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Filed Pursuant to Rule 424(b)(4)
Registration Number 333-77085
MAY 12, 1999
PROSPECTUS
2,500,000 SHARES OF COMMON STOCK
[LOGO]
WebTrends Corporation is selling 1,250,000 shares and the selling
shareholders identified in this prospectus are selling 1,250,000 shares of
WebTrends' common stock in this offering. In addition, WebTrends may sell up to
187,500 additional shares and the selling shareholders may sell an aggregate of
up to 187,500 additional shares depending on whether the underwriters exercise
their over-allotment option. WebTrends will not receive any of the proceeds from
the sale of shares by the shareholders.
Trading Symbol: Nasdaq National Market "WEBT"
On May 12, 1999, the last reported sale price for our common stock on the
Nasdaq National Market was $34.125 per share.
INVESTING IN THIS STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
-------------------------
<TABLE>
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TOTAL
--------------------------------
PER WITHOUT WITH
SHARE OVER-ALLOTMENT OVER-ALLOTMENT
------ -------------- --------------
<S> <C> <C> <C>
Price to Public......................... $33.00 $82,500,000 $94,875,000
Underwriting Discounts & Commissions.... 1.73 4,325,000 4,973,750
WebTrends' Proceeds..................... 31.27 39,087,500 44,950,625
Selling Shareholders' Proceeds.......... 31.27 39,087,500 44,950,625
</TABLE>
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
BANCBOSTON ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
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DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
Top Center:
Text:
Enterprise Management Solutions for Internet Systems
Center:
Graphic:
A large WebTrends logo centered on the page with the text "Manage Your
WWWorld(TM)" centered below the logo. The logo and text are in the middle of a
ring of eight circles. Each of the eight circles contains text. Starting with
the circle directly above the logo and proceeding clockwise, the texts in the
circles state: "Web Site Traffic Analysis," "Proxy Server Traffic Analysis,"
"Site Content & QA Management," "E-Commerce and ROI Reports," "Alerting,
Monitoring & Recovery," "Streaming Media Server Management," Firewall and VPNs
Management," and "Server & Network Security Analysis."
Bottom:
Text:
Awards for the WebTrends product family:
Graphic:
Nine graphics appear below the text representing awards that have been
given to WebTrends' products. The awards depicted from left to right are: (1) PC
Magazine Editors' Choice, (2) ICE Best of Class, (3) PC Computing MVP Finalist,
(4) Network Computing Editors' Choice, (5) iw Labs Best of Test, (6) The Best of
LANTIMES, (7) Network Computing Best Value, (8) CODIE Awards Finalist, and (9)
ZDNET Editors' Pick.
GATEFOLD (LEFT SIDE)
Top Right:
Graphic:
The WebTrends logo.
Top Left:
Text:
WebTrends Enterprise Suite
Graphics:
There are three graphics under the text. From left to right they are: (1)
product packaging for the WebTrends Enterprise Suite, (2) screen shot of the
site manager feature, and (3) screen shot of a traffic analysis report.
Middle:
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Test:
WebTrends Professional Suite
Graphics:
There are three graphics under the text. From left to right they are: (1)
product packaging for the WebTrends Professional Suite, (2) screen shot of an
alerting, monitoring, and recovery report, and (3) screen shot of the main
console.
Bottom:
Text:
WebTrends for Firewalls and VPNs
Graphics:
There are four graphics under the text. From left to right they are (1)
product packaging for WebTrends for Firewalls and VPNs, (2) screen shot of the
general options feature, (3) screen shot of the scheduler feature, and (4)
screen shot of a firewall report.
GATEFOLD (RIGHT SIDE)
Top:
Text:
WebTrends Enterprise Reporting Server*; * Available for Solaris and Linux.
Graphics:
There are four graphics under the text. From left to right they are: (1)
product packaging for the WebTrends Enterprise Reporting Server, (2) screen shot
of a user profile report, (3) screen shot of the content editor feature, and (4)
screen shot of the status feature.
Middle:
Text:
WebTrends Security Analyzer
Graphics:
There are three graphics under the text. From left to right they are: (1)
product packaging for the WebTrends Security Analyzer, (2) screen shot of the
main viewer, and (3) screen shot of a security analysis report.
Bottom:
Text:
WebTrends Log Analyzer
Graphics:
There are four graphics under the text. From left to right they are: (1)
product packaging for the WebTrends Log Analyzer, (2) screen shot of the
scheduler feature, (3) screen shot of the options feature, and (4) screen shot
of a traffic analysis report.
Bottom Right:
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary........... 1
Risk Factors................. 5
Use of Proceeds.............. 15
Price Range of Common
Stock...................... 15
Dividend Policy.............. 15
Capitalization............... 16
Selected Financial Data...... 17
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................. 18
Business..................... 30
Management................... 49
</TABLE>
<TABLE>
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PAGE
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<S> <C>
Insider Transactions......... 57
Principal and Selling
Shareholders............... 58
Description of Capital
Stock...................... 60
Shares Eligible for Future
Sale....................... 62
Underwriting................. 64
Legal Matters................ 66
Experts...................... 66
Where You May Find Additional
Information................ 66
Index to Financial
Statements................. F-1
</TABLE>
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"AuditTrack," "AlertTrack," "ClusterTrends," "CommerceTrends," "DBTrends,"
"FastTrends," "FireTrends," "Manage Your WWWorld," "SmartPass," "WebTrends," and
WebTrends' logo are all WebTrends' trademarks. "AuditTrack" and "WebTrends" are
registered trademarks in the United States. All other trade names, trademarks,
and service marks appearing in this prospectus are the property of their
respective holders.
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights only selected information contained elsewhere in
this prospectus. Before making an investment in WebTrends' common stock, you
should read this entire prospectus and the Financial Statements and notes, all
of which should be consulted when reading this summary. Except where noted
otherwise, all information in this prospectus, including share and per share
information, assumes no exercise of the underwriters' over-allotment option. See
"Description of Capital Stock" and "Underwriting."
WEBTRENDS CORPORATION
WebTrends Corporation is a leading provider of enterprise management and
reporting solutions for Internet-based systems. Internet-based systems include
Web servers, intranets, and extranets. Web servers are the computer servers that
connect to the Internet's Worldwide Web. Intranets are networks that use
Internet technology for communications within an organization. Extranets are
networks that use Internet technology for communications between related
organizations.
We offer organizations a comprehensive set of solutions that are
integrated, modular, and easy-to-use, and that scale to high-volume
environments. Our enterprise management products facilitate analysis and
reporting of:
- Web site traffic, quality, content, and usage,
- Internet advertising campaigns,
- e-commerce activities, and
- return on investment from Internet-based systems.
Our solutions also help organizations manage their Internet infrastructure
by providing valuable information about systems designed to implement secure
communications, such as firewalls and virtual private networks, as well as
capacity and bandwidth requirements. Our products have been specifically
designed to enable organizations to centrally manage and administer multiple
Internet-based systems across the enterprise regardless of the quantity or
geographic locations of servers supporting those systems.
Our business has grown rapidly, with revenue increasing from $1.9 million
in 1996 to $8.0 million for the year ended December 31, 1998. Revenue for the
three months ended March 31, 1999, was $3.0 million. We have been profitable
throughout this period. Since the introduction of our original Web site traffic
analysis product in 1996, we have introduced eight new products:
- WebTrends Enterprise Suite,
- WebTrends Professional Suite,
- WebTrends Suite for Lotus Domino,
- WebTrends for Firewalls and VPNs,
- Server Cluster Add-on,
- WebTrends Security Analyzer,
- WebTrends Enterprise Reporting Server for Solaris, and
- WebTrends Enterprise Reporting Server for Linux.
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We plan to introduce an additional product, CommerceTrends Add-on, by June
1999. The acronym "VPNs" in the name of the product WebTrends for Firewalls and
VPNs stands for virtual private networks that are networks that use security
features to provide the attributes of a private communications network while
transporting information over the public Internet.
We market and deliver our award-winning products to both IT professionals
and other business managers. Over 25,000 customers have purchased our products,
including sophisticated Internet service providers and over one-third of the
Fortune 500 companies.
WebTrends was incorporated in Delaware in 1993 and reorganized in Oregon in
1997. Our executive offices are located at 851 SW Sixth Avenue, Suite 1200,
Portland, Oregon 97204, our telephone number is 1-888-WEBTRENDS
(1-888-932-8736), and our Web site is located at http://www.webtrends.com.
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THE OFFERING
Common Stock Offered by WebTrends........ 1,250,000 shares
Common Stock Offered by Selling
Shareholders............................. 1,250,000 shares
Common Stock to be Outstanding After the
Offering Based on Shares Outstanding on
March 31, 1999......................... 12,500,080 shares
Additional Shares Reserved Under Stock
Option and Stock Purchase Plans at
March 31, 1999......................... 3,310,446 shares of which 1,464,208
shares were subject to outstanding
stock options at a weighted average
exercise price of $2.73
Nasdaq National Market Symbol............ WEBT
Use of Proceeds.......................... Working capital and general
corporate purposes. See "Use of
Proceeds."
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................ $1,865 $4,055 $8,008 $1,621 $3,006
Gross margin............................. 1,660 3,763 7,375 1,492 2,716
Income from operations................... 398 427 222 24 116
Net income............................... 405 287 219 26 178
Basic net income per share............... .04 .03 .00 .02
Diluted net income per share............. .04 .02 .00 .02
Shares used in basic net income per share
calculation............................ 8,126 8,211 8,211 9,582
Shares used in diluted net income per
share calculation...................... 8,126 9,022 8,211 10,932
Pro forma net income..................... 265
Pro forma net income per share -- basic
and diluted............................ .03
Shares used in pro forma net income per
share calculation -- basic and
diluted................................ 7,800
</TABLE>
Net income is not comparable for all periods shown, since, prior to 1997,
WebTrends was not taxable as an entity because the shareholders had elected to
be taxed individually based on their percentage ownership of the outstanding
common stock. Pro forma net income and pro forma net income per share data have
been presented for comparison purposes only as if WebTrends had been organized
as a taxable entity in 1996.
The following table presents balance sheet data, both historically and on a
pro forma basis, giving effect to WebTrends' sale in this offering of 1,250,000
shares of common stock at the offering price of $33.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------
ACTUAL PRO FORMA
------- ---------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $30,568 $69,256
Working capital........................................... 35,378 74,066
Total assets.............................................. 40,073 78,761
Total shareholders' equity................................ 36,265 74,953
</TABLE>
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RISK FACTORS
In addition to the other information contained in this prospectus, you
should carefully read and consider the following risk factors before purchasing
our common stock. Investment in our common stock involves a high degree of risk.
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. Many of these risks are discussed under the sub-headings below.
We may not be able to successfully address any or all of these risks.
Failure to adequately do so could have a material adverse effect on our
business, results of operations, and financial condition. 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.
SEASONAL AND OTHER 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 OWN COMMON STOCK
During our short operating history, we have experienced seasonality in our
operating results. While revenue from sales has continued to grow, the second
and third quarters of the year have been typically characterized by lower levels
of revenue growth. In addition to seasonal fluctuations, we may experience
significant fluctuations in our operating results from other causes. In
particular, as we increasingly focus on sales of our product suites 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 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 WebTrends has historically experienced.
As a result of the factors described above, we believe that our quarterly
revenue and results from operations are likely to 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Selected Quarterly Financial
Results."
OUR CUSTOMERS' AND POTENTIAL CUSTOMERS' FOCUS ON THE YEAR 2000 COMPUTER PROBLEM
MAY REDUCE OUR SALES
Our customers and potential customers may devote substantial portions of
their budgets and staff to correcting year 2000 computer problems, forcing them
to defer purchases of our products. Customers may also be unwilling to introduce
new products into
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their organizations until they confirm that their existing systems are year 2000
compliant. Accordingly, demand for our products may be particularly volatile and
unpredictable for the remainder of 1999 and early 2000.
WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW PRODUCTS 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 stages of development and is rapidly evolving. Failure
to develop and release enhanced or new products, or delays or quality problems
in doing so, could have a material adverse effect on our business, results of
operations, and financial condition. 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. The market for our existing products may not be sustainable at its
current level. We launched several new products in calendar 1998 and the first
quarter of 1999. We have an additional new product launch, as well as upgrades
to existing products, planned for the remainder of 1999. The market for the
recently introduced and planned products may not expand or develop.
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, any of which could have a material
adverse effect on our business, results of operations, and financial condition.
Each of WebTrends' 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 Internet management solutions with their Internet
products. WebTrends 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. For all of the foregoing
reasons, we may not be able to compete successfully against our current and
future competitors. See "Business -- Competition."
OUR SUCCESS DEPENDS ON INCREASING MARKET AWARENESS OF OUR BRAND
If we fail to successfully promote our brand name or if we incur
significant expenses promoting and maintaining our brand name, it could have a
material adverse effect on our business, results of operations, and financial
condition. Due in part to the emerging nature of the market for Internet
management solutions and the substantial resources available to many of our
competitors, there may be a time-limited opportunity to achieve and maintain a
significant market share. Developing and maintaining awareness of the
"WebTrends" brand name is critical to achieving widespread acceptance of our
enterprise management
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and reporting solutions. Furthermore, the importance of brand recognition will
increase as competition in the market for our products increases. Successfully
promoting and positioning the WebTrends brand will depend largely on the
effectiveness of our marketing efforts and our ability to develop reliable and
useful products at competitive prices. Therefore, we may need to increase our
financial commitment to creating and maintaining brand awareness among potential
customers.
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 expand our direct and indirect sales operations and
channels of distribution. Failure to do so could have a material adverse effect
on our business, results of operations, and financial condition. We need to
expand our relationships with domestic and international channel partners,
distributors, value-added resellers, systems integrators, on-line 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
increase 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 Webmasters, other management personnel
associated with a prospective customer's Internet capabilities, and other
functional managers throughout the organization. In order to achieve increased
sales, we plan to hire additional telemarketing and direct field sales
personnel. Any new hires will require training and take time to achieve full
productivity. We may not be able to hire enough qualified individuals when
needed, or at all, and we may not be able to increase distribution through any
other methods.
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 making an effort to increase distribution of our products through
various indirect channels of distribution, including channel partners,
value-added resellers, distributors, resellers, original equipment
manufacturers, Internet service providers, and others. The loss of one or more
of these channel partners, because of either their preference for competing
products or products they may develop internally, could have a material adverse
effect on our business, results of operations, and financial condition. In
addition, 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, which could have a material
adverse effect on our business, results of operations, and financial condition.
Reliance on indirect channels of distribution may subject us to greater
credit risk as the revenue from sales of our products to distributors and other
channel partners flows first
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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. Revenue received from Network Trade accounted for 20.6%
of our total revenue for the three months ended March 31, 1999. Failure of our
channel providers to timely pay for our products, or any failure to accurately
forecast the demand for our products, could have a material adverse effect on
our business, results of operations, and financial condition.
THE LOSS OF OUR CO-FOUNDERS OR OTHER KEY PERSONNEL OR OUR FAILURE TO ATTRACT
ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS AND DECREASE THE VALUE
OF YOUR INVESTMENT
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 effect on our business,
results of operations, and financial condition. In particular, we rely on our
co-founders, Elijahu Shapira, Chief Executive Officer and Chairman of the Board,
and W. Glen Boyd, President, Chief Technical Officer, and director. Messrs.
Shapira and Boyd do not have employment agreements and, therefore, could
terminate their employment with us at any time without penalty. 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 may not be successful in attracting or retaining
qualified personnel, which could have a material adverse effect on our business,
results of operations, and financial condition. 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 AND DECREASE THE VALUE OF YOUR INVESTMENT
Any failure to properly manage our growth could have a material adverse
effect on our business, results of operations, and financial condition. 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
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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 ARE SIGNIFICANT AND COULD DECREASE FOR REASONS
ADDITIONAL TO THOSE AFFECTING DOMESTIC SALES
Approximately 22.0% and 27.5% of our total revenue for the years ended
December 31, 1997 and December 31, 1998, respectively, were attributable to
sales made outside the United States. International sales were 26.1% of total
revenue for the three months ended March 31, 1999. Any reduction in
international sales, or our failure to further develop our international
distribution channels could have a material adverse effect on our business,
results of operations, and financial condition.
Our international operations are subject to the risks inherent in
international business activities, including, in particular:
- Management of an organization spread over various countries;
- 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;
- Overlap of different tax structures;
- Foreign currency exchange rate fluctuations;
- Import and export licensing requirements;
- Trade restrictions, changes in tariffs, and freight rates; and
- Regional economic conditions.
Such factors could have a material adverse effect on our future
international sales and, consequently, our business, results of operations, and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Sales, Marketing, and
Distribution."
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. Any
such infringement or misappropriation could have a material adverse effect on
our business, results of operations, and financial condition. We currently have
no issued patents. We have three 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
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
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made available through the Internet. Furthermore, our competitors may
independently develop similar technology that substantially limits the value of
our intellectual property. See "Business -- Proprietary Rights."
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.
Any such infringement or claim of infringement could have a material adverse
affect on our business, result of operations, and financial condition.
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.
Any of these results could have a material adverse effect on our business,
results of operations, and financial condition.
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, 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. Furthermore, any regulation
imposing fees for Internet use could result in a decline in the use of the
Internet and the viability of Internet commerce, which could have a material
adverse effect on our business, results of operations, and financial condition.
PRODUCT DEFECTS 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 could result in
adverse publicity, loss of or delay in market acceptance, or claims by customers
against us, any of which could have a material adverse effect on our business,
results of operations, and financial condition. Our products are used to monitor
the activity levels of our customers' Internet
10
<PAGE> 16
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 products liability insurance. To the extent our contractual
limitations are unenforceable or such claims are not covered by insurance, a
successful products liability claim could have a material adverse effect on our
business, results of operations, and financial condition.
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. See "Business -- Products and
Services."
SOME OF OUR PRODUCTS MAY NOT BE YEAR 2000 COMPLIANT, WHICH COULD RESULT IN
CUSTOMER DISSATISFACTION OR CLAIMS AGAINST US
Failure of our products to be year 2000 compliant could result in
significant decreases in market acceptance of our products and legal liability
for defective software, either of which would have a material adverse effect on
our business, results of operations, and financial condition. We have not tested
our products in every possible computer environment, and therefore such products
may not be fully year 2000 compliant. Older versions of our products may not be
year 2000 compliant; however, corrections for such non-compliance are available.
We have not tested for year 2000 compliance discontinued products that we no
longer market that run on Novell systems, some of which remain in use. These
discontinued products may not be year 2000 compliant.
If our suppliers, vendors, major distributors, and partners fail to correct
their year 2000 problems, such failure could result in an interruption in, or a
failure of, our normal business activities or operations. Such failures could
have a material adverse effect on our business, results of operations, and
financial condition. Due to the general uncertainty inherent in the year 2000
problem resulting from the uncertainty of the year 2000 readiness of third-party
suppliers and vendors, we are unable to determine at this time whether the
consequences of the year 2000 failures will have a material effect on our
business, results of operations, and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET
Continued expansion in the sales of our Internet management solutions will
depend upon the adoption of the Internet as a widely used medium for commerce
and communication. If the Internet does not continue to become a widespread
communications medium and commercial marketplace, the demand for our Internet
management solutions could be significantly reduced, which could have a material
adverse effect on our business, results of operations, and financial condition.
The Internet may not prove to be a viable
11
<PAGE> 17
commercial marketplace because of inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
complementary products, such as high speed modems. The Internet infrastructure
may not be able to support the demands placed on it by continued growth.
Additionally, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity, security, reliability, cost, ease of use,
accessibility, and quality of service.
OUR SALES MAY DECLINE IF WE ARE UNABLE TO ADAPT OUR PRODUCTS TO CHANGES IN
INTERNET TECHNOLOGY
Even if the infrastructure, standards, or protocols of the Internet, or
complementary services, products, or facilities are developed, we may be
required to make significant expenditures to adapt our products to the changing
or emerging technologies. For example, if the format of Internet log files were
to change, our solutions for traffic analysis may not function as designed, and
we may incur significant expenses in developing new products that would be
compatible with the new format. We may not be successful in either developing
such software or timely introducing it to the market. Any such changes in
technology could have a material adverse effect on our business, results of
operations, and financial condition.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
WEBTRENDS' PROFITS OR MARKET VALUE
The net proceeds from the sale of the common stock we are offering for sale
will be added to our general working capital upon completion of this offering.
We have not reserved or allocated the proceeds for any specific purpose, and we
cannot specify with certainty how we will use the net proceeds. Accordingly, our
management will have considerable discretion in the application of the net
proceeds, and you will not have the opportunity, as part of your investment
decision, to assess whether the proceeds are being used appropriately. The net
proceeds may be used for corporate purposes that do not increase WebTrends'
profitability or market value. Pending application of the proceeds, they may be
placed in investments that do not produce income or that lose value. See "Use of
Proceeds."
