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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-25215
WEBTRENDS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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OREGON 93-1123283
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
851 S.W. SIXTH AVENUE, SUITE 1200 97204
PORTLAND, OREGON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(503) 294-7025
(TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K. [X]
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Aggregate market value of common stock held by
non-affiliates as of February 29, 2000.................... $719,895,560
Number of shares of common stock outstanding as of February
29, 2000.................................................. 25,951,350
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of our proxy statement in connection with our May 11, 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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WEBTRENDS CORPORATION
FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters....................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 34
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 34
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 34
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PART I
ITEM 1. BUSINESS
OVERVIEW
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about our industry, management's beliefs, and certain
assumptions made by management. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Forward-Looking Statements."
WebTrends is a leading provider of enterprise solutions for Visitor
Relationship Management(TM), eBusiness Intelligence, and Systems Management. We
offer organizations a comprehensive set of solutions to continuously manage and
enhance the success of their eBusinesses, including their Internet
infrastructure, eCommerce strategies, eMarketing activities and to manage their
visitor relationships. Those organizations are investing in and depending on a
growing array of Internet-based systems such as Internet web sites, extranets
and intranets that run on a variety of servers including web servers, email
servers, streaming media servers, proxy servers, database systems and firewalls.
Internet professionals and business managers have discovered that successful
eBusinesses require constant and real-time reporting, analysis and management.
Our integrated, scalable, modular and easy-to-use solutions encompass the
following critical areas:
- eBusiness Intelligence and Visitor Relationship
Management -- Understanding and analyzing the eMarketing and eCommerce
activity on Internet systems.
- eBusiness Systems Management -- Managing the integrity, quality and
availability of Internet-based systems.
- eBusiness Security -- Monitoring, reporting and analyzing the security of
eBusiness infrastructure.
WebTrends' solutions deliver essential information to key departments
across an enterprise, including marketing, sales, executive management,
information services, security, customer service, finance and human resources.
Our solutions are used by thousands of customers such as Internet service
providers (ISPs), Application Service Providers (ASPs), government entities,
educational institutions and corporate clients that include American Express,
Boeing, Ford, AT&T, Cable & Wireless, Comcast, DIGEX, Dow Jones & Company, EDS,
Firstar, IBM, Interliant, Microsoft, NASA, NCR, Pharmacia & Upjohn, PSINet,
Verio, USWeb/CKS, and UUNet.
WebTrends was incorporated in Delaware in 1993 and reorganized in Oregon in
1997. An initial public offering was completed in February 1999, a follow-on
offering was completed in May 1999, and our common stock is listed on the Nasdaq
National Market under the symbol "WEBT." Our locations are as follows:
Executive offices
851 SW Sixth Avenue, Suite 1200
Portland, Oregon 97204
503-294-7025 and 1-888-WEBTRENDS (1-888-932-8736)
Primary web sites
http://www.webtrends.com
http://www.webtrends.net
http://www.webtrendslive.com
AuditTrack, ClusterTrends, CommerceTrends, WebTrends and Visitor
Relationship Management are either registered trademarks or trademarks of
WebTrends Corporation. All other names mentioned herein may be trademarks of
their respective owners.
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INDUSTRY AND MARKET BACKGROUND
The primary factors driving demand for WebTrends' solutions are the growing
use of Internet-based systems and the adoption of Internet technology to conduct
everyday business. Internet server shipments are expected to quadruple from 1.3
million in 1998 to 5 million by 2002 according to a Gartner Group study. At the
same time, the use of Internet-based systems has become much more sophisticated,
evolving rapidly from simple "brochure-ware" to interactive systems that are
critically important to how an organization functions.
Internet strategies and eBusiness systems are becoming operational
imperatives. Their growing corporate importance has moved the overall
responsibility for the success of an organization's Internet strategy from
webmasters to a vice president or director within the organization. These
managers coordinate with a large team that includes editors, producers, IS
personnel, security professionals, marketing managers, partners and interested
representatives from each part of the organization. All of these people, and
potentially hundreds of others across the organization, need detailed
information about how their areas are performing. More importantly, the
organization needs comprehensive information about the overall performance of
their Internet and eBusiness strategies.
While eBusiness strategies and the diverse teams that manage them have
expanded and evolved, so too has the need for management solutions. With
extensive systems and teams in place, the emphasis is shifting from initial
development and deployment to ongoing management and optimization. An
organization's Internet-based systems must stay ahead of the rate of change in
order to maintain a competitive edge. How do organizations ensure and maximize
the success of their eBusiness initiatives when faced with an accelerating rate
of change in markets, competition, and customer preferences? One very effective
way is to create a feedback loop that continuously delivers the status and
results of Internet-based systems to the personnel responsible for their
success.
For many companies, deploying and maintaining such systems is far too
costly in time and capital, so they are increasingly outsourcing these
functions. International Data Corporation projects the application service
provider market to reach $2 billion by 2003 and Forrester Research projects that
within the same time frame, up to one-fifth of total applications revenue could
be from hosted services.
As web sites, intranets, and extranets become more complex, ongoing
management and feedback are needed in many areas. Over time, three key
categories of need have emerged. A successful eBusiness now depends on a
continuous stream of improvements that ensure detailed usage analysis,
fine-tuned quality and performance, and tight security.
Detailed Usage Analysis. Successful Internet and eBusiness strategies
require an understanding of how visitors and customers interact with the
company's Internet site and how various marketing campaigns translate into
bottom line results. Managers need a means of forecasting, tracking and
integrating historical visitor data with other corporate and market databases in
order to optimize their eCommerce revenue and eMarketing return on investment.
Demand will grow for powerful applications that can correlate data from web
sites with customer relationship management and enterprise resource planning
systems and provide comprehensive real-time analysis and reporting.
Fine-tuned Quality, Performance and Reliability. A positive user experience
depends on a well-organized site, with reliable and fast loading web pages and
links that work. Companies hosting various types of transactions on their
Internet and intranet sites depend on multiple systems running constantly,
consistently and reliably. Having any of these systems down for just a few
minutes can cause users to become frustrated and potentially cost thousands of
dollars in lost sales.
Tight Security. As eBusiness systems continue to expand in size and
sophistication, the potential for security holes also increases. Security
professionals need to proactively ensure that their servers and internal
networks are protected.
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THE WEBTRENDS SOLUTION
WebTrends addresses the key eBusiness management needs and the wide variety
of Internet-based systems an eBusiness depends on, including web servers,
firewalls, proxy servers, media servers, email servers, and database systems.
Our solutions fill three broad needs.
eBusiness Intelligence Solutions help customers understand and analyze the
activity of their Internet and intranet systems and correlate this information
with other proprietary information. A wide range of reports show how many people
come to a web site, what they are doing on the site, how much time they are
spending on each page and return on investment for both the site itself and
specific advertising campaigns. Detailed reports allow marketing managers to
increase the effectiveness of advertising and promotional efforts; web designers
to improve usability; content managers to expand areas of interest; business
managers to streamline online processes; and executives to plan strategy.
Significant technology enhancements embedding real-time, online analytical
processing (OLAP) and data mining with current reporting and analysis solutions
will extend these capabilities.
eBusiness Systems Management Solutions are targeted at Internet
professionals that are responsible for integrity and availability of their
eBusiness systems. eBusiness Systems Management helps maximize the quality of
web sites by checking items such as broken links, pages not found, software
syntax problems and page download times. eBusiness Systems Management can
monitor servers, routers, databases and applications running on those systems.
If a problem is detected, automatic recovery routines can be run or personnel
can be automatically alerted via pager or email. Trending and historical reports
can be generated to evaluate device integrity and failure rates. Organizations
can also monitor bandwidth and server requirements.
eBusiness Security Solutions are targeted at Internet-focused security
professionals. eBusiness Security helps monitor and report on firewall activity
internal and external to the organization and detects security vulnerabilities.
Security vulnerabilities can be quickly addressed by following recommended fixes
and hyperlinks to third-party sites where patches are available.
WebTrends adds to the completeness of its solutions with professional
training, a professional services organization and around-the-clock technical
support. The combined effect of eBusiness Intelligence, eBusiness Systems
Management and eBusiness Security is to improve the overall quality and
effectiveness of eBusiness systems. The ongoing improvements derived from these
solutions enhance a company's image, competitiveness, sales, efficiencies and
customer satisfaction.
PRODUCTS AND SERVICES
Products. WebTrends markets the following software suites and stand-alone
products for eBusiness Intelligence, eBusiness Systems Management and eBusiness
Security:
WEBTRENDS COMMERCETRENDS. Introduced in June 1999, our most advanced
eBusiness Intelligence solution includes web site traffic analysis, eCommerce
revenue forecasting, eMarketing return on investment analysis, advertising
campaign management, visitor and buyer qualification, data warehousing and
database integration. Version 2, released in November 1999, provides enhanced
scalability, performance and data warehousing capabilities. Future versions
incorporating OLAP and web housing technology will enable a Visitor Relationship
Management platform.
WEBTRENDS ENTERPRISE REPORTING SERVER. Introduced in March 1999, our
cross-platform (Solaris, Linux, Microsoft Windows NT/2000/98/95), enterprise
scalable web traffic analysis solution for high traffic sites includes remote
management, configuration and customized reporting accessible from any browser
by multiple users and departments. Version 2, released in November 1999,
provides advanced capabilities such as analysis of dynamically created web
sites.
WEBTRENDS ENTERPRISE SUITE. Our most complete solution for web site
management includes web server traffic analysis, media server analysis, proxy
server reporting, link analysis and quality control, and alerting, monitoring
and recovery for unlimited devices. The Enterprise Suite supports large server
clusters.
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WEBTRENDS ENTERPRISE SUITE FOR LOTUS DOMINO. Provides functionality similar
to the WebTrends Enterprise Suite customized for the Lotus Domino system.
WEBTRENDS PROFESSIONAL SUITE. Our most complete solution for single server
web sites includes web site traffic analysis, proxy server reporting, link
analysis and quality control, and alerting, monitoring and recovery for up to 10
devices.
WEBTRENDS LOG ANALYZER. Our award-winning traffic analysis solution.
In December 1999, WebTrends released new versions of WebTrends Enterprise
Suite, WebTrends Enterprise Suite for Lotus Domino, WebTrends Professional Suite
and WebTrends Log Analyzer. Among the new capabilities in these new versions are
improved performance and scalability, enhanced reporting on the paths visitors
take to any specified page on a Web site and analysis of dynamically created Web
sites.
WEBTRENDS FIREWALLS SUITE. Our solution for managing firewalls and virtual
private networks 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. Version 2, released in
February 2000, introduces SurfWatch, which facilitates monitoring of improper
employee Internet use by categories of misuse such as gambling or pornography,
and provides improved scalability.
WEBTRENDS SECURITY ANALYZER. Introduced in January 1999, our premiere
security solution enables managers to discover and fix the latest known security
vulnerabilities on Internet, intranet and extranet servers. Version 3, released
in December 1999, added support for Linux and Solaris systems and greatly
improves security analysis performance by distributing processing tasks.
WEBTRENDS SERVER CLUSTER ADD-ON. Allows users of our proprietary
ClusterTrends technology to enable WebTrends Commerce Trends, WebTrends
Enterprise Reporting Server, WebTrends Enterprise Suite and WebTrends Enterprise
Suite for Lotus Domino to analyze multiple log files created by web servers in a
cluster.
AUDITTRACK FOR NETWARE. A solution to monitor, audit and report on activity
on NetWare servers.
Services. WebTrends provides technical support to its registered users, a
portal site and hosted eBusiness Management services.
