##### 



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 1934FOR THE THREE MONTHS ENDED DECEMBER 31, 2003[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 1-15681   webMethods, Inc. (Exact name of Registrant as Specified in its Charter) Delaware
    
    54-1807654


(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)3930 Pender Drive, Fairfax, Virginia
(Address of Principal Executive Offices)
    
    22030
(Zip Code)
 Registrants telephone number, including area code: (703) 460-2500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section
    12(g) of the Act: Common Stock, $0.01par value Preferred Stock Purchase Rights   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 [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [x] No [  ] As of February 12, 2004, there were outstanding 52,624,711 shares of the
registrants Common Stock.




---



##### 



---

---



WEBMETHODS, INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
TABLE OF CONTENTS Part I
    
    Financial InformationItem 1
    
    Financial StatementsCondensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of December 31, 2003 and March 31, 2003(unaudited)Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) -Three and nine months ended December 31, 2003 and 2002Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months endedDecember 31, 2003 and 2002Notes to Condensed Consolidated Financial Statements (unaudited)Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of OperationsItem 3
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4
    
    Controls and ProceduresPart II
    
    Other InformationItem 1
    
    Legal ProceedingsItem 6
    
    Exhibits and Reports on Form 8-K(a) Exhibits(b) Reports on Form 8-K
 2




---



##### 



PART I FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS WEBMETHODS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) DECEMBER 31,
        
        MARCH 31,2003
        
        2003(UNAUDITED)ASSETSCurrent assets:Cash and cash equivalents
        
        $
        63,896
        
        
        $
        79,702Marketable securities
            available for sale
        
        
        57,688
        
        
        
        97,079Accounts receivable,
            net of allowance of $2,124 and $2,850
        
        
        38,301
        
        
        
        43,691Prepaid expenses
            and other current assets
        
        
        6,661
        
        
        
        7,562Total current assets
        
        
        166,546
        
        
        
        228,034Marketable securities
            available for sale
        
        
        37,054
        
        
        
        24,845Property and equipment,
            net
        
        
        9,684
        
        
        
        12,068Goodwill
        
        
        46,681
        
        
        
        29,838Intangible assets,
            net
        
        
        11,386
        
        
        
        Other assets
        
        
        9,036
        
        
        
        9,651Total assets
        
        $
        280,387
        
        
        $
        304,436LIABILITIES AND STOCKHOLDERS
            EQUITYCurrent liabilities:Accounts payable
        
        $
        10,715
        
        
        $
        9,768Accrued expenses
        
        
        13,984
        
        
        
        14,802Accrued salaries
            and commissions
        
        
        9,990
        
        
        
        11,648Deferred revenue
        
        
        36,774
        
        
        
        39,649Current portion of
            capital lease obligations
        
        
        1,192
        
        
        
        2,743Total current liabilities
        
        
        72,655
        
        
        
        78,610Capital lease obligations,
            net of current portion and other
        
        
        714
        
        
        
        567Long term deferred
            revenue
        
        
        3,167
        
        
        
        6,700Total liabilities
        
        
        76,536
        
        
        
        85,877Stockholders equity:Common stock, $0.01
            par value; 500,000,000 sharesauthorized; 52,326,725
            and 51,766,572 shares issued and outstanding
        
        
        523
        
        
        
        518Additional paid-in
            capital
        
        
        519,210
        
        
        
        515,828Deferred stock compensation
            and warrant charge
        
        
        (7,286
        )
        
        
        (9,450
        )Accumulated deficit
        
        
        (310,808
        )
        
        
        (288,449
        )Accumulated other
            comprehensive income
        
        
        2,212
        
        
        
        112Total stockholders
            equity
        
        
        203,851
        
        
        
        218,559Total liabilities
            and stockholders equity
        
        $
        280,387
        
        
        $
        304,436
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




---



##### 



WEBMETHODS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS(UNAUDITED) THREE MONTHS ENDED
    
    NINE MONTHS ENDEDDECEMBER 31,
    
    DECEMBER 31,2003
    
    2002
    
    2003
    
    2002(In thousands, except share and per share data)Revenue:License
    
    $
    25,037
    
    
    $
    33,940
    
    
    $
    68,863
    
    
    $
    89,084Professional services
    
    
    11,210
    
    
    
    7,951
    
    
    
    30,661
    
    
    
    24,737Maintenance
    
    
    13,851
    
    
    
    11,919
    
    
    
    39,188
    
    
    
    33,832Total revenue
    
    
    50,098
    
    
    
    53,810
    
    
    
    138,712
    
    
    
    147,653Cost of revenue:License:Amortization of acquired technology and
customer relationships
    
    
    599
    
    
    
    
    
    
    
    599
    
    
    
    Other license costs
    
    
    601
    
    
    
    765
    
    
    
    1,622
    
    
    
    1,425Professional services and maintenance:Stock based compensation
    
    
    12
    
    
    
    65
    
    
    
    57
    
    
    
    218Other professional services and
maintenance costs
    
    
    13,614
    
    
    
    10,409
    
    
    
    37,676
    
    
    
    31,344Total cost of revenue
    
    
    14,826
    
    
    
    11,239
    
    
    
    39,954
    
    
    
    32,987Gross profit
    
    
    35,272
    
    
    
    42,571
    
    
    
    98,758
    
    
    
    114,666Operating expenses:Sales and marketing:Stock based compensation and warrant
charge
    
    
    689
    
    
    
    896
    
    
    
    2,106
    
    
    
    2,848Other sales and marketing costs
    
    
    24,617
    
    
    
    24,309
    
    
    
    68,534
    
    
    
    71,211Research and development:Stock based compensation
    
    
    5
    
    
    
    26
    
    
    
    15
    
    
    
    85Other research and development costs
    
    
    11,446
    
    
    
    12,059
    
    
    
    33,503
    
    
    
    36,159General and administrative:Stock based compensation
    
    
    1
    
    
    
    
    
    
    
    7
    
    
    
    44Other general and administrative costs
    
    
    4,333
    
    
    
    4,758
    
    
    
    13,282
    
    
    
    13,051Restructuring costs
    
    
    1,315
    
    
    
    2,237
    
    
    
    1,315
    
    
    
    2,237In-process research and development
    
    
    4,284
    
    
    
    
    
    
    
    4,284
    
    
    
    Total operating expenses
    
    
    46,690
    
    
    
    44,285
    
    
    
    123,046
    
    
    
    125,635Operating loss
    
    
    (11,418
    )
    
    
    (1,714
    )
    
    
    (24,288
    )
    
    
    (10,969
    )Other income, net
    
    
    295
    
    
    
    975
    
    
    
    1,929
    
    
    
    3,227Impairment of equity investment in private
company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )Net loss
    
    $
    (11,123
    )
    
    $
    (739
    )
    
    $
    (22,359
    )
    
    $
    (8,742
    )Basic and diluted net loss per common share
    
    $
    (0.21
    )
    
    $
    (0.01
    )
    
    $
    (0.43
    )
    
    $
    (0.17
    )Weighted average shares used in computing
basic and diluted net loss per common share
    
    
    52,101,406
    
    
    
    51,046,792
    
    
    
    51,982,122
    
    
    
    50,821,804Comprehensive loss:Net loss
    
    $
    (11,123
    )
    
    $
    (739
    )
    
    $
    (22,359
    )
    
    $
    (8,742
    )Other comprehensive loss:Unrealized loss/(gain) on marketable
securities available for sale
    
    
    (164
    )
    
    
    128
    
    
    
    (255
    )
    
    
    (102
    )Foreign currency cumulative translation
adjustment
    
    
    1,323
    
    
    
    414
    
    
    
    2,355
    
    
    
    740Total comprehensive loss
    
    $
    (9,964
    )
    
    $
    (197
    )
    
    $
    (20,259
    )
    
    $
    (8,104
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




---



##### 



WEBMETHODS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) NINE MONTHS ENDED DECEMBER 31,2003
    
    2002(in thousands)Cash flows from operating activities:Net loss
    
    $
    (22,359
    )
    
    $
    (8,742
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    6,416
    
    
    
    7,531Amortization of acquired technology and customer relationships
    
    
    599
    
    
    
    Provision for allowance for doubtful accounts
    
    
    17
    
    
    
    214Amortization of deferred stock compensation related to
employee and non-employee stock options and non-employee
stock warrants
    
    
    2,185
    
    
    
    3,195Write off of in-process research and development
    
    
    4,284
    
    
    
    Impairment of equity investment in private company
    
    
    
    
    
    
    1,000Conversion of interest income into equity in private company
    
    
    (257
    )
    
    
    Non cash restructuring costs
    
    
    54
    
    
    
    Increase (decrease) in cash resulting from changes in assets and
liabilities, net of business acquisitions:Accounts receivable
    
    
    7,925
    
    
    
    3,392Prepaid expenses and other current assets
    
    
    1,320
    
    
    
    1,039Other non-current assets
    
    
    31
    
    
    
    910Accounts payable
    
    
    258
    
    
    
    (6,699
    )Accrued expenses
    
    
        (2,516
    )
    
    
    (1,928
    )Accrued salaries and commissions
    
    
    (1,713
    )
    
    
    (2,493
    )Accrued ESPP
    
    
    (498
    )
    
    
    (891
    )Deferred revenue
    
    
    (8,520
    )
    
    
    (10,054
    )Net cash used in operating activities
    
    
        (12,774
    )
    
    
    (13,526
    )Cash flows from investing activities:Acquisition of businesses, net of cash acquired
    
    
        (27,082
    )
    
    
    Acquisition of technology
    
    
    (5,278
    )
    
    
    Purchases of property and equipment
    
    
    (1,989
    )
    
    
    (2,459
    )Net sales (purchases) of marketable securities available for sale
    
    
    26,926
    
    
    
    (12,515
    )Proceeds from the sale of investment in private company
    
    
    1,000
    
    
    
    Net cash used in investing activities
    
    
        (6,423
    )
    
    
    (14,974
    )Cash flows from financing activities:Borrowings under leasing agreements
    
    
    
    
    
    
    2,500Payments on capital leases
    
    
    (2,789
    )
    
    
    (3,467
    )Proceeds from exercise of stock options and stock issued under
the ESPP
    
    
    3,312
    
    
    
    4,119Net cash provided by financing activities
    
    
    523
    
    
    
    3,152Effect of exchange rate on cash and cash equivalents
    
    
    2,868
    
    
    
    1,115Net decrease in cash and cash equivalents
    
    
    (15,806
    )
    
    
    (24,233
    )Cash and cash equivalents at beginning of period
    
    
    79,702
    
    
    
    98,497Cash and cash equivalents at end of period
    
    $
    63,896
    
    
    $
    74,264
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




---



##### 



WEBMETHODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  1.
    
