<PAGE> 1
. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for
webMethods should be read in conjunction with the consolidated financial
statements and the notes to the consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations of webMethods, which are included elsewhere in this report.
webMethods was founded in June 1996. In August 2000, the Company acquired Active
Software which was accounted for as a pooling of interests. We have presented
historical results from the inception of Active Software, which was September
19, 1995. The historical consolidated statement of operations data for the years
ended March 31, 2000, 1999 and 1998 and the historical consolidated balance
sheet data as of March 31, 2000 and 1999 are derived from the audited
consolidated financial statements of webMethods, which appear elsewhere in this
report and are retroactively restated to give effect to the pooling of Active
Software. The historical consolidated statement of operations data for the
period from inception of Active Software (September 19, 1995) to March 31, 1996
and for the year ended March 31, 1997 and the historical consolidated balance
sheet data as of March 31, 1998,1997 and 1996 are derived from consolidated
financial statements of webMethods not contained in this Form 8-K. Historical
results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, INCEPTION (SEPT. 19,
-------------------- 1995) TO MARCH 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License....................................... $ 42,822 $ 10,775 $ 3,458 $ 496 $ 35
Professional services......................... 11,699 2,459 817 15 25
Maintenance................................... 5,624 1,036 10 10 --
---------- -------- -------- -------- --------
Total revenue......................... 60,145 14,270 4,285 521 60
---------- -------- -------- -------- --------
Cost of revenue:
License....................................... 2,612 799 30 64 --
Professional services and maintenance(a)...... 16,102 3,803 804 165 10
---------- -------- -------- -------- --------
Total cost of revenue................. 18,714 4,602 834 229 10
---------- -------- -------- -------- --------
Gross profit.................................... 41,431 9,668 3,451 292 50
---------- -------- -------- -------- --------
Operating expenses:
Sales and marketing(a)........................ 44,033 14,741 4,854 1,163 33
Research and development(a)................... 14,780 6,065 3,525 1,642 206
General and administrative(a)................. 9,753 3,171 2,163 1,310 299
Amortization of goodwill and acquired
intangibles................................. 1,305 -- -- -- --
In-process research and development........... 2,737 -- -- -- --
Amortization of deferred stock compensation... 3,589 577 22 -- --
Write-off of intellectual property............ -- -- -- 150 --
---------- -------- -------- -------- --------
Total operating expenses.............. 76,197 24,554 10,564 4,265 538
---------- -------- -------- -------- --------
Operating loss.................................. (34,766) (14,886) (7,113) (3,973) (488)
Interest income, net............................ 3,362 414 172 60 32
---------- -------- -------- -------- --------
Loss before income taxes........................ (31,404) (14,472) (6,941) (3,913) (456)
Deferred tax provision.......................... (46) -- -- -- --
---------- -------- -------- -------- --------
Net loss...................................... (31,450) (14,472) (6,941) (3,913) (456)
Accretion and accrued dividends related to
mandatorily redeemable preferred stock........ (10,223) (605) (113) -- --
---------- -------- -------- -------- --------
Net loss attributable to common shareholders.. $ (41,673) $(15,077) $ (7,054) $ (3,913) $ (456)
========== ======== ======== ======== ========
Basic and diluted net loss per common share..... $ (2.23) $ (1.75) $ (0.83) $ (0.52) $ (0.54)
========== ======== ======== ======== ========
Shares used in computing basic and diluted net
loss per common share......................... 18,717 8,633 8,490 7,485 837
========== ======== ======== ======== ========
</TABLE>
----------
(a) For the year ended March 31, 2000, 1999 and 1998, excludes non-cash stock
compensation as described in the webMethods consolidated financial
statements included elsewhere in this Form 8-K.
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
</TABLE>
1
<PAGE> 2
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.....................$ 171,716 $ 8,874 $ 11,450 $ 405 $3,390
Working capital............................... 181,356 8,462 13,071 1,980 3,296
Total assets.................................. 299,187 19,738 14,236 1,332 3,665
Long-term obligations, net of current
portion....................................... 6,208 465 -- -- --
Mandatorily redeemable preferred stock........ -- 11,118 4,076 -- --
Total stockholders' equity ................... 252,169 345 7,916 236 3,539
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of webMethods should be read in conjunction with the
"Selected Consolidated Financial Data" contained in Item 6, and webMethods'
consolidated financial statements and related notes contained in Item 8. This
discussion and analysis contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934. Words such as
"anticipates," "expects," "intends," "believes," "plans," "seeks," "estimates"
and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors" in our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, on file with the Securities
and Exchange Commission as well as factors mentioned elsewhere in this report.
OVERVIEW
We are a leading provider of infrastructure software and services for
achieving business-to-business integration, or B2Bi. Our software 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, the Company acquired
Active Software which was accounted for as a pooling of interests. Active
Software was founded in September 1995. We have grown from 94 employees as of
March 31, 1998 to 526 employees as of March 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 webMethods B2B and
Enterprise Server software, professional services, and maintenance and support.
We historically license our B2B software on a two-year renewable basis, which
includes maintenance and support for the term of the renewable license and our
Enterprise Server on a perpetual basis, which includes maintenance and support
for the first year of the perpetual licenses. Periodically, we license our
webMethods B2B 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 included
in renewable licenses for the term of the license. Maintenance on perpetual
licenses is generally billed annually in advance. We offer implementation and
other professional services on a time and materials basis and training on a
fixed fee basis. We began our international direct sales efforts in our fiscal
fourth quarter 1999 and expect that our revenue from international licenses will
grow as we expand our sales efforts abroad.
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
2
<PAGE> 3
additional unspecified software during its term or if the license contains
extended payment terms. Maintenance revenue is recognized ratably over the
maintenance period as payment becomes due. The portion of revenue from the
two-year renewable and perpetual licenses that is allocated to maintenance and
support is recognized over 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 and a provision for warranty obligations. 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 March 31, 2000, had an
accumulated deficit of approximately $65.5 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 526 full-time employees as of March 31, 2000, and intend to hire a
significant number of 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
BUSINESS MERGERS AND ACQUISITIONS
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 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. All shares of preferred stock issued by Active
have been converted to the equivalent of webMethods common stock at the time of
issuance. 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 presentation.
Prior to the merger, in February 2000, Active Software agreed to acquire
Premier Software Technologies, Inc. (Premier), a provider of integration
products and services for eCommerce. In connection with this transaction,
Active Software issued 121,308 shares of its common stock and paid cash of
$500,000 in exchange for all of the outstanding shares of capital stock of
Premier.
Also in February 2000, Active Software agreed to acquire TransLink
Software, Inc. (TransLink), a provider of high performance mainframe
intergration solutions for eBusiness. In connection with this transaction,
Active Software issued 796,363 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 an aggregate of 43,041 shares of
Active Software's common stock.
The acquisitions of Premier and TransLink were completed in April 2000.
After completion of the merger, the shares of Active Software stock issued as
part of these acquisitions were converted into shares of the Company's stock
using the same conversion ratio as for the conversion of other shares of Active
Software stock. The options issued in connection with these acquisitions were
converted into options to acquire shares of Company stock, converted using the
same conversion ratio.
3
<PAGE> 4
AMENDMENT TO DEVELOPMENT PARTNER AGREEMENT WITH SAP AG
In June 2000, we signed an amendment to the development partner agreement
with SAP AG. The amendment expanded our relationship with SAP AG by making us
the supplier of enterprise application integration technology for SAP AG's
Business Connector. In addition, we have set up a formula to compensate SAP AG
for sales referrals for webMethods products. The amendment did not change the
term of the original agreement, nor did it change the fixed fee payable under
the terms of the original agreement.
RESULTS OF OPERATIONS
The following table sets forth our historical consolidated statement of
operations data for each of the periods indicated as a percentage of total
revenue.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, INCEPTION
-------------------- (SEPT. 19, 1995)
2000 1999 1998 1997 TO MARCH 31, 1996
---- ---- ---- ---- -----------------
PERCENTAGE OF TOTAL REVENUE:
Revenue:
<S> <C> <C> <C> <C> <C>
License ......................................... 71.2% 75.5% 80.7% 95.2% 58.3%
Professional services ........................... 19.5 17.2 19.1 2.9 41.7
Maintenance ..................................... 9.3 7.3 0.2 1.9 --
------- ------- -------- ------- -------
Total revenue ........................... 100.0 100.0 100.0 100.0 100.0
------- ------- -------- ------- -------
Cost of revenue:
License ......................................... 4.3 5.6 0.7 12.2 --
Professional services and maintenance ........... 26.8 26.6 18.8 31.7 16.7
------- ------- -------- ------- -------
Total cost of revenue ................... 31.1 32.2 19.5 43.9 16.7
------- ------- -------- ------- -------
Gross profit ...................................... 68.9 67.8 80.5 56.1 83.3
------- ------- -------- ------- -------
Operating expenses:
Sales and marketing ............................. 73.2 103.3 113.3 223.2 55.0
Research and development ........................ 24.6 42.5 82.2 315.2 343.3
General and administrative ...................... 16.2 22.2 50.5 251.4 498.3
Amortization of goodwill and acquired
intangibles ................................... 2.2 -- -- -- --
In-process research and development.............. 4.6 -- -- -- --
Amortization of deferred stock compensation ..... 5.9 4.1 0.5 -- --
Write-off Intellectual Property ................. -- -- -- 28.8 --
------- ------- -------- ------- -------
Total operating expenses ................ 126.7 172.1 246.5 818.6 896.6
------- ------- -------- ------- -------
Operating loss .................................... (57.8) (104.3) (166.0) (762.5) (813.3)
Interest income, net .............................. 5.6 2.9 4.0 11.5 53.3
------- ------- -------- ------- -------
Loss before income taxes .......................... (52.2) (101.4) (162.0) (751.0) (760.0)
Deferred tax provision ............................ (0.1) -- -- -- --
------- ------- -------- ------- -------
Net loss ..................................... (52.3)% (101.4)% (162.0)% (751.0)% (760.0)%
======= ======= ======== ======= =======
</TABLE>
YEAR ENDED MARCH 31, 2000 COMPARED TO YEAR ENDED MARCH 31, 1999
REVENUE
Total revenue increased by approximately $45.9 million, or 321%, to $60.1
million for the year ended March 31, 2000 from $14.3 million for the year ended
March 31, 1999.
License. License revenue increased by approximately $32.0 million, or 297%,
to $42.8 million for the year ended March 31, 2000 from $10.8 million for the
year ended March 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 $9.2 million, or 376%, to $11.7 million for the year ended March
31, 2000 from $2.5 million for the year ended March 31, 1999. This increase is
attributable to the increased licensing activity described above, which has
resulted in increased
4
<PAGE> 5
customer implementation activity and follow-on professional services.
