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WebMethods to Restate 2004 Financial Results

By Ellen McCarthy
Washington Post Staff Writer
Friday, February 4, 2005; Page E05

WebMethods Inc., a Fairfax business software company, said it will have to restate its 2004 financial results by about $5 million because of improper transactions and accounting activities by employees of its Japanese subsidiary.

The company said employees of the subsidiary, WebMethods K.K., conducted improper licensing transactions, did not record certain expenses, borrowed money without authorization and misled WebMethods managers about the unit's financial results. The Securities and Exchange Commission has launched an informal investigation into the matter, the company said.

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"We've taken swift and aggressive action to eliminate the wrongdoers," said David Mitchell, the company's president and chief executive. "And we're confident this is not being repeated elsewhere."

WebMethods began investigating the subsidiary in early November after an employee of the unit told managers he was concerned about some transactions. The results of the investigation, undertaken by the company's audit committee, were given to the SEC in late January.

WebMethods said the subsidiary's president and chief executive, Akimasa Koizumi, resigned from the firm and was named managing director for Avaya Inc. in Japan, where he began work on Tuesday. The company said Koizumi did not play a role in the improper activities. The company's executives said several employees described as senior managers of the unit were suspended as soon as the behavior was uncovered and are undergoing disciplinary hearings, as mandated by the country's labor laws.

"WebMethods takes these matters very seriously, and when the whistle-blower did identify the issues, we acted immediately," Mitchell said. "We feel that the problem is now fixed, though we still have some work to do as far as filing our financial restatement."

The company said it overstated revenue from software licenses by about $4.5 million to $5 million during its fiscal year ended in March. Revenue from services was overstated by between $450,000 and $600,000. Because some of the transactions should have been counted as deferred revenue, the company understated its results for the quarter ended Sept. 30 by between $2.8 million and $2.9 million.

For fiscal 2004, the company's net loss -- $27.9 million, or 54 cents per share -- is expected to grow by 10 cents to 12 cents a share as a result of the restatement, the company's executives said.

WebMethods spent about $1.1 million on the investigation during the three months ended Dec. 31 and will spend an additional $1 million on the matter during the current quarter, according to Chief Financial Officer Mary Dridi.

Mitchell, the chief executive, said the firm is also conducting a review of accounting procedures at the rest of its international offices, including operations in Germany, Spain and Hong Kong.

Mitchell took over the top spot in October after WebMethods co-founder Phillip Merrick resigned. The Fairfax company was founded in 1996 and held an initial public offering in 2000, when its shares debuted at $35 and skyrocketed on the first day of trading to close at $212.63.

The company yesterday also released financial results for its third fiscal quarter. The company earned $48,000 (zero per share) on $55 million in revenue. In the comparable quarter a year earlier, the company reported an $11.1 million (21 cents) loss on $50.1 million in revenue, though WebMethods said yesterday it will restate its results for each quarter of that year.

"I thought the financial results, all things considered, were pretty solid," said Gregg Moskowitz, an analyst with the Susquehanna Financial Group. "You never want to see a restatement, that's for sure, but the good news is the actual amount and the origin of the wrongdoing were relatively contained."

Shares of WebMethods, which announced its restatement after markets closed yesterday, fell 20 cents to close at $5.85.

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