    BASIS OF PRESENTATION The accompanying consolidated financial statements of webMethods, Inc. and
its subsidiaries (collectively, the Company) have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). This Quarterly Report on Form 10-Q should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended
March 31, 2003. Certain information and footnote disclosures which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. The information reflects all normal and recurring adjustments
that, in the opinion of management, are necessary for a fair presentation of
the financial position of the Company, and its results of operations for the
interim periods set forth herein. The results for the three and nine months
ended December 31, 2003 are not necessarily indicative of the results to be
expected for the full year or any future period. Certain amounts previously
reported have been reclassified to conform with current year presentation.  2.
    
    PRO FORMA 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. The following table summarizes the Companys results on a pro forma basis
as if it had recorded compensation expense based upon the fair value at the
grant date for awards consistent with the methodology prescribed in SFAS 123,
Accounting for Stock Based Compensation, for the three and nine months ended
December 31, 2003 and 2002 : THREE MONTHS ENDED
    NINE MONTHS ENDEDDECEMBER 31,
    DECEMBER 31,2003
    
    2002
    
    2003
    
    2002(In thousands, except per share data)Net loss, as reported
    
    $
    (11,123
    )
    
    $
    (739
    )
    
    $
    (22,359
    )
    
    $
    (8,742
    )Add: Stock-based
compensation expense
determined under intrinsic
value method
    
    
    46
    
    
    
    137
    
    
    
    201
    
    
    
    644Less: Stock based
compensation expense
determined under fair
value method
    
    
    (10,526
    )
    
    
    (11,646
    )
    
    
    (34,289
    )
    
    
    (37,194
    )Net loss, pro forma
    
    
    (21,603
    )
    
    
    (12,248
    )
    
    
    (56,447
    )
    
    
    (45,292
    )Basic and diluted net loss
per common share, as
reported
    
    
    (0.21
    )
    
    
    (0.01
    )
    
    
    (0.43
    )
    
    
    (0.17
    )Basic and diluted net loss
per common share, pro forma
    
    $
    (0.41
    )
    
    $
    (0.24
    )
    
    $
    (1.09
    )
    
    $
    (0.89
    )
 6




---



##### 



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 2.93% and 4.30% for the three and nine
months ended December 31, 2003 and 2002, respectively; expected volatility of
97% and 125% for the three and nine months ended December 31, 2003 and 2002,
respectively; expected life of 4 years, and no anticipated dividends. The weighted average fair value per share for stock option grants awarded
during the three months ended December 31, 2003 and 2002 was $8.79 and $7.45,
respectively. The weighted average fair value per share for stock option grants
awarded during the nine months ended December 31, 2003 and 2002 was $8.88 and
$8.83, respectively.  3.
    
    COMPUTATION OF NET LOSS PER SHARE The Companys net loss per share calculation for basic and diluted is
based on the weighted average number of common shares outstanding. There are no
reconciling items in the numerator and denominator of the Companys net loss
per share calculation. Employee stock options and warrants of 871,056 and
953,619 for the three months ended December 31, 2003 and 2002, respectively,
have been excluded from the net loss per share calculation because their effect
would be anti-dilutive. Employee stock options and warrants of 829,031 and
1,194,459 for the nine months ended December 31, 2003 and 2002, respectively,
have been excluded from the net loss per share calculation because their effect
would be anti-dilutive.  4.
    
    SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION NINE MONTHS ENDED DECEMBER 31,2003
    
    2002(in thousands)Cash paid during the period for interest
    
    $
    157
    
    
    $
    546Non-cash investing and financing activities:Equipment purchased under capital lease
    
    $
    1,454
    
    
    $
    1,070Conversion of debt and interest to equity in a private
company
    
    $
    1,257
    
    
    $
    Change in net unrealized gain on marketable
securities
    
    $
    (255
    )
    
    $
    102
  5.
    
    SEGMENT INFORMATION The Company conducts operations worldwide and is primarily managed on a
geographic basis with those geographic segments being the Americas,
Europe/Middle-East/Africa (EMEA), Japan and Asia Pacific regions. Revenue is
primarily attributable to the region in which the contract is signed and the
product is deployed. Information regarding geographic areas is as follows: THREE MONTHS ENDED
        
        NINE MONTHS ENDEDDECEMBER 31,
        
        DECEMBER 31,REVENUE
        
        2003
        
        2002
        
        2003
        
        2002(In thousands)Americas
        
        $
        28,956
        
        
        $
        38,847
        
        
        $
        80,370
        
        
        $
        102,112EMEA
        
        
        10,652
        
        
        
        9,463
        
        
        
        33,313
        
        
        
        26,001Japan
        
        
        5,759
        
        
        
        3,198
        
        
        
        14,499
        
        
        
        11,307Asia Pacific
        
        
        4,731
        
        
        
        2,302
        
        
        
        10,530
        
        
        
        8,233Total
        
        $
        50,098
        
        
        $
        53,810
        
        
        $
        138,712
        
        
        $
        147,653
 7




---



##### 



AS OF
        
        AS OFDECEMBER 31,
        
        MARCH 31,LONG LIVED ASSETS
        
        2003
        
        2003(In thousands)Americas
        
        $
        72,397
        
        
        $
        47,853EMEA
        
        
        2,366
        
        
        
        2,228Japan
        
        
        1,629
        
        
        
        935Asia Pacific
        
        
        395
        
        
        
        541Total
        
        $
        76,787
        
        
        $
        51,557
  6.
    
    RESTRUCTURING CHARGES In response to changing market conditions, including the decline in
information technology spending, the Company implemented restructuring plans in
the second quarter of fiscal 2002, third quarter of fiscal 2003 and third
quarter of fiscal 2004. During the quarter ended September 30, 2001, the Company recorded a
restructuring charge of $7.2 million, consisting of headcount reductions,
consolidations of facilities, and other related restructuring charges. During
the quarter ended December 31, 2002, the Company recorded a restructuring
charge of $2.2 million to further reduce headcount. In addition, in October
2003, the Company recorded a restructuring charge of $1.3 million due to an
additional headcount reduction of approximately 39 employees or 4% of the
workforce As of December 31, 2003 and March 31, 2003, respectively, $2.2 million and
$1.8 million of restructuring charges remained unpaid. The accrual primarily
relates to rent on excess facilities and severance payable related to the
October 2003 restructuring.  7.
    
    INVESTMENTS IN PRIVATE COMPANY The Company has an investment in a private company and shares a common Board
member. In September 2003, the Company received $1,000,000 as repayment of
convertible debt and converted $257,000 of interest into additional equity in
this private company. As of December 31, 2003 and March 31, 2003, the carrying
value of the investment in this private company was $1,057,000 and $1,800,000,
respectively, and the Companys equity position, excluding conversion of other
convertible debt, was less than 4%. The Company incurred royalty expense of $320,000 and $483,000 to this
private company in the three months ended December 31, 2003 and 2002,
respectively, and $1,079,000 and $824,000 in the nine months ended December 31,
2003 and 2002, respectively.  8.
    
    BUSINESS COMBINATIONS AND ACQUISITION OF TECHNOLOGY In October 2003,
    the Company completed the business acquisitions of The Mind Electric, Inc.
    (TME) and The Dante Group, Inc. as well as the asset acquisition
    of the portal solution previously known as DataChannel. TME was a leading
    provider of software for service-oriented architectures, and The Dante Group
    was a provider of business activity monitoring software. DataChannel (previously
    marketed as PortalMinder by Netegrity) was a comprehensive portal platform
    for creating secure, identity-driven portals within a scalable architecture. DataChannel The Company
    acquired the portal solution technology  and certain fixed assets from DataChannel
    for $5,278,000 in cash, including $176,000 in direct acquisition costs. The Company
    also assumed deferred revenue of $66,000 related to on-going maintenance contracts. 8




---



##### 



The acquisition
    of the existing portal solution technology of $5,243,000 was recorded as purchased technology
    and is amortized over the estimated useful life of 60 months. The technology
    is expected to complement the Companys existing technology and the incremental
    efforts required to market the portal solution product were minimal. The Company
    determined that as of the date of the technology purchase the purchased technology
    had alternative future use and had attained technological feasibility. TME and The Dante Group The acquisitions of TME and The Dante Group were accounted for under the
purchase method of accounting and, accordingly, the results of operations of
each acquisition are included in the accompanying unaudited condensed
consolidated statements of operations and comprehensive loss since the
acquisition date.
As a result of these acquisitions, the Company has recorded charges for
in-process research and development and has recorded assets related to existing
technology. In-process research and development represents in-process technology that,
as of the date of the acquisition, had not reached technological feasibility
and had no alternative future use. Based on valuation assessments, the value of
these projects was determined by estimating the projected net cash flows from
the sale of the completed products, reduced by the portion of the revenue
attributable to developed technology. The resulting cash flows were then
discounted back to their present values at appropriate discount rates.
Consideration was given to the stage of completion, complexity of the work
completed to date, the difficulty of completing the remaining development and
the costs already incurred. The amounts allocated to the acquired in-process
research and development were immediately expensed in the period the
acquisition was completed. Existing
    technology represents purchased technology for which development had been
    completed as of the date of acquisition. This amount was determined using the
    income approach. This method consisted of estimating future net cash flows
    attributable to existing technology for a discrete projection period and discounting
    the net cash flows to their present value. The existing technology will be
    amortized over its expected useful life of 60 months. The aggregate purchase price for these acquisitions, including $593,000 in
direct acquisition costs, has been allocated to the assets acquired
and liabilities assumed based upon their estimated fair values at the
date of acquisition as follows (in thousands): The Dante Group
    
    TME
    
    TotalCash and cash equivalents
    
    $
    90
    
    
    $
    3
    
    
    $
    93Accounts receivable
    
    
    69
    
    
    
    116
    
    
    
    185Property and equipment
    
    
    146
    
    
    
    31
    
    
    
    177Other assets
    
    
    93
    
    
    
    7
    
    
    
    100Accounts payable
    
    
    (32
    )
    
    
    (580
    )
    
    
    (612
    )Accrued expenses and other liabilities
    
    
        (231
    )
    
    
        (230
    )
    
    
        (461
    )Deferred revenue
    
    
    (138
    )
    
    
    (38
    )
    
    
    (176
    )In-process research and development
    
    
    3,138
    
    
    
    1,146
    
    
    
    4,284Existing technology
    
    
    3,530
    
    
    
    2,379
    
    
    
    5,909Customer relationships
    
    
    392
    
    
    