PROFESSIONAL SERVICES. In January 1999, we formed a professional services
organization to provide implementation, training and consulting for customers,
certification and training for third-party service providers and resellers, and
management, analysis and reporting services for high-traffic Internet events.
PORTAL SITE FOR INTERNET PROFESSIONALS. Also in 1999, we launched an
Internet portal site for Internet professionals. The site, located at
www.webtrends.net, provides a wide variety of product and industry information,
software products and resources, discussion forums, and other content related to
building and managing web sites.
SERVICES BUSINESS UNIT. In March 2000, WebTrends created an eServices
Business Unit to meet the growing demand for hosted eBusiness Management
Solutions and simultaneously released WebTrends Live 2.0. WebTrends Live is an
eService platform for real-time web site visitor analysis, eCommerce tracking
and eMarketing campaign management designed to serve high volume web sites with
secure, comprehensive reporting and eCommerce tracking. WebTrends Live provides
the ability to correlate eCommerce data with visitor demographics, buyer
behavior and sales cycle analysis while maintaining high standards of privacy
and security.
SALES, MARKETING AND DISTRIBUTION
Our products are sold through our internal corporate sales force, through
an enterprise field sales organization, through national distributors, through
numerous value-added resellers and online from our web site. Our products are
also co-marketed with or integrated and sold with the offerings of our strategic
partners, which include Internet service providers, original equipment
manufacturers, system integrators and others. In 1999, we enhanced our sales
organization by establishing a regional presence in Atlanta, Boston, Chicago,
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Dallas, Houston, New York, San Francisco, and Los Angeles and a national
distribution relationship with Tech Data to complement existing relationships
with Ingram and Merisel. Continued expansion of the international distribution
of our products is one of our corporate objectives.
RESEARCH AND DEVELOPMENT
The focus of product development at WebTrends is to bring new products and
services as well as new versions of existing products to market quickly in order
to keep pace with the rapid evolution of Internet technologies and increasing
customer demands. WebTrends devotes a substantial portion of its resources to
developing new products. Research and development expenses were approximately
$1.1 million in 1997, $2.2 million in 1998 and $3.8 million in 1999.
COMPETITION
We compete in the markets for eBusiness intelligence, eBusiness systems
management and eBusiness security solutions. These markets are intensely
competitive, increasingly subject to rapid changes, and significantly affected
by new product introductions and other activities of market participants. In
addition, these markets are highly fragmented, and our competitors vary
depending upon the needs that our eBusiness solutions address. Today, no single
company offers competing products in all categories.
In the market for eBusiness intelligence solutions, our primary competitors
are Accrue Software Inc. and net.Genesis Corp. In the market for eBusiness
systems management solutions, our primary competitors are IPSwitch, Inc., Geneva
Software, Inc., and Computer Associates. In the market for eBusiness security
solutions, we compete primarily with ISS Group, Network Associates, and BindView
Development Corporation. Although the markets in which we compete are highly
fragmented, we could face additional competition from existing competitors if
any of them were to broaden the scope of their eBusiness solutions by developing
or acquiring additional products or distribution channels. As we introduce new
products and services we will face competition from both established companies
and other new market entrants.
We also compete with vendors of Internet servers, operating systems, and
networking hardware. In particular, Microsoft, Netscape, Sun Microsystems,
Oracle and others bundle Internet management solutions with their Internet
products. We expect this bundling activity to increase in the future. The
bundling of competing products with standard features of operating systems,
Internet servers or networking hardware could render our products obsolete and
unmarketable. Even if the functionality, ease of use, and performance of the
products included with operating systems, Internet servers, or networking
hardware are inferior to that of our products, a significant number of customers
may elect to accept these products instead of purchasing additional software or
services from us.
We believe that additional competitors will continue to enter the market as
the size and visibility of the market opportunity increases. These new market
entrants may include traditional system and network management software
developers.
We also face competition and potential competition from web management
service providers, such as consulting firms, web design firms, Internet audit
firms, site management vendors, Internet service providers, and independent
software vendors. These service providers may use our solutions, our
competitors' solutions, or custom-developed solutions to manage web sites for
their customers who otherwise would have been sale opportunities for us. Some
larger potential customers may rely on their IT departments to internally
develop Internet management solutions.
PROPRIETARY RIGHTS
WebTrends relies on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality and license agreements, to protect our
proprietary rights. We have five U.S. patent applications pending, one of which
has been allowed; three registered U.S. trademarks and 19 U.S. trademark
applications pending, five of which have been allowed; and 22 registered U.S.
copyrights and four U.S. copyright applications pending. We also seek protection
for our intellectual property in other countries where we do
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business. We regard our proprietary rights as critical to our success. Effective
protection for our proprietary rights may not be available in every country in
which we market our products or services.
EMPLOYEES
As of December 31, 1999, we employed 163 persons. None of our employees is
represented by a labor union. We have experienced no work stoppages and believe
our relationships with our employees are good.
RISK FACTORS
The following risk factors and other information included in this report
should be carefully considered. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
WebTrends Has a Limited Operating History and May Not Remain
Profitable. WebTrends was formed in August 1993, and we introduced our first
Internet product in February 1996. Due to our limited operating history, any
evaluation of our business and our prospects must be in light of the risks and
uncertainties often encountered by companies in their early stages of
development. These risks and uncertainties are particularly significant for
companies in rapidly evolving markets, such as the market for Internet products
and services. In addition, although our revenue has increased in recent periods
while we maintained profitability, our revenue may not grow in future periods,
may not grow at past rates, and we may not maintain profitability on a quarterly
or annual basis, or at all.
Fluctuations in Our Operating Results May Make it Difficult to Predict Our
Future Performance and May Result in Volatility in the Market Price of Our
Common Stock. We may experience significant fluctuations in our operating
results. In particular, as we focus increasingly on sales of our product suites
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 may vary significantly in the future and that
quarter-to-quarter comparisons of our operating results may not be meaningful.
You should therefore not rely on the results of one quarter as an indication of
future performance. Our future operating results may fall below the expectations
of securities analysts or investors, which would likely cause the trading price
of our common stock to decline.
We May Not Be Able to Develop Acceptable New Products, Services or
Enhancements to Our Existing Products at the Rate Required by Our Rapidly
Changing Market. Our future success depends upon our ability to address the
rapidly changing needs of our customers by developing and introducing high
quality products, product enhancements, and services on a timely basis and by
keeping pace with technological developments and emerging industry standards.
The market for our products is in the early stage of development and is rapidly
evolving. As is common in such new and rapidly evolving industries, demand and
market acceptance for recently introduced products are subject to high levels of
uncertainty and risk. Furthermore, new products can quickly render obsolete
products that were only recently in high demand.
New Products and Services May Present Additional and Unanticipated
Risks. As we introduce new products and services such as hosted services on-line
we may encounter risks not present in our current business. We must anticipate
and manage these risks which may include new regulations, competition,
technological requirements and our own ability to deliver or maintain reliable
services to our customers or partners. Failure to do so may result in
unrecovered costs, loss of market share or adverse publicity.
The Intense Competition in Our Markets May Lead to Reduced Sales of Our
Products and Reduced Profits. The markets for our products are intensely
competitive and are likely to become even more
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competitive. Increased competition could result in pricing pressures, reduced
sales, reduced margins, or the failure of our products to achieve or maintain
market acceptance. Each of 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 eBusiness 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.
Failure to Expand Our Sales Operations and Channels of Distribution Would
Limit Our Growth. In order to maintain and increase our current and future
market share and revenue, we will need to continue to develop our direct and
indirect sales operations and channels of distribution. We need to continue to
expand our relationships with domestic and international channel partners,
distributors, value-added resellers, systems integrators, online and other
resellers, Internet service providers, original equipment manufacturers and
other partners to build our indirect sales channel. We must also continue to
expand and maintain strategic relationships with key hardware and software
vendors, distribution partners and customers. In addition, to maintain and
improve our results from operations, we must increase the number of products
that each of our customers licenses. This may require an increasingly
sophisticated sales effort targeted at both management personnel associated with
a prospective customer's Internet capabilities and other functional managers
throughout the organization.
Our Reliance on Indirect Distribution Channels Could Result in a Reduction
in Our Revenue, Because We Have Less Control Over Sales by Our Channel Partners
Than Our Own Direct Sales. We are continuing to distribute our products through
various indirect channels of distribution, including channel partners, value-
added resellers, distributors, resellers, original equipment manufacturers,
Internet service providers and others. We cannot predict the extent to which any
of these channel partners will be successful in marketing or distributing our
Internet management solutions. Many of these channel partners also market and
sell competitive products. We may not be able to effectively manage potential
conflicts among the various channel partners or prevent them from devoting
greater resources to supporting the products of other companies. In addition,
Network Trade, a third-party export management company, has the primary
responsibility for identifying international distributors, resellers and
value-added resellers for our products. Accordingly, any disruption in our
relationship with Network Trade, which may be terminated by either party with 30
days' notice, could materially slow our international sales growth. Reliance on
indirect channels of distribution may subject us to greater credit risk because
the revenue from sales of our products to distributors and other channel
partners flows first through the distributors, and then to us. In particular,
Network Trade, while not technically a distributor, collects payments from our
international resellers and then forwards those payments to us, presenting a
similarly increased credit risk.
The Loss of Our Senior Management or Other Key Personnel or Our Failure to
Attract Additional Personnel Could Adversely Affect Our Business. Our success
depends largely upon the continued services of our executive officers and other
key management and development personnel. The loss of the services of one or
more of our executive officers, engineering personnel, or other key employees
could have a material adverse effect on our business, results of operations, and
financial condition. In particular, we rely on Elijahu Shapira, Chief Executive
Officer and Chairman of the Board; W. Glen Boyd, President, Chief Technical
Officer and director; James T. Richardson, Senior Vice President and Chief
Financial Officer and Daniel J. Meub, Chief Operating Officer. Messrs. Shapira,
Boyd, Richardson and Meub 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 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
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unable to attract, assimilate, or retain additional highly qualified personnel
in the future. Additionally, we attempt to hire engineers with high levels of
experience in designing and developing software and Internet-related products in
time-pressured environments. There is a limited number of qualified engineers in
our geographic location, resulting in intense competition for the services of
such engineers.
The Strain that Our Growth Rate Places Upon Our Systems and Management
Resources May Adversely Affect Our Business. The rapid growth that we have
experienced places significant challenges on our management, administrative and
operational resources. To properly manage this growth, we must, among other
things, implement and improve additional and existing administrative, financial
and operational systems, procedures and controls on a timely basis. We will also
need to expand our finance, administrative, and operations staff. We may not be
able to complete the necessary improvements to our systems, procedures and
controls necessary to support our future operations in a timely manner.
Management may not be able to hire, train, retain, motivate and manage required
personnel and may not be able to successfully identify, manage and exploit
existing and potential market opportunities. In connection with our expansion,
we plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support, and improve
operational and financial systems. Failure of our revenue to increase along with
these expenses during any fiscal period could have a materially adverse impact
on our financial results for that period.
WebTrends' International Sales Could Decrease for Reasons Additional to
Those Affecting Domestic Sales. Our international operations are subject to the
risks inherent in international business activities, including, in particular
management of an organization spread over various countries; longer accounts
receivable payment cycles and other collection difficulties, such as
difficulties obtaining and enforcing judgments against delinquent customers;
compliance with a variety of foreign laws and regulations; foreign currency
exchange rate fluctuations; import and export licensing requirements; trade
restrictions, changes in tariffs, and freight rates; and regional economic
conditions.
