<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15681
---------------
WEBMETHODS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 54-1807654
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3930 PENDER DRIVE, FAIRFAX, VIRGINIA 22030
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (703) 460-2500
---------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2000, 47,184,584 shares of the registrant's Common
Stock, par value $.01 per share, were issued and outstanding.
1
<PAGE> 2
WEBMETHODS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I. Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and March 31, 2000
Condensed Consolidated Statements of Operations -
Three and six months ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows -
Six months ended September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Part II Other Information
Item 2 Changes in Securities and Use of Proceeds
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
</TABLE>
2
<PAGE> 3
PART I
ITEM 1: FINANCIAL STATEMENTS
WEBMETHODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 88,125,997 $171,716,075
Marketable securities available for sale.......................... 94,295,453 25,255,901
Accounts receivable, net of allowances of $2,003,000 and
$1,058,000, respectively....................................... 30,899,368 18,578,340
Prepaid expenses and other current assets......................... 10,054,188 6,615,330
------------- ------------
Total current assets...................................... 223,375,006 222,165,646
Marketable securities available for sale............................ 27,641,243 37,137,889
Property and equipment, net......................................... 10,272,576 6,309,693
Goodwill and acquired intangibles, net.............................. 112,547,436 42,356,015
Other assets........................................................ 13,271,621 5,310,836
------------- ------------
Total assets.............................................. $ 387,107,882 $313,280,079
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 5,436,773 $ 4,207,708
Accrued expenses.................................................. 14,113,219 7,322,566
Accrued salaries and commissions.................................. 9,839,740 8,034,904
Deferred revenue.................................................. 38,924,581 20,333,862
Current portion of capital lease obligations...................... 701,502 148,026
Current portion of notes payable and lines of credit.............. 108,739 762,217
------------- ------------
Total current liabilities................................. 69,124,554 40,809,283
------------- ------------
Capital lease obligations, net of current portion................. 1,291,030 426,145
Long-term obligations, less current portion....................... -- 267,212
Long term deferred revenue........................................ 16,889,036 5,515,103
------------- ------------
Total liabilities......................................... 87,304,620 47,017,743
------------- ------------
Stockholders' equity
Common stock, $0.01 par value; 500,000,000 shares
authorized; 46,937,386 and 45,429,400 shares issued and
outstanding.................................................... 469,374 454,294
Additional paid-in capital........................................ 442,348,695 344,019,296
Deferred stock compensation....................................... (8,930,850) (12,540,586)
Accumulated deficit............................................... (134,400,162) (65,541,247)
Accumulated other comprehensive income (loss)..................... 316,205 (129,421)
------------- ------------
Total stockholders' equity................................ 299,803,262 266,262,336
------------- ------------
Total Liabilities and stockholders' equity................ $ 387,107,882 $313,280,079
============= ============
</TABLE>
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------ ------------- -------------
Revenue:
<S> <C> <C> <C> <C>
License...................................................... $ 32,423,917 $ 7,793,972 $ 56,408,950 $ 13,581,350
Professional services........................................ 8,440,675 2,243,232 16,183,837 4,043,329
Maintenance.................................................. 4,872,523 1,109,314 8,208,887 1,894,115
------------ ----------- ------------ -----------
Total revenue........................................ 45,737,115 11,146,518 80,801,674 19,518,794
------------ ----------- ------------ -----------
Cost of revenue:
License...................................................... 1,303,022 726,592 2,305,364 1,120,914
Professional services and maintenance
(exclusive of amortization of deferred stock compensation
of $381,496 for the three months ended September 30, 2000,
$33,330 for the three months ended September 30, 1999,
$762,991 for the six months ended September 30, 2000 and
$66,550 for the six months ended September 30, 1999)....... 10,754,854 2,812,038 20,859,938 4,981,637
------------ ----------- ------------ -----------
Total cost of revenue................................ 12,057,876 3,538,630 23,165,302 6,102,551
------------ ----------- ------------ -----------
Gross profit................................................... 33,679,239 7,607,888 57,636,372 13,416,243
------------ ----------- ------------ -----------
Operating expenses:
Sales and marketing (exclusive of amortization of deferred
stock compensation of $930,921 for the three months ended
September 30, 2000, $151,500 for the three months ended
September 30, 1999, $1,861,841 for the six months ended
September 30, 2000 and $302,500 for the six months ended
September 30, 1999)........................................ 22,102,062 8,728,282 41,576,025 14,701,558
Research and development (exclusive of amortization of
deferred stock compensation of $324,692 for the three
months ended September 30, 2000, $84,840 for the three
months ended September 30, 1999, $649,383 for the six
months ended September 30, 2000 and $169,400 for the six
months ended September 30, 1999)........................... 10,871,942 3,673,869 18,533,199 5,550,654
General and Administrative (exclusive of amortization of
deferred stock compensation of $167,759 for the three
months ended September 30, 2000, $33,330 for the three
months ended September 30, 1999, $335,521 for the six
months ended September 30, 2000 and $66,550 for the six
months ended September 30, 1999)........................... 4,902,649 2,241,593 9,006,120 3,446,532
Merger related expenses...................................... 34,039,218 -- 34,039,218 --
Amortization of deferred stock compensation.................. 1,804,868 303,000 3,609,736 605,000
Amortization of goodwill and acquired intangibles............ 12,936,302 -- 24,765,302 --
In-process research and development.......................... -- -- 2,311,000 --
------------ ------------ ------------ ------------
Total operating expenses............................. 86,657,041 14,946,744 133,840,600 24,303,744
------------ ----------- ------------ -----------
Operating loss................................................. (52,977,802) (7,338,856) (76,204,228) (10,887,501)
Interest income, net........................................... 4,133,176 444,957 7,345,313 572,611
------------ ----------- ------------ -----------
Net loss.................................................. (48,844,626) (6,893,899) (68,858,915) (10,314,890)
Accretion and accrued dividends related to
mandatorily redeemable preferred stock....................... -- 460,000 -- 808,882
------------ ----------- ------------ -----------
Net loss attributable to common shareholders.............. $(48,844,626) $ (7,353,899) $(68,858,915) $(11,123,772)
============= ============ ============ ============
Basic and diluted net loss per common share.................... $ (1.04) $ (0.52) $ (1.47) $ (0.94)
============= ============ ============ ============
Shares used in computing basic and diluted net
loss per common share....................................... 46,760,384 14,215,758 46,755,775 11,789,217
============ =========== ============ ===========
Comprehensive loss:
Net loss.................................................. $(48,844,626) $ (6,893,899) $(68,858,915) $(10,314,890)
Other comprehensive loss:
Unrealized gain (loss) on securities available for
sale............................................... 329,635 (55) 308,971 (1,796)
Foreign currency cumulative translation
adjustment......................................... 40,772 -- 98,525 --
------------ ------------ ------------ -----------
Total comprehensive loss............................. $(48,474,219) $ (6,893,954) $(68,451,419) $(10,316,686)
============ ============= ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE> 5
WEBMETHODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (68,858,915) $ (10,314,890)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.................... 1,511,741 501,229
Provision for bad debts and returns ............. 1,017,000 58,000
Provision for warranty........................... 87,919 50,000
Expense related to fair value of options
issued to non-employees.......................... -- 140,280
Amortization of deferred stock
compensation..................................... 3,609,736 605,000
Amortization of goodwill and acquired
intangibles.................................... 24,765,302 --
Write off of in-process research and development 2,311,000 --
Increase (decrease) in cash resulting from
changes in assets and liabilities:
Accounts receivable.............................. (13,036,303) (95,391)
Prepaid expenses and other current assets........ (3,338,195) (349,796)
Other assets..................................... (7,930,825) 86,608
Accounts payable................................. 1,187,398 1,241,597
Accrued expenses................................. 6,624,338 1,587,745
Accrued salaries and commissions ................ 1,804,836 1,157,077
Deferred revenue................................. 29,627,362 2,828,945
------------- -------------
Net cash used in operating activities .............. (20,617,606) (2,503,596)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment................. (3,664,798) (1,815,663)
Acquisition of business net of cash acquired........ (4,740,879) --
Net purchases of marketable securities available
for sale............................................ (59,097,280) (15,230,034)
------------- -------------
Net cash used in investing activities............ (67,502,957) (17,045,697)
------------- -------------
Cash flows from financing activities:
Payments on capital leases.......................... (221,988) (3,372,000)
Borrowings under notes payables and lines of credit. -- 3,294,000
Repayments under notes and lines of credit.......... (920,690) (23,111)
Proceeds from of stock options and stock issued
under the ESPP................................... 5,673,163 31,427
Proceeds from issuance of common stock.............. -- 40,491,000
Proceeds from issuance of preferred stock........... -- 11,852,230
Issuance costs related to preferred stock
offerings........................................ -- (119,370)
------------- -------------
Net cash provided by financing activities........ 4,530,485 52,154,176
------------- -------------
Net decrease in cash and cash equivalents............. (83,590,078) 32,604,883
Cash and cash equivalents at beginning of period...... 171,716,075 3,478,500
------------- -------------
Cash and cash equivalents at end of period............ $ 88,125,997 $ 36,083,383
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE> 6
WEBMETHODS, INC..
NOTES TO CONDENSED CONSOLITATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of webMethods, Inc. and its subsidiaries (collectively, the
"Company") reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented in conformity with generally accepted accounting principles for the
interim financial information. Such adjustments are of a normal recurring
nature. Intercompany balances and transactions have been eliminated in
consolidation.
The results of the interim periods presented are not necessarily
indicative of the results for the year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin (SAB) No.101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. The SEC
released SAB 101A, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 6, 1999 and March 15,
2000. Subsequently the SEC released SAB 101B, which delayed the implementation
date of SAB 101 until no later than the fourth quarter of fiscal years
beginning after December 15, 1999. The Company does not expect a material
effect on the Company's financial position, results of operations or cash flows
as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, which delays the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for the
Company's fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
entered into derivative contracts and does not have near term plans to enter
into contracts, accordingly the adoption of SFAS No. 133 and SFAS No. 137 is not
expected to have a material effect on the financial statements.
In March 2000, FASB issued Interpretation (FIN) No. 44, "Accounting
for Certain Transactions Involving Stock Compensation -- An Interpretation of
APB Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The adoption did not have a material impact on the Company's
financial position or results of operations
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
2000 1999
------------ -------------
<S> <C> <C>
Cash paid during the period for interest $ 111,733 $ 64,240
============ ============
Non-cash investing and financing activities
Accrual of preferred stock dividends $ - $ 787,151
============ ============
Preferred stock accretion $ - $ 21,731
============ ============
Equipment purchased under capital lease $ 1,562,381 $ -
============ ============
Change in net unrealized gain (loss) of
marketable securities $ (153,272) $ 4,128
============ ============
Issuance of common stock and options for
business acquisitions $ 92,671,316 $ -
============ ============
</TABLE>
6
<PAGE> 7
4. SEGMENT INFORMATION
The Company markets it products in the United States and in foreign
countries. Information regarding geographic areas for the three and six months
ended September 30, 2000 and 1999 are as follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
REVENUES 2000 1999 2000 1999
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
North America. $ 43,487,936 $ 9,743,109 $ 77,304,528 $ 17,935,916
Europe........ 2,137,790 1,403,409 3,385,757 1,582,878
Asia Pacific.. 111,389 - 111,389 -
------------ ------------ ------------ ------------
Total... $ 45,737,115 $ 11,146,518 $ 80,801,674 $ 19,518,794
============ ============ ============ ============
AS OF AS OF
SEPTEMBER 30, MARCH 31,
LONG LIVED ASSETS 2000 2000
------------------ ------------ -----------
North America..... $135,291,217 $53,834,732
Europe............ 707,771 141,812
Asia Pacific...... 92,645 -
------------ -----------
Total... $136,091,633 $53,976,544
============ ===========
</TABLE>
5. ACTIVE MERGER
On August 15, 2000, the Company completed a merger with Active Software,
Inc. 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. Certain reclassifications
have been made to the Active Financial Statements to conform to Webmethod's
presentation. A reconciliation between revenue and net loss as previously
reported and as restated is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
REVENUE:
As previously reported..................... $ 3,847,518 $ 6,886,794
Active..................................... 7,299,000 12,632,000
----------------- -----------------
As restated................................ $ 11,146,518 $ 19,518,794
================= =================
NET LOSS
As previously reported..................... $ (4,093,405) $ (4,986,579)
Active..................................... (2,800,494) (5,900,922)
----------------- -----------------
As restated................................... $ (6,893,899) $ (10,314,890)
================= =================
</TABLE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the prospectus included in the Company's Registration Statement on
Form S-1, as amended, filed with the SEC on November 19, 1999 (SEC File No.
333-91309) (the "Form S-1")and the Registration Statement on Form S-4, as
amended, filed with the SEC on June 16, 2000 (SEC File No. 333-39572). The
information contained herein is not a comprehensive discussion and analysis of
the financial condition and results of operations, but rather updates
disclosures made in the Company's Form S-1 and S-4 filings.
Certain information contained herein should be considered
"forward-looking information," which is subject to a number of substantial risks
and uncertainties. Statements contained herein that are not statements of
historical fact may be deemed to be forward-looking information. Without
limiting the foregoing, words such as "anticipates," "believes," "could,"
"estimate," "expect," "intend," "may," "might," "should," "will," and "would"
and other forms of these words or similar words are intended to identify
forward-looking information. Such forward-looking statements are made only as of
the date of this report. The Company's actual results could differ materially
from those contained in forward-looking statements. Important factors known to
the Company that could cause such material differences are discussed under the
caption "Risk Factors" in the abovementioned filings. The Company undertakes no
obligations to publicly update or revise any forward-looking information,
whether as a result of new information, future events or otherwise.