BECAUSE OWNERSHIP IS CONCENTRATED, YOU AND OTHER INVESTORS WILL HAVE MINIMAL
INFLUENCE ON SHAREHOLDER DECISIONS
Our officers and directors will beneficially own at least 46% and possibly
as much as 48% of the outstanding common stock after this offering, depending on
whether and to what extent the underwriters exercise their over-allotment
option. As a result, they will be able to exercise significant influence over
all matters requiring shareholder approval, such as the election of directors
and the approval or disapproval of significant corporate transactions. The
concentration of ownership could prevent or significantly delay another company
or person from acquiring or merging with us. See "Management" and "Principal and
Selling Shareholders."
OUR ANTI-TAKEOVER PROVISIONS AND PREFERRED STOCK MAY REDUCE THE MARKET PRICE OF
OUR COMMON STOCK
Provisions of our articles of incorporation and bylaws may have the effect
of delaying or preventing a merger or sale of WebTrends, or making a merger or
acquisition less desirable to a potential acquirer, even where shareholders may
consider the acquisition or
12
<PAGE> 18
merger favorable. See "Description of Capital Stock -- Anti-Takeover Measures --
Articles and Bylaws."
The issuance of preferred stock may have the effect of delaying, deferring,
or preventing a change in control without further action by the shareholders.
Any such issuance may have a material adverse effect on the market price of the
common stock and the voting rights of the holders of common stock. The issuance
of preferred stock may also result in the loss of the voting control of holders
of common stock to the holders of the preferred stock. See "Description of
Capital Stock -- Preferred Stock."
Provisions of the Oregon Business Corporation Act and the Control Share Act
may also delay, prevent, or discourage someone from acquiring or merging with
us. See "Description of Capital Stock -- Anti-Takeover Measures -- Oregon
Control Share and Business Combination Statutes."
TRADING IN OUR COMMON STOCK MAY BE LIMITED
We completed our initial public offering in February 1999. Before this
there was no trading market for our stock. The volume of daily trades has varied
significantly from as few as approximately 100,000 shares to over 2.3 million
shares. Because of the short history and volatility of the trading market for
our stock, we do not know how liquid that market will be.
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 your 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, any or all of which could
13
<PAGE> 19
have a material adverse effect on our business, results of operations, and
financial condition.
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found in
the material set forth under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as within
this prospectus generally. In addition, when used in this prospectus, the words
"believes," "intends," "anticipates," "expects," and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
subject to a number of risks and uncertainties. Actual results could differ
materially from those described in the forward-looking statements as a result of
the risk factors set forth in this section and the information provided in this
prospectus generally. We do not intend to update any forward-looking statements.
14
<PAGE> 20
USE OF PROCEEDS
Based on the offering price of $33.00 per share, the net proceeds from the
sale of shares of common stock to be sold by WebTrends are expected to be
approximately $38.7 million (approximately $44.6 million if the underwriters
exercise their overallotment option in full), after deduction of underwriting
discounts and commissions and estimated offering expenses payable by WebTrends.
WebTrends will not receive any proceeds from the sale of common stock by the
selling shareholders.
Among the purposes of this offering are the following:
- To obtain additional equity capital; and
- To improve liquidity in the public market for the common stock.
The board of directors and management of WebTrends have significant
flexibility in applying the net proceeds of this offering. The amounts and
timing of WebTrends' actual expenditures will depend upon numerous factors,
including the status of WebTrends' product development efforts, competition, and
marketing and sales activities. WebTrends anticipates using the net proceeds of
this offering for working capital and general corporate purposes, and may also
use a portion of the net proceeds to license or acquire new products or
technologies or to acquire or invest in businesses complementary to its own.
WebTrends has no current plans or proposals pending for any such acquisitions or
investments. Pending the use of the net proceeds, WebTrends intends to invest
them in government securities and short-term, investment-grade, interest-bearing
securities.
PRICE RANGE OF COMMON STOCK
WebTrends' common stock is traded on The Nasdaq National Market under the
symbol "WEBT." Public trading of the common stock commenced on February 19,
1999. The following table shows, for the periods indicated, the high and low per
share sales prices of the common stock, as reported by The Nasdaq National
Market
<TABLE>
<CAPTION>
1999 HIGH LOW
---- ------ ------
<S> <C> <C>
First Quarter (beginning February 19, 1999)................. $59.00 $22.00
Second Quarter (through May 12, 1999)....................... $84.00 $32.25
</TABLE>
On May 12, 1999, the last reported sale price of the common stock on The
Nasdaq National Market was $34.125 per share, and there were approximately 47
holders of record of the common stock.
DIVIDEND POLICY
WebTrends did not declare any cash dividends on its capital stock in 1997
or 1998. WebTrends intends to retain its present and future earnings, if any, to
finance the growth and development of its business. It does not intend to pay
cash dividends in the foreseeable future, and the amounts and payment of future
dividends, if any, will be determined by its board of directors.
15
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of WebTrends as of March
31, 1999,
(a) on a historical basis and
(b) on an adjusted basis, giving effect to the sale of 1,250,000 shares of
common stock being sold by WebTrends in this offering at the offering price of
$33.00 per share, and after deducting estimated underwriters discounts and
commissions and estimated offering expenses payable by WebTrends.
The information shown below excludes 3,310,446 shares reserved for issuance
under WebTrends' stock option and stock purchase plans, of which 1,464,208 were
issuable upon exercise of stock options outstanding as of March 31, 1999, with a
weighted average exercise price of $2.73 per share.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and WebTrends' Financial Statements and related notes thereto and
other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
AS
ACTUAL ADJUSTED
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value per share; 15,000,000
shares authorized, no shares issued and outstanding,
actual and adjusted................................... $ -- $ --
Common stock, no par value per share; 60,000,000 shares
authorized, 11,250,080 shares issued and outstanding,
actual; 60,000,000 shares authorized, 12,500,080
shares issued and outstanding, as adjusted............ 36,058 74,746
Deferred compensation...................................... (515) (515)
Retained earnings.......................................... 722 722
------- -------
Total shareholders' equity....................... 36,265 74,953
------- -------
Total capitalization............................. $36,265 $74,953
======= =======
</TABLE>
16
<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the Financial Statements and notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other financial information appearing elsewhere in this
prospectus. The statement of operations data set forth below for each of the
years in the three-year period ended December 31, 1998, and the balance sheet
data as of December 31, 1997 and 1998, are derived from, and qualified by
reference to, the audited financial statements appearing elsewhere in this
prospectus. The statement of operations data set forth below for the year ended
December 31, 1995, and the balance sheet data as of December 31, 1995 and 1996
are derived from, and qualified by reference to, audited financial statements.
The statement of operations data set forth below, for the year ended December
31, 1994 and the quarters ended March 31, 1998 and 1999, and the balance sheet
data as of December 31, 1994 and March 31, 1999, are derived from, and qualified
by reference to, unaudited financial statements. The unaudited financial
statements have been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information set forth therein. Historical results are not
necessarily indicative of the results that may be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue:
Software licenses........................................ $ 276 $ 617 $1,858 $3,837 $7,206 $1,496 $ 2,587
Support services......................................... -- 20 7 218 802 125 419
------ ------ ------ ------ ------ ------ -------
Total revenue..................................... 276 637 1,865 4,055 8,008 1,621 3,006
Cost of revenue............................................ 7 39 205 292 633 129 290
------ ------ ------ ------ ------ ------ -------
Gross margin............................................... 269 598 1,660 3,763 7,375 1,492 2,716
------ ------ ------ ------ ------ ------ -------
Operating expenses:
Research and development................................. 34 91 403 1,059 2,211 456 639
Sales and marketing...................................... 12 152 552 1,528 3,642 720 1,506
General and administrative............................... 126 187 307 749 1,300 292 455
------ ------ ------ ------ ------ ------ -------
Total operating expenses.......................... 172 430 1,262 3,336 7,153 1,468 2,600
------ ------ ------ ------ ------ ------ -------
Income from operations..................................... 97 168 398 427 222 24 116
Other income, net.......................................... 1 1 7 10 29 5 169
------ ------ ------ ------ ------ ------ -------
Income before income taxes................................. 98 169 405 437 251 29 285
Income taxes(1)............................................ -- -- -- 150 32 3 107
------ ------ ------ ------ ------ ------ -------
Net income(1).............................................. $ 98 $ 169 $ 405 $ 287 $ 219 $ 26 $ 178
====== ====== ====== ====== ====== ====== =======
Basic net income per share(2).............................. $ .04 $ .03 .00 .02
Diluted net income per share(2)............................ .04 .02 .00 .02
====== ====== ====== =======
Shares used in basic net income per share calculation(2)... 8,126 8,211 8,211 9,582
Shares used in diluted net income per share calculation.... 8,126 9,022 8,211 10,932
Pro forma net income(1).................................... $ 64 $ 111 $ 265
====== ====== ======
Pro forma net income per share -- basic and diluted(1)..... $ .01 $ .01 $ .03
====== ====== ======
Shares used in pro forma net income per share
calculation -- basic and diluted(2)...................... 7,800 7,800 7,800
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ---------
1994 1995 1996 1997 1998 1999
---- ---- ----- ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $108 $179 $ 321 $ 807 $1,099 $30,568
Working capital (deficit)................................... 158 319 (103) 260 221 35,378
Total assets................................................ 198 365 910 1,886 3,362 40,073
Long-term obligations....................................... 70 72 -- 7 -- --
Total shareholders' equity.................................. 98 267 47 584 842 36,265
</TABLE>
- -------------------------
(1) Prior to 1997, WebTrends had elected to have taxes on WebTrends' income paid
by WebTrends' shareholders rather than by WebTrends. Pro forma net income
data has been presented for comparison purposes only, as if WebTrends had
been organized as a taxable entity for periods prior to 1997.
(2) See Note 1 of Notes to Financial Statements for the determination of shares
used in computing basic and diluted net income per share and pro forma net
income per share data.
17
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Financial Statements and related notes thereto
included elsewhere in this prospectus. The following "Management's Discussion
and Analysis of Financial Condition and Results of Operations' contains
forward-looking statements that involve risks and uncertainties, such as
WebTrends' plans, objectives, expectations, and intentions. WebTrends' actual
results could differ materially from those anticipated in these forward-looking
statements as a result of factors, including, but not limited to, those
discussed below, those set forth under "Risk Factors," and elsewhere in this
Prospectus.
OVERVIEW
WebTrends Corporation provides comprehensive, integrated, scaleable,
modular, and easy-to-use solutions that enable organizations to cost-effectively
manage and report on their Internet-based systems. WebTrends was incorporated on
August 31, 1993 and reorganized effective January 1, 1997. Prior to 1997,
WebTrends was not taxable as an entity because the shareholders had elected to
be taxed individually based on their percentage ownership of the outstanding
common stock.
Since the year ended December 31, 1996, WebTrends has generated most of its
revenue from licensing its traffic analysis and management suite products and
related support services. WebTrends' initial traffic analysis product, the
WebTrends Log Analyzer, was introduced in February 1996. In September and
November 1997, respectively, WebTrends introduced the Enterprise and
Professional Suite products. The Professional Suite integrates Web site traffic
analysis with proxy server traffic analysis, link analysis, quality control,
content management, as well as monitoring, alerting, and recovery. The
Enterprise Suite enables users to manage more complex server configurations and
to integrate Web site traffic analysis data with existing databases, permitting
advanced, custom analyses. In May 1998, WebTrends introduced the WebTrends Suite
for Lotus Domino, which is the first software package on the market to offer
full management, reporting, and analysis for Lotus Domino Web servers. In June
1998, WebTrends introduced WebTrends for Firewalls and VPNs, which is a
real-time solution to manage, report, and monitor firewall activity. In January
1999, WebTrends introduced the WebTrends Security Analyzer, which helps secure
Internet servers and other Internet devices. In March and April 1999, WebTrends
introduced the WebTrends Enterprise Reporting Server for Solaris and the
WebTrends Enterprise Reporting Server for Linux, which provide traffic analysis
and distributed reporting for high-traffic corporate Web sites, Internet service
providers, web hosting sites, and managed service providers. Prior to 1996,
substantially all of WebTrends' revenue was generated from the license of its
AuditTrack product and related products developed as solutions for managing
Novell networks. WebTrends continues to sell AuditTrack, and revenue from this
product represented approximately 13.2% of total revenue during 1998. We expect
that revenue in 1999 from our AuditTrack product will decrease as a percentage
of revenue as sales of our Internet products continue to increase.
Software license revenue consists of fees for licenses of WebTrends'
software products. Revenue allocated to software licenses is recognized upon
delivery of software, assuming no significant obligations or customer acceptance
rights exist. WebTrends generally provides a thirty-day right of return for each
product sold. Estimated sales returns and allowances are recorded upon shipment
of the product.
18
<PAGE> 24
WebTrends sells a portion of its products domestically and internationally
through resellers. Revenue from sales to domestic resellers is managed directly
by WebTrends, and we recognize revenue from sales primarily at the time of
shipment, net of estimated returns and allowances. In December of 1998,
WebTrends entered into domestic distribution agreements with Merisel Americas,
Inc. and Ingram Micro, Inc. These agreements offer expanded rights of return and
price protection beyond our normal reseller agreements. For these distributors,
WebTrends is recognizing revenue upon sales from the distributor to a third
party or end user until a returns history can be established. Revenue from sales
to international resellers is managed by a third-party export management company
and revenue is recognized upon sales from the reseller to a third party or end
user.
Support services revenue consists of annual subscriptions for upgrades,
post-sale customer support services, and professional services. Revenue
allocated to subscriptions, which allow the subscriber to purchase the right to
obtain upgrades, when and if available, are paid in advance and revenues are
recognized ratably over the term of the subscription. Revenue allocated to
professional services is recognized as the services are performed.
WebTrends generates revenue through direct sales to end users and through
its indirect distribution channels. Direct sales are generated by our telesales
organization, direct field sales force, and through on-line sales. The indirect
distribution channel includes distributors, resellers, and value-added
resellers. WebTrends also conducts joint marketing and distribution programs
with strategic partners. We derive our international revenue primarily through
our indirect distribution channel.
Approximately 22.0%, 27.5%, and 26.1% of WebTrends' total revenue for the
years ended December 31, 1997 and 1998, and the three months ended March 31,
1999, respectively, was attributable to sales made outside the United States. We
expect that international sales will continue to represent a significant portion
of our total revenue. WebTrends' international sales are currently denominated
in U.S. dollars. As a result, increases in the value of the U.S. dollar relative
to foreign currencies could make our products more expensive and, therefore,
potentially less competitive in those markets.
WebTrends has recorded net deferred compensation of approximately $515,000
as of March 31, 1999, which represents the difference between the exercise price
and the fair value of the shares of common stock issuable upon the exercise of
stock options that were granted to employees in July and August 1998. The
deferred compensation is being amortized over the vesting period of the stock
options.
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 achieving technological feasibility and the general
availability of such software has been short; therefore, software development
costs qualifying for capitalization have been immaterial. Accordingly, WebTrends
has not capitalized any software development costs and has charged all such
costs to research and development expense.
WebTrends has grown rapidly, with revenue increasing from $1.9 million in
1996 to $8.0 million in 1998. Revenue for the three months ended March 31, 1999
was $3.0 million. During this period, we have experienced continued
profitability and, as of March 31, 1999, WebTrends had retained earnings of
$722,000. However, this growth rate and profitability may not be sustainable,
and it should not be relied upon as predictive of future performance.
19
<PAGE> 25
WebTrends expects to continue to increase its expenditures in all areas in order
to execute its business plan. In particular, WebTrends currently expects to
expand its sales and marketing operations, expand its international distribution
channels, increase its investment in product development, and improve its
internal operating and financial infrastructure. As a result, we do not expect
profitability to increase in line with revenue growth.
WebTrends' prospects must be considered in light of the risks and
uncertainties frequently encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets.
WebTrends may not be successful in addressing such risks and difficulties or
sustaining or increasing profitability in the future.
RESULTS OF OPERATIONS
The following table sets forth historical operating information of
WebTrends, as a percentage of total revenue, for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses................... 99.6% 94.6% 90.0% 92.3% 86.1%
Support services.................... 0.4 5.4 10.0 7.7 13.9
----- ----- ----- ----- -----
Total revenue............... 100.0 100.0 100.0 100.0 100.0
Cost of revenue....................... 11.0 7.2 7.9 8.0 9.7
----- ----- ----- ----- -----
Gross margin........................ 89.0 92.8 92.1 92.0 90.3
----- ----- ----- ----- -----
Operating expenses:
Research and development............ 21.6 26.1 27.6 28.1 21.3
Sales and marketing................. 29.6 37.7 45.5 44.4 50.1
General and administrative.......... 16.5 18.5 16.2 18.0 15.1
----- ----- ----- ----- -----
Total operating expenses.... 67.7 82.3 89.3 90.5 86.5
----- ----- ----- ----- -----
Income from operations................ 21.3 10.5 2.8 1.5 3.8
Other income, net..................... 0.4 0.3 0.4 0.3 5.7
----- ----- ----- ----- -----
Income before income taxes............ 21.7 10.8 3.2 1.8 9.5
Income taxes.......................... -- 3.7 0.4 0.2 3.6
----- ----- ----- ----- -----
Net income............................ 21.7% 7.1% 2.8% 1.6% 5.9%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUE
Total revenue increased 85.4% from $1.6 million for the three months ended
March 31, 1998 to $3.0 million for the three months ended March 31, 1999.
Software Licenses. Software license revenue increased 72.9% from $1.5
million for the three months ended March 31, 1998 to $2.6 million for the three
months ended March 31, 1999. Software license revenue represented 92.3% and
86.1% of total revenue for the three months ended March 31, 1998 and March 31,
1999, respectively. The increase in software license revenue is primarily
attributable to the effect of continued growth of sales of our suite products
and our WebTrends for Firewalls and VPNs product which was introduced in the
second quarter of 1998, as well as the introduction of the WebTrends Security
Analyzer product during the quarter ended March 31, 1999.
20
<PAGE> 26
Support Services. Support services revenue increased 234.3% from $125,000
for the three months ended March 31, 1998 to $419,000 for the three months ended
March 31, 1999, representing approximately 7.7% and 13.9% of total revenue,
respectively. The increase in support services revenue is primarily attributable
to an increase in subscription revenue from the increase in our installed base
of customers and the sale of consulting and training services which was
initiated during the second half of 1998.
COST OF REVENUE
Cost of revenue includes product packaging, software documentation,
duplication, labor, and other costs associated with handling, packaging, and
shipping product, royalties associated with the sale of WebTrends' products, and
costs associated with providing technical support and consulting services to
customers. Cost of revenue increased 124.3% from $129,000 for the three months
ended March 31, 1998 to $290,000 for the three months ended March 31, 1999. As a
percentage of total revenue, cost of revenue increased from 8.0% for the three
months ended March 31, 1998 to 9.7% for the three months ended March 31, 1999.
The increase in cost of revenue is primarily attributable to the hiring of
additional customer support personnel to handle the demand from a larger
customer base as support services became a higher percentage of our revenue, and
the hiring of additional employees to manage consulting and training services.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
primarily of salaries and related costs associated with the development of new
products, the enhancement of existing products, and the performance of quality
assurance and documentation activities. Research and development expenses
increased 40.2% from $456,000 for the three months ended March 31, 1998 to
$639,000 for the three months ended March 31, 1999. As a percentage of total
revenue, research and development expenses decreased from 28.1% for the three
months ended March 31, 1998 to 21.3% for the three months ended March 31, 1999.
The increase in research and development 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 primarily due to the rapid growth in
total revenue. WebTrends continues to believe that significant investment in
research and development is required to remain competitive in its markets, and
therefore anticipates 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. Sales and marketing expenses consist primarily of
salaries, trade shows, commissions, and advertising costs. Sales and marketing
expenses increased 109.1% from $720,000 for the three months ended March 31,
1998 to $1.5 million for the three months ended March 31, 1999. As a percentage
of total revenue, sales and marketing expenses increased from 44.4% for the
three months ended March 31, 1998 to 50.1% for the three months ended March 31,
1999. The increase in sales and marketing expense is primarily attributable to
the hiring of additional sales, marketing, and customer support personnel,
including additional personnel required to support indirect distribution
channels, and increased spending on advertising. WebTrends expects that sales
and marketing expenses will continue to increase in absolute dollars as it
continues to expand its marketing programs and sales force to increase brand
awareness, but they may vary as a percent of total revenue.
General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs for executive,
financial, human resource, and other administrative functions, as well as legal,
accounting, and insurance costs. General
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and administrative expenses increased 55.8% from $292,000 for the three months
ended March 31, 1998 to $455,000 for the three months ended March 31, 1999. As a
percentage of total revenue, general and administrative expenses decreased from
18.0% for the three months ended March 31, 1998 to 15.1% for the three months
ended March 31, 1999. The increase in absolute dollars is primarily attributable
to the hiring of additional accounting and administration personnel, and public
company related costs during the three months ended March 31, 1999. WebTrends
expects 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.
INCOME TAXES
Income taxes increased from $3,000 for the three months ended March 31,
1998 to $107,000 for the three months ended March 31, 1999, primarily due to
increased income from operations resulting from WebTrends' increased revenue,
partially offset by the utilization of research and development tax credits
associated with its investment in developing new products. Income taxes for the
three months ended March 31, 1998 reflect an estimated effective tax rate of
12.0%. Income taxes for the three months ended March 31, 1999 reflect an
estimated effective tax rate of 37.5%.