Maintenance. Maintenance revenue increased by approximately $4.6 million,
or 443%, to $5.6 million for the year ended March 31, 2000 from $1.0 million for
the year ended March 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 $1.8 million,
or 227%, to $2.6 million for the year ended March 31, 2000 from $799,000 for the
year ended March 31, 1999. The growth in cost of license revenues on an absolute
dollars basis was attributable primarily to a larger proportion of our products
sold incorporating third party technology for which we pay royalties. We
anticipate that the cost of license revenue will increase in absolute dollars as
we license additional products, although cost of license revenue may vary as a
percentage of license revenue from period to period. Gross profit margin on
license revenue increased to 94% for the year ended March 31, 2000 compared to
93% for the year ended March 31, 1999.
Professional Services and Maintenance. Cost of professional services and
maintenance increased by approximately $12.3 million, or 323% to $16.1 million
for the year ended March 31, 2000 from $3.8 million for the year ended March 31,
2000. This increase is primarily attributable to increases in the number of
professional service and technical support personnel, which increased to 114
people as of March 31, 2000 from 26 people as of March 31, 1999. In addition,
subcontractor, travel, and recruiting expenses contributed to the increase in
cost of professional services and maintenance for the year ended March 31, 2000.
Gross profit margin on professional services and maintenance increased to 7% of
professional services and maintenance revenue in the year ended March 31, 2000
compared to (9%) for the year ended March 31, 1999.
GROSS PROFIT
Gross profit increased by approximately $31.8 million, or 329%, to $41.4
million for the year ended March 31, 2000 from $9.7 million for the year ended
March 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. The gross profit margin was 69% for the year ended
March 31, 2000 up from 68% for the year ended March 31, 1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by
approximately $29.3 million, or 199%, to $44.0 million for the year ended March
31, 2000 from $14.7 million for the year ended March 31, 1999. The increase in
sales and marketing expenses is primarily attributable to an increase in the
number of sales and marketing employees and, to a lesser extent, increases in
marketing programs. 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 $8.7 million, or 143%, to $14.8 million for the year ended March
31, 2000 from $6.1 million for the year ended March 31,
5
<PAGE> 6
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, we expect research and
development expenses to increase significantly in future periods.
General and Administrative. General and administrative expenses increased
by approximately $6.6 million, or 208%, to $9.8 million for the year ended March
31, 2000 from $3.2 million for the year ended March 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 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.
Amortization of Goodwill and Acquired Intangibles. Amortization of goodwill
and acquired intangibles was $1.3 million in the year ended March 31, 2000. The
estimated useful life of the goodwill and the acquired intangibles is 3 years
for trained and acquired assembled workforce, one year for license agreements,
2 years for non-compete agreements, 3 years for goodwill and 4 years for
favorable lease terms. The goodwill and acquired intangibles relates to the
acquisition of Alier.
In-process Research and Development. In-progress research and development
was $2.7 million in the year ended March 31, 2000. This amount represents a
one-time charge of $2.7 million recorded upon the acquisition of Alier in
February 2000. This charge relates to the in-process research and development
that was expensed upon consummation of the acquisition as it had not reached
technological feasibility, and in the opinion of management, has no alternative
future use.
Amortization of Deferred Stock Compensation. Certain options granted during
the year ended March 31, 2000 have been treated as compensatory because the
estimated fair value for accounting purposes was greater than the exercise
price as determined by our Board of Directors on the date of grant. The total
deferred stock compensation associated with these options as of March 31, 2000
amounted to approximately $12.5 million, net of amortization. In connection
with the acquisition of Alier, Active issued restricted stock to two of the
Alier stockholders which has been treated as deferred stock compensation. These
restrictions vest over a 2 year period. Of the total deferred stock
compensation, approximately $3.6 million was amortized in the year ended March
31, 2000. These amounts are being amortized over the respective vesting periods
of these equity arrangements, generally 48 months for the options and 24 months
for the restricted stock.
INTEREST INCOME, NET
Interest income, net increased by approximately $2.9 million, or 711%, to
$3.4 million for the year ended March 31, 2000 from $415,000 for the year ended
March 31, 1999. This increase is attributable to increases in interest income
that resulted from the approximately $169.4 million in net cash proceeds
resulting from issuance of common stock in our initial public offering and the
concurrent private placement in February 2000.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
REVENUE
Total revenue increased by approximately $10.0 million, or 233%, to $14.3
million in fiscal 1999, from $4.3 million in fiscal 1998 as we first shipped
webMethods B2B at the end of the first quarter of fiscal 1999. During fiscal
2000 and 1999, no customers accounted for more than 10% of our total revenue. In
fiscal 1998, Boeing, Maryland Procurement Office and Hewlett Packard accounted
for an aggregate of approximately 49% of our total revenue.
6
<PAGE> 7
License. License revenue increased by approximately $7.3 million, or 212%,
to $10.8 million in fiscal 1999 from $3.5 million in fiscal 1998. This increase
is primarily attributable to the initial shipment of webMethods B2B in June
1998, an increase in sales to customers resulting from increasing the sales
force and a growing acceptance of our software.
Professional Services. Professional services revenue increased
approximately $1.6 million, or 201%, to $2.5 million in fiscal 1999 from
$817,000 in fiscal 1998. This increase is attributable to the increased license
activity described above which resulted in customer implementation activity and
follow-on professional services.
Maintenance. Maintenance revenue increased by approximately $1.0 million,
or 10,271%, to $1.0 million in fiscal 1999 from $10,000 in fiscal 1998. This
increase is attributable to the increased licensing activity described above.
COST OF REVENUE
License. Cost of license revenue increased to $799,000 in fiscal 1999 from
$30,000 in fiscal 1998. This increase in the cost of licenses is due to license
fees paid to third party software developers for software included in our
software. Gross profit margin on license revenue decreased to 93% in fiscal 1999
compared to 99% in fiscal 1998. This decrease was attributable to fiscal 1999
costs associated with the above mentioned license fees and warranty obligations,
neither of which were incurred in fiscal 1998.
Professional Services and Maintenance. Cost of professional services and
maintenance increased to $3.8 million in fiscal 1999 from $804,000 in fiscal
1998. This increase is primarily attributable to increases in the number of
professional service and technical support personnel, which increased to 26
people at March 31, 1999 from 8 at March 31, 1998. Gross profit margin on
professional services and maintenance decreased to (9%) of professional services
and maintenance revenue in fiscal 1999 compared to 3% in fiscal 1998. The gross
margin on professional services and maintenance declined due to the costs
incurred in expanding the professional services and customer care organization.
GROSS PROFIT
Gross profit increased by approximately $6.2 million, or 180%, to $9.7
million in fiscal 1999 from $3.5 million in fiscal 1998. The increase is
attributable to the growth in our customer base, which contributed to increased
revenue from software licenses, professional services and maintenance. The gross
profit margin was 68% for the year ended March 31, 1999, down from 81% for the
year ended March 31, 1998. The reduction in the gross profit margin is
attributable to the increased proportion of professional services revenue, which
generates a lower margin than license revenue, during the year ended March 31,
1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by
approximately $9.9 million, or 204%, to $14.7 million in fiscal 1999 from $4.9
million in fiscal 1998. The increase in the total amount of sales and marketing
expenses is primarily attributable to an increase in the number of sales and
marketing employees and,
7
<PAGE> 8
to a lesser extent, increases in marketing programs.
Research and Development. Research and development expenses increased by
approximately $2.5 million, or 72%, to $6.1 million in fiscal 1999 from $3.5
million in fiscal 1998. The increase in the total amount of research and
development expenses is attributable to increases in the number of software
developers and pre-commercial release quality assurance and documentation
personnel.
General and Administrative. General and administrative expenses increased
by approximately $1.1 million, or 47%, to $3.1 million in fiscal 1999 from $2.2
million in fiscal 1998. This increase is primarily attributable to increases in
the number of administrative and professional services personnel and other
general corporate expenses as we grew from 8 employees as of March 31, 1998 to
17 employees as of March 31, 1999.