Our Ability to Secure, Protect and Expand Our Network and Data Center Is
Increasingly Important to Our Current and Future Business. We must protect our
network infrastructure and equipment against damage from human error, physical
or electronic security breaches, power loss and other facility failures, fire,
earthquake, flood, telecommunications failure, sabotage, vandalism and similar
events. Despite precautions we have taken, a natural disaster or other
unanticipated problems could result in interruptions in our services or
significant damage. In addition, failure of any of our telecommunications
providers to provide consistent data communications capacity could result in
interruptions in our services and thus in our ability to provide service to our
customers. Additionally, we must continue to expand and adapt our network to
satisfy our internal and customer requirements. We are dependent upon certain
telecommunications providers for our backbone capacity and it may be difficult
to quickly increase this capacity in light of the lead times in the industry.
We May Be Unable to Protect Our Intellectual Property. We regard
substantial elements of our Internet management solutions as proprietary and
attempt to protect them by relying on patent, trademark, service mark, trade
dress, copyright and trade secret laws and restrictions, as well as
confidentiality procedures and contractual provisions. Any steps we take to
protect our intellectual property may be inadequate, time consuming and
expensive. Furthermore, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property. We
have five U.S. patent applications pending, one of which has been allowed, three
registered U.S. trademarks and 19 U.S. trademark applications pending, five of
which have been allowed; and 22 registered U.S. copyrights and four U.S.
copyright applications pending. We also seek protection for our intellectual
property in other countries where we do business. These or any new patent,
trademark or copyright applications may not result in issued patents, trademarks
or copyrights 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 made available through
the Internet. Furthermore, our competitors may independently develop similar
technology that substantially limits the value of our intellectual property.
10
<PAGE> 11
Others May Bring Infringement Claims Against Us. In addition to the
technology we have developed internally, we also use code libraries developed
and maintained by third parties and have acquired or licensed technologies from
other companies. Our internally developed technology, the code libraries, or the
technology we acquired or licensed may infringe on a third party's intellectual
property rights and such third parties may bring claims against us alleging
infringement of their intellectual property rights. In recent years, there has
been significant litigation in the United States involving patents and other
intellectual property rights. In 1999, we were involved in such a dispute with
WebSideStory, Inc., which dispute was settled in January 2000. We are not
currently involved in any intellectual property litigation. We may, however, be
a party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of others' intellectual property. Such claims
and any resulting litigation could subject us to significant liability for
damages and invalidation of our proprietary rights. Such litigation, regardless
of its success, would likely be time-consuming and expensive to defend and would
divert management time and attention. Any potential intellectual property
litigation could also force us to do one or more of the following: cease
selling, incorporating, or using products or services that incorporate the
challenged intellectual property; obtain from the holder of the infringed
intellectual property right a license to sell or use the relevant technology,
which license may not be available on reasonable terms, or at all; and redesign
those products or services that incorporate such technology.
Evolving Regulation of the Internet May Affect Us Adversely. As Internet
commerce continues to evolve, increasing regulation by federal, state, or
foreign agencies becomes more likely. Such regulation is likely in the areas of
user privacy, pricing, content, advertising, intellectual property rights,
information security, privacy and quality of products and services. Taxation of
Internet use, or other charges imposed by government agencies or by private
organizations for accessing the Internet, may also be imposed. Laws and
regulations applying to the solicitation, collection, or processing of personal
or consumer information could affect our activities.
Privacy and Security Concerns May Limit the Effectiveness of and Reduce the
Demand for Our Solutions. The effectiveness of our products relies on the use of
data collected from web sites and future products may combine this information
with data collected from various other sources. Our customers' use of such data
for profiling may raise privacy and security concerns. Should regulators or
Internet users choose to restrict the use of customer profiling technologies
some of our solutions would be less useful to our customers and thus sales and
profits could be adversely affected.
Our Success Depends on Continued Use and Expansion of the Internet and
Internet-based systems. The rapid growth of the Internet is a recent phenomenon.
The growth of our revenues is dependent upon the continued adoption of the
Internet as a medium for communication and commerce. In addition, the Internet
infrastructure must continue to evolve in order to handle increased levels of
Internet activity, security, reliability, cost, ease of use, accessibility and
quality of service.
Product Defects and Service Interruptions Could Lead to Loss of Customers
and to Product Liability Claims That Would Require Considerable Effort and
Expense to Defend. The occurrence of errors or failures in our products or
interruptions of service at our data center could result in adverse publicity,
loss of or delay in market acceptance, or claims by customers against us. Our
products and on-line services are used to monitor the activity levels of our
customers' Internet sites, to provide real-time monitoring of firewalls, and to
provide real-time monitoring, alerting and recovery of Internet servers. These
and other functions that our products provide are often critical to our
customers, especially in light of the considerable resources many organizations
spend on the development and maintenance of their web sites. Additionally, our
security products often contribute to vital protection of a company's internal
systems and information. Our end-user licenses contain provisions that limit our
exposure to product liability claims, but these provisions may not be
enforceable in all jurisdictions. Additionally, we maintain limited product
liability insurance. Our products and product enhancements are very complex and
may from time to time contain errors or result in failures that we did not
detect or anticipate when introducing such products or enhancements to the
market. The computer hardware environment is characterized by a wide variety of
non-standard configurations that make pre-release testing for programming or
compatibility errors very difficult and time consuming. Despite our testing,
errors may still be discovered in some new products or enhancements after the
products or enhancements are delivered to customers.
11
<PAGE> 12
If Our Internal Professional Services Organization Does Not Provide
Training or Implementation Services Effectively and According to Schedule, Our
Revenues and Profitability May be Harmed. Customers that license our products
may require consulting, implementation, maintenance and training services from
our internal professional services organization. If our professional services
organization does not effectively implement or support our products or if we are
unable to expand our professional services organization as needed to meet our
customer needs, our ability to sell our solutions may be reduced and we may
suffer adverse publicity. When we sell licenses and professional services for
implementation and training we recognize revenue as we perform the
implementation. Thus, delays in providing the complementary services will delay
recognition of revenue.
The Market Price for Our Common Stock, Like Other Technology Stocks, Has
Been and May Continue to Be Volatile. The market price of our common stock has
been highly volatile and has experienced wide fluctuations. We expect our stock
price will continue to fluctuate. The value of an investment in WebTrends could
decline due to the impact of any of the following factors upon the market price
of WebTrends common stock: variations in our actual and anticipated operating
results; changes in our earnings estimates by analysts; our failure to meet
analysts' performance expectations; and lack of liquidity.
The stock markets have, in general, and with respect to Internet companies
in particular, recently experienced stock price and volume volatility that has
affected companies' stock prices. The stock markets may continue to experience
volatility that may adversely affect the market price of our common stock. Stock
prices for many companies in the technology and emerging growth sector have
experienced wide fluctuations that have often been unrelated to the operating
performance of such companies. Fluctuations such as these may affect the market
price of our common stock.
Significant Fluctuation in the Market Price of Our Common Stock Could
Result in Securities Class Action Claims Against Us. Securities class action
claims have been brought against issuing companies in the past after volatility
in the market price of a company's securities. Such litigation could be very
costly and divert our management's attention and resources, and any adverse
determination in such litigation could also subject us to significant
liabilities.
EXECUTIVE OFFICERS
The executive officers of WebTrends, and their ages and positions as of
February 29, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Elijahu Shapira 34 Chairman of the Board and Chief Executive Officer
W. Glen Boyd 32 President, Chief Technical Officer and Director
James T. Richardson 52 Senior Vice President, Chief Financial Officer, and
Secretary
Daniel J. Meub 46 Chief Operating Officer
</TABLE>
There are no family relationships among any of the directors or executive
officers of WebTrends.
Elijahu Shapira is a co-founder of WebTrends and has served as its Chief
Executive Officer since December 1997 and as a director since September 1993.
From September 1994 to November 1995 and from November 1996 to December 1998, he
served as its Vice President and Secretary. Mr. Shapira has 15 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
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<PAGE> 13
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' Senior Vice President since
April 1999, Vice President and Chief Financial Officer since July 1998 and
Secretary since December 1998. From April 1994 to December 1997, Mr. Richardson
served as the Senior Vice President of Corporate Operations and Chief Financial
Officer of Network General, a producer of networking software that merged with
McAfee Associates in December 1997 to form Network Associates. From July 1992 to
April 1994, Mr. Richardson served as the Vice President of finance and Chief
Financial Officer of Logic Modeling Corporation, an electronic design automation
software company that merged with Synopsys, Inc. in February 1994. From November
1989 to June 1992, Mr. Richardson served as the Vice President of Finance and
Administration and as Chief Financial Officer of Advanced Logic Research, a
manufacturer of personal computers. Mr. Richardson has served in various
management positions in the high-technology industry since 1977.
Daniel J. Meub has served as WebTrends' Chief Operating Officer since
February 2000. From April 1999 until February 2000, he was WebTrends' Senior
Vice President of Marketing and Sales. From December 1998 until April 1999, he
was WebTrends' Vice President of Marketing. From December 1996 to October 1998,
Mr. Meub served as the President and Chief Executive Officer of Adaptive
Solutions Inc., a supplier of forms processing software and imaging solutions
for the health care and governmental markets that filed a voluntary petition
under Chapter 7 of the United States Bankruptcy Code due to insolvency. From
January 1995 to November 1996, Mr. Meub served as the Executive Vice President
of Marketing and Product Development of Now Software Inc., a supplier of time
management and utility software. From February 1993 to June 1994, Mr. Meub
served as the Vice President/General Manager of the Desktop Product Group of
Central Point Software. From November 1991 to February 1993, Mr. Meub served as
the Vice President of Marketing and Development of Calera Recognition Systems, a
character recognition software development company. Mr. Meub has served in a
variety of sales and marketing roles since 1976.
ITEM 2. PROPERTIES
We currently lease approximately 52,000 square feet of office space in
Portland, Oregon. The lease expires in January 2004, with an option to renew for
five additional years. We also lease office space for sales and support
personnel in Houston.
ITEM 3. LEGAL PROCEEDINGS
In November 1999, WebSideStory, Inc. filed a lawsuit in the United States
District Court for the Southern District of California against WebTrends,
alleging that our introduction of our WebTrendsLive service constituted
copyright infringement, trade dress infringement and unfair competition.
WebSideStory requested the following relief: damages, injunctive relief and
attorneys' fees. The court granted a temporary restraining order that required
WebTrends to withdraw the WebTrendsLive service from the Internet. The parties
reached a settlement which was not material to our operations or financial
position in January 2000 and the case was dismissed. The WebTrendsLive service
was relaunched in March.
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently involved in
any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market System under the
symbol WEBT. The following table sets forth the high and low closing sales
prices for our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
---------------------------- ------ ------
<S> <C> <C>
First Quarter (from February 19)................... $26.75 $12.00
Second Quarter..................................... $36.00 $12.63
Third Quarter...................................... $23.88 $14.69
Fourth Quarter..................................... $49.28 $19.13
</TABLE>
As of February 29, 2000, our common stock was held by an estimated 10,100
shareholders with 55 shareholders of record.
We have never declared or paid any cash dividends. We currently intend to
retain our earnings, if any, for developing our business. Accordingly, we do not
anticipate paying any cash dividends in the foreseeable future.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report. Historical results are not necessarily indicative of future
results.
