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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15681
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WEBMETHODS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1807654
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3930 PENDER DRIVE, FAIRFAX, VIRGINIA 22030
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 460-2500
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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 [ ]
As of January 31, 2001, 47,861,700 shares of the registrant's Common
Stock, par value $.01 per share, were issued and outstanding.
WEBMETHODS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Part I. Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2000 (unaudited) and March 31, 2000
Condensed Consolidated Statements of Operations
(unaudited) -
Three and nine months ended December 31, 2000 and
1999
Condensed Consolidated Statements of Cash Flows
(unaudited) -
Nine months ended December 31, 2000 and 1999
Notes to Condensed Consolidated Financial
Statements (unaudited)
Item 2 Management's Discussion and Analysis of Financial
Condition And Results of Operations
Item 3 Quantitative and Qualitative Disclosures about
Market Risk
Part II Other Information
Item 2 Changes in Securities and Use of Proceeds
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
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PART I
ITEM 1: FINANCIAL STATEMENTS
WEBMETHODS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
2000 2000
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 99,869,892 $ 171,716,075
Marketable securities available for sale .................... 82,966,340 25,255,901
Accounts receivable, net of allowances of $3,060,230 and
$1,058,000, respectively ................................. 42,656,387 18,578,340
Prepaid expenses and other current assets ................... 10,684,351 6,615,330
------------- -------------
Total current assets ................................ 236,176,970 222,165,646
Marketable securities available for sale ...................... 40,841,176 37,137,889
Property and equipment, net ................................... 13,765,744 6,309,693
Goodwill and acquired intangibles, net ........................ 79,044,942 28,262,683
Other assets .................................................. 13,240,639 5,310,836
------------- -------------
Total assets ........................................ $ 383,069,471 $ 299,186,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 9,584,516 $ 4,207,708
Accrued expenses ............................................ 15,438,137 7,322,566
Accrued salaries and commissions ............................ 12,352,145 8,034,904
Deferred revenue ............................................ 45,030,319 20,333,862
Current portion of capital lease obligations ................ 892,269 148,026
Current portion of notes payable and lines of credit ........ -- 762,217
------------- -------------
Total current liabilities ........................... 83,297,386 40,809,283
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Capital lease obligations, net of current portion ........... 1,493,467 426,145
Long-term obligations, less current portion ................. -- 267,212
Long term deferred revenue .................................. 21,874,173 5,515,103
------------- -------------
Total liabilities ................................... 106,665,026 47,017,743
------------- -------------
Stockholders' equity
Common stock, $0.01 par value; 500,000,000 shares
authorized; 47,779,268 and 45,429,400 shares issued and
outstanding .............................................. 477,792 454,294
Additional paid-in capital .................................. 449,602,509 344,019,296
Deferred stock compensation ................................. (23,819,131) (26,633,918)
Accumulated deficit ......................................... (150,317,931) (65,541,247)
Accumulated other comprehensive income (loss) ............... 461,206 (129,421)
------------- -------------
Total stockholders' equity .......................... 276,404,445 252,169,004
------------- -------------
Total Liabilities and stockholders' equity .......... $ 383,069,471 $ 299,186,747
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenue:
License ..................................................... $ 43,426,135 $ 13,575,397 $ 99,835,084 $ 27,156,747
Professional services ....................................... 8,780,365 2,509,196 24,964,202 6,552,525
Maintenance ................................................. 7,175,311 1,510,583 15,384,199 3,404,698
------------- ------------- ------------- -------------
Total revenue ....................................... 59,381,811 17,595,176 140,183,485 37,113,970
------------- ------------- ------------- -------------
Cost of revenue:
License ..................................................... 1,658,433 752,512 3,963,797 1,873,426
Professional services and maintenance
(exclusive of amortization of deferred stock compensation
of $269,787 and $92,170 for the three months ended December
31, 2000 and 1999, respectively, and $1,016,163 and $157,726
for the nine months ended December 31, 2000 and 1999,
respectively) ............................................. 12,533,312 4,047,095 33,393,250 9,028,732
------------- ------------- ------------- -------------
Total cost of revenue ............................... 14,191,745 4,799,607 37,357,047 10,902,158
------------- ------------- ------------- -------------
Gross profit .................................................. 45,190,066 12,795,569 102,826,438 26,211,812
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Operating expenses:
Sales and marketing (exclusive of amortization of deferred
stock compensation of $1,059,836 and $225,454 for the three
months ended December 31, 2000 and 1999, respectively, and
$4,093,007 and $533,566 for the nine months ended December
31, 2000 and 1999, respectively) .......................... 27,317,156 12,412,109 68,893,181 27,113,667
Research and development (exclusive of amortization of
deferred stock compensation of $3,006,680 and $124,443 for
the three months ended December 31, 2000 and 1999,
respectively, and $9,396,343 and $290,789 for the nine