INTEREST INCOME, NET
Interest income, net increased by approximately $243,000, or 142%, to
$415,000 in fiscal 1999 from $171,000 in fiscal 1998. This increase is
attributable to increases in interest income, which resulted from approximately
$6.4 million in net cash proceeds we generated from the issuance of mandatorily
redeemable, convertible preferred stock in September 1998.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth consolidated statement of operations data
for webMethods for each of the eight quarters ended March 31, 2000, 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 which have been retroactively restated to give effect to
the pooling of interests in connection with the merger between a subsidiary of
webMethods and Active Software. The unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements contained in Item 8 of this report and include all adjustments,
consisting only of normal recurring adjustments that we consider necessary for a
fair presentation of such information. You should read this information in
conjunction with our annual audited consolidated financial statements and
related notes appearing in Item 8 of this report. You should not draw any
conclusions about our future results from the results of operations for any
quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
2000 1999 1999 1999
---------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
License......................... $ 15,666 $ 13,575 $ 7,794 $ 5,787
Professional services........... 5,148 2,509 2,243 1,800
Maintenance..................... 2,217 1,511 1,110 785
---------- ---------- ---------- -----------
Total revenue............. 23,031 17,595 11,147 8,372
---------- ---------- ---------- -----------
Cost of revenue:
License......................... 738 753 727 394
Professional services and
maintenance................... 7,074 4,047 2,812 2,170
--------- --------- --------- --------
Total cost of revenue..... 7,812 4,800 3,539 2,564
--------- --------- --------- --------
Gross profit...................... 15,219 12,795 7,608 5,808
--------- --------- --------- --------
Operating expenses:
Sales and marketing............. 16,919 12,412 8,728 5,973
Research and development........ 5,101 4,127 3,674 1,877
General and administrative...... 3,379 2,926 2,241 1,206
Amortization of goodwill and
acquired intangibles.......... 1,305 --- --- ---
In-process research and
development................... 2,737 --- --- ---
Amortization of deferred stock
compensation.................. 2,301 683 303 302
--------- --------- --------- --------
Total operating expenses.. 31,742 20,148 14,946 9,358
--------- --------- --------- --------
Operating loss.................... (16,523) (7,353) (7,338) (3,550)
Interest income, net.............. 1,991 796 445 129
--------- --------- --------- --------
Loss.............................. (14,532) (6,557) (6,893) (3,421)
Deferred tax provision............ (46) --- --- ---
--------- --------- --------- --------
Net loss.......................... $ (14,578) $ (6,557) $ (6,893) $ (3,421)
========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1999 1998 1998 1998
----------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
License......................... $ 4,141 $ 3,367 $ 2,067 $ 1,200
Professional services........... 1,243 671 363 182
Maintenance..................... 471 291 157 117
-------- -------- -------- --------
Total revenue............. 5,855 4,329 2,587 1,499
-------- -------- -------- --------
Cost of revenue:
License......................... 250 326 171 51
Professional services and
maintenance................... 1,500 1,332 672 299
-------- -------- -------- --------
Total cost of revenue..... 1,750 1,658 843 350
-------- -------- -------- --------
Gross profit...................... 4,105 2,671 1,744 1,149
-------- -------- -------- --------
Operating expenses:
Sales and marketing............. 4,960 3,773 3,213 2,794
Research and development........ 1,639 1,608 1,569 1,251
General and administrative...... 972 799 778 622
Amortization of goodwill and
acquired intangibles --- --- --- ---
In-process research and
development................... --- --- --- ---
Amortization of deferred stock
compensation.................. 263 157 95 62
-------- -------- -------- --------
Total operating expenses.. 7,834 6,337 5,655 4,729
-------- -------- -------- --------
Operating loss.................... (3,729) (3,666) (3,911) (3,580)
Interest income, net.............. 72 149 96 97
-------- -------- -------- --------
Net loss before income taxes...... (3,657) (3,517) (3,815) (3,483)
Deferred tax provision............ --- --- --- ---
-------- -------- -------- --------
Net loss.......................... $ (3,657) $ (3,517) $ (3,815) $ (3,483)
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-----------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
2000 1999 1999 1999
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
License......................... 68.0% 77.1% 69.9% 69.1%
Professional services........... 22.4 14.3 20.1 21.5
Maintenance..................... 9.6 8.6 10.0 9.4
------ ----- ------ ------
Total revenue............. 100.0 100.0 100.0 100.0
------ ----- ------ ------
Cost of revenue:
License......................... 3.2 4.3 6.5 4.7
Professional services and
maintenance................... 30.7 23.0 25.2 25.9
------ ----- ------ ------
Total cost of revenue..... 33.9 27.3 31.7 30.6
------ ----- ------ ------
Gross profit...................... 66.1 72.7 68.3 69.4
------ ----- ------ ------
Operating expenses:
Sales and marketing............. 73.5 70.5 78.3 71.4
Research and development........ 22.1 23.5 33.0 22.4
General and administrative...... 14.7 16.6 20.1 14.4
Amortization of goodwill and
acquired intangibles.......... 5.6 --- --- ---
In-process research and
development................... 11.9 --- --- ---
Amortization of deferred stock
compensation.................. 10.0 3.9 2.7 3.6
------ ----- ------ ------
Total operating expenses.. 137.8 114.5 134.1 111.8
------ ----- ------ ------
Operating loss.................... (71.7) (41.8) (65.8) (42.4)
Interest income, net.............. 8.2 4.5 4.0 1.5
------ ----- ------ ------
Loss before income taxes.......... (63.5) (37.3) (61.8) (40.9)
Deferred tax provision............ (.2) --- --- ---
------ ----- ------ ------
Net loss (63.3)% (37.3)% (61.8)% (40.9)%
====== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-----------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1999 1998 1998 1998
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Revenue:
License......................... 70.7% 77.8% 79.9% 80.1%
Professional services........... 21.2 15.5 14.0 12.1
Maintenance..................... 8.1 6.7 6.1 7.8
------ ------ ------ ------
Total revenue............. 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenue:
License......................... 4.3 7.5 6.6 3.4
Professional services and
maintenance................... 25.6 30.8 26.0 19.9
------ ------ ------ ------
Total cost of revenue..... 29.9 38.3 32.6 23.3
------ ------ ------ ------
Gross profit...................... 70.1 61.7 67.4 76.7
------ ------ ------ ------
Operating expenses:
Sales and marketing............. 84.7 87.2 124.2 186.4
Research and development........ 28.0 37.1 60.6 83.5
General and administrative...... 16.6 18.5 30.1 41.5
Amortization of goodwill and
acquired intangibles.......... --- --- --- ---
In-process research and
development................... --- --- --- ---
Amortization of deferred stock
compensation.................. 4.5 3.6 3.7 4.1
------ ------ ------ ------
Total operating expenses.. 133.8 146.4 218.6 315.5
------ ------ ------ ------
Operating loss.................... (63.7) (84.7) (151.2) (238.8)
Interest income, net.............. 1.2 3.5 3.7 6.5
------ ------ ------ ------
Net loss before income taxes...... (62.5) (81.2) (147.5) (232.3)
Deferred tax provision............ --- --- --- ---
------ ------ ------ ------
Net loss.......................... (62.5)% (81.2)% (147.5)% (232.3)%
====== ====== ======= ======
</TABLE>
Our total revenue has increased in each quarter since it released
webMethods B2B in June 1998. The quarterly increase is due to growth in the
number of customers resulting from increased market awareness and acceptance of
webMethods' software, expansion of the company's sales organization and an
increase in professional services and maintenance revenue that reflects the
growth in the installed base of product licenses.
The cost of revenue has increased each quarter in conjunction with
increases in total revenue. The increase in cost of revenue in the
quarter-ended September 30, 1999 is due to a write-off of prepaid third-party
software licensing fees. These costs generally represents payments of royalties
to third parties for incorporation of third party technology in some of our
products. Cost of professional services and maintenance increased due to the
expansion of the professional services and customer care organizations and
increased subcontractor costs.
Operating expenses have generally increased in absolute dollars each
quarter because of increased staffing in sales and marketing, research and
development and general and administrative functions. In addition, sales and
marketing expenses have increased due to increases in marketing programs, sales
commissions, sales office expenses and expansion into Europe in our fiscal
fourth quarter 1999. In addition to costs related to increased headcount,
general and administrative expenses have increased due to increases in legal,
accounting and other professional fees.
PROVISION FOR INCOME TAXES
We recorded a provision for income taxes of $46,000 for the year ended
March 31, 2000, which relates to the write-off of the deferred tax asset
recorded in connection with the unrealized holding losses on marketable
securities available for sale. No other provisions for income taxes has been
recorded as we have incurred
9
<PAGE> 10
operating losses since inception. 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, 2000, we had net operating loss carry-forwards of
approximately $38.2 million. These net operating loss carryforwards are
available to reduce future taxable income and begin to expire in fiscal 2010.
Under the provisions of the Internal Revenue Code, certain substantial changes
in our ownership may limit the amount of net operating loss carry-forwards that
could be utilized annually in the future to offset taxable income.
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. Active also completed an
initial public offering in August 1999 with net proceeds of $40.0 million. In
addition, we had private sales of mandatorily redeemable, convertible preferred
stock, resulting in net proceeds from inception to March 31, 2000, of
approximately $38.7 million, and, to a lesser extent, through bank loans and
equipment leases. Active also had private sales of convertible redeemable
preferred stock resulting in net proceeds from inception to March 31, 2000, of
approximately $25.1 million. As of March 31, 2000, we had approximately $171.7
million in cash and cash equivalents, approximately $25.3 million in short-term
investments, approximately $37.1 million in long-term investments and
approximately $181.4 million in working capital.
Net cash used in operating activities was approximately $6.2 in fiscal
2000, approximately $13.8 million in fiscal 1999, and approximately $6.3 million
in fiscal 1998. Net cash flows from operating activities in each period reflect
increasing net losses and, to a lesser extent, increases in accounts receivable
offset in part by increases in accounts payable, accrued expenses and accrued
compensation. Net cash used in operating activities for the year ended March 31,
2000 reflects an increase of $22.1 million of deferred revenue from customer
payments that were not recognized as revenue.
Net cash used in investing activities was approximately $70.1 million in
fiscal 2000, approximately $2.6 million in fiscal 1999, and $521,000 in fiscal
1998. Cash used in investing activities reflects purchases of property and
equipment in each period, and purchases of marketable securities available for
sale in fiscal 1999 and fiscal 2000. Capital expenditures were approximately
$5.7 million in fiscal 2000, approximately $1.1 in fiscal 1999, and
approximately $521,000 in fiscal 1998. 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 in the future. In
connection with the relocation of corporate headquarters in March 2000, we
incurred approximately $1.6 million in leasehold improvements and furniture and
equipment purchases in fiscal 2000. Approximately $2.3 million was paid in
connection with the acquisition of Alier.
Net cash provided by financing activities was approximately $239.1 million
in fiscal 2000, approximately $13.2 million in fiscal 1999, and approximately
$18.5 million in fiscal 1998. These cash flows primarily reflect net cash
proceeds from private sales of mandatorily redeemable, convertible preferred
stock in fiscal 2000, fiscal 1999 and fiscal 1998. In addition, we received an
additional $165 million in net proceeds from the issuance of common stock from
our initial public offering in February 2000 and $17.5 million in proceeds from
the sale of shares of common stock issued in a private transaction concurrent
with the closing of our initial public offering and $40 million in proceeds from
the initial public offering of Active Software, in August 1999. We have an
outstanding balance of $153,000 as of March 31, 2000 under a credit agreement.
This loan bears interest at the bank's prime rate plus 1.5% per annum and is
secured by substantially all of our assets. In December 1999 we entered into a
new revolving promissory note to borrow up to a
10
<PAGE> 11
maximum principal amount of $3,000,000 with a maturity date of December 2, 2000.
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 March 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. As a result of the acquisition of Active Software and Alier,
Inc., we assumed a line of credit agreement which expired in July 2000. The
Company also assumed two notes payable with a combined outstanding balance of
approximately $458,000 as of March 31, 2000. The first note which bore interest
at the rate of 17%, was paid off in July 2000. The second note bears
interest at the bank's prime rate plus 2.5% per annum.
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. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
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. 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 delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
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 was
11
<PAGE> 12
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 to have a material impact on our financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE AND QUANTITATIVE 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 and certificate
of deposit accounts at financial institutions. Our exposure to market risk due
to fluctuations in interest rates relates primarily to interest earnings on our
cash deposits. These securities are subject to interest rate 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, 2000, 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 its whole portfolio of
such investments at twelve months, placing its 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 UK, Netherland and German subsidiaries. Although
we transact business in various foreign countries, settlement amounts are
usually based on U.S. currency. 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 pound, guilders or deutsche mark 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, analysis of the direct effects of interest
rate and foreign currency exchange rate fluctuations on the value of certain of
our investments and accounts, 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.
12
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
WEBMETHODS' AUDITED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants............................... 14
Consolidated Balance Sheets at March 31, 2000 and 1999.......... 15
Consolidated Statements of Operations and Comprehensive Loss
for the years ended March 31, 2000, 1999 and 1998............. 16
Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 2000, 1999 and 1998............. 17
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 1999 and 1998................................. 18
Notes to Consolidated Financial Statements...................... 19
</TABLE>
13
<PAGE> 14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
webMethods, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of webMethods, Inc. and its subsidiaries at March 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 2000 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
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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.