The selected financial data and balance sheet data presented below for each
of the years in the five year period ended December 31, 1999 have been derived
from the audited financial statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue.................................. $ 637 $ 1,865 $ 4,055 $ 8,008 $19,726
Operating income......................... 168 398 427 222 1,370
Net income(1)............................ 169 405 287 219 2,736
Net income per share:
Basic.................................. .02 .01 .12
Diluted................................ .02 .01 .11
Weighted average shares:
Basic.................................. 16,252 16,421 23,538
Diluted................................ 16,252 18,044 25,976
Pro forma net income(1).................. 111 265
Pro forma net income per share -- basic
and diluted............................ .01 .02
Shares used in pro forma net income per
share calculation -- basic and
diluted................................ 15,600 15,600
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1995 1996 1997 1998 1999
---- ----- ------------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.................. $179 $ 321 $ 807 $1,099 $28,898
Working capital (deficit).................. 319 (103) 260 221 76,099
Total assets............................... 365 910 1,886 3,362 90,235
Long-term obligations...................... 72 -- 7 -- --
Total shareholders' equity................. 267 47 584 842 80,536
</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.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that involve risks and
uncertainties that may cause actual results to differ materially from those
predicted in the forward-looking statements. In particular, there are
forward-looking statements concerning our expectations for operating expenses
and liquidity and capital resources. Forward-looking statements can be
identified by their use of such verbs as "expects," "anticipates," "believes,"
or similar terms. If any of our assumptions on which the statements are based
prove incorrect or should unanticipated circumstances arise, our actual results
could materially differ from those anticipated by such forward-looking
statements. The differences could be caused by a number of factors or
combination of factors, including, but not limited to, the risks detailed in the
section of this report entitled "Business -- Risk Factors."
RESULTS OF OPERATIONS
WebTrends will continue to develop and launch new products and services to
provide innovative, comprehensive solutions for a very rapidly evolving segment
of the market. Revenue growth may vary from our historical trends due to the
rate of new introductions. The related direct costs associated with products and
services sold may also vary as a percent of revenue and may not follow a
predictable trend based on historical performance.
Revenue
Total revenue increased 146.3% to $19.7 million for 1999 from $8.0 million
for 1998, and $4.1 million for 1997. Primary contributing factors for these
changes are discussed below.
SOFTWARE LICENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 CHANGE 1998 CHANGE 1999
------ ------ ------ ------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Software Licenses..................... $3,837 87.8% $7,206 129.3% $16,523
Percent of Revenues................... 94.6% 89.9% 83.8%
</TABLE>
We continue to benefit from a very strong market for Internet
infrastructure products and the strategic contribution of our solutions to our
customers' eBusiness success. Software license revenue increased as a result of
strong growth across each of the eBusiness Intelligence Solutions, eBusiness
System Management Solutions and eBusiness Security Solutions product lines
introduced in the second quarter of 1998. The January 1999 introduction of
Enterprise Reporting Server products for multiple operating systems contributed
significantly to the growth of the eBusiness Intelligence Solutions line of
products. The Enterprise Server Cluster product, introduced in the fourth
quarter of 1998 to the eBusiness System Management Solutions product line,
contributed significantly to the line's growth.
SUPPORT AND SERVICES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 CHANGE 1998 CHANGE 1999
---- ------ ----- ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Support and Services..................... $218 267.9% $ 802 299.4% $3,203
Percent of Revenues...................... 5.4% 10.0% 16.2%
</TABLE>
16
<PAGE> 17
The increase in support and services revenue resulted primarily from
increased subscription revenue derived from continued growth in the installed
base of customers, and the sale of consulting, training, support and services,
programs initiated during the second half of 1998.
Cost of Revenue
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 CHANGE 1998 CHANGE 1999
---- ------ ---- ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of Revenue........................... $292 116.8% $633 153.4% $1,604
Percent of Revenues....................... 7.2% 7.9% 8.1%
</TABLE>
Cost of revenue includes costs associated with providing technical support
and consulting services to customers, product packaging, software documentation,
duplication, labor, and other costs associated with product fulfillment, and
royalties associated with the sale of WebTrends' products. The increase in cost
of revenue resulted primarily from hiring customer support and professional
services personnel to meet demand from a larger customer base and to manage and
perform consulting and training services.
Operating Expenses
We continue to believe that strategic investment in all areas of our
business is required, and we anticipate that expenses will increase in absolute
dollars in future periods. Expenses in each category may vary as a percent of
revenues and relative to one another as we continue to take advantage of
strategic hiring and investing opportunities.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 CHANGE 1998 CHANGE 1999
------ ------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Research and Development............... $1,059 108.8% $2,211 72.8% $3,820
Percent of Revenues.................... 26.1% 27.6% 19.4%
</TABLE>
Research and development expenses consist primarily of salaries and related
costs associated with developing new products, enhancing existing products and
performing quality assurance and documentation activities. The increase in such
expenses in absolute dollars is primarily attributable to increasing the number
of research and development employees over the periods presented. Research and
development expenses decreased as a percentage of total revenue due to the rapid
growth in total revenue and our ability to build our enterprise sales force
during the period. We continue to believe that significant investment in
research and development is required to remain competitive in our markets, and
anticipate that research and development expenses will increase in absolute
dollars in future periods, but may vary as a percent of total revenue.
SALES AND MARKETING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 CHANGE 1998 CHANGE 1999
------ ------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales and Marketing.................... $1,527 138.5% $3,642 173.7% $9,967
Percent of Revenues.................... 37.7% 45.5% 50.5%
</TABLE>
The increase in sales and marketing expense is primarily attributable to
the cost of hiring and maintaining additional sales and marketing personnel,
including employees to expand the direct sales force and to support indirect
distribution channels. We expect that sales and marketing expenses will continue
to increase in
17
<PAGE> 18
absolute dollars as we continue to expand our marketing programs and sales force
to increase brand awareness, but may vary as a percent of total revenue.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 CHANGE 1998 CHANGE 1999
---- ------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
General and Administrative.............. $749 73.7% $1,301 127.9% $2,965
Percent of Revenues..................... 18.5% 16.2% 15.0%
</TABLE>
General and administrative expenses consist primarily of salaries and other
employee-related costs for executive, financial, human resources and
infrastructure personnel. Legal and accounting services, and insurance and
general facility costs are also included in general and administrative expenses.
The increase in absolute dollars is primarily attributable to our growth and
expansion, which includes hiring additional accounting and administration
personnel and expanding infrastructure and facilities. WebTrends expects general
and administrative expenses will continue to increase in absolute dollars to
support the anticipated expansion of sales and operations, but may vary as a
percent of total revenue.
Other Income, Net
Other income, net for 1997, 1998 and 1999 was $10,411, $28,886 and $2.9
million, respectively. The increase in 1999 is primarily attributable to
interest income on investment of funds received from the initial and follow-on
public offerings in February and May of 1999.
Income Taxes
Income tax provisions for 1997, 1998 and 1999 reflect effective tax rates
of 34.4%, 12.5% and 36.3%, respectively. The increase in the effective rate for
1999 is primarily attributable to research and development credits that were
fully utilized in 1998.
YEAR 2000 ISSUES
As a result of its Year 2000 readiness efforts, WebTrends' mission critical
internal systems successfully distinguished between the year 1900 and the year
2000, without any application failures. We are not aware of any Year 2000 issues
experienced by our customers with any of our products, and have not seen any
problems arising from suppliers experiencing Year 2000 issues. However, we will
continue to monitor throughout the year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
LIQUIDITY AND CAPITAL RESOURCES
WebTrends had cash and cash equivalents and investments of $79.3 million at
December 31, 1999, which represents our primary source of liquidity, and working
capital of approximately $76.1 million.
Our primary market risk exposure is the impact of interest rate
fluctuations on interest income earned on our investment portfolio. The risks
associated with market, liquidity and principal are mitigated by investing in
high-credit quality securities and limiting concentrations of issuers and
maturity dates. Derivative financial instruments are not part of our investment
portfolio. We have no debt instruments or credit facilities, because our line of
credit expired in April 1999 and has not been renewed.
Cash and cash equivalents and investments increased by $78.2 million during
1999, primarily as a result of cash generated by financing and operating
activities. We received approximately $74.7 million from the completion of our
initial and follow-on public offerings in February and May of 1999 and the
exercise of stock options. Net cash provided by operating activities was
approximately $7.9 million for 1999, and resulted primarily from profitable
operations and increased deferred revenues and accrued liabilities, partially
offset by increased accounts receivable for the periods indicated. Cash used by
investing activities, net of the purchase
18
<PAGE> 19
of short-term investments, was approximately $2.3 million for 1999, consisting
primarily of purchased computer equipment and furniture and fixtures related to
increased personnel.
While increasing in absolute dollars, for the year ended December 31, 1999,
operating expenses decreased as a percentage of revenue to 84.9%, from 89.3% for
the same period in 1998. Since inception, we have continued to increase our
operating expenses in terms of absolute dollars. We anticipate that we will
continue to reinvest revenues in operating expenses for the foreseeable future,
and that these expenses plus capital expenditures will constitute a material use
of cash resources. Additionally, we may utilize cash resources to fund
acquisitions or investments in businesses, technologies or product lines that
are complementary to our business. We believes that our current cash and cash
equivalents, short-term investments and funds expected to be generated from
operations will satisfy our anticipated working capital and other cash
requirements for at least the next 12 months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the risk of change in the value of short-term
investments and financial instruments caused by fluctuations in investment
prices, interest rates and foreign currency exchange rates.
All of our transactions are denominated in U.S. dollars. For this reason,
we do not have significant exposure to foreign exchange rate fluctuations.
WebTrends has not entered into any derivative financial instruments to
manage interest rate risk or for speculative purposes and is not currently
evaluating the future use of such financial instruments.
We follow established policies and procedures to manage exposure to changes
in the interest rate and market risks of our investments. Due to the short-term
maturities of our investments, management has determined that the fair value
does not differ materially from the carrying amount and that the market risk
arising from our holdings at December 31, 1999 is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 20
Balance Sheets.............................................. 21
Statements of Operations.................................... 22
Statements of Shareholders' Equity.......................... 23
Statements of Cash Flows.................................... 24
Notes to Financial Statements............................... 25
</TABLE>
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors
WebTrends Corporation:
We have audited the accompanying balance sheets of WebTrends Corporation as
of December 31, 1998 and 1999, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1998 and 1999, and the results of its operations, and its cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Portland, Oregon
January 21, 2000
20
<PAGE> 21
WEBTRENDS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $1,098,847 $29,397,650
Short-term investments.................................... -- 49,885,523
Accounts receivable, net.................................. 977,577 4,968,544
Inventories............................................... 62,115 63,889
Prepaid expenses.......................................... 190,530 980,730
Deferred offering costs................................... 255,394 --
Deferred taxes............................................ 157,500 502,500
---------- -----------
Total current assets.............................. 2,741,963 85,798,836
Property and equipment, net................................. 598,407 2,375,750
Deferred taxes, net and other............................... 22,016 2,060,662
---------- -----------
Total assets...................................... $3,362,386 $90,235,248
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 383,187 $ 1,161,679
Accrued liabilities....................................... 385,233 1,481,225
Accrued compensation...................................... 508,422 2,552,863
Accrued sales tax......................................... 268,533 83,427
Accrued income taxes...................................... -- 297,397
Deferred revenue.......................................... 824,013 4,122,882
Notes payable to shareholders............................. 151,103 --
---------- -----------
Total liabilities................................. 2,520,491 9,699,473
---------- -----------
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 16,421,054
and 25,817,568......................................... 260,000 77,661,491
Common stock, Class B non-voting, no par value Authorized
30,000,000 shares; 16,874 and -0- shares issued and
outstanding............................................ 589,694 --
Deferred compensation, net................................ (551,534) (405,391)
Retained earnings......................................... 543,735 3,279,675
---------- -----------
Total shareholders' equity........................ 841,895 80,535,775
---------- -----------
Total liabilities and shareholders' equity........ $3,362,386 $90,235,248
========== ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE> 22
WEBTRENDS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Software licenses................................. $ 3,836,657 $ 7,206,461 $16,523,352
Support services.................................. 218,233 801,963 3,202,500
----------- ----------- -----------
Total revenue............................. 4,054,890 8,008,424 19,725,852
Cost of revenue..................................... 292,268 632,925 1,604,208
----------- ----------- -----------
Gross margin.............................. 3,762,622 7,375,499 18,121,644
----------- ----------- -----------
Operating expenses:
Research and development.......................... 1,059,439 2,211,029 3,819,760
Sales and marketing............................... 1,526,889 3,641,965 9,966,717
General and administrative........................ 748,832 1,300,626 2,965,278
----------- ----------- -----------
Total operating expenses.................. 3,335,160 7,153,620 16,751,755
----------- ----------- -----------
Income from operations.................... 427,462 221,879 1,369,889
----------- ----------- -----------
Other income (expense):
Interest income................................... 21,769 41,997 2,993,894
Interest expense.................................. (11,358) (13,111) (67,101)
----------- ----------- -----------
Other income, net......................... 10,411 28,886 2,926,793
----------- ----------- -----------
Income before income taxes................ 437,873 250,765 4,296,682
Income taxes........................................ 150,500 31,305 1,560,742
----------- ----------- -----------
Net income................................ $ 287,373 $ 219,460 $ 2,735,940
=========== =========== ===========
Net income per share:
Basic..................................... $ 0.02 $ 0.01 $ 0.12
=========== =========== ===========
Diluted................................... $ 0.02 $ 0.01 $ 0.11
=========== =========== ===========
Weighted average shares:
Basic..................................... 16,252,346 16,421,302 23,538,136
Diluted................................... 16,252,346 18,044,154 25,975,868
</TABLE>
See accompanying notes to financial statements.