OVERVIEW
We are a leading provider of infrastructure software and services for
achieving business-to-business integration, or B2Bi. Our software, webMethods
B2B, enables companies to work more closely with their customers, suppliers and
other business partners through the real-time exchange of information and
transactions over the Internet.
webMethods was founded in June 1996. In August 2000, we acquired
Active Software which was founded in September 1995 and accounted for as a
pooling of interests. We have grown from 526 employees as of March 31, 2000 to
712 employees as of September 30, 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 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.
7
<PAGE> 8
We recognize revenue from the sale of software licenses upon shipment
of our software, provided that the fee is fixed and determinable, persuasive
evidence of an arrangement exists and collection of the resulting receivable is
considered probable. Historically, we have not experienced significant returns
or exchanges of our software. We recognize software license revenue over the
term of the license if the license requires us to deliver unspecified software
during its term or if the license contains extended payment terms. 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 term of the
maintenance and support period. Amounts billed in advance of revenue
recognition are recorded as deferred revenue. Professional services revenue is
recognized as the service is performed.
Our cost of license revenue primarily includes royalties to third
parties for software used in our software 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 September 30, 2000, had
an accumulated deficit of approximately $134.4 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 712 full-time employees as of September 30, 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
ACQUISITION OF ACTIVE SOFTWARE, INC.
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. Active had a calendar
fiscal year end. In connection with the retroactive restatement the financial
statements of Active were recast to a March 31 year end to conform to webMethods
presentations.
In April 2000, the Company acquired Premier Software Technologies,
Inc. (Premier), a provider of integration products and services for eCommerce.
In connection with this transaction, the Company 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.
In April 2000, the Company acquired TransLink Software, Inc.
(TransLink), a provider of high performance mainframe integration solutions for
eBusiness. In connection with this transaction, the Company issued 796,363
shares of the Company's 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 the Company's common stock.
RESULTS OF OPERATIONS
8
<PAGE> 9
REVENUE
Total revenue increased by approximately $61.3 million, or 314.0%, to
$80.8 million for the six months ended September 30, 2000 from $19.5 million for
the six months ended September 30, 1999. During the three month period ending
September 30, 2000, total revenue increased $34.6 million, or 310.3%, to $45.7
million from $11.1 million for the three month period ending September 30 ,
1999.
License. License revenue increased by approximately $42.8 million, or
315.3%, to $56.4 million for the six months ended September 30, 2000 from $13.6
million for the six months ended September 30, 1999. During the three month
period ending September 30, 2000, license revenue increased $24.6 million, or
316.0%, to $32.4 million from $7.8 million for the three month period ending
September 30 , 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 $12.1 million, or 300.3%, to $16.2 million for the six months
ended September 30, 2000 from $4.1 million for the six months ended September
30, 1999. During the three month period ending September 30, 2000, professional
services revenue increased $6.2 million, or 276.3%, to $8.4 million from $2.2
million for the three month period ending September 30, 1999. This increase is
attributable to the increased licensing activity described above, which has
resulted in increased customer implementation activity and follow-on
professional services.
Maintenance. Maintenance revenue increased by approximately $6.3
million, or 333.4%, to $8.2 million for the six months ended September 30, 2000
from $1.9 for the six months ended September 30, 1999. During the three month
period ending September 30, 2000, maintenance revenue increased $3.8 million, or
339.2%, to $4.9 million from $1.1 million for the three month period ending
September 30, 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 $1.2
million, or 105.7%, to $2.3 million for the six months ended September 30, 2000
from $1.1 million for the six months ended September 30, 1999. During the three
month period ending September 30, 2000, cost of license revenue increased
$576,000, or 79.3%, to $1.3 million from $727,000 for the three month period
ending September 30, 1999. This increase in the cost of licenses is primarily
due to the amortization of prepaid third party software licensing fees and, to a
lesser extent expenses related to the provision for warranty obligations. Gross
profit margin on license revenue increased to 95.9% for the six months ended
September 30, 2000 compared to 91.7% for the six months ended September 30,
1999.
Professional Services and Maintenance. Cost of professional services
and maintenance increased by approximately $15.9 million, or 318.7% to $20.9
million for the six months ended September 30, 2000 from $5.0 million for the
six months ended September 30, 1999. During the three month period ending
September 30, 2000, cost of professional services and maintenance revenue
increased $7.9 million, or 282.5%, to $10.7 million from $2.8 million for the
three month period ending September 30, 1999. This increase is primarily
attributable to increases in the number of professional service and technical
support personnel, which increased to 133 people as of September 30, 2000 from
57 people as of September 30, 1999. In addition, subcontractor and travel
expenses contributed to the increase in cost of professional services and
maintenance for the six months ended September 30, 2000. Gross profit margin on
professional services and maintenance decreased to 14.5% of professional
services and maintenance revenue for the six months ended September 30, 2000
compared to 16.1% for the six months ended September 30, 1999.
GROSS PROFIT
Gross profit increased by approximately $44.2 million, or 329.6%, to
$57.6 million for the six months ended September 30, 2000 from $13.4 million for
the six months ended September 30, 1999. During the three month period ending
September 30, 2000, gross profit increased $26.1 million, or 342.7%, to $33.7
million from $7.6 million for the three month period ending September 30, 1999.
The increase is attributable to the growth in our customer base, which
contributed to increased revenue from software licenses, professional services
and maintenance.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by
approximately $26.9 million, or 182.8%, to $41.6 million for the six months
ended September 30, 2000 from $14.7 million for the six months ended September
30, 1999. Sales and marketing
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expenses increased by approximately $13.3 million, or 153.2%, to $22.1 million
for the three months ended September 30, 2000 from $8.7 million for the three
months ended September 30, 1999. The increase in sales and marketing expenses is
primarily attributable to the continued expenses related to our marketing
programs including our B2B Leadership Forum and to a lesser extent to the
increase in the number of sales and marketing employees. We believe that these
expenses will continue to increase in absolute dollar amounts in future periods
as we continue to expand its sales and marketing efforts.
Research and Development. Research and development expenses increased
by approximately $13.0 million, or 233.9%, to $18.5 million for the six months
ended September 30, 2000 from $5.5 million for the six months ended September
30, 1999. Research and development expenses increased by approximately $7.2
million, or 195.9%, to $10.9 million for the three months ended September 30,
2000 from $3.7 million for the three months ended September 30, 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 its strategic objectives, and, as a result, expect research and
development expenses to increase significantly in future periods.
General and Administrative. General and administrative expenses
increased by approximately $5.6 million, or 161.3%, to $9.0 million for the six
months ended September 30, 2000 from $3.4 million for the six months ended
September 30, 1999. General and administrative expenses increased by
approximately $2.7 million, or 118.7%, to $4.9 million for the three months
ended September 30, 2000 from $2.2 million for the three months ended September
30, 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.