/s/ PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
October 17, 2000
14
<PAGE> 15
WEBMETHODS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
2000 1999
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 171,716,075 $ 8,873,831
Marketable securities available for sale..................................... 25,255,901 254,850
Accounts receivable, net of allowances of $1,394,000 and
$317,000, respectively.................................................... 18,578,340 6,201,491
Prepaid expenses and other current assets.................................... 6,615,330 941,937
--------------- -------------
Total current assets................................................. 222,165,646 16,272,109
Marketable securities available for sale....................................... 37,137,889 1,269,408
Property and equipment, net.................................................... 6,309,693 1,316,966
Goodwill and acquired intangibles, net......................................... 28,262,683 --
Other assets................................................................... 5,310,836 879,743
--------------- -------------
Total assets......................................................... $ 299,186,747 $ 19,738,226
=============== =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 4,207,708 $ 1,538,137
Accrued expenses............................................................. 7,322,566 965,478
Accrued salaries and commissions............................................. 8,034,904 1,576,003
Deferred revenue............................................................. 20,333,862 3,376,245
Current portion of capital lease obligations................................. 148,026 --
Current portion of notes payable and lines of credit......................... 762,217 354,520
--------------- -------------
Total current liabilities............................................ 40,809,283 7,810,383
--------------- -------------
Capital lease obligations, net of current portion............................ 426,145 --
Note payable, net of current portion......................................... 267,212 83,938
Long term deferred revenue................................................... 5,515,103 380,744
--------------- -------------
Total liabilities.................................................... 47,017,743 8,275,065
--------------- -------------
Commitments and contingencies
Mandatorily redeemable preferred stock:
Convertible preferred stock, $0.01 par value, 650,477
shares authorized, issued and outstanding at March 31,
1999...................................................................... -- 11,117,728
--------------- -------------
Stockholders' equity:
Common stock, $0.01 par value; 200,000,000 shares
authorized; shares issued and outstanding 45,429,382 and 16,223,758....... 454,294 162,238
Additional paid-in capital................................................... 344,019,296 30,414,042
Deferred stock compensation.................................................. (26,633,918) (4,436,785)
Notes receivable from stockholders........................................... -- (9,500)
Accumulated deficit.......................................................... (65,541,247) (25,783,362)
Accumulated other comprehensive loss......................................... (129,421) (1,200)
--------------- -------------
Total stockholders' equity........................................... 252,169,004 345,433
--------------- -------------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity.......................... $ 299,186,747 $ 19,738,226
=============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 16
WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
----------------- ---------------- ---------------
<S> <C> <C> <C>
Revenue:
License............................................. $ 42,821,729 $ 10,774,589 $ 3,457,918
Professional services............................... 11,699,034 2,458,802 817,335
Maintenance......................................... 5,623,971 1,036,146 9,991
----------------- ---------------- ---------------
Total revenue................................. 60,144,734 14,269,537 4,285,244
----------------- ---------------- ---------------
Cost of revenue:
License............................................. 2,611,676 799,000 30,013
Professional services and maintenance (exclusive of
amortization of deferred stock compensation of
$559,978, $71,027, and $3,024, respectively)...... 16,102,123 3,802,551 803,862
----------------- ---------------- ---------------
Total cost of revenue......................... 18,713,799 4,601,551 833,875
----------------- ---------------- ---------------
Gross profit............................................ 41,430,935 9,667,986 3,451,369
----------------- ---------------- ---------------
Operating expenses:
Sales and marketing (exclusive of amortization of
deferred stock compensation of $1,471,238, $266,128
and $13,137, respectively)........................ 44,033,514 14,740,968 4,853,832
Research and development (exclusive of amortization
of deferred stock compensation of $1,250,253
$182,469 and $5,585, respectively)................ 14,779,714 6,065,665 3,524,879
General and administrative (exclusive of amortization
of deferred stock compensation of $307,018,
$57,272, and $--, respectively).................. 9,752,565 3,170,711 2,163,413
Amortization of goodwill and acquired intangibles... 1,305,441 -- --
In-process research and development................. 2,737,000 -- --
Amortization of deferred stock compensation......... 3,588,487 576,896 21,746
----------------- ---------------- ---------------
Total operating expenses...................... 76,196,721 24,554,240 10,563,870
----------------- ---------------- ---------------
Operating loss.......................................... (34,765,786) (14,886,254) (7,112,501)
Interest income, net.................................... 3,361,992 414,500 171,208
----------------- ---------------- ---------------
Loss before income taxes................................ (31,403,794) (14,471,754) (6,941,293)
Deferred tax provision.................................. (46,647) -- --
----------------- ---------------- ---------------
Net loss........................................... (31,450,441) (14,471,754) (6,941,293)
Accretion and accrued dividends related to
mandatorily redeemable preferred stock................ (10,222,510) (605,453) (112,792)
----------------- ---------------- ---------------
Net loss attributable to common shareholders....... $ (41,672,951) $ (15,077,207) $ (7,054,085)
================= ================ ===============
Basic and diluted net loss per common share............. $ (2.23) $ (1.75) $ (0.83)
================= ================ ===============
Shares used in computing basic and diluted net loss
per common share...................................... 18,716,943 8,633,488 8,489,531
================= ================ ===============
Comprehensive loss:
Net loss........................................... $ (31,450,441) $ (14,471,754) $ (6,941,293)
Other comprehensive loss:
Unrealized loss on securities available for
sale........................................ (113,809) (1,200) --
Foreign currency cumulative translation
adjustment.................................. (14,412)
-- --
----------------- ---------------- ---------------
Total comprehensive loss...................... $ (31,578,662) $ (14,472,954) $ (6,941,293)
================= ================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended March 31, 1998, 1999 and 2000
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED
------------ PAID-IN STOCK
SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------- ------------
<S> <C> <C> <C> <C>
Balance, March 31, 1997........................... 12,253,926 $122,539 $4,533,732 --
Exchange of common stock for Series A
preferred stock................................. (1,446,355) (14,464) (371,891) --
Stock options exercised, net...................... 816,889 8,169 208,049 --
Deferred compensation related to stock
option grants................................... -- -- 598,767 (598,767)
Amortization of deferred stock compensation....... -- -- -- 21,746
Accretion of preferred stock...................... -- -- (2,184) --
Accrued dividends on preferred stock.............. -- -- (110,608) --
Issuance of common stock.......................... 3,079,585 30,796 14,850,990 --
Net loss.......................................... -- -- -- --
---------- -------- ----------- -----------
Balance, March 31, 1998........................... 14,704,045 147,040 19,706,855 (577,021)
Stock options exercised, net...................... 708,546 7,086 343,023 --
Fair value of warrants issued to
non-employees................................... -- 300,600 --
Repayments of notes receivable.................... -- -- -- --
Deferred compensation related to stock
option grants................................... -- -- 4,436,660 (4,436,660)
Amortization of deferred stock compensation....... -- -- -- 576,896
Accretion of preferred stock...................... -- -- (13,166) --
Accrued dividends on preferred stock.............. -- -- (592,287) --
Issuance of common stock.......................... 811,167 8,112 6,232,357 --
Other comprehensive loss.......................... -- -- -- --
Net loss.......................................... -- -- -- --
---------- -------- ----------- -----------
Balance, March 31, 1999........................... 16,223,758 162,238 30,414,042 (4,436,785)
Stock options and warrants exercised, net......... 2,361,727 23,617 1,184,855 --
Fair value of options issued to
non-employees................................... -- 585,306 --
Repayments of note receivable..................... -- -- -- --
Deferred compensation related to stock
option grants................................... -- -- 11,079,534 (11,079,534)
Amortization of deferred stock compensation....... -- -- -- 3,588,487
Deemed dividend in connection with the............ --
beneficial conversion feature in Series E
preferred stock................................. -- 8,307,444 --
Accretion to redemption........................... -- -- (43,573) --
Accrued dividends on preferred stock.............. -- -- (1,871,493) --
Issuance of common stock pursuant to WebMethods
initial public offering......................... 4,715,000 47,150 164,977,850 --
Net issuance of common stock pursuant to
Active's initial public offering................ 2,121,175 21,212 39,974,433 --
Issuance of common stock pursuant to the
concurrent private placement.................... 518,058 5,180 17,494,820 --
Initial public offering and concurrent
private placement issuance costs................ -- -- (13,158,338) --
Conversion of preferred stock to common
stock........................................... 19,283,673 192,837 41,496,292 --
Alier acquisition................................. 205,991 2,060 43,578,124 (14,706,086)
Other comprehensive loss.......................... -- -- -- --
Net loss.......................................... -- -- -- --
---------- -------- ----------- -----------
Balance, March 31, 2000.......................... 45,429,382 $454,294 $344,019,296 $ (26,633,918)
========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE OTHER
FROM ACCUMULATED COMPREHENSIVE
STOCKHOLDERS DEFICIT LOSS TOTAL
------------ ------- ---- -----
<S> <C> <C> <C> <C>
Balance, March 31, 1997........................... $(49,500) $ (4,370,315) -- $236,456
Exchange of common stock for Series A
preferred stock................................. -- -- -- (386,355)
Stock options exercised, net...................... -- -- -- 216,218
Deferred compensation related to stock
option grants................................... -- -- -- --
Amortization of deferred stock compensation....... -- -- -- 21,746
Accretion of preferred stock...................... -- -- -- (2,184)
Accrued dividends on preferred stock.............. -- -- -- (110,608)
Issuance of common stock.......................... -- -- -- 14,881,786
Net loss.......................................... -- (6,941,293) -- (6,941,293)
---------- ------------ ----------- -----------
Balance, March 31, 1998........................... (49,500) (11,311,608) -- 7,915,766
Stock options exercised, net...................... 29,167 -- -- 379,276
Fair value of warrants issued to
non-employees................................... -- -- -- 300,600
Repayments of notes receivable.................... 10,833 -- -- 10,833
Deferred compensation related to stock
option grants................................... -- -- -- --
Amortization of deferred stock compensation....... -- -- -- 576,896
Accretion of preferred stock...................... -- -- -- (13,166)
Accrued dividends on preferred stock.............. -- -- -- (592,287)
Issuance of common stock.......................... -- -- -- 6,240,469
Other comprehensive loss.......................... -- -- (1,200) (1,200)
Net loss.......................................... -- (14,471,754) -- (14,471,754)
---------- ------------ ----------- -----------
Balance, March 31, 1999........................... (9,500) (25,783,362) (1,200) 345,433
Stock options and warrants exercised, net......... -- -- -- 1,208,472
Fair value of options issued to
non-employees................................... -- -- -- 585,306
Repayments of note receivable..................... 9,500 -- -- 9,500
Deferred compensation related to stock
option grants................................... -- -- -- --
Amortization of deferred stock compensation....... -- -- -- 3,588,487
Deemed dividend in connection with the............