months ended December 31, 2000 and 1999, respectively) .... 12,774,043 4,127,267 31,307,242 9,677,921
General and Administrative (exclusive of amortization of
deferred stock compensation of $401,921 and $241,305 for
the three months ended December 31, 2000 and 1999,
respectively, and $1,573,866 and $306,291 for the nine
months ended December 31, 2000 and 1999, respectively) .... 5,929,126 2,926,128 14,935,245 6,372,660
Merger related expenses ..................................... -- -- 34,039,218 --
Amortization of deferred stock compensation ................. 4,738,224 683,372 16,079,379 1,288,372
Amortization of goodwill and acquired intangibles ........... 10,604,063 -- 30,887,800 --
In-process research and development ......................... -- -- 2,311,000 --
------------- ------------- ------------- -------------
Total operating expenses ............................ 61,362,612 20,148,876 198,453,065 44,452,620
------------- ------------- ------------- -------------
Operating loss ................................................ (16,172,546) (7,353,307) (95,626,627) (18,240,808)
Interest income, net .......................................... 3,504,621 796,227 10,849,943 1,368,838
------------- ------------- ------------- -------------
Net loss ................................................. (12,667,925) (6,557,080) (84,776,684) (16,871,970)
Accretion and accrued dividends related to
mandatorily redeemable preferred stock ...................... -- 8,980,928 -- 9,789,810
------------- ------------- ------------- -------------
Net loss attributable to common shareholders ............. $ (12,667,925) $ (15,538,008) $ (84,776,684) $ (26,661,780)
============= ============= ============= =============
Basic and diluted net loss per common share ................... $ (.27) $ (0.82) $ (1.82) $ (1.89)
============= ============= ============= =============
Shares used in computing basic and diluted net
loss per common share ...................................... 47,217,615 18,855,365 46,618,217 14,110,293
============= ============= ============= =============
Comprehensive loss:
Net loss ................................................. $ (12,667,925) $ (15,538,008) $ (84,776,684) $ (26,661,780)
Other comprehensive loss:
Unrealized gain (loss) on securities available for
sale .............................................. 559,563 (32,897) 906,663 (39,692)
Foreign currency cumulative translation
adjustment ........................................ (414,561) -- (316,036) --
------------- ------------- ------------- -------------
Total comprehensive loss ............................ $ (12,522,923) $ (15,570,905) $ (84,186,057) $ (26,701,472)
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The accompanying notes are an integral part of these consolidated financial
statements.
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WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
2000 1999
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Cash flows from operating activities:
Net loss .............................................. $ (84,776,684) $ (16,871,970)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ...................... 2,681,265 855,960
Provision for bad debts and returns ................ 2,720,255 609,000
Provision for warranty ............................. 87,919 165,000
Expense related to fair value of options
issued to non-employees .......................... -- 690,461
Loss on disposal of equipment ...................... 43,962 3,000
Amortization of deferred stock compensation ........ 16,079,379 1,288,372
Amortization of goodwill and acquired
intangibles ...................................... 30,887,800 --
Write off of in-process research and development ... 2,311,000 --
Increase (decrease) in cash resulting from
changes in assets and liabilities:
Accounts receivable ................................ (26,199,305) (9,792,531)
Prepaid expenses and other current assets .......... (3,527,886) (2,051,231)
Other assets ....................................... (8,233,294) 355,642
Accounts payable ................................... 5,105,120 461,663
Accrued expenses ................................... 8,031,994 3,401,593
Accrued salaries and commissions ................... 4,356,625 3,749,875
Deferred revenue ................................... 40,566,893 9,846,315
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Net cash used in operating activities .............. (9,864,957) (7,288,851)
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Cash flows from investing activities:
Purchases of property and equipment ................... (7,794,093) (2,626,580)
Acquisition of business net of cash acquired .......... (4,740,879) --
Net purchases of marketable securities available
for sale .............................................. (60,630,457) (32,850,401)
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Net cash used in investing activities .............. (73,165,429) (35,476,981)
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Cash flows from financing activities:
Payments on capital leases ............................ (516,193) --
Repayments under notes and lines of credit ............ (1,029,429) (145,666)
Proceeds from exercise of stock options and stock
issued under the ESPP .............................. 12,951,585 90,622
Proceeds from issuance of common stock ................ -- 40,389,000
Proceeds from issuance of preferred stock ............. -- 28,852,174
Issuance costs related to preferred stock
offerings .......................................... -- (195,839)
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Net cash provided by financing activities .......... 11,405,963 68,990,291
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Effective of exchange rate on cash ...................... (221,760)
Net decrease in cash and cash equivalents ............... (71,846,183) 26,224,459
Cash and cash equivalents at beginning of period ........ 171,716,075 8,873,666
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Cash and cash equivalents at end of period .............. $ 99,869,892 $ 35,098,125
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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WEBMETHODS, INC..