22
<PAGE> 23
WEBTRENDS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
COMMON STOCK, CLASS A CLASS B
------------------------ ------------------- DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS TOTAL
---------- ----------- ------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996......... 15,600,000 $ 10,000 -- $ -- $ -- $ 36,902 $ 46,902
Sale of common stock............... 821,054 250,000 -- -- -- -- 250,000
Net income......................... -- -- -- -- -- 287,373 287,373
---------- ----------- ------- --------- --------- ---------- -----------
Balance, December 31, 1997......... 16,421,054 260,000 -- -- -- 324,275 584,275
Deferred compensation.............. -- -- -- 584,575 (584,575) -- --
Amortization of deferred
compensation..................... -- -- -- -- 33,041 -- 33,041
Exercise of stock options.......... -- -- 16,874 5,119 -- -- 5,119
Net income......................... -- -- -- -- -- 219,460 219,460
---------- ----------- ------- --------- --------- ---------- -----------
Balance, December 31, 1998......... 16,421,054 260,000 16,874 589,694 (551,534) 543,735 841,895
Conversion of Common B to Common
A................................ 16,874 589,694 (16,874) (589,694) -- -- --
Shares issued in public
offerings........................ 8,500,000 73,743,261 -- -- -- -- 73,743,261
Amortization of deferred
compensation..................... -- -- -- -- 146,143 -- 146,143
Shares issued pursuant to benefit
plans............................ 879,640 3,068,536 -- -- -- -- 3,068,536
Net income......................... -- -- -- -- -- 2,735,940 2,735,940
---------- ----------- ------- --------- --------- ---------- -----------
Balance, December 31, 1999......... 25,817,568 $77,661,491 -- $ -- $(405,391) $3,279,675 $80,535,775
========== =========== ======= ========= ========= ========== ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 24
WEBTRENDS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 287,373 $ 219,460 $ 2,735,940
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 88,375 206,417 523,738
Provision for doubtful accounts................. 32,705 43,548 190,000
Loss on sale of assets.......................... -- 293 41,762
Amortization of deferred compensation........... -- 33,041 146,143
Changes in assets and liabilities:
Accounts receivable........................... (149,443) (494,484) (4,180,967)
Inventories................................... (76,027) 27,020 (1,774)
Prepaid expenses.............................. (26,209) (403,925) (534,806)
Other assets.................................. (83,593) (90,484) (126,702)
Accounts payable.............................. 165,269 139,357 778,492
Accrued liabilities........................... 31,273 325,922 1,095,991
Accrued compensation.......................... 97,719 342,617 2,044,441
Accrued sales tax............................. 155,137 113,396 (185,106)
Accrued income taxes.......................... 24,548 (24,548) 2,062,747
Accrued interest.............................. 5,503 (8,606) (1,103)
Deferred revenue.............................. 255,481 436,939 3,298,869
--------- ---------- ------------
Net cash provided by operating
activities............................... 808,111 865,963 7,887,665
--------- ---------- ------------
Cash flows from investing activities:
Acquisition of property and equipment.............. (269,533) (479,151) (2,342,843)
Purchase of investments............................ -- -- (51,945,466)
--------- ---------- ------------
Net cash used for investing activities..... (269,533) (479,151) (54,288,309)
--------- ---------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 250,000 5,119 73,743,261
Stock issued pursuant to benefit plans............. -- -- 1,106,186
Dividend payments to shareholders.................. (482,882) -- --
Principal payments on borrowings from
shareholders.................................... (70,000) (100,000) (150,000)
Borrowings from shareholders....................... 250,000 -- --
--------- ---------- ------------
Net cash (used for) provided by financing
activities............................... (52,882) (94,881) 74,699,447
--------- ---------- ------------
Increase in cash and cash equivalents...... 485,696 291,931 28,298,803
Cash and cash equivalents, beginning of year......... 321,220 806,916 1,098,847
--------- ---------- ------------
Cash and cash equivalents, end of year............... $ 806,916 $1,098,847 $ 29,397,650
========= ========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................ $ 5,855 $ 21,717 $ 25,339
Income taxes.................................... $ 208,000 $ 155,500 $ 94,300
</TABLE>
See accompanying notes to financial statements.
24
<PAGE> 25
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
WebTrends Corporation is a leading developer and provider of enterprise
solutions for Visitor Relationship Management, eBusiness Intelligence, and
eBusiness Systems Management. WebTrends offers integrated scalable software
solutions and professional services addressing key eBusiness management needs
and a wide variety of Internet-based systems including web servers, firewalls,
proxy servers, media servers, email servers and database systems. Products are
sold through internal corporate and enterprise field sales, distributors,
resellers and online from our web site and are also available as a hosted
application.
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 these estimates.
Cash, Investments and Cash Equivalents
The Company classifies highly liquid investments purchased with an original
maturity of three months or less as cash equivalents. Short and long term
investments consist of certificates of deposit, commercial paper and other
highly liquid investments with original maturities in excess of three months,
and primarily less than one year. All investments are classified assuming they
will be held to maturity and are recorded at amortized cost, which approximates
market value.
Accounts Receivable
Accounts receivable are shown net of allowance for doubtful accounts of
$40,000 and $230,000 at December 31, 1998 and 1999, respectively. Charges
against the reserve were $23,000, $29,000 and $240,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of individual assets 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 expensed as incurred. When depreciable
properties are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting gain or
loss is reflected in operations.
Revenue Recognition
The Company's revenue recognition policies are in compliance with all
applicable accounting regulations, including American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, and SOP 98-9, Modification of SOP 97-2, With Respect to Certain
Transactions.
Software license revenue, consisting of fees for licenses of WebTrends'
software products, 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.
25
<PAGE> 26
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. WebTrends has also entered
into agreements with a limited number of large domestic distributors. These
agreements offer expanded rights of return and price protection beyond the
Company's normal reseller agreements. For these distributors, WebTrends
recognizes revenues upon sale from the distributor to a third party or end user
until a returns history can be established. Sales to International resellers are
managed by a third-party export management company and revenue is recognized
upon sale 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 give the subscriber the right to obtain
upgrades, when and if available, is paid in advance and is recognized ratably
over the term of the subscription. Revenue allocated to professional services is
recognized as the services are performed.
Concentration of Credit Risk
Sales outside of the United States were approximately $893,000, $2,206,000
and $4,484,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. During these same periods, no individual customer or reseller
accounted for 10% or more of total revenue. However, sales through a third-party
export management company were 11.8%, 16.7% and 17.2% for the years ended
December 31, 1997, 1998 and 1999, respectively. Accounts receivable at December
31, 1998 and 1999 includes balances due from this third-party export management
company, which manages most of the invoicing and collection processes for
WebTrends' international sales. Receivables through this export management
company comprised 28% and 18% of the total outstanding accounts receivable
balance at December 31, 1998 and 1999, respectively, of which 94% and 66% was
due less than thirty days from billing at those respective dates. No other
customer comprised greater than 10% of the total accounts receivable balance at
December 31, 1998 and 1999.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, investments, accounts
receivable, accounts payable and notes payable to shareholders approximate fair
value due to the short-term nature of these instruments.
Advertising Costs
Advertising costs are generally expensed when incurred and totaled
approximately $553,000, $957,000 and $1,439,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
Research and Development
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. To
date, the period between the achievement of technological feasibility and the
general availability of such software has been short; therefore, software
development costs qualifying for capitalization have been immaterial and have
been charged to research and development expense.
Income Taxes
WebTrends accounts for income taxes under the asset and liability approach.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets
26
<PAGE> 27
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and liabilities are measured using tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Stock-Based Employee Compensation
WebTrends has adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply provisions of APB Opinion No. 25 under which no
compensation cost for stock options granted to employees is recognized for stock
option awards granted at or above fair market value and to provide pro forma net
income and pro forma earnings per share disclosures as if the fair-value-based
method defined in SFAS No. 123 had been applied. WebTrends has elected to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Net Income Per Share
Basic and diluted net income per share are computed using the weighted
average number of common shares outstanding during each year, 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 for the years ended December 31, 1998 and 1999
were 16,421,054 and 25,817,568, respectively. For diluted net income per share,
1,622,852 and 2,437,732 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.
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
Computer hardware and equipment..................... $ 813,255 $2,236,507
Furniture and fixtures.............................. 4,383 566,026
Computer software................................... 113,830 389,676
--------- ----------
Total..................................... 931,468 3,192,209
Less accumulated depreciation..................... (333,061) (816,459)
--------- ----------
Total property and equipment, net......... $ 598,407 $2,375,750
========= ==========
</TABLE>
27
<PAGE> 28
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $194,000 $102,000 $1,401,125
State................................... 49,500 19,805 290,249
-------- -------- ----------
243,500 121,805 1,691,374
-------- -------- ----------
Deferred:
Federal................................. (75,000) (75,000) (103,988)
State................................... (18,000) (15,500) (26,644)
-------- -------- ----------
(93,000) (90,500) (130,632)
-------- -------- ----------
Total provision for income taxes.......... $150,500 $ 31,305 $1,560,742
======== ======== ==========
</TABLE>
The provision for income taxes varies from the amounts computed by applying
the federal statutory rate to income before taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Federal income tax statutory rates................... 34.0% 34.0% 34.0%
State and local taxes, net of federal benefits....... 8.5 8.0 6.7
Research and development credits..................... (14.2) (37.3) (4.8)
Foreign sales corporation benefit.................... -- (1.2) --
Deferred stock compensation.......................... -- 4.3 --
Change in tax status................................. 2.0 -- --
Other................................................ 4.1 4.7 0.4
----- ----- ----
Total...................................... 34.4% 12.5% 36.3%
===== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts..................... $ 15,700 $ 89,600
Accrued sales tax................................... 94,800 --
Research and development credits.................... 23,600 --
Accrued vacation and bonus.......................... 34,000 58,100
Allowance for sales returns......................... -- 214,400
Accrued liabilities................................. -- 67,800
Other............................................... 13,000 72,600
-------- ---------
Deferred tax assets......................... $181,100 $ 502,500
Deferred tax liabilities:
Deferred compensation............................... -- (39,300)
Depreciation of equipment........................... (6,600) (157,700)
-------- ---------
Net deferred tax assets..................... $174,500 $ 305,500
======== =========
</TABLE>
28
<PAGE> 29
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WebTrends has not recorded a valuation allowance against its deferred tax
assets existing at December 31, 1998 or 1999, as it believes it is more likely
than not that the results of future operations will generate sufficient taxable
income to realize the deferred tax assets.