beneficial conversion feature in Series E
preferred stock................................. -- (8,307,444) -- --
Accretion to redemption........................... -- -- -- (43,573)
Accrued dividends on preferred stock.............. -- -- -- (1,871,493)
Issuance of common stock pursuant to WebMethods
initial public offering......................... -- -- -- 165,025,000
Net issuance of common stock pursuant to
Active's initial public offering................ -- -- -- 39,995,645
Issuance of common stock pursuant to the
concurrent private placement.................... -- -- -- 17,500,000
Initial public offering and concurrent
private placement issuance costs................ -- -- -- (13,158,338)
Conversion of preferred stock to common
stock........................................... -- -- -- 41,689,129
Alier acquisition................................. -- -- -- 28,874,098
Other comprehensive loss.......................... -- -- (128,221) (128,221)
Net loss.......................................... -- (31,450,441) -- (31,450,441)
---------- ------------ ----------- -----------
Balance, March 31, 2000.......................... $ -- $(65,541,247) $ (129,421) $252,169,004
========== ============ =========== ===========
</TABLE>
17
<PAGE> 18
WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (31,450,441) $(14,471,754) $(6,941,293)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization...................... 1,429,560 610,376 384,433
Provision for bad debts and returns................ 917,227 222,924 95,316
Provision for warranty............................. 204,737 -- --
Loss on buyout of capital leases................... -- 10,226 --
Provision for deferred income taxes................ 46,647 -- --
Expense related to fair value of options issued --
to non-employees................................. 585,306 300,600 --
Amortization of deferred stock compensation........ 3,588,487 576,896 21,746
Amortization of goodwill and acquired intangibles.. 1,305,441 -- --
Write off of in-process research and development... 2,737,000 -- --
Increase (decrease) in cash resulting from changes in
assets and liabilities:
Accounts receivables............................... (13,019,400) (5,316,284) (1,019,531)
Prepaid expenses and other current assets.......... (5,675,405) (831,226) (78,696)
Other non-current assets........................... (3,433,631) (532,936) (56,595)
Accounts payable................................... 2,482,645 979,231 356,222
Accrued expenses................................... 6,151,006 928,951 (167,752)
Accrued salaries and commissions................... 6,243,795 1,043,200 472,629
Deferred revenue................................... 21,947,287 2,974,538 582,641
Other current liabilities.......................... (108,130) 15,609 91,636
Other non-current liabilities...................... (148,270) (266,048) --
------------ ----------- ---------
Net cash used in operating activities................. (6,196,139) (13,755,697) (6,259,244)
------------ ----------- ---------
Cash flows from investing activities:
Purchases of property and equipment................... (5,714,870) (1,120,688) (521,142)
Net purchases of marketable securities available
for sale .......................................... (56,494,823) (1,525,458) --
Purchase of other assets ............................. (5,539,129) -- --
Acquisition of business, net of cash acquired......... (2,315,684) -- --
------------ ----------- ---------
Net cash used in investing activities.............. (70,064,506) (2,646,146) (521,142)
------------ ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock................ -- 6,240,470 14,881,786
Borrowings under notes payable line of credit......... 87,331 282,664 --
Repayments under notes payable line of credit......... (94,221) (35,389) --
Payments on capital leases ........................... (111,897) (156,184) (181,349)
Repayments of notes receivable from shareholders ..... 9,500 40,000 --
Proceeds from issuance of preferred stock............. 28,852,174 6,499,996 3,615,000
Issuance costs related to preferred stock
offerings.......................................... (195,839) (63,545) (38,324)
Proceeds from exercise of stock options and warrants.. 1,208,472 350,109 216,218
Net proceeds from Active's initial public offering.... 39,995,645 -- --
Proceeds from WebMethods' initial public offering..... 165,025,000 -- --
Proceeds from concurrent private placement............ 17,500,000 -- --
Issuance costs related to common stock offering....... (13,158,338) -- --
------------ ----------- ---------
Net cash provided by financing activities.......... 239,117,827 13,158,121 18,493,331
------------ ----------- ---------
Effect of the exchange rate on cash..................... (14,938) -- --
Net increase in cash and cash equivalents............... 162,842,244 (3,243,722) 11,712,945
Cash and cash equivalents at beginning of period........ 8,873,831 12,117,553 404,608
------------ ----------- ---------
Cash and cash equivalents at end of period.............. $171,716,075 $ 8,873,831 $12,117,553
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
18
<PAGE> 19
WEBMETHODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
webMethods, Inc. (the Company) is a leading provider of infrastructure
software and services for achieving business-to-business integration. The
Company's products enable companies to work more closely with their customers,
suppliers and other business partners to complete transactions electronically
through the real-time exchange of information over the Internet. The Company was
incorporated in Delaware on June 12, 1996 and changed its name from TransactNet,
Inc. to webMethods, Inc. on January 21, 1997. During the fiscal year ended March
31, 2000, the company established wholly owned subsidiaries: webMethods Germany
GmbH, webMethods B.V., and webMethods UK Limited. These subsidiaries provide
technical support, marketing and distribution support in their geographic
regions.
The Company's operations are subject to certain risks and uncertainties,
including, among others, rapid technological changes, success of the Company's
product marketing and product distribution strategies, the need to manage
growth, the need to retain key personnel and protect intellectual property, 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. All material intercompany
accounts and transactions have been eliminated.
Financial Statement Presentation
On August 15, 2000, webMethods completed a merger (the "Active Merger")
with Active Software, Inc. ("Active"), a publicly traded company 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 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. All shares of preferred stock issued by Active are
presented as the equivalent of webMethods common stock at the time of issuance.
However, Active's preferred stock for the earnings per share calculation have
been treated as preferred stock until they are converted upon the Active initial
public offering. Prior to the acquisition, 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 presentation.
Use of estimates
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
19
<PAGE> 20
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from these estimates.
Fair value information
The carrying amount of current assets and current liabilities approximates
fair value because of the short maturity of these instruments. The carrying
amount of the Company's line of credit approximates market based on the floating
interest rates.
Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Marketable securities
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
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 amoritized 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.
Software development costs
Software development costs are expensed as incurred until technological
feasibility has been established, at which time such costs are capitalized until
the product is 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 only after the
majority of customer testing and customer feedback has been incorporated into
product functionality. To date, the period between technological feasibility and
general availability has been short, and thus all software development costs
qualifying for capitalization are insignificant.
20
<PAGE> 21
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.
Notes receivable from stockholders
The notes receivable from stockholders were issued in exchange for common
stock, bearing interest at 5.73% per annum, and paid on January 15, 2000.
Income taxes
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, 2000 and 1999.
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; revenues and expenses are translated using the average exchange
rates in 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.
Revenue recognition
Revenue from the sale of software licenses is recognized upon shipment of
product, provided that the fee is fixed and determinable, persuasive evidence of
an arrangement exists and collection of the resulting receivable is considered
probable. The Company does not offer exchanges of its products and historically
has not experienced significant returns. The Company recognizes software license
revenue over the term of the license if the license requires delivery of
unspecified products during its term. Revenue related to customer support
agreements is deferred and recognized ratably over the term of the respective
agreements. When the Company provides a software license and the related
customer support arrangement for one bundled price, the fair value of the
customer support, based on the price charged for that element separately, is
deferred and recognized ratably over the term of the respective agreement. If
the license agreement contains extended payment terms,
21
<PAGE> 22
revenue is recognized as the payments become due, assuming that all other
revenue recognition criteria is met. Professional services revenue, which
includes training and consulting, is recognized at the time the service is
performed.
Stock-based compensation
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma disclosures
of net loss as if the fair value method had been applied in measuring
compensation expense. Under the intrinsic value method of accounting for stock
based compensation, when the exercise price of options granted to employees is
less than the fair value of the underlying stock on the grant date, compensation
expense is recognized over the applicable vesting period.
Net loss per share
Basic loss per share is computed based on the weighted average number of
outstanding shares of common stock. 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. 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.
Segment reporting
The Company operates as a single segment and will evaluate additional
segment disclosure requirements as it expands its operations. See Note 16 for
required geographic segment information.
Recent 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 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 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 16, 1999 and March 15,
2000. Subsequently, the SEC released SAB 101B which further delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
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.
22
<PAGE> 23
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 was 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. RELATED-PARTY TRANSACTIONS
An individual who is a director, corporate secretary and stockholder of the
Company is associated with a law firm that has rendered various legal services
for the Company. For the years ended March 31, 2000, 1999 and 1998, the Company
has paid the firm approximately $909,000, $178,000, and $64,000, respectively.
As of March 31, 2000 and 1999, the aggregate amount due for these services was
approximately $249,000 and $137,000, respectively.
For the year ended March 31, 2000, the Company has entered into certain
contractual arrangements with several third parties that invested in the Company
through the purchase of Series D and Series E mandatorily redeemable,
cumulative, convertible preferred stock (see Note 13). Revenue generated from
these related parties was $6,100,000 for the year ended March 31, 2000. Accounts
receivable from these related parties as of March 31, 2000 was $241,000.
Additionally, the Company paid $432,000 for services and equipment from related
parties for the year ended March 31, 2000. Accounts payable to these related
parties was $113,000 as of March 31, 2000.
4. 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 Company has not experienced
significant losses related to receivables in the past.
For the year ended March 31, 1999, two organizations individually accounted
for approximately 15% and 13% of accounts receivable. For the year ended March
31, 1998, three organizations individually accounted for approximately 27%, 12%
and 10% of total revenue, and three organizations individually accounted for
approximately 39%, 18% and 16% of accounts receivable.
23
<PAGE> 24
5. MARKETABLE SECURITIES
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:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
----------------------------- ----------------------------
COST FAIR VALUE COST FAIR VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less.......... $ 25,304,611 $ 25,255,901 $ 255,129 $ 254,850
Due after one year through two
years.......................... 37,254,800 37,137,889 1,271,129 1,269,408
------------- ------------- ------------ ------------
$ 62,559,411 $ 62,393,790 $ 1,526,258 $ 1,524,258
============= ============= ============ ============
</TABLE>
The gross unrealized holding losses were $165,621 and $2,000 for the years
ended March 31, 2000 and 1999, respectively. There were no gross unrealized
holding gains for the years ended March 31, 2000 and 1999. The unrealized
holding losses have been included, net of the related tax effect, in accumulated
other comprehensive loss, which is a separate component of stockholders' equity.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Equipment................................... $ 4,892,556 $ 1,827,688
Software.................................... 1,488,142 271,520
Furniture................................... 1,401,663 273,805
Leasehold improvements...................... 1,098,472 103,429
------------ -----------
8,880,833 2,476,442
Accumulated depreciation and amortization... (2,571,140) (1,159,476)
------------ -----------
$ 6,309,693 $ 1,316,966
============ ===========
</TABLE>
During the year ended March 31, 2000, the Company acquired certain
equipment and software under capital leases. Included in equipment as of March
31, 2000 is $428,225 in assets under capital leases, and included in software as
of March 31, 2000 is $257,843 in assets under capital leases. As of March 31,
2000, there was $90,440 of accumulated amortization under these capital leases.