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
REVENUE
Total revenue increased from $1.9 million in 1996 to $4.1 million in 1997,
and $8.0 million in 1998. The increases reflect year to year revenue growth of
117.4% and 97.5%, respectively.
Software Licenses. Software license revenue represented 90% or more of
total revenue for each of the years in the three-year period ended December 31,
1998. Software license revenue increased from $1.9 million in 1996, to $3.8
million in 1997, and $7.2 million in 1998. The increase in software license
revenue from 1996 to 1997 is primarily attributable to the effect of a full year
of sales of the WebTrends Log Analyzer, which accounted for approximately 86% of
the license revenue growth, and sales of our suite products, which were
introduced in late 1997, and which accounted for approximately 11% of the
license revenue growth. The increase in software license revenue from 1997 to
1998 is primarily attributable to the effect of a full year of sales of our
suite products, which accounted for approximately 78% of the license revenue
growth, and sales of WebTrends for Firewalls and VPNs, which was introduced in
mid-1998, and which accounted for approximately 17% of the license revenue
growth. The slowing of revenue attributable to the WebTrends Log Analyzer
reflects our customers' preferences to obtain traffic analysis functionality
from our suite products.
Support Services. Support services revenue increased from $7,000 in 1996,
to $218,000 in 1997, and $802,000 in 1998, representing approximately 0.4%,
5.4%, and 10.0% of total revenues, respectively. The increases in support
services revenue are primarily attributable to an increase in the installed base
of customers over the comparable periods and the initiation of WebTrends
subscription program in the fourth quarter of 1996.
COST OF REVENUE
Cost of revenue increased from $205,000 in 1996, to $292,000 in 1997, and
$633,000 in 1998. As a percentage of total revenue, cost of revenue increased
from 7.2% for the year ended December 31, 1997 to 7.9% for the year ended
December 31, 1998. The increase in cost of revenue is primarily attributable to
the hiring of seven additional employees for customer support between 1996 and
1998 to handle the increased demand from a larger
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<PAGE> 28
installed base. As a percentage of total revenue, cost of revenue decreased from
11.0% for the year ended December 31, 1996 to 7.2% for the year ended December
31, 1997. This decrease is primarily due to leveraging fixed costs across
increased license revenue and greater material and shipping discounts associated
with higher sales volume.
OPERATING EXPENSES
Research and Development. Research and development expenses increased from
$403,000 in 1996, to $1.1 million in 1997, and $2.2 million in 1998,
representing 21.6%, 26.1%, and 27.6% of total revenues, respectively. The
increases in research and development expenses, both in absolute dollars and as
a percent of total revenue, are primarily attributable to increasing the number
of research and development employees from four in 1996, to 13 in 1997, and 27
in 1998, and costs related to supporting the development of new products and
enhanced versions of existing products. Research and development compensation
increased $454,000 from 1996 to 1997 and $994,000 from 1997 to 1998, and the
incremental costs related to supporting the development of new products and
enhanced versions of existing products increased $24,000 from 1996 to 1997 and
$42,000 from 1997 to 1998. During the year ended December 31, 1998, WebTrends
released three new products.
Sales and Marketing. Sales and marketing expenses increased from $553,000
in 1996, to $1.5 million in 1997, and $3.6 million in 1998, representing 29.6%,
37.7%, and 45.5% of total revenues, respectively. The increases in sales and
marketing expenses are primarily attributable to increasing the number of sales,
marketing, and customer support personnel, including additional personnel
required to support indirect distribution channels, and increased spending on
advertising. Sales, marketing and customer support employees grew from four in
1996, to 16 in 1997, and 37 in 1998, resulting in increases in sales and
marketing compensation of $527,000 from 1996 to 1997 and $1.0 million from 1997
to 1998. Advertising expense grew from $266,000 in 1996, to $553,000 in 1997,
and $957,000 in 1998.
General and Administrative. General and administrative expenses increased
from $307,000 in 1996, to $749,000 in 1997, and $1.3 million in 1998,
representing 16.5%, 18.5%, and 16.2% of total revenues, respectively. The
increase in absolute dollars is primarily attributable to increasing the number
of accounting, administration, and information services personnel. Accounting,
administration, and information services employees grew from four in 1996, to
nine in 1997, and 14 in 1998, resulting in increases in general and
administrative compensation of $130,000 from 1996 to 1997 and $349,000 from 1997
to 1998. Cost for rent grew from approximately $5,000 in 1996, to $17,000 in
1997, and $36,000 in 1998.
INCOME TAXES
Income taxes decreased from $151,000 for the year ended December 31, 1997,
to $31,000 for the year ended December 31, 1998, primarily due to lower income
from operations resulting from WebTrends' increased operating expenses during
1998 and from the utilization of research and development tax credits associated
with its investment in developing new products. WebTrends was organized as an S
Corporation, meaning that under federal and state taxation laws, taxes on
WebTrends' income were paid by its shareholders and not by WebTrends, before
1997. Income taxes for the year ended December 31, 1997 reflect an effective tax
rate of approximately 34.4% of taxable income and is comprised of federal and
state income taxes. Income taxes for the year ended December 31, 1998, reflect
WebTrends' tax rate for federal and state taxes of approximately 12.5% of
taxable income.
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SELECTED QUARTERLY FINANCIAL RESULTS
The following table sets forth a summary of WebTrends' unaudited quarterly
operating results for each of the five quarters in the period ended March 31,
1999, as well as results expressed as a percentage of total revenue for the
periods indicated. This information has been derived from unaudited interim
financial statements that, in the opinion of management, have been prepared on a
basis consistent with the financial statements contained elsewhere in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information when read in
conjunction with the Financial Statements and notes thereto appearing elsewhere
in this prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MAR. 31, JUNE 30, SEPT 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses.................. $1,496 $1,661 $1,868 $2,181 $2,587
Support services................... 125 168 221 288 419
------ ------ ------ ------ ------
Total revenue................... 1,621 1,829 2,089 2,469 3,006
Cost of revenue...................... 129 149 167 188 290
------ ------ ------ ------ ------
Gross margin.................... 1,492 1,680 1,922 2,281 2,716
------ ------ ------ ------ ------
Operating expenses:
Research and development........... 456 512 639 604 639
Sales and marketing................ 720 800 877 1,245 1,506
General and administrative......... 292 329 356 323 455
------ ------ ------ ------ ------
Total operating expenses........ 1,468 1,641 1,872 2,172 2,600
------ ------ ------ ------ ------
Income from operations............... 24 39 50 109 116
Other income, net.................... 5 8 9 7 169
------ ------ ------ ------ ------
Income before income taxes........... 29 47 59 116 285
Income taxes......................... 3 6 7 16 107
------ ------ ------ ------ ------
Net income........................... $ 26 $ 41 $ 52 $ 100 $ 178
====== ====== ====== ====== ======
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Software licenses.................. 92.3% 90.8% 89.4% 88.3% 86.1%
Support services................... 7.7 9.2 10.6 11.7 13.9
------ ------ ------ ------ ------
Total revenue................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue...................... 8.0 8.1 8.0 7.6 9.7
------ ------ ------ ------ ------
Gross margin.................... 92.0 91.9 92.0 92.4 90.3
------ ------ ------ ------ ------
Operating expenses:
Research and development........... 28.1 28.0 30.6 24.5 21.3
Sales and marketing................ 44.4 43.7 42.0 50.4 50.1
General and administrative......... 18.0 18.0 17.0 13.1 15.1
------ ------ ------ ------ ------
Total operating expenses........ 90.5 89.7 89.6 88.0 86.5
------ ------ ------ ------ ------
Income from operations............... 1.5 2.2 2.4 4.4 3.8
Other income, net.................... 0.3 0.4 0.4 0.3 5.7
------ ------ ------ ------ ------
Income before income taxes........... 1.8 2.6 2.8 4.7 9.5
Income taxes......................... 0.2 0.3 0.4 0.6 3.6
------ ------ ------ ------ ------
Net income........................... 1.6% 2.3% 2.4% 4.1% 5.9%
====== ====== ====== ====== ======
</TABLE>
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During WebTrends' history, its operating results have varied on a quarterly
basis and may fluctuate significantly in the future on a quarterly and annual
basis as a result of a combination of factors. The second and third quarters of
the year have been typically characterized by lower levels of revenue growth.
This seasonal reduction in the rate of growth is due primarily to a general
reduction in the amount and frequency of new sales in the European markets
during the summer months. WebTrends expects this seasonality to continue, and it
may result in lower revenue during those quarters. In addition to these seasonal
fluctuations, factors that could cause WebTrends' quarterly operating results to
fluctuate include:
- The level of demand for our products;
- The volume and timing of orders;
- The level of product and price competition;
- The ability to expand our domestic and international sales, and marketing
organizations;
- The ability to develop new and enhanced products;
- The ability to attract and retain key technical, sales and managerial
personnel;
- The mix of distribution channels through which our products are sold;
- The growth in the acceptance of, and activity on, the Internet,
particularly by users within organizations;
- The level of growth of intranets;
- Customer budgets;
- Foreign currency exchange rates; and
- General economic factors.
In addition, the amount of revenue associated with particular licenses can
vary significantly based upon the number of products licensed and the number of
devices involved in the installation. WebTrends establishes its expenditure
levels for product development, sales and marketing and other operating expenses
based, in large part, on its expected future revenue. WebTrends' expectations
regarding future revenue may not be accurate. As a result, if revenues fall
below expectations, operating results and net income are likely to be adversely
and disproportionately affected because only a small portion of WebTrends'
expenses vary with its revenue.
WebTrends is also increasing its sales and marketing efforts focused on
larger purchases by larger customers. Such transactions are generally more
complex and may increase the length of WebTrends' average sales cycle. We
anticipate that an increasing portion of our revenue could be derived from
larger orders, in which case the timing of receipt and fulfillment of any such
orders could cause fluctuations in our operating results, particularly on a
quarterly basis.
Due to the foregoing factors, WebTrends' operating results are difficult to
forecast. We believe that period-to-period comparisons of our historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, our operating results may fall below our
expectations and those of securities analysts or investors in some future
quarter. In such event, the market price of our common stock would likely be
materially adversely affected.
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<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
WebTrends has financed its operations primarily with cash from operations,
loans and capital contributions from shareholders, and the completion of its
initial public offering in February 1999. As of March 31, 1999, we had working
capital of approximately $35.4 million, compared to working capital of $221,000
at December 31, 1998.
Net cash provided by operating activities was approximately $191,000 and
$430,000 for the three months ended March 31, 1998 and 1999, respectively. Net
cash provided by operating activities resulted primarily from profitable
operations, higher credit card sales volume, and increased accrued liabilities
and deferred revenues, partially offset by increased accounts receivable for the
periods indicated.
Net cash used by investing activities was approximately $64,000 and $6.5
million for the three months ended March 31, 1998 and 1999, respectively.
Investing activities for the periods were primarily short-term investments and
purchases of computer equipment and related software. At March 31, 1999,
WebTrends had no material commitments for capital expenditures.
Net cash provided by financing activities was approximately $0 and $35.6
million for the three months ended March 31, 1998 and 1999, respectively. Net
cash provided by financing activities resulted from the completion of WebTrends'
initial public offering and the exercise of employee stock options, partially
offset by the repayment of loans made to WebTrends by its shareholders.
As of March 31, 1999, WebTrends had approximately $36.8 million in cash,
cash equivalents, and short-term investments and a $750,000 bank line of credit
with a major financial institution. The line of credit expires on April 30, 1999
and we do not plan on renewing the line. Since our inception, we have
significantly increased our operating expenses. We anticipate that we will
continue to experience significant growth in our operating expenses for the
foreseeable future and that our operating expenses and capital expenditures will
constitute a material use of our cash resources. In addition, WebTrends may
utilize cash resources to fund acquisitions or investments in businesses,
technologies, or product lines that are complementary to its business. We
believe that the net proceeds to us from this offering, together with our
current cash and cash equivalents, 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.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
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STATE OF READINESS OF OUR PRODUCTS
All new products introduced by WebTrends will be year 2000 compliant. We
have been testing our existing products for use in the year 2000 and beyond. The
results suggest that the following versions of our products, and later versions
of such products, are year 2000 compliant:
- AuditTrack v 3.2
- SmartPass v1.09
- WebTrends Log Analyzer v 4.0a
- WebTrends Professional Suite v3.0a
- WebTrends Enterprise Suite v3.0a
- WebTrends Suite for Lotus Domino v2.0a
- WebTrends for Firewalls and VPNs v1.0
- WebTrends Security Analyzer v.2.0
- WebTrends Enterprise Reporting Server for Solaris v1.0
- WebTrends Enterprise Reporting Server for Linux v1.0
However, our testing does not cover every possible computing environment.
Accordingly, some customers may have year 2000 problems with products that
WebTrends believes are year 2000 compliant.
WebTrends' customers may be using older versions of the above products.
Problems encountered by such customers could be quickly remedied because of the
availability of year 2000 upgrades and updates for such products. In addition,
WebTrends has not tested discontinued products that it no longer markets for
year 2000 compliance, some of which might still be in use. These discontinued
products are not widely deployed. WebTrends expects that any customers that
materially rely on such discontinued products will test them for year 2000
compliance and notify WebTrends if there are problems. WebTrends' experience in
developing year 2000 compliant versions of its existing products suggests that
if it is required to correct year 2000 problems in such discontinued products,
it could do so without incurring material expenses.
STATE OF READINESS OF OUR INTERNAL SYSTEMS
WebTrends may be affected by year 2000 issues related to non-compliant
internal systems developed by WebTrends or by third-party vendors. We have
received assurances from our third-party vendors for all material systems in use
by WebTrends that such systems are year 2000 compliant. WebTrends is not
currently aware of any year 2000 problem relating to any of its internal,
material systems. WebTrends plans to test all such systems for year 2000
compliance by June 30, 1999. We do not believe that we have any material systems
that contain embedded chips that are not year 2000 compliant.
WebTrends' internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers, and
service providers. We believe that absent a systemic failure outside the control
of WebTrends, such as a prolonged loss of electrical or telephone service, year
2000 problems at such third parties will not have a material impact on
WebTrends. WebTrends has no contingency plan for systemic failures. WebTrends'
contingency plan in the event of a non-systemic failure is to
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<PAGE> 33
establish relationships with alternative suppliers or vendors to replace failed
suppliers or vendors. Other than the previously described testing, and remedying
problems identified by testing or from external sources, WebTrends has no other
contingency plans or intention to create other contingency plans.
COST
WebTrends does not separately track expenditures relating to year 2000
compliance. Such expenditures are primarily absorbed within WebTrends'
development organization. Based on our overall development expenditures and the
amount of time people in the organization are spending on year 2000 compliance,
WebTrends believes that its spending on compliance to date has not been
material. Furthermore, based on its experiences to date, and its assessment that
all material internal systems and all currently marketed products are year 2000
compliant, WebTrends does not anticipate that costs associated with remediating
WebTrends' non-compliant products or internal systems will be material.
RISKS
Any failure of WebTrends to make our products year 2000 compliant could
result in a decrease in sales of our products, an increase in allocation of
resources to address year 2000 problems of our customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by WebTrends' customers due to such
year 2000 problems. Failures of the internal systems of WebTrends could
temporarily prevent us from processing orders, issuing invoices, and developing
products, and could require us to devote significant resources to correcting
such problems. Due to the general uncertainty inherent in the year 2000 computer
problem, resulting from the uncertainty of the year 2000 readiness of
third-party suppliers and vendors, we are unable to determine at this time
whether the consequences of year 2000 failures will have a material impact on
our business, results of operations, and financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. This statement of position is effective for financial
statements for fiscal years beginning after December 15, 1998. Adoption of this
statement did not have a material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities." This standard establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The standard
also requires that changes in the derivatives' fair value be recognized
currently in results of operations unless specific hedge accounting criteria are
met. It is effective for fiscal years beginning after June 15, 1999. We do not
expect it to have a material impact on our financial statements.
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<PAGE> 34
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, Modification of Statement of Position 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. This
statement of position amends Statement of Position 97-2 to require recognition
of revenue using the "residual method" in circumstances outlined in the
statement of position. Under the residual method, revenue is recognized as
follows:
(1) the total fair value of undelivered elements, as indicated by
vender specific objective evidence, is deferred and subsequently recognized
in accordance with the relevant sections of Statement of Position 97-2 and
(2) the difference between the total arrangement fee and the amount
deferred for the undelivered elements is recognized as revenue related to
the delivered elements.
Statement of Position 98-9 is effective for fiscal years beginning after
March 15, 1999. Also, the provisions of Statement of Position 97-2 that were
deferred by Statement of Position 98-4 will continue to be deferred until the
date Statement of Position 98-9 becomes effective. WebTrends is in the process
of evaluating the impact of Statement of Position 98-9.
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BUSINESS
The following Business Section contains forward-looking statements that
involve risks and uncertainties. WebTrends' actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
WebTrends is a leading provider of enterprise management and reporting
solutions for Internet-based systems. WebTrends offers organizations a
comprehensive set of solutions that are integrated, scaleable, modular, and
easy-to-use. Its enterprise management products facilitate analysis and
reporting of:
- Web site traffic: the number of visitors to a Web site, the timing of
visits, and other related characteristics;
- Web site quality: errors that prevent a Web site's content from being
displayed properly or efficiently;
- Internet advertising campaigns: the number of visitors drawn to your Web
site by particular Internet advertisements;
- Web site content: information specific to particular Web site pages, such
as the most popular pages on your Web site;
- usage patterns: the order in which visitors see the pages on your Web
site, and the Web sites most visited by an organization's employees;
- e-commerce activities: information relating to the volume of business
driven by your Web site, such as the number of visitors to a Web site's
order entry page;
- return on investment: information relating to revenues and profits
generated or costs saved from specific Internet expenditures; and
- security: security vulnerabilities for Internet servers and other
Internet devices and recommended fixes.
WebTrends' solutions also help organizations manage their Internet
infrastructure by providing valuable information about firewall activity and
virtual private networks, as well as capacity requirements for the
organization's computers and bandwidth requirements for the organization's
communications lines. Our products have been specifically designed to enable
organizations to centrally manage and administer multiple Internet-based systems
across the enterprise regardless of the quantity or geographic locations of
servers supporting those systems.
INDUSTRY BACKGROUND
EXPLOSIVE GROWTH OF THE INTERNET
The Internet has grown in less than a decade from a limited research tool
to a global network consisting of millions of computers and users. The Internet
is expected to continue to grow rapidly. We estimate that the number of Internet
users worldwide will grow from approximately 69 million in 1997 to 320 million
in 2002. The U.S. Department of Commerce estimates that Internet traffic doubles
every 100 days. The number of Internet Web sites is also growing rapidly. The
number of Web sites detected by the Netcraft Web Server Survey increased from
approximately 1.0 million in April 1997 to approximately
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2.2 million in April 1998, and to over 5.0 million in April 1999, reflecting
annual growth exceeding 100%. Network Solutions, Inc., which estimates that it
holds a 75% worldwide market share in domain name registrations, registered over
1.9 million new domains in 1998, nearly double the previous year.
The growth of the Internet is primarily attributable to its value as a
low-cost, open, and ubiquitous platform for communications and commerce. As a
result of these attributes, organizations are increasingly embracing the
Internet as a critical platform for communicating with key constituents and
conducting business. Internally, many organizations have adopted Internet-based
systems to facilitate communications among employees and to automate internal
business processes. Many organizations are adding Web-based applications to
increase sales, cut costs, and improve customer service. Customer-centric
applications range from Web sites offering electronic brochures, to electronic
acquisition of goods and services, and automated customer service and support.
Organizations are making large investments in these applications to create
meaningful and attractively presented content that informs, entertains, and
communicates. Emerging applications now enable organizations to attract
customers and build customer loyalty by offering dynamic, personalized content.
Web-based applications for suppliers and distributors have also significantly
improved business-to-business procurement, payment systems, and logistics
planning. Entirely new businesses have emerged that have been developed
specifically to exploit the unique characteristics of the Internet and
e-commerce. We estimate that the volume of Internet commerce will increase from
approximately $12 billion in 1997 to over $400 billion in 2002.
Advertising revenue has also played an important role in the growth of the
Internet. Attracted by increasing numbers of users, Internet-based businesses
have developed that are supported primarily by advertising revenue. Traditional
businesses have also realized incremental advertising spending from their Web
sites. We estimate that Internet advertising spending will grow from $1.9
billion in 1998 to $7.7 billion in 2002.
GROWTH OF INTERNET TECHNOLOGY, CONTENT, AND INFRASTRUCTURE
Organizations are supporting their Internet-based systems by investing
heavily in technology, content, and infrastructure. Forrester Research estimates
that spending on software and services for e-commerce alone will exceed $5.6
billion in 1998 and $35 billion by 2002. The creation of Internet content
continues to grow rapidly by any measure. For example, we estimate that the
number of Web pages will increase from 829 million in 1998 to 7.7 billion in
2002. The Internet uses Web and specialized servers for different tasks and
forms of communications. For example, specialized servers are used for Web
browsing, mail, chat, news groups, file transfers, and audio and video
streaming. A measure of the growth of the Internet infrastructure is the number
of Web and other Internet servers that are installed. These servers are programs
that respond to requests for information and manage data from back-end computing
resources. We estimate that the number of Web and other Internet servers
installed will grow from approximately 6.3 million in 1998 to nearly 12 million
in the year 2002.