NOTES TO CONDENSED CONSOLITATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of webMethods, Inc. and its subsidiaries (collectively, the
"Company") reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented in conformity with generally accepted accounting principles for the
interim financial information. Such adjustments are of a normal recurring
nature. Intercompany balances and transactions have been eliminated in
consolidation.
The results of the interim periods presented are not necessarily
indicative of the results for the year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No.101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The SEC
released SAB 101A, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 6, 1999 and March 15,
2000. Subsequently the SEC released SAB 101B, which further delayed the
implementation date of SAB 101 until no later than the fourth quarter of fiscal
years beginning after December 15, 1999. The Company does not expect a material
effect on the Company's financial position, results of operations or cash flows
as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, which delays the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for the
Company's fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
entered into derivative contracts and does not have near term plans to enter
into contracts, accordingly the adoption of SFAS No. 133 and SFAS No. 137 is not
expected to have a material effect on the financial statements.
In March 2000, FASB issued Interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The adoption did not have a material impact on the Company's financial
position or results of operations
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
2000 1999
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Cash paid during the period for interest $ 129,211 $ 84,187
============ ============
Non-cash investing and financing activities
Accretion and accrued dividends related
to mandatorily redeemable preferred stock $ -- $ 10,598,692
============ ============
Equipment purchased under capital lease $ 2,301,631 $ 668,545
============ ============
Change in net unrealized gain (loss) of
marketable securities $ 1,450,660 $ (37,560)
============ ============
Issuance of common stock and options for
business acquisitions $ 92,671,316 $ --
============ ============
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4. SEGMENT INFORMATION
The Company markets it products in the United States and in foreign
countries. Information regarding geographic areas for the three and nine months
ended December 31, 2000 and 1999 are as follow:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
REVENUES 2000 1999 2000 1999
- ------------------ ------------ ------------ ------------ ------------
North America ... $ 52,142,710 $ 15,634,418 $129,447,238 $ 33,570,334
Europe .......... 5,773,729 1,960,758 9,159,486 3,543,636
Asia Pacific .... 1,465,372 -- 1,576,761 --
------------ ------------ ------------ ------------
Total ..... $ 59,381,811 $ 17,595,176 $140,183,485 $ 37,113,970
============ ============ ============ ============
AS OF AS OF
DECEMBER 31, MARCH 31,
LONG LIVED ASSETS 2000 2000
----------------- ------------ ------------
North America ... $104,825,378 $ 39,741,400
Europe .......... 1,001,443 141,812
Asia Pacific .... 224,504 --
------------ ------------
Total ..... $106,051,325 $ 39,883,212
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5. ACTIVE MERGER
On August 15, 2000 the Company completed a merger with Active Software,
Inc. ("Active Software"), a publicly held software company based in Santa Clara,
California that develops and markets software products for businesses that allow
users to integrate incompatible software applications across their extended
enterprises of customers, suppliers and partners. Active stockholders received
.527 shares of common stock of webMethods for each share of stock of Active
common stock, or an aggregate of 13.9 million shares. The merger is being
accounted for as a pooling of interests, and accordingly the financial
statements have been retroactively restated as if the Active Merger had occurred
as of the beginning of the earliest period presented. Active had a calendar
fiscal year end. In connection with the retroactive restatement the financial
statements of Active were recast to a March 31 year end to conform to webMethods
presentations.