7. INCOME TAXES
The Company has recorded no provision for income taxes for the year ended
March 31, 2000, as the Company has incurred operating losses since its
inception. Net operating loss carryforwards (NOLs) as of March 31, 2000 and 1999
are approximately $38,200,000 and $19,700,000 respectively, both of which begin
to expire in 2010. 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
rules could adversely affect the Company's ability to utilize the NOLs. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
24
<PAGE> 25
The tax effect of each temporary difference is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net operating loss carryforwards.. $ 14,690,000 $ 7,610,000
Accrued expenses.................. 4,560,000 320,000
Deferred revenue.................. 800,000 530,000
Accounts receivable............... 430,000 820,000
Property and equipment............ 50,000 80,000
General business credits.......... 780,000 530,000
Stock option compensation......... 210,000 140,000
Acquired intangibles.............. (1,030,000) --
Other............................. (140,000) (140,000)
Valuation allowance............... (20,350,000) (9,890,000)
------------- -------------
Net Deferred Tax Assets......... $ -- $ --
============= =============
</TABLE>
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 net
operating loss carryforwards 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 the realizability of the deferred tax assets is not
currently predictable. The change in the valuation allowance was an increase of
$10,460,000, which can be attributed primarily to accrued deferred tax
liabilities and additional operating losses.
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:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
U.S. Federal statutory rate............................. 34.0% 34.0% 34.0%
State and local taxes, net of Federal income tax benefit 3.8 4.5 4.5
Change in valuation allowance........................... (32.7) (39.3) (40.2)
Amortization of nondeductible goodwill.................. (2.1) 0.0 0.0
In-process research and development write-off........... (3.0) 0.0 0.0
Stock option compensation............................... (0.1) (0.1) 0.0
Change in general business credit....................... 0.8 1.9 2.8
Other................................................... (0.7) (1.0) (1.1)
------- ------- -------
Effective Tax Rate...................................... --% --% --%
======== ======== ========
</TABLE>
8. NOTES PAYABLE AND LINES OF CREDIT
Notes payable and lines of credit consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Bank line of credit, at prime plus 1.5% (10.5% at March 31, 2000) $ 153,054 $ 247,275
Bank line of credit at 10% 418,775 --
Note payable at 17%, due in monthly installments of $11,153, through July 2000 90,388 191,183
Note payable at prime plus 2.5% (11.25% at March 31, 2000), due in monthly installments
of $8,333, through September 2003 367,212 --
-------------- -------------
Total debt 1,029,429 438,458
Less current portion of notes payable and line of credit (762,217) (354,520)
-------------- -------------
Notes payable, net of current portion $ 267,212 $ 83,938
============== =============
</TABLE>
The Company has a loan agreement with a bank providing borrowings up to
$500,000 for working capital purposes and equipment advances. The Company was
able to borrow under this agreement through March 31, 1999, and the unpaid
principal balance as of that date is payable in 36 equal monthly installments
that commenced shortly thereafter. As of March 31, 2000 the balance under this
line was $153,054. Interest is payable at the bank's prime rate plus 1.5% per
annum. The line of
25
<PAGE> 26
credit is collateralized by substantially all of the Company's assets. The
related agreement contains restrictive covenants, which require the Company to
maintain, among other things, a ratio of quick assets to current liabilities,
net of deferred revenue, of at least 2 to 1. The Company was in compliance with
all covenants as of March 31, 2000 and 1999. Of the total line of credit amount,
$200,000 has been designated for the issuance of letters of credit relating to
an office lease agreement. On March 31, 1999, $100,000 in letters of credit was
outstanding. The Company expects to repay all outstanding balances under this
loan agreement within one year from the balance sheet date.
In connection with this line of credit, the Company issued the bank options
to purchase 46,788 shares of the Company's common stock at approximately $0.27
per share. The fair value of these options was determined using the Black
Scholes valuation model and was insignificant to the overall financial
statements.
In December 1999, the Company entered into a new revolving promissory note
with the same bank to borrow up to a maximum principal amount of $3,000,000 with
a maturity date of December 2, 2000. Borrowings under this note are limited to a
borrowing base equal to 75% of eligible accounts receivable. Interest is payable
on the unpaid principal balance at a rate of the bank's prime rate plus 1% per
annum. This note is collateralized by substantially all of the Company's assets.
The related agreement includes restrictive covenants which require the Company
to maintain, among other things, a ratio of quick assets to current liabilities,
less 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 equal to or greater than
total revenue for the immediately preceding fiscal quarter. As of March 31,
2000, the Company had not borrowed against this revolving promissory note. In
connection with the revolving promissory note, the Company obtained a letter of
credit totaling $750,000 related to a new office lease. The letter of credit
expires in June 2001.
As a result of the acquisition of Active Software and Alier, Inc., the
Company assumed a line of credit agreement expiring in July 2000. Borrowings
under this agreement bear interest at 10%. At March 31, 2000, the Company had a
total of $418,775 outstanding under this line of credit. The Company also
assumed two notes payable: The first, a $401,00 note payable, bearing interest
at 17%, payable in monthly installments through July 2000, and collaterized by
all of the Company's equipment. As of March 31, 2000, a principal balance of
$90,388 was outstanding. The second, a $400,000 note payable, bearing interest
at the bank's prime rate, plus 2.50% per annum, and payable in 48 monthly
installments through September 2003. At March 31, 2000, $367,212 was outstanding
under the loan. Future minimum payments under the loan are $100,000 in fiscal
year 2001, $100,000 in fiscal year 2002, $100,000 in fiscal year 2003, and
$67,212 in fiscal year 2004.
9. LEASE COMMITMENTS
In August 1999, the Company entered into an equipment line of credit with a
leasing company for the purchase 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 547 basis points. Principal and interest is payable
under each lease in 36 monthly installments. At expiration of the lease term,
the lessee will have the option to purchase the equipment at fair market value
not to exceed 10% of the original cost. This arrangement includes a restrictive
covenant that requires the Company to maintain a minimum of $2,500,000 of cash
and marketable securities. The Company was in compliance with this covenant as
of March 31, 2000.
26
<PAGE> 27
The Company leases office space in various locations under operating leases
expiring through fiscal 2004. Total rent expense was approximately $1,878,000,
$636,000, and $246,000 for the years ended March 31, 2000, 1999 and 1998,
respectively. In May 1999, the Company entered into a lease for office space in
Virginia expiring in May 31, 2001. In December 1999, the Company entered into a
new five-year lease agreement for office space for the Company's new
headquarters in Virginia. The Company occupied the new facility in March 2000
and also turned its previous premises over to a sublessee through the end of the
lease term. Future minimum lease payments under the Company's capital and
operating leases, net of expected sublease income, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
-------------- -----------
Years ending March 31,
<S> <C> <C>
2001........................................ $ 3,477,019 $ 212,520
2002........................................ 2,309,487 265,173
2003........................................ 2,150,172 185,239
2004........................................ 1,955,828 --
2005........................................ 1,567,140 --
-------------- -----------
$ 11,459,646 662,932
==============
less amounts representing interest............ (88,761)
-----------
574,171
less current portion.......................... (148,026)
-----------
capital lease obligation, net of current
portion..................................... $ 426,145
===========
</TABLE>
During the year ended March 31, 1999, the Company issued a warrant to
purchase 6,132 shares of the Company's common stock at an exercise price of
$1.08 per share to the landlord of one of their leased facilities. The fair
value of this warrant on the grant date was determined using the Black-Scholes
valuation model and was insignificant to the overall financial statements.
10. STOCKHOLDERS' EQUITY
The Company completed its initial public offering of 4,715,000 of its $.01
par value common stock, priced at $35.00 per share on February 10, 2000 (the
IPO) including 615,000 shares sold in connection with the exercise of the
underwriters' over-allotment. Concurrent with the IPO, the Company sold an
additional 518,058 shares of its common stock in a private placement transaction
at a price per share equal to $33.78 (the IPO price less one-half of the
underwriting discounts and commissions). In preparation for the IPO, on October
22, 1999, the board of directors and stockholders approved an increase in the
number of authorized shares of common stock from 20,000,000 shares to
200,000,000 shares. On February 10, 2000 in connection with the IPO, the Company
consummated a 1.533 for one stock split. All references to the number of shares
authorized, issued and outstanding and per-share information for all periods
presented have been adjusted to reflect the effects of the stock split and share
authorization.
On October 10, 1997, the Company's Board of Directors approved a stock
split in the form of a stock dividend at a rate of an additional 7.9 shares of
common stock for each share of common stock outstanding as of October 10, 1997.
On March 5, 1998, the Board approved a stock split in the form of a stock
dividend at a rate of an additional 19 shares of common stock for each share of
common stock outstanding as of March 5, 1998.
11. ACTIVE MERGER
27
<PAGE> 28
As discussed in Note 2, on August 15, 2000, the Company completed a merger
with Active. The Company incurred transaction costs of approximately $34.0
million directly related to the merger. The Active Merger was accounted for
as a pooling of interests and accordingly, all prior period amounts have been
restated. There were no intercompany transactions between Active and the Company
that would require elimination in any of the periods presented. A reconciliation
between revenue and net loss as previously reported and as restated is as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
REVENUE:
As previously reported..................... $ 23,001,984 $ 4,461,651 $ 165,894
Active..................................... 37,142,750 9,807,886 4,119,350
----------------- ----------------- ----------------
As restated................................ $ 60,144,734 $ 14,269,537 $ 4,285,244
================= ================= ================
NET LOSS
As previously reported..................... $ (18,157,490) $ (3,296,276) $ (1,362,674)
Active..................................... (13,292,951) (11,175,478) (5,578,619)
----------------- ----------------- ----------------
As restated................................... $ (31,450,441) $ (14,471,754) $ (6,941,293)
================= ================= ================
</TABLE>
Significant transactions of Active during the restatement period after
giving effect to the .527 conversion ratio were as follows:
Issuance of Common Stock
In February 1996, Active sold 3,173,858 shares of common stock at a price
per share of $1.27; in April 1997 and March 1998 Active sold 2,063,205 at a
price per share of $3.40 and 1,016,380 at a price per share of $7.74,
respectively; and in June 1998, July 1998 and October 1998 Active sold 326,791,
96,876 and 387,500 shares of common stock, respectively at a price per share of
$7.74.