    441
    
    
    
    833Goodwill
    
    
    12,152
    
    
    
    4,691
    
    
    
    16,843Total cash purchase price
    
    $
        19,209
    
    
    $
        7,966
    
    
    $
        27,175
 We determined the valuation of the identifiable intangible assets using
the income approach and a valuation report from an independent appraiser. The
amounts allocated to the identifiable intangible assets were determined through
established valuation techniques accepted in the technology and software
industries. The Company is in the process of finalizing the
valuations of the businesses, thus the allocation of the purchase price
is preliminary. 9




---



##### 



The income approach, which includes an analysis of the cash flows and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the other identifiable intangible assets. Key assumptions
included discount factors ranging from 26% to 31%, and estimates of revenue
growth, maintenance renewal rates, cost of sales, operating expenses and taxes.
The purchase price in excess of the net liabilities assumed and the
identifiable intangible assets acquired was allocated to goodwill. The following unaudited pro forma supplemental table presents selected
financial information as though the purchases of TME and The Dante Group,
which may be material acquisitions for this purpose, had been completed at the beginning of the periods
presented. The unaudited pro forma data gives effect to actual operating
results prior to the acquisition, adjusted to include the pro forma effect of
amortization of intangibles, reduction in interest income on cash paid for the
acquisitions and the elimination of the charge for acquired in-process research
and development.
The unaudited pro forma data for the three and nine months ended December 31, 2003,
includes a $1.4 million nonrecurring compensation charge for accelerated vesting of options of The Dante Group
which occurred just prior to the transaction.
These unaudited pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisitions occurred as of the beginning of the periods presented or that may
be obtained in the future (in thousands, except per share data): THREE MONTHS ENDED
        
        NINE MONTHS ENDEDDECEMBER 31,
        
        DECEMBER 31,(UNAUDITED)
        
        (UNAUDITED)2003
        
        2002
        
        2003
        
        2002Pro forma net revenue
        
        $
        50,098
        
        
        $
        54,557
        
        
        $
        139,254
        
        
        $
        148,957Pro forma net loss
        
        
        (9,211
        )
        
        
        (2,011
        )
        
        
        (24,521
        )
        
        
        (12,094
        )Pro forma net loss
            per basic and diluted share
        
        $
        (0.18
        )
        
        $
        (0.04
        )
        
        $
        (0.47
        )
        
        $
        (0.24
        )
  9.
    
    GOODWILL AND INTANGIBLE ASSETS Goodwill The change in carrying amount of goodwill for the nine months ended
December 31, 2003, is as follows (in thousands): Balance as of March 31, 2003
    
    $
    29,838Additions
    
    
    16,843Balance as of December 31, 2003
    
    $
    46,681
 Intangible Assets The components of identifiable intangible assets are as follows (in
thousands): AS OF DECEMBER 31, 2003Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    AmountExisting
technology
    
    $
    11,152
    
    
    $
    (557
    )
    
    $
    10,595Customer relationships
    
    
    833
    
    
    
    (42
    )
    
    
    791Total intangibles
    
    $
    11,985
    
    
    $
    (599
    )
    
    $
    11,386
 10




---



##### 



The Company had no intangible assets as of March 31, 2003. During the three
and nine months ended December 31, 2003, the Company had amortization of
$599,000 related to its intangible assets. The Company is amortizing
intangible assets using the straight line method over a 60 month period. As
of December 31, 2003, the estimated intangibles amortization expense for
each fiscal year ended March 31 is as follows (in thousands): 2004 (remaining three months)
    
    $
    5992005
    
    
    2,3962006
    
    
    2,3962007
    
    
    2,3962008
    
    
    2,3962009
    
    
    1,203$
    11,386
  10.
    
    SUBSEQUENT EVENT In February 2004, the Company announced and implemented a restructuring
plan designed to further align its cost structure with expected
revenue and business requirements.
Actions taken included a reduction in the Companys employee workforce by
approximately 20 positions and the consolidation of our Berkeley, California
office into our Sunnyvale, California office. The Company is still
evaluating the total costs associated with this restructuring. ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Examples of
forward-looking statements include, but are not limited to, (i) projections of
financial performance or financial results, including items such as revenue,
costs or expense, cost savings, margins, income or loss, earnings or loss per
share, capital expenditures, cash requirements or other financial items or
metrics, the impact of expenses on levels of cash and marketable securities,
sufficiency of working capital and projections regarding the market for the
Companys current and anticipated software offerings, (ii) statements of the
plans or objectives of webMethods, Inc. or its management, including the
development or enhancement of software, dates of availability of new products
and new releases of existing products, competitive strategies and the impact of
competition, development and continuation of strategic partnerships and
alliances, contributions to future financial performance of any of our new or
existing products, technologies or businesses, contribution to our financial
performance by business partners, implementation and effect of sales and
marketing initiatives by webMethods, strength of results from geographic or
specific vertical markets and allocation of resources to those markets,
predictions of the timing and type of customer or market reaction to those
initiatives or our product offerings, the ability to control expenses or
achieve projected expense levels, future hiring, webMethods business strategy
and the execution on it and actions by customers and competitors, (iii)
statements of future economic performance, economic conditions or the impact of
recent changes in accounting standards and (iv) assumptions underlying any of
the foregoing. In some instances, forward-looking statements can be identified
by the use of the words believes, anticipates, plans, expects,
intends, may, will, should, estimates, predicts, continue, the
negative thereof or similar expressions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, our
expectations or the forward-looking statements could prove to be incorrect, and
actual results could differ materially from those indicated by the
forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to risks and
uncertainties, including (but not limited to) those discussed in Item 1 of our
Form 10-K for the year ended March 31, 2003 under the caption Factors That May
Affect Future Operating Results and under this Item under the caption Factors
That May Affect Future Operating Results. Achieving the future results or
accomplishments described or projected in forward-looking statements depends
upon events or developments that are often beyond our ability to control. All
forward-looking statements and all reasons why actual results may differ that
are included in this report are made as of the date of this report, and
webMethods disclaims any obligation to publicly update or revise such
forward-looking statements or reasons why actual results may differ. OVERVIEW Background We are a leading provider of a comprehensive set of products so that our
customers can build a Web services infrastructure. Our software products and
services provide standards-based, non-proprietary and vendor-neutral solutions
that enable customers to run, measure and optimize their business. We deliver 11




---



##### 



software products and provide related services that give organizations the
ability, seamlessly and in real-time, to integrate disparate information
resources, to connect customers, vendors and business partners with the
organization and its employees and to run, manage and optimize the connected
information resources, data, business processes and human workflows. By
deploying webMethods software, customers can reduce costs, achieve faster time
to value, create new revenue opportunities, strengthen relationships with
customers, vendors and business partners, increase supply chain efficiencies
and analyze and optimize business processes. In October 2003, the Company completed the business and asset acquisitions
of The Mind Electric, Inc. (TME), The Dante Group and the portal solution
previously known as DataChannel. TME was a leading provider of software for the
service-oriented architectures, and The Dante Group was a provider of business
activity monitoring software. The aggregate acquisition cost for these three
acquisitions was approximately $32.4 million in cash. Overview of Third Quarter of Fiscal 2004 Our net loss of $11.1 million for the quarter ended December 31, 2003
increased by approximately $10.4 million from a net loss of $739,000 in the
quarter ended December 31, 2002. The increase in net loss is due primarily to a
decrease in revenue of approximately $3.7 million, an increase in cost of
revenue of $3.6 million, an increase in operating expenses of $2.4 million and
a decrease in net other income of approximately $680,000. The $2.4 million
increase in operating expenses includes a $4.3 million in-process research and
development charge related to the acquisitions of TME and The Dante Group which
occurred during the quarter ended December 31, 2003, partially offset by a
decrease of $922,000 in restructuring costs. Our total revenue decreased to $50.1 million for the quarter ended
December 31, 2003 from $53.8 million for the quarter ended December 31, 2002.
Our revenue decrease resulted from a decline in license revenue of $8.9
million, partially offset by a $3.3 million increase in professional services
revenue and a $1.9 million increase in maintenance revenue in the quarter ended
December 31, 2003 compared to the same quarter in the prior year. The 26%
decrease in license revenue was attributable to the continued uncertainty in
information technology spending, the residual impact from our quota bearing
sales headcount in the Americas being down approximately 10% at the beginning
of the first quarter of our fiscal year 2004, and
lower-than-anticipated sequential growth in our Americas license sales in our quarter ended December 31, 2003.
During the third quarter of our fiscal year 2004, many enterprises
headquartered in the Americas continued to be cautious, and information
technology purchases were subjected to rigorous internal reviews and approvals
which often resulted in longer sales cycles, the postponement of information
technology projects, customers placing smaller orders, or difficulty in closing
large deals. In October 2003, the Company completed the business acquisitions of TME
and The Dante Group as well as the asset acquisition of the portal solution
previously known as DataChannel. TME was a leading provider of software for
service-oriented architectures, and The Dante Group was a provider of
business activity monitoring software. DataChannel (previously marketed as
PortalMinder by Netegrity) was a comprehensive portal platform for creating
secure, identity-driven portals within a scalable architecture. We sell our software and services to Global 2000 customers through our
direct sales force augmented by system integrators, our relationships with
application software partners, and to a lesser extent, resellers. We license
our software to customers primarily on a perpetual basis. As of December 31,
2003, we had over 1,050 customers, compared to over 900 customers as of
December 31, 2002. We believe one of our competitive differentiators is our strong
partnership with application software companies and system integrators. Under
our partnerships with application software vendors, the partner may resell or
embed our software with their applications under limited use licenses for a
license or royalty fee. Leading enterprise application software vendors with
whom we have strong relationships include AMS, i2 Technologies, Informatica,
Peoplesoft and Siebel Systems. Our application and system integrator partners
actively assist us in selling the full webMethods Integration Platform to their
customers, making us the logical choice for enterprise-wide integration
initiatives. We believe our partners influenced, directly or indirectly, a
substantial portion of our license revenue during the third quarter of our
fiscal year 2004, and 12