At December 31, 1999, the Company had tax loss carryovers of approximately
$10,900,000 and $11,570,000 for federal and state purposes, respectively, to
offset against future taxable income. These carryovers expire beginning in 2014
through 2019. In addition, the Company had approximately $605,000 and $178,000
of federal and state credit carryforwards, respectively, to offset against
future taxable income which expire from 2004 through 2019. The carryforwards
identified relate to the disqualifying disposition of employee stock options
and, when realized, the resulting tax savings will be credited directly to
shareholders' equity and will not impact tax expense reported for book purposes.
During the year the Company experienced a change in ownership as defined in
Internal Revenue Code Section 382 which limits the utilization of tax loss
carryforwards. However, the Company does not expect the "annual limitation" to
impact the timing or amount of carryforward limitation.
(4) DEFERRED REVENUE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Deferred customer support............................ $107,055 $ 520,313
Deferred product revenues............................ 68,166 752,614
Deferred subscription revenues....................... 533,893 1,845,441
Other................................................ 114,899 1,004,514
-------- ----------
$824,013 $4,122,882
======== ==========
</TABLE>
(5) 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 subject to 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 paid administrative
costs of $3,328 and $4,680 for the years ended December 31, 1998 and 1999,
respectively. Effective January 1, 2000 the Company may elect to match all or a
portion of the participants' contributions to the plan. Participants will
receive their share of the value of their investments upon retirement or
termination, subject to a vesting schedule for Company matching contributions.
(6) SHAREHOLDERS' EQUITY
Preferred Stock
WebTrends is authorized to issue 15,000,000 shares of preferred stock, no
par value. The Board of Directors of 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. As of December 31, 1999 no preferred
shares have been issued.
Common Stock
On February 19, 1999, WebTrends completed an initial public offering of
7,000,000 shares including 6,000,000 newly issued shares sold by WebTrends and
1,000,000 outstanding shares sold by existing shareholders. Subsequently, the
selling shareholders sold an additional 1,050,000 shares pursuant to the
underwriters' exercise of their overallotment option. WebTrends did not receive
any of the proceeds from the
29
<PAGE> 30
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
sale of stock by the selling shareholders. The offered shares generated net
proceeds to WebTrends of approximately $35.2 million. On May 13, 1999, WebTrends
completed a follow-on offering of 5,000,000 shares, including 2,500,000 shares
sold by WebTrends, and 2,500,000 shares sold by existing shareholders. WebTrends
did not receive any of the proceeds from the sale of stock by the selling
shareholders. The follow-on offering generated net proceeds to WebTrends of
approximately $38.4 million after expenses.
Deferred Compensation
Deferred compensation cost 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 and
$146,143 of deferred compensation has been recorded for the years ended December
31, 1998 and 1999, respectively.
Stock Options
Effective March 28, 1997, WebTrends established the 1997 Key Employees'
Incentive Stock Option Plan and subsequently authorized 3,000,000 shares of
non-voting common stock, no par value, to be reserved for grants under the plan.
Effective December 5, 1997, the Board approved the 1997 Stock Incentive
Compensation Plan (the "Plan") which replaced the Key Employee Incentive Stock
Option Plan. Options granted under the Plan may be designated as incentive or
nonqualified at the discretion of the plan administrator. On October 30, 1998,
WebTrends increased the number of shares authorized under the plan to 4,000,000.
In December 1998, WebTrends reduced the number of shares authorized in the Plan
to 3,069,048 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 2,930,950 shares of common stock for the 1998
Plan, plus (a) any shares returned to the 1997 Plan upon termination of certain
option and stock grants (other than terminations due to exercise or settlement
of such awards); and (b) an automatic annual increase, to be added on the first
day of WebTrends' fiscal year beginning in 2001, equal to the lesser of
1,000,000 shares or 5% of the average common shares outstanding as used to
calculate fully diluted earnings per share as reported in WebTrends' Annual
Report for the preceding year.
The option price for incentive stock options is set at not less than the
market value of WebTrends' common stock (market value plus 10% for shareholders
who possess more than 10% of the combined voting power of all classes of shares
of WebTrends) at the date of the grant. Employee options generally vest over a
four-year period, 25% after the first year of employment and the balance in
equal monthly amounts thereafter over the remaining vesting period. Options are
contingent on continued employment with WebTrends and expire ten years (five
years for 10% shareholders as defined above) from the date of grant. The vesting
period for certain options is subject to acceleration upon a change in control
of WebTrends as defined in the option agreements.
WebTrends applies APB Opinion No. 25 in accounting for its stock options
plans. Accordingly, compensation cost is generally not recognized for stock
option grants.
30
<PAGE> 31
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at December 31, 1996................... -- --
Granted.................................................. 1,333,416 $ 0.30
Canceled................................................. -- --
Forfeited................................................ (75,000) 0.30
Exercised................................................ -- --
--------- ------
Options outstanding at December 31, 1997................... 1,258,416 $ 0.30
Granted.................................................. 2,001,134 1.67
Canceled................................................. (70,000) 0.39
Forfeited................................................ (230,378) 0.33
Exercised................................................ (16,874) 0.30
--------- ------
Options outstanding at December 31, 1998................... 2,942,298 $ 1.23
Granted.................................................. 1,328,070 17.88
Canceled................................................. -- --
Forfeited................................................ (405,650) 3.27
Exercised................................................ (854,340) 1.08
--------- ------
Options outstanding at December 31, 1999................... 3,010,378 $ 8.34
========= ======
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives for options of
similar price and grant date.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------
WEIGHTED
WEIGHTED REMAINING OPTIONS EXERCISABLE
EXERCISE PRICE NUMBER OF AVERAGE AVERAGE WEIGHTED AVERAGE
RANGE SHARES PRICE CONTRACTUAL LIFE NUMBER EXERCISE PRICE
- -------------- --------- ------------- ---------------- ------- -------------------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $10.72.. 1,777,018 $ 1.28 8.1 139,575 $0.5076
$10.73 - $21.43.. 1,106,560 $17.38 9.1 -- --
$21.44 - $32.16.. 126,800 $28.54 9.8 -- --
--------- -------
3,010,378 $ 8.34 8.5 139,575 $0.5076
</TABLE>
Employee Stock Purchase Plan
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 700,000 shares of common stock plus an automatic annual
increase as defined in the Employee Stock Purchase Plan. A total of 25,300
shares were issued under the Employee Stock Purchase Plan in 1999.
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.
31
<PAGE> 32
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The per share weighted average fair value of stock options granted during
1997, 1998 and 1999 was $1.76, $1.74 and $13.02, respectively. For SFAS No. 123
purposes, the fair value of each option has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
assumptions for grants:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Average dividend yield................................ --% --% #%
Expected life in years................................ 4 4 4
Risk free interest rate............................... 7.0% 6.0% 6.0%
Expected volatility................................... 100% 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 1999
-------- -------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported............................ $287,373 $219,460 $ 2,735,940
Pro forma.............................. 240,947 (15,857) (1,662,856)
Net income (loss) per share, diluted:
As reported............................ $ 0.02 $ 0.01 $ 0.11
Pro forma.............................. $ 0.01 -- (.06)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
(9) COMMITMENTS AND CONTINGENCIES
WebTrends currently occupies office space under a lease agreement
negotiated in November 1998 with a five-year term and an option to extend for an
additional five years. The lease term began on January 15, 1999 and provides for
a base rent of $34,208 per month for the first six months. In July 1999,
WebTrends leased additional space in the same building, and the base rent
increased to $57,467 for the combined space. Beginning in March of 2000, the
Company will again lease additional space in the same building and the base rent
for all space occupied will increase to $81,772, with an adjustment in July of
2001. For the years ended December 31, 1997, 1998 and 1999, rent expense was
approximately $84,000, $204,000 and $566,000 respectively.
Future minimum lease payments under this lease are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000................................... $ 932,650
2001................................... 1,015,576
2002................................... 1,049,891
2003................................... 1,049,891
2004................................... 87,491
Thereafter............................. --
----------
$4,135,499
==========
</TABLE>
(10) SUBSEQUENT EVENT
In January 2000, WebTrends approved a 2-for-1 stock split of the shares of
common stock of the Company to be effected by means of a stock dividend to
shareholders of record on February 8, 2000. The stock dividend was distributed
on February 29, 2000. Common share data for all periods presented in the
accompanying financial statements have been adjusted to give effect to the stock
split.
32
<PAGE> 33
WEBTRENDS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................... $1,621 $1,829 $2,089 $2,469 $3,006 $4,007 $5,308 $7,405
Gross margin............... 1,492 1,680 1,922 2,281 2,716 3,663 4,902 6,841
Income from operations..... 24 39 50 109 116 185 386 682
Net income................. 26 41 52 100 178 526 878 1,154
Net income per share,
diluted.................. -- -- -- $ 0.01 $ 0.02 $ 0.02 $ 0.03 $ 0.04
</TABLE>
33
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding directors is included in
our proxy statement for our annual meeting of shareholders to be held on May 11,
2000, and is incorporated herein by reference. The information required by this
item regarding executive officers is contained under the caption "Executive
Officers" in Item 1 of Part I hereof. Information regarding compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, is also
included in the above referenced proxy statement and incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in our proxy statement
for our annual meeting of shareholders to be held on May 11, 2000, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in our proxy statement
for our annual meeting of shareholders to be held on May 11, 2000, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in our proxy statement
for our annual meeting of shareholders to be held on May 11, 2000, and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Index to Financial Statements
Independent Auditors' Report
Balance Sheets
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flow
Notes to the Financial Statements
(a)2. Financial Statement Schedules
All Schedules have been omitted because the required information is
included in the financial statements or the notes thereto, or is not applicable
or required.
34
<PAGE> 35
(a)3. Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1(1) Third Restated Articles of Incorporation
3.2(2) Second Restated Bylaws
10.1 Amended and Restated 1998 Stock Incentive Compensation Plan
10.2(2) Employee Stock Purchase Plan
10.3(2) 1997 Stock Incentive Compensation Plan
10.4(2) Office Lease dated November 20, 1998, by and between the
Prudential Insurance Company of America and WebTrends
Corporation
10.5 First Addendum to Lease dated October 15, 1999, by and
between the Prudential Insurance Company of America and
WebTrends Corporation
21.1(2) List of Subsidiaries
23.1 Consent of KPMG LLP, Independent Accountants
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference from registration statement on Form S-1 (File No.
333-77085) declared effective on May 11, 1999.
(2) Incorporated by reference from registration statement on Form S-1 (File No.
333-69171) declared effective on February 18, 1999.
(b) Reports on Form 8-K
None
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
10, 2000.
