Room 4561
September 22, 2005
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 August 1, 2005
File No. 1-15681
Dear Mr. Mitchell,
We have reviewed the above referenced filing and have the
following comments. Please note that we have limited our review
to
the matters addressed in the comments below. 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
comment is inapplicable or a revision is unnecessary. Please be
as
detailed as necessary in your explanation. In some of our
comments,
we may ask you to provide us with supplemental information so we
may
better understand your disclosure. After reviewing this
information,
we may or may not 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 7. MD&A of Financial Condition and Results of Operations
Results of Operations
1. You disclose on page 33 that maintenance revenue increased in
fiscal year 2005 primarily due to the increase in customers
licensing
your software. However, we note that license revenue decreased in
fiscal year 2005. Please explain to us how you experienced an
increase in software licensing when revenue related to such
licensing
decreased. If the changes are due to changes in price and or
volume,
then you should consider addressing the reasons for such changes.
See Item 303 (a) (3) (iii) of Regulation S-K.
2. We note that license revenues consistently and significantly
declined over the three reported periods but it appears that you
do
not address this trend in your results of operations section.
Please
tell us how you have considered Item 303 (a) (3) of Regulation S-K
and SEC Release No. 33-6835 Section III.B in disclosing the trend
of
declining license revenues and all other material trends known to
you
that may affect your liquidity and the results of your future
operations.
3. It appears that you do not quantify each of the multiple
factors
that contributed to material year-to-year changes for each of your
operating line items. For example, your general and
administrative
expenses increased by $7.2 million in fiscal year 2005 but it does
not appear that you quantify the increase for each of the material
cost components (e.g. internal investigation of the Japanese
subsidiary and Sarbanes Oxley compliance) that contributed to such
increases. Please tell us how you considered the requirements of
SEC
Release Number 33-6835 Section III D in quantifying the material
year-to-year changes affecting your operating line items.
Item 8. Financial Statements
Notes to Consolidated Financial Statements
Note 2. Summary of significant accounting policies
Revenue Recognition, page F-10
4. You disclose on pages 7 and 17 that a significant portions of
your
sales are secured through several intermediaries including
distributors and resellers. If material, please identify any
contingencies such as price protection, rights of return,
conditions
of acceptance, warranties, etc., explain the material terms of
such
provisions in your arrangements and describe how these
contingencies
affect revenue recognition related to sales to or through such
intermediaries.
Guarantees and Indemnification, page F-12
5. You disclose that you have historically received only a limited
number of requests for indemnification and you have not been
required
to make material payments. Accordingly you have not recorded a
liability related to such indemnification provisions. However,
you
made a payment of $2.25 million to settle potential infringement
claims on behalf of five of your customers. In light of this
payment
please explain the basis for your disclosure indicating that
indemnifications have not been material. Also, tell us how you
concluded that you are not required to reserve for estimated
future
infringement settlements.
Note 8. Income taxes, page F-15
6. We note that you disclose deferred tax assets net of deferred
tax
liabilities. Please tell us how you considered the disclosure
requirements of paragraph 43 of SFAS 109 in segregating total
deferred tax assets from total deferred tax liabilities.
Note 11. Stockholder`s equity, page F-17
7. We note that you entered into a reseller agreement with i2
Technologies (i2) where you issued 710,000 warrants, as amended,
to
i2 and in return you will receive approximately $8.8 million, as
amended, in OEM fees. Please provide us with a comprehensive
analysis of your accounting for this transaction in accordance
with
EITF 01-09. In your analysis, justify the classification of the
amortization of the deferred warrant charge as sales and marketing
expense.
Form 8-K, filed August 1, 2005
8. Your disclosures in the press release should not make reference
to
"pro forma" operating profit, "pro forma" net income, "pro forma"
net
income per share, or "pro forma" results. The information you
have
presented throughout the press release should be referred to as
"non-
GAAP" and not "pro forma." Pro forma has a meaning, as defined by
generally accepted accounting principles and SEC rules, that is
significantly different than your presentation. Refer to
Regulation
S-K, Item 10(e) (ii) (E).
9. We note that the non-GAAP measure you have presented excludes
recurring cost items but includes revenue generated directly from
these cost items. Demonstrate the usefulness of the non-GAAP
measure
in assessing performance when these recurring items are a result
of
your operations and have contributed to your performance. Refer
to
Question 8, Frequently Asked Questions Regarding the Use of Non-
GAAP
Financial Measures. Ensure that you adequately disclose why each
recurring item excluded is not relevant in assessing performance.
10. We note that you disclose several non-GAAP measures as a
result
of presenting a full statement of operations on a non-GAAP basis.
Each line item, subtotal and total affected by your adjustments
represents a separate measure for which you must provide specific
and
meaningful disclosures in order to comply with the guidance
provided
in Item 10(e)(1) of Regulation S-K and the related FAQ. Please
explain to us how you concluded that your current disclosure is
adequate for each individual non-GAAP measure presented.
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.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
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.
Very truly yours,
Brad Skinner
Accounting Branch Chief
David Mitchell
webMethods, Inc.
September 22, 2005
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