---



##### 



we expect this influence to continue. Under certain partnership arrangements,
we may share license fees derived from joint selling opportunities with our
partner. In other partnership arrangements, we may pay a sales assistance fee
to a partner who performs or assists in certain sales activities, and that fee
usually is paid once payment of license fees from the joint customer is
received. During the second quarter of our fiscal year 2004, Peoplesoft chose
our technology to embed within their AppConnect product suite, which will allow
our technology to be used for a number of complex business process integration
requirements, and AMS chose to embed webMethods Workflow into twelve of their
different applications targeted at the United States military and defense
market. We believe our strong focus and track record of ensuring that our software
is successfully put into production (production event) is a strong
competitive advantage and differentiator. During the third quarter of our
fiscal year 2004, our global customer services group reported and documented
over 130 separate production events as compared to over 85 such events in the
prior year period. Ensuring that our customers successfully implement our
software in a timely manner enables them to achieve a greater return on their
investment and, in many cases, encourages them to purchase additional software
for other integration projects and serve as a referenceable customer for us in
our future sales efforts. We believe the software integration and web services infrastructure market
will continue to provide opportunity for long-term growth. Our focus on
customer success and satisfaction has resulted in an increasing number of
referenceable customers and productions events. Approximately 65% of our
bookings in the third quarter of our fiscal year 2004 came from our existing
customers. We strive to provide the most comprehensive integration platform
available, and will continue to invest to ensure an advantageous positioning
relative to our competition, resulting in recognized industry and technology
leadership and increasing market share. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosures.
We evaluate our estimates, on an on-going basis, including those related to
allowances for bad debts, investments, intangible assets, income taxes,
contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our condensed
consolidated financial statements. Revenue Recognition We enter into arrangements, which may include the sale of licenses of our
software, professional services and maintenance or various combinations of each
element. We recognize revenue based on Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended, and modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions. SOP 98-9 modified SOP 97-2 by requiring revenue to be
recognized using the residual method if certain conditions are met. Revenue
is recognized based on the residual method when an agreement has been signed by
both parties, the fees are fixed or determinable, collection of the fees is
probable, delivery of the product has occurred, vendor specific objective
evidence of fair value exists for any undelivered element, and no other
significant obligations remain. Revenue allocated to the undelivered elements
is deferred using vendor-specific objective evidence of fair value of the
elements and the remaining portion of the fee is allocated to the delivered
elements (generally the software license). See Note 2 of the Consolidated
Financial Statements included in the Companys Annual Report on Form 10-K for
the year ended March 31, 2003 for a more comprehensive discussion of our
revenue recognition policies. Judgments we
make regarding these items, including collection risk, can materially impact
the timing of recognition of license revenue. 13




---



##### 



Policies related to revenue recognition require difficult judgments on
complex matters that are often subject to multiple sources of authoritative
guidance. These sources may publish new authoritative guidance which might
impact current revenue recognition policies. We continue to evaluate our
revenue recognition policies as new authoritative interpretations and guidance
are published, and where appropriate, may modify our revenue recognition
policies. Application of our revenue recognition policy requires a review of
our license and professional services agreements with customers and may require
management to exercise judgment in evaluating whether delivery has occurred,
payments are fixed and determinable, collection is probable, and where
applicable, if vendor-specific objective evidence of fair value exists for
undelivered elements of the contract. In the event judgment in the application
of our revenue recognition policies is incorrect, the revenue recognized by
webMethods could be impacted. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses which
may result from the inability of our customers to make required payments to us.
These allowances are established through analysis of the credit-worthiness of
each customer with a receivable balance, determined by credit reports from
third parties, published or publicly available financial information, customers
specific experience including payment practices and history, inquiries, and
other financial information from our customers. The use of different estimates
or assumptions could produce materially different allowance balances. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Business Combinations We are required to allocate the purchase price of acquired companies to the
tangible and intangible assets acquired, liabilities assumed, as well as
IPR&D based on their estimated fair values. We engaged independent
third-party appraisal firms to assist us in determining the fair values of
assets acquired and liabilities assumed. Such a valuation requires management
to make significant estimates and assumptions, especially with respect to
intangible assets. Critical estimates in valuing certain of the intangible assets include but
are not limited to: future expected cash flows from license sales,
maintenance agreements, consulting contracts, customer contracts, and
acquired developed technologies and IPR&D projects, and discount rates.
Managements estimates of fair value are based upon assumptions believed
to be reasonable, but which are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances may occur. Other estimates associated with the accounting for these acquisitions may
change as additional information becomes available regarding the assets
acquired and liabilities assumed. Goodwill and Intangibles Assets We record goodwill and intangible assets when we acquire other companies.
The allocation of acquisition cost to intangible assets and goodwill involves
the extensive use of managements estimates and assumptions, and the result of
the allocation process can have a significant impact on our future operating
results. Financial Accounting Standards Board No. 142, Goodwill and Other
Intangible Assets (SFAS 142), which was issued during fiscal year 2002 and
adopted by us on April 1, 2002, eliminated the amortization of goodwill and
indefinite lived intangible assets. Intangible assets with finite lives are
amortized over their useful lives while goodwill and indefinite lived assets
are not amortized under SFAS 142, but are periodically tested for impairment.
In accordance with SFAS 142, all of our goodwill is associated with our
corporate reporting unit, as we do not have multiple reporting units. On an
annual basis, we will evaluate whether an impairment of the goodwill may exist.
Goodwill is tested for impairment using a two-step process. The first step is
to identify a potential impairment and the second step measures the amount of
the impairment loss, if any. Goodwill is deemed to be impaired if the carrying
amount of the asset exceeds its estimated fair value. Acquired In-process
Research and Development Costs to acquire in-process research and development (IPR&D)
technologies which have no alternative future use and which have not
reached technological feasibility at the date of acquisition are
expensed as incurred (see Note 8, The Mind Electric and Dante Group
acquisitions). Foreign Currency Effects The functional currency for our foreign operations is the local currency.
The financial statements of foreign subsidiaries have been translated into
United States dollars. Asset and liability accounts have been translated using
the exchange rate in effect at the balance sheet date. Revenue and expense
accounts have been translated using the average exchange rate for the period.
The gains and losses associated with the translation of the financial
statements resulting from the changes in exchange rates from period to period
have been reported in other comprehensive income or loss. To the extent assets
and liabilities of the foreign operations are realized or the foreign
operations are expected to pay back the intercompany debt in the foreseeable
future, amounts previously reported in other comprehensive income or loss would
be included in net income or loss in the period in which the transaction
occurs. Transaction gains or losses are included in net income or loss in the
period in which they occur. 14




---



##### 



Accounting for Income Taxes We have recorded a tax valuation allowance to reduce our deferred tax
assets to the amount that is expected to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the
future in excess of its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made.
Likewise, should we determine that we would not be able to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made. Restructuring Costs We have recorded restructuring costs to align our cost structure with
changing market conditions. These restructuring plans resulted in a reduction
in headcount and the consolidation of facilities through the closing of excess
offices. Our restructuring costs included accruals for the estimated loss on
facilities that we intend to sublease based on estimates of the timing and
amount of sublease income. We reassess this liability each period based in
market conditions. Revisions to our estimates of this liability could
materially impact our operating results and financial position in future
periods if anticipated events and key assumptions, such as the timing and
amounts of sublease rental income, either change or do not materialize. RESULTS OF OPERATIONS The following table summarizes the results of our operations for the three
and nine months ended December 31, 2003 and 2002 (all percentages are
calculated using the underlying data in thousands): Three Months Ended
        
        Nine Months EndedDecember 31,
        
        December 31,
        
        Percentage
        
        December 31,
        
        December 31,
        
        Percentage2003
        
        2002
        
        Change
        
        2003
        
        2002
        
        Change($ in thousands)Total revenue
        
        $
        50,098
        
        
        $
        53,810
        
        
        
        (7)
        %
        
        $
        138,712
        
        
        $
        147,653
        
        
        
        (6)
        %Gross profit
        
        
        35,272
        
        
        
        42,571
        
        
        
        (17)
        %
        
        
        98,758
        
        
        
        114,666
        
        
        
        (14)
        %% of total revenue
        
        
        70
        %
        
        
        79
        %
        
        
        
        
        
        
        71
        %
        
        
        78
        %Total operating expenses
        
        
        46,690
        
        
        
        44,285
        
        
        
        5
        %
        
        
        123,046
        
        
        
        125,635
        
        
        
        (2)
        %% of total revenue
        
        
        93
        %
        
        
        82
        %
        
        
        
        
        
        
        89
        %
        
        
        85
        %Operating loss
        
        
        (11,418
        )
        
        
        (1,714
        )
        
        
        566
        %
        
        
        (24,288
        )
        
        
        (10,969
        )
        
        
        121
        %% of total revenue
        
        
        (23)
        %
        
        
        (3)
        %
        
        
        
        
        
        
        (18)
        %
        
        
        (7)
        %Net loss
        
        $
        (11,123
        )
        
        $
        (739
        )
        
        
        1405
        %
        
        $
        (22,359
        )
        
        $
        (8,742
        )
        
        
        156
        %% of total revenue
        
        
        (22)
        %
        
        
        (1)
        %
        
        
        
        
        
        
        (16)
        %
        
        
        (6)
        %
 15




---



##### 



In the nine months ended December 31, 2003, total revenue decreased by 6%,
to $138.7 million from $147.7 million for the nine months ended December 31,
2002 due primarily to a decrease in license revenue, which was partially offset
by an increase in maintenance and professional services revenue. During the
quarter ended December 31, 2003, total revenue decreased $3.7 million, or 7%,
compared to the quarter ended December 31, 2002, due primarily to a decrease in
license revenue which was partially offset by an increase in maintenance and
professional services revenue. The decreases in license revenue in the quarter
and nine months ended December 31, 2003, reflect the continued
uncertainty in information
technology spending, the residual impact of our quota-bearing sales
representatives in the Americas being down approximately 10% at the beginning of our
fiscal year 2004 and lower-than-anticipated sequential growth in our
Americas license sales in the second and third quarters of our
fiscal year 2004. Our net loss of $22.4 million for the nine months ended December 31, 2003
increased 156% from a net loss of $8.7 million in the nine months ended
December 31, 2002, due primarily to a decrease in total revenue of $8.9
million, an increase in the cost of revenue of $7.0 million and a $1.3 million
decrease in net other income. Those items were partially offset by a $2.6
million decrease in operating expenses and a $1.0 million impairment charge of
an equity investment in a private company. During the quarter ended December
31, 2003, our net loss increased by $10.4 million, or 1405%, compared to the
quarter ended December 31, 2002, due primarily to a decrease in total revenue of
$3.7 million, an increase in the cost of revenue of $3.6 million, an increase
in operating expenses of $2.4 million and a $680,000 decrease in net other
income. Operating expenses in the quarter and nine months ended
December 31, 2003 included a $4.3 million in-process research &
development charge. Revenue The following table summarizes our revenue for the three and nine months
ended December 31, 2003 and 2002: Three Months Ended
        