Stock Compensation
During the years ended March 30, 1999 and 1998, in connection with the
grant of certain stock options, Active recorded deferred stock compensation of
$4,437,000 and $599,000, respectively, representing the difference between the
exercise price of the options and the estimated fair value of Active's common
stock on the date of grant. Such amount is being amortized over the vesting
period of the related options, generally fifty months. For the years ended March
30, 2000, 1999 and 1998, amortization of deferred stock compensation was
$1,209,000, $577,000 and $22,000, respectively. At March 30, 2000, $3,228,000 of
unamortized deferred stock compensation remains.
Common Stock Warrants
In September 1996, in conjunction with a note payable, Active issued a
warrant to purchase 22,134 shares of common stock at $1.27 per share. The net
warrant was exercised in September 1999, which resulted in a total of 21,519
shares of common stock issued to the warrant holder.
In June 1998 and July 1998, Active issued warrants to system integrators in
connection with services rendered to purchase 72,153 shares of common stock at
$1.46 per share. An expense of $300,600 was recorded in 1999 related to the
issuance of such warrants, which was based on the warrants' estimated fair
market value at the date of issuance. All 72,153 warrants were exercised in July
1999.
28
<PAGE> 29
In October 1998, Active issued a warrant to a strategic partner to purchase
19,375 shares of common stock at $7.74 per share, which expire in October 2005.
In August 1999, the warrant to purchase 19,375 shares of common stock issued to
the strategic partner became exercisable based on achievement of certain
software performance improvements. Accordingly, Active recorded a research and
development expense of approximately $350,000 in 1999, representing the fair
value of the warrant at the time the contingency was resolved.
Initial Public Offering
In August 1999, Active completed its initial public offering ("IPO") of
2,125,175 shares of common stock at an initial public offering price of $11 per
share. The net proceeds from the offering, after deducting underwriting
discounts and commissions and offering expenses incurred by Active, were
approximately $40 million.
Acquisition
In February 2000, Active acquired Alier, Inc. (Alier) a provider of
enterprise application integration solutions to financial institutions. In
connection with this transaction, all outstanding shares of capital stock of
Alier were exchanged for 205,991 shares of our common stock valued at $31.3
million and cash of $2.0 million. In addition, the outstanding options to
purchase Alier capital stock were converted into options to purchase 83,412
shares of our common stock valued at $12.4 million. The company assumed $1
million in net liabilities of Alier and incurred approximately $316,000 in
transaction costs. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of Alier have been included in the
Company's financial statements from the date of acquisition. In connection with
the acquisition, the purchase price was allocated, based on an independent
valuation, to goodwill and acquired intangibles of $29.6 million, deferred stock
compensation of $14.7 million, and acquired in-process research and development
of $2.7 million. The $2.7 million allocated to in-process research and
development was expensed upon consummation of the acquisition as it had not
reached technological feasibility and, in the opinion of management, has no
alternative future use. For the first quarter of fiscal 2000, the Company
recorded $2.0 million for amortization of goodwill and acquired intangibles,
which are amortized over their useful lives of one to three years. Proforma
information is not considered necessary as differences between actual and
proforma information are not material.
12. STOCK BASED COMPENSATION
Stock Incentive Plan
On November 1, 1996, the Company adopted the 1996 Stock Incentive 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. At March 31, 2000, the
Company had reserved 10,731,000 shares of the Company's common stock for
issuance upon the exercise of options granted under the Plan. At March 31, 2000,
options to purchase 9,231,979 shares were outstanding.
Qualified incentive stock options granted pursuant to the Plan have an
exercise price equal to the fair value of the underlying common stock at the
date of grant, vest at either the rate of 33.3% or 25% per year, beginning
29
<PAGE> 30
one year after the date of award, and have a term of ten years. Prior to the
Company's initial public offering, the Board of Directors determined the fair
value of the underlying common stock on the date of grant based on
contemporaneous sales of the Company's preferred stock for cash to third party
investors.
The following table summarizes the Company's activity for all of its stock
option awards:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED
STOCK OPTIONS EXERCISE PRICE AVERAGE
----------- ------------------ EXERCISE PRICE
--------------
<S> <C> <C> <C>
Outstanding March 31, 1997.... 1,655,557 $0.05 -- $ 0.27 $0.17
Granted and assumed......... 2,845,357 0.34 -- 11.6 0.41
Exercised................... (816,889) 0.13 -- 0.34 0.23
Forfeited................... (169,699) 0.13 -- 10.30 0.30
----------- ------------------ -----
Outstanding March 31, 1998.... 3,514,326 0.05 -- 0.27 0.29
Granted and assumed......... 5,106,397 0.11 -- 33.15 0.89
Exercised................... (693,215) 0.11 -- 10.30 0.43
Cancelled................... (2,145,701) 0.05 -- 10.30 0.32
Forfeited................... (176,201) 0.11 -- 0.27 0.13
----------- ------------------ -----
Outstanding March 31, 1999.... 5,605,606 0.11 -- 0.33 0.70
Granted and assumed......... 6,308,576 2.17 -- 254.27 20.91
Exercised................... (2,261,923) 0.11 -- 20.87 0.47
Forfeited................... (420,280) 0.11 -- 174.34 8.39
----------- ------------------ -----
Outstanding March 31, 2000.... 9,231,979 $0.11 -- $254.27 $14.25
=========== ================== =====
</TABLE>
Certain options granted during the year ended March 31, 2000 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 $11,100,000. This amount is
being amortized over the respective vesting periods of these options, ranging
from three to four years. Approximately $1,767,000 was amortized during the
year ended March 31, 2000 related to these options. See Note 11 - Active Merger
for disclosure of additional stock compensation.
Included in the above table are options to purchase 46,788 shares of the
Company's common stock granted to the Company's bank during the year ended March
31, 1998 (see Note 8) and options to purchase an aggregate of 45,990 shares of
the Company's common stock granted to three non-employees during the year ended
March 31, 2000. The options granted to non-employees were granted in exchange
for services provided. Options to purchase 15,330 of these shares have an
exercise price of $2.17 per share and the options to purchase the remaining
30,660 shares have an exercise price of $2.88 per share. All of these options
granted to non-employees were fully exercisable and non-forfeitable on September
30, 1999. These options were recorded at their aggregate fair value on September
30, 1999 of $235,461 and amortized over the terms of the respective consulting
agreements. As of March 31, 2000, they have been fully amortized. The Company
valued these options using the Black-Scholes valuation model with the following
assumptions: Risk-free interest rate of 5.50%; expected life of 6 years; no
anticipated dividends; expected volatility of 85%; and a fair market value of
the underlying common stock on the date of grant equal to the exercise price.
Options to purchase 783,383, 1,073,857, and 302,346 shares of the Company's
common stock were exercisable at March 31, 2000 and 1999, and 1998,
respectively, at a weighted average exercise price of $1.97, $0.47, and $0.64,
per share, respectively.
Had compensation expense for the Plan been determined based on the fair
value of the related options at the grant dates, consistent with SFAS No. 123,
the Company's net loss and net loss per share would have increased by the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------
<S> <C>
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
2000 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss attributable to common shareholders,
as reported................................. $ (41,672,951) $ (15,077,207) $ (7,054,085)
Net loss attributable to common shareholders,
pro forma................................... $ (46,188,080) $ (14,594,199) $ (7,067,248)
Basic and diluted net loss per common share,
as reported................................. $ (2.23) $ (1.75) $ (0.83)
Basic and diluted net loss per common share,
pro forma................................... $ (2.47) $ (1.69) $ (0.83)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes valuation model with the following weighted average
assumptions: Risk-free interest rates of 6.10%, 4.69%, and 5.50% for the years
ended March 31, 2000, 1999 and 1998, respectively; expected volatility of 90%,
0% and 0% for the years ended March 31, 2000, 1999 and 1998, respectively;
expected life of 4 years; and no anticipated dividends.
The weighted average fair value per share for stock option grants that were
awarded during the years ended March 31, 2000, 1999 and 1998 was $10.49, $0.15,
and $0.08, respectively.
In connection with the Active merger, options held by employees of Active
were converted into options to purchase shares of the Company's common stock
based on .527 conversion ratio. All option disclosures reflect the impact of
transition options after retroactive restatement for the impact of the Active
Merger. As of March 31, 2000, 1999, and 1998, respectively, there were
2,219,438, 1,568,337, and 879,252 options outstanding related to Active's stock
option plans.
Employee Stock Purchase Plan
In January 2000, the Board of Directors approved the Company's 2000
Employee Stock Purchase Plan (the ESPP). The ESPP became effective upon the
completion of the initial public offering on February 10, 2000. A total of
1,500,000 shares of common stock are initially available for issuance under the
ESPP. 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.
The ESPP, which is intended to qualify under Section 423 of the IRS Code,
will be 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
will consist of four consecutive purchase periods of approximately six months'
duration, and at the end of each offering period, an automatic purchase will be
made for participants. The initial offering period commenced on February 10,
2000 and ends on December 31, 2001; the initial purchase period began on
February 10, 2000 and ends on June 30, 2000. Participants generally may not
purchase more than 1,000 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 will be 85% of the lower of (1) the fair
market value of the Company's common stock on the purchase date and (2) the fair
market value of a share of the Company's common stock on the last trading day
before the offering date, or, in the case of the first offering period under the
plan, the price at which one share of the Company's common stock is offered to
the public in the Company's initial public offering.
In June 1999, Active approved the 1999 Employee Stock Purchase Plan (the
"Purchase Plan"). In connection with the merger of Active, the Company
assumed the Purchase Plan for all currently eligible employees of Active. Under
the Purchase Plan, 647,087 shares of the Company's common stock has been
reserved for issuance. Eligible employees of the Purchase Plan may purchase a
limited number of shares of the Company's
31
<PAGE> 32
common stock. Each participant is granted the option to purchase the Company's
common stock on the first day of each 24 month offering period (which begins on
May 1 and November 1 of each year) and such option is automatically exercised on
the last day of each six month purchase period during the offering period. The
purchase price for the Company's common stock under the Purchase Plan is 85% of
the lesser of (1) the common stock on the first day of the applicable offering
period and (2) the last day of the applicable purchase period. In fiscal 2000 no
shares of the Company's common stock has been issued under the purchase plan.
The Purchase Plan terminates on October 30, 2001.
13. MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED STOCK
On October 23, 1997, the Company entered into a Share Exchange Agreement
whereby certain stockholders of the Company exchanged an aggregate of 1,446,355
shares of common stock for 47,174 shares of mandatorily redeemable, convertible
Series A Preferred Stock. Each share of Series A Preferred Stock had cumulative
dividends at a rate equal to 8% per annum payable on a liquidation value of
$8.19 per share, as adjusted for stock splits, stock dividends, stock
combinations and recapitalizations.
