Room 4561
January 19, 2006
Mr. David Mitchell
President and Chief Executive Officer
webMethods, Inc.
3877 Fairfax Ridge Road
South Tower
Fairfax, Virginia 22030
Re: webMethods, Inc.
Form 10-K for the Fiscal Year Ended March 31, 2005
Filed June 14, 2005
Form 8-K
Filed October 25, 2005
File No. 1-15681
Dear Mr. Mitchell,
We have reviewed your response letter dated October 14,
2005,
as well as the filings referenced above, and have the following
comments. Where indicated, we think you should revise your
document
in response to these comments. If you disagree, we will consider
your explanation as to why our comments are inapplicable or a
revision is unnecessary. Please be as detailed as necessary in
your
explanation. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comment or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the Fiscal Year Ended March 31, 2005
Item 8. Financial Statements
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies
1. We have considered your response to prior comment number 5 from
our letter dated September 22, 2005 and remain unclear with
respect
to various aspects of the intellectual property settlement and the
related accounting. To clarify our understanding, please provide
the
following additional information:
* Describe, in reasonable detail, the nature of the claims made by
the private company against your customers. In this regard,
describe
the nature and purpose of the private company`s product or
technology. Also, describe the specific actions or activities of
your customers that the private company claimed infringed their
intellectual property;
* Describe, in reasonable detail, the relationship between your
products and the actions or activities of your customers that led
to
the infringement claims by the third party;
* Describe, in reasonable detail, the nature of, and parties to,
the
"contemporaneous litigation matter" in which the private company
conceded that your products did not infringe the private company`s
patent. Describe any damages or relief sought. Explain when and
how
the litigation matter was resolved.
2. Describe for us, in greater detail, the various business
reasons
which led you to enter into a settlement agreement with the
private
company. As part of your response, address the following:
* Describe the "various court proceedings" that could have
resulted
in potential expense. What court proceedings did you believe you
would be involved in? Why did you believe you would be involved
in
them?
* Describe the possible impacts on your existing customer
relationships;
* Describe the potential impact of the infringement allegations on
your prospective business. In this regard, clarify both the
potential impact you had identified or considered, as well as the
specific infringement allegations that could result in that
impact.
* Describe the potential impacts of various outcomes of the
infringement allegations on your business. Clarify the potential
impacts, the various outcomes and the infringement allegations
that
could result in those impacts and outcomes.
3. Describe the material terms of the product license you acquired
as
part of the settlement. Explain whether it relates to past,
current
or future use of the underlying technology. Also, explain your
basis
for expensing this settlement. In this regard, explain the
consideration you gave to capitalizing the amount and amortizing
over
future periods. Separately, explain your basis for reporting the
settlement outside of cost of goods sold.
Note 11. Stockholder`s Equity, page F-17
4. We note your response to our previous comment number 7. In
addition to the periodic payments received under the March 2001
OEM
Agreement from i2, tell us the amount of any revenue recognized
from
i2 in each period subsequent to the date of the agreement and how
you
accounted for this revenue. Additionally, tell us how you
determined
the amount and the schedule of the cash payments received from i2
under the OEM Agreement.
Form 8-K, filed October 25, 2005
5. We note your response to prior comment number 10 from our
letter
dated September 22, 2005. Please note that the requirements of
Item
10(e)(1)(i) of Regulation S-K specifically apply to information
furnished under Item 2.02 of Form 8-K. See instruction 2 to Item
2.02 of Form 8-K.
6. In view of the nature, content and format of the presentation,
we
question whether it complies with Item 100(b) of Regulation G. In
this regard we note the following:
* The presentation of a full non-GAAP Statement of Operations may
create the unwarranted impression that the presentation is based
on a
comprehensive set of accounting rules or principles;
* Your reference to "core operations" and "core operating
performance", for both you and your competitors, may create the
unwarranted impression that "core operations" and "core operating
performance" are defined items that are calculated consistently
under
a comprehensive set of accounting rules or principles; and,
* You describe as unusual or infrequent charges where the nature
of
the charge is such that it appears reasonably likely to recur
within
two years or there was a similar charge within the prior two
years.
7. We have considered your response to prior comment number 10
from
our letter dated September 22, 2005, together with the non-GAAP
information included in the press release furnished in the Form 8-
K
filed October 25, 2005. Your non-GAAP presentation does not
appear
consistent with our guidance and requirements on such
presentation.
Following are such inconsistencies in greater detail:
* Your presentation includes a numerous non-GAAP measures
including,
but not limited to, non-GAAP cost of revenue, non-GAAP gross
profit,
various non-GAAP operating expense items, non-GAAP operating
income
and non-GAAP net income (loss). However, the disclosure that you
have provided regarding these measures appears generic in nature
and
does not appear to address any of the measure individually. Note
that each line item, sub-total or total for which an adjustment
has
been made represents a separate non-GAAP measure that must be
separately identified and addressed in the accompanying
disclosure.
See Items 10(e)(1)(i)(C) and 10(e)(1)(i)(D) of Regulation S-K.
* We note no substantive disclosure that addresses the disclosures
in
Question 8 of the FAQ. For example, you do not explain why it is
useful to investors to eliminate non-cash charges from a
performance,
as opposed to liquidity, measure. Further, you do not explain the
material limitations associated with each measure or the manner in
which management compensates for such limitations.
To the extent that the non-GAAP measures exclude items that are
considered recurring in nature, you must meet the burden of
demonstrating the usefulness of each measure and clearly disclose
why
each non-GAAP measures is useful when these items are excluded.
See
Question 8 of the June 13, 2003 FAQs.
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. Please submit all correspondence and
supplemental
materials on EDGAR as required by Rule 101 of Regulation S-T. You
may wish to provide us with marked copies of any amendment to
expedite our review. Please furnish a cover letter with any
amendment that keys your responses to our comments and provides
any
requested information. Detailed cover letters greatly facilitate
our
review. Please understand that we may have additional comments
after
reviewing any amendment and your responses to our comments.
You may contact Stathis Kouninis, Staff Accountant, at (202)
551-3476, Marc Thomas, Senior Staff Accountant at (202) 551-3452
or
me at (202) 551-3489 if you have any questions regarding these
comments.
Sincerely,
Brad Skinner
Accounting Branch Chief
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David Mitchell
webMethods, Inc.
January 19, 2006
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