        Nine Months EndedDecember 31,
        
        December 31,
        
        Percentage
        
        December 31,
        
        December 31,
        
        Percentage2003
        
        2002
        
        Change
        
        2003
        
        2002
        
        Change($ in thousands)License
        
        $
        25,037
        
        
        $
        33,940
        
        
        
        (26)
        %
        
        $
        68,863
        
        
        $
        89,084
        
        
        
        (23
        )%Professional services
        
        
        11,210
        
        
        
        7,951
        
        
        
        41
        %
        
        
        30,661
        
        
        
        24,737
        
        
        
        24
        %Maintenance
        
        
        13,851
        
        
        
        11,919
        
        
        
        16
        %
        
        
        39,188
        
        
        
        33,832
        
        
        
        16
        %Total revenue
        
        $
        50,098
        
        
        $
        53,810
        
        
        
        (7)
        %
        
        $
        138,712
        
        
        $
        147,653
        
        
        
        (6
        )%
 The following table summarizes our net revenue by geographic region for
the three and nine months ended December 31, 2003 and 2002: Three Months Ended
        
        Nine Months EndedDecember 31,
        
        December 31,
        
        Percentage
        
        December 31,
        
        December 31,
        
        Percentage2003
        
        2002
        
        Change
        
        2003
        
        2002
        
        Change($ in thousands)Americas
        
        $
        28,956
        
        
        $
        38,847
        
        
        
        (25)
        %
        
        $
        80,370
        
        
        $
        102,112
        
        
        
        (21)
        %EMEA
        
        
        10,652
        
        
        
        9,463
        
        
        
        13
        %
        
        
        33,313
        
        
        
        26,001
        
        
        
        28
        %Japan
        
        
        5,759
        
        
        
        3,198
        
        
        
        80
        %
        
        
        14,499
        
        
        
        11,307
        
        
        
        28
        %Asia Pacific
        
        
        4,731
        
        
        
        2,302
        
        
        
        106
        %
        
        
        10,530
        
        
        
        8,233
        
        
        
        28
        %Total Revenue
        
        $
        50,098
        
        
        $
        53,810
        
        
        
        (7)
        %
        
        $
        138,712
        
        
        $
        147,653
        
        
        
        (6)
        %
 16




---



##### 



Total revenue for the quarter and nine months ended December 31, 2003
decreased 7% and 6%, respectively, compared to the quarter and nine months
ended December 31, 2002. These decreases were due primarily to decreases in
license revenue, which were partially offset by increases in maintenance and
professional services revenue. The decreases in total revenue in the quarter
and nine months ended December 31, 2003, as well as the decreases in license
revenue in those periods, were due primarily to less-than-anticipated
sequential growth in Americas license sales in the second and third
quarters of our fiscal 2004, which were impacted by factors discussed in the
following paragraph. For the quarter and nine months ended December 31, 2003,
revenue from EMEA, Asia Pacific and Japan (international revenue) increased
41% and 28%, respectively, compared to the quarter and nine months ended
December 31, 2002. The increase in international revenue was principally due to
our increased focus in the EMEA, Japan and Asia Pacific regions that has
resulted in an increased acceptance of our software, an increase in the number
of larger deals and an increased customer base. License revenue for the quarter and nine months ended December 31, 2003,
decreased 26% and 23%, respectively, compared to the quarter and nine months
ended December 31, 2002. These decreases reflect the continued uncertainty in
information technology spending, the impact of our quota bearing
sales representatives in the Americas being down approximately 10% at the beginning
of our fiscal year 2004 and lower-than-anticipated growth in our
Americas license sales in the second and third quarters of our fiscal year 2004.
During the first nine months of our fiscal year 2004,
many enterprises headquartered in the Americas remained cautious, and
information technology purchases were subjected to rigorous internal reviews
and approvals that often resulted in longer sales cycles, the postponement of
information technology projects, customers placing smaller orders, or
difficulty in closing large deals. For the quarter and nine months ended December 31, 2003, professional
services revenue increased by 41% and 24%, respectively, compared to the
quarter and nine months ended December 31, 2002. These increases in
professional services revenue are attributable primarily to an increase in the
volume and/or size of customer engagements and the increased use of
subcontractors. For both the quarter and nine months ended December 31, 2003, maintenance
revenue increased by 16% compared to the quarter and nine months ended December
31, 2002. These increases in maintenance revenue were a result of new licenses
of our software and the cumulative effect of agreements for post-contract
maintenance and support, which are recognized as revenue ratably over the term
of the agreement. Gross Profit The following table summarizes the Companys gross profit by type of
revenue, excluding stock based compensation, for three and nine months ended
December 31, 2003 and 2002: Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002License margin
    
    
    95
    %
    
    
    98
    %
    
    
    97
    %
    
    
    98
    %Professional services and maintenance margin
    
    
    46
    %
    
    
    48
    %
    
    
    46
    %
    
    
    46
    %Gross margin
    
    
    70
    %
    
    
    79
    %
    
    
    71
    %
    
    
    78
    %
 17




---



##### 



Total
gross margin, excluding stock based compensation, was 70% and 71% for
the three and nine months ended December 31, 2003,
respectively. Total gross margin,
excluding stock based compensation, was 79% and 78% for the three and nine
months ended December 31, 2002, respectively. This decrease year over year was due to the
higher contribution of professional services revenue as a percentage of total
revenue and the resulting increase of professional services costs as well as
the additional amortization of existing technology and customer relationships
relating to the business acquisitions of TME and the Dante Group, which
occurred during the quarter ended December 31, 2003. Our cost of license revenue consists of royalties for products licensed
from third parties as well as the amortization of existing technology and
customer relationships relating to the business acquisitions of TME and The
Dante Group, which occurred during the quarter ended December 31, 2003. We
recorded $599,000 of amortization of acquired intangibles for the three and
nine months ended December 31, 2003. Our gross margin on license revenue,
excluding stock based compensation, was 95% and 98% for the quarters ended
December 31, 2003 and 2002, respectively, and 97% and 98% for the nine months
ended December 31, 2003 and 2002, respectively. The decrease in license gross
margin for the three month period and year over year was due to an increase in
amortization of existing technology and customer relationships, an
increase in the cost of licensing of royalty bearing products and a
decrease in license revenue. Our cost of professional services and maintenance consists of costs
related to internal professional services and support personnel, and
subcontractors hired to provide implementation and support services. Our gross
margin on professional services and maintenance, excluding stock based
compensation, was 46% and 48% for the quarters ended December 31, 2003 and
2002, respectively, and 46% for the nine months ended December 31, 2003 and 2002. The increase in our gross margin on professional services for
the three month period ended December 31, 2003 compared to the three month
period ended December 31, 2002, was due to the increased use of subcontractors
which was partially offset by decreased personnel costs due primarily to a
reduction in incentive compensation. Operating Expenses The following table presents certain information regarding the Companys
operating expenses during the three and nine months ended December 31, 2003 and
2002: Three Months Ended
        
        Nine Months EndedDecember 31,
        
        December 31,
        
        Percentage
        
        December 31,
        
        December 31,
        Percentage($ in thousands)
        
        2003
        
        2002
        
        Change
        
        2003
        
        2002
        Change($ in thousands)Operating expenses:Sales and marketing*
        
        $
        24,617
        
        
        $
        24,309
        
        
        
        1
        %
        
        $
        68,534
        
        
        $
        71,211
        
        
        
        (4)
        %% of Total revenue
        
        
        49
        %
        
        
        45
        %
        
        
        
        
        
        
        49
        %
        
        
        48
        %Research and development*
        
        
        11,446
        
        
        
        12,059
        
        
        
        (5)
        %
        
        
        33,503
        
        
        
        36,159
        
        
        
        (7)
        %% of Total revenue
        
        
        23
        %
        
        
        22
        %
        
        
        
        
        
        
        24
        %
        
        
        24
        %General and administrative*
        
        
        4,333
        
        
        
        4,758
        
        
        
        (9)
        %
        
        
        13,282
        
        
        
        13,051
        
        
        
        2
        %% of Total revenue
        
        
        9
        %
        
        
        9
        %
        
        
        
        
        
        
        10
        %
        
        
        9
        %Stock based compensation
            and warrant charge
        
        
        695
        
        
        
        922
        
        
        
        (25)
        %
        
        
        2,128
        
        
        
        2,977
        
        
        
        (29)
        %% of Total revenue
        
        
        1
        %
        
        
        2
        %
        
        
        
        
        
        
        2
        %
        
        
        2
        %Restructuring costs
        
        
        1,315
        
        
        
        2,237
        
        
        
        (41)
        %
        
        
        1,315
        
        
        
        2,237
        
        
        
        (41)
        %% of Total revenue
        
        
        3
        %
        
        
        4
        %
        
        
        
        
        
        
        1
        %
        
        
        2
        %In-process research
            and development
        
        
        4,284
        
        
        
        
        
        
        
        
        
        
        
        4,284
        
        
        
        % of Total revenue
        
        
        9
        %
        
        
        
        
        
        
        
        
        
        
        3
        %
        
        
        Total operating expenses
        
        $
        46,690
        
        
        $
        44,285
        
        
        
        5
        %
        
        $
        123,046
        
        
        $
        125,635
        
        
        
        (2)
        %% of Total revenue
        
        
        93
        %
        
        
        82
        %
        
        
        
        
        