WEBTRENDS CORPORATION
By: /s/ JAMES T. RICHARDSON
------------------------------------
James T. Richardson
Senior Vice President, Chief
Financial
Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 10, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<S> <C>
/s/ ELIJAHU SHAPIRA Chief Executive Officer and Director
- ---------------------------------------------
Elijahu Shapira
/s/ W. GLEN BOYD President, Chief Technical Officer and
- --------------------------------------------- Director
W. Glen Boyd
/s/ JAMES T. RICHARDSON Senior Vice President,
- --------------------------------------------- Chief Financial Officer and Secretary
James T. Richardson (principal financial and chief accounting
officer)
/s/ MICHAEL BURMEISTER-BROWN Director
- ---------------------------------------------
Michael Burmeister-Brown
/s/ SRIVATS SAMPATH Director
- ---------------------------------------------
Srivats Sampath
/s/ JOHN RYAN Director
- ---------------------------------------------
John Ryan
</TABLE>
36
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1(1) Third Restated Articles of Incorporation
3.2(2) Second Restated Bylaws
10.1 Amended and Restated 1998 Stock Incentive Compensation Plan
10.2(2) Employee Stock Purchase Plan
10.3(2) 1997 Stock Incentive Compensation Plan
Office Lease dated November 20, 1998, by and between the
Prudential Insurance Company of America and WebTrends
10.4(2) Corporation
First Addendum to Lease dated October 15, 1999, by and
between the Prudential Insurance Company of America and
10.5 WebTrends Corporation
21.1(2) List of Subsidiaries
23.1 Consent of KPMG LLP, Independent Accountants
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference from registration statement on Form S-1 (File No.
333-77085) declared effective on May 11, 1999.
(2) Incorporated by reference from registration statement on Form S-1 (File No.
333-69171) declared effective on February 18, 1999.
<PAGE> 1
EXHIBIT 10.1
WEBTRENDS CORPORATION
AMENDED AND RESTATED 1998 STOCK INCENTIVE
COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the WebTrends Corporation 1998 Stock Incentive
Compensation Plan (the "Plan") is to enhance the long-term shareholder value of
WebTrends Corporation, an Oregon corporation (the "Company"), by offering
opportunities to selected persons to participate in the Company's growth and
success, and to encourage them to remain in the service of the Company and its
Related Corporations (as defined in Section 2) and to acquire and maintain stock
ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
"AWARD" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Options and Stock Awards, or any
combination of the foregoing.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means dishonesty, fraud, misconduct, unauthorized use or
disclosure of confidential information or trade secrets, or conviction or
confession of a crime punishable by law (except minor violations), in each case
as determined by the Plan Administrator, and its determination shall be
conclusive and binding.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"COMMON STOCK" means the common stock, without par value, of the
Company.
"CORPORATE TRANSACTION" means any of the following events:
(a) Consummation of any merger or consolidation of the Company
with or into another corporation; or
(b) Consummation of any sale, lease, exchange or other transfer
in one transaction or a series of related transactions of all or
substantially all of the Company's assets other than a transfer of the
Company's assets to a majority-owned subsidiary corporation (as defined
in Section 8.3) of the Company.
"DISABILITY," unless otherwise defined by the Plan Administrator, means
a mental or physical impairment of the Participant that is expected to result in
death or that has lasted or is expected to last for a continuous period of 12
months or more and that causes the Participant to be unable, in the opinion of
the Company, to perform his or her duties for the Company and to be engaged in
any substantial gainful activity.
"EFFECTIVE DATE" means the date on which the Plan is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the average of the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for a single trading day or (b)
if the Common Stock is
-1-
<PAGE> 2
listed on the New York Stock Exchange or the American Stock Exchange, the
average of the high and low per share sales prices for the Common Stock as such
price is officially quoted in the composite tape of transactions on such
exchange for a single trading day. If there is no such reported price for the
Common Stock for the date in question, then such price on the last preceding
date for which such price exists shall be determinative of Fair Market Value.
"GRANT DATE" means the date on which the Plan Administrator completes
the corporate action relating to the grant of an Award and all conditions
precedent to the grant have been satisfied, provided that conditions to the
exercisability or vesting of Awards shall not defer the Grant Date.
"INCENTIVE STOCK OPTION" means an Option to purchase Common Stock
granted under Section 7 with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
"NONQUALIFIED STOCK OPTION" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
"OPTION" means the right to purchase Common Stock granted under Section
7.
"PARENT" means, except as otherwise defined in Section 8.3 in connection
with Incentive Stock Options, any entity, whether now or hereafter existing,
that directly or indirectly controls the Company.
"PARTICIPANT" means: (a) the person to whom an Award is granted; (b) for
a Participant who has died, the personal representative of the Participant's
estate, the person(s) to whom the Participant's rights under the Award have
passed by will or by the applicable laws of descent and distribution, or the
beneficiary designated in accordance with Section 11; or (c) the person(s) to
whom an Award has been transferred in accordance with Section 11.
"PLAN ADMINISTRATOR" means the Board or any committee or committees of
the Board to administer the Plan under Section 3.1.
"RELATED CORPORATION" means any Parent or Subsidiary of the Company.
"RETIREMENT" means retirement as of the individual's normal retirement
date under the Company's 401(k) Plan or other similar successor plan applicable
to salaried employees, unless otherwise defined by the Plan Administrator from
time to time for purposes of the Plan.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCK AWARD" means shares of Common Stock or units denominated in
Common Stock granted under Section 9, the rights of ownership of which may be
subject to restrictions prescribed by the Plan Administrator.
"SUBSIDIARY," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company.
"SUCCESSOR CORPORATION" has the meaning set forth in Section 12.3.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board and/or a committee or
committees (which term includes subcommittees) appointed by, and consisting of
two or more members of, the Board (a "Plan Administrator"). If and so long as
the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act,
the Board shall consider in selecting the members of any committee acting as
Plan Administrator, with respect to any persons subject or likely to become
subject to Section 16 of the Exchange Act, the provisions regarding (a) "outside
-2-
<PAGE> 3
directors" as contemplated by Section 162(m) of the Code and (b) "nonemployee
directors" as contemplated by Rule 16b-3 under the Exchange Act. The Board may
delegate the responsibility for administering the Plan with respect to
designated classes of eligible persons to different committees consisting of two
or more members of the Board, subject to such limitations as the Board deems
appropriate. Committee members shall serve for such term as the Board may
determine, subject to removal by the Board at any time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan,
the Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 12.1, the
number of shares of Common Stock that shall be available for issuance under the
Plan shall be:
(a) 4,228,950 shares plus;
(b) an annual increase to be added as of the first day of the Company's
fiscal year beginning in 2001 equal to the lesser of (i) 1,000,000 shares, (ii)
5% of the adjusted average common shares outstanding of the Company used to
calculate fully diluted earnings per share as reported in the Annual Report to
shareholders for the preceding year, and (iii) a lesser amount determined by the
Plan Administrator; provided, that any shares from any such increases in
previous years that are not actually issued, shall be added to the aggregate
number of shares for issuance under the Plan; plus
(c) any shares subject to outstanding awards under the Company's 1997
Stock Incentive Compensation Plan (the "Prior Plan") on the Effective Date that
cease to be subject to such awards (other than by reason of exercise or payment
of the awards to the extent they are exercised for or settled in vested and
nonforfeitable shares), which shares shall no longer be available for grant and
issuance under the Prior Plan, but shall be available for issuance under this
Plan.
Shares issued under the Plan shall be drawn from authorized and unissued
shares or shares now held or subsequently acquired by the Company.
4.2 LIMITATIONS
(a) Subject to adjustment from time to time as provided in Section 12.1,
not more than an aggregate of 1,400,000 shares shall be available for issuance
pursuant to grants of Stock Awards under the Plan.
(b) Subject to adjustment from time to time as provided in Section 12.1,
not more than 1,000,000 shares of Common Stock may be made subject to Awards
under the Plan to any individual in the aggregate in any one fiscal year of the
Company, except that the Company may make additional one-time grants of up to
2,000,000 shares to newly hired individuals, such limitation to be applied in a
manner consistent with the
-3-
<PAGE> 4
requirements of, and only to the extent required for compliance with, the
exclusion from the limitation on deductibility of compensation under Section
162(m) of the Code.
4.3 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in vested and
nonforfeitable shares) shall again be available for issuance in connection with
future grants of Awards under the Plan; provided, however, that for purposes of
Section 4.2, any such shares shall be counted in accordance with the
requirements of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Related Corporations as the Plan Administrator
from time to time selects. Awards may also be made to consultants, agents,
advisors and independent contractors who provide services to the Company and its
Related Corporations; provided such Participants render bona fide services that
are not in connection with the offer and sale of the Company's securities in a
capital-raising transaction and do not directly or indirectly promote or
maintain a market for the Company's securities.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole discretion,
to determine the type or types of Awards to be made under the Plan. Such Awards
may include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options and Stock Awards. Awards may be granted singly or in combination.
6.2 SETTLEMENT OF AWARDS
The Company may settle Awards through the delivery of shares of Common
Stock, cash payments, the granting of replacement Awards, or any combination
thereof as the Plan Administrator shall determine. Any Award settlement,
including payment deferrals, may be subject to such conditions, restrictions and
contingencies as the Plan Administrator shall determine. The Plan Administrator
may permit or require the deferral of any Award payment, subject to such rules
and procedures as it may establish, which may include provisions for the payment
or crediting of interest, or dividend equivalents, including converting such
credits into deferred stock equivalents. The Plan Administrator may at any time
offer to buy out for a payment in cash or Common Stock, an Option previously
granted based on such terms and conditions as the Plan Administrator shall
establish and communicate to the Participant at the time such offer is made.
6.3 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, except as may be required for
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such
Awards shall be deemed to be Participants.
-4-
<PAGE> 5
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 85% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified Stock Options. For
Incentive Stock Options granted to a more than 10% shareholder, the option
exercise price shall be as specified in Section 8.2.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan
Administrator or, if not so established, shall be 10 years from the Grant Date.
For Incentive Stock Options granted to a more than 10% shareholder, the maximum
Option term shall be as specified in Section 8.2.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which, or the installments in which, the
Option shall vest and become exercisable, which provisions may be waived or
modified by the Plan Administrator at any time. If not so established in the
instrument evidencing the Option, the Option shall vest and become exercisable
according to the following schedule, which may be waived or modified by the Plan
Administrator at any time:
<TABLE>
<CAPTION>
PERIOD OF PARTICIPANT'S CONTINUOUS EMPLOYMENT
OR SERVICE WITH THE COMPANY OR ITS PERCENT OF TOTAL OPTION
RELATED CORPORATIONS FROM THE OPTION GRANT DATE THAT IS VESTED AND EXERCISABLE
- ----------------------------------------------- ------------------------------
<S> <C>
After 1 year 25%
Each additional one-month period of continuous service An additional 1/48
completed thereafter
After 4 years 100%
</TABLE>
To the extent that the right to purchase shares has accrued thereunder,
an Option may be exercised from time to time by delivery to the Company of a
written stock option exercise agreement or notice, in a form and in accordance
with procedures established by the Plan Administrator, setting forth the number
of shares with respect to which the Option is being exercised, the restrictions
imposed on the shares purchased under such exercise agreement, if any, and such
representations and agreements as may be required by the Company, accompanied by
payment in full as described in Section 7.5. An Option may not be exercised as
to less than a reasonable number of shares at any one time, as determined by the
Plan Administrator.
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check or, unless the Plan Administrator in its sole
discretion determines otherwise, either at the time the Option is granted or at
any time before it is exercised, any combination of:
-5-
<PAGE> 6
(a) cash or check; or
(b) tendering (either actually or, if and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, by attestation)
shares of Common Stock already owned by the Participant for at least six months
(or any shorter period necessary to avoid a charge to the Company's earnings for
financial reporting purposes) having a Fair Market Value on the day prior to the
exercise date equal to the aggregate Option exercise price;
(c) if and so long as the Common Stock is registered under Section 12(b)
or 12(g) of the Exchange Act, delivery of a properly executed exercise notice,
together with irrevocable instructions, to (i) a brokerage firm designated by
the Company to deliver promptly to the Company the aggregate amount of sale or
loan proceeds to pay the Option exercise price and any withholding tax
obligations that may arise in connection with the exercise and (ii) the Company
to deliver the certificates for such purchased shares directly to such brokerage
firm, all in accordance with the regulations of the Federal Reserve Board; or
(d) such other consideration as the Plan Administrator may permit.