In April 2000, Active Software acquired Premier Software Technologies,
Inc. (Premier), a provider of integration products and services for eCommerce.
In connection with this transaction, Active Software issued shares of its
common stock and paid cash of $500,000 in exchange for all of the outstanding
shares of capital stock of Premier. These shares were converted into 63,929
shares of webMethods common stock in connection with Active Software's merger
with webMethods. This acquisition was reflected in the pooled webMethods'
consolidated financial statements.
In April 2000, Active Software acquired TransLink Software, Inc.
(TransLink), a provider of high performance mainframe integration solutions for
eBusiness. In connection with this transaction, Active Software issued shares of
its common stock and paid cash of $4.5 million. In addition, the outstanding
options to purchase TransLink capital stock were converted into options to
purchase shares of Active Software's common stock. These shares were converted
into 442,365 shares of webMethods common stock in connection with Active
Software's merger with webMethods. This acquisition was reflected in the pooled
webMethods' consolidated financial statements.
6. SUBSEQUENT EVENTS
On February 5, 2001, webMethods acquired Intelliframe Corporation
("Intelliframe"), a wholly owned subsidiary of Computer Network Technology
Corporation. Through the acquisition, webMethods acquired Intelliframe, certain
technology and Intelliframe's Boston based research and development team. The
total purchase price for the acquisition was $31.3 million, of which $8.8
million was paid in cash and $22.5 million was paid in newly issued shares of
webMethods' common stock. Since this was primarily an acquisition of research
and development, which in the opinion of management has not reached
technological feasibility, substantially all of the purchase price is expected
to be recorded as a one-time charge to in-process research and development in
the fourth quarter ended March 31, 2001.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the prospectus included in the Company's Current Report on Form
8-K dated December 6, 2000 (File No. 001-15681) and in the Quarterly Report for
the period ended September 30, 2000, as amended (File No. 001-15681). The
information contained herein is not a comprehensive discussion and analysis of
the financial condition and results of operations, but rather updates
disclosures made in the Company's Current Report on Form 8-K and Quarterly
Report for the period ended September 30, 2000.
Certain information contained herein should be considered
"forward-looking information," which is subject to a number of substantial risks
and uncertainties. Statements contained herein that are not statements of
historical fact may be deemed to be forward-looking information. Without
limiting the foregoing, words such as "anticipates," "believes," "could,"
"estimate," "expect," "intend," "may," "might," "should," "will," and "would"
and other forms of these words or similar words are intended to identify
forward-looking information. Such forward-looking statements are made only as of
the date of this report. The Company's actual results could differ materially
from those contained in forward-looking statements. Important factors known to
the Company that could cause such material differences are discussed under the
caption "Risk Factors" in the abovementioned filings. The Company undertakes no
obligations to publicly update or revise any forward-looking information,
whether as a result of new information, future events or otherwise.
OVERVIEW
We are a leading provider of infrastructure software and services for
achieving business-to-business integration, or B2Bi. Our software, webMethods
B2B, enables companies to work more closely with their customers, suppliers and
other business partners through the real-time exchange of information and
transactions over the Internet.
webMethods was founded in June 1996. In August 2000, we acquired Active
Software which was accounted for as a pooling of interest. Active was founded in
September 1995. We have grown from 526 employees as of March 31, 2000 to 820
employees as of December 31, 2000. We shipped the first version of webMethods
B2B in June 1998 and have released five subsequent versions of webMethods B2B,
the most recent of which we began shipping in September 2000. The first version
of webMethods Enterprise Server was shipped in August 1996, and ten subsequent
versions of the webMethods Enterprise Server have been released since, the most
recent of which began shipping in September 2000.
Our revenue is derived from sales of licenses of our B2B and
Enterprise software, professional services and maintenance and support. We
generally license our software on a two-year renewable basis. Periodically, we
license our software over a different renewable term or on a perpetual basis.
License fees are generally billed upon shipment. Maintenance, which includes the
right to receive product upgrades on a when-and-if available basis, is generally
included in our renewable licenses for the term of the license. Alternatively
we include maintenance for the first year of the renewable license and
maintenance for the remaining term of the license is optional. Maintenance on
perpetual licenses is generally included for the first year of the license. We
offer implementation and other professional services on a time and materials
basis and training on a fixed fee basis.