Merger Related Expenses. In connection with the merger with Active,
we expensed $34 million in merger related expenses.
Amortization of Deferred Stock Compensation. Certain options granted
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. Deferred stock compensation increased by
approximately $3.0 million, or 496.7%, to $3.6 million for the six months ended
September 30, 2000, from $605,000 for the six months ended September 30, 1999.
Amortization of deferred stock compensation increased by approximately $1.5
million, or 495.7%, to $1.8 million for the three months ended September 30,
2000, from $303,000 for the three months ended September 30, 1999. Of the total
deferred stock compensation, approximately $3.6 million was amortized in the six
months ended September 30, 2000. These amounts are being amortized over the
respective vesting periods of these equity arrangements, generally 48 months.
Amortization of Goodwill and Acquired Intangibles. In connection with
the acquisition of Alier, Premier and Translink and based on independent
valuations, we allocated the purchase price to goodwill, acquired intangibles
and in-process research and development. Goodwill and acquired intangibles are
being amortized over their useful lives of one to three years. We amortized
$24.8 million in the six months ended September 30, 2000.
INTEREST INCOME, NET
Interest income, net increased by approximately $6.7 million, or
1166.9%, to $7.3 million for the six months ended September 30, 2000 from
$573,000 for the six months ended September 30, 1999. Interest income, net
increased by approximately $3.5 million, or 795.5%, to $4.0 million for the
three months ended September 30, 2000 from $445,000 for the three months ended
September 30, 1999. This increase is attributable to increases in interest
income that resulted from the approximately $169.4 million in net cash proceeds
that we generated from the issuance of common stock in our initial public
offering and the concurrent private placement in February 2000.
In-process research and development. In-process research and
development was expensed upon consummation of the Transline acquisition as it
had not reached technological feasibility and, in the opinion of management,
has no alternative future use. For the six months ended September 30, 2000, $2.3
million was expensed related to In-process research and development.
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have incurred 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.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through an initial public offering of
our common stock which was completed on February 10, 2000, private sales of
mandatorily redeemable, convertible preferred stock, resulting in net proceeds
from inception to March 31, 2000, and, to a lesser extent, through bank loans
and equipment leases. As of September 30, 2000, we had approximately $171.7
million in cash and cash equivalents, approximately $94.3 million in short-term
investments, approximately $27.6 million in long-term investments and
approximately $154.3 million in working capital.
Net cash used in operating activities was approximately $20.6 million
for the six months ended September 30,2000, and approximately $2.5 million for
the six months ended September 30, 1999. Net cash flows from operating
activities in each period reflect increasing deferred revenue from customer
payments that were not recognized as revenue and, to a lesser extent, increases
in accrued expenses offset in part by increases in net losses and prepaid
expenses.
Net cash used in investing activities was approximately $67.5 million
for the six months ended September 30, 2000, and approximately $17.0 million for
the six months ended September 30, 1999. Cash used in investing activities
reflects purchases of marketable securities available for sale in each period.
Capital expenditures were approximately $3.7 million for the six months ended
September 30, 2000 and $1.8 million for the six months ended September 30, 1999.
Capital expenditures consisted of purchases of operating resources to manage
operations, including computer hardware and software, office furniture and
equipment and leasehold improvements. Since inception we have generally funded
capital expenditures either through capital leases, the use of working capital,
or bank loans. We expect that our capital expenditures will continue to increase
along with our continued use of leasing in the future.
Net cash from financing activities was approximately $4.5 million for
the six months ended September 30, 2000, and approximately $52.2 million for the
six months ended September 30, 1999. These cash flows in the six months ended
September 30, 2000 primarily reflect net cash proceeds from issuance of shares
in the employee stock purchase plan and the proceeds from the exercise of stock
options. During the six months ended September 30, 1999, these cash flows
reflect the private sales of mandatorily redeemable, convertible preferred stock
in fiscal 1999. We have an outstanding balance of $109,000 as of September 30,
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
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 September 30, 2000, we had not borrowed against this revolving
promissory note. In connection with the revolving promissory note, we obtained a
letter of credit totaling $750,000 which expires in June 2001 and relates to the
new office lease.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. We may utilize cash
resources to fund acquisitions or investments in complementary businesses,
technologies or product lines. We believe that our existing working capital and
our revolving promissory note will be sufficient to meet our working capital and
operating resource expenditure requirements for at least the next twelve months.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, which delays the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for our
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. We have not entered into
derivative contracts and do not have near term plans to enter into derivative
contracts, accordingly the adoption of SFAS No. 133 and SFAS No. 137 is not
expected to have a material effect on our financial statements.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB 101A, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. Subsequently the SEC released SAB 101B, which delayed
the effective date of SAB 101 until no later than the fourth quarter of fiscal
years beginning after December 15, 1999. We do not expect a material effect on
our financial position, results of operations or cash flows as a result of SAB
101.
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In March 2000, FASB issued Interpretation (FIN) No. 44, "Accounting
for Certain Transactions Involving Stock Compensation -- An Interpretation of
APB Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The adoption of FIN 44 did not have a material impact on our financial
position or results of operations.
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Potential investors in our company's stock should carefully consider the
following risk factors.
UNANTICIPATED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD AFFECT THE
PRICE OF OUR STOCK.
We believe that quarter-to-quarter comparisons of our financial
results are not necessarily meaningful indicators of our future operating
results and should not be relied on as an indication of our future
performance. If our quarterly operating results fail to meet the expectations
of analysts, the trading price of shares of our common stock could be
negatively affected. Our quarterly operating results have varied substantially
in the past and may vary substantially in the future depending upon a number
of factors, including the amount and timing of operating costs relating to
expansion of our business, operations and infrastructure and the number and
timing of new hires.
We plan to continue to increase our operating expenses to expand
our sales and marketing operations and fund greater levels of research and
development. Our operating expenses, which include sales and marketing,
research and development and general and administrative expenses, are based on
our expectations of future revenues and are relatively fixed in the short
term. If revenue falls below our expectations in a quarter and we are not able
to quickly reduce our spending in response, our operating results for that
quarter could be harmed. It is possible that in some future quarter our
operating results may be below the expectations of public market analysts and
investors and, as a result, the price of our common stock may fall.
In addition, the stock market, particularly the stock prices of
Internet-related companies, has been very volatile. This volatility is often
not related to the operating performance of the companies. From our initial
public offering in February 2000 until September 30, 2000, the closing price
of our common stock on the Nasdaq National Market has ranged from a high of
$308.06 to a low of $61.27. Fluctuations in the price of our common stock may
affect our visibility and credibility in our market.
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GROWTH OF OUR SALES MAY SLOW DOWN FROM TIME TO TIME, CAUSING OUR QUARTERLY
OPERATING RESULTS TO FLUCTUATE.