        
        89
        %
        
        
        85
        %
 *
    
    Excludes stock based compensation and warrant charge, as applicable. 18




---



##### 



Our operating expenses are primarily classified as sales and marketing,
research and development and general and administrative. Each category includes
related expenses for compensation, employee benefits, recruiting, professional
fees, travel, communications and allocated facilities and overhead costs. Our
sales and marketing expenses also include expenses which are specific to the
sales and marketing activities, such as commissions, trade shows, public
relations, business development costs, promotional costs and marketing
collateral. Also included in our operating expenses is the amortization of
deferred stock compensation and warrant charge, restructuring costs and
in-process research and development. Sales and marketing expenses, excluding stock based compensation and
warrant charge, increased by 1% or approximately $308,000 in the quarter ended December 31,
2003 compared to the quarter ended December 31, 2002. This increase was
primarily due to the following expense changes: increased investment in our
annual Integration World customer conference; an increase in travel expense
which we believe is due in part to increased sales activity related to the
recent acquisitions; and an increase in external consulting fees. These
increases were offset by a decrease in incentive compensation and commissions
due to lower sales bookings. Sales and marketing expenses, excluding stock
based compensation and warrant charge, decreased by 4%, or
$2.7 million, for the
nine months ended December 31, 2003 compared to the nine months ended December
31, 2002. This decrease was primarily due to the following: a decrease in
incentive compensation, commissions and referral fees due to lower sales
bookings and a decrease in travel expenses due to continued focus on
travel cost containment.
These decreases were partially offset by the following: increased investment in
our annual Integration World customer conference and an increase in external
consulting expense. Sales and marketing expenses, excluding stock based compensation
and warrant charge, as a percentage of total revenue was 49% and 48% in the
nine months ended December 31, 2003 and 2002, respectively and 49% and 45% in
the quarters ended December 31, 2003 and 2002, respectively. Research and development expenses, excluding stock based compensation,
decreased by 5% and 7% in the quarter and nine months ended December 31, 2003,
respectively, compared to the quarter and nine months ended December 31, 2002.
These decreases were primarily due to a reduction in incentive
compensation costs and contractor costs. Research and development expense,
excluding stock based compensation, as a percentage of total revenue was 24% in
each of the nine months ended December 31, 2003 and 2002, and 23% and 22% in
the quarters ended December 31, 2003 and 2002, respectively. General and administrative expenses, excluding stock based compensation,
decreased by 9%, or $425,000 in the quarter ended December 31, 2003 compared to
the quarter ended December 31, 2002. This decrease was primarily due to
decreases in business related taxes, professional fees and bad
debt expense. These decreases were offset by an increase in business
insurance,
and to a lesser extent, travel and recruiting costs. General and
administrative expenses, excluding stock based compensation, increased by 2%,
or $231,000, for the nine months ended December 31, 2003 compared to the nine
months ended December 31, 2002. This increase was primarily due to
increases in business insurance, recruiting, personnel and
professional fees. These increases were offset by decreases in business related
taxes, bad debt expense and travel costs. General and administrative expense,
excluding stock based compensation, as a percentage of total revenue was 10%
and 9% in the nine months ended December 31, 2003 and 2002, respectively, and
9% in each of the quarters ended December 31, 2003 and 2002. Stock
based compensation and warrant charges were $2.2 million and $3.2
million during the nine months ended December 31, 2003 and 2002, respectively,
of which $57,000 and $218,000, respectively, was included in cost of sales.
During the quarters ended December 31, 2003 and 2002, stock based compensation
and warrant charges were $707,000 and $987,000, respectively, of which $12,000
and $65,000, respectively, was included in cost of sales. Deferred stock based
compensation and warrant charges were recorded for the following transactions: 19




---



##### 



(i) The issuance of restricted stock in connection with certain
acquisitions during 2000 and the grant of stock options to employees and
non-employee directors at exercise prices less than the deemed fair value of
our common stock at the date of the grant; and (ii) In March 2001, we entered into an OEM/Reseller agreement with i2
Technologies (i2) and issued a warrant that, as amended, permits i2 to purchase
710,000 shares of our common stock at an exercise price of $28.70 per share.
The fair value of the warrant, based on the Black-Scholes valuation model was
$23.6 million on the date of issuance which has been recorded as a deferred
warrant charge. As part of the amended agreement, i2 will pay us OEM fees of
$8.8 million over the amended term of the OEM/Reseller agreement which will be
recorded as a reduction to the deferred warrant charge and will not be recorded
as revenue. The deferred stock compensation and warrant charge is presented as a
reduction of stockholders equity and amortized over the vesting period of the
applicable equity arrangement and is shown by expense category. In response to changing market conditions, including the decline in
information technology spending, we implemented restructuring plans in the
second quarter of fiscal 2002, third quarter of fiscal 2003 and third quarter
of fiscal 2004. Restructuring costs relating to headcount reductions of
approximately 40 employees, or 4% of the workforce, were $1.3 million for the
three months and nine months ended December 31, 2003 compared to $2.2 million
for the three and nine months ended December 31, 2002 relating to headcount
reductions of approximately 45 employees, or 5% of the workforce. In-process research and development charges were $4.3 million for the
three and nine months ended December 31, 2003. These charges related to the
business acquisitions of TME and The Dante Group, which occurred during the
quarter ended December 31, 2003. The value of the acquired
in process research and development reflects the
fair value of the acquired research and development that, as of the
date of the acquisitions has not reached technological feasibility
and has no alternative future use. The amounts allocated to
the acquired in process research and development were immediately expensed in the period the acquisition was
completed because the projects associated with the in process research and development efforts had not yet
reached technological feasibility and no future alternative used existed for
the technology. Other Income, net Other income, net, includes interest income from cash equivalents,
marketable securities, long-term investments, interest expense from borrowings
under lease agreements and foreign currency exchange gains or losses. Net
interest income decreased by $1.3 million, or 40%, to $1.9 million for the nine
months ended December 31, 2003 from $3.2 million for the nine months ended
December 31, 2002. During the quarter ended December 31, 2003, net other income
decreased $680,000, or 70%, to $295,000 from $975,000 for the quarter ended
December 31, 2002. These decreases were primarily attributable a decrease in
cash and marketable securities balances and lower interest rates on corporate
paper, bonds and money market funds in the respective period of our fiscal year
2004, compared to those in the same period in the prior year. Additionally,
for the three months ended December 31, 2003, we recorded $211,000 in foreign
currency losses resulting from the revaluation of short-term inter-company
payables and receivables and other transaction gains and losses. Income Taxes 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 Historically we have financed our operations and met our capital
requirements though the sales of equity securities. Our liquidity and financial
position at December 31, 2003, showed a 21% decrease in our cash and marketable
securities, to $158.6 million, and a 42% decrease in our working capital, to
$93.9 million, from our positions at December 31, 2002. The decrease in our cash
and marketable securities is due primarily to approximately $32.4 million in
cash paid in connection with the acquisitions completed in 20




---



##### 



October 2003. Excluding
acquisition payments, our cash and marketable securities at December
31, 2003 decreased by approximately $10.6 million as compared to
December 31, 2002. The decrease in working capital is primarily due to a decrease
in our cash, short-term marketable securities and accounts receivable balances
at December 31, 2003, as compared to December 31, 2002. Net
cash used in operating activities was $12.8 million for the nine
months ended December 31, 2003, compared to $13.5 million for the nine months
ended December 31, 2002. The decrease in cash used in operating activities
during the first nine months of our fiscal year 2004  compared to the first nine
months of our fiscal year 2003, was due primarily to a smaller decrease in
accounts payable and a larger increase in accounts receivable offset by higher
net loss in the nine months ended December 31, 2003. Net
cash used in investing activities was $6.4 million for the nine months
ended December 31, 2003, compared to $15.0 million during the nine months ended
December 31, 2002. The decrease in cash used in investing activities during
the first nine months of our fiscal 2004 compared to the first nine months of
our prior fiscal year was primarily due to the increase in the sale of
marketable securities available for sale offset by $32.4 million used in
connection with the acquisitions completed in October 2003. Capital
expenditures were $2.0 million and $2.5 million for the nine months ended
December 31, 2003 and 2002, respectively. Capital expenditures consisted of
purchases of computer hardware and software, office furniture and equipment and
leasehold improvements. We generally fund capital expenditures through capital
leases and the use of working capital. Additionally, for the nine months ended
December 31, 2003, we received $1.0 million in proceeds from the sale of a
significant portion of an investment in a private company. Net cash provided by financing activities was $523,000 for the nine months
ended December 31, 2003, compared to $3.2 million during the nine months ended
December 31, 2002. These cash flows primarily reflect net cash proceeds from
exercises of stock options and Employee Stock Purchase Plan common stock
issuances offset by payments on capital leases for the nine months ended
December 31, 2003 and 2002 and borrowings under lease agreements for the nine
months ended December 31, 2002. Net cash proceeds from exercises of stock
options were $831,000 and $1.1 million for the nine months ended December 31,
2003 and 2002 respectively. Net cash proceeds from ESPP common stock issuances
were $2.5 million and $3.0 million for the nine months ended December 31, 2003
and 2002 respectively. Payments on capital leases were $2.8 million and $3.5
million for the nine months ended December 31, 2003 and 2002, respectively.
Borrowings on capital leases were $2.5 million for the nine months ended
December 31, 2002. We have a line of credit to borrow up to a maximum principal amount of
$20,000,000, with a maturity date of October 9, 2004. Any borrowings under this
line bear interest at the banks prime rate per annum. As of December 31, 2003,
we had not borrowed against this line of credit. In connection with the line of
credit, we have a letter of credit totaling $355,000 related to an office
lease. Borrowings under this line are limited to 80% of eligible accounts
receivable. We believe that our existing working capital and our line of credit will
be sufficient to meet our operating resource expenditure requirements for at
least the next twelve months. However, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or
product lines. In the event additional financing is required, we may not be
able to raise it on acceptable terms or at all. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS You should consider the following factors when evaluating our statements
in this report and elsewhere. webMethods is subject to risks in addition to
those described below, which, at the date of this report, we may not be aware
of or which we may not consider significant. Those risks may adversely affect
our business, financial condition, results of operations or the market price of
webMethods stock. Unanticipated fluctuations in our quarterly revenue or operating results could
significantly affect the price of our stock. 21




---



##### 



We believe that quarter-to-quarter or year-to-year comparisons of our
financial results are not necessarily meaningful indicators of our future
revenue or operating results and should not be relied on as an indication of
our future performance. If our quarterly or annual revenue or operating results
fail to meet the expectations of investors or analysts, the market price of
webMethods 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 changes in demand for our
products and services, economic conditions, our competitors and the
bases of competition, amount and
timing of operating cost, the timing and amount of revenue from our
new products and businesses, the achievement of cost savings, and changes that we may make in our business,
operations and infrastructure. In addition, economic uncertainties, economic
consequences or after-effects of terrorist acts, geopolitical developments or
uncertainties, delays in the availability of new products
or new releases of existing products, and other major, unanticipated events may
impact our quarterly operating results. We generally close a substantial number
of license transactions in the last month of each quarter, which makes it more
difficult to gauge the level of license revenue we will have in any quarter
until near to, or after, its conclusion. We expect to continue devoting
resources to our sales and marketing operations and our research and
development activities. Our operating expenses, which include sales and
marketing, research and development and general and administrative expenses,
are based on our expectations of future revenue 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 significantly below the expectations of investors or analysts.
It is possible that our revenue or operating results in the future may be below
the expectations of investors or analysts and, as a result, the market price of
webMethods stock may fall. In addition, the stock market, particularly the
stock prices of independent infrastructure software 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 February 1, 2004, the closing price of webMethods stock on the Nasdaq National Market
has ranged from a high of $336.25 to a low of $4.32. Growth of our sales may slow from time to time, causing our quarterly operating
results to fluctuate. Due to customer demand, economic conditions, competitive pressures,
seasonal factors or major, unanticipated events, we may experience a lower
growth rate for, no growth in, or a decline in quarterly or annual revenue from
sales of our software and services in some or all of the geographic regions in
which we operate. For example, the growth rate for revenue from sales of our
software and services during summer months may be lower than at other times
during the year, particularly in European markets. We also
may experience declines in expected revenue due to patterns in the
capital budgeting and purchasing cycles of our current and prospective
customers, changes in demand for our software and services, the timing and
amount of revenue from our new products and businesses, and deferrals of
purchases due to economic uncertainties, geopolitical developments or uncertainties or other major, unanticipated events. These periods of slower or no
growth may lead to lower revenue, which could cause fluctuations in our
quarterly operating results. In addition, variations in sales cycles may have
an impact on the timing and amount of our revenue, which in turn could cause our quarterly
operating results to fluctuate. Any misperception
by us in the needs of our customers and prospective customers, or any delay in
sales of our software and services could cause our revenue and operating
results to vary significantly from quarter to quarter, which could result in
a decline in the price, or volatility in the price, of webMethods stock. Our target markets are highly competitive, and we may not be able to compete
effectively. The markets
for Web services solutions, integration
software, business activity monitoring software and portal products is
rapidly changing and intensely competitive. There are a variety of methods
available to run Web services, integrate software applications, monitor and
optimize business processes and workflows and provide user access to available
data and Web services. 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 our Web services solutions, our
integration software, our workflow solution, our business activity monitoring software, our portal
product or other solutions we offer or have announced. If 22