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We recognize revenue from the sale of software licenses upon shipment of
our software, provided that the fee is fixed and determinable, persuasive
evidence of an arrangement exists and collection of the resulting receivable is
considered probable. Historically, we have not experienced significant returns
or exchanges of our software. We recognize software license revenue over the
term of the license if the license requires us to deliver unspecified software
during its term or if the license contains extended payment terms we recognize
this revenue as payments became due. Maintenance revenue is recognized ratably
over the maintenance period. The portion of revenue from the two-year renewable
and perpetual licenses that is allocated to maintenance and support is
recognized over the term of the maintenance and support period. Amounts billed
in advance of revenue recognition are recorded as deferred revenue. Professional
services revenue is recognized as the service is performed.
Our cost of license revenue primarily includes royalties to third
parties for software used in our software. Our cost of professional services and
maintenance revenue includes salaries and related expenses for our professional
services and technical support organizations, costs of third-party consultants
we use to provide professional services to customers and an allocation of
overhead and recruitment costs.
Although revenue has consistently increased from quarter to quarter, we
have incurred significant costs to develop our technology and products and to
recruit and train personnel for our research and development, sales, marketing,
professional services and administration departments. As a result, we have
incurred significant losses since inception, and as of December 31, 2000, had
an accumulated deficit of approximately $150.3 million. We believe our success
depends on rapidly increasing our customer base, further developing the
webMethods B2B and Enterprise software and introducing new product enhancements
into the marketplace. We intend to continue to invest heavily in research and
development, sales, marketing and professional services. As a result, we expect
to continue to incur substantial operating losses for the foreseeable future.
We had 820 full-time employees as of December 31, 2000, and intend to
hire more employees in the future. This expansion places significant demands on
our management and operational resources. To manage this rapid growth and
increase demand, we must invest in and implement scalable operational systems,
procedures and controls. We must also be able to recruit qualified candidates to
manage our expanding operations. We expect future expansion to continue to
challenge management's ability to hire, train, manage and retain our employees.
RECENT DEVELOPMENTS
On February 5, 2001, webMethods acquired Intelliframe Corporation, a
wholly owned subsidiary of Computer Network Technology Corporation
("Intelliframe"). Through the acquisition, webMethods acquired Intelliframe,
certain technology and Intelliframe's Boston based research and development
team. The total purchase price for the acquisition was $31.3 million, of which
$8.8 million was paid in cash and $22.5 million was paid in newly issued
shares of webMethods' common stock. Substantially all of the purchase price is
expected to be recorded as a one-time charge to in-process research and
development in the quarter ended March 31, 2001.
RESULTS OF OPERATIONS
REVENUE
Total revenue increased by approximately $103.1 million, or 277.7%, to
$140.2 million for the nine months ended December 31, 2000 from $37.1 million
for the nine months ended December 31, 1999. For the three month period ending
December 31, 2000, total revenue increased $41.8 million, or 237.5%, to $59.4
million from $17.6 million for the three month period ending December 31, 1999.
License. License revenue increased by approximately $72.6 million, or
267.6%, to $99.8 million for the nine months ended December 31, 2000 from $27.2
million for the nine months ended December 31, 1999. For the three month
period ending December 31, 2000, license revenue increased $29.8 million, or
219.9%, to $43.4 million from $13.6 million for the three month period ending
December 31, 1999. This increase is primarily attributable to an increase in
sales to new and existing customers resulting from increased sales force
headcount and a growing acceptance of our webMethods B2B and Enterprise
software.
Professional Services. Professional services revenue increased by
approximately $18.4 million, or 281.0%, to $25.0 million for the nine months
ended December 31, 2000 from $6.6 million for the nine months ended December
31, 1999. For the three month period ending December 31, 2000, professional
services revenue increased $6.3 million, or 249.9%, to $8.8 million from $2.5
million for the three month period ending December 31, 1999. This increase is
attributable to the increased licensing activity described above, which has
resulted in increased customer implementation activity and follow-on
professional services.
Maintenance. Maintenance revenue increased by approximately $12.0
million, or 351.9%, to $15.4 million for the nine months
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ended December 31, 2000 from $3.4 million for the nine months ended December
31, 1999. For the three month period ending December 31, 2000, maintenance
revenue increased $5.7 million, or 375.0%, to $7.2 million from $1.5 million
for the three month period ending December 31, 1999. This increase is
attributable to the increased licensing activity described above. Because a
majority of the license contracts include post-contract maintenance and
support, an increased level of license revenue as well as renewal maintenance
on perpetual licenses results in an increased amount of maintenance revenue
recognized ratably over the term of the maintenance agreement.