At certain times during the year, we may experience a slowing down
in the growth rate for sales of our software products and services. For
example, the growth rate for the sale of our products and services during
summer months may be slower than at other times during year, particularly in
European markets. In the future, we may have slower growth due to patterns in
the capital budgeting and purchasing cycles of our current and prospective
customers. These periods of slower growth may lead to fluctuations in our
quarterly operating results. In addition, variations in sales cycle may have
an impact on the timing of our revenue, which in turn could cause our
quarterly operating results to fluctuate. To successfully sell our software
and services, we generally must educate our potential customers regarding
their use and benefits, which can require significant time and resources. Any
delay in sales of our products and services could cause our operating results
to vary significantly from quarter to quarter, which could result in
volatility in our stock price or in the stock price of company.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
We may have a large number of shares of common stock outstanding
and available for resale at various points in time in the future. At September
30, 2000, we had an aggregate of 46,937,386 shares outstanding, of which
2,574,691 shares are subject to resale restrictions under Rule 144. In
November 2000, 2,056,556 shares will become eligible for resale and in
February 2001, another 518,135 shares may be resold, subject to the provisions
of Rule 144. The market price of our common stock could decline as a result of
sales of a large number of shares of our common stock in the market, or the
perception that such sales could occur. These sales might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
Certain holders of our common stock also have certain demand and
piggyback registration rights enabling them to register their shares under the
Securities Act for sale. Registration of these shares under the Securities Act
would result in these shares becoming freely tradable without restriction
under the Securities Act immediately upon the effectiveness of the
registration.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS,
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT ALWAYS REMAIN WITH US.
Our success depends upon the continued service of our executive
officers and other key employees, and none of these officers or key employees
is bound by an employment agreement for any specific term. If we lose the
services of one or more of our executive officers or key employees, or if one
or more of them decide to join a competitor or otherwise compete directly or
indirectly with us, our business, operating results and financial condition
could be harmed. In particular, Phillip Merrick, our Chairman of the Board,
President and Chief Executive Officer, and R. James Green, our Chief
Technology Officer and Executive Vice President of Product Development, would
be particularly difficult to replace. Our future success will also depend in
large part on our ability to attract and retain experienced technical, sales,
marketing and management personnel.
WE RELY ON SYSTEM INTEGRATORS AND OTHER STRATEGIC RELATIONSHIPS TO IMPLEMENT
AND PROMOTE OUR SOFTWARE PRODUCTS AND, IF THESE RELATIONSHIPS TERMINATE, WE
MAY LOSE IMPORTANT SALES AND MARKETING OPPORTUNITIES.
We have established strategic relationships with B2B e-commerce
marketplaces, resellers, enterprise application software providers, hardware
platform and software applications developers, service providers, system
integrators and other technology leaders. These relationships expose our
software to many potential customers to which we may not otherwise have
access. In addition, these relationships provide us with insights into new
technology and with third-party service providers that our customers can use
for implementation assistance. If our relationships with any of these
organizations were terminated or if we failed to work effectively with our
partners or to grow our base of these types of partners, we might lose
important opportunities, including sales and marketing opportunities, and our
business may suffer.
In general, our partners are not required to market or promote our
products and generally are not restricted from working with competing software
companies. Accordingly, our success will depend on their willingness and
ability to devote sufficient resources and efforts to marketing our software
products rather than the products of others. If these relationships fail, we
will have to devote substantially more resources to the distribution, sales
and marketing, implementation and support of our products than we would
otherwise, and our efforts may not be as effective as those of our partners,
which would harm our business.
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OUR OPERATING RESULTS MAY DECLINE AND OUR CUSTOMERS MAY BECOME DISSATISFIED IF
WE DO NOT EXPAND OUR PROFESSIONAL SERVICES ORGANIZATION OR IF WE ARE UNABLE TO
ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD-PARTY IMPLEMENTATION
PROVIDERS.
We cannot be certain that we can attract or retain a sufficient
number of highly qualified professional services personnel. Customers that
license our software typically engage our professional services staff or third
party consultants to assist with support, training, consulting and
implementation. We believe that growth in our software sales depends on our
ability to provide our customers with these services and to attract and
educate third-party consultants to provide similar services. As a result, we
plan to increase the number of our professional services personnel and third
party consultants to meet these needs. New professional services personnel and
service providers will require training and education and take time to reach
full productivity. Competition for qualified personnel and service providers
is intense, particularly because we are in a new market and only a limited
number of individuals have acquired the skills needed to provide the services
our customers require. Our business may be harmed if we are unable to expand
our professional services organization and establish and maintain
relationships with third-party implementation providers.
BECAUSE OUR PRODUCTS INCORPORATE TECHNOLOGY LICENSED FROM THIRD PARTIES, THE
LOSS OF OUR RIGHT TO USE THIS LICENSED TECHNOLOGY COULD HARM OUR BUSINESS.
We license technology that is incorporated into our products from
third parties. Any significant interruption in the supply or support of any
licensed software could adversely affect our sales, unless and until we can
replace the functionality provided by this licensed software. Because our
products incorporate software developed and maintained by third parties, we
depend on these third parties to deliver and support reliable products,
enhance our current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes. The failure of these third parties to meet these
criteria could harm our business.
OUR SOFTWARE MUST INTEGRATE WITH APPLICATIONS MADE BY THIRD PARTIES, AND, IF
WE LOSE ACCESS TO THE PROGRAMMING INTERFACES FOR THESE APPLICATIONS, OR IF WE
ARE UNABLE TO MODIFY OUR PRODUCTS OR DEVELOP NEW PRODUCTS IN RESPONSE TO
CHANGES IN THESE APPLICATIONS, OUR BUSINESS COULD SUFFER.
Our software uses software components called Adapters to
communicate with our customers' enterprise applications. Our ability to
develop these Adapters is largely dependent on our ability to gain access to
the application programming interfaces, or APIs, for the applications, and we
may not have access to necessary APIs in the future. APIs are written and
controlled by the application provider. Accordingly, if an application
provider becomes a competitor by entering the B2Bi market, it could restrict
access to its APIs for competitive reasons. Our business could suffer if we
are unable to gain access to these APIs. Furthermore, we may need to modify
our software products or develop new Adapters in the future as new
applications or newer versions of existing applications are introduced. If we
fail to continue to develop Adapters or respond to new applications or newer
versions of existing applications, our business could suffer.
We rely in part on third parties to develop Adapters necessary for
the integration of applications using our software. We cannot be certain that
these companies will continue to develop these Adapters, or that, if they do
not continue to do so, that we will be able to develop these Adapters
internally in a timely or efficient manner. In addition, we cannot be certain
that Adapters developed by third parties will not contain undetected errors or
defects, which could harm our reputation, result in product liability or
decrease the market acceptance of our products.