Two other important components of the Internet infrastructure are proxy
servers and firewalls, which are network computers that are used to improve the
performance of information gathering and to prevent unauthorized access to
network resources, respectively. Firewalls are also used to implement virtual
private networks. We expect the worldwide firewall market to grow from
approximately $353 million in 1997 to $1.2 billion by the year 2000.
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NEED FOR ENTERPRISE MANAGEMENT AND REPORTING SOLUTIONS FOR INTERNET-BASED
SYSTEMS
As organizations have increased their reliance on the Internet, their
fundamental challenge has been to ensure that their investments in Internet
technology, content, and infrastructure are furthering their strategic goals.
These organizations are increasingly looking for management and reporting
solutions that track and control the effectiveness of their Internet-based
systems by optimizing Internet advertising, measuring return on investment,
monitoring performance, and determining usage patterns. Specifically,
organizations need to track and optimize a user's experience on the
organization's Internet sites, whether it be an employee, customer, or business
partner. Organizations also must manage their investments in Internet
advertising.
Without effective management and reporting, Internet-based systems are
unlikely to fulfill their strategic missions. Many Web sites do not provide
enough information and suffer from reliability problems and quality issues, such
as broken links and failed functions. A 1997 survey from InfoWeek/Ernst & Young
revealed a significant increase in security threats and insufficient resources
to monitor network security.
For management to optimize the effectiveness and value of Internet-based
systems, such systems must fulfill the business needs of the critical functional
areas within the organization. Examples include:
- EXECUTIVE MANAGEMENT. How successful is the implementation of our
Internet strategy? What is the return on investment?
- MARKETING AND SALES. Which Web site visitors are purchasing our products
and services? Is our advertising effective in bringing qualified
prospects to our Web site?
- INFORMATION TECHNOLOGY. Is our existing Internet infrastructure secure
and does it have sufficient capacity? Are we providing reports to
functional managers that enable them to effectively manage our Internet
investment?
- CUSTOMER SERVICE. Has our Web site reduced the volume and duration of
telephone support calls? What are the most common support issues?
- FINANCE. Are we allocating Internet-related expenditures correctly? How
is our Internet strategy affecting employee productivity?
Despite the widespread need for comprehensive, scaleable, and easy-to-use
management and reporting solutions for Internet-based systems, there have been
no solutions offering all of these capabilities. Several companies offer
reporting and management tools designed for previous generations of computer
networks that are still widely deployed. These traditional network management
tools, however, are not designed specifically for the Internet and do not allow
business managers to analyze Internet-specific activities and content
effectively, increasing the likelihood that Internet investments will be
misallocated. Another approach is to develop a custom application to analyze
Internet data or to port Internet data to a database management system that can
generate reports from user queries. These custom applications and database query
tools, however, are not cost-effective solutions because of the volume and
complexity of the underlying data. The few Internet tools available are
typically limited to particular needs, such as traffic analysis, security
analysis, or quality analysis. Furthermore, stand-alone tools for traffic
analysis are prohibitively expensive, yet do not scale to high volume Web sites.
In addition, piecing together individual tools from different vendors for
traffic analysis, security analysis, quality control, and other management
functions into a complete solution is expensive, difficult to manage, and
results in a confusing array of inconsistent user interfaces and report formats.
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THE WEBTRENDS SOLUTION
WebTrends offers a comprehensive solution of integrated, scaleable, and
modular software products that enable organizations to cost-effectively manage
and report on their Internet-based systems. Our enterprise management products
facilitate analysis and reporting of Web site traffic, quality, content, usage,
and e-commerce activities, as well as returns on investments from Internet-based
systems and Internet advertising campaigns. WebTrends' solutions also help
organizations manage their Internet infrastructure by providing valuable
information about firewall activity, virtual private networks, and security
vulnerabilities, as well as capacity and bandwidth requirements.
The WebTrends solution has the following key benefits:
Comprehensive Solution. WebTrends' products provide a comprehensive
solution to important Internet management needs. As Internet technology has
evolved and additional management requirements have become apparent, our modular
architecture has enabled us to rapidly develop additional products and product
enhancements to meet customer needs.
Centralized Management. The WebTrends solution enables organizations to
centrally manage and administer multiple Internet-based systems across the
enterprise regardless of the quantity or geographic locations of servers
supporting those systems. WebTrends' products analyze data from servers that run
in numerous operating environments, including UNIX, Windows NT, NetWare, and
others. Organizations can also use WebTrends' products to manage Web sites
hosted by third parties such as Internet service providers.
Scaleability and Performance. The WebTrends solution is capable of managing
and reporting on high-traffic and distributed Internet-based systems. The
WebTrends solution is designed to scale to the following environments:
- A single system hosting up to 500 Web sites.
- One Internet server spread across a 50-server cluster.
- One Internet server or firewall generating over 40 million hits per day.
- One Internet server or firewall generating log files exceeding 10
gigabytes per day.
- One Internet server or firewall consisting of tens of thousands of Web
pages.
WebTrends' products are designed to produce results quickly. For example,
server logs can be analyzed in real time while transactions are being processed.
In addition, results of traffic analyses can be stored using WebTrends'
FastTrends caching technology, allowing customers to perform further analyses or
reorganize results quickly.
Comprehensive and Flexible Reporting. Each WebTrends product produces
dozens of reports that can be customized for format and content. Reports can be
generated as Web pages for on-line browsing or in Microsoft Word or other
formats for professional-looking printed output.
Ease of Use and Installation. WebTrends' solutions have features that make
them easy to use, including fast installation, automatic detection of data
sources such as server logs, and an award-winning user-interface consistent
across all products. These features permit WebTrends' solutions to be used
throughout an organization by marketing, sales, and financial managers, as well
as Webmasters and other IT professionals.
Open and Flexible. WebTrends' solutions are designed to integrate with
other systems. Data can be analyzed from numerous Internet system components
developed by dozens of vendors. Results can be exported to either our FastTrends
cache or most
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database management systems. Internet service providers can use the WebTrends
Internet service providers application programming interface to automate
configuration for their own customers. Independent software developers can
develop their own applications as cartridges that interface with the WebTrends
framework.
STRATEGY
WebTrends' objectives are to continue to lead and expand the market for
enterprise management and reporting solutions for Internet-based systems. Key
strategies to achieving these objectives include:
Leverage Market Leadership to Build Brand Awareness. WebTrends believes it
is the leading provider of enterprise management and reporting solutions for
Internet-based systems. WebTrends has been able to accomplish this by being the
first company to market a solution combining Web site traffic analysis -- a
market in which WebTrends is the leader with almost three times the share of its
next closest competitor according to a March 1998 International Data Corporation
report -- with a variety of other products that enable organizations to manage
several critical aspects of their Internet investments, such as firewall
activity and virtual private networks. Fundamental to WebTrends' strategy has
been its belief that enterprise management and reporting solutions for
Internet-based systems require broad, integrated solutions that track not just
Internet traffic, but also quality, performance, and security. Thus, WebTrends
has, and will continue to, leverage its market leadership to offer additional
traffic analysis, security, e-commerce management, and other new products that
enable organizations to manage the evolving needs of their Internet-based
systems.
Offer Comprehensive Internet Management Solutions. WebTrends intends to
reinforce and aggressively market its existing position as the only vendor
offering a comprehensive set of solutions for important Internet management
needs. We believe that individuals within an organization making purchase
decisions for Internet management and reporting solutions prefer a set of
solutions that offer consistent features for installation, reporting format,
user interface, and scaleability. We introduced our Enterprise and Professional
Suites in 1997, our Server Cluster Add-on and Lotus Domino Suite in 1998, our
Security Analyzer in January 1999, our Reporting Server for Solaris and Linux in
March and April 1999, respectively, and we plan to introduce the CommerceTrends
Add-on in the second quarter of 1999. We intend to continue to develop new
features and products to meet the additional management demands that will arise
as Internet usage and technologies evolve.
Address Needs of Both IT Professionals and Other Business Managers. In
addition to marketing our products to IT professionals on the basis of
performance and technical capabilities, our strategy is to market directly to
the needs of business managers in such departments as sales and marketing,
customer service, finances, and human resources. WebTrends' products enable
these managers to make informed enterprise-wide management decisions. At the
same time, we market our products as the preferred solution for the IT
professional to not only manage essential Internet issues such as network
bandwidth, navigation, capacity, quality assurance, system availability, and
security, but also increasingly to provide vital information to other managers
across the enterprise.
Exploit Architecture to Expand Product Line for Evolving Internet
Systems. Our extensible, modular product architecture significantly reduces the
design cycle, allowing us to bring new products and features to market on a
frequent, timely basis. This strategy is critical because WebTrends must
continue to provide management solutions for evolving Internet technologies.
Since the introduction of our original Web site traffic analysis
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product in 1996, we have introduced seven additional product offerings, with an
additional offering scheduled for introduction no later than June 1999.
Aggressively Expand Channels and Geographic Scope of Sales. To increase the
distribution and visibility of its products, WebTrends intends to continue to
expand its domestic and international sales capabilities. We anticipate adding
telesales and on-line sales resources and augmenting our field sales staffing
and locations. We also intend to invest significant efforts in further
developing our indirect channels with key value-added resellers, distributors,
resellers, original equipment manufacturers, Internet service providers, and
other channel partners in both domestic and international markets.
Continue to Offer Scaleable Solutions that Address All Segments of
WebTrends' Market. WebTrends intends to reinforce its image as the leading
provider of enterprise management and reporting solutions of Internet systems by
continuing to offer a wide range of product choices and suite configurations at
price points appropriate to the resources and requirements of a broad spectrum
of business users. The speed, utility, and scaleability of WebTrends' products
make them appropriate for the enterprise management and reporting needs of the
largest Internet systems. Customers include large organizations managing
networks of hundreds of servers as well as Internet service providers providing
hosted Internet resource management to thousands of customers. In addition,
WebTrends has provided its solutions to organizations that require information
management for specific high-traffic Internet events such as NASA's Web site for
the John Glenn shuttle mission that received over seven million hits on its most
active day. All of these customers look to WebTrends' solutions for their
ability to scale to the demands of large volumes of Internet users. At the same
time, the price/performance attributes of WebTrends' products make them
affordable and appropriate solutions for business users with more modest system
requirements.
Invest in Technology to Maintain Leadership and Product
Performance. WebTrends believes that its customers purchase its solutions
primarily due to their superior performance characteristics. WebTrends' existing
products offer superior reliability, high speed relative to other available
solutions, a broad array of information reporting and analysis choices, and the
ability to scale up to very high traffic requirements. We believe that the
reputation of our existing products for performance will facilitate acceptance
of additional products into our market. We intend to continue to devote
substantial resources to the enhancement of our existing solutions and the
development of new products as the demands of our market evolve.
PRODUCTS AND SERVICES
WebTrends markets management suites, as well as stand-alone products for
traffic analysis, security analysis, and firewall management.
MANAGEMENT SUITES AND TRAFFIC ANALYSIS
WebTrends Professional Suite. WebTrends Professional Suite is an integrated
enterprise solution that manages and reports on an organization's important
Internet-related functions. The suite bundles together four related
applications, called cartridges:
1. Web Site Traffic Analysis: The Web Site Traffic Analysis cartridge
analyzes log files created by Web servers to provide valuable information
concerning the site and the users that visit it. It is compatible with all
significant Web servers and can analyze server log files that were created by
the same computer running the WebTrends software, or that were created on
remotely located computers. The Web Site Traffic Analysis cartridge can
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produce separate analyses for each of multiple Web sites that share a single Web
server. Traffic analysis reports answer questions such as:
- How many qualified prospects are being drawn to the Web site by an
advertising campaign?
- Which search engines and portals are referring qualified prospects to the
Web site?
- Which pages are most popular? What changes can be made to the Web site to
make the most popular pages easy to find?
- How can the appearance of the Web site be improved in light of the most
frequently used browsers and access speeds of our visitors?
2. Proxy Server Traffic Analysis: The Proxy Server Traffic Analysis
cartridge enables real-time analysis of employee Internet usage. Proxy server
traffic analysis reports answer questions such as:
- What Web sites provide useful information to employees?
- Which employees use the most resources?
- How much time do employees spend browsing Web sites that are unrelated to
their work?
3. Link Analysis and Quality Control: The Link Analysis and Quality Control
cartridge detects broken links and other quality related problems on Web sites.
Link analysis and quality control reports answer questions such as:
- Does my Web site contain links to nonexistent Web pages?
- Which Web pages are slow to load in a browser?
- Does the Web site include duplicative images?
4. Monitoring, Alerting, and Recovery: The Monitoring, Alerting, and
Recovery cartridge monitors devices such as servers, routers and databases, and
both issues alerts by e-mail or pager and runs automatic recovery routines when
failures are detected. Monitoring, alerting, and recovery reports answer
questions such as:
- What is the total downtime of our Internet-based system?
- Which components in our Internet-based system have experienced the
greatest number of failures?
WebTrends Enterprise Suite. The WebTrends Enterprise Suite adds advanced
capabilities to the WebTrends Professional Suite. The WebTrends Enterprise Suite
includes DBTrends technology. DBTrends allows an IT professional to integrate
Web traffic analysis results with data from the organization's existing
databases for custom analysis of e-commerce and other advanced applications. The
WebTrends Enterprise Suite also permits WebTrends analyses to be exported to
most database management systems for archiving and historical analyses.
WebTrends Enterprise Suite also includes the WebTrends Streaming Media cartridge
which reports on traffic of audio and video servers available from RealNetworks,
Inc. and Microsoft. Reports from this cartridge identify the number of streams
requested, the connection speeds for browsers, and the most popular streamed
content.
WebTrends Log Analyzer. The WebTrends Log Analyzer is a stand-alone product
that provides all of the capabilities of the Web Site Traffic Analysis cartridge
included in
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the WebTrends suites. The WebTrends Log Analyzer was our first product for
managing Internet-based systems and is a popular choice for organizations that
require an inexpensive, feature-rich solution for traffic analysis.
WebTrends Enterprise Reporting Server for Solaris and Linux. The WebTrends
Enterprise Reporting Server is a Web site traffic analysis solution that runs on
two versions of the UNIX computer operating system, namely Solaris, marketed by
Sun Microsystems, and Linux. It is designed to serve the needs of Internet
service providers and enterprise customers by allowing multiple users
concurrent, remote management and access to reports via Web browsers residing on
any Windows, UNIX, or Macintosh client.
WebTrends Server Cluster Add-on. The WebTrends Server Cluster Add-on
enables the WebTrends Enterprise Suite to analyze multiple log files created by
Web servers in a cluster -- a group of Web servers cooperating to provide high
bandwidth and reliable access to a single Web site -- automatically
reconstructing the correct time of arrival for each and every hit, to produce
accurate Web traffic analysis reports. The WebTrends Server Cluster Add-on also
reports how well the load is balanced across the servers in the cluster and how
well a redirector device is distributing requests to servers that are installed
in different geographic locations.
WebTrends Suite for Lotus Domino. The WebTrends Suite for Lotus Domino
contains the functionality of the cartridges of the WebTrends Professional
Suite, with each cartridge customized for the Lotus Domino Web server
environment.
WebTrends CommerceTrends Add-on. The WebTrends CommerceTrends Add-on helps
organizations manage their e-commerce and on-line advertising activities. The
WebTrends CommerceTrends Add-on creates a profile of an organization's
Internet-based advertising campaigns and expenditures and assigns a monetary
value for individual Web site visitors by analyzing their activity and their
interest in specific products or services. The Add-on supplements the existing
capabilities of WebTrends Enterprise Suite relating to return on investment
reporting by using the profile and traffic data to calculate the organization's
return on investment from each advertisement, allowing the organization to make
more effective advertising investments.
The WebTrends CommerceTrends Add-on is currently in development. A
prototype of the product has been developed, but has not been released to
internal testers. It is expected to be released as an add-on product to the
WebTrends Enterprise Suite during the second quarter of 1999. WebTrends does not
expect the remaining development to consume a material amount of resources.
Aside from its prospectuses and discussions relating to its prospectuses,
WebTrends has not publicized this product.
SECURITY AND FIREWALL MANAGEMENT
WebTrends for Firewalls and VPNs. WebTrends for Firewalls and VPNs is an
enterprise management solution that provides information that enables
organizations to manage bandwidth usage, security, employee usage of Web sites
outside of the firewall, and traffic originating from outside the firewall.
WebTrends for Firewalls and VPNs is compatible with firewall products from all
of the leading firewall vendors including Check Point Software Technologies,
Inc., Cisco Systems, Inc., Lucent Technologies Inc., and Network Associates.
Firewall and VPN reports answer questions such as:
- Have hackers tried to breach our security?
- Does my Internet-based system have sufficient memory and disk capacity
and communications bandwidth to service current traffic volume?
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- What errors are occurring during user sessions?
- Which employees and departments use the most resources?
WebTrends Security Analyzer. The WebTrends Security Analyzer helps secure
Internet servers and other Internet devices by detecting security
vulnerabilities and recommending fixes that decrease the likelihood of
intrusions by hackers. An AutoSync capability updates the WebTrends Security
Analyzer as system vendors discover new vulnerabilities. As part of the
Microsoft Security Partners Program, WebTrends is able to quickly integrate
tests into WebTrends Security Analyzer to address Microsoft Security Advisories
relating to vulnerabilities in Microsoft Windows 95, Windows 98 and Windows
NT-based networks. WebTrends offers Professional and Enterprise versions of this
product as well as versions tailored for security consultants.
WEBTRENDS NETWORK PORTAL
The WebTrends Network is an Internet portal site for Internet
professionals. A prototype has been developed and is available to the public on
a test basis at the Web site www.webtrends.net. The WebTrends Network will
provide a wide variety of product and industry information, software products
and resources, discussion forums, and other content related to building and
managing Web sites. The majority of the content is provided through partnerships
with leading Internet content providers. The portal is an important part of
WebTrends' strategy to build brand awareness, deliver Internet management
solutions, and service the needs of Internet professionals. The portal is
designed to attract both existing WebTrends' customers interested in staying
current with changes and trends on the Internet, and potential new WebTrends'
customers, who, in addition to the content, are provided on-line management
features along with an opportunity to purchase WebTrends' products.
AUDITTRACK
When WebTrends was founded in 1993, its business plan was to develop
solutions for managing Novell networks. WebTrends continues to sell, support,
and enhance AuditTrack, a solution for auditing activity on Novell network
servers.
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AWARDS
WebTrends' products have received over 25 industry awards including the
following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AWARD PRODUCT DATE AWARDED DESCRIPTION
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Network World's Blue WebTrends December 1998 Received top score (8.45 out of 10.00
Ribbon Award Enterprise possible) of three Web management tools
Suite 3.0 tested. Score was a weighted average of
scores in the following categories:
monitoring and alerting, site quality
analysis; log file analysis; user
interface; installation; and
documentation.
- ---------------------------------------------------------------------------------------------------
Network Computing WebTrends November 1998 Received top score (4.40 out of 5.00
Editor's Choice Award Enterprise possible) of 5 Web site management suites
Suite 2.1 tested. Score was a weighted average of
scores in the following categories:
analysis; reporting; ease of use;
performance; and price.
- ---------------------------------------------------------------------------------------------------
Finalist, PC Computing WebTrends November 1998 One of two runners up among Internet site
1998 MVP Award Professional management products.
Suite 2.1
- ---------------------------------------------------------------------------------------------------
Internet Commerce Expo, WebTrends September 1998 Awarded for achievement in the product
Best of Class Professional category of analysis/performance,
Suite networking and other services.
- ---------------------------------------------------------------------------------------------------
PC Magazine Editor's WebTrends March 1998 Received highest ranking for ease of use
Choice Log and second highest ranking for power out
Analyzer of 11 Web site analysis tools considered.
4.0 Evaluation was in the following
categories: installation; importing log
files; generating reports; and analysis
aids.
- ---------------------------------------------------------------------------------------------------
VAR Business Magazine, WebTrends January 1998 One of two products to receive top overall
VAR Business Professional ranking of "A" out of 7 Web site
Recommends Suite management tools considered. Evaluation
was in the following categories: ease of
installation; ease of use; site
management; site tracking; reports; and
VAR program.
- ---------------------------------------------------------------------------------------------------
Software Publisher's WebTrends January 1998 One of five runners up in the category of
Association CODIE Professional best enterprise management Tools and only
Award Finalist for Suite Web site management product to be so
Best Enterprise recognized.
Management Tools
- ---------------------------------------------------------------------------------------------------
ZDNet Editor's Choice WebTrends December 1997 Both products received highest possible
(Five Star Rating) Log rating.