COST OF REVENUE
License. Cost of license revenue increased by approximately $2.1
million, or 111.6%, to $4.0 million for the nine months ended December 31, 2000
from $1.9 million for the nine months ended December 31, 1999. For the three
month period ending December 31, 2000, cost of license revenue increased
$906,000, or 120.4%, to $1.7 million from $753,000 for the three month period
ending December 31, 1999. This increase in the cost of licenses is primarily
due to increased sales of our product which incorporates third party technology
for which we pay royalties, and to a lesser extent, the amortization of prepaid
third party software licensing fees. Gross profit margin on license revenue
increased to 96.0% for the nine months ended December 31, 2000 compared to
93.1% for the nine months ended December 31, 1999.
Professional Services and Maintenance. Cost of professional services and
maintenance increased by approximately $24.4 million, or 269.9% to $33.4
million for the nine months ended December 31, 2000 from $9.0 million for the
nine months ended December 31, 1999. For the three month period ending December
31, 2000, cost of professional services and maintenance revenue increased $8.5
million, or 209.7%, to $12.5 million from $4.0 million for the three month
period ending December 31, 1999. This increase is primarily attributable to
increases in the number of professional service and technical support
personnel, which increased to 222 people as of December 31, 2000 from 57 people
as of December 31, 1999. In addition, subcontractor and travel expenses
contributed to the increase in cost of professional services and maintenance
for the nine months ended December 31, 2000. Gross profit margin on
professional services and maintenance increased to 17.2% of professional
services and maintenance revenue for the nine months ended December 31, 2000
compared to 9.3% for the nine months ended December 31, 1999.
GROSS PROFIT
Gross profit increased by approximately $76.6 million, or 292.3%, to
$102.8 million for the nine months ended December 31, 2000 from $26.2 million
for the nine months ended December 31, 1999. During the three month period
ending December 31, 2000, gross profit increased $32.4 million, or 253.2%, to
$45.2 million from $12.8 million for the three month period ending December 31,
1999. The increase is attributable to the growth in our customer base, which
contributed to increased revenue from software licenses, professional services
and maintenance.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by
approximately $41.8 million, or 154.1%, to $68.9 million for the nine months
ended December 31, 2000 from $27.1 million for the nine months ended December
31, 1999. Sales and marketing expenses increased by approximately $14.9 million,
or 120.1%, to $27.3 million for the three months ended December 31, 2000 from
$12.4 million for the three months ended December 31, 1999. The increase in
sales and marketing expenses is primarily attributable to the increased spending
on marketing programs, and to a lesser extent, to the increase in the number of
sales and marketing employees. We believe that these expenses will continue to
increase in absolute dollar amounts in future periods as we continue to expand
our sales and marketing efforts.
Research and Development. Research and development expenses increased by
approximately $21.6 million, or 223.5%, to $31.3 million for the nine months
ended December 31, 2000 from $9.7 million for the nine months ended December 31,
1999. Research and development expenses increased by approximately $8.6 million,
or 209.5%, to $12.8 million for the three months ended December 31, 2000 from
$4.1 million for the three months ended December 31, 1999. The increase in
research and development expenses is attributable to increases in the number of
software development, pre-commercial release quality assurance and documentation
personnel and in third party development costs. We believe that continued
investment in research and development is critical to attaining our strategic
objectives, and, as a result, expect research and development expenses to
increase significantly in future periods.
General and Administrative. General and administrative expenses
increased by approximately $8.5 million, or 134.4%, to $14.9 million for the
nine months ended December 31, 2000 from $6.4 million for the nine months ended
December 31, 1999. General and administrative expenses increased by
approximately $3.0 million, or 102.6% to $5.9 million for the three months
ended December 31, 2000 from $2.9 million for the three months ended December
31, 1999. This increase is primarily attributable to increases in the number of
accounting and finance, human resources, and office administration personnel.
In addition, professional service fees, corporate insurance, bad debt expense
and other general corporate costs increased to support organizational growth.
We expect general and administrative costs to continue to increase in absolute
dollars as we add personnel to support our expanding operations and incur
additional costs related to the growth of our business.