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IF OUR RELATIONSHIP WITH SAP AG CHANGES OR TERMINATES, OUR REVENUES MAY
DECLINE AND WE MAY LOSE IMPORTANT SALES AND MARKETING OPPORTUNITIES.
In March 1999, we entered into a development partner agreement with
SAP AG. Under this development agreement, we granted SAP AG a perpetual license
to include an SAP-specific version of our webMethods B2B product in its SAP
Business Connector product. In June 2000, we signed, with SAP AG, an amendment
to the development partner agreement under which we will be the supplier of
enterprise application integration technology for the SAP Business Connector.
If our relationship with SAP AG terminates or changes, our revenues may decline
and our business could be adversely affected. If SAP AG chooses not to renew
the development partner agreement and as a result, not receive access to the
latest version of our software at the expiration of the development partner
agreement, our revenues may decline and our business could be adversely
affected. We cannot be certain that SAP AG's interest in promoting our software
to its customers will be consistent with our own. As a result, we cannot be
certain that we will continue to have access to SAP AG's customer base or that
SAP AG customers will license additional software from us.
SAP AG has announced its intention to be a significant supplier of
business-to-business e-commerce services and products. SAP AG may become one
of our competitors in the marketplace. Because the development partner
agreement contemplates the payment of a fixed fee for a license to integrate
certain webMethods products into SAP products and license such integrated
products to customers, an increase in SAP's market share attributable to
increased sales and use of SAP AG integrated products may not result in
increased revenues to us, and may make it more difficult for us to sell our
products and services, which could cause our revenues to decline and harm our
business, operating results and financial condition.
IF OUR CUSTOMERS DO NOT RENEW THEIR LICENSES, WE MAY LOSE A RECURRING REVENUE
STREAM, WHICH COULD HARM OUR OPERATING RESULTS.
Although most enterprise software providers offer perpetual
licenses with a single payment received at the time of the license grant, we
typically license our software products on a two-year renewable basis.
We first shipped webMethods B2B in June 1998 and we first began licensing
webMethods Enterprise on a renewable basis in August 2000. To date, only a few
of our initial two-year licenses have reached their respective renewal dates.
If a significant portion of our customers were to elect not to renew their
licenses for our software or were to seek perpetual licenses in the future, we
would lose a recurring revenue stream on which we base our business model,
which could harm our business, operating results and financial condition.
WE MAY NOT BE ABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR SOFTWARE IF
WE DO NOT EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES.
We need to substantially expand our direct and indirect sales and
distribution efforts, both domestically and internationally, in order to
increase market awareness and sales of our software products and the related
services we offer. We have recently expanded our direct sales force and plan
to hire additional sales personnel. Our software products require a
sophisticated sales effort targeted at multiple departments within an
organization. Competition for qualified sales and marketing personnel is
intense, and we might not be able to hire and retain adequate numbers of such
personnel to maintain our growth. New hires will require training and take
time to achieve full productivity. Our competitors have attempted to hire
employees away from us, and we expect that they will continue such attempts in
the future. We also plan to expand our relationships with system integrators,
enterprise software vendors and other third-party resellers to further develop
our indirect sales channel. As we continue to develop our indirect sales
channel, we will need to manage potential conflicts between our direct sales
force and third party reselling efforts.
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WE INTEND TO CONTINUE EXPANDING OUR INTERNATIONAL SALES EFFORTS BUT DO NOT
HAVE SUBSTANTIAL EXPERIENCE IN INTERNATIONAL MARKETS.
We have been, and intend to continue, expanding our international
sales efforts. We have limited experience in marketing, selling and supporting
our software and services abroad. Expansion of our international operations
will require a significant amount of attention from our management and
substantial financial resources. If we are unable to continue expanding our
international operations successfully and in a timely manner, our business and
operating results could be harmed. In addition, doing business internationally
involves additional risks, particularly:
- the difficulties and costs of staffing and managing foreign
operations;
- unexpected changes in regulatory requirements, taxes, trade
laws and tariffs;
- differing intellectual property rights;
- differing labor regulations; and
- changes in a specific country's or region's political or
economic conditions;
THE B2Bi MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The market for B2Bi solutions is rapidly changing and intensely
competitive. There are a variety of integration methods available for B2Bi
software. We expect that competition will remain intense as the number of
entrants and new technologies increases. We do not know if our target markets
will widely adopt and deploy B2Bi products such as our software products. If
B2Bi products such as our software products are not widely adopted by our
target markets or if we are not able to compete successfully against current
or future competitors, our business, operating results and financial condition
may be harmed.
Our current and potential competitors include, among others, large
software vendors, companies and trading exchanges that develop their own B2Bi
and e-commerce solutions, electronic data interchange, or EDI, vendors,
vendors of proprietary enterprise application integration, or EAI, solutions
and application server vendors who have added XML capabilities to their
products. We also face competition for some aspects of our product and service
offerings from major system integrators, both independently and in conjunction
with corporate in-house information technology departments, which have
traditionally been the prevalent resource for application integration. In
addition, our customers and companies with whom we currently have strategic
relationships may become competitors in the future. Some of our competitors or
potential competitors may have more experience developing Internet-based
software, larger technical staffs, larger customer bases, more established
distribution channels, greater brand recognition and greater financial,
marketing and other resources than we do. Our competitors may be able to
develop products and services that are superior to our software and services,
that achieve greater customer acceptance or that have significantly improved
functionality as compared to our existing software and future products and
services. In addition, negotiating and maintaining favorable customer and
strategic relationships is critical to our business. Our competitors may be
able to negotiate strategic relationships on more favorable terms than we are
able to negotiate. Many of our competitors may also have well-established
relationships with our existing and prospective customers. Increased
competition may result in reduced margins, loss of sales or decreased market
share, which in turn could harm our business, operating results and financial
condition.
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IF WE EXPERIENCE DELAYS IN DEVELOPING OUR SOFTWARE, OR IF OUR SOFTWARE
CONTAINS DEFECTS, WE COULD LOSE CUSTOMERS AND REVENUE.
We expect that the rapid evolution of Internet-based applications
and standards, as well as general technology trends such as changes in or
introductions of operating systems, will require us to adapt our software
products to remain competitive. Our products could become obsolete and
unmarketable if we are unable to adapt to new technologies or standards
Software as complex as ours often contains known and undetected
errors or performance problems. Many serious defects are frequently found
during the period immediately following introduction of new software or
enhancements to existing software. Internal quality assurance testing and
customer testing may reveal product performance issues or desirable feature
enhancements that could lead us to postpone the release of new versions of our
software. The reallocation of resources associated with any postponement could
cause delays in the development and release of future enhancements to our
currently available software. Although we attempt to resolve all errors that
we believe would be considered serious by our customers, our software is not
error-free. Undetected errors or performance problems may be discovered in the
future, and known errors that we consider minor may be considered serious by
our customers. This could result in lost revenue or delays in customer
deployment and would be detrimental to our reputation, which could harm our
business, operating results and financial condition. If our software products
experience performance problems, we may have to increase our product
development costs and divert our product development resources to address the
problems. In addition, because our customers depend on our software for their
critical systems and business functions, any interruptions could cause our
customers to initiate product liability suits against us.
