-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AGiuRmemKBEt/WTF830rRJ2yFG6pObRxit1uF5nJm8ENWAVUOcmezDU9ar/zTP+R 3Fxz+see96mu/0AwX4yArA== 0000891020-01-000191.txt : 20010208 0000891020-01-000191.hdr.sgml : 20010208 ACCESSION NUMBER: 0000891020-01-000191 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEBTRENDS CORP CENTRAL INDEX KEY: 0001075316 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 931123283 STATE OF INCORPORATION: OR FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25215 FILM NUMBER: 1527701 BUSINESS ADDRESS: STREET 1: 851 SW SIXTH AVENUE SUITE 1200 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5032947025 MAIL ADDRESS: STREET 1: 821 SW MORRISON ST STREET 2: SUITE 1200 CITY: PORTLAND STATE: OR ZIP: 97204 10-K 1 v69203e10-k.txt FORM 10-K PERIOD ENDED DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 0-25215 WEBTRENDS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OREGON 93-1123283 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 851 S.W. SIXTH AVENUE, SUITE 1200, PORTLAND, OREGON 97204 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(503) 294-7025 (TELEPHONE NUMBER) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common stock, no par value 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 the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [X] Aggregate market value of common stock held by non-affiliates as of January 31, 2001..................... $686,072,000 Number of shares of common stock outstanding as of January 31, 2001.................................................. 26,502,397
DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 WEBTRENDS CORPORATION FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 12 Item 3. Legal Proceedings........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 12 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 13 Item 6. Selected Financial Data..................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 15 Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 18 Item 8. Financial Statements and Supplementary Data................. 19 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 34 PART III Item 10. Directors and Executive Officers of the Registrant.......... 34 Item 11. Executive Compensation...................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 40 Item 13. Certain Relationships and Related Transactions.............. 41 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 42
i 3 PART I ITEM 1. BUSINESS OVERVIEW This Annual Report on Form 10-K contains forward-looking statements based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by management. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Statements." WebTrends is a leading provider of enterprise solutions for Visitor Relationship Management(TM), eBusiness Intelligence and Systems Management. We offer organizations a comprehensive set of solutions to continuously manage and enhance the success of their eBusinesses, including their Internet infrastructure, eCommerce strategies, eMarketing activities and visitor relationship management. Those organizations are investing in and depending on a growing array of Internet-based systems such as Internet web sites, extranets and intranets that run on a variety of servers including web servers, email servers, streaming media servers, proxy servers, database systems and firewalls. Internet professionals and business managers have discovered that successful eBusinesses require constant and real-time reporting, analysis and management. Our integrated, scalable, modular and easy-to-use solutions encompass the following critical areas: - eBusiness Intelligence -- Understanding and analyzing web visitor behavior and integrating this information with customer or transactional data to measure and improve eMarketing and eCommerce activity on Internet systems. - eBusiness Management -- Monitoring, analyzing, reporting and managing the security, integrity, quality and availability of Internet-based systems. WebTrends' solutions deliver essential information to key departments across an enterprise, including marketing, sales, executive management, information services, security, customer service, finance and human resources. Our solutions are used by thousands of customers such as internet service providers or ISPs, application service providers or ASPs, government and educational institutions and corporate clients that include American Express, AOL Time Warner, Bank of America, Boeing, British Telecom, GMAC Mortgage, Dow Jones & Company, EDS, IBM, Merrill Lynch & Co., Microsoft, Motorola, Washington Mutual and TD Waterhouse. WebTrends was incorporated in Delaware in 1993 and reincorporated in Oregon in 1997. Our common stock is listed on the Nasdaq National Market under the symbol "WEBT." Our principal location and primary web sites are as follows: Executive offices 851 SW Sixth Avenue, Suite 1200 Portland, Oregon 97204 503-294-7025 and 1-888-WEBTRENDS (1-888-932-8736) Primary web sites http://www.webtrends.com http://www.webtrends.net http://www.webtrendslive.com AuditTrack, ClusterTrends, CommerceTrends, WebTrends and Visitor Relationship Management are either registered trademarks or trademarks of WebTrends Corporation. All other names mentioned herein may be trademarks of their respective owners. 1 4 PROPOSED NETIQ MERGER On January 16, 2001, the Company, NetIQ Corporation, a Delaware Corporation, and North Acquisition Corporation, an Oregon corporation and a wholly-owned subsidiary of NetIQ, entered into a definitive merger agreement. Under the merger agreement, North Acquisition will be merged with and into the Company, with the Company surviving the merger and becoming a wholly owned subsidiary of NetIQ. Closing of the merger is subject to regulatory and shareholder approvals, among other conditions and terms, as set out in the merger agreement. At the effective time of the merger, each outstanding share of the Company's common stock will be converted into the right to receive 0.48 of a share of NetIQ common stock. The transaction is expected to be completed in the first or second calendar quarter of 2001. The transaction is expected to be accounted for as a purchase. On January 19, 2001, the Company filed a report on Form 8-K with the Securities and Exchange Commission that included other information concerning the merger and a copy of the definitive merger agreement. On February 1, 2001, NetIQ filed a Registration Statement on Form S-4 with the Securities and Exchange Commission addressing the proposed merger and issuance of NetIQ shares in the merger. Copies of the aforementioned Form 8-K and S-4 may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission: Judiciary Plaza City Corp Center Seven World Trade Center Room 1024 500 West Madison Street 13th Floor 450 Fifth Street, NW Suite 1400 New York, New York Washington, D.C. 20549 Chicago, Illinois 60661 10048
Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Sections of the Securities and Exchange Commission, 405 Fifth Street NW, Washington, D.C. 20549, by calling the Securities and Exchange Commission at 1-800-SEC-0330, or at the web site of the Securities and Exchange Commission located at www.sec.gov. INDUSTRY AND MARKET BACKGROUND The primary factors driving demand for WebTrends' solutions are the growing use of Internet-based systems and the adoption of Internet technology to conduct everyday business. Internet server shipments are expected to quadruple from 1.3 million in 1998 to 5 million by 2002 according to a Gartner Group study. Forrester Research estimates that global eCommerce transactions will grow ten-fold to more than seven trillion by 2004. At the same time, the use of Internet-based systems has become much more sophisticated, evolving rapidly from simple "brochure-ware" to interactive systems that are critical components of an organization's infrastructure. Aberdeen Group estimates the total web analytics market for applications software, ASP services and professional services to grow to nearly $900 million in expenditures during 2001, making web analytics one of the most rapidly growing segments in the software industry. As Internet strategies and eBusiness systems have become operational imperatives, managing security, integrity and continuous availability has become a key role within an organization. The growing corporate importance of these systems has moved the overall responsibility for the success of an organization's Internet strategy from webmasters to a vice president or director within the organization. In addition to managing a very complex infrastructure these managers coordinate with a large team that includes editors, producers, information systems personnel, security professionals, marketing managers, partners and interested representatives from each part of the organization. All of these people, and potentially hundreds of others across the organization, need detailed information about how their areas are performing. More importantly, the organization needs comprehensive information about the overall performance of their Internet and eBusiness strategies. While eBusiness strategies and the diverse teams that manage them have expanded and evolved, so too has the need for management solutions. With extensive systems and teams in place, the emphasis is shifting from initial development and deployment to ongoing management and optimization. An organization's Internet-based systems must stay ahead of the rate of change in order to maintain a competitive edge. How do organizations ensure and maximize the success of their eBusiness initiatives when faced with an accelerating 2 5 rate of change in markets, competition, and customer preferences? One very effective way is to create a feedback loop that continuously delivers the status and results of Internet-based systems to the personnel responsible for their success. For many companies, deploying and maintaining such systems is far too costly in time and capital, so they are increasingly outsourcing these functions. International Data Corporation projects the ASP market to reach $2 billion by 2003 and Forrester Research projects that within the same time frame, up to one-fifth of total applications revenue could be from hosted services. As web sites, intranets, and extranets become more complex, ongoing management and feedback are needed in many areas. Over time, three key categories of need have emerged. A successful eBusiness now depends on a continuous stream of improvements that ensure detailed usage analysis, fine-tuned quality and performance, and tight security. Detailed Usage Analysis. Successful Internet and eBusiness strategies require an understanding of how visitors and customers interact with the organization's Internet site and how various marketing campaigns translate into bottom line results. Managers need a means of forecasting, tracking and integrating historical visitor data with other corporate and market databases in order to increase their eCommerce revenue and eMarketing return on investment. Demand will grow for powerful applications that can correlate data from web sites with customer relationship management and enterprise resource planning systems and provide comprehensive real-time analysis and reporting. A December 2000 study from Aberdeen Group found that worldwide web analytics expenditures grew from $141 million in 1999 to more that $425 million in 2000. The same study estimated the web analytics market to grow to four billion in 2004. Fine-tuned Quality, Performance and Reliability. A positive user experience depends on a well-organized site, with reliable and fast loading web pages and links that work. Companies hosting various types of transactions on their Internet and intranet sites depend on multiple systems running constantly, consistently and reliably. Having any of these systems down for just a few minutes can cause users to become frustrated and potentially cost thousands of dollars in lost sales. Tight Security. As eBusiness systems continue to expand in size and sophistication, the potential for security holes also increases. Security professionals need to proactively ensure that their servers and internal networks are protected. THE WEBTRENDS SOLUTION WebTrends addresses the key eBusiness management needs and the wide variety of Internet-based systems an eBusiness depends on, including web servers, firewalls, proxy servers, media servers, email servers, and database systems. Our solutions fill two broad needs. eBusiness Intelligence Solutions help customers understand and analyze the activity of their Internet and intranet systems and correlate this information with other proprietary information. A wide range of reports show how many people come to a web site, what they are doing on the site, how much time they are spending on each page and return on investment for both the site itself and specific advertising campaigns. Detailed reports allow marketing managers to increase the effectiveness of advertising and promotional efforts; web designers to improve usability; content managers to expand areas of interest; business managers to streamline online processes; and executives to plan strategy. Significant technology enhancements embedding real-time, online analytical processing (OLAP), and data mining with current reporting and analysis solutions extend these capabilities. eBusiness Management Solutions are targeted at Internet professionals that are responsible for security, integrity and availability of their eBusiness systems. eBusiness Management helps improve the quality of web sites by checking items such as broken links, pages not found, software syntax problems and page download times. eBusiness Management can monitor servers, routers, databases and applications running on those systems. If a problem is detected, automatic recovery routines can be run or personnel can be automatically alerted via pager or email. Trending and historical reports can be generated to evaluate device integrity and failure rates. Organizations can also monitor bandwidth and server requirements. Specialized security 3 6 solutions help monitor and report on firewall activity internal and external to the organization and detects security vulnerabilities. Security vulnerabilities can be quickly addressed by following recommended fixes and hyperlinks to third-party sites where patches are available. WebTrends adds to the completeness of its solutions with professional training, a professional services organization and around-the-clock technical support. The combined effect of eBusiness Intelligence, eBusiness Systems Management and eBusiness Security is to improve the overall quality and effectiveness of eBusiness systems. The ongoing improvements derived from these solutions enhance a company's image, competitiveness, sales, efficiencies and customer satisfaction. PRODUCTS AND SERVICES Products. WebTrends markets the following software suites and stand-alone products for eBusiness Intelligence, eBusiness Systems Management and eBusiness Security: WebTrends CommerceTrends. Introduced in June 1999, our most advanced eBusiness Intelligence solution includes web site traffic analysis, eCommerce revenue forecasting, eMarketing return on investment analysis, advertising campaign management, visitor and buyer qualification, data warehousing and database integration. Version 3, released in June 2000, incorporates OLAP and web housing technology to enable a Visitor Relationship Management platform. This platform is the industry's first comprehensive open architecture solution for integrating web visitor information with customer and transactional data to drive personalized content and targeted eMarketing campaigns. CommerceTrends runs on Sun Solaris, Red Hat Linux and Microsoft Windows NT/2000. WebTrends Enterprise Reporting Server. Introduced in March 1999, our cross-platform (Solaris, Linux, Microsoft Windows NT/2000/98/95) enterprise scalable web traffic analysis solution for high traffic sites includes remote management, configuration and customized reporting accessible from any browser by multiple users and departments. Version 3, released in May 2000, provides improvements in scalability and advanced reporting and analysis capabilities such as comprehensive, in-depth analysis of web visitor preferences on pages that depend on dynamic and database-driven content, enhanced parameter analysis, and reverse path analysis. WebTrends Enterprise Suite. Our most complete solution for web site management includes web server traffic analysis, media server analysis, proxy server reporting, link analysis and quality control, and alerting, monitoring and recovery for unlimited devices. The Enterprise Suite provides detailed analytics for sites in excess of one billion hits per analysis period and up to 40 million unique visitors per day. Version 5 released in August 2000 added the capability to analyze and report on activity for three major streaming media platforms and integration with the Vignette V/5 eBusiness Platform. WebTrends Enterprise Suite for Lotus Domino. Provides functionality similar to the WebTrends Enterprise Suite customized