Analyzer
4.0 and
WebTrends
Professional
Suite 1.0
- ---------------------------------------------------------------------------------------------------
</TABLE>
LICENSING AND PRICING
All of WebTrends' products are licensed for use and are priced to be
affordable to both large and small organizations. In general, WebTrends'
products are licensed to be run
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on a single computer. WebTrends offers customers who license its products the
option to purchase one-year subscriptions that permit users to download all new
versions of the licensed product during the subscription period. Subscriptions
are generally priced at 20% of the license fee. Changes to its pricing and
licensing policies are periodically made as a result of competitive conditions
and other factors. The following table lists end-user product prices as of April
1, 1999 (upgrade pricing and shipping and handling charges not shown). WebTrends
offers reseller discounts, volume discounts, and occasional promotional pricing.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PRODUCTS SCOPE U.S. INTRODUCTION
LIST DATE
PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANAGEMENT SUITES AND TRAFFIC ANALYSIS
- -----------------------------------------------------------------------------------------------------
WebTrends Enterprise Suite 500 virtual domains $1,499 September 1997
- Server Cluster Add-On Each additional server $ 999 August 1998
- CommerceTrends Add-on TBD* TBD* 2nd Qtr. 1999
- -----------------------------------------------------------------------------------------------------
WebTrends Professional Suite 100 virtual domains $ 599 November 1997
- -----------------------------------------------------------------------------------------------------
WebTrends Log Analyzer 50 virtual domains $ 399 February 1996
- -----------------------------------------------------------------------------------------------------
WebTrends Enterprise Reporting Server for $4,999 March 1999
Solaris Each additional server $2,999
Each additional client $ 499
- -----------------------------------------------------------------------------------------------------
WebTrends Enterprise Reporting Server for $1,499 April 1999
Linux Each additional server $ 999
Each additional client $ 499
- -----------------------------------------------------------------------------------------------------
WebTrends Suite for Lotus Domino 500 virtual domains $ 999 May 1998
- -----------------------------------------------------------------------------------------------------
SECURITY AND FIREWALL MANAGEMENT
- -----------------------------------------------------------------------------------------------------
WebTrends for Firewalls and VPNs Each firewall $1,499 June 1998
- -----------------------------------------------------------------------------------------------------
WebTrends Security Analyzer 255 IP Addresses $1,499 January 1999
Unlimited IP Addresses $4,999
- -----------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
* To Be Determined
PRODUCT ARCHITECTURE AND TECHNOLOGY
The focus of product development at WebTrends is to bring new products 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. WebTrends devotes a substantial portion of its resources to developing
new products. Research and development expenses were approximately $403,000 in
1996, $1.1 million in 1997, and $2.2 million in 1998. Research and development
expenses were approximately $639,000 for the three months ended March 31, 1999.
WebTrends has recruited a product development team experienced in bringing
quality products to market on-time. As of March 31, 1999, our product
development team consisted of 29 employees with responsibilities that include
software engineering, quality assurance, and technical writing. This team is
currently developing new versions of most of the existing products as well as a
new add-on for analyzing e-commerce and on-line advertising activities.
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[DIAGRAM]
WebTrends' product architecture and technologies, as shown in the above
diagram, provide significant competitive advantages. The architecture consists
of application cartridges atop a shared foundation of base technologies. The
application cartridges request services from the foundation, where most of the
programming code is located, through an interface layer. This shared foundation
shortens the product development cycle because the shared components do not have
to be redeveloped for each new application cartridge. In addition, enhancements
to the foundation, such as improving the speed of the report generator, benefit
all cartridges.
Some of the important base technologies are:
Scheduler. The Scheduler automatically runs analyses and reports at
specified times and intervals, without the presence of an operator.
User-Interface Framework. WebTrends improves the usability of its products
by presenting a consistent look and feel to the end-user.
Reporting Engine. WebTrends' Reporting Engine permits customers to
customize the reports generated by the application cartridges. In addition, many
reports can be generated in HTML, which stands for hypertext marked language, a
computer language used to specify how a Web browser should display a Web page,
Microsoft Word, Microsoft Excel, and other standard formats.
Language Editor. A language editor is built into the products that
facilitates customizing the product for international use.
WebTrends has numerous additional technologies and product features,
including the following:
Direct Analysis of Server Logs. WebTrends' products can analyze server logs
as they are created or at scheduled times. In either case, the server logs are
read and analyzed in a single pass. WebTrends believes that the alternative
approach of first importing the log data into a database management system and
then analyzing the data is slow and costly.
FastTrends Cache. The FastTrends technology stores the results of an
analysis, allowing customers to quickly perform further analysis or reorganize
the results in
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meaningful ways. FastTrends contributes to the scaleability of WebTrends'
products by efficiently handling large amounts of data.
64-bit Technology. WebTrends has implemented 64-bit technology to permit
its products to analyze log files containing more than four gigabytes of data.
WebTrends' products are compiled to run on 32-bit processors.
Standard Programming Languages. WebTrends' engineers develop software using
C and C++ programming languages to produce fast, scaleable products. Standard
programming languages also ease porting the technology to new operating
environments.
Remote Analysis. WebTrends' products need not reside on the server being
analyzed. Server logs can be exported to the system where the product resides or
can be remotely accessed.
Compatibility with Database Management Systems. WebTrends' products can
obtain data from databases that are compatible with the popular Open DataBase
Connectivity standard. In addition, the results of analyses can be exported to
such databases.
Information Gathering. WebTrends' products use an electronic product
registration form to collect detailed customer information. The products also
have a customer feedback feature that encourages customers to communicate with
WebTrends. Information from both of these sources is used for sales leads and as
input for the next round of product upgrades and improvements.
SERVICES AND SUPPORT
WebTrends provides technical support to its registered users by telephone,
e-mail, and on its Web site. Products are easy to install and use, and WebTrends
also maintains an extensive database of support information on its Web site, all
of which enables the support organization to operate efficiently and increases
customer loyalty and satisfaction.
We intend to continue to enhance our services capabilities. Our
recently-formed professional services organization provides end-user
implementation and training, certification and training for third-party service
providers and resellers, and management and reporting for high-traffic Internet
events and seminars. We also rely on value-added resellers and Internet service
providers that distribute and promote our products to provide similar services.
CUSTOMERS
As of March 31, 1999, WebTrends had licensed over 60,000 products to over
25,000 customers. Some of our customers are Internet-based businesses that were
specifically formed to take advantage of emerging Internet opportunities.
However, the bulk of our customers are traditional companies from all segments
of the economy that are developing new applications and porting existing
applications to the Internet. WebTrends' products are used by over one-third of
the Fortune 500, but are also affordable to small organizations.
An important customer segment is Internet service providers that sell Web
site hosting services. Several of these Internet service providers use
WebTrends' products to perform WebTrends' analyses on their customers' Web sites
as an added service. Some of the Internet service providers' own customers have
become WebTrends' customers to do more sophisticated analyses in-house or to
analyze other in-house Internet servers.
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Representative customers include:
TECHNOLOGY
Cisco Systems
Compaq Computer
Dell Computer
EDS
Hewlett-Packard
IBM
Intel
Siemens
INTERNET SERVICE PROVIDERS
@Home
Cable and Wireless
DIGEX
NETCOM
Prodigy
PSINet
Verio
INTERNET COMPANIES
broadcast.com
InfoSeek
Netscape
Peapod
USWeb
UUNet
ZDNet
TELECOMMUNICATIONS
AT&T
Ameritech
Bell Atlantic
British Telecom
Comcast
GTE
MEDIA
BBC
Dow Jones & Company
NBC
Playboy Enterprises
Washington Post
FINANCIAL SERVICES
American Express
BankAmerica
Chase Manhattan
Dun and Bradstreet
Union Bank
PUBLIC SECTOR
City of San Jose
NASA
University of Illinois
U.S. House of Representatives
U.S. Dept. of Labor
U.S. Air Force
MANUFACTURING
Boeing
Caterpillar
DaimlerChrysler
Eastman-Kodak
Ford Motor Co.
Pharmacia & Upjohn
TRANSPORTATION
Air New Zealand
Alaska Airlines
American Airlines
Greyhound Lines
KLM Royal Dutch Airlines
CASE STUDIES
DIGEX Incorporated -- Internet Service Provider Managing Web Sites for its
Customers
DIGEX is a leading national Internet carrier that hosts and manages
hundreds of Web sites and firewalls for companies including America's Health
Network and Nike. DIGEX derives competitive advantage from its sophisticated Web
site management organization that includes 250 employees.
In August 1997, DIGEX initiated an engineering effort to evaluate Web site
reporting and analysis solutions to provide management reports to its customers.
After running a full battery of tests and comparing several competing traffic
analysis solutions, DIGEX decided to standardize on a single traffic analysis
software package to avoid the difficulties and expense in providing world-class
support on a variety of different applications.
DIGEX selected WebTrends' products because of their industry-leading
functionality, high quality, attractive prices, and ease of use. WebTrends'
support for server clusters and ability to perform with little to no demand on
the Web servers during peak hours were also critical. For example, the WebTrends
Log Analyzer generates reports between 1 a.m. and 2 a.m. daily for one of
DIGEX's largest customers whose site runs on a cluster of nine Web servers each
producing a 200 megabyte log file each day.
DIGEX cites three key benefits from its use of WebTrends' products:
- Increased Customer Satisfaction: DIGEX is experiencing improved customer
retention because customers are more satisfied with their overall hosting
solution.
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- Reduced Cost: DIGEX estimates that it is saving $200,000 per year,
compared to when it was supporting multiple reporting packages.
- Increased Competitiveness: DIGEX's ability to deliver industry-leading
reporting functionality provides a competitive advantage over Web-hosting
competitors.
Since standardizing on WebTrends, DIGEX has installed hundreds of copies of
WebTrends' products.
Cable & Wireless USA -- Internet Service Provider Keeping Up With Customer
Demands
Cable & Wireless owns and operates one of the world's premier Internet
networks. Its Internet Solutions Center manages mission-critical Web sites for
hundreds of global corporations. In May 1998, after extensive testing and
evaluation of off-the-shelf packages, the Internet Solutions Center decided to
replace its internally developed management applications with the WebTrends
Enterprise Suite. WebTrends Enterprise Suite met all of the Internet Solutions
Center's evaluation criteria including maintaining all of the existing
functionality of the internally developed applications and handling its largest
Web sites reliably.
The Internet Solutions Center installed WebTrends Enterprise Suite onto
numerous processing servers dedicated to running WebTrends software. Log files
from hundreds of Web Sites are moved to these processing servers each night by 2
a.m. The WebTrends Enterprise Suite automatically detects the type of each log
file, then creates up to 33 reports for each Web site, processing approximately
three gigabytes of data. By morning, daily and month-to-date reports are created
for every customer and are available on a reporting server via a Web browser.
Cable & Wireless has seen three clear benefits from the WebTrends solution:
- Increased Customer Satisfaction: Cable & Wireless customers are receiving
the reports they need, on a timely basis, to manage their businesses.
Requests to Cable & Wireless from its customers for customized reports
have significantly decreased.
- Lowered Operating Cost: Operational support effort has been reduced from
about 25 hours per week to about 10 hours per week, saving about $30,000
annually.
- Eliminated Development Costs: Two software developers who were developing
enhancements to the Internet Solutions Center's internally-developed
management software have been redeployed, saving about $200,000 annually.
Pharmacia & Upjohn -- Managing a Global Intranet
Pharmacia & Upjohn is a pharmaceutical and healthcare company with offices
in 54 countries and over 30,000 employees. Pharmacia & Upjohn used Internet
technology to develop an internal use network for communication of company
information and news that generates over 13 million hits per month to 400,000
Web pages housed on 50 geographically dispersed servers. Using WebTrends
Professional Suite, Pharmacia & Upjohn's Webmaster analyzes and monitors the
entire worldwide network from a single workstation in his office. Analyses are
scheduled for automatic execution and the reports are made available on the
network where they are regularly reviewed by 50 to 100 managers. The WebTrends
solution has benefited Pharmacia & Upjohn in the following ways:
- Improved Design: Frequently accessed information has been made easier to
find. Certain low-traffic pages have been deleted.
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- Increased Availability: E-mail messages or pager messages are
automatically sent when a server is down, reducing recovery delays.
- Facilitates Capacity Planning: Overall usage trends permit Pharmacia &
Upjohn to anticipate needs and upgrade servers and communications
facilities before network performance degrades.
- Reduced Overhead: The WebTrends' scheduler automates many of the
management activities. Furthermore, functional management is able to
review and customize their own reports reducing the stress on the IT
organization.
SALES, MARKETING, AND DISTRIBUTION
WebTrends conducts a number of marketing programs to promote its brand and
to support the sale and distribution of its products. These programs are
designed to inform existing and potential resellers and end-user customers about
the capabilities and benefits of its products. Marketing activities include:
press relations; publication of technical and educational articles in its
on-line magazine, WebTrends Corporation Alert; participation in industry trade
shows; product/technology conferences and seminars; Web-based and traditional
advertising; development and distribution of literature; and maintenance of the
WebTrends Web site. WebTrends also conducts joint marketing and distribution
with strategic partners, including:
- Oracle: Distributes trial versions of Web site management products with
Oracle's Internet Application Server.
- Microsoft: WebTrends promotes its products at the microsoft.com Web site
and at the Microsoft Partners' Pavilion at selected trade conferences.
- Check Point Software: Distributes trial versions of WebTrends' products
from its Web site and partner for marketing, advertising, and trade show
activities.
- Hewlett-Packard: Promotes WebTrends' products on the HP Covision Web site
as a strategic part of an integrated solution for electronic business.
- WatchGuard Technologies: Offers WebTrends for Firewalls and VPNs with its
WatchGuard for MSS (Managed Security Services) suite of security
products.
- Netscape: Sells WebTrends' products through its Software-Depot Store
e-commerce Web site.
Many of WebTrends' sales leads are generated from its own Web site, which
is often a customer's first contact with WebTrends. The Web site contains
extensive product information and sales literature. The Web site also has an
on-line purchasing capability. Many visitors download free trial versions of
WebTrends' products from the Web site. Customers can purchase the product during
the trial period. For 1998, on-line sales accounted for approximately 18% of
WebTrends' revenue. In the three months ended March 31, 1999, on-line sales
accounted for 13% of WebTrends' revenue.
In addition to on-line sales, the sales force consists of a telesales
organization and a direct field sales organization. The telesales organization
responds to incoming inquiries generated by advertising and marketing
activities. Telesales representatives also initiate calls to contact customers
who download trial software from the Web site, and offer new products to
existing customers. Data from software downloads and license registrations are
used to identify volume licensing opportunities that are generally referred to a
direct field
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sales representative or a value-added reseller. As of March 31, 1999, the
telesales organization consisted of one manager and 13 sales representatives.
The direct field sales organization is focused on large enterprises and
strategic sales. Strategic sales efforts are targeted at Internet service
providers, Internet-based companies, and other organizations with significant
on-line presences. By selling its solutions to the perceived Internet technology
leaders, WebTrends believes it enhances its brand image. As of March 31, 1999,
the direct field sales organization consisted of five sales representatives.
WebTrends plans to grow its direct field sales force and base more of its direct
field sales representatives in their respective geographic territories in 1999.
In 1998, direct sales, excluding on-line sales, accounted for approximately 51%
of WebTrends' revenue. In the three months ended March 31, 1999, direct sales,
excluding on-line sales, accounted for approximately 57% of WebTrends' revenue.
WebTrends' domestic, indirect distribution channel consists of numerous
resellers and a value-added reseller program. WebTrends relies on the
value-added reseller program not only to expand sales but also to meet the
demand for value-added services related to the installation and use of our
products. Recently we established national distribution relationships with
Merisel and Ingram. As of March 31, 1999, WebTrends employed three value-added
reseller partner managers to establish new value-added resellers and manage
relationships with existing value-added resellers and one reseller manager to
manage relationships with new and existing resellers. In 1998 and in the three
months ended March 31, 1999, indirect sales, both domestic and international,
accounted for approximately 31% of WebTrends' revenue.
WebTrends has a nonexclusive relationship with a third-party export
management company to establish indirect distribution channels outside of the
United States. The export management company is responsible for shipment of
products to the international distributor, reseller, or value-added reseller and
for all documentation of such export shipments. International resellers and
value-added resellers are responsible for the localization of reports, marketing
materials and packaging in the countries where they distribute WebTrends'
products. In 1998, international sales, both direct and indirect and primarily
from European markets, accounted for approximately 28% of WebTrends' revenues.
In the three months ended March 31, 1999, international sales accounted for 26%
of WebTrends' revenue.
COMPETITION
We compete in the markets for Web site traffic analysis solutions, alerting
and monitoring solutions, firewall and proxy server traffic analysis solutions,
and security analysis 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
market that our Internet management solutions address.
In the market for Web site traffic analysis solutions, our primary
competitors are Andromedia, Inc., Accrue Software Inc., Internet Profiles
Corporation (I/Pro) (recently acquired by CMGI, Inc.), Marketwave Corporation,
net.Genesis Corp., and WebManage Technologies, Inc. In the Web site link
analysis and quality control market, our primary competitors are Tetranet
Software Incorporated and Coast Software Inc. In the alerting and monitoring
market, our primary competitors are IPSwitch, Inc. and Geneva Software, Inc. In
the firewall and proxy analysis market, our primary competitors are Telemate
Software, Inc. and SecureIT, Inc., a division of VeriSign, Inc. In the security
analysis
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market, we compete primarily with ISS Group, Axent Technologies, Network
Associates, and BindView Development Corporation. Although the markets in which
we compete are highly fragmented, we may face additional competition from
existing competitors if any of them were to broaden the scope of their Internet
management products either by developing or acquiring additional products or
distribution channels.
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
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. For example, Computer Associates is currently offering an extension
to its Unicenter TNG product line that includes functions for alerting and
monitoring, Web site traffic analysis, and link analysis.
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 IT departments to internally
develop Internet management solutions.
PROPRIETARY RIGHTS
WebTrends relies on a combination of copyright, trade secret, patent,
trademark, confidentiality procedures, and contractual provisions to protect its
proprietary rights. WebTrends' software, documentation and other written
materials are provided limited protection by international and United States
copyright laws. WebTrends licenses its products in object code format for
limited use by customers. We treat the source code for our products as a trade
secret and require all employees and third parties who require access to the
source code to sign non-disclosure agreements.
WebTrends currently has three pending United States patents that seek to
protect inventions underlying the FastTrends cache, server cluster analysis
technology, and CommerceTrends technology, respectively. WebTrends does not have
any issued patents.
WebTrends has developed and published a log format for firewall data that
we hope to establish as a standard. WebTrends may develop additional formats to
facilitate the standardization process for enterprise management of Internet and
intranet servers. We permit such formats to be implemented by vendors of servers
and other Internet products, and by competing enterprise management software
companies.
WebTrends has registered the trademarks WebTrends and AuditTrack in the
United States. We have applied for United States trademark registrations for the
following: AlertTrack, ClusterTrends, CommerceTrends, DBTrends, FastTrends,
FireTrends, Manage
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Your WWWorld, SmartPass, and WWWorld. Certain of these marks are also protected
in other jurisdictions.
EMPLOYEES
As of March 31, 1999, WebTrends had 87 employees, including 48 in sales,
marketing, and customer support, 29 in research and development, and 10 in
finance and administration. All of the employees were located at its
headquarters in Portland, Oregon, except for three sales representatives. None
of the employees is represented by a labor union. We have experienced no work
stoppages and believe our relationships with our employees are good.
FACILITIES
WebTrends is headquartered in Portland, Oregon, where it leases
approximately 22,000 square feet pursuant to a recently executed five-year
lease. Pursuant to the new lease, WebTrends will occupy an additional 15,000
square feet by July 1999. WebTrends has sales offices in Boston, Massachusetts
and Houston, Texas.
LEGAL PROCEEDINGS
WebTrends is not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY PERSONNEL
The executive officers, directors, and key personnel of WebTrends, and
their ages and positions, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Elijahu Shapira.................... 33 Chairman of the Board and Chief
Executive Officer
W. Glen Boyd....................... 32 President, Chief Technical Officer,
and Director
James T. Richardson................ 51 Senior Vice President, Chief
Financial Officer, and Secretary
Gregory D. Applegate............... 38 Vice President of Sales
Daniel J. Meub..................... 45 Senior Vice President of Marketing
and Sales
Michael Burmeister-Brown........... 41 Director
John W. Ryan....................... 37 Director
Srivats Sampath.................... 40 Director
John D. Teddy...................... 35 Vice President of Research and
Development
</TABLE>
There are no family relationships among any of the directors, executive
officers, or key personnel 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 14 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 12 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.
James T. Richardson has served as WebTrends' Vice President and Chief
Financial Officer since July 1998, as Secretary since December 1998, and as
Senior Vice President since April 1999. 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
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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.
Gregory D. Applegate has served as WebTrends' Vice President of Sales since
April 1998. From December 1996 to April 1998, Mr. Applegate served as the Vice
President of Sales of OrCAD Inc., an electronic design automation software
company. From October 1993 to November 1996, Mr. Applegate served in a variety
of other management roles at OrCAD. Prior to his employment with OrCAD, Mr.
Applegate served in sales and management positions at INTERSOLV, Inc., an
enterprise solution and software management company.
Daniel J. Meub has served as WebTrends' Senior Vice President of Marketing
and Sales since April 1999. 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.
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 16 years
of experience in senior management roles in the computer industry.