WE ARE A YOUNG COMPANY AND HAVE A LIMITED OPERATING HISTORY WITH WHICH TO
EVALUATE OUR RESPECTIVE BUSINESS AND PROSPECTS.
We commenced operations in June 1996 and first shipped webMethods
B2B in June 1998. Active Software was incorporated in September 1995 and
commercially released its first software product in August 1996. We have been
operating as a combined company since August 2000. If we do not generate
sufficient cash resources from our business to fund operations, our growth
could be limited unless we are able to obtain additional capital through
equity or debt financings. If we are unable to grow as planned, our chances of
achieving and maintaining profitability could be reduced, which, in turn,
could have a material adverse effect on the market price of our common stock.
Our products are complex and generally involve significant capital
expenditures by our customers. We do not have a long history of selling our
products and will have to devote substantial resources to educate prospective
customers about the benefits of our software products. Our efforts to educate
potential customers may not result in our products achieving market
acceptance. In addition, many of these prospective customers have made
significant investments in internally developed or custom systems and would
incur significant costs in switching to third party products such as ours.
Furthermore, even if our products are effective, our target customers may not
choose them for technical, cost, support or other reasons. If the market for
our products fails to grow or grows more slowly than we anticipate, our
business could suffer.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS, AND
WE MAY NOT BE ABLE TO MANAGE OUR FUTURE GROWTH SUCCESSFULLY.
Our ability to successfully offer software and services and
implement our business plan in a rapidly evolving market requires an effective
planning and management process. Our growth could be limited if we or our
partners are unable to provide to our customers in a timely manner the
implementation services sometimes required for the successful installation and
use of our products. In addition, our management team may not be able to
achieve the rapid execution necessary to fully exploit the market for our
products and services. We have increased, and plan to continue to increase,
the scope of our operations at a rapid rate. Our total revenues have grown to
approximately $80.8 million for the six-month period ending September 30,
2000, from $60.1 million for the year ended March 31, 2000. The number of
people we employ has grown and will continue to grow substantially. As of
March 31, 2000, we had a total of 526 employees. As of September 30, 2000, we
had a total of 712 employees. Future expansion efforts could be expensive and
may strain our managerial and other resources. To manage future growth
effectively, we must maintain and enhance our financial and accounting systems
and controls, integrate new personnel, manage expanded operations and our
relationships with our customers, suppliers and partners. If we do not manage
growth properly, it could harm our business, operating results and financial
condition.
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WE MAY STILL FACE CHALLENGES THAT MAY PREVENT US FROM SUCCESSFULLY COMPLETING
THE INTEGRATION OF ACTIVE SOFTWARE AND WEBMETHODS.
The integration of webMethods and Active Software is a complex,
time-consuming and expensive process. While substantial progress has been made
in integrating webMethods and Active Software following the merger in August
2000, we may still face certain challenges which, if not met successfully, may
prevent us from successfully completing the integration of the two companies.
We may still encounter substantial difficulties, costs and delays involved in
integrating operations, including:
- inability to retain key employees over a long period of time;
- inability to market successfully an integrated line of
products and services to our customers;
- inability to successfully complete the integration of the
operations of three companies recently acquired by Active
Software; and
- diversion of management's attention and financial resources
from other ongoing business concerns.
In addition, if we do not successfully complete the integration of Active
Software, the market price of our common stock may decline. Factors that could
cause the stock price to decline include our inability to achieve the
perceived benefits of the merger as rapidly as, or to the extent, anticipated
by financial or industry analysts or the effect of the merger on our financial
results becomes inconsistent with the expectations of financial or industry
analysts.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS
TO OUR BUSINESS OR THE DISTRACTION OF OUR MANAGEMENT.
We may acquire or make investments in other complementary
businesses and technologies in the future. We may not be able to identify
other future suitable acquisition or investment candidates, and even if we
identify suitable candidates, may not be able to make these acquisitions or
investments on commercially acceptable terms, or at all. If we acquire or
invest in other companies, we may not be able to realize the benefits we
expected to achieve at the time of entering into the transaction. In any
future acquisitions, we will likely face many or all of the risks inherent in
integrating two corporate cultures, product lines, operations and businesses.
Further, we may have to incur debt or issue equity securities to pay for any
future acquisitions or investments, the issuance of which could be dilutive to
our existing stockholders.
WE MAY NOT HAVE SUFFICIENT RESOURCES AVAILABLE TO US IN THE FUTURE TO TAKE
ADVANTAGE OF CERTAIN OPPORTUNITIES.
In the future, we may not have sufficient resources available to us
to take advantage of growth, product development or marketing opportunities.
We may need to raise additional funds in the future through public or private
debt or equity financings in order to:
- take advantage of opportunities, including more rapid
international expansion or acquisitions of complementary
businesses or technologies;
- develop new products or services; or
- respond to competitive pressures.
Additional financing needed by us in the future may not be
available on terms favorable to us, if at all. If adequate funds are not
available, not available on a timely basis, or are not available on acceptable
terms, we may not be able to take advantage of opportunities, develop new
products or services or otherwise respond to unanticipated competitive
pressures. In such case, our business, operating results and financial
condition could be harmed.
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IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE A VALUABLE
ASSET, EXPERIENCE REDUCED MARKET SHARE, OR INCUR COSTLY LITIGATION TO PROTECT
OUR RIGHTS.
Our success depends, in part, upon our proprietary technology and
other intellectual property rights. To date, we have relied primarily on a
combination of copyright, trade secret, trademark and patent laws, and
nondisclosure and other contractual restrictions on copying and distribution
to protect our proprietary technology. We have two pending patent applications
for technology related to our software, but we cannot assure you that these
applications will be successful. A small number of our agreements with
customers and system integrators contain provisions regarding the rights of
third parties to obtain the source code for our software, which may limit our
ability to protect our intellectual property rights in the future.
Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products and obtain and use information that
we regard as proprietary. In addition, other parties may breach
confidentiality agreements or other protective contracts we have entered into,
and we may not be able to enforce our rights in the event of these breaches.
Furthermore, we expect that we will increase our international operations in
the future, and the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws of the United
States. Our means of protecting our intellectual property rights in the United
States or abroad may not be adequate to fully protect our intellectual
property rights. Litigation to enforce our intellectual property rights or
protect our trade secrets could result in substantial costs and may not be
successful. Any inability to protect our intellectual property rights could
seriously harm our business, operating results and financial condition.
THIRD PARTY CLAIMS THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS
COULD BE COSTLY TO DEFEND OR SETTLE.