for the Lotus Domino system. WebTrends Professional Suite. Our most complete solution for single server web sites includes web site traffic analysis, proxy server reporting, link analysis and quality control, and alerting, monitoring and recovery for up to 10 devices. WebTrends Log Analyzer. Our award-winning traffic analysis solution provides comprehensive analysis and reporting of web server traffic for singer-server web sites offering over 70 comprehensive and customizable reports. WebTrends Firewall Suite. Our solution for security management and reporting manages, monitors and reports on all leading firewalls, virtual private networks and proxy servers. Firewall Suite enables organizations to manage bandwidth usage, security, employee usage of web sites outside of the firewall, and traffic originating from outside the firewall. Version 2, released in February 2000, introduces SurfWatch, which facilitates monitoring of improper employee Internet use by categories of misuse such as gambling or pornography, and provides improved scalability. Version 3, released in August 2000 added monitoring, alerting and recovery customization, remote management and editing, and included signifi 4 7 cant enhancements to performance and scalability. Much of the functionality of WebTrends Security Analyzer was bundled with Version 3 providing the ability to conduct over 1100 security tests to detect security vulnerabilities and recommend the latest fixes and updates. WebTrends Security Analyzer. Introduced in January 1999, our premiere security solution enables managers to discover and fix the latest known security vulnerabilities on Internet, intranet and extranet servers. With the release of Version 3.5 in April 2000, Security Analyzer provides a comprehensive test suite offering over 1100 security tests for Windows 95, 98, NT, 2000, Red Hat Linux and Solaris operating systems on more than 14 types of servers. WebTrends Server Cluster Add-on. Allows users of our proprietary ClusterTrends technology to enable WebTrends Commerce Trends, WebTrends Enterprise Reporting Server, WebTrends Enterprise Suite and WebTrends Enterprise Suite for Lotus Domino to analyze multiple log files created by web servers in a cluster. AuditTrack for NetWare. A solution to monitor, audit and report on activity on NetWare servers. Services. WebTrends provides technical support to its registered users, a portal site and hosted eBusiness Management services. Professional Services. In January 1999, we formed a professional services organization to provide implementation, training and consulting for customers, certification and training for third-party service providers and resellers, and management, analysis and reporting services for high-traffic Internet events. Portal Site for Internet Professionals. Also in 1999, we launched an Internet portal site for Internet professionals. The site, located at www.webtrends.net provides a wide variety of product and industry information, software products and resources, discussion forums, and other content related to building and managing web sites. Services Business Unit. In March 2000, the Company created an eServices Business Unit to meet the growing demand for hosted eBusiness Management Solutions and simultaneously released WebTrends Live 2.0. WebTrends Live is an eService platform for real-time web site visitor analysis, eCommerce tracking and eMarketing campaign management designed to serve high volume web sites with secure, comprehensive reporting and eCommerce tracking. WebTrends Live provides the ability to correlate eCommerce data with visitor demographics, buyer behavior and sales cycle analysis while maintaining high standards of privacy and security. In 2000, real-time wireless analysis and reporting was added allowing users to access reports from wireless devices. In November 2000, French, German, Japanese and Spanish versions were introduced. SALES, MARKETING AND DISTRIBUTION Our products are sold through our internal corporate sales force, through an enterprise field sales organization, through national distributors, through numerous value-added resellers and online from our web site. Our products are also co-marketed with or integrated and sold with the offerings of our strategic partners, which include Internet service providers, original equipment manufacturers, system integrators and others. Our sales organization has a regional presence in 19 states and national distribution relationships with Tech Data, Ingram and GE Access. We have relationships with distributors in most key international markets. In June 2000 we purchased our distributor in the United Kingdom. We will continue to expand the international distribution of our products. RESEARCH AND DEVELOPMENT The focus of product development at WebTrends is to bring new products and services as well as new versions of existing products to market quickly in order to keep pace with the rapid evolution of Internet technologies and increasing customer demands. The Company devotes a substantial portion of its resources to developing new products. Research and development expenses were approximately $2.2 million in 1998, $3.8 million in 1999 and $10.1 million in 2000. 5 8 COMPETITION We compete in the markets for eBusiness intelligence, eBusiness systems management and eBusiness security solutions. These markets are intensely competitive, increasingly subject to rapid changes and significantly affected by new product introductions and other activities of market participants. In addition, these markets are highly fragmented, and our competitors vary depending upon the needs that our eBusiness solutions address. Today, no single company offers competing products in all categories. In the market eBusiness intelligence solutions, our primary competitors are Accrue Software Inc., Broadbase Software Inc., E.piphany Inc., Informatica Corporation, MicroStrategy Inc. and net.Genesis Corporation. In the market for eBusiness systems management solutions, our primary competitors are IPSwitch, Inc., Geneva Software, Inc. and Computer Associates. In the market for eBusiness security solutions we compete primarily with ISS Group and our firewall products compete primarily with Check Point Software Technologies. Although the markets in which we compete are highly fragmented, we could face additional competition from existing competitors if any of them were to broaden the scope of their eBusiness solutions by developing or acquiring additional products or distribution channels. As we introduce new products and services we will face competition from both established companies and other new market entrants. We also compete with vendors of Internet servers, operating systems, and networking hardware. In particular, Microsoft, Netscape, Sun Microsystems, Oracle and others bundle Internet management solutions with their Internet products. We expect this bundling activity to increase in the future. The bundling of competing products with standard features of operating systems, Internet servers or networking hardware could render our products obsolete and unmarketable. Even if the functionality, ease of use, and performance of the products included with operating systems, Internet servers, or networking hardware are inferior to that of our products, a significant number of customers may elect to accept these products instead of purchasing additional software or services from us. We believe that additional competitors will continue to enter the market as the size and visibility of the market opportunity increases. These new market entrants may include traditional system and network management software developers. We also face competition and potential competition from web management service providers, such as consulting firms, web design firms, Internet audit firms, site management vendors, Internet service providers, and independent software vendors. These service providers may use our solutions, our competitors' solutions, or custom-developed solutions to manage web sites for their customers who otherwise would have been sale opportunities for us. Some larger potential customers may rely on their information systems departments to internally develop Internet management solutions. PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality and license agreements, to protect our proprietary rights. We have one issued U.S. patent and an additional 8 patent applications pending; 6 registered U.S. trademarks and 18 U.S. trademark applications pending, 8 of which have been allowed; and 26 registered U.S. copyrights. We also seek protection for our intellectual property in other countries where we do business. We regard our proprietary rights as critical to our success. Effective protection for our proprietary rights may not be available in every country in which we market our products or services. EMPLOYEES At December 31, 2000, we employed 400 persons. None of our employees are represented by a labor union. We have experienced no work stoppages and believe our relationships with our employees are good. 6 9 RISK FACTORS The following risk factors and other information included in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected. The proposed merger with NetIQ raises a number of risks and uncertainties for the Company. On January 16, 2001, WebTrends announced it had entered into a merger agreement with NetIQ Corporation so that upon the closing of the merger, WebTrends will become the wholly owned subsidiary of NetIQ. If the merger is not completed for any reason, the Company may be subject to a number of material risks, including the following: - The Company may be required under certain circumstances to pay NetIQ a termination fee of $41.0 million; - The price of the Company's common stock may decline; and - Costs related to the merger, such as financial advisory, legal, accounting and printing fees, must be paid even if the merger is not completed. In addition, the Company's customers and strategic partners, in response to the announcement of the merger, may delay or defer decisions, which could have a material adverse effect on the Company's business, regardless of whether the merger is ultimately completed. Moreover, diversion of management focus and resources from the day-to-day operation of the business to matters relating to the merger could have a material adverse effect on the Company's business, regardless of whether the merger is completed. Similarly, current and prospective employees of the Company may experience uncertainty about their future roles with the combined company. This may adversely affect the Company's ability to attract and retain key management, sales, marketing and technical personnel. If the merger is terminated and the Company's board of directors seeks another merger or business combination, the Company's shareholders cannot be certain that the Company will be able to find a partner willing to pay an equivalent or more attractive price than the price to be paid by NetIQ in the merger. In addition, while the merger agreement is in effect and subject to very narrowly defined exceptions, the Company is prohibited from soliciting, initiating or encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination, with any third party and from taking certain actions that would change the Company's business. Further, assuming our merger with NetIQ closes as expected, there are a number of risks related to the merger and the conduct of the combined company after the merger. For a discussion of these risks, we urge you to read the section titled "Risk Factors" in the joint proxy statement/prospectus we prepared with NetIQ, which is included in the Registration Statement on Form S-4 filed by NetIQ with the SEC on February 1, 2001. WebTrends Has a Limited Operating History and May Not Remain Profitable. WebTrends was formed in August 1993, and we introduced our first Internet product in February 1996. Due to our limited operating history, any evaluation of our business and our prospects must be in light of the risks and uncertainties often encountered by companies in their early stages of development. These risks and uncertainties are particularly significant for companies in rapidly evolving markets, such as the market for Internet products and services. In addition, although our revenue has increased in recent periods while we maintained profitability, our revenue may not grow in future periods, may not grow at past rates, and we may not maintain profitability on a quarterly or annual basis, or at all. Fluctuations in Our Operating Results May Make it Difficult to Predict Our Future Performance and May Result in Volatility in the Market Price of Our Common Stock. We may experience significant fluctuations in our operating results. In particular, as we focus increasingly on sales of our product suites and more complex integrated platform solutions requiring installation time and talent rather than stand-alone products and on larger purchases by larger customers, we expect the sales cycle associated with the purchase of our products to 7 10 lengthen. Furthermore, the amount of revenue associated with particular licenses can vary significantly based upon the number of products that are licensed and the number of devices involved in the installation. These factors all tend to make the timing of revenue unpredictable and may lead to greater period-to-period fluctuations in revenue than the Company has historically experienced. As a result of the factors described above, we believe that our quarterly revenue and results from operations may vary significantly in the future and that quarter-to-quarter comparisons of our operating results may not be meaningful. You should therefore not rely on the results of one quarter as an indication of future performance. Our future operating results may fall below the expectations of securities analysts or investors, which would likely cause the trading price of our common stock to decline. We May Not Be Able to Develop Acceptable New Products, Services or Enhancements to Our Existing Products at the Rate Required by Our Rapidly Changing Market. Our future success depends upon our ability to address the rapidly changing needs of our customers by developing and introducing high quality products, product enhancements, and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The market for our products is in the early stage of development and is rapidly evolving. As is common in such new and rapidly evolving industries, demand and market acceptance for recently introduced products are subject to high levels of uncertainty and risk. Furthermore, new products can quickly render obsolete products that were only recently in high demand. New Products and Services May Present Additional and Unanticipated Risks. As we introduce new products and services such as hosted services on-line we may encounter risks not present in our current business. We must anticipate and manage these risks which may include new regulations, competition, technological requirements and our own ability to deliver or maintain reliable services to our customers or partners. Failure to do so may result in unrecovered costs, loss of market share or adverse publicity. The Intense Competition in Our Markets May Lead to Reduced Sales of Our Products and Reduced Profits. The markets for our products are intensely competitive and are likely to become even more competitive. Increased competition could result in pricing pressures, reduced sales, reduced margins or the failure of our products to achieve or maintain market acceptance. Each of the Company's products faces intense competition from multiple competing vendors. WebTrends also faces current and potential competition from vendors of Internet servers, operating systems, and networking hardware, many of which now, or may in the future, bundle eBusiness solutions with their Internet products. The Company also competes against and expects increased competition from traditional system and network management software developers and web management service providers. Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, or substantially greater resources than we have. As a result, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards, or customer requirements. The market for eBusiness Infrastructure Management and Intelligence Solutions is difficult to estimate. The market for eBusiness infrastructure management and intelligence solutions software may not develop or may grow more slowly than we anticipate, and this could materially and adversely affect our ability to grow our business, sell our products, and maintain profitability on an operating basis. The rate of acceptance of our products is dependent on the increasing complexity of businesses' operating environments resulting in the continuous deployment of additional servers and applications. Many companies have been addressing their eBusiness management needs internally and only recently have become aware of the benefits of third-party solutions as their needs have become more complex. Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party eBusiness management software products and their deployment of these products on an enterprise-wide basis. Our success depends on continued use and expansion of the Internet and Internet-based systems. Many of our eBusiness infrastructure management and intelligence solutions are targeted for Internet-based systems. The rapid growth of the Internet is a recent phenomenon. The growth of our revenue is dependent on the continued use of the Internet for communication and commerce. Additionally, the Internet infrastructure must continue to evolve to handle increased levels of Internet activity, security, reliability, cost, ease of use, accessibility and quality of service. Potential federal, state and foreign regulation in the areas of privacy and 8 11 content, as well as potential taxation of Internet use, could hamper Internet growth. Similarly, Internet users may become more concerned about Internet privacy and security. To the extent that government regulation or user concern hampers the growth of the Internet, our business could be negatively affected. WebTrends will need to recruit and retain additional qualified personnel to successfully manage our business. Our future success will depend in large part on our ability to attract and retain experienced sales, research and development, marketing, technical support and management personnel. New employees will likely require substantial training in the use of our products, which in turn will require significant resources and management attention. If we do not attract and retain such personnel, this could materially adversely affect our ability to grow our business. Moreover, the complexity of distributed computing systems requires highly trained customer service and technical support personnel to assist customers with installation and deployment of our products. The labor market for these personnel is very competitive due to the limited number of people available with the necessary technical skills. We have experienced difficulty in recruiting qualified personnel, especially technical and sales personnel. There is a risk that even if we invest significant resources in attempting to attract, train and retain these qualified personnel, we will not be successful in our efforts. To achieve our business objectives, we may recruit and employ skilled technical professionals from other countries to work in the United States. Limitations imposed by federal immigration laws and the availability of visas could materially adversely affect our ability to attract necessary qualified personnel. This may have a negative effect on our business and future operating results. Failure to Expand Our Sales Operations and Channels of Distribution Would Limit Our Growth. In order to maintain and increase our current and future market share and revenue, we will need to continue to develop our direct and indirect sales operations and channels of distribution. We need to continue to expand our relationships with domestic and international channel partners, distributors, value-added resellers, systems integrators, online and other resellers, Internet service providers, original equipment manufacturers and other partners to build our indirect sales channel. We must also continue to expand and maintain strategic relationships with key hardware and software vendors, distribution partners and customers. In addition, to maintain and improve our results from operations, we must increase the number of products that each of our customers licenses. This may require an increasingly sophisticated sales effort targeted at both management personnel associated with a prospective customer's Internet capabilities and other functional managers throughout the organization. Our Reliance on Indirect Distribution Channels Could Result in a Reduction in Our Revenue, Because We Have Less Control Over Sales by Our Channel Partners Than Our Own Direct Sales. We are continuing to distribute our products through various indirect channels of distribution, including channel partners, value- added resellers, distributors, resellers, original equipment manufacturers, Internet service providers and others. We cannot predict the extent to which any of these channel partners will be successful in marketing or distributing our Internet management solutions. Many of these channel partners also market and sell competitive products. We may not be able to effectively manage potential conflicts among the various channel partners or prevent them from devoting greater resources to supporting the products of other companies. In addition, Network Trade, a third-party export management company, has the primary responsibility for identifying international distributors, resellers and value-added resellers for our products. Accordingly, any disruption in our relationship with Network Trade, which may be terminated by either party with 30 days' notice, could materially slow our international sales growth. Reliance on indirect channels of distribution may subject us to greater credit risk because the revenue from sales of our products to distributors and other channel partners flows first through the distributors, and then to us. In particular, Network Trade, while not technically a distributor, collects payments from our international resellers and then forwards those payments to us, presenting a similarly increased credit risk. The Loss of Our Senior Management or Other Key Personnel or Our Failure to Attract Additional Personnel Could Adversely Affect Our Business. Our success depends largely upon the continued services of our executive officers and other key management and development personnel. The loss of the services of one or more of our executive officers, engineering personnel, or other key employees could have a material adverse 9 12 effect on our business, results of operations, and financial condition. In particular, we rely on Elijahu Shapira, Chief Executive Officer and Chairman of the Board; W. Glen Boyd, President, Chief Technical Officer and director; James T. Richardson, Senior Vice President and Chief Financial Officer, Daniel J. Meub, Chief Operating Officer and Mark Reed, Senior Vice President of Corporate Development and Sales. We do not maintain key person life insurance policies on any of our employees. In addition, because of the complexity of our products and technologies, we are substantially dependent upon the continued service of our existing engineering personnel. Our future success also depends on our ability to attract and retain highly qualified personnel. We intend to hire a number of additional sales, support, marketing, and research and development personnel. The competition for qualified personnel in the computer software and Internet markets is intense, and we may be unable to attract, assimilate, or retain additional highly qualified personnel in the future. Additionally, we attempt to hire engineers with high levels of experience in designing and developing software and Internet-related products in time-pressured environments. There is a limited number of qualified engineers in our geographic location, resulting in intense competition for the services of such engineers. The Strain that Our Growth Rate Places Upon Our Systems and Management Resources May Adversely Affect Our Business. The rapid growth that we have experienced places significant challenges on our management, administrative and operational resources. To properly manage this growth, we must, among other things, implement and improve additional and existing administrative, financial and operational systems, procedures and controls on a timely basis. We will also need to expand our finance, administrative, and operations staff. We may not be able to complete the necessary improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. Management may not be able to hire, train, retain, motivate and manage required personnel and may not be able to successfully identify, manage and exploit existing and potential market opportunities. In connection with our expansion, we plan to increase our operating expenses to expand our sales and marketing operations, develop new distribution channels, fund greater levels of research and development, broaden professional services and support, and improve operational and financial systems. Failure of our revenue to increase along with these expenses during any fiscal period could have a materially adverse impact on our financial results for that period. WebTrends' International Sales Could Decrease for Reasons Additional to Those Affecting Domestic Sales. Our international operations are subject to the risks inherent in international business activities, including, in particular management of an organization spread over various countries; greater sales seasonality; longer accounts receivable payment cycles and other collection difficulties, such as difficulties obtaining and enforcing judgments against delinquent customers; compliance with a variety of foreign laws and regulations; foreign currency exchange rate fluctuations; import and export licensing requirements; trade restrictions, changes in tariffs, and freight rates; and regional economic conditions. Our Ability to Secure, Protect and Expand Our Network and Data Center Is Increasingly Important to Our Current and Future Business. We must protect our network infrastructure and equipment against damage from human error, physical or electronic security breaches, power loss and other facility failures, fire, earthquake, flood, telecommunications failure, sabotage, vandalism and similar events. Despite precautions we have taken, a natural disaster or other unanticipated problems could result in interruptions in our services or significant damage. In addition, failure of any of our telecommunications providers to provide consistent data communications capacity could result in interruptions in our services and thus in our ability to provide service to our customers. Additionally, we must continue to expand and adapt our network to satisfy our internal and customer requirements. We are dependent upon certain telecommunications providers for our backbone capacity and it may be difficult to quickly increase this capacity in light of the lead times in the industry. We May Be Unable to Protect Our Intellectual Property. We regard substantial elements of our Internet management solutions as proprietary and attempt to protect them by relying on patent, trademark, service mark, trade dress, copyright and trade secret laws and restrictions, as well as confidentiality procedures and contractual provisions. Any steps we take to protect our intellectual property may be inadequate, time consuming and expensive. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. We currently have one issued patent and numerous patent applications pending. These or any new patent applications may not result in issued patents and may not provide us with any competitive advantages or may be challenged by third parties. Legal 10 13 standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, and the future viability or value of any of our intellectual property rights is uncertain. Effective trademark, copyright and trade secret protection may not be available in every country in which our products are distributed or made available through the Internet. Furthermore, our competitors may independently develop similar technology that substantially limits the value of our intellectual property. Others May Bring Infringement Claims Against Us. In addition to the technology we have developed internally, we also use code libraries developed and maintained by third parties and have acquired or licensed technologies from other companies. Our internally developed technology, the code libraries, or the technology we acquired or licensed may infringe on a third party's intellectual property rights and such third parties may bring claims against us alleging infringement of their intellectual property rights. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We are not currently involved in any intellectual property litigation. We may, however, be a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others' intellectual property. Such claims and any resulting litigation could subject us to significant liability for damages and invalidation of our proprietary rights. Such litigation, regardless of its success, would likely be time-consuming and expensive to defend and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or more of the following: cease selling, incorporating, or using products or services that incorporate the challenged intellectual property; obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; and redesign those products or services that incorporate such technology. Evolving Regulation of the Internet May Affect Us Adversely. As Internet commerce continues to evolve, increasing regulation by federal, state, or foreign agencies becomes more likely. Such regulation is likely in the areas of user privacy, pricing, content, advertising, intellectual property rights, information security, privacy and quality of products and services. Taxation of Internet use, or other charges imposed by government agencies or by private organizations for accessing the Internet, may also be imposed. Laws and regulations applying to the solicitation, collection, or processing of personal or consumer information could affect our activities. Privacy and Security Concerns May Limit the Effectiveness of and Reduce the Demand for Our Solutions. The effectiveness of our products relies on the use of data collected from web sites and future products may combine this information with data collected from various other sources. Our customers' use of such data for profiling may raise privacy and security concerns. Should regulators or Internet users choose to restrict the use of customer profiling technologies some of our solutions would be less useful to our customers and thus sales and profits could be adversely affected. Product Defects and Service Interruptions Could Lead to Loss of Customers and to Product Liability Claims That Would Require Considerable Effort and Expense to Defend. The occurrence of errors or failures in our products or interruptions of service at our data center could result in adverse publicity, loss of or delay in market acceptance, or claims by customers against us. Our products and on-line services are used to monitor the activity levels of our customers' Internet sites, to provide real-time monitoring of firewalls, and to provide real-time monitoring, alerting and recovery of Internet servers. These and other functions that our products provide are often critical to our customers, especially in light of the considerable resources many organizations spend on the development and maintenance of their web sites. Additionally, our security products often contribute to vital protection of a company's internal systems and information. Our end-user licenses contain provisions that limit our exposure to product liability claims, but these provisions may not be enforceable in all jurisdictions. Additionally, we maintain limited product liability insurance. Our products and product enhancements are very complex and may from time to time contain errors or result in failures that we did not detect or anticipate when introducing such products or enhancements to the market. The computer hardware environment is characterized by a wide variety of non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time consuming. Despite our testing, errors may still be discovered in some new products or enhancements after the products or enhancements are delivered to customers. 11 14 If Our Internal Professional Services Organization Does Not Provide Training or Implementation Services Effectively and According to Schedule, Our Revenues and Profitability May Be Harmed. Customers that license our products may require consulting, implementation, maintenance and training services from our internal professional services organization. If our professional services organization does not effectively implement or support our products or if we are unable to expand our professional services organization as needed to meet our customer needs, our ability to sell our solutions may be reduced and we may suffer adverse publicity. When we sell licenses and professional services for implementation and training we recognize revenue as we perform the implementation. Thus, delays in providing the complementary services will delay recognition of revenue. The Market Price for Our Common Stock, Like Other Technology Stocks, Has Been and May Continue to Be Volatile. The market price of our common stock has been highly volatile and has experienced wide fluctuations. We expect our stock price will continue to fluctuate. The value of an investment in WebTrends could decline due to the impact of any of the following factors upon the market price of WebTrends common stock: variations in our actual and anticipated operating results; changes in our earnings estimates by analysts; our failure to meet analysts' performance expectations; and lack of liquidity. The stock markets have, in general, and with respect to Internet companies in particular, recently experienced stock price and volume volatility that has affected companies' stock prices. The stock markets may continue to experience volatility that may adversely affect the market price of our common stock. Stock prices for many companies in the technology and emerging growth sector have experienced wide fluctuations that have often been unrelated to the operating performance of such companies. Fluctuations such as these may affect the market price of our common stock. Significant Fluctuation in the Market Price of Our Common Stock Could Result in Securities Class Action Claims Against Us. Securities class action claims have been brought against issuing companies in the past after volatility in the market price of a company's securities. Such litigation could be very costly and divert our management's attention and resources, and any adverse determination in such litigation could also subject us to significant liabilities. ITEM 2. PROPERTIES We have two leases for an aggregate of 110,000 square feet of office space in Portland, Oregon. The first lease, for approximately 52,000 square feet, expires in January 2004, with an option to renew for five additional years. The second lease, for approximately 58,000 square feet, expires in December 2006 with options to renew ranging between two and five years. We also lease office space for sales and support personnel in Newbury, Berkshire, United Kingdom. ITEM 3. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. We are not currently involved in any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter. 12 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market System under the symbol WEBT. The following table sets forth the high and low closing sales prices for our common stock as reported by the Nasdaq National Market:
HIGH LOW ------ ------ YEAR ENDED DECEMBER 31, 2000 First Quarter............................................... $85.50 $32.88 Second Quarter.............................................. $72.38 $24.06 Third Quarter............................................... $44.25 $28.00 Fourth Quarter.............................................. $35.25 $15.50
As of January 31, 2001, our common stock was held by an estimated 12,000 shareholders with 69 shareholders of record. We have never declared or paid any cash dividends. We currently intend to retain our earnings, if any, for developing our business. Accordingly, we do not anticipate paying any cash dividends in the foreseeable future. 13 16 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. Historical results are not necessarily indicative of future results. The selected financial data and balance sheet data presented below for each of the years in the five year period ended December 31, 2000 have been derived from the audited consolidated financial statements of the Company.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA Revenue.................................. $ 1,865 $ 4,055 $ 8,008 $19,726 $61,271 Operating income......................... 398 427 222 1,370 8,941 Net income(1)............................ 405 287 219 2,736 8,921 Net income per share: Basic.................................. -- .02 .01 .12 .34 Diluted................................ -- .02 .01 .11 .31 Weighted average shares: Basic.................................. -- 16,252 16,421 23,538 26,133 Diluted................................ -- 16,252 18,044 25,976 28,389 Pro forma net income(1).................. 265 Pro forma net income per share -- basic and diluted............................ .02 Shares used in pro forma net income per share calculation -- basic and diluted................................ 15,600
DECEMBER 31, ------------------------------------------------ 1996 1997 1998 1999 2000 ----- ------ ------ ------- -------- (IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents................... $ 321 $ 807 $1,099 $29,398 $ 13,805 Working capital (deficit)................... (103) 260 221 76,099 79,820 Total assets................................ 910 1,886 3,362 90,235 120,479 Long-term obligations....................... -- 7 -- -- -- Total shareholders' equity.................. 47 584 842 80,536 97,605
- --------------- (1) Prior to 1997, the Company had elected to have taxes on WebTrends' income paid by WebTrends' shareholders rather than by the Company. Pro forma net income data has been presented for comparison purposes only, as if the Company had been organized as a taxable entity for periods prior to 1997. 14 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report includes forward-looking statements that involve risks and uncertainties that may cause actual results to differ materially from those predicted in the forward-looking statements. In particular, there are forward-looking statements concerning our expectations for operating expenses and liquidity and capital resources. Forward-looking statements can be identified by their use of such verbs as "expects," "anticipates," "believes," or similar terms. If any of our assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, our actual results could differ materially from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors, including, but not limited to, the risks detailed in the section of this report entitled "Business -- Risk Factors." PENDING MERGER WITH NETIQ On January 16, 2001, WebTrends announced it had entered into a merger agreement with NetIQ Corporation so that upon the closing of the merger, WebTrends will become a wholly owned subsidiary of NetIQ. Closing of the merger is subject to regulatory and shareholder approvals, among other conditions and terms, as set out in the merger agreement. At the effective time of the merger, each outstanding share of the Company's common stock will be converted into the right to receive 0.48 of a share of NetIQ common stock. The transaction is expected to be completed in the first or second calendar quarter of 2001. The following management's discussion and analysis addresses the historical results of, and known trends and uncertainties with respect to, the business of WebTrends as a separate company, and does not specifically contemplate the effect of the proposed merger with NetIQ. RESULTS OF OPERATIONS Revenue Software license revenue consists of fees for licenses of WebTrends' software products while support services revenue consists of annual subscriptions for unspecified upgrades, post-sale customer support services, and professional consulting services. Total revenue increased 210.6% to $61.3 million for 2000 from $19.7 million for 1999, and was $8.0 million in 1998. Foreign sales were approximately 27.5%, 22.7%, and 27.5% of total revenues during 1998, 1999 and 2000, respectively. The primary contributing factors for the increase in revenue are discussed below. SOFTWARE LICENSES
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- CHANGE FROM CHANGE FROM 1998 1998 TO 1999 1999 1999 TO 2000 2000 ------ ------------ ------- ------------ ------- (DOLLAR AMOUNTS IN THOUSANDS) Software Licenses...................... $7,206 129.3% $16,523 196.8% $49,042 Percent of Revenues.................... 89.9% 83.8% 80.0%
WebTrends benefited from a very strong market for Internet infrastructure products and the strategic contribution of our solutions to our customers' eBusiness success. Software license revenue increased as a result of continued strong growth across each of our product categories as new releases of existing products in late 1999 and early 2000 gained increasing customer acceptance. Specifically, we experienced an increase of 155% in our eBusiness Management and Security Solutions product category and an increase of 347% in our eBusiness Intelligence Solutions product category for the year ended December 31, 2000, compared to the year ended December 31, 1999. The large investment made in significantly increasing our sales force by 115% to more than 80 as of December 31, 2000, also had a positive effect on revenue growth for the year ended December 31, 2000. Despite the fast growth in software license revenue, the pace of growth in support services 15 18 was even more rapid and, as a consequence, software license revenue decreased as a percent of total revenue in the year ended December 31, 2000, compared to the prior periods. SUPPORT AND SERVICES
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- CHANGE FROM CHANGE FROM 1998 1998 TO 1999 1999 1999 TO 2000 2000 ----- ------------ ------ ------------ ------- (DOLLAR AMOUNTS IN THOUSANDS) Support and Services................... $ 802 299.4% $3,203 281.8% $12,229 Percent of Revenues.................... 10.0% 16.2% 20.0%
The increase in support services revenue resulted primarily from additional consulting, training and support services associated with the sale of our new Enterprise Reporting Service and Commerce Trends products which accounted for approximately 45% of the increase. The remaining increase was derived primarily from increased subscription revenue as we experience continued growth in the installed base of customers. To support these new products our support services staff grew by almost 60 employees in 2000 to more than 90 as of December 31, 2000. Cost of Revenue
YEAR ENDED DECEMBER 31, -------------------------------------------------------- CHANGE FROM CHANGE FROM 1998 1998 TO 1999 1999 1999 TO 2000 2000 ---- ------------ ------ ------------ ------ (DOLLAR AMOUNTS IN THOUSANDS) Cost of Revenue.......................... $633 153.4% $1,604 347.0% $7,170 Percent of Revenues...................... 7.9% 8.1% 11.7%
Cost of revenue includes costs associated with providing technical support and consulting services to customers, product packaging, software documentation, duplication, labor, and other costs associated with product fulfillment, and royalties associated with the sale of WebTrends' products. The increase in cost of revenue as a percent of total revenue resulted primarily from hiring customer support and professional services personnel to meet demand from a larger customer base and to manage and perform consulting and training services. Operating Expenses We continue to believe that strategic investment in all areas of our business is required, and we anticipate that expenses will increase in absolute dollars in future periods. Expenses in each category may vary as a percent of total revenue and relative to one another as we continue to take advantage of strategic hiring and investing opportunities. RESEARCH AND DEVELOPMENT
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- CHANGE FROM CHANGE FROM 1998 1998 TO 1999 1999 1999 TO 2000 2000 ------ ------------ ------ ------------ ------- (DOLLAR AMOUNTS IN THOUSANDS) Research and Development.............. $2,211 72.8% $3,820 164.9% $10,121 Percent of Revenues................... 27.6% 19.4% 16.5%
Research and development expenses consist primarily of salaries and related costs associated with developing new products, enhancing existing products and performing quality assurance and documentation activities. The increase in such expenses in absolute dollars is primarily attributable to increasing the number of research and development employees over the periods presented. Research and development expenses decreased as a percentage of total revenue due to the rapid growth in total revenue. We continue to believe 16 19 that significant investment in research and development is required to remain competitive in our markets, and anticipate that research and development expenses will increase in absolute dollars in future periods, but may vary as a percent of total revenue. SALES AND MARKETING
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- CHANGE FROM CHANGE FROM 1998 1998 TO 1999 1999 1999 TO 2000 2000 ------ ------------ ------ ------------ ------- (DOLLAR AMOUNTS IN THOUSANDS) Sales and Marketing................... $3,642 173.7% $9,967 181.1% $28,016 Percent of Revenues................... 45.5% 50.5% 45.7%
The increase in sales and marketing expense is primarily attributable to the cost of hiring and maintaining additional sales and marketing personnel, including employees to expand the direct sales force and to support indirect distribution channels. We expect that sales and marketing expenses will continue to increase in absolute dollars as we continue to expand our marketing programs and sales force to increase brand awareness, but may vary as a percent of total revenue. GENERAL AND ADMINISTRATIVE
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- CHANGE FROM CHANGE FROM 1998 1998 TO 1999 1999 1999 TO 2000 2000 ------ ------------ ------ ------------ ------ (DOLLAR AMOUNTS IN THOUSANDS) General and Administrative............. $1,301 127.9% $2,965 136.8% $7,022 Percent of Revenues.................... 16.2% 15.0% 11.5%
General and administrative expenses consist primarily of salaries and other employee-related costs for executive, financial, human resources and infrastructure personnel. General legal and accounting services, insurance and general facility costs are also included within general and administrative expenses. The 2000 period includes a charge of $317,500 related to the acquisition of OpenSoft Communications Ltd. incurred during the quarter ended June 30, 2000. The increase in absolute dollars, excluding the acquisition charge, is primarily attributable to the addition of accounting and administrative personnel necessary to handle the increased level of transactions. We expect general and administrative expenses will continue to increase in absolute dollars to support the anticipated expansion of sales and operations, but they may vary as a percent of total revenue. Other Income, Net Other income, net, which consists almost entirely of interest income, for 1998, 1999 and 2000 was $28,886, $2.9 million and $5.2 million, respectively. The increase in 1999 is primarily attributable to interest income on investment of funds received from the initial and follow-on public offerings in February and May of 1999. In addition to the investment of the public offering funds received in 1999, the increase in other income for 2000 is also attributable to the investment of cash generated from the business since the 1999 public offerings. Income Taxes Income tax provisions for 1998, 1999 and 2000 reflect effective tax rates of 12.5%, 36.3% and 37.1%, respectively. The increases in the effective rates are primarily attributable to significant research and development credits generated and utilized in 1998. Fewer tax credits were available in 1999 and 2000. 17 20 LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents and investments of $92.3 million at December 31, 2000, which represents our primary source of liquidity, and working capital of approximately $79.8 million. Our primary market risk exposure is the impact of interest rate fluctuations on interest income earned on our investment portfolio. The risks associated with market, liquidity and principal are mitigated by investing in high-credit quality securities and limiting concentrations of issuers and maturity dates. Derivative financial instruments are not part of our investment portfolio. We have no debt instruments or credit facilities in place at December 31, 2000. Cash and cash equivalents and investments increased by $10.9 million during 2000, primarily as a result of cash generated by financing and operating activities. Net cash provided by operating activities was approximately $19.3 million for 2000, and resulted primarily from profitable operations and increased deferred revenues, accounts payable and accrued liabilities, partially offset by increased accounts receivable due to sales growth. Cash used by investing activities, exclusive of the purchase and maturity of short-term investments, was $11.3 million for 2000. Such investing activities consisted of purchased computer equipment and furniture and fixtures related to increased personnel for $9.7 million in addition to the acquisition of Opensoft Communications Ltd., a distributor of WebTrends products, in June 2000 for $1.7 million. Cash provided by financing activities of $3.0 million related to stock issued pursuant to employee benefit plans. While increasing in absolute dollars, for the year ended December 31, 2000, operating expenses decreased as a percentage of revenue to 73.7%, from 84.9% for the year ended December 31, 1999. Since inception, we have continued to increase our operating expenses in terms of absolute dollars. We anticipate that we will continue to reinvest revenues in operating expenses for the foreseeable future, and that these expenses plus capital expenditures will constitute a material use of cash resources. Additionally, we may utilize cash resources to fund acquisitions or investments in businesses, technologies or product lines that are complementary to our business. We believe that our current cash and cash equivalents, short-term investments and funds expected to be generated from operations will satisfy our anticipated working capital and other cash requirements for at least the next 12 months. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk represents the risk of change in the value of short-term investments and financial instruments caused by fluctuations in investment prices, interest rates and foreign currency exchange rates. The Company is exposed to foreign exchange rate fluctuations related to the translation of the financial results of our foreign subsidiary into U.S. dollars during consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuations on the Company for the year ended December 31, 2000 was immaterial. All other financial transactions are denominated in U.S. dollars. The Company has not entered into any derivative financial instruments to manage interest rate risk or for speculative purposes and is not currently evaluating the future use of such financial instruments. We follow established policies and procedures to manage exposure to changes in the interest rate and market risks of our investments. Due to the relative short-term maturities of our investments, management has determined that the fair value does not differ materially from the carrying amount and that the market risk arising from our holdings at December 31, 2000 is not material. 18 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors WebTrends Corporation: We have audited the accompanying consolidated balance sheets of WebTrends Corporation and subsidiary as of December 31, 1999 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of WebTrends' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WebTrends Corporation and subsidiary as of December 31, 1999 and 2000, and the results of their operations, and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Portland, Oregon January 19, 2001 19 22 WEBTRENDS CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- 1999 2000 ----------- ------------ Current assets: Cash and cash equivalents................................. $29,397,650 $ 13,805,329 Short-term investments.................................... 49,885,523 72,195,093 Accounts receivable, net.................................. 4,968,544 15,344,995 Prepaid expenses and other................................ 1,044,619 625,229 Deferred taxes............................................ 502,500 724,315 ----------- ------------ Total current assets.............................. 85,798,836 102,694,961 Property and equipment, net................................. 2,375,750 9,888,787 Long-term investments....................................... 2,060,662 6,295,102 Goodwill, net............................................... -- 1,516,790 Deferred taxes, net......................................... -- 83,750 ----------- ------------ Total assets...................................... $90,235,248 $120,479,390 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,307,690 $ 3,501,996 Accrued liabilities....................................... 1,418,641 2,761,328 Accrued compensation...................................... 2,552,863 4,198,636 Accrued income taxes...................................... 297,397 906,445 Deferred revenue.......................................... 4,122,882 11,506,061 ----------- ------------ Total liabilities................................. 9,699,473 22,874,466 ----------- ------------ Commitments (note 9) Shareholders' equity: Preferred stock, no par value. Authorized 15,000,000 shares; no shares outstanding.......................... -- -- Common stock, no par value. Authorized 300,000,000 shares; issued and outstanding 25,817,568 and 26,425,505....... 77,661,491 85,641,804 Deferred compensation, net................................ (405,391) (223,690) Accumulated other comprehensive loss...................... -- (14,046) Retained earnings......................................... 3,279,675 12,200,856 ----------- ------------ Total shareholders' equity........................ 80,535,775 97,604,924 ----------- ------------ Total liabilities and shareholders' equity........ $90,235,248 $120,479,390 =========== ============
See accompanying notes to consolidated financial statements. 20 23 WEBTRENDS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1999 2000 ----------- ----------- ----------- Revenue: Software licenses................................. $ 7,206,461 $16,523,352 $49,041,784 Support services.................................. 801,963 3,202,500 12,228,770 ----------- ----------- ----------- Total revenue............................. 8,008,424 19,725,852 61,270,554 Cost of revenue..................................... 632,925 1,604,208 7,170,361 ----------- ----------- ----------- Gross margin........................................ 7,375,499 18,121,644 54,100,193 ----------- ----------- ----------- Operating expenses: Research and development.......................... 2,211,029 3,819,760 10,120,525 Sales and marketing............................... 3,641,965 9,966,717 28,015,922 General and administrative........................ 1,300,626 2,965,278 7,022,456 ----------- ----------- ----------- Total operating expenses.................. 7,153,620 16,751,755 45,158,903 ----------- ----------- ----------- Income from operations............................ 221,879 1,369,889 8,941,290 ----------- ----------- ----------- Other income (expense): Interest income................................... 41,997 2,993,894 5,233,902 Interest expense.................................. (13,111) (67,101) -- ----------- ----------- ----------- Other income, net.............................. 28,886 2,926,793 5,233,902 ----------- ----------- ----------- Income before income taxes..................... 250,765 4,296,682 14,175,192 Income taxes........................................ 31,305 1,560,742 5,254,011 ----------- ----------- ----------- Net income..................................... $ 219,460 $ 2,735,940 $ 8,921,181 =========== =========== =========== Net income per share: Basic............................................. $ 0.01 $ 0.12 $ 0.34 =========== =========== =========== Diluted........................................... $ 0.01 $ 0.11 $ 0.31 =========== =========== =========== Weighted average shares: Basic............................................. 16,421,302 23,538,136 26,132,849 Diluted........................................... 18,044,154 25,975,868 28,389,173
See accompanying notes to consolidated financial statements. 21 24 WEBTRENDS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK, COMMON STOCK, ACCUMULATED CLASS A CLASS B OTHER ------------------------ ------------------- DEFERRED COMPREHENSIVE RETAINED SHARES AMOUNT SHARES AMOUNT COMPENSATION LOSS EARNINGS ---------- ----------- ------- --------- ------------ ------------- ----------- Balance, December 31, 1997...... 16,421,054 $ 260,000 -- $ -- $ -- $ -- $ 324,275 Net income...................... -- -- -- -- -- -- 219,460 Deferred compensation........... -- -- -- 584,575 (584,575) -- -- Amortization of deferred compensation.................. -- -- -- -- 33,041 -- -- Shares issued pursuant to employee benefit plans, including tax benefit......... -- -- 16,874 5,119 -- -- -- ---------- ----------- ------- --------- --------- -------- ----------- Balance, December 31, 1998...... 16,421,054 260,000 16,874 589,694 (551,534) -- 543,735 Net income...................... -- -- -- -- -- -- 2,735,940 Conversion of Common B to Common A............................. 16,874 589,694 (16,874) (589,694) -- -- -- Shares issued in public offerings..................... 8,500,000 73,743,261 -- -- -- -- -- Amortization of deferred compensation.................. -- -- -- -- 146,143 -- -- Shares issued pursuant to employee benefit plans, including tax benefit......... 879,640 3,068,536 -- -- -- -- -- ---------- ----------- ------- --------- --------- -------- ----------- Balance, December 31, 1999...... 25,817,568 77,661,491 -- -- (405,391) -- 3,279,675 Net income...................... -- -- -- -- -- -- 8,921,181 Foreign currency translation adjustment.................... -- -- -- -- -- (14,046) -- Comprehensive loss.............. -- -- -- -- -- -- -- Amortization of deferred compensation.................. -- -- -- -- 131,601 -- -- Unamortized portion of deferred compensation associated with terminated employees.......... -- (50,100) -- -- 50,100 -- -- Shares issued pursuant to employee benefit plans, including tax benefit......... 607,937 8,030,413 -- -- -- -- -- ---------- ----------- ------- --------- --------- -------- ----------- Balance, December 31, 2000...... 26,425,505 $85,641,804 -- $ -- $(223,690) $(14,046) $12,200,856 ========== =========== ======= ========= ========= ======== =========== TOTAL ----------- Balance, December 31, 1997...... $ 584,275 Net income...................... 219,460 Deferred compensation........... -- Amortization of deferred compensation.................. 33,041 Shares issued pursuant to employee benefit plans, including tax benefit......... 5,119 ----------- Balance, December 31, 1998...... 841,895 Net income...................... 2,735,940 Conversion of Common B to Common A............................. -- Shares issued in public offerings..................... 73,743,261 Amortization of deferred compensation.................. 146,143 Shares issued pursuant to employee benefit plans, including tax benefit......... 3,068,536 ----------- Balance, December 31, 1999...... $80,535,775 Net income...................... 8,921,181 Foreign currency translation adjustment.................... (14,046) Comprehensive loss.............. 8,907,135 Amortization of deferred compensation.................. 131,601 Unamortized portion of deferred compensation associated with terminated employees.......... -- Shares issued pursuant to employee benefit plans, including tax benefit......... 8,030,413 ----------- Balance, December 31, 2000...... $97,604,924 ===========
See accompanying notes to consolidated financial statements. 22 25 WEBTRENDS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1999 2000 ---------- ------------- ------------- Cash flows from operating activities: Net income............................................ $ 219,460 $ 2,735,940 $ 8,921,181 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................... 206,417 523,738 2,493,262 Provision for doubtful accounts.................... 43,548 190,000 1,322,000 Loss on sale of assets............................. 293 41,762 -- Amortization of deferred compensation.............. 33,041 146,143 131,601 Tax benefit from employee stock option plans....... -- 1,962,350 5,072,437 Increase in deferred income taxes.................. -- (131,000) (305,565) Changes in assets and liabilities (net of assets acquired): Accounts receivable.............................. (494,484) (4,180,967) (11,076,820) Prepaid expenses and other....................... (467,389) (514,564) 419,390 Accounts payable................................. 139,357 924,503 1,524,340 Accrued liabilities.............................. 430,712 1,032,305 1,204,230 Accrued compensation............................. 342,617 2,044,441 1,645,773 Accrued income taxes............................. (24,548) (185,136) 609,048 Deferred revenue................................. 436,939 3,298,869 7,383,179 ---------- ------------- ------------- Net cash provided by operating activities..... 865,963 7,888,384 19,344,056 ---------- ------------- ------------- Cash flows from investing activities: Acquisition of property and equipment................. (479,151) (2,342,843) (9,677,826) Business acquired..................................... -- -- (1,658,471) Purchase of investments............................... -- (368,415,185) (215,366,010) Maturity of investments............................... -- 316,469,000 188,822,000 ---------- ------------- ------------- Net cash used for investing activities........ (479,151) (54,289,028) (37,880,307) ---------- ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock................ 5,119 73,743,261 -- Stock issued pursuant to employee benefit plans....... -- 1,106,186 2,957,976 Principal payments on borrowings from shareholders.... (100,000) (150,000) -- ---------- ------------- ------------- Net cash provided by (used for) financing activities.................................. (94,881) 74,699,447 2,957,976 ---------- ------------- ------------- Effect of foreign currency exchange rates on cash........................................ -- -- (14,046) Increase (decrease) in cash and cash equivalents................................. 291,931 28,298,803 (15,592,321) Cash and cash equivalents, beginning of year............ 806,916 1,098,847 29,397,650 ---------- ------------- ------------- Cash and cash equivalents, end of year.................. $1,098,847 $ 29,397,650 $ 13,805,329 ========== ============= ============= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest........................................... $ 21,717 $ 25,339 $ -- Income taxes....................................... $ 155,500 $ 94,300 $ (315,633)
See accompanying notes to consolidated financial statements. 23 26 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY WebTrends Corporation, or the "Company," is a leading developer and provider of enterprise solutions for Visitor Relationship Management, eBusiness Intelligence and eBusiness Systems Management. WebTrends offers integrated scalable software solutions and professional services addressing key eBusiness management needs and a wide variety of Internet-based systems including web servers, firewalls, proxy servers, media servers, email servers and database systems. Products are sold through internal corporate and enterprise field sales, distributors, resellers, online from our web site and are also available as a hosted application. The accompanying financial statements include the accounts of WebTrends Corporation and its wholly owned subsidiary, WebTrends UK Limited. All significant intercompany transactions have been eliminated. USE OF ESTIMATES The presentation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH, CASH EQUIVALENTS AND INVESTMENTS The Company classifies highly liquid investments purchased with an original maturity of three months or less as cash equivalents. Investments consist of certificates of deposit, commercial paper and other highly liquid investments with original maturities ranging from three months to two years. Investments with maturity dates in excess of one year from the balance sheet date are classified as long-term investments in the accompanying balance sheet. All investments are classified assuming they will be held to maturity and are recorded at amortized cost, which approximates market value. ACCOUNTS RECEIVABLE Accounts receivable are shown net of allowance for doubtful accounts of $230,000 and $950,000 at December 31, 1999 and 2000, respectively. Charges against the reserve were $29,000, $240,000 and $602,000 for the years ended December 31, 1998, 1999 and 2000, respectively. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of individual assets ranging from three to five years. Expenditures for renewals and improvements that significantly add to the useful life of an asset are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures incurred for computer software developed or obtained for internal use are capitalized for application developed activities and expensed as incurred for preliminary project activities or post-implementation activities. When depreciable properties are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. REVENUE RECOGNITION The Company has adopted Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of a Provision of 97-2, and SOP 98-9, Modification of 24 27 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SOP 97-2, With Respect to Certain Transactions. The provisions of SOP's 97-2 and 98-4 have been applied to transactions entered into beginning January 1, 1998. The provisions of SOP 98-9 have been applied to transactions entered into beginning January 1, 1999. Prior to 1997, the Company's revenue policy was in accordance with the preceding authoritative guidance provided by SOP 91-1, Software Revenue Recognition. The adoption of SOP 97-2, as amended, did not have a significant impact on the Company's accounting for revenues. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the vendor specific objective evidence of the relative fair values of each element in the arrangement. SOP 98-9 amended SOP 97-2 to require recognition of revenue using the "residual method" in a multiple element arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the residual method, the total fair value of the undelivered elements is deferred and subsequently recognized in accordance with SOP 97-2. Software license revenue, consisting of fees for licenses of WebTrends' software products, is generally recognized upon receipt of a signed contract or purchase order and delivery of the software, provided the related fee is fixed and determinable, collectibility of the fee is probable and vendor specific objective evidence for all elements has been established. The Company has established sufficient vendor specific objective evidence to ascribe a value to professional consulting services and post-contract customer support based on the price charged when these elements are sold separately. Accordingly, software license revenue is recorded under the residual method described above in arrangements in which licenses are sold with professional consulting services, post-contract customer support or both. In addition, in arrangements involving professional consulting services that are considered essential to the functionality of the software, all of the software license and consulting revenue is deferred until installation is complete using the completed contract method which, due to the short length of the installation period does not differ materially from the result that would be obtained if the percentage of completion method were used. Support services revenue consists of annual subscriptions for upgrades, post-sale customer support services and professional consulting services. Our customers typically purchase maintenance agreements annually, which give the subscriber the right to obtain upgrades, when and if available. Subscriptions are priced based on a percentage of the software license fee, are collected in advance and the revenue is recognized ratably over the term of the subscription. Professional consulting services are billed either on a time and materials basis or on a fixed-price schedule. Revenue allocated to professional consulting services is recognized as the services are performed except as described above where such services are considered essential to the functionality of the software sold as part of the arrangement. The Company generally provides a thirty-day right of return for each product sold. Estimated sales returns and allowances are recorded upon shipment of the product and have not been material to date. WebTrends sells a portion of its products domestically and internationally through resellers. Revenue from sales to domestic resellers is managed directly by the Company and is recognized from sales primarily at the time of shipment, net of estimated returns and allowances. WebTrends has also entered into agreements with a limited number of large domestic distributors. These agreements offer expanded rights of return and price protection beyond the Company's normal reseller agreements. For these distributors, the Company recognizes revenues upon sale from the distributor to a third party or end user. Revenue on sales to international resellers managed by a third-party export management company is recognized upon sale from the reseller to a third party or end user. CONCENTRATION OF CREDIT RISK Sales outside of the United States were approximately $2,206,000, $4,484,000 and $16,840,000 for the years ended December 31, 1998, 1999 and 2000, respectively. During these same periods, no individual 25 28 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) customer or reseller accounted for 10% or more of total revenue. However, sales through a third-party export management company were 16.7%, 17.2% and 21.7% for the years ended December 31, 1998, 1999 and 2000, respectively. Accounts receivable at December 31, 1999 and 2000 includes balances due from this third-party export management company, which manages most of the invoicing and collection processes for the Company's international sales. Receivables through this export management company comprised 18% and 20% of the total outstanding accounts receivable balance at December 31, 1999 and 2000, respectively, of which 66% and 83% was due less than thirty days from billing at those respective dates. No other customer comprised greater than 10% of the total accounts receivable balance at December 31, 1999 and 2000. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, investments, accounts receivable and accounts payable approximate fair value due to the relative short-term nature of these instruments. ADVERTISING COSTS Advertising costs are generally expensed when incurred and totaled $957,000, $1,439,000 and $3,065,000 for the years ended December 31, 1998, 1999 and 2000, respectively. RESEARCH AND DEVELOPMENT Software development costs have been accounted for in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. To date, the period between the achievement of technological feasibility and the general availability of such software has been short; therefore, software development costs qualifying for capitalization have been immaterial and have been charged to research and development expense. INCOME TAXES The Company accounts for income taxes under the asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK-BASED EMPLOYEE COMPENSATION The Company has adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply provisions of APB Opinion No. 25 under which no compensation cost for stock options granted to employees is recognized for stock option awards granted at or above fair market value and to provide pro forma net income and pro forma earnings per share disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. 26 29 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NET INCOME PER SHARE Basic and diluted net income per share are computed using the weighted average number of common shares outstanding during each year. Diluted shares outstanding also include potential dilution for stock options outstanding calculated using the treasury method. Diluted shares outstanding for 2000 excludes 533,270 of incremental options as these options would have been antidilutive. Basic and diluted net income per share have been calculated in accordance with SEC Staff Accounting Bulletin No. 98. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. These changes had no impact on previously reported results of operations or shareholders' equity. (2) PROPERTY AND EQUIPMENT
DECEMBER 31, ------------------------- 1999 2000 ---------- ----------- Computer hardware and equipment.................... $2,236,507 $ 8,440,497 Furniture and fixtures............................. 566,026 2,057,067 Computer software.................................. 389,676 2,194,449 Leasehold improvements............................. -- 381,174 ---------- ----------- Total.................................... 3,192,209 13,073,187 Less accumulated depreciation.................... (816,459) (3,184,400) ---------- ----------- Total property and equipment, net........ $2,375,750 $ 9,888,787 ========== ===========
(3) INCOME TAXES For 2000, foreign operations incurred a loss before tax of $402,000 while domestic income before taxes was $14,577,000. Prior to June 30, 2000, the Company did not have foreign operations. The provision for income taxes is comprised of the following:
1998 1999 2000 -------- ---------- ---------- Current: Federal....................................... $102,000 $1,401,125 $4,578,574 State......................................... 19,805 290,249 964,485 -------- ---------- ---------- 121,805 1,691,374 5,543,059 -------- ---------- ---------- Deferred: Federal....................................... (75,000) (103,988) (74,407) State......................................... (15,500) (26,644) (14,776) Foreign....................................... -- -- (199,865) -------- ---------- ---------- (90,500) (130,632) (289,048) -------- ---------- ---------- Total provision for income taxes...... $ 31,305 $1,560,742 $5,254,011 ======== ========== ==========
27 30 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provision for income taxes varies from the amounts computed by applying the federal statutory rate to income before taxes as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1998 1999 2000 ------ ----- ----- Federal income tax statutory rates.......................... 34.0% 34.0% 35.0% State and local taxes, net of federal benefits.............. 8.0 6.7 6.4 Research and development credits............................ (37.3) (4.8) (3.1) Foreign sales corporation benefit........................... (1.2) -- (1.5) Deferred stock compensation................................. 4.3 -- -- Other....................................................... 4.7 0.4 0.3 ----- ---- ---- Total............................................. 12.5% 36.3% 37.1% ===== ==== ====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31, ---------------------- 1999 2000 --------- --------- Deferred tax assets: Reserves and allowances............................ $ 304,000 $ 410,200 Foreign loss carryforwards......................... -- 83,700 Accrued liabilities................................ 125,900 111,000 Other.............................................. 72,600 203,165 --------- --------- Deferred tax assets............................. $ 502,500 $ 808,065 ========= ========= Deferred tax liabilities: Deferred compensation.............................. (39,300) (89,000) Depreciation of equipment.......................... (157,700) (124,898) --------- --------- Net deferred tax assets......................... $ 305,500 $ 594,167 ========= =========
The Company has not recorded a valuation allowance against its deferred tax assets existing at December 31, 1999 or 2000, as it believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. At December 31, 2000, the Company had tax loss carryovers of approximately $7,700,000, $8,200,000 and $276,000 for federal, state and foreign purposes, respectively, to offset against future taxable income. These carryovers expire beginning in 2014 through 2019. In addition, the Company had approximately $1,060,000 and $375,000 of federal and state credit carryforwards, respectively, to offset against future taxable income which expire from 2004 through 2020. The carryforwards identified relate to the disqualifying disposition of employee stock options and, when realized, the resulting tax savings will be credited directly to shareholders' equity and will not impact tax expense reported for book purposes. During 1999 the Company experienced a change in ownership as defined in Internal Revenue Code Section 382 which limits the utilization of tax loss carryforwards. The Company does not expect the "annual limitation" to impact the timing or amount of carryforward limitation. 28 31 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) DEFERRED REVENUE
DECEMBER 31, ------------------------- 1999 2000 ---------- ----------- Deferred customer support.......................... $ 520,313 $ 2,143,646 Deferred product revenues.......................... 752,614 2,521,226 Deferred subscription revenues..................... 1,845,441 6,084,363 Other.............................................. 1,004,514 756,826 ---------- ----------- $4,122,882 $11,506,061 ========== ===========
(5) EMPLOYEE BENEFIT PLAN The Company established an employee benefit plan, effective January 1, 1997, that features a 401(k) salary reduction provision covering all employees who meet certain eligibility requirements. Eligible employees can elect to defer up to 15% of compensation subject to the statutorily prescribed annual limit. WebTrends, at its discretion, may make contributions to the plan. No discretionary contributions were made to the plan in 1998 or 1999. The Company matched 3% of employee contributions in the amount of $263,980 in 2000. To date, the Company has paid plan administrative costs of $3,328, $4,680 and $9,906 for the years ended December 31, 1998, 1999, and 2000, respectively. Participants will receive their share of the value of their investments upon retirement or termination, subject to a vesting schedule for Company matching contributions. (6) SHAREHOLDERS' EQUITY PREFERRED STOCK WebTrends is authorized to issue 15,000,000 shares of preferred stock, no par value. The Board of Directors of the Company has the authority to divide the preferred stock into as many series as it shall from time to time determine. Each series of preferred stock shall have the powers, preferences and rights as determined by the Board at its discretion. As of December 31, 2000, no preferred shares have been issued. COMMON STOCK On February 19, 1999, WebTrends completed an initial public offering of 7,000,000 shares including 6,000,000 newly issued shares sold by WebTrends and 1,000,000 outstanding shares sold by existing shareholders. Subsequently, the selling shareholders sold an additional 1,050,000 shares pursuant to the underwriters' exercise of their overallotment option. The Company did not receive any of the proceeds from the sale of stock by the selling shareholders. The offered shares generated net proceeds to WebTrends of approximately $35.2 million. On May 13, 1999, the Company completed a follow-on offering of 5,000,000 shares, including 2,500,000 shares sold by WebTrends, and 2,500,000 shares sold by existing shareholders. The Company did not receive any of the proceeds from the sale of stock by the selling shareholders. The follow-on offering generated net proceeds to WebTrends of approximately $38.4 million after expenses. DEFERRED COMPENSATION Deferred compensation cost of $584,575 was recognized in 1998 for stock option awards that were granted with exercise prices that were less than the estimated value of the stock at the date of grant. Amortization of $33,041, $146,143 and $131,601 of deferred compensation has been recorded for the years ended December 31, 1998, 1999 and 2000, respectively. 29 32 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STOCK OPTIONS Effective March 28, 1997, WebTrends established the 1997 Key Employees' Incentive Stock Option Plan and subsequently authorized 3,000,000 shares of non-voting common stock, no par value, to be reserved for grants under the plan. Effective December 5, 1997, the Board approved the 1997 Stock Incentive Compensation Plan (the "Plan") which replaced the Key Employee Incentive Stock Option Plan. Options granted under the Plan may be designated as incentive or nonqualified at the discretion of the plan administrator. On October 30, 1998, the Company increased the number of shares authorized under the plan to 4,000,000. In December 1998, the Company reduced the number of shares authorized in the Plan to 3,069,048 and determined that no additional options would be granted under the Plan. In December 1998, WebTrends adopted the 1998 Stock Incentive Compensation Plan (the "1998 Plan"). The 1998 Plan permits both option and stock grants. The Board initially reserved a total of 2,930,950 shares of common stock for the 1998 Plan, plus (a) any shares returned to the 1997 Plan upon termination of certain option and stock grants (other than terminations due to exercise or settlement of such awards); and (b) an automatic annual increase, to be added on the first day of the fiscal year beginning in 2001, equal to the lesser of 1,000,000 shares or 5% of the average common shares outstanding as used to calculate fully diluted earnings per share as reported in the Company's Annual Report for the preceding year. Effective May 11, 2000, the 1998 plan was amended to, among other things, authorize 1,298,000 additional shares for issuance. The option price for incentive stock options is set at not less than the market value of WebTrends' common stock (market value plus 10% for shareholders who possess more than 10% of the combined voting power of all classes of shares of the Company) at the date of the grant. Employee options generally vest over a four-year period, 25% after the first year of employment and the balance in equal monthly amounts thereafter over the remaining vesting period. Options are contingent on continued employment with the Company and expire ten years (five years for 10% shareholders as defined above) from the date of grant. The vesting period for certain options is subject to acceleration upon a change in control of WebTrends as defined in the option agreements. WebTrends applies APB Opinion No. 25 in accounting for its stock options plans. Accordingly, compensation cost is generally not recognized for stock option grants. 30 33 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of stock option activity follows:
WEIGHTED AVERAGE NUMBER EXERCISE OF SHARES PRICE --------- -------- Options outstanding at December 31, 1997............... 1,258,416 $ 0.30 Granted................................................ 2,001,134 1.67 Canceled............................................... (70,000) 0.39 Forfeited.............................................. (230,378) 0.33 Exercised.............................................. (16,874) 0.30 --------- ------ Options outstanding at December 31, 1998............... 2,942,298 $ 1.23 Granted................................................ 1,328,070 17.88 Canceled............................................... -- -- Forfeited.............................................. (405,650) 3.27 Exercised.............................................. (854,340) 1.08 --------- ------ Options outstanding at December 31, 1999............... 3,010,378 $ 8.34 Granted................................................ 2,651,590 27.01 Canceled............................................... -- -- Forfeited.............................................. (354,133) 21.12 Exercised.............................................. (567,016) 3.62 --------- ------ Options outstanding at December 31, 2000............... 4,740,819 $18.41 ========= ======
The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives for options of similar price and grant date.