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John W. Ryan has served as a director of WebTrends since January 1998.
Since January 1997, Mr. Ryan has 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 15 years of experience in
executive level and senior management roles in the computer industry.
Srivats Sampath has served as a director of WebTrends since January 1998.
Since July 1998, Mr. Sampath has 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 15 years of
experience serving in management and executive roles in the computer industry.
John D. Teddy has served as WebTrends' Vice President of Research &
Development since November 1998. From April 1997 to November 1998, Mr. Teddy
served as the Vice President of Engineering and Director of Engineering for
Cybermedia, Inc., a software development company. From April 1994 to April 1997,
Mr. Teddy served as the Chief Architect and Senior Development Manager for
Symantec, where he helped create software such as PCTools, Norton Navigator, and
CrashGuard. From October 1991 to April 1994, Mr. Teddy served as a Senior
Development Manager of Central Point Software.
CLASSIFIED BOARD; REMOVAL OF DIRECTORS
WebTrends' bylaws provide that if the number of directors is increased to
six or more, the board of directors will, at the next annual meeting of
shareholders, be divided into three classes, each of which will serve for a
staggered three-year term. Currently, the board is comprised of five directors,
each serving a one-year term. The articles of incorporation provide that a
director may be removed only for cause. The bylaws provide that a director may
be removed at a special meeting of the shareholders specifically called for that
purpose, and the meeting notice must state that the purpose, or one of the
purposes, of the meeting is removal of the director by a vote of the holders of
a majority of the shares then entitled to vote on the election of directors.
BOARD COMMITTEES
WebTrends maintains two standing committees, an Audit Committee and a
Compensation Committee.
Audit Committee. In December 1998, the board of directors formed the audit
committee for the purpose of reviewing WebTrends' internal accounting procedures
and consulting with and reviewing the services provided by WebTrends'
independent public accountants. Messrs. Sampath and Burmeister-Brown constitute
the audit committee.
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Compensation Committee. In December 1997, the board of directors formed the
compensation committee. The compensation committee reviews and recommends to the
board the compensation and benefits of all WebTrends' officers and reviews
general policy relating to compensation and benefits of employees. The
compensation committee also administers WebTrends' stock option plans and stock
purchase plan. Messrs. Shapira, Burmeister-Brown, and Ryan constitute the
compensation committee.
COMPENSATION OF DIRECTORS
Directors do not currently receive cash compensation for services rendered
as members of the board of directors. WebTrends does, however, reimburse the
directors for reasonable expenses incurred in connection with their attendance
at board and committee meetings.
In August 1998, WebTrends entered into a consulting agreement with J Ryan &
Associates, a company founded by Mr. Ryan. Consulting services pursuant to the
agreement include assistance related to WebTrends' North American distribution
channels and its overall market positioning and planning. WebTrends has paid Mr.
Ryan $45,000, and in August 1998, granted Mr. Ryan an option to purchase 7,500
shares of common stock at an exercise price of $1.82 per share. The shares vest
yearly over a four-year period. See "Insider Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to December 1997, WebTrends' board of directors did not maintain a
standing compensation committee, and the entire board, including Messrs. Boyd
and Shapira, participated in all decisions regarding compensation of its
executive officers. In December 1997, the board formed the compensation
committee and appointed Messrs. Burmeister-Brown, Ryan, and Shapira as committee
members. Mr. Shapira serves as the Chairman of the Board and Chief Executive
Officer of WebTrends. Messrs. Burmeister-Brown and Ryan are not employees or
officers or former employees or officers of WebTrends. No executive officer of
WebTrends 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
WebTrends' board of directors or compensation committee.
In November 1996, Messrs. Boyd and Shapira each extended a $300,000 line of
credit to WebTrends to provide working capital. In March 1997, WebTrends
borrowed $125,000 from each of Messrs. Boyd and Shapira under the line of credit
and issued them promissory notes. The notes originally bore interest at 5% per
annum and were to mature in December 1997. In August 1998, the payment terms of
these notes were amended to provide that payments in amounts not less than
$25,000 per quarter would be made on each promissory note until the entire
principal and accrued interest was paid in full. WebTrends has made two
quarterly payments totaling $60,858 to each of Messrs. Boyd and Shapira as of
December 31, 1998. The balance of the notes was paid off during the first
quarter of 1999.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to WebTrends' Chief
Executive Officer and its other executive officers whose salary and bonus
exceeded $100,000 for services rendered to WebTrends in all capacities during
fiscal 1998 (collectively, the "Named Executive Officers").
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
--------------------------- ---- -------- -------
<S> <C> <C> <C>
Elijahu Shapira, Chairman of the Board and Chief
Executive Officer............................... 1998 $150,000 $20,000
1997 133,333 30,000
W. Glen Boyd, President and Chief Technical
Officer......................................... 1998 150,000 20,000
1997 133,333 30,000
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to the Named Executive Officers during the
year ended December 31, 1998.
EMPLOYEE BENEFIT PLANS
401(K) PLAN
WebTrends maintains a 401(k) tax-qualified employee savings and retirement
plan covering all employees who satisfy eligibility requirements relating to
minimum age and length of service. Pursuant to the 401(k) plan, eligible
employees may elect to reduce their current compensation by up to the lesser of
15% of their annual compensation or the statutorily prescribed annual limit and
have the amount of such reduction contributed to the 401(k) plan. The 401(k)
Plan is intended to qualify under applicable law, so that contributions to the
401(k) plan and income earned on the 401(k) plan contributions are not taxable
until withdrawn. The 401(k) plan is available to WebTrends' executive officers
on terms not more favorable than those offered to other employees.
1999 EMPLOYEE STOCK PURCHASE PLAN
WebTrends adopted the 1999 employee stock purchase plan in December 1998.
The 1999 employee stock purchase plan was implemented upon the effectiveness of
our initial public offering. WebTrends intends for the 1999 employee stock
purchase plan to qualify under Section 423 of the Internal Revenue Code. The
1999 employee stock purchase plan permits eligible employees of WebTrends and
our subsidiaries to purchase common stock through payroll deductions of up to
15% of their cash compensation. WebTrends will implement the 1999 employee stock
purchase plan with six-month offering periods, except that the first offering
period began on the effectiveness of our initial public offering and ends on
June 30, 1999. Subsequent offering periods will begin on each January 1 and July
1. Under the 1999 employee stock purchase plan, no employee may purchase common
stock worth more than $25,000 in any offering period or in any calendar year,
valued as of the first day of each offering period. In addition, owners of 5% or
more of the combined voting power or value of all classes of stock of WebTrends
or its subsidiary may not participate in the 1999 employee stock purchase plan.
WebTrends authorized the issuance of a total of 350,000 shares of common stock
under the 1999 employee stock purchase plan, plus an automatic increase on
January 1, 2000, and each anniversary thereafter that will be equal to the
lesser of
(a) 16,250 shares;
(b) 0.125% of the average common shares outstanding as used to calculate
fully diluted earnings per share as reported in the annual report to
shareholders for the preceding year; or
(c) a lesser amount determined by its board of directors.
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Any unissued shares resulting from increases in previous years will be
added to the aggregate number of shares available for issuance under the 1999
employee stock purchase plan.
The price of the common stock purchased under the 1999 employee stock
purchase plan will be the lesser of 85% of the fair market value on the first
day of an offering period and 85% of the fair market value on the last day of an
offering period, except that the purchase price for the first offering period
will be equal to the lesser of the $13.00 initial public offering price for the
common stock and 85% of the fair market value on June 30, 1999. The 1999
employee stock purchase plan will terminate in December 2008, but the board of
directors may terminate it at any earlier time. WebTrends has not issued any
shares of common stock under the 1999 employee stock purchase plan.
In the event of a merger or proposed sale of all or substantially all of
WebTrends' assets, the 1999 employee stock purchase plan provides that each
outstanding option to purchase shares under the 1999 employee stock purchase
plan will be assumed or an equivalent option substituted by the successor
corporation. If the successor corporation refuses to assume or provide an
equivalent substitute for the option, the offering period during which a
participant may purchase stock will be shortened to a specified date before the
merger or proposed sale. In the event of a proposed liquidation or dissolution
of WebTrends, the offering period during which a participant may purchase stock
will be shortened to a specified date before the date of the proposed
liquidation or dissolution.
1998 STOCK INCENTIVE COMPENSATION PLAN
In December 1998, WebTrends adopted the 1998 option plan. The purpose of
the 1998 option plan is to enhance the long-term shareholder value of WebTrends
by offering opportunities to our selected employees, directors, officers,
consultants, agents, advisors, and independent contractors to participate in our
growth and success, to encourage them to remain in our service, and to own our
stock. The 1998 option plan permits both option and stock grants. The board has
reserved 1,465,475 shares of common stock for the 1998 option plan, plus:
- any shares returned to the 1997 option plan upon termination of option
and stock grants, other than terminations due to exercise or settlement
of such awards; and
- an automatic annual increase, to be added on the first day of the fiscal
year beginning in 2001, equal to the lesser of 500,000 shares or 5% of
the average common shares outstanding as used to calculate fully diluted
earnings per share as reported in WebTrends' annual report to
shareholders for the preceding year.
As of March 31, 1999, a total of 1,473,725 shares of common stock were
reserved under the 1998 option plan.
Stock Option Grants. The compensation committee serves as the plan
administrator of the 1998 option plan. The plan administrator has the authority
to select individuals to receive options under the 1998 option plan and
specifies the following:
- the terms and conditions of each option granted;
- the exercise price;
- the vesting provisions; and
- the option term.
As of March 31, 1999, options to purchase an aggregate of 32,175 shares of
common stock were outstanding under the 1998 option plan, with exercise prices
ranging from $9.00 to $43.28 per share. No options have been exercised under the
1998 option plan.
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For incentive stock options, the exercise price must be at least equal to
the fair market value of the common stock on the date of grant and for
nonqualified options must be at least 85% of the fair market value of the common
stock on the date of grant. For purposes of the 1998 option plan, fair market
value means the average of the high and low per share sales price as reported on
the Nasdaq National Market on the date of grant. Unless otherwise provided by
the plan administrator, and to the extent required for incentive stock options
by applicable law, an option granted under the 1998 option plan generally will
expire on the earliest of:
- ten years from the date of grant,
- one year after the optionee's retirement, early retirement, death,
or disability,
- notice to the optionee of termination for cause, and
- three months after other terminations.
Stock Awards. The plan administrator is authorized under the 1998 option
plan to issue shares of common stock to eligible participants with terms,
conditions, and restrictions established by the plan administrator in its sole
discretion. Restrictions may be based on continuous service with WebTrends or
the achievement of performance goals. Holders of restricted stock are
shareholders of WebTrends and have, subject to established restrictions, all the
rights of shareholders with respect to such shares.
Termination of the 1998 Option Plan. Unless terminated sooner by the board
of directors, the 1998 option plan will terminate in December 2008.
Adjustments. The plan administrator will make proportional adjustments to
the aggregate number of shares issuable under the 1998 option plan and to
outstanding awards in the event of stock splits or other capital adjustments.
Corporate Transactions. In the event of corporate transactions, such as a
merger or sale, each outstanding option to purchase shares under the 1998 option
plan may be assumed or an equivalent option substituted by the buyer. If the
buyer does not assume or provide an equivalent substitute for the option, the
option terminates, but the holder has the right to exercise the vested portion
of the option immediately before the corporate transaction. Some option
agreements call for accelerated vesting in the event of a corporate transaction.
In the event of a proposed dissolution or liquidation of WebTrends, the plan
administrator, in its discretion, may accelerate options and cancel any
forfeiture provisions or repurchase options applicable to stock awards.
1997 STOCK INCENTIVE COMPENSATION PLAN
WebTrends' 1997 option plan provides for the grant of incentive and
nonqualified stock options and stock awards to our employees, directors, and
consultants. An aggregate of 1,534,524 shares of common stock has been
authorized for issuance under the 1997 option plan. As of March 31, 1999,
options to purchase an aggregate of 1,432,033 shares of common stock were
outstanding under the 1997 option plan, with exercise prices ranging from $0.61
to $8.00 per share. As of March 31, 1999, options to purchase 39,553 shares of
common stock had been exercised under the 1997 option plan. No additional
options will be granted under the 1997 option plan, as future option grants will
be made under the 1998 option plan. Any shares that are returned to the 1997
option plan upon termination of options and stock grants, other than
terminations due to exercise or settlement of such awards, will be added to the
number of shares reserved for issuance under the 1998 option plan. Options
outstanding under the 1997 option plan will continue to be governed by the terms
of the 1997 option plan. In the event of a merger of WebTrends with or into
another
55
<PAGE> 61
corporation, the options may be assumed or an equivalent option substituted by
the successor corporation or a parent or subsidiary of such corporation. If the
successor corporation refuses to assume or provide an equivalent substitute for
the option, unless otherwise provided in an individual's option letter
agreement, the option will terminate, but the holder of the option shall have
the right to exercise the vested portion of the option immediately before the
corporate transaction.
LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Oregon law, WebTrends' articles of incorporation require
indemnification against liabilities and expenses of a director, and the articles
and bylaws permit such indemnification of an officer, where either is made or
threatened to be made a party to a proceeding, other than a proceeding by or in
the right of WebTrends to procure a judgment in our favor, because such person
is or was our director or officer. Indemnification is provided if the director
or officer acted in good faith and in a manner he or she reasonably believed was
in or not opposed to WebTrends' best interests, and, with respect to any
criminal action or proceeding, the director or officer, in addition, had no
reasonable cause to believe his or her conduct was unlawful. In the case of any
proceeding by or in the right of WebTrends, a director or officer is entitled to
indemnification of expenses if he or she acted in good faith and in a manner he
or she reasonably believed was in or not opposed to WebTrends' best interests.
However, pursuant to Oregon law, no indemnification would be made if the
director's or officer's errors or omissions were shown to have involved any:
- breach of the director's or officer's duty of loyalty to WebTrends;
- act or omission not in good faith or that involved intentional misconduct
or a knowing violation of law;
- distribution that was unlawful under Oregon law;
- transaction from which the director or officer received an improper
personal benefit; or
- profits made from the purchase and sale by the director or officer of
securities of WebTrends within the meaning of Section 16(b) of the
Securities Exchange Act of 1934 or similar provision of any state
statutory law or common law.
The articles also provide that no director will be liable to WebTrends or
its shareholders for monetary damages for conduct as a director, except that a
director may be personally liable in the instances set forth in the list above.
Indemnification may also be provided to persons other than directors or
officers.
WebTrends understands that the current position of the Securities and
Exchange Commission is that any indemnification of liabilities arising under the
Securities Act of 1933 is against public policy and is, therefore,
unenforceable.
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<PAGE> 62
INSIDER TRANSACTIONS
On August 24, 1998, WebTrends entered into a consulting agreement with J
Ryan & Associates, a consulting company formed by John W. Ryan, a director of
WebTrends, pursuant to which WebTrends is required to pay a fee of $45,000,
grant Mr. Ryan an option to purchase 7,500 shares of common stock, and reimburse
him for reasonable out-of-pocket expenses incurred in connection with his
providing services as a consultant. The consulting services include assistance
related to WebTrends' North American distribution channels and assisting with
company positioning and overall market planning. The consulting agreement had a
term of six months, and ended on February 28, 1999. Mr. Ryan completed the
consulting services and has been paid in full. See "Management -- Compensation
of Directors."
In November 1996, W. Glen Boyd and Elijahu Shapira, executive officers and
directors of WebTrends, each extended a $300,000 line of credit to WebTrends to
provide working capital. In March 1997, WebTrends borrowed $125,000 from each of
Messrs. Boyd and Shapira under the line of credit and issued them promissory
notes. The Notes carried a 5% per annum interest rate and were to mature in
December 1997. In August 1998, the payment terms of these notes were amended to
provide that payments in amounts not less than $25,000 per quarter would be made
on each promissory note until the entire principal and accrued interest was paid
in full. On March 5, 1999, WebTrends paid the remaining principal and accrued
interest on these notes in full.
WebTrends believes that all of the transactions set forth above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties. Any future transactions between WebTrends and our officers,
directors, and principal shareholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to WebTrends
than could be obtained from unaffiliated third parties.
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<PAGE> 63
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of WebTrends common stock as of March 31, 1999, by the following:
- Each person or group of affiliated persons known by WebTrends to
beneficially own more than a number of shares equal to 5% of the common
stock;
- Each director and Named Executive Officer;
- The selling shareholders;
- All of the directors and executive officers as a group.
Beneficial ownership of shares includes any shares over which a person
exercises sole or shared voting or investment power, or of which a person has
the right to acquire ownership at any time within 60 days, for example, through
the exercise of a vested option that has vested as to all or a portion of the
underlying shares. Shares of common stock subject to options currently
exercisable or exercisable within 60 days are deemed outstanding for purposes of
computing the percentage ownership of the person holding the options, but are
not deemed outstanding for computing the percentage ownership of any other
person. Except as otherwise indicated, WebTrends believes that the beneficial
owners of the common stock listed below, based on information furnished by such
owners, have sole voting and investment power with respect to such shares.
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<PAGE> 64
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED BEFORE OFFERING BEING OWNED AFTER OFFERING
---------------------- OFFERED ----------------------
NAME AND ADDRESS NUMBER PERCENT FOR SALE NUMBER PERCENT
---------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Elijahu Shapira(1)
c/o WebTrends Corporation
851 SW Sixth Avenue, Suite 1200
Portland, Oregon 97204........... 3,387,500 30.1% 297,500 2,792,500 22.3%
Anne Lim Shapira
as trustee of The Shapira Group
Trust, U/A/D 9/29/98.
c/o WebTrends Corporation
851 SW Sixth Avenue, Suite
1200
Portland, Oregon 97204........ 500,000 4.4 297,500 202,500 1.6
W. Glen Boyd(2)
c/o WebTrends Corporation
851 SW Sixth Avenue, Suite 1200
Portland, Oregon 97204........... 3,387,500 30.1 297,500 2,792,500 22.3
Alice Ferguson Boyd
as trustee of The Boyd Group
Trust, U/A/D 9/29/98
c/o WebTrends Corporation
851 SW Sixth Avenue, Suite
1200
Portland, Oregon 97204........ 500,000 4.4 297,500 202,500 1.6
Michael Burmeister-Brown(3)
c/o Second Nature Software
1325 Officers' Row
Vancouver, Washington 98661...... 415,527 3.7 60,000 355,527 2.8
John W. Ryan(4)
c/o J Ryan & Associates
2903 Mill Reef Cove
Austin, Texas 78746.............. 21,526 * -- 21,526 *
Srivats Sampath(4)(5)
c/o Network Associates, Inc.
3965 Freedom Circle
Santa Clara, CA 95054............ 21,526 * -- 21,526 *
All directors and executive
officers as a
group (eight persons)(4)......... 7,282,570 64.4 1,250,000 6,032,570 48.0
</TABLE>
- -------------------------
* Less than 1%.
(1) Shares beneficially owned include 500,000 shares of common stock before the
offering and 202,500 shares of common stock after the offering held by Anne
Lim Shapira as trustee of The Shapira Group Trust, U/A/D 9/29/98. Mr.
Shapira disclaims beneficial ownership of such shares.
(2) Shares beneficially owned include 500,000 shares of common stock before the
offering and 202,500 shares of common stock after the offering held by Alice
Ferguson Boyd as trustee of The Boyd Group Trust, U/A/D 9/29/98. Mr. Boyd
disclaims beneficial ownership of such shares.
(3) Shares beneficially owned before and after the offering include 5,000 shares
held by Susan Burmeister-Brown. Mr. Burmeister-Brown disclaims beneficial
ownership of such shares.
(4) Shares beneficially owned before and after the offering include shares
subject to options exercisable within 60 days after March 31, 1999, as
follows: John W. Ryan, 20,526 shares; Srivats Sampath, 20,526 shares; and
for all officers and directors as a group, 61,677 shares.
(5) Shares beneficially owned before and after the offering include 1,000 shares
held by Renuka Srivats. Mr. Sampath disclaims beneficial ownership of such
shares.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of WebTrends consists of 60 million shares of
common stock, no par value per share, and 15 million shares of preferred stock,
no par value per share.
COMMON STOCK
As of March 31, 1999, there were 11,250,080 shares of common stock
outstanding, held of record by approximately 34 shareholders. Following this
offering, 12,500,080 shares of common stock will be issued and outstanding. This
number does not reflect the exercise of stock options subsequent to March 31,
1999, if any. Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Because holders of common stock do
not have cumulative voting rights, the holders of a majority of the shares of
common stock can elect all of the members of the board of directors standing for
election. Subject to preferences of any preferred stock that may be issued in
the future, the holders of common stock are entitled to receive such dividends
as may be declared by the board of directors. If WebTrends is liquidated,
dissolved, or wound up, the holders of common stock are entitled to receive pro
rata all of its assets available for distribution to its shareholders after
payment of liquidation preferences of any outstanding shares of preferred stock.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and non-assessable.