---



##### 



our technology, software and solutions 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 Web
services technologies, integration solutions, workflow or business
process management solutions, and business activity monitoring
solutions, electronic data interchange vendors, vendors of proprietary
enterprise application integration, vendors of portal products, and application
server vendors. We also face competition from various providers of application
integration technologies to run Web services and companies offering
products and services that address specific aspects of application integration
or Web services. Further, we face competition from major system integrators, which
have traditionally been the prevalent resource for application integration. In
addition, our customers and application software vendors with whom we currently
have strategic relationships are offering competitive solutions or may become
competitors in the future. Some of our competitors or potential competitors may
have more experience developing integration, portal or business activity
monitoring software or enabling Web services, 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 or performance as compared to our
existing software and future software and services offerings. 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
or delay of sales
or decreased market share, which in turn could harm our business, operating
results and financial condition. We rely on strategic partnerships with software vendors, alliances with major
system integrators and other similar relationships to implement and promote our
software and, if these relationships terminate, we may lose important deals and
marketing opportunities. We have established strategic relationships with enterprise application
software vendors and system integration partners. These strategic partners
provide us with important sales and marketing opportunities, create
opportunities to upsell our products to customers already using our software
embedded in their enterprise application products, and greatly increase our
implementation capabilities. We also have similar relationships with resellers,
distributors and other technology leaders. 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 strategic partners, resellers and
distributors, 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 software and generally are not
restricted from working with vendors of competing software or solutions.
Accordingly, our success will depend on their willingness and ability to devote
sufficient resources and efforts to marketing our software rather than the
products of competitors. If these relationships are not successful or if they
terminate, our revenue and operating results could be materially adversely
affected, our ability to increase our penetration of our target markets could
be impaired, we may have to devote substantially more resources to the
distribution, sales and marketing, implementation and support of our software
than we would otherwise, and our efforts may not be as effective as those of
our partners, which could harm our business. Third-party claims that
we or our customers infringe upon their intellectual property rights may
be costly to defend or settle or could damage our business. We cannot be certain that our software and the services do not infringe
issued patents, copyrights, trademarks or other intellectual property rights of
third parties. Litigation regarding intellectual property rights is common in
the software industry, and we are subject to, and may be increasingly subject
to, legal proceedings and claims from time to time, including claims of alleged
infringement of intellectual property rights of third parties by us or our
customers concerning their use of our software products and integration
technologies and services. 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 have brought claims of infringement
against us or our customers, and may do so in the future. Because our software is integrated with our
customers networks 23




---



##### 



and business processes, as well as other software applications, third parties
may bring claims of infringement against us, as well as our customers and other
software suppliers, if the cause of the alleged infringement cannot easily be
determined. We have agreed to indemnify certain
of our customers against claims that our software infringes upon the
intellectual property rights of others or that implementation of our
products involves processes allegedly covered by intellectual property
rights of third parties. Furthermore, former employers of our
current and future employees may assert that our employees have improperly
disclosed confidential or proprietary information to us. Such claims may be
with or without merit. Claims of alleged infringement, regardless of merit, may have a material
adverse effect on our business in a number of ways. Claims may discourage
potential customers from doing business with us on acceptable terms, if at all.
Litigation to defend against claims of infringement or contests of validity may
be very time-consuming and may result in substantial costs and diversion of
resources, including our managements attention to our business. In addition,
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, which may not be
available on acceptable terms, if at all. Furthermore, a party making such a
claim could secure a judgment that requires us to pay substantial damages, and
also include an injunction or other court order that could prevent us from
selling our software or require that we re-engineer some or all of our
products. We and our customers have been subject to such claims and litigation,
and may in the future be subject to additional claims and litigation. We may in
the future settle any such claims, regardless of merit, to avoid the cost and
uncertainty of continued litigation. Defense of any lawsuit or failure to
obtain any such required licenses could significantly harm our business,
operating results and financial condition and the price of webMethods common
stock. Although we carry general liability insurance, our current insurance
coverage may not apply to, and likely would not protect us from, all liability
that may be imposed under these types of claims. We are trying to increase our sales to the US Government and to others in the
public sector, and we may face difficulties in our attempts to procure new
contracts with them and risks unique to government contracts that may have a
detrimental impact on our business or operating results. We are attempting to expand our customer base to include more entities and
agencies within the US Government, state, local and foreign governments.
Developing new business in the public sector often requires companies to
develop relationships with different agencies or entities, as well as other
government contractors. If we are unable to develop or sustain these
relationships, we may be unable to procure new contracts within the timeframe
we expect, and our business and financial results may be adversely affected.
Contracting with the US Government and other governments also requires
businesses to adhere to requirements of soliciting and doing business
with government agencies and their contracting officers, and
noncompliance could result in penalties, including debarment from
further contracting. Further, contracting with the US Government and
with other governments requires us to participate in a highly competitive bidding process to obtain new
contracts. We lack substantial experience in bidding for public sector
contracts. We may be unable to bid competitively if our software and services
are improperly priced or if we are incapable of providing our software and
services at a competitive price. The bidding process is an expensive and
time-consuming endeavor that may result in a loss for webMethods if we fail to
win a contract on which we submitted a bid. Further, some agencies within the
US Government may also require some or all of our personnel to obtain a
security clearance or may require us to add features or functionality to our
software. If our key personnel are unable to obtain or retain this clearance or
if we cannot or do not provide required features or functionality, we may be
unsuccessful in our bid for some government contracts. Contracts with the US Government or with many state, local, and foreign
governments also frequently include provisions not found in the private sector
and are often governed by laws and regulations that do not affect private
contracts. These differences permit the public sector customer to take action
not available to customers in the private sector. This may include termination
of current contracts for convenience or due to a default. The US Government can
also suspend operations if Congress does not allocate sufficient funds, and the
US Government may allow our competitors to protest our successful bids. If any
of these events occur, they may negatively affect our business and financial
results. In order to maintain contracts with the US Government, webMethods must
also comply with many rules and regulations that may affect our relationship
with other customers. The US Government can terminate its contract with us if
we come under foreign government control or influence, may require that we
disclose our pricing data during the course of negotiations, and may require us
to prevent access to classified data. If the US Government 24




---



##### 



requires us to meet any of these demands, it could result in increased costs or
an inability to take advantage of certain opportunities that may present
themselves in the future. US Government agencies routinely investigate and
audit government contractors administrative processes. They may audit our
performance and our pricing, and review our compliance with rules and
regulations. If they find that we have improperly allocated costs, they may
require us to refund those costs or may refuse to pay us for outstanding
balances related to the improper allocation. An unfavorable audit could result
in a reduction of revenue, and may result in civil or criminal liability if the
audit uncovers improper or illegal activities. This could harm our business,
financial results and reputation. Recent and future acquisitions of companies or technologies may result in
disruptions to our business or the distraction of our management. We recently acquired three businesses and technologies, and 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. With respect to our recent acquisitions and potential future
acquisitions, we may not be able to realize the benefits we expected to achieve
at the time of entering into the transaction. In such acquisitions, we will
likely face many or all of the risks inherent in integrating corporate
cultures, product lines, operations and businesses. We will be required to
train our sales, professional services and customer support staff with respect
to acquired software products, which can detract from executing against goals
in the current period, and we may be required to modify priorities of our
product development, customer support, systems engineering and sales
organizations. 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. Our operating results may decline and our customers may become dissatisfied if
we do not provide professional services or if we are unable to establish and
maintain relationships with third-party implementation providers. 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 many of our software sales
depend, in part, on our ability to provide our customers with these services
and to attract and educate third-party consultants to provide similar services.
New professional services personnel and service providers require training and
education and take time to reach full productivity. Competition for qualified
personnel and service providers is intense. Our business may be harmed if we
are unable to provide professional services to our customers and establish and
maintain relationships with third-party implementation providers. 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 software or develop new adapters 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 integration 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 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. 25




---



##### 



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, our business, operating
results and financial condition could be harmed. In particular, Phillip
Merrick, our Chairman of the Board and Chief Executive Officer, 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. If our customers do not renew their product support and maintenance agreements,
we may lose a recurring revenue stream, which could harm our operating results. Many of our customers subscribe for software support and maintenance
services, which we recognize over the term of those support and maintenance
agreements. If a significant portion of those customers chose not to continue
subscribing for product support and maintenance, our recurring revenue from
those services would be adversely affected, 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 maintain our sales and distribution capabilities. We need to maintain and further develop our direct and indirect sales and
distribution efforts, both domestically and internationally, in order to
increase market awareness and sales of our software and the related services we
offer. Our software requires 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. 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, which may impact our business and
operating results. We intend to continue expanding our international sales efforts, and our
inability to do so could harm our business and operating results. 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 in some international markets. 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. We currently do not engage in any currency hedging transactions. Our
foreign sales generally are invoiced in the local currency, and, as we expand
our international operations or if there is continued volatility in exchange
rates, our exposure to gains and losses in foreign currency transactions may
increase when we determine that foreign operations are expected to repay
intercompany debt in the foreseeable future. Moreover, the costs of doing
business abroad may increase as a result of adverse exchange rate fluctuations.
For example, if the United States dollar declines in value relative to a local
currency and we are funding operations in that country from our U.S.
operations, we could be required to pay more for salaries, commissions, local
operations and marketing expenses, each of which is paid in local currency. In
addition, exchange rate fluctuations, currency devaluations or economic crises
may reduce the ability of our prospective customers to purchase our software
and services. 26