Also on October 23, 1997, the Board of Directors authorized the issuance of
up to 180,750 shares of mandatorily redeemable, convertible Series B Preferred
Stock at a purchase price of $20.00 per share. The Company issued 180,750 shares
of Series B Preferred Stock for gross proceeds to the Company of $3,615,000 and
incurred $38,324 in direct issuance costs. Each share of Series B Preferred
Stock had cumulative dividends at a rate equal to 8% per annum payable on a
liquidation value of $20 per share, as adjusted for stock splits, stock
dividends, stock combinations and recapitalizations.
On September 16, 1998, the Board of Directors authorized the issuance of up
to 195,783 shares of mandatorily redeemable, convertible Series C Preferred
Stock at a purchase price of $33.20. The Company issued 195,783 shares of Series
C Preferred Stock for gross proceeds of $6,499,996 and incurred $63,545 in
direct issuance costs. Each share of Series C Preferred Stock had cumulative
dividends at a rate equal to 8% per annum payable on a liquidation value of
$33.20 per share, as adjusted for stock splits, stock dividends, stock
combinations and recapitalizations.
On March 17, 1999, the Board of Directors authorized the issuance of up to
158,000 shares of mandatorily redeemable, convertible Series D Preferred Stock
and on May 12, 1999, the Company issued 134,075 shares of Series D Preferred
Stock for gross proceeds of $11,852,230 and incurred $119,370 in direct issuance
costs. Each share of Series D Preferred Stock had cumulative dividends at a rate
equal to 8% per annum payable on a liquidation value of $88.40 per share, as
adjusted for stock splits, stock dividends, stock combinations and
recapitalizations. One of the investors in the round of mandatorily redeemable,
convertible Series D Preferred Stock had the right to purchase the number of
common shares equal to $2.5 million at the initial public offering price per
share less one-half of the underwriting discount and commission, concurrent with
an underwritten initial public offering. Such right was exercised in connection
with the concurrent private placement.
On November 4, 1999, the Company authorized the issuance of up to 68,770
shares of mandatorily redeemable, convertible Series E Preferred Stock for gross
proceeds of $16,999,944 and incurred $76,469 in direct issuance costs. Each
share of Series E Preferred Stock had cumulative dividends at a rate equal to 8%
per annum payable on a liquidation value of $247.20 per share, as adjusted for
stock splits, stock dividends, stock combinations and recapitalizations.
32
<PAGE> 33
Based on the short period of time elapsed between the issuance of the
Series E Preferred Stock on November 4, 1999 and the initial filing of the
Company's Registration Statement on Form S-1 on November 19, 1999, the Company
had recorded a deemed dividend of $8.3 million. The deemed dividend has been
included in the accretion and accrued dividends related to mandatorily
redeemable preferred stock for purposes of determining basic and diluted net
loss per common share.
Each outstanding share of Series A, Series B, Series C, Series D and Series
E Preferred Stock was automatically converted into 30.66 shares of the Company's
common stock immediately upon the closing of the initial public offering. In
addition, at the time of the initial public offering common stock was issued for
accrued and unpaid dividends based on the $35.00 fair market value of the stock
at the time of the offering.
The mandatorily redeemable convertible Series A, Series B, Series C, Series
C, Series D and Series E Preferred stock activity is summarized as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B
-------- --------
SHARES AMOUNT SHARES AMOUNT
------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Balance, June 12, 1996........................... -- $ -- -- $ --
------- ----------- -------- -------------
Balance, March 31, 1997.......................... -- -- -- --
Exchange of common stock for Series A
Preferred stock................................ 47,174 386,355 -- --
Sale of Series B
Preferred stock, net of issuance costs of
$38,324...................................... -- -- 180,750 3,576,676
Accretion to redemption price.................... -- -- -- 2,184
Accrued dividends................................ -- 14,736 -- 95,872
------- ----------- -------- -------------
Balance, March 31, 1998.......................... 47,174 401,091 180,750 3,674,732
Sale of Series C preferred stock, net of issuance
costs of $63,545............................... -- -- -- --
Accretion to redemption price.................... -- -- -- 6,589
Accrued dividends................................ -- 33,828 -- 289,200
------- ----------- -------- -------------
Balance, March 31, 1999.......................... 47,174 434,919 180,750 3,970,521
Sale of Series D preferred stock, net of issuance
costs of $119,370.............................. -- -- -- --
Sale of Series E preferred stock, net of issuance
costs of $76,469............................... -- -- -- --
Accretion to redemption price.................... -- -- -- 5,827
Accrued dividends................................ -- 29,655 -- 256,844
Conversion to common stock....................... (47,174) (464,574) (180,750) (4,233,192)
------- ----------- -------- -------------
Balance, March 31, 2000.......................... -- $ -- -- $ --
======= =========== ======== =============
</TABLE>
<TABLE>
<CAPTION>
SERIES C SERIES D
-------- --------
SHARES AMOUNT SHARES AMOUNT
-------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Balance, June 12, 1996........................... -- $ -- -- $ --
-------- ------------- -------- -----------
Balance, March 31, 1997.......................... -- -- -- --
Exchange of common stock for Series A
Preferred stock................................ -- -- -- --
Sale of Series B
Preferred stock, net of issuance costs of
$38,324...................................... -- -- -- --
Accretion to redemption price.................... -- -- -- --
Accrued dividends................................ -- -- -- --
-------- ------------- -------- -----------
Balance, March 31, 1998.......................... -- -- -- --
Sale of Series C preferred stock, net of issuance
costs of $63,545............................... 195,783 6,436,451 -- --
Accretion to redemption price.................... -- 6,577 -- --
Accrued dividends................................ -- 269,260 -- --
-------- ------------- -------- -----------
Balance, March 31, 1999.......................... 195,783 6,712,288 -- --
Sale of Series D preferred stock, net of issuance
costs of $119,370.............................. -- -- 134,075 11,732,860
Sale of Series E preferred stock, net of issuance
costs of $76,469............................... -- -- -- --
Accretion to redemption price.................... -- 11,225 -- 20,982
Accrued dividends................................ -- 461,822 -- 732,989
Conversion to common stock....................... (195,783) (7,185,335) (134,075) (12,486,831)
-------- ------------- -------- -----------
Balance, March 31, 2000.......................... -- $ -- -- $ --
======== ============= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
SERIES E
--------
SHARES AMOUNT
------- -----------
<S> <C> <C>
Balance, June 12, 1996........................... -- $ --
------- -----------
Balance, March 31, 1997.......................... -- --
Exchange of common stock for Series A
Preferred stock................................ -- --
Sale of Series B
Preferred stock, net of issuance costs of
$38,324...................................... -- --
Accretion to redemption price.................... -- --
Accrued dividends................................ -- --
------- -----------
Balance, March 31, 1998.......................... -- --
Sale of Series C preferred stock, net of issuance
costs of $63,545............................... -- --
Accretion to redemption price.................... -- --
Accrued dividends................................ -- --
------- -----------
Balance, March 31, 1999.......................... -- --
Sale of Series D preferred stock, net of issuance
costs of $119,370.............................. -- --
Sale of Series E preferred stock, net of issuance
costs of $76,469............................... 68,770 16,923,475
Accretion to redemption price.................... -- 5,539
Accrued dividends................................ -- 390,183
Conversion to common stock....................... (68,770) (17,319,197)
------- -----------
Balance, March 31, 2000.......................... -- $ --
======= ===========
</TABLE>
14. 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, 2000, 1999 and 1998.
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash paid during the period for interest................ $ 93,289 $ 51,840 $ --
============= ========== =========
Non-cash investing and financing activities:
Accrual of preferred stock dividends.................. $ 1,871,493 $ 592,287 $ --
============= ========== =========
Preferred stock accretion............................. $ 43,573 $ 13,166 $ --
============= ========== =========
Equipment purchased under capital lease............... $ 686,068 $ -- $ --
============= ========== =========
Conversion of preferred stock to common stock......... $ 41,689,129 $ -- $ --
============= ========== =========
Deemed discount in connection with the beneficial
conversion feature on Series E preferred stock..... $ 8,307,444 $ -- $ --
============= ========== =========
Change in net unrealized loss of marketable securities $ 165,621 $ 2,000 $ --
============= ========== =========
Fair value of options issued to non-employees......... $ 235,461 $ -- $ --
============= ========== =========
Alier Acquisition:
Fair value of assets acquired......................... $ 44,622,518 $ -- $ --
Less:
Liabilities assumed................................... (1,463,650) -- --
Common stock issued in connection with the
acquisition........................................ (43,580,184) -- --
------------- ---------- ---------
(421,316) -- --
Write-off of in-process research and development..... 2,737,000 -- --
------------- ---------- ---------
Cash paid for acquisition............................. $ 2,315,684 $ -- $ --
============= ========== =========
</TABLE>
33
<PAGE> 34
16. SEGMENT INFORMATION
The Company markets it products in the United States and in foreign
countries. Information regarding geographic areas for the years ended March 31,
2000, 1999 and 1998 are as follow:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------
REVENUES 2000 1999 1998
-------- -------------- ------------- --------------
<S> <C> <C> <C>
North America $ 55,051,234 $ 14,043,226 $ 4,016,555
Europe 5,093,500 226,311 268,689
-------------- ------------- --------------
Total $ 60,144,734 $ 14,269,537 $ 4,285,244
============== ============= ==============
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
LONG LIVED ASSETS 2000 1999
----------------- ------------- ------------
<S> <C> <C>
North America $ 39,741,400 $ 2,196,709
Europe 141,812 --
------------- ------------
Total $ 39,883,212 $ 2,196,709
============= ============
</TABLE>
17. SUBSEQUENT EVENTS
Prior to the merger, in February 2000, Active Software agreed to acquire
Premier Software Technologies, Inc. (Premier), a provider of integration
products and services for eCommerce. In connection with this transaction, Active
Software issued 121,308 shares of common stock and paid cash of $500,000 in
exchange for all of the outstanding shares of capital stock of Premier.
Also in February 2000, Active Software agreed to acquire TransLink
Software, Inc. (TransLink), a provider of high performance mainframe integration
solutions for eBusiness. In connection with this transaction, Active Software
issued 796,363 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 an aggregate of 43,041 shares of Active
Software's common stock.
The acquisitions of Premier and TransLink were completed in April 2000.
After completion of the merger, the shares of Active Software stock issued as
part of these acquisitions were converted into shares of the Company's stock
using the same conversion ratio as for the conversion of other shares of Active
Software stock. The options issued in connection with these acquisitions were
converted into options to acquire shares of Company stock, converted using the
same conversion ratio.
In August 2000, the Company increased the number of shares reserved for
issuance under the stock incentive plan to 20,731,000.
34