PREFERRED STOCK
Subject to the provisions of the articles of incorporation and limitations
prescribed by law, the board of directors has the authority to issue, without
further vote or action by the shareholders, up to 15 million shares of preferred
stock in one or more series. The board has the power and authority to fix the
rights, preferences, privileges, and restrictions thereof, including dividend
rights, dividend rates, conversion rates, voting rights, terms of redemption,
redemption prices, liquidation preferences, and the number of shares
constituting any series or the designation of such series. Any series of
preferred stock may have rights and privileges superior to those of the common
stock. There will be no shares of preferred stock outstanding upon the
completion of this offering, and WebTrends has no present plans to issue any
preferred stock.
One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or to discourage a third party's
attempt to obtain control of WebTrends by means of a tender offer, proxy
contest, merger, or otherwise. The issuance of shares of the preferred stock may
also discourage a party from making a bid for the common stock because such
issuance may adversely affect the rights of the holders of common stock. For
example, preferred stock may rank prior to the common stock as to dividend
rights, liquidation preference, or both, may have full or limited voting rights,
and may be convertible into shares of common stock. Accordingly, the issuance of
shares of preferred stock may discourage bids for the common stock or may
otherwise adversely affect the market price of the common stock.
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<PAGE> 66
ANTI-TAKEOVER MEASURES
ARTICLES AND BYLAWS
WebTrends' articles and bylaws contain provisions that may have the effect
of delaying, deferring, or preventing a change in control. Such provisions
include:
- The ability of the board of directors, without further shareholder
approval, to issue up to 15 million shares of preferred stock;
- Requiring a classified board whenever there are six or more directors,
with each class containing as nearly as possible one-third of the total
number of directors and the members of each class serving for staggered
three-year terms;
- Prohibiting cumulative voting for the election of directors;
- Requiring supermajority approval of the shareholders to effect amendments
to the bylaws; and
- Requiring no less than 60 days' advance notice with respect to
nominations of directors or other matters to be voted on by shareholders
other than by or at the direction of the board of directors.
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES
Oregon law may restrict the ability of significant shareholders of
WebTrends to exercise voting rights. The law generally applies to a person who
acquires voting stock of an Oregon corporation in a transaction that results in
such person's holding more than 20%, 33 1/3% or 50% of the total voting power of
the corporation. If such a transaction occurs, the person cannot vote the shares
unless voting rights are restored to those shares by:
- a majority of the outstanding voting shares, including the acquired
shares, and
- the holders of a majority of the outstanding voting shares, excluding the
acquired shares and shares held by the corporation's officers and inside
directors.
This law is construed broadly and may apply to persons acting as a group.
The restricted shareholder may, but is not required to, submit to the
corporation a statement setting forth information about itself and its plans
with respect to the corporation. The statement may request that the corporation
call a special meeting of shareholders to determine whether voting rights will
be granted to the shares acquired. If a special meeting of shareholders is not
requested, the issue of voting rights of the acquired shares will be considered
at the next annual or special meeting of shareholders. If the acquired shares
are granted voting rights and they represent a majority of all voting power,
shareholders who do not vote in favor of granting such voting rights will have
the right to receive the appraised fair value of their shares. The appraised
fair value will, at a minimum, be equal to the highest price paid per share by
the person for the shares acquired in a transaction subject to this law.
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<PAGE> 67
WebTrends is also subject to provisions of Oregon law that govern business
combinations between corporations and interested shareholders. These provisions
generally prohibit a corporation from entering into a business combination
transaction with a person, or affiliate of such person, for a period of three
years from the date such person acquires 15% or more of the voting stock of the
corporation. For the purpose of this law, the prohibition generally applies to
the following:
- A merger or plan of share exchange;
- Any sale, lease, mortgage, or other disposition of 10% or more of the
assets of the corporation; and
- Transactions that result in the issuance of capital stock of the
corporation to the 15% shareholder.
However, the general prohibition does not apply if:
- The 15% shareholder, as a result of the transaction in which such person
acquired 15% of the shares, owns at least 85% of the outstanding voting
stock of the corporation;
- The board of directors approves the share acquisition or business
combination before the shareholder acquired 15% or more of the
corporation's outstanding voting stock; or
- The board of directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation, excluding shares owned by
the 15% shareholder, approve the transaction after the shareholder
acquires 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.,
located in Canton, Massachusetts.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
this offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices for the common stock or our future ability to
raise capital through an offering of equity securities.
Upon the closing of this offering, and assuming no exercise of outstanding
stock options subsequent to March 31, 1999, WebTrends will have 12,500,080
shares of common stock outstanding. All of the 4,025,000 shares sold in our
initial public offering and the 2,500,000 shares sold in this offering will be
freely tradable without restriction or limitation under the Securities Act,
except for any such shares purchased by "affiliates" of WebTrends, as such term
is defined under Rule 144 of the Securities Act, which will be subject to the
resale limitations of Rule 144. We have also registered the issuance of
3,312,321 shares of common stock issued or currently reserved for issuance under
the 1997 option plan, the 1998 option plan, and the 1999 employee stock purchase
plan and the resale of up to 37,678 shares of common stock issued under the 1997
option plan. Although none of the shares under these plans were transferable at
the time of our initial public offering because of lock-up agreements with our
underwriters, effective on April 28, 1999, the underwriters have waived the
transfer restrictions with respect to these shares.
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<PAGE> 68
Accordingly, subject to the grant of stock options, the vesting of stock
options, and Rule 144 volume limitations applicable to affiliates, these shares
will be freely tradable. As of March 31, 1999, of the registered shares under
the plans, 39,553 shares were outstanding.
The remaining 5,935,527 shares of WebTrends common stock issued and
outstanding are "restricted securities" within the meaning of Rule 144 and were
issued and sold by WebTrends in private transactions. Such restricted securities
may be publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration, such as Rule 144.
WebTrends and the holders of all such remaining shares entered into lock-up
agreements at the time of our initial public offering providing that, without
the prior written consent of our underwriters, they will not, directly or
indirectly, issue, sell, offer, agree to sell, grant any option for the sale of,
pledge, make any short sale, or otherwise dispose of shares of common stock, for
a 180-day period ending August 17, 1999. Upon expiration of the lock-up
agreements, all of these restricted securities will be eligible for immediate
resale in the public market subject to the limitations of Rule 144.
In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, would be entitled to sell, within any three-month period, that number of
shares that does not exceed the greater of
(a) 1% of the then-outstanding shares of common stock, which is
approximately 125,000 shares upon the closing of this offering, and
(b) the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which a notice of sale
is filed with the Securities and Exchange Commission, provided that the
manner of sale and notice requirements and requirements as to the
availability of current public information about WebTrends are
satisfied.
In addition, in order to sell shares of common stock that are not
restricted securities, affiliates of WebTrends must comply with all restrictions
and requirements of Rule 144 other than the one-year holding period requirement.
As defined in Rule 144, an "affiliate" of an issuer is a person who directly or
indirectly through the use of one or more intermediaries controls, or is
controlled by, or is under common control with, such issuer. Under Rule 144(k),
a holder of "restricted securities" who is not deemed an affiliate of the issuer
and who has beneficially owned shares for at least two years would be entitled
to sell shares under Rule 144(k) without regard to the limitations described
above.
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<PAGE> 69
UNDERWRITING
The underwriters named below, acting through their representatives, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, BancBoston Robertson
Stephens Inc., and SoundView Technology Group, Inc. have severally agreed,
subject to the terms and conditions of the underwriting agreement, to purchase
from WebTrends and the selling shareholders the number of shares of common stock
set forth opposite their respective names below. The underwriters are committed
to purchase and pay for all such shares if any are purchased, subject to the
conditions stated in the underwriting agreement.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ---------
<S> <C>
Dain Rauscher Wessels....................................... 982,813
BancBoston Robertson Stephens Inc. ......................... 637,500
SoundView Technology Group, Inc. ........................... 504,687
Hambrecht & Quist LLC....................................... 125,000
Ladenburg Thalmann & Co. Inc. .............................. 125,000
Pacific Crest Securities.................................... 125,000
---------
Total............................................. 2,500,000
=========
</TABLE>
The representatives have advised WebTrends and the selling shareholders
that the underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession of not in excess of $1.00 per
share, of which $0.10 may be reallowed to other dealers. After the public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the representatives. No such reduction shall change the amount of
proceeds to be received by WebTrends as set forth on the cover page of the
prospectus. The prices at which the common stock will sell in the public market
after this offering may not be equal to or greater than the public offering
price.
The underwriting agreement contains covenants of indemnity among the
underwriters, WebTrends, and the selling shareholders against civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
WebTrends and the selling shareholders have granted to the underwriters an
option to purchase up to 375,000 additional shares of common stock. This option
may be exercised at any time up to 30 days after the date of this prospectus.
The option entitles the underwriters to purchase the additional shares of common
stock at the same price per share as the 2,500,000 shares being sold in this
offering. If the underwriters exercise the option, each of the underwriters must
purchase approximately the same percentage of additional shares from the Company
and the selling shareholders as the number of shares of common stock to be
purchased by each of them shown in the table above bears to the total number of
shares of common stock indicated in the table above. If purchased, the
additional shares will be sold by the underwriters on the same terms as those on
which the 2,500,000 shares are being sold.
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<PAGE> 70
The price of the shares of common stock purchased by the underwriters will
be the public offering price set forth on the cover page of the prospectus less
the following underwriting discounts and commissions, to be provided by
WebTrends and the selling shareholders:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- --------------- ---------------
<S> <C> <C> <C>
By WebTrends............................... $1.73 $2,162,500 $2,486,875
By selling shareholders.................... 1.73 2,162,500 2,486,875
</TABLE>
WebTrends will also pay offering expenses estimated to total $400,000.
Without the prior written consent of the underwriters, Elijahu Shapira, The
Shapira Family Trust, U/A/D 9/29/98, W. Glen Boyd, The Boyd Family Trust, U/A/D
9/29/98, and Michael Burmeister-Brown have agreed, for a period of 180 days
after February 19, 1999, not to sell, transfer, grant any third party the right
to purchase, or otherwise dispose of any shares of common stock or other
securities that they own or acquire other than shares sold by them pursuant to
the underwriting agreement. This 180-day period is known as the lock-up period.
The representatives may, without notice and in their sole discretion, allow any
of these five shareholders to dispose of common stock or other securities prior
to the expiration of the lock-up period. There are, however, no agreements
between the underwriters and any of such five shareholders or option holders
that would allow them to do so.
In addition, WebTrends has agreed that it will not issue, sell, offer to
sell, or otherwise dispose of any shares of its common stock or other securities
during the lock-up period without the prior consent of the underwriters. This
agreement does not include shares of common stock or other securities issued
pursuant to employee stock option plans, employee stock purchase plans, or
common stock or other securities issued pursuant to options or other securities
outstanding on the date of this prospectus.
The underwriters have advised WebTrends that in connection with this
offering, certain persons participating in this offering may engage in
transactions that may have the effect of stabilizing or maintaining the market
price of the common stock at a level above that which might otherwise prevail in
the open market. These transactions may include stabilizing bids, syndicate
covering transactions and the imposition of penalty bids. A "stabilizing bid" is
a bid for or the purchase of common stock on behalf of the underwriters for the
purpose of preventing or retarding a decline in the market price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by such underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by such underwriter or syndicate
member. The representatives have advised WebTrends that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commence, may be
discontinued at any time.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934,
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<PAGE> 71
as amended. During the business day prior to the pricing of the offering before
the commencement of offers or sales of our common stock, passive market makers
must comply with applicable volume and price limitations and must be identified
as such. In general, a passive market maker must display its bid at a price not
in excess of the highest independent bid of such security; if all independent
bids are lowered below the passive market maker's bid, however, such bid must
then be lowered when certain purchase limits are exceeded.
In February of 1999, Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, and SoundView Technology Group, Inc. participated as underwriters
in WebTrends' initial public offering.
LEGAL MATTERS
The validity of the common stock offered hereby and other legal matters
will be passed upon for WebTrends by Perkins Coie LLP, Portland, Oregon. Legal
matters will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
WebTrends' financial statements as of December 31, 1997 and 1998, and for
each of the years in the three-year period ended December 31, 1998, have been
included in this prospectus and elsewhere in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU MAY FIND ADDITIONAL INFORMATION
WebTrends has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered hereby. This prospectus does not contain all of the
information contained in the registration statement, together with the exhibits
and schedules to the registration statement, on file with the Securities and
Exchange Commission. The registration statement, including the exhibits and
schedules, may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Securities and Exchange
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and copies may be obtained at the prescribed rates from the Public Reference
Section of the Securities and Exchange Commission at its principal office in
Washington, D.C. The Securities and Exchange Commission also maintains a Web
site on the Internet that contains reports, proxy and information statements,
and other information regarding registrants, including WebTrends, that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
Statements contained in this prospectus concerning the provisions of
documents are necessarily summaries of the material provisions of such
documents, and each statement is qualified by reference to the copy of the
applicable document filed with the Securities and Exchange Commission.
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<PAGE> 72
WebTrends is subject to the information and periodic reporting requirements
of the Securities Exchange Act, and it files periodic reports, proxy statements
and other information with the Securities and Exchange Commission when required.
These documents are available for inspection and copying at the Commission's
public reference rooms and Web site.
WebTrends intends to furnish its shareholders with annual reports
containing audited financial statements and an opinion thereon expressed by
independent auditors and may furnish its shareholders with quarterly reports for
the first three quarters of each fiscal year containing unaudited summary
financial information.
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<PAGE> 73
WEBTRENDS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP............................. F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Shareholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
The Board of Directors
WebTrends Corporation:
We have audited the accompanying balance sheets of WebTrends Corporation as
of December 31, 1997 and 1998, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of WebTrends' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of WebTrends Corporation as of
December 31, 1997 and 1998, and the results of its operations, and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
January 11, 1999, except for note 10
which is as of January 19, 1999
F-2
<PAGE> 75
WEBTRENDS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 806,916 1,098,847 30,568,239
Short-term investments....................... -- -- 6,195,415
Accounts receivable, net..................... 526,641 977,577 2,050,411
Inventories.................................. 89,135 62,115 74,996
Prepaid expenses............................. 41,999 190,530 139,503
Deferred offering costs...................... -- 255,394 --
Deferred taxes............................... 90,500 157,500 157,500
---------- --------- ----------
Total current assets................. 1,555,191 2,741,963 39,186,064
Property and equipment, net.................... 325,966 598,407 869,218
Other assets................................... 5,032 5,016 --
Deferred taxes, net............................ -- 17,000 17,535
---------- --------- ----------
Total assets......................... $1,886,189 3,362,386 40,072,817
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. 243,830 383,187 692,617
Accrued liabilities.......................... 59,311 385,233 483,941
Accrued compensation and employment taxes.... 165,805 508,422 574,457
Accrued sales tax............................ 155,137 268,533 320,009
Accrued income taxes......................... 24,548 -- 70,750
Deferred revenue............................. 387,074 824,013 1,666,029
Notes and interest payable to shareholders... 259,709 151,103 --
---------- --------- ----------
Total current liabilities............ 1,295,414 2,520,491 3,807,803
Deferred taxes................................. 6,500 -- --
---------- --------- ----------
Total liabilities.................... 1,301,914 2,520,491 3,807,803
---------- --------- ----------
Commitments and contingencies (note 9)
Shareholders' equity:
Preferred stock, no par value. Authorized
15,000,000 shares; no shares
outstanding............................... -- -- --
Common stock, Class A voting, no par value.
Authorized 30,000,000 shares; issued and
outstanding 8,210,527 shares at December
31, 1997 and 1998 and 11,250,080 at March
31, 1999.................................. 260,000 260,000 36,058,196
Common stock, Class B non-voting, no par
value. Authorized 30,000,000 shares at
December 31, 1998 and none at March 31,
1999; none and 8,437 shares issued and
outstanding at December 31, 1997 and 1998
and none at March 31, 1999................ -- 589,694 --
Deferred compensation, net................... -- (551,534) (514,998)
Retained earnings............................ 324,275 543,735 721,816
---------- --------- ----------
Total shareholders' equity........... 584,275 841,895 36,265,014
---------- --------- ----------
Total liabilities and shareholders'
equity............................. $1,886,189 3,362,386 40,072,817
========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 76
WEBTRENDS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1996 1997 1998 1998 1999
---------- ---------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses...................... $1,858,014 3,836,657 7,206,461 1,496,225 2,586,973
Support services....................... 6,824 218,233 801,963 125,449 419,353
---------- ---------- --------- --------- ----------
Total revenue................... 1,864,838 4,054,890 8,008,424 1,621,674 3,006,326
Cost of revenue.......................... 204,546 292,268 632,925 129,412 290,310
---------- ---------- --------- --------- ----------
Gross margin.................... 1,660,292 3,762,622 7,375,499 1,492,262 2,716,016
---------- ---------- --------- --------- ----------
Operating expenses:
Research and development............... 402,583 1,059,439 2,211,029 455,778 639,133
Sales and marketing.................... 552,634 1,526,889 3,641,965 720,034 1,505,538
General and administrative............. 307,318 748,832 1,300,626 292,274 455,465
---------- ---------- --------- --------- ----------
Total operating expenses........ 1,262,535 3,335,160 7,153,620 1,468,086 2,600,136
---------- ---------- --------- --------- ----------
Income from operations.......... 397,757 427,462 221,879 24,176 115,880
---------- ---------- --------- --------- ----------
Other income (expense):
Interest income........................ 9,042 21,769 41,997 7,910 170,917
Interest expense....................... (2,097) (11,358) (13,111) (3,202) (1,866)
---------- ---------- --------- --------- ----------
Other income, net............... 6,945 10,411 28,886 4,708 169,051
---------- ---------- --------- --------- ----------
Income before income taxes...... 404,702 437,873 250,765 28,884 284,931
Income taxes............................. -- 150,500 31,305 3,465 106,850
---------- ---------- --------- --------- ----------
Net income...................... $ 404,702 287,373 219,460 25,419 178,081
========== ========== ========= ========= ==========
Basic net income per share............... $ .04 .03 .00 .02
========== ========= ========= ==========
Diluted net income per share............. $ .04 .02 .00 .02
========== ========= ========= ==========
Shares used in basic net income per share
calculation............................ 8,126,173 8,210,651 8,210,527 9,581,526
========== ========= ========= ==========
Shares used in diluted net income per
share calculation...................... 8,126,173 9,022,077 8,210,527 10,932,209
========== ========= ========= ==========
Pro forma net income data:
Income before income taxes as reported... 404,702
Pro forma income taxes................... 140,027
----------
Pro forma net income..................... $ 264,675
==========
Pro forma net income per share -- basic
and diluted............................ $ .03
==========
Shares used in pro forma net income per
share calculation -- basic and
diluted................................ 7,800,000
==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 77
WEBTRENDS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------- ------------------------ ----------------- DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS TOTAL
------ ------ ---------- ----------- ------ -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995.................. -- $ -- 6,300,300 $ 10,000 -- $ -- -- 257,150 267,150
Conversion of S
Corporation shares to
C Corporation
shares................ -- -- 1,499,700 -- -- -- -- -- --
Dividend distribution... -- -- -- -- -- -- -- (624,950) (624,950)
Net income.............. -- -- -- -- -- -- -- 404,702 404,702
-- ---- ---------- ----------- ------ -------- -------- -------- ----------
Balance, December 31,
1996.................. -- -- 7,800,000 10,000 -- -- -- 36,902 46,902
Sale of common stock.... -- -- 410,527 250,000 -- -- -- -- 250,000
Net income.............. -- -- -- -- -- -- -- 287,373 287,373
-- ---- ---------- ----------- ------ -------- -------- -------- ----------
Balance, December 31,
1997.................. -- -- 8,210,527 260,000 -- -- -- 324,275 584,275
Deferred compensation... -- -- -- -- -- 584,575 (584,575) -- --
Amortization of deferred
compensation.......... -- -- -- -- -- -- 33,041 -- 33,041
Exercise of stock
options............... -- -- -- -- 8,437 5,119 -- -- 5,119
Net income.............. -- -- -- -- -- -- -- 219,460 219,460
-- ---- ---------- ----------- ------ -------- -------- -------- ----------
Balance, December 31,
1998.................. -- -- 8,210,527 260,000 8,437 589,694 (551,534) 543,735 841,895
Amortization of deferred
compensation
(unaudited)........... -- -- -- -- -- -- 36,536 -- 36,536
Exercise of stock
options (unaudited)... -- -- 31,116 52,081 -- -- -- -- 52,081
Issuance of common
stock, net of offering
costs (unaudited)..... -- -- 3,000,000 35,156,421 -- -- -- -- 35,156,421
Conversion of common B
stock to common A
stock................. -- -- 8,437 589,694 (8,437) (589,694) -- -- --
Net income
(unaudited)........... -- -- -- -- -- -- -- 178,081 178,081
-- ---- ---------- ----------- ------ -------- -------- -------- ----------
Balance, March 31, 1999
(unaudited)........... -- $ -- 11,250,080 $36,058,196 -- $ -- (514,998) 721,816 36,265,014
== ==== ========== =========== ====== ======== ======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 78
WEBTRENDS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- -------- --------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 404,702 287,373 219,460 25,419 178,081
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 29,447 88,375 206,417 36,267 82,296
Provision for doubtful accounts............ 12,423 32,705 43,548 5,841 40,000
Loss (gain) on marketable securities....... 1,323 -- -- (81) (91)
Loss on sale of assets..................... -- -- 293 -- --
Amortization of deferred stock
compensation............................ -- -- 33,041 -- 36,536
Changes in assets and liabilities:
Accounts receivable..................... (261,525) (149,443) (494,484) (46,706) (1,112,836)
Inventories............................. (9,728) (76,027) 27,020 11,514 (12,882)
Prepaid expenses........................ (14,216) (26,209) (403,925) (68,762) 306,421
Deferred taxes, net..................... -- (84,000) (90,500) -- --
Other assets............................ (4,101) 407 16 -- 4,572
Accounts payable........................ 78,561 165,269 139,357 (37,844) (22,613)
Accrued liabilities..................... 12,409 31,273 325,922 118,009 (98,417)
Accrued compensation and employment
taxes................................. 57,809 97,719 342,617 104,972 66,036
Accrued sales tax....................... -- 155,137 113,396 38,285 51,477
Accrued income taxes.................... -- 24,548 (24,548) (10,715) 70,750
Accrued interest........................ 2,097 5,503 (8,606) 3,202 (1,103)
Deferred revenues....................... 131,592 255,481 436,939 11,964 842,016
--------- -------- --------- ------- ----------
Net cash provided by operating
activities.......................... 440,793 808,111 865,963 191,365 430,243
--------- -------- --------- ------- ----------
Cash flows from investing activities:
Acquisition of property and equipment........ (156,422) (269,533) (479,151) (64,301) (353,107)
Purchase of short-term investments........... -- -- -- -- (6,195,415)
--------- -------- --------- ------- ----------
Net cash used by investing
activities.......................... (156,422) (269,533) (479,151) (64,301) (6,548,522)
--------- -------- --------- ------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock....... -- 250,000 5,119 -- 35,685,590
Dividend payments to shareholders............ (142,068) (482,882) -- -- --
Exercise of stock options.................... -- -- -- -- 52,081
Principal payments on borrowings from
shareholders............................... -- (70,000) (100,000) -- (150,000)
Borrowings from shareholders................. -- 250,000 -- -- --
--------- -------- --------- ------- ----------
Net cash (used by) provided by
financing activities................ (142,068) (52,882) (94,881) -- 35,587,671
--------- -------- --------- ------- ----------
Increase in cash and cash
equivalents......................... 142,303 485,696 291,931 127,064 29,469,392
Cash and cash equivalents, beginning of
period....................................... 178,917 321,220 806,916 806,916 1,098,847
--------- -------- --------- ------- ----------
Cash and cash equivalents, end of period....... $ 321,220 806,916 1,098,847 933,980 30,568,239
========= ======== ========= ======= ==========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................... $ -- 5,855 21,717 3,578 2,490
Income taxes............................... -- 208,000 155,500 65,000 7,000
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 79
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
WebTrends Corporation (WebTrends) was incorporated as an S Corporation on
August 31, 1993 in Delaware and was reorganized into a C Corporation effective
January 1, 1997 in Oregon. WebTrends Corporation is a leading provider of
enterprise management solutions for Internet-based systems.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared by
WebTrends in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in accordance with such
rules and regulations. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of
WebTrends, and its results of operations and cash flows. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999 or any other future interim period, and WebTrends makes no representations
related thereto.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles 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 those estimates.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, WebTrends considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$20,000 and $40,000 at December 31, 1997 and 1998, respectively.
