
|
Cash payments made in fiscal 2005
|
|
|
(383 |
) |
|
|
(436 |
) |
|
|
(193 |
) |
|
|
(3,505 |
) |
|
|
— |
|
|
|
(4,517 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005
|
|
$ |
534 |
|
|
$ |
1,007 |
|
|
$ |
2,900 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,441 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to March 31, 2005, the Company implemented
another restructuring plan consisting of headcount reductions
and the consolidation of facilities to further align its cost
structure with changing market conditions. The Company is still
evaluating the total costs associated with this restructuring.
F-26
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
18. Segment information
The Company conducts operations worldwide and is primarily
managed on a geographic basis with those geographic segments
being the Americas, Japan, EMEA and Asia Pacific regions.
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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended March 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
119,610 |
|
|
$ |
114,507 |
|
|
$ |
133,756 |
|
|
EMEA
|
|
|
50,599 |
|
|
|
44,965 |
|
|
|
36,351 |
|
|
Japan
|
|
|
15,157 |
|
|
|
15,472 |
|
|
|
15,274 |
|
|
Asia Pacific
|
|
|
15,235 |
|
|
|
14,597 |
|
|
|
11,373 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
200,601 |
|
|
$ |
189,541 |
|
|
$ |
196,754 |
|
| |
|
|
|
|
|
|
|
|
|
|
Long Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
67,572 |
|
|
$ |
70,497 |
|
|
$ |
47,853 |
|
|
EMEA
|
|
|
1,852 |
|
|
|
2,189 |
|
|
|
2,228 |
|
|
Japan
|
|
|
1,509 |
|
|
|
1,681 |
|
|
|
935 |
|
|
Asia Pacific
|
|
|
630 |
|
|
|
360 |
|
|
|
541 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
71,563 |
|
|
$ |
74,727 |
|
|
$ |
51,557 |
|
| |
|
|
|
|
|
|
|
|
|
F-27
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
Allowance for doubtful accounts for the years ended
March 31, 2003, 2004 and 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
Beginning of | |
|
|
|
|
|
End of | |
| |
|
Period | |
|
Provisions | |
|
Deductions | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Year ended March 31, 2003 allowance for doubtful accounts
|
|
$ |
3,685 |
|
|
$ |
280 |
|
|
$ |
1,115 |
|
|
$ |
2,850 |
|
|
Year ended March 31, 2004 allowance for doubtful accounts
|
|
|
2,850 |
|
|
|
19 |
|
|
|
766 |
|
|
|
2,103 |
|
|
Year ended March 31, 2005 allowance for doubtful accounts
|
|
|
2,103 |
|
|
|
233 |
|
|
|
474 |
|
|
|
1,862 |
|
F-28
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Board of Directors and Stockholders
of webMethods, Inc.:
Our audits of the consolidated financial statements, of
management’s assessment of the effectiveness of internal
control over financial reporting and of the effectiveness of
internal control over financial reporting referred to in our
report dated June 13, 2005 appearing in this Annual Report
on Form 10-K of webMethods, Inc. for the year ended
March 31, 2005 also included an audit of the financial
statement schedule listed in Item 15(a)(2) of this
Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/
PRICEWATERHOUSECOOPERS LLP
______________________________________________________
McLean, Virginia
June 13, 2005
F-29
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
3.1(1) |
|
|
Fifth Amended and Restated Certificate of Incorporation of
webMethods, Inc., as amended |
| |
3.2 (2 |
) |
|
Amended and Restated Bylaws of webMethods, Inc. |
| |
4.1(3) |
|
|
Specimen certificate for shares of webMethods, Inc. Common Stock |
| |
4.2(4) |
|
|
Rights Agreement dated as of October 18, 2001 between
webMethods, Inc. and American Stock Transfer & Trust
Company |
| |
10.2(5) |
|
|
webMethods, Inc. Amended and Restated Stock Option Plan, as
amended |
| |
10.3(3) |
|
|
Employee Stock Purchase Plan |
| |
10.4(3) |
|
|
Indemnification Agreement entered into between webMethods, Inc.
and each of its directors |
| |
10.5(6) |
|
|
Executive Agreement entered into between webMethods, Inc. and
certain of its executive officers |
| |
10.6(7) |
|
|
Form of Stock Option Agreement for stock option grants to
employees or officers other than California residents |
| |
10.7(8) |
|
|
Form of Stock Option Agreement for stock option grants to
directors |
| |
10.8(7) |
|
|
Form of notice of grant of stock option |
| |
10.9 * |
|
|
Deferred Compensation Plan for Directors, as amended |
| |
10.10(8 |
) |
|
Consulting Agreement dated October 3, 2004 between Phillip
Merrick and webMethods, Inc. |
| |
14(9) |
|
|
webMethods, Inc. Code of Ethics |
| |
21.1* |
|
|
Subsidiaries of webMethods, Inc. |
| |
23.1* |
|
|
Consent of PricewaterhouseCoopers LLP |
| |
24 |
|
|
Power of Attorney (included on signature page hereof) |
| |
31.1* |
|
|
Rule 13a-14(a) Certification of Chief Executive Officer |
| |
31.2* |
|
|
Rule 13a-14(a) Certification of Chief Accounting Officer |
| |
31.3* |
|
|
Rule 13a-14(a) Certification by Executive Vice President |
| |
32.1* # |
|
|
Section 1350 Certification of Chief Executive Officer |
| |
32.2* # |
|
|
Section 1350 Certification of Chief Accounting Officer |
| |
32.3* # |
|
|
Section 1350 Certification of Executive Vice President |
|
|
| (1) |
Incorporated by reference to webMethods’ Form 10-K for
the year ended March 31, 2002 (File No. 1-15681). |
| |
| (2) |
Incorporated by reference to webMethods’ Form 10-Q for
the three months ended December 31, 2004 (File
No. 1-15681). |
| |
| (3) |
Incorporated by reference to webMethods’ Registration
Statement on Form S-1, as amended (File No. 333-91309). |
| |
| (4) |
Incorporated by reference to webMethods’ Registration
Statement on Form 8-A (File No. 1-15681). |
| |
| (5) |
Incorporated by reference to webMethods’ Form 10-K for
the year ended March 31, 2003 (File No. 1-15681). |
| |
| (6) |
Incorporated by reference to webMethods’ Form 10-Q for
the three months ended June 30, 2004 (File
No. 1-15681). |
| |
| (7) |
Incorporated by reference to webMethods’ Form 8-K
dated October 2, 2004 (File No. 1-15681). |
| |
| (8) |
Incorporated by reference to webMethods’ Form 10-Q for
the three months ended September 30, 2004 (File
No. 1-15681). |
|
|
| (9) |
Incorporated by reference to webMethods’ definitive proxy
statement dated July 29, 2003 (File No. 1-15681). |
| |
| * |
Filed herewith. |
| |
| # |
This item is furnished as an exhibit to this report but is not
filed with the Securities and Exchange Commission. |