Litigation regarding intellectual property rights is common in the
Internet and software industries. We expect that Internet technologies and
software products and services may be increasingly subject to third-party
infringement claims as the number of competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. We
may from time to time encounter disputes over rights and obligations
concerning intellectual property. Although we believe that our intellectual
property rights are sufficient to allow us to market our software without
incurring liability to third parties, third parties may bring claims of
infringement against us. Such claims may be with or without merit. Any
litigation to defend against claims of infringement or invalidity could result
in substantial costs and diversion of resources. Furthermore, a party making
such a claim could secure a judgment that requires us to pay substantial
damages. A judgment could also include an injunction or other court order that
could prevent us from selling our software. Our business, operating results
and financial condition could be harmed if any of these events occurred.
Furthermore, former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or proprietary
information to us.
In addition, we have agreed, and may agree in the future, to
indemnify certain of our customers against claims that our software infringes
upon the intellectual property rights of others. We could incur substantial
costs in defending ourself and our customers against infringement claims. In
the event of a claim of infringement, we, as well as our customers, may be
required to obtain one or more licenses from third parties. We, or our
customers, may be unable to obtain necessary licenses from third parties at a
reasonable cost, or at all. Defense of any lawsuit or failure to obtain any
such required licenses could harm our business, operating results and
financial condition.
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BECAUSE OUR PRODUCTS COULD INTERFERE WITH THE OPERATIONS OF OUR CUSTOMERS'
OTHER SOFTWARE APPLICATIONS, WE MAY BE SUBJECT TO POTENTIAL PRODUCT LIABILITY
AND WARRANTY CLAIMS BY THESE CUSTOMERS, WHICH MAY BE TIME CONSUMING, COSTLY TO
DEFEND AND MAY NOT BE ADEQUATELY COVERED BY INSURANCE.
Our software is integrated with our customers' networks and
software applications and is often used for mission critical applications such
as Internet commerce. Errors, defects or other performance problems could
result in financial or other damages to our customers. Customers could seek
damages for losses from us, which, if successful, could have a material
adverse effect on our business, operating results or financial condition. In
addition, the failure of our products to perform to customer expectations
could give rise to warranty claims.
Although our license agreements typically contain provisions
designed to limit our exposure to product liability claims, existing or future
laws or unfavorable judicial decisions could negate these limitation of
liability provisions. We have not experienced any product liability claims to
date. However, a product liability claim brought against us, even if not
successful, could be time consuming and costly to defend and could harm our
reputation. In addition, although we carry general liability insurance, our
current insurance coverage would likely be insufficient to protect us from all
liability that may be imposed under these types of claims.
BECAUSE MARKET PARTICIPANTS IN SOME MARKETS HAVE ADOPTED INDUSTRY-SPECIFIC
TECHNOLOGIES, WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES IN ORDER TO ADDRESS
SPECIFIC MARKETS.
Our strategy is to continue developing our B2Bi software to be
broadly applicable to many industries. However, in some markets, market
participants have adopted core technologies that are specific to their
markets. For example, many companies in the healthcare and financial services
industries have adopted industry-specific protocols for the interchange of
information. In order to successfully sell our products to companies in these
markets, we may need to expand or enhance our products to adapt to these
industry-specific technologies, which could be costly and require the
diversion of engineering resources.
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ITEM 3: 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 its
interest earnings on its cash deposits. These securities are subject to interest
rate risk in as much 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 September 30, 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 our
investments with high credit quality issuers and limiting the amount of credit
exposure with any one issuer.
Foreign currency exchange rate risk. Our exposure to market risk due
to fluctuations in foreign currency exchange rates relates primarily to the
intercompany balances with our UK, Netherland, French, Australian and Singapore
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.
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 10, 2000, in connection with our initial public offering,
a Registration Statement on Form S-1 (No. 333-91309) was declared effective by
the Securities and Exchange Commission, pursuant to which 4,715,000 share of our
common stock were offered and sold for our account at a price of $35.00 per
share, generating aggregate gross proceeds of $165 million for the account of
the Company. The managing underwriters were Morgan Stanley Dean Witter, Merrill
Lynch & Co., Dain Rauscher Wessels and Freidman Billings Ramsey. After
deduction approximately $11.6 million in underwriting discounts and $1.5
million in other related expenses, the net proceeds of the offering were
approximately $151.9 million. As of June 30, 2000, $151.9 million of the net
proceeds were invested in cash and cash equivalents, short-term and long-term
investments. We intend to use such proceeds for capital expenditures and for
general corporate purposes, including working capital to fund anticipated
operating losses.
On August 15, 2000, the stockholders voted to increase the number of shares
of common stock authorized under webMethods' fifth amended and restated
certificate of incorporation to 500,000,000 shares.
Item 4. Submission of Matters To a Vote of Security Holders
Stockholders of the Company holding a majority of the shares present in
person or represented by proxy at the annual meeting and entitled to vote took
the following actions:
Approved the issucance of shares of webMethods common stock in connection
with the merger of a wholly owned subsidiary of webMethods with and into Active
Software, Inc.;
Approved an amendment to the webMethods Stock Option Plan; and
Ratified PricewaterhouseCoopers LLP as the Company's independent auditors
for the year ending March 31, 2001.
In addition, a plurality of the shares present in person or represented by proxy
at the annual meeting re-elected Robert Cook, Robert Vasan and Chase Bailey as
Class I directors of the Company's board of directors; and
The holders of two-thirds of the outstanding shares of webMethods common stock
approved an amendment to the Comapny's Fifth Amended and Restated Certificate of
Incorporation;
Item 5. Other Information
On November 14, 2000, Chase Bailey, one of the Company's directors,
submitted his resignation. Mr. Bailey cited personal reasons for his
resignation. His term on the Board would have expired in 2003.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1.1 Agreement and Plan of Merger dated as of May 20, 2000, by and
among the Registrant, Wolf Acquisition, Inc. and Active Software,
Inc.**
3.1 Fifth Amended and Restated Certificate of Incorporation, as
amended**
3.2 Amended and Restated Bylaws of the Registrant*
10.1 Second Amended and Restated Investor Rights Agreement*
10.2 Stock Option Plan, as amended**
22.0 Information regarding matters Submitted to Vote of Security
Holders**
27.0 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-91309)
** Incorporated by reference to the the Registrant's definitive Proxy Statement
filed on Schedule 14A on July 21, 2000 (File No. 001-15681)
(b) Reports on Form 8-K
August 23, 2000, Item 2: Reported completion of the merger between a
wholly owned subsidiary of the Registrant and Active Software, Inc. and results
of the Registrant's annual meeting.
September 25, 2000, Item 5: Reported creation of the webMethods Ariba
Supplier Network.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000 By: /s/ Phillip Merrick
-------------------------------
Phillip Merrick
President and Chief
Executive Officer
Date: November 14, 2000 By: /s/ Mary Dridi
-------------------------------
Mary Dridi
Chief Financial
(Principal Financial
Officer)
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