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Merger Related Expenses. In connection with the merger with Active, we
expensed $34.0 million in merger related expenses for the nine months ended
December 31, 2000.
Amortization of Deferred Stock Compensation. Amortization of deferred
stock compensation increased by approximately $14.8 million, or 1,148.0% to
$16.1 million for the nine months ended December 31, 2000 from $1.3 million for
the nine months ended December 31, 1999. Amortization of deferred stock
compensation increased by $4.1 million, or 593.4% to $4.7 million for the three
months ended December 31, 2000 from $683,000 for the three months ended
December 31, 1999. Certain options granted to employees have been treated as
compensatory because the estimated fair value of the underlying stock for
accounting purposes was greater than the exercise price as determined by our
Board of Directors on the date of the grant. In addition, in connection with
the acquisition of Alier, Premier and TransLink, certain shareholders of these
companies had been given restricted stock which was treated as deferred stock
compensation and is being amortized over the vesting period of the stock. These
amounts are being amortized over the respective vesting periods of these equity
arrangements, generally 48 months. The increase in amortization is also due to
acceleration of options of former Active option holders upon closing of the
merger, which caused a one time acceleration of the deferred stock related to
those options of $1.4 million.
In-process research and development. In-process research and development
was expensed upon consummation of the Translink acquisition as it had not
reached technological feasibility and, in the opinion of management, has no
alternative future use. For the nine months ended December 31, 2000, $2.3
million was expensed related to in-process research and development.
INTEREST INCOME, NET
Interest income, net increased by approximately $9.4 million, or
692.6%, to $10.8 million for the nine months ended December 31, 2000 from $1.4
million for the nine months ended December 31, 1999. Interest income, net
increased by approximately $2.7 million, or 340.2%, to $3.5 million for the
three months ended December 31, 2000 from $796,000 for the three months ended
December 31, 1999. This increase is attributable to increases in interest
income that resulted from the approximately $169.4 million in net cash proceeds
that we generated from the issuance of common stock in our initial public
offering and the concurrent private placement in February 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through an initial public offering of
our common stock which was completed on February 10, 2000, private sales of
mandatorily redeemable, convertible preferred stock, resulting in net proceeds
from inception to March 31, 2000, and, to a lesser extent, through bank loans
and equipment leases. As of December 31 2000, we had approximately $99.9 million
in cash and cash equivalents, approximately $83.0 million in short-term
investments, approximately $40.8 million in long-term investments and
approximately $152.9 million in working capital.
Net cash used in operating activities was approximately $9.9 million for
the nine months ended December 31, 2000, and approximately $7.3 million used in
operating activities for the nine months ended December 31, 1999. Net cash used
from operating activities in each period reflect increasing net losses and
accounts receivable offset in part deferred revenue from customer payments that
were not recognized as revenue and, to a lesser extent, increases in
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accrued expenses.
Net cash used in investing activities was approximately $73.2 million
for the nine months ended December 31, 2000, and approximately $35.5 million for
the nine months ended December 31, 1999. Cash used in investing activities
reflects purchases of marketable securities available for sale in each period.
Capital expenditures were approximately $7.8 million for the nine months ended
December 31, 2000 and $2.6 million for the nine months ended December 31, 1999.
Capital expenditures consisted of purchases of operating resources to manage
operations, including computer hardware and software, office furniture and
equipment and leasehold improvements. Since inception we have generally funded
capital expenditures either through capital leases, the use of working capital,
or bank loans. We expect that our capital expenditures will continue to increase
along with our continued use of leasing in the future.
Net cash from financing activities was approximately $11.4 million for
the nine months ended December 31, 2000, and approximately $69.0 million for the
nine months ended December 31, 1999. These cash flows in the nine months ended
December 31, 2000 primarily reflect net cash proceeds from issuance of shares in
the employee stock purchase plan and the proceeds from the exercise of stock
options. During the nine months ended December 31, 1999, these cash flows
reflect the private sales of mandatorily redeemable, convertible preferred stock
in fiscal 1999. In December 1999, we entered into a revolving promissory note to
borrow up to a maximum principal amount of $3,000,000 with a maturity date of
March 31, 2001. Borrowings under this note are limited to a borrowing base of
75% of eligible accounts receivable. This note bears interest at the bank's
prime rate plus 1% per annum. As of December 31, 2000, we had not borrowed
against this revolving promissory note. In connection with the revolving
promissory note, we obtained a letter of credit totaling $750,000 which expires
in June 2001 and relates to the new office lease.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. We may utilize cash
resources to fund acquisitions or investments in complementary businesses,
technologies or product lines. We believe that our existing working capital and
our revolving promissory note will be sufficient to meet our working capital and
operating resource expenditure requirements for at least the next twelve months.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, which delays the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for our
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. We have not entered into
derivative contracts and do not have near term plans to enter into derivative
contracts, accordingly the adoption of SFAS No. 133 and SFAS No. 137 is not
expected to have a material effect on our financial statements.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB 101A, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. Subsequently the SEC released SAB 101B, which further
delayed the effective date of SAB 101 until no later than the fourth quarter of
fiscal years beginning after December 15, 1999. We do not expect a material
effect on our financial position, results of operations or cash flows as a
result of SAB 101.