OPTIONS OUTSTANDING -------------------------------------------- WEIGHTED OPTIONS EXERCISABLE REMAINING -------------------------- EXERCISE PRICE NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE SHARES AVERAGE PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE - --------------- --------- ------------- ---------------- ------- ---------------- $ 0.30 - $12.90 1,243,117 $ 1.27 7.2 294,634 $ 1.13 $12.90 - $20.83 1,316,633 $17.28 9.1 200,811 $16.65 $20.84 - $30.05 1,767,799 $25.78 9.5 66,312 $24.41 $30.06 - $53.59 413,270 $42.03 9.1 -- -- --------- ------- 4,740,819 $18.41 8.8 561,757 $ 9.45
EMPLOYEE STOCK PURCHASE PLAN WebTrends adopted the 1999 Employee Stock Purchase Plan in December 1998. The Company intends for the Employee Stock Purchase Plan to qualify under Section 423 of the Internal Revenue Code of 1986, as amended. WebTrends authorized the issuance of a total of 700,000 shares of common stock plus an automatic annual increase as defined in the Employee Stock Purchase Plan. A total of 25,300 and 40,921 shares were issued under the Employee Stock Purchase Plan in 1999 and 2000, respectively. SFAS NO. 123 DISCLOSURE WebTrends applies APB No. 25 and related interpretations in accounting for its plans. However, pro forma information regarding net income is required by SFAS No. 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted under the fair value method prescribed by that statement. In accordance with SFAS No. 123, pro forma disclosures as if WebTrends adopted the cost recognition requirements under SFAS No. 123 in 1997 are presented below. 31 34 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The per share weighted average fair value of stock options granted during 1998, 1999 and 2000 was $1.74, $13.02 and $18.87, respectively. For SFAS No. 123 purposes, the fair value of each option has been estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions for grants:
YEAR ENDING DECEMBER 31, -------------------- 1998 1999 2000 ---- ---- ---- Average dividend yield.................................. --% --% --% Expected life in years.................................. 4 4 4 Risk free interest rate................................. 6.0% 6.0% 6.0% Expected volatility..................................... 100% 100% 100%
Had WebTrends used the fair value methodology for determining compensation expense, WebTrends' net income (loss) net of related tax effects would have approximated the pro forma amounts below:
1998 1999 2000 -------- ----------- ----------- Net income (loss): As reported................................. $219,460 $ 2,735,940 $ 8,921,181 Pro forma................................... (15,857) (1,662,856) (6,294,322) Net income (loss) per share, diluted: As reported................................. $ 0.01 $ 0.11 $ 0.31 Pro forma................................... -- (.06) (.24)
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. (9) COMMITMENTS WebTrends currently occupies office space under operating lease agreements in several locations. For the years ended December 31, 1998, 1999 and 2000, rent expense was approximately $204,000, $566,000 and $1,056,000, respectively. Future minimum lease payments under operating leases are as follows: Year ending December 31: 2001................................................... $1,790,289 2002................................................... 2,195,720 2003................................................... 2,202,150 2004................................................... 1,303,651 2005................................................... 1,229,419 Thereafter............................................. 1,229,419 ---------- $9,950,648 ==========
(10) ACQUISITION OF UNITED KINGDOM DISTRIBUTOR On June 30, 2000, the Company acquired all the outstanding stock of OpenSoft Communications Ltd., the Company's United Kingdom distributor, for $1.7 million in cash plus $150,000 in acquisition related expenses. The acquisition has been accounted for as a purchase and resulted in $1.6 million in goodwill that is being amortized on a straight-line basis over 7 years. The results of operations for this acquisition do not have a material effect on consolidated operating results. Accordingly, pro forma data is not presented. 32 35 WEBTRENDS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) SUBSEQUENT EVENT On January 16, 2001, the Company, NetIQ Corporation, a Delaware Corporation ("NetIQ") and North Acquisition Corporation, an Oregon corporation and a wholly-owned subsidiary of NetIQ, entered into a definitive merger agreement. Under the merger agreement, North Acquisition will be merged with and into the Company, with the Company surviving the merger and becoming a wholly owned subsidiary of NetIQ. Closing of the merger is subject to regulatory and shareholder approvals, among other conditions and terms, as set out in the merger agreement. At the effective time of the merger, each outstanding share of the Company's common stock will be converted into the right to receive 0.48 of a share of NetIQ common stock. The transaction is expected to be completed in the first or second calendar quarter of 2001. The transaction is expected to be accounted for as a purchase. (12) QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED --------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1999 1999 1999 1999 2000 2000 2000 2000 -------- -------- --------- -------- -------- -------- --------- -------- Revenue....................... $3,006 $4,007 $5,308 $7,405 $10,380 $13,519 $17,018 $20,354 Gross margin.................. 2,716 3,663 4,902 6,841 9,311 11,947 15,100 17,742 Income from operations........ 116 185 386 682 1,183 1,451 2,560 3,747 Net income.................... 178 526 878 1,154 1,512 1,874 2,429 3,106 Net income per share, diluted..................... $ 0.02 $ 0.02 $ 0.03 $ 0.04 $ 0.06 $ 0.07 $ 0.09 $ 0.11
33 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of WebTrends, and their ages and positions as of January 31, 2001, are as follows:
NAME AGE POSITION ---- --- -------- Elijahu Shapira........... 35 Chairman of the Board and Chief Executive Officer W. Glen Boyd.............. 33 President, Chief Technical Officer and Director Michael 42 Director Burmeister-Brown........ John W. Ryan.............. 39 Director Srivats Sampath........... 41 Director James T. Richardson....... 53 Senior Vice President, Chief Financial Officer Daniel J. Meub............ 47 Chief Operating Officer Mark E. Reed.............. 50 Senior Vice President of Corporate Development and Sales
There are no family relationships among any of the directors or executive officers of WebTrends. Elijahu Shapira is a co-founder of WebTrends and has served as its Chief Executive Officer since December 1997 and as a director since September 1993. From September 1994 to November 1995 and from November 1996 to December 1998, he served as its Vice President and Secretary. Mr. Shapira has 16 years of experience in the software industry. From June 1991 to September 1994, Mr. Shapira was the Product Development Manager for the AntiVirus product line of Central Point Software, an anti-virus software development company that was acquired by Symantec Corporation in 1994. From March 1987 to October 1990, Mr. Shapira was the Vice President of International Business Development for Carmel Software Engineering, a company specializing in network security and encryption products. W. Glen Boyd is a co-founder of WebTrends and has served as its President since December 1996, as its Chief Technical Officer since December 1997 and as a director since September 1993. Mr. Boyd served as the President of WebTrends from September 1993 to November 1995 and as its Vice President and Secretary from November 1995 to December 1996. Mr. Boyd has more than 13 years of experience in the software industry. Prior to co-founding WebTrends in 1993, from October 1990 to January 1993, Mr. Boyd was a Section Manager for the AntiVirus, Commute, and PCTools product lines of Central Point Software. Michael Burmeister-Brown has served as a director of WebTrends since October 1996. Since July 1997, Mr. Burmeister-Brown has served as a software engineer at Yahoo!, Inc., a company that provides services as a Web portal. Since May 1992, Mr. Burmeister-Brown has also served as the President of Second Nature Software, a software development company. From 1981 to 1991, Mr. Burmeister-Brown served in various executive management roles, including President, Chief Executive Officer and Chief Technology Officer for Central Point Software, a company he founded in 1981. Mr. Burmeister-Brown has 18 years of experience in senior management roles in the computer industry. John W. Ryan has served as a director of WebTrends since January 1998. Since July 1999, Mr. Ryan has served as Chief Executive Officer of Wisecity.com, Inc., a vertical Internet portal. From January 1997 to May 1999, Mr. Ryan served as the President of J. Ryan & Associates, a provider of high technology marketing and sales consulting services. From September 1995 to January 1997, Mr. Ryan served as the Vice President of Marketing Strategy and Programs for Tivoli Systems, a systems management division of IBM. From April 1994 to September 1995, Mr. Ryan served as the Vice President of Marketing for Mergent International, a producer of security software. From December 1990 to April 1994, he served as the director of a business unit for Central Point Software. Mr. Ryan has 17 years of experience in executive-level and senior management roles in the computer industry. 34 37 Srivats Sampath has served as a director of WebTrends since January 1998. Since December 1998, Mr. Sampath has served as President and Chief Executive Officer of McAffee.com Corporation, a provider of services to upgrade, protect and manage personal computers online. From July 1998 to December 1998, Mr. Sampath served as the Vice President of Worldwide Marketing of Network Associates, a provider of security and management solutions for enterprise networks. From June 1996 to December 1997, Mr. Sampath served as the Vice President of Product Marketing for Netscape Communications, a provider of Internet software and services. From June 1993 to June 1996, Mr. Sampath served as the President and Chief Executive Officer of Discussions Corporation, a company that he founded to develop e-mail based groupware solutions. From 1984 to 1991, Mr. Sampath managed the LAN Enhancement Operations and Microcomputer Communications Division of Intel Corporation. Mr. Sampath has over 17 years of experience serving in management and executive roles in the computer industry. James T. Richardson has served as WebTrends' Senior Vice President since April 1999, Vice President and Chief Financial Officer since July 1998. From April 1994 to December 1997, Mr. Richardson served as the Senior Vice President of Corporate Operations and Chief Financial Officer of Network General, a producer of networking software that merged with McAfee Associates in December 1997 to form Network Associates. From July 1992 to April 1994, Mr. Richardson served as the Vice President of Finance and Chief Financial Officer of Logic Modeling Corporation, an electronic design automation software company that merged with Synopsys, Inc. in February 1994. From November 1989 to June 1992, Mr. Richardson served as the Vice President of Finance and Administration and as Chief Financial Officer of Advanced Logic Research, a manufacturer of personal computers. Mr. Richardson has served in various management positions in the high-technology industry since 1977. Daniel J. Meub has served as WebTrends' Chief Operating Officer since February 2000. From April 1999 until February 2000, he was WebTrends' Senior Vice President of Marketing and Sales. From December 1998 until April 1999, he was WebTrends' Vice President of Marketing. From December 1996 to October 1998, Mr. Meub served as the President and Chief Executive Officer of Adaptive Solutions Inc., a supplier of forms processing software and imaging solutions for the health care and governmental markets that filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code due to insolvency. From January 1995 to November 1996, Mr. Meub served as the Executive Vice President of Marketing and Product Development of Now Software Inc., a supplier of time management and utility software. From February 1993 to June 1994, Mr. Meub served as the Vice President/General Manager of the Desktop Product Group of Central Point Software. From November 1991 to February 1993, Mr. Meub served as the Vice President of Marketing and Development of Calera Recognition Systems, a character recognition software development company. Mr. Meub has served in a variety of sales and marketing roles since 1976. Mark E. Reed has served as WebTrends' Senior Vice President of Corporate Development and Sales since December 2000. From September to December 2000, Mr. Reed served as the Senior Vice President of Corporate Development at the Company. In 1997, Mr. Reed founded High Ground Partners LLC, a high tech consulting firm focused on helping high potential companies launch and/or re-engineer all facets of their business with a key focus on marketing and sales strategy. During this time Mr. Reed served in CEO and other executive positions with envoyGlobal.com, Lightware, Inc., CORD Communications and other technology companies. From May 1993 to September 1997 Mr. Reed served as senior vice president of sales, marketing and services at In Focus Systems and as president and CEO of Genigraphics, a wholly owned subsidiary of In Focus Systems. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock. Based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, we believe that all such reports were filed on a timely basis in 2000. 35 38 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Directors do not currently receive cash compensation for services rendered as members of the board of directors or its committees. Directors are, however, reimbursed for expenses they incur in connection with attendance at board meetings. SUMMARY OF COMPENSATION The following table shows the compensation for Elijahu Shapira, our Chief Executive Officer, and our three next highest compensated executive officers: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------- ------------------- SECURITIES NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS --------------------------- ---- -------- ------- ------------------- Elijahu Shapira............................... 2000 150,000 40,000 -- Chairman of the Board and 1999 150,000 -- -- Chief Executive Officer 1998 150,000 20,000 -- W. Glen Boyd.................................. 2000 150,000 40,000 -- President and 1999 150,000 -- -- Chief Technical Officer 1998 150,000 20,000 -- James T. Richardson........................... 2000 135,000 65,000 50,000 Senior Vice President, Chief 1999 135,000 50,000 150,000 Financial Officer and Secretary 1998 58,326 -- 492,632 Daniel J. Meub................................ 2000 135,000 65,000 150,000 Chief Operating Officer 1999 135,000 50,000 150,000 1998 9,259 -- 165,000
OPTION GRANTS AND EXERCISES The following table shows additional information for options granted or exercised in 2000: OPTION GRANTS IN 2000