NEED FOR NEW PRODUCT DEVELOPMENT
A substantial portion of WebTrends' revenues each year are generated from
the development and rapid release to market of computer software products newly
introduced during the year. In the extremely competitive industry environment in
which WebTrends operates, such product generation, development and marketing
processes are uncertain and complex, requiring accurate prediction of market
trends and demand as well as successful management of various development risks
inherent in such products. In light of these requirements, it is reasonably
possible that failure to successfully manage a significant
F-7
<PAGE> 80
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
product introduction could have a severe near-term impact on WebTrends' growth
and results of operations.
INVENTORIES
Inventory is valued at the lower of estimated cost or market determined
using the "first-in, first-out" (FIFO) method. Inventories consist of CDs,
printing, packaging and receiving costs.
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 of
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 charged to income. 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
In October 1997, The American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition.
Subsequently, in March 1998, the Financial Accounting Standards Board ("FASB")
approved SOP 98-4, Deferral of the Effective Date of a Provision of 97-2,
Software Revenue Recognition. SOP 98-4 defers for one year, the application of
several paragraphs and examples in SOP 97-2 that limit the definition of vendor
specific objective evidence (VSOE) of the fair value of various elements in a
multiple element arrangement. The provisions of SOP's 97-2 and 98-4 have been
applied to transactions entered into beginning January 1, 1998. Prior to 1997,
WebTrends' revenue policy was in accordance with the preceding authoritative
guidance provided by SOP No. 91-1, Software Revenue Recognition.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on VSOE of the
relative fair values of each element in the arrangement.
Software license revenue consists of fees for licenses of WebTrends'
software products. Revenue allocated to software licenses is recognized upon
delivery of software, assuming no significant obligations or customer acceptance
rights exist. WebTrends generally provides a thirty-day right of return for each
product sold. Estimated sales returns and allowances are recorded upon shipment
of the product.
WebTrends sells a portion of its products domestically and internationally
through resellers. Revenue from sales to domestic resellers is managed directly
by WebTrends, and it recognizes revenue from sales primarily at the time of
shipment, net of estimated returns and allowances. In December of 1998,
WebTrends entered into domestic distribution agreements with Merisel and Ingram.
These agreements offer expanded rights of return and price protection beyond our
normal reseller agreements. For these distributors, WebTrends is recognizing
revenues upon sales from the distributor to a third-party or end user until a
returns history can be established. Revenue from sales to international
resellers
F-8
<PAGE> 81
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
is managed by a third party export management company and revenue is recognized
upon sales from the reseller to a third party or end user.
Support services revenue consists of annual subscriptions for upgrades,
post customer support services, and professional services. Revenue allocated to
subscriptions, which allow the subscriber to purchase the right to obtain
upgrades, when and if available, are paid in advance and revenues are recognized
ratably over the term of the subscription. Revenue allocated to professional
services is recognized as the services are performed.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. This SOP
amends SOP 97-2 to require recognition of revenue using the "residual method" in
circumstances outlined in the SOP. Under the residual method, revenue is
recognized as follows: (1) the total fair value of undelivered elements, as
indicated by VSOE, is deferred and subsequently recognized in accordance with
the relevant sections of SOP 97-2 and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements.
SOP 98-9 is effective for fiscal years beginning after March 15, 1999.
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to
be deferred until the date SOP 98-9 becomes effective.
CONCENTRATION OF CREDIT RISK
Sales outside of the United States were approximately $336,000, $893,000
and $2.2 million for the years ended December 31, 1996, 1997 and 1998,
respectively. During these same periods, no individual customer or reseller
accounted for 10% or more of total revenue. However, sales managed by a
third-party export management company were 8.1%, 11.8% and 16.7% for the years
ended December 31, 1996, 1997 and 1998, respectively. Accounts receivable at
December 31, 1997 and 1998 includes balances due from a third-party export
management company that manages most of WebTrends' international sales through
invoicing and initiating collection procedures. This account comprised 21% and
28%, respectively, of the total outstanding accounts receivable balance at those
respective dates of which 81% and 94%, respectively, was due less than thirty
days from billing. For 1997 and 1998, except for the one third-party export
management company, no customer comprised greater than 10% of the total accounts
receivable balance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and notes payable to shareholders approximate fair value due to
the short-term nature of these instruments. Fair value estimates are made at a
specific point in time, based on relevant market information about the financial
instrument when available. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
F-9
<PAGE> 82
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
ADVERTISING COSTS
Advertising costs are generally expensed when incurred. Total advertising
costs were approximately $266,000, $553,000 and $957,000 for the years ended
December 31, 1996, 1997 and 1998, 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 achieving technological feasibility and the general
availability of such software has been short; therefore, software development
costs qualifying for capitalization have been immaterial. Accordingly, WebTrends
has not capitalized any software development costs and charged all such costs to
research and development expense.
INCOME TAXES
Prior to January 1, 1997, WebTrends was taxed under the S Corporation
provisions of the Internal Revenue Code. Under those provisions, WebTrends did
not pay federal or state corporate income taxes on its taxable income. Instead,
the shareholders were liable for federal and state income taxes on WebTrends'
taxable income. Supplemental pro forma net income data for the year ended
December 31, 1996, as if WebTrends was a C Corporation, are presented for
comparison purposes only.
Effective January 1, 1997, the S Corporation election was terminated.
WebTrends' income taxes since that date are accounted for under the asset and
liability method. 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
enacted 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
WebTrends 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 and 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. WebTrends has
elected to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
F-10
<PAGE> 83
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
NET INCOME PER SHARE
Basic and diluted net income per share were computed using the weighted
average number of common shares outstanding during each year, with diluted net
income per share including the effect of potentially dilutive common stock
equivalents. The weighted average number of common shares outstanding for basic
net income per share computations were 8,126,173 and 8,210,651 for the years
ended December 31, 1997 and 1998, respectively, and 8,210,527 and 9,581,526 for
the quarters ended March 31, 1998 and 1999, respectively. For diluted net income
per share, -0-, 811,426, -0-, and 1,350,683 shares were added to the weighted
average number of common shares outstanding for the same periods, respectively,
representing potential dilution for stock options outstanding, calculated using
the treasury stock method. Basic and diluted net income per share have been
calculated in accordance with SEC Staff Accounting Bulletin No. 98. Pro forma
net income per share data is presented for comparison purposes only as if
WebTrends were taxed as a C Corporation in 1996. WebTrends had no potentially
dilutive common stock equivalents prior to 1997.
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Computer hardware and equipment.......................... $416,166 813,255
Furniture and fixtures................................... 4,383 4,383
Computer software........................................ 32,061 113,830
-------- --------
Total.......................................... 452,610 931,468
Less accumulated depreciation and amortization........... (126,644) (333,061)
-------- --------
Total assets, net.............................. $325,966 598,407
======== ========
</TABLE>
(3) INCOME TAXES
Components of the 1997 provision for income taxes include:
<TABLE>
<CAPTION>
CHANGE TOTAL
IN TAX TAX
CURRENT DEFERRED TOTAL STATUS EXPENSE
-------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Federal..................... $187,000 (75,000) 112,000 7,000 119,000
State and local............. 47,500 (18,000) 29,500 2,000 31,500
-------- ------- ------- ----- -------
Total............. $234,500 (93,000) 141,500 9,000 150,500
======== ======= ======= ===== =======
</TABLE>
Components of the 1998 provision for income taxes include:
<TABLE>
<CAPTION>
TOTAL
TAX
CURRENT DEFERRED EXPENSE
-------- -------- -------
<S> <C> <C> <C>
Federal.......................................... $102,000 (75,000) 27,000
State and local.................................. 19,805 (15,500) 4,305
-------- ------- ------
Total.................................. $121,805 (90,500) 31,305
======== ======= ======
</TABLE>
F-11
<PAGE> 84
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
The 1997 and 1998 provision for income taxes varies from the amounts
computed by applying the federal statutory rate to income before taxes:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Federal income tax computed at statutory rates.............. 34.0% 34.0%
State and local taxes, net of federal benefits.............. 8.5 8.0
Tax credits................................................. (14.2) (37.3)
Foreign sales corporation benefit........................... -- (1.2)
Deferred stock compensation................................. -- 4.3
Change in tax status........................................ 2.0 --
Other....................................................... 4.1 4.7
----- -----
Total............................................. 34.4% 12.5%
===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred incentive compensation........................ $16,600 --
Allowance for doubtful accounts........................ 7,800 15,700
Accrued sales tax...................................... 54,600 94,800
Research and development credits....................... -- 23,600
Accrued vacation and bonus............................. 2,600 34,000
Other.................................................. 8,900 13,000
------- -------
Deferred tax assets............................ 90,500 181,100
Deferred tax liabilities:
Depreciation of equipment.............................. (6,500) (6,600)
------- -------
Net deferred tax assets........................ $84,000 174,500
======= =======
</TABLE>
WebTrends has not recorded a valuation allowance against its deferred tax
assets existing at December 31, 1997 or 1998, 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 for which no valuation allowance has
been assigned.
At December 31, 1998, WebTrends had approximately $24,000 of federal and
state tax credit carryforwards to offset future taxable income which will expire
in the year 2013.
(4) DEFERRED REVENUE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- -------
<S> <C> <C>
Deferred customer support............................... $ -- 107,055
Deferred product revenues............................... 115,308 68,166
Deferred subscription revenues.......................... 218,277 533,893
Other................................................... 53,489 114,899
-------- -------
$387,074 824,013
======== =======
</TABLE>
F-12
<PAGE> 85
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
(5) NOTES PAYABLE TO SHAREHOLDERS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- -------
<S> <C> <C>
Notes payable to officer/shareholders, unsecured, due on
demand with interest at 5%............................ $250,000 150,000
Accrued interest on notes............................... 9,709 1,103
-------- -------
$259,709 151,103
======== =======
</TABLE>
(6) LINE OF CREDIT
As of December 31, 1998, WebTrends had a $750,000 bank line of credit with
a major financial institution. The line of credit expires on April 30, 1999.
Borrowings under the line generally are limited to 80% of WebTrends' eligible
accounts receivable. Interest on the unpaid balance accrues at a rate of prime
plus 0.25%. Borrowings under the line of credit are collateralized by WebTrends'
accounts receivable, inventory and general intangible assets, including its
intellectual property rights. The line of credit agreement contains financial
covenants, including tangible net worth and the ratio of current assets to
liabilities. As of December 31, 1998, WebTrends had a letter of credit for
$225,000 outstanding against its line of credit.
(7) EMPLOYEE BENEFIT PLAN
WebTrends 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 or the statutorily prescribed annual limit. WebTrends, at
its discretion, may make contributions to the plan. To date, WebTrends has made
no contributions to the plan and has incurred administrative costs of $1,775 and
$3,328 for the years ended December 31, 1997 and 1998, respectively.
(8) SHAREHOLDERS' EQUITY
PREFERRED STOCK
WebTrends is authorized to issue 15,000,000 shares of preferred stock, no
par value. The Board of Directors of WebTrends 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.
COMMON STOCK
Effective December 31, 1996, the shareholders exchanged 300 shares, no par
value, of the S Corporation for 1,500,000 shares, no par value, of the C
Corporation as part of its restructuring into a C Corporation which became
effective January 1, 1997. At the same time, WebTrends authorized 30,000,000
shares of Class A voting common stock, no par value, to be made available for
issuance. Effective March 17, 1997, WebTrends authorized a stock for stock
exchange of the then outstanding 1,500,000 shares for 7,800,000 shares. This
stock for stock exchange has been retroactively reflected for all periods
presented.
F-13
<PAGE> 86
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
Also on March 17, 1997, WebTrends authorized the sale of 410,527 shares to one
of its Board members.
In May 1998, WebTrends approved a 3-for-1 stock split. Accordingly, share
and per share amounts for common stock have been retroactively restated to
reflect the stock split for all periods presented. See note 10 for additional
discussion.
In December of 1998, WebTrends approved a recapitalization of its common
stock to be effected upon the closing of its initial public offering. Under the
terms of the recapitalization, the Class A common stock will be redesignated
common stock, no par value per share, and will be the only authorized class of
common stock. Each share of Class B common stock will automatically be converted
into one share of such common stock, and the recorded value of the Class B
common stock will be transferred to common stock. See unaudited recent
developments.
Deferred compensation cost recognized for 1998 totaled $584,575 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 of
deferred compensation was recorded for the year ended December 31, 1998.
STOCK OPTIONS
Effective March 28, 1997, WebTrends established the 1997 Key Employees'
Incentive Stock Option Plan and subsequently authorized 1,500,000 shares of
Class B 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, WebTrends increased the number of shares authorized under the
plan to 2,000,000. In December 1998, WebTrends reduced the number of shares
authorized in the Plan to 1,534,524 and WebTrends determined that no additional
options will 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 has reserved a total of 1,465,475 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 WebTrends' fiscal year beginning in 2001, equal to the lesser of 500,000
shares or 5% of the average common shares outstanding as used to calculate fully
diluted earnings per share as reported in WebTrends' Annual Report for the
preceding year.
The option price for incentive stock options are 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 WebTrends) at the date of the grant. Employee options generally vest 25%
after the first year of employment and in equal amounts on a monthly or annual
basis thereafter over the term of the option. Options are contingent on
continued employment with WebTrends and expire ten years (five years for 10%
shareholders as defined above) from the date of grant. Certain options
F-14
<PAGE> 87
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
are 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.
A summary of stock options follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at December 31, 1996................. -- $ --
Granted.................................................. 666,708 0.6067
Canceled................................................. -- --
Forfeited................................................ (37,500) 0.6067
--------- -------
Options outstanding at December 31, 1997................. 629,208 0.6067
Granted.................................................. 1,000,567 3.3488
Canceled................................................. (35,000) 0.7800
Forfeited................................................ (115,189) 0.6566
Exercised................................................ (8,437) 0.6067
--------- -------
Options outstanding at December 31, 1998................. 1,471,149 $2.4630
========= =======
</TABLE>
At December 31, 1998, the range of exercise prices and weighted average
remaining contractual life of the outstanding options was $0.6067 to $8 and 9.22
years, respectively. At December 31, 1998, 134,802 options were exercisable with
a weighted average exercise price of $0.6067.
WebTrends adopted the 1999 Employee Stock Purchase Plan in December 1998.
WebTrends 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 350,000 shares of common stock plus an automatic annual
increase as defined in the Employee Stock Purchase Plan.
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
WebTrends 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.
The per share weighted average fair value of stock options granted during
1997 and 1998 was $.44 and $3.48, respectively. For SFAS No. 123 purposes, the
fair value of each
F-15
<PAGE> 88
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
option has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following assumptions for grants in 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Average dividend yield...................................... --% --%
Expected life in years...................................... 4 4
Risk free interest rate..................................... 7.0% 6.0%
Expected volatility......................................... 100% 100%
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Net income (loss):
As reported............................................. $287,373 219,460
Pro forma............................................... 240,947 (15,857)
Net income (loss) per share, diluted:
As reported............................................. $ .04 .02
Pro forma............................................... .03 --
</TABLE>
The effect of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
(9) COMMITMENTS AND CONTINGENCIES
WebTrends leases its office facilities under a six-year operating lease
which commenced October 1, 1997. This lease was amended in September 1998 to
terminate on January 31, 1999. As consideration for the early termination,
WebTrends paid the landlord $20,548.
In November 1998, WebTrends negotiated a new five-year lease for office
facilities in a new premises with the option to extend for an additional five
years. The lease term begins on January 15, 1999. The new lease provides for a
base rent of $34,208 per month for the first six months. Beginning July 1999,
WebTrends will lease additional space in the same building. At that time, the
base rent will increase to $57,467 for all space occupied, with annual
adjustments thereafter. For the years ended December 31, 1996, 1997 and 1998,
rent expense was approximately $31,000, $84,000 and $204,000, respectively.
Future minimum lease payments under this lease are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999............................................. $ 532,946
2000............................................. 689,599
2001............................................. 712,696
2002............................................. 735,794
2003............................................. 735,794
Thereafter....................................... 61,316
----------
$3,468,145
==========
</TABLE>
F-16
<PAGE> 89
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
(10) SUBSEQUENT EVENTS
In January 1999, WebTrends approved a 1-for-2 reverse stock split.
Accordingly, share and per share amounts for common stock have been
retroactively restated to reflect the reverse stock split for all periods
presented.
(11) UNAUDITED RECENT DEVELOPMENT
On February 19, 1999, WebTrends completed an initial public offering of
3,500,000 shares including 3,000,000 newly issued shares by the Company and
500,000 outstanding shares sold by existing shareholders. Subsequently, the
selling shareholders sold an additional 525,000 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 stockholders. The
offered shares generated net proceeds to WebTrends of $35,156,421.
F-17
<PAGE> 90
Text:
Manage Your WWWorld(TM)
INSIDE BACK COVER
Top Left:
Text:
www.webtrends.com
Top:
Graphics:
There are two screen shots inside a box. The first screen shot is the
Professional Suite product page from the WebTrends Web site. The second screen
shot is the "contact us" page from the Web Trends Web site.
Center:
Graphics:
There are two screen shots inside a box. The first screen shot is the
products page from the WebTrends Web site. The second screen shot is the
ordering page from the WebTrends Web site.
Bottom:
Graphics:
There are two screen shots inside a box. The first screen shot is the
knowledge base page from the WebTrends Web site. The second screen shot is the
technical support page from the WebTrends Web site.
<PAGE> 91
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION WHERE IT IS
UNLAWFUL TO DO SUCH. THE INFORMATION IN THIS PROSPECTUS IS CURRENT AND CORRECT
ONLY AS OF MAY 12, 1999, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS
OR ANY SALE OF SECURITIES.
- --------------------------------------------------------------------------------
2,500,000 SHARES OF COMMON STOCK
[LOGO]
DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
BANCBOSTON ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
MAY 12, 1999
- --------------------------------------------------------------------------------