---



##### 



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 integration software and standards
and web services technologies and protocols, as well as general technology
trends such as changes in or introductions of operating systems or enterprise
applications, will require us to adapt our software to remain competitive. Our
software could become obsolete, unmarketable or less desirable to prospective
customers if we are unable to adapt to new technologies or standards. 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 and could
damage the reputation of our software in the marketplace. 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 experiences 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. Because our software 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. Errors,
defects, other performance problems or failure to provide support 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 software to perform to customer expectations could give rise to
warranty claims. Although our license agreements typically contain provisions
designed to limit our exposure to potential product liability claims, existing
or future laws or unfavorable judicial decisions could negate these limitation
of liability provisions. Although we have not experienced any product liability
claims to date, sale and support of our software entail the risk of such
claims. The integration of our software with our customers networks and
software applications increases the risk that a customer may bring a lawsuit
against several suppliers if an integrated computer system fails and the cause
of the failure cannot easily be determined. Even if our software is not at
fault, 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. We are a relatively young company and have a relatively limited operating
history with which to evaluate our business and the prospects of achieving our
anticipated growth and of maintaining sustained profitability. We commenced operations in September 1996. Active Software, with which we
completed a merger in August 2000, was incorporated in September 1995. We have
been operating as a combined company since August 2000. In addition, we have
recently acquired businesses with limited operating histories.
If we do not generate sufficient revenue from our business to fund operations,
our growth could be limited unless we are willing to incur operating losses
that may be substantial and are able to fund those operating losses from our
available assets or, if necessary, from the sale of additional capital through
public or private equity or debt financings. If we are unable to grow as
planned, our chances of maintaining sustained profitability and the anticipated
or forecasted results of operations could be reduced, which, in turn, could
have a material adverse effect on the market price of webMethods stock. 27




---



##### 



Our penetration
of our markets and the growth of our
business achieved in our relatively limited operating history are not
necessarily indicative of our ability in the future to continue to penetrate
our target markets and to grow our business as we anticipate. Our software is
complex and generally involves significant capital expenditures by our
customers. We often have to devote substantial resources to educate prospective
customers about the benefits of our software. Our efforts to educate potential
customers may not result in our software being accepted by the potential
customer or 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 software
such as ours. Furthermore, even if our software is effective, our potential
customers may not choose it for technical, cost, support, competitive, economic
or other reasons. If the market for our software fails to grow or grows more
slowly than we anticipate, or if our penetration of our target markets and the
growth of our business is less or slower than we anticipate, our business could
suffer, and our ability to achieve and maintain profitability and the
anticipated or forecasted results of operations could be reduced, which, in
turn, could have a material adverse effect on the market price of webMethods
stock. 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 software 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 software or
services or otherwise respond to unanticipated competitive pressures. In such
case, our business, operating results and financial condition could be harmed. 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 one patent and several pending
patent applications for technology related to our software, but we cannot
assure you that this patent is valid or 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 software 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 to continue increasing 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, may not result in timely
relief and may not be successful. Any inability to protect our intellectual
property rights could seriously harm our business, operating results and
financial condition. Because some of our software products incorporate technology licensed from, or
provided by, third parties, the loss of our right to use that technology could
harm our business. Some of our software products contain technology that is licensed from, or
provided by, third parties. Any significant interruption in the supply or
support of any of that third-party software could adversely affect our sales,
unless and until we can replace the functionality provided by the third-party
software. 28




---



##### 



Because some of our software incorporates software developed and maintained by
third parties, we depend on these third parties to deliver and support reliable
products, enhance our current software, develop new software on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes. In other instances we provide third-party software with
our current software and offer support for the third party software, and we
depend on these third-parties to deliver reliable products, provide underlying
product support and respond to emerging industry standards and other
technological changes. The failure of these third parties to meet these
criteria could harm our business. 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 integration 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 financial services industries have adopted
industry-specific protocols for the interchange of information. In order to
successfully sell our software to companies in these markets, we may need to
expand or enhance our software to adapt to these industry-specific
technologies, which could be costly and require the diversion of engineering
resources. We adopted a shareholder rights plan in October 2001, and previously
implemented certain provisions in our certificate of incorporation and bylaws,
that may have anti-takeover effects. Our Board of Directors adopted a shareholder rights plan and declared a
dividend distribution of one right for each outstanding share of webMethods
stock. Each right, when exercisable, entitles the registered holder to purchase
certain securities at a specified purchase price, subject to adjustment. The
rights plan may have the anti-takeover effect of causing substantial dilution
to a person or group that attempts to acquire webMethods on terms not approved
by our Board of Directors. The existence of the rights plan could limit the
price that certain investors might be willing to pay in the future for shares
of webMethods stock and could discourage, delay or prevent a merger or
acquisition of webMethods, Inc. that stockholders may consider favorable. In
addition, provisions of the current certificate of incorporation and bylaws of
webMethods, Inc., as well as Delaware corporate law, could make it more
difficult for a third-party to acquire us without the support of our Board of
Directors, even if doing so would be beneficial to our stockholders.  ITEM 3. QUANTATIVE AND QUALITATIVE 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 accounts,
corporate bonds, commercial paper, Treasury notes, and agency notes. Our
exposure to market risk due to fluctuations in interest rates relates primarily
to our 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 December 31, 2003, 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 our 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 subsidiaries located in Australia, England,
France, Germany, Japan, the Netherlands, Korea, Hong Kong and Singapore.
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 29




---



##### 



change in the price of the euro, Great Britain pound, Singapore dollar,
Australian dollar, or yen 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, the direct effects of interest rate and
foreign currency exchange rate fluctuations on the value of certain of our
investments and accounts, and 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.  ITEM 4. CONTROLS AND PROCEDURES As of December 31, 2003, webMethods management, including our Chief
Executive Officer and Chief Financial Officer, have conducted an evaluation of
the effectiveness of disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. There
have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, during the quarter ended December 31,
2003 that has materially affected, or is reasonably likely to materially
affect, webmethods internal control over financial reporting. PART II OTHER INFORMATION  ITEM 1. LEGAL PROCEEDINGS On November 30, 2001, a purported class action lawsuit was filed in the
Southern District of New York naming webMethods, several of its executive
officers at the time of our initial public offering and the managing
underwriters of our initial public offering as defendants. The amended
complaint alleges, among other things, that webMethods initial public offering
registration statement and final prospectus contained material
misrepresentations and omissions related in part to certain commissions
allegedly solicited and received by the underwriters, and tie-in arrangements
allegedly demanded by the underwriters, in connection with their allocation of
shares in our initial public offering, and that those commissions and
arrangements were not disclosed to the public after webMethods initial public
offering. The amended complaint also alleges that false analysts reports were
issued. The amended complaint seeks unspecified damages on behalf of a
purported class of purchasers of webMethods common stock between February 10,
2000 and December 6, 2000. This case has been consolidated as part of In Re
Initial Public Offering Securities Litigation (SDNY). We have considered and
agreed to enter into a proposed settlement offer with representatives of the
plaintiffs in the consolidated proceeding, and believe that any liability on
behalf of webMethods that may accrue under that settlement offer would be
covered by our insurance policies. Until that settlement is fully effective, we
intend to defend against the amended complaint vigorously. From time to time, the Company is involved in other disputes and
litigation in
the normal course of business. Those disputes and litigation include
situations in which we choose to defend or indemnify customers in
actions in which they are alleged to infringe the intellectual
property rights of others even though we believe that the alleged
intellectual property rights are invalid or that our software does
not infringe those rights. 30




---



##### 



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. ExhibitNumber
        
        Description2.1(1)
        
        Agreement and Plan of Merger dated as of
          May 20, 2000, by and among webMethods, Inc., Wolf Acquisition,
          Inc. and Active Software, Inc.3.1(2)
        
        Fifth Amended and Restated Certificate of
          Incorporation of webMethods, Inc., as amended3.2(3)
        
        Amended and Restated Bylaws of webMethods,
          Inc.4.1(3)
        
        Specimen certificate for shares of webMethods
          Common Stock4.2(4)
        
        Rights Agreement dated as of October 18,
          2001 between webMethods, Inc. and American Stock Transfer & Trust
          Company.10.1(3)
        
        Second Amended and Restated Investor Rights
          Agreement10.2(5)
        
        webMethods, Inc. Amended and Restated Stock
          Option Plan10.3(3)
        
        Employee Stock Purchase Plan10.4(3)
        
        ndemnification Agreement entered into between
          webMethods, Inc. and each of its directors and executive officers
        I31.1
        
        *Rule 13a-14(a) Certification of Chief
          Executive Officer31.2
        
        *Rule 13a-14(a) Certification of Chief
          Financial Officer32.1
        
        *#Section 1350 Certification of Chief
          Executive Officer32.2
        
        *#Section 1350 Certification of Chief
          Financial Officer
 (1)
    
    Incorporated by reference to webMethods Registration Statement on Form
S-4, as amended (File No. 333-39572).(2)
    
    Incorporated by reference to webMethods Annual Report on Form 10-K for
the year ended March 31, 2001 (File No. 001-15681).(3)
    
    Incorporated by reference to webMethods Registration Statement on Form
S-1, as amended (File No. 333-91309).(4)
    
    Incorporated by reference to webMethods Registration Statement on Form
8-A (File No. 001-15681)(5)
    
    Incorporated by reference to webMethods Annual Report on Form 10-K for
the year ended March 31, 2002 (File No. 001-15681).*
    
    Filed herewith.#
    
    This item is furnished as an exhibit to this report but is not filed
with the Securities and Exchange Commission.
 31




---



##### 



(b) Reports onForm 8-K.The following reports on Form 8-K have been
filed by webMethods, Inc. since the beginning of its fiscal quarter on October
1, 2003: Date of Report
    
    Item No.
    
    Item ReportedOctober 13, 2003
    
    
    5,7
    
    
    Press release dated October 13, 2003.October 21, 2003
    
    
    7,12
    
    
    Press release dated October 21, 2003.January 21, 2004
    
    
    7,12
    
    
    Press release dated January 21, 2004.
 32




---



##### 



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. WEBMETHODS, INCDate: February 13, 2004
    
    By: /s/ PHILLIP MERRICKPhillip MerrickChairman of the Board andChief Executive OfficerDate: February 13, 2004
    
    By: /s/ MARY DRIDIMary DridiChief Financial Officer(Principal Financial Officer)
 33