In March 2000, FASB issued Interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The adoption of FIN 44 did not have a material impact on our financial
position or results of operations.
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 10, 2000, in connection with our initial public offering, a
Registration Statement on Form S-1 (No. 333-91309) was declared effective by the
Securities and Exchange Commission, pursuant to which 4,715,000 share of our
common stock were offered and sold for our account at a price of $35.00 per
share, generating aggregate gross proceeds of $165 million for the account of
the Company. The managing underwriters were Morgan Stanley Dean Witter, Merrill
Lynch & Co., Dain Rauscher Wessels and Freidman Billings Ramsey. After deduction
approximately $11.6 million in underwriting discounts and $1.5 million in other
related expenses, the net proceeds of the offering were approximately $151.9
million. As of June 30, 2000, $151.9 million of the net proceeds were invested
in cash and cash equivalents, short-term and long-term investments. We intend to
use such proceeds for capital expenditures and for general corporate purposes,
including working capital to fund anticipated operating losses.
On August 15, 2000, the stockholders voted to increase the number of
shares of common stock authorized under webMethods' fifth amended and restated
certificate of incorporation to 500,000,000 shares.
Item 4. Submission of Matters To a Vote of Security Holders
Stockholders of the Company holding a majority of the shares present in
person or represented by proxy at the annual meeting and entitled to vote took
the following actions:
Approved the issuance of shares of webMethods common stock in
connection with the merger of a wholly owned subsidiary of webMethods with and
into Active Software, Inc.;
Approved an amendment to the webMethods Stock Option Plan; and
Ratified PricewaterhouseCoopers LLP as the Company's independent
auditors for the year ending March 31, 2001.
In addition, a plurality of the shares present in person or represented by proxy
at the annual meeting re-elected Robert Cook, Robert Vasan and Chase Bailey as
Class I directors of the Company's board of directors; and
The holders of two-thirds of the outstanding shares of webMethods common stock
approved an amendment to the Comapny's Fifth Amended and Restated Certificate of
Incorporation;
ITEM 5. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
1.1 Agreement and Plan of Merger dated as of May 20, 2000, by and
among the Registrant, Wolf Acquisition, Inc. and Active Software,
Inc.**
3.1 Fifth Amended and Restated Certificate of Incorporation, as
amended**
3.2 Amended and Restated Bylaws of the Registrant*
10.1 Second Amended and Restated Investor Rights Agreement*
10.2 Stock Option Plan, as amended**
22.0 Information regarding matters Submitted to Vote of Security
Holders**
27.0 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-91309)
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** Incorporated by reference to the the Registrant's definitive Proxy Statement
filed on Schedule 14A on July 21, 2000 (File No. 001-15681)
(b) Reports on Form 8-K
October 25, 2000, Item 5: Reported registrant's second quarter results
including results of the combined operations for the entire quarter resulting
from the registrant's acquisition of Active Software, Inc.
October 30, 2000, Item 5: Reported post-merger unaudited consolidated
quarterly financial results in connection with the registrant's acquisition of
Active Software, Inc.
December 30, 2000, Item 5: Reported consolidated financial results from
September 1995 to March 31, 2000, restated to reflect the registrant's
acquisition of Active Software, Inc.
SIGNATURES
Pursuant to the requirements 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.
Date: February 14, 2001 By: /s/ Phillip Merrick
-----------------------
Phillip Merrick
President and Chief
Executive Officer
Date: February 14, 2001 By: /s/ Mary Dridi
------------------
Mary Dridi
Chief Financial
(Principal Financial
Officer)
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