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM(3) OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------- NAME GRANTED(1) 2000(2) PRICE DATE 5% 10% ---- ---------- ------------- -------- ---------- ---------- ---------- James T. Richardson........... 50,000 1.9% $18.06 10/12/10 $ 567,892 $1,439,149 Daniel J. Meub................ 100,000 3.8 28.19 8/3/10 1,772,854 4,492,760 50,000 1.9 18.06 10/12/10 567,892 1,439,149
- --------------- (1) Options generally have a term of ten years and become exercisable over four years as follows: 1/4 on the first anniversary of the date of grant and an additional 1/48 each month thereafter. (2) Based on an aggregate of 2,651,590 shares subject to options granted to employees of the Company in 2000. (3) These dollar amounts are calculated based on growth rates required by rules of the Securities and Exchange Commission. These growth rates are not intended by WebTrends to forecast future appreciation, if any, of the price of our common stock, and WebTrends expressly disclaims any representation to that effect. The vesting of share options for certain of the Company's named executive officers will accelerate upon the closing of the proposed merger with NetIQ. This is detailed more fully in the registration statement on Form S-4 filed by NetIQ in connection with the proposed merger. 36 39 AGGREGATED OPTION EXERCISES IN 2000, AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT ACQUIRED DECEMBER 31, 2000 DECEMBER 31, 2000(2) ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- -------- ----------- ----------- ------------- ----------- ------------- James T. Richardson..... 109,464 $4,683,711 46,874 376,830 $581,706 $9,495,592 Daniel J. Meub.......... 53,500 $1,566,233 49,058 318,880 $915,074 $3,684,202
- --------------- (1) Based on the difference between the fair market value on the date of exercise and the exercise price. (2) Based on the difference between the fair market value on December 31, 2000 ($28.94 per share) and the exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the compensation committee in 2000 were Messrs. Shapira, Ryan and Burmeister-Brown. Mr. Shapira is our Chief Executive Officer. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. There were no transactions relating to members of the compensation committee in 2000. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION Executive Officer Compensation Our executive compensation program combines competitive salaries with added incentives for annual and long-term performance. The program is intended to attract, motivate and retain highly-skilled senior managers. The program provides for (i) base salaries and benefits, (ii) bonuses and (iii) stock option grants. Base Salary and Benefits. We provide a base salary and benefits package that is competitive within the industry and geographic regions in which we offer employment. The primary factors that determine the level of base salary are individual performance, responsibilities, prior experience, breadth of knowledge and market forces. Executives are generally eligible to participate in benefit programs that are available to all employees. Annual Bonus. Annual bonuses are awarded for the achievement of annual financial and strategic objectives. The objectives may be based on overall company performance or individual goals. The maximum achievable bonus is generally a significant percentage of an executive's base salary. Stock Option Grants. Stock options are intended to provide an incentive for management, as well as other employees, to generate shareholder value. Options generally vest over a four-year period. Accordingly, options improve executive and employee retention while encouraging a focus on long-term, sustainable value. The same factors considered in determining base salary are considered in awarding stock options with the goal of providing an overall compensation package required from a competitive point of view to retain the services of a valued executive officer. Compensation for the Chief Executive Officer Compensation for Elijahu Shapira, our chief executive officer, is generally determined in the same fashion as the other executive officers. Mr. Shapira does not participate in setting his own compensation. He has not been awarded any stock options. The committee believes Mr. Shapira is paid a reasonable salary and bonus that is nonetheless low based on his relative contributions to WebTrends. However, as Mr. Shapira is a significant WebTrends shareholder, he has sufficient incentive to continue to focus his efforts on generating shareholder value. 37 40 Tax Deductibility of Compensation The Internal Revenue Code contains a provision that limits the tax deductibility of compensation paid to executive officers. This provision may disallow the deductibility of compensation in excess of $1 million per year unless it is considered performance-based compensation under the tax code. We did not exceed the limitation in 2000 for any officer and do not expect to exceed the limitation for any officer in 2001. However, we reserve the right to forego any or all of the tax deduction if we believe it to be in the best long-term interests of our shareholders. Conclusion This report is submitted by the compensation committee of the board of directors of WebTrends Corporation as of December 31, 2000. COMPENSATION COMMITTEE Elijahu Shapira John Ryan Michael Burmeister-Brown 38 41 PERFORMANCE MEASUREMENT COMPARISON The following graph shows the total shareholder return of an investment of $100 in cash for our common stock on February 19, 1999 at the initial public offering price versus an investment of $100 in cash on or about the same date if (i) the Nasdaq Composite Index and (ii) the Nasdaq Computer and Data Processing Index. All values assume reinvestment of the full amount of all dividends and are calculated as of the last day of the period started. COMPARISON OF 22 MONTH CUMULATIVE TOTAL RETURN* AMONG WEBTRENDS CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX [PERFORMANCE GRAPH]
- -------------------------------------------------------------------------------- 2/19/99 12/99 12/00 - -------------------------------------------------------------------------------- WEBTRENDS CORPORATION 100.00 311.54 222.60 NASDAQ STOCK MARKET (U.S.) 100.00 178.56 107.44 NASDAQ COMPUTER & DATA PROCESSING 100.00 210.78 97.49 - --------------------------------------------------------------------------------
- --------------- * $100 INVESTED ON 2/19/99 IN STOCK OR INDEX -- INCLUDING REINVESTMENT OF DIVIDENDS 39 42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table indicates how much common stock as of January 31, 2001, is beneficially owned by: (i) each director and nominee for director; (ii) each of the executive officers named in the Summary Compensation Table below; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock.
SHARES BENEFICIALLY OWNED -------------------- NAME NUMBER PERCENT ---- ------ ------- Elijahu Shapira(1) c/o WebTrends Corporation 851 SW Sixth Avenue, Suite 1200 Portland, Oregon 97204.................................... 3,995,500 15.1% W. Glen Boyd(2) c/o WebTrends Corporation 851 SW Sixth Avenue, Suite 1200 Portland, Oregon 97204.................................... 3,995,500 15.1% T. Rowe Price Associates, Inc.(3) 100 E. Pratt Street Baltimore, Maryland 21202................................. 3,676,580 13.9% Michael Burmeister-Brown(4)................................. 546,054 2.1 John W. Ryan................................................ -- * Srivats Sampath(5).......................................... 80,156 * James T. Richardson(6)...................................... 161,502 * Daniel J. Meub(7)........................................... 59,429 * All directors and executive officers as a group (seven persons)(8)............................................... 8,838,141 33.3%
- --------------- * Less than 1%. (1) Includes 315,000 shares held by the Anne and Eli Shapira Charitable Foundation. Mr. Shapira disclaims beneficial ownership of such shares. (2) Includes 315,000 shares held by the Glen Boyd Charitable Foundation. Mr. Boyd disclaims beneficial ownership of such shares. (3) These securities are owned by various individual and institutional investors including T. Rowe Price New Horizons Fund, Inc. (which owns 2,350,000 shares, representing 8.9% of the shares outstanding), for which T. Rowe Price Associates, Inc. (Price Associates) serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. (4) Includes 10,000 shares held by Susan Burmeister-Brown. Mr. Burmeister-Brown disclaims beneficial ownership of such shares. (5) Includes 78,156 shares subject to options exercisable within 60 days after January 31, 2001. Also includes 2,000 shares held by Renuka Srivats. Mr. Sampath disclaims beneficial ownership of the shares held by Renuka Srivats. (6) Includes 102,038 shares subject to options exercisable within 60 days after January 31, 2001. (7) Includes 58,432 shares subject to options exercisable within 60 days after January 31, 2001. (8) Includes shares referred to in footnotes (2) through (5). 40 43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INTERESTS OF CERTAIN PERSONS RELATED TO THE PENDING MERGER WITH NETIQ Certain directors and members of management of the Company have interests in the proposed merger with NetIQ that are different from, or in addition to, their interests as WebTrends shareholders generally. Among these interests include employment agreements entered into by Mr. Elijahu Shapira and Mr. W. Glen Boyd, whereby they shall serve as Chief Strategy Officer and Chief Information Officer, respectively, of NetIQ following the merger and will receive options to acquire NetIQ stock in connection with their employment. Additionally, two of the Company's current directors, John Ryan and Srivats Sampath, and three of WebTrends' executive officers, Daniel Meub, Mark Reed and James Richardson, have agreements with WebTrends that provide for the partial or full acceleration of their unvested stock options in connection with the merger. These interests are more fully described in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on February 1, 2000 addressing the proposed merger and issuance of NetIQ shares in the merger in the section titled "Interests of certain persons related to the pending merger." 41 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Index to Financial Statements Independent Auditors' Report................................ 19 Consolidated Balance Sheets................................. 20 Consolidated Statements of Operations....................... 21 Consolidated Statements of Shareholders' Equity............. 22 Consolidated Statements of Cash Flow........................ 23 Notes to the Consolidated Financial Statements.............. 24
(a)2. Financial Statement Schedules All Schedules have been omitted because the required information is included in the financial statements or the notes thereto, or is not applicable or required. (a)3. Index to Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1(1) Third Restated Articles of Incorporation, as amended on May 26, 2000. 3.2(2) Second Restated Bylaws 10.1(3) Amended and Restated 1998 Stock Incentive Compensation Plan 10.2(2) Employee Stock Purchase Plan 10.3(2) 1997 Stock Incentive Compensation Plan 10.4(2) Office Lease dated November 20, 1998, by and between the Prudential Insurance Company of America and WebTrends Corporation 10.5(4) First Addendum to Lease dated October 15, 1999, by and between the Prudential Insurance Company of America and WebTrends Corporation 10.6(1) Lease for certain office space entered into by the Company and Fox Tower LLC on June 22, 2000. 21.1 List of Subsidiaries 23.1 Consent of KPMG LLP, Independent Accountants
- --------------- (1) Incorporated by reference from the quarterly report on Form 10-Q for the quarter ended June 30, 2000. (2) Incorporated by reference from registration statement on Form S-1 (File No. 333-69171) declared effective on February 18, 1999. (3) Incorporated by reference from the quarterly report on Form 10-Q for the quarter ended September 30, 2000. (4) Incorporated by reference from the annual report on Form 10-K for the year ended December 31, 1999. (b) Reports on Form 8-K None 42 45 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 1, 2001. WEBTRENDS CORPORATION By: /s/ JAMES T. RICHARDSON ------------------------------------ James T. Richardson Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 1, 2001 by the following persons on behalf of the Registrant and in the capacities indicated. /s/ ELIJAHU SHAPIRA Chief Executive Officer and Director - --------------------------------------------------- Elijahu Shapira /s/ W. GLEN BOYD President, Chief Technical Officer and Director - --------------------------------------------------- W. Glen Boyd /s/ JAMES T. RICHARDSON Senior Vice President, Chief Financial Officer - --------------------------------------------------- (principal financial and chief accounting James T. Richardson officer) /s/ MICHAEL BURMEISTER-BROWN Director - --------------------------------------------------- Michael Burmeister-Brown /s/ SRIVATS SAMPATH Director - --------------------------------------------------- Srivats Sampath /s/ JOHN RYAN Director - --------------------------------------------------- John Ryan
43 46 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1(1) Third Restated Articles of Incorporation, as amended on May 26, 2000. 3.2(2) Second Restated Bylaws 10.1(3) Amended and Restated 1998 Stock Incentive Compensation Plan 10.2(2) Employee Stock Purchase Plan 10.3(2) 1997 Stock Incentive Compensation Plan 10.4(2) Office Lease dated November 20, 1998, by and between the Prudential Insurance Company of America and WebTrends Corporation 10.5(4) First Addendum to Lease dated October 15, 1999, by and between the Prudential Insurance Company of America and WebTrends Corporation 10.6(1) Lease for certain office space entered into by the Company and Fox Tower LLC on June 22, 2000. 21.1 List of Subsidiaries 23.1 Consent of KPMG LLP, Independent Accountants
- --------------- (1) Incorporated by reference from the quarterly report on Form 10-Q for the quarter ended June 30, 2000. (2) Incorporated by reference from registration statement on Form S-1 (File No. 333-69171) declared effective on February 18, 1999. (3) Incorporated by reference from the quarterly report on Form 10-Q for the quarter ended September 30, 2000. (4) Incorporated by reference from the annual report on Form 10-K for the year ended December 31, 1999. 44 EX-21.1 2 v69203ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES WebTrends FSC, Incorporated - Barbados WebTrends UK Ltd. - United Kingdom EX-23.1 3 v69203ex23-1.txt EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors WebTrends Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 333-72653, 333-76913, and 333-43500) on Form S-8 and the Joint Proxy Statement/Prospectus (No. 333-54746) on Form S-4 of WebTrends Corporation of our report dated January 19, 2001, with respect to the consolidated balance sheets of WebTrends Corporation as of December 31, 1999 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the annual report on Form 10-K of WebTrends Corporation. /s/ KPMG LLP Portland, Oregon February 7, 2001 -----END PRIVACY-ENHANCED MESSAGE-----