In addition, to assist a Participant (including a Participant who is an
officer or a director of the Company) in acquiring shares of Common Stock
pursuant to an Award granted under the Plan, the Plan Administrator, in its sole
discretion, may authorize, either at the Grant Date or at any time before the
acquisition of Common Stock pursuant to the Award, (a) the payment by a
Participant of a full-recourse promissory note, (b) the payment by the
Participant of the purchase price, if any, of the Common Stock in installments,
or (c) the guarantee by the Company of a full-recourse loan obtained by the
Participant from a third party. Subject to the foregoing, the Plan Administrator
shall in its sole discretion specify the terms of any loans, installment
payments or loan guarantees, including the interest rate and terms of and
security for repayment.
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Participant ceases to be
employed by, or to provide services to, the Company or its Related Corporations,
which provisions may be waived or modified by the Plan Administrator at any
time. If not so established in the instrument evidencing the Option, the Option
shall be exercisable according to the following terms and conditions, which may
be waived or modified by the Plan Administrator at any time:
(a) Any portion of an Option that is not vested and exercisable on the
date of termination of the Participant's employment or service relationship (the
"Termination Date") shall expire on such date, unless the Plan Administrator
determines otherwise.
(b) Any portion of an Option that is vested and exercisable on the
Termination Date shall expire upon the earliest to occur of:
(i) the last day of the Option term;
(ii) if the Participant's Termination Date occurs for reasons
other than Cause, death, Disability or Retirement, the three-month anniversary
of such Termination Date;
(iii) if the Participant's Termination Date occurs by reason of
Retirement, the one-year anniversary of such Termination Date; or
(iv) if the Participant's Termination Date occurs by reason of
Disability or death, the one-year anniversary of such Termination Date.
-6-
<PAGE> 7
Notwithstanding the foregoing, if the Participant dies after the
Termination Date while the Option is otherwise exercisable, the portion of the
Option that is vested and exercisable on such Termination Date shall expire upon
the earlier to occur of (y) the last day of the Option term and (z) the first
anniversary of the date of death, unless the Plan Administrator determines
otherwise.
Also notwithstanding the foregoing, in case of termination of the
Participant's employment or service relationship for Cause, the Option shall
automatically expire upon first notification to the Participant of such
termination, unless the Plan Administrator determines otherwise. If a
Participant's employment or service relationship with the Company is suspended
pending an investigation of whether the Participant shall be terminated for
Cause, all the Participant's rights under any Option likewise shall be suspended
during the period of investigation.
A Participant's transfer of employment or service relationship between
or among the Company and its Related Corporations, or a change in status from or
to an employee to or from a consultant, shall not be considered a termination of
employment or service relationship for purposes of this Section 7. The effect of
a Company-approved leave of absence on the terms and conditions of an Option
shall be determined by the Plan Administrator, in its sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 TERM
Subject to Section 8.2, the term of an Incentive Stock Option shall not
exceed 10 years.
8.5 EXERCISABILITY
An Option designated as an Incentive Stock Option shall cease to qualify for
favorable tax treatment as an Incentive Stock Option to the extent it is
exercised (if permitted by the terms of the Option) (a) more than three
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<PAGE> 8
months after the Termination Date for reasons other than death or disability,
(b) more than one year after the Termination Date by reason of Disability or (c)
after the Participant has been on leave of absence for more than 90 days, unless
the Participant's reemployment rights are guaranteed by statute or contract.
For purposes of this Section 8.5, Disability shall mean "permanent and
total disability" as that term is defined for purposes of Section 422 of the
Code.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock
Options under Section 422 of the Code, the Participant must hold the shares
issued upon the exercise of an Incentive Stock Option for two years after the
Grant Date and one year from the date of exercise. A Participant may be subject
to the alternative minimum tax at the time of exercise of an Incentive Stock
Option. The Participant shall give the Company prompt notice of any disposition
of shares acquired by the exercise of an Incentive Stock Option prior to the
expiration of such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 7.5 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK AWARDS
9.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock or
Awards denominated in units of Common Stock on such terms and conditions and
subject to such restrictions, if any, which may be based on continuous service
with the Company or the achievement of performance goals related to profits,
profit growth, profit-related return ratios, cash flow or total shareholder
return, where such goals may be stated in absolute terms or relative to
comparison companies as the Plan Administrator shall determine, in its sole
discretion, which terms, conditions and restrictions shall be set forth in the
instrument evidencing the Award. The terms, conditions and restrictions that the
Plan Administrator shall have the power to determine shall include, without
limitation, the manner in which shares subject to Stock Awards are held during
the periods they are subject to restrictions and the circumstances under which
forfeiture of the Stock Award shall occur by reason of termination of the
Participant's employment or service relationship.
9.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions
prescribed in respect to a Stock Award, or upon the Participant's release from
any terms, conditions and restrictions of a Stock Award, as determined by the
Plan Administrator, the Company shall release, as soon as practicable, to the
Participant or, in the case of the Participant's death, to the personal
representative of the Participant's estate or as the appropriate court directs,
the appropriate number of shares of Common Stock.
9.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Stock Award under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate; provided, however, that the Plan Administrator may not adjust
performance goals for any Stock Award intended to be exempt under Section 162(m)
of the Code for the year in which the Stock Award is settled in such a manner as
would increase the amount of compensation otherwise payable to a Participant.
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<PAGE> 9
SECTION 10. WITHHOLDING
The Company may require the Participant to pay to the Company the amount
of any withholding taxes that the Company is required to withhold with respect
to the grant, vesting or exercise of any Award. Subject to the Plan and
applicable law, the Plan Administrator may, in its sole discretion, permit the
Participant to satisfy withholding obligations (up to the minimum required
federal tax withholding rate), in whole or in part, by electing to have the
Company withhold shares of Common Stock or by transferring shares of Common
Stock to the Company, in such amounts as are equivalent to the Fair Market Value
of the withholding obligation. The Company shall have the right to withhold from
any Award or any shares of Common Stock issuable pursuant to an Award or from
any cash amounts otherwise due or to become due from the Company to the
Participant an amount equal to such taxes. The Company may also deduct from any
Award any other amounts due from the Participant to the Company or a Related
Corporation.
SECTION 11. ASSIGNABILITY
Awards granted under this Plan and any interest therein may not be
assigned, pledged or transferred by the Participant and may not be made subject
to attachment or similar proceedings otherwise than by will or by the applicable
laws of descent and distribution, and, during the Participant's lifetime, such
Awards may be exercised only by the Participant. Notwithstanding the foregoing,
and to the extent permitted by Section 422 of the Code, the Plan Administrator,
in its sole discretion, may permit such assignment, transfer and exercisability
and may permit a Participant to designate a beneficiary who may exercise the
Award or receive compensation under the Award after the Participant's death;
provided, however, that any Award so assigned or transferred shall be subject to
all the same terms and conditions contained in the instrument evidencing the
Award.
SECTION 12. ADJUSTMENTS
12.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company being received by the holders of shares of
Common Stock of the Company, then the Plan Administrator shall make proportional
adjustments in (i) the maximum number and kind of securities subject to the Plan
as set forth in Section 4.1 and the maximum number and kind of securities that
may be made subject to Stock Awards and to Awards to any individual as set forth
in Section 4.2, and (ii) the number and kind of securities that are subject to
any outstanding Award and the per share price of such securities, without any
change in the aggregate price to be paid therefor. The determination by the Plan
Administrator as to the terms of any of the foregoing adjustments shall be
conclusive and binding. Notwithstanding the foregoing, a dissolution or
liquidation of the Company or a Corporate Transaction shall not be governed by
this Section 12.1 but shall be governed by Sections 12.2 and 12.3, respectively.
12.2 DISSOLUTION OR LIQUIDATION
In the event of the proposed dissolution or liquidation of the Company,
the Plan Administrator shall notify each Participant as soon as practicable
prior to the effective date of such proposed transaction. The Plan Administrator
in its discretion may permit a Participant to exercise an Option until ten days
prior to such transaction with respect to all vested and exercisable shares of
Common Stock covered thereby and with respect to such number of unvested shares
as the Plan Administrator shall determine. In addition, the Plan Administrator
may provide that any forfeiture provision or Company repurchase option
applicable to any Award shall lapse as to such number of shares as the Plan
Administrator shall determine, contingent upon the occurrence of the proposed
dissolution or liquidation at the time and in the manner contemplated. To the
extent an Option has not been previously exercised, the Option shall terminate
automatically immediately prior to the consummation of the proposed action. To
the
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<PAGE> 10
extent a forfeiture provision applicable to a Stock Award has not been waived by
the Plan Administrator, the Stock Award shall be forfeited automatically
immediately prior to the consummation of the proposed action.
12.3 CORPORATE TRANSACTION
In the event of a Corporate Transaction, except as otherwise provided in
the instrument evidencing the Award, each outstanding Option shall be assumed or
an equivalent option or right substituted by the successor corporation or its
parent corporation (the "Successor Corporation"). In the event that the
Successor Corporation refuses to assume or substitute for the Option, the Option
shall terminate, but the Participant shall have the right immediately prior to
the Corporate Transaction to exercise the Participant's Option to the extent the
vesting requirements applicable to the Option have been satisfied.
12.4 FURTHER ADJUSTMENT OF AWARDS
Subject to Sections 12.2 and 12.3, the Plan Administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Participants, with respect to
Awards. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, Awards so as to provide for earlier, later, extended or
additional time for exercise, lifting restrictions and other modifications, and
the Plan Administrator may take such actions with respect to all Participants,
to certain categories of Participants or only to individual Participants. The
Plan Administrator may take such action before or after granting Awards to which
the action relates and before or after any public announcement with respect to
such sale, merger, consolidation, reorganization, liquidation or change in
control that is the reason for such action.
12.5 LIMITATIONS
The grant of Awards shall in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
12.6 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by any
Award, each such Award shall cover only the number of full shares resulting from
such adjustment.
SECTION 13. MARKET STANDOFF
In connection with any underwritten public offering by the Company of
its equity securities pursuant to an effective registration statement filed
under the Securities Act, including the Company's initial public offering, a
person shall not sell, make any short sale of, loan, hypothecate, pledge, grant
any option for the purchase of, or otherwise dispose or transfer for value or
otherwise agree to engage in any of the foregoing transactions with respect to
any shares issued pursuant to an Award granted under the Plan without the prior
written consent of the Company or its underwriters. Such limitations shall be in
effect for such period of time as may be requested by the Company or such
underwriters and agreed to by the Company's officers and directors with respect
to their shares; provided, however, that in no event shall such period exceed
180 days. The limitations of this paragraph shall in all events terminate two
years after the effective date of the Company's initial public offering. Holders
of shares issued pursuant to an Award granted under the Plan shall be subject to
the market standoff provisions of this paragraph only if the officers and
directors of the Company are also subject to similar arrangements.
In the event of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Company's outstanding Common Stock effected as a class without the Company's
receipt of consideration, then any new, substituted or additional securities
distributed with respect to the purchased
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<PAGE> 11
shares shall be immediately subject to the provisions of this Section 13, to the
same extent the purchased shares are at such time covered by such provisions.
In order to enforce the limitations of this Section 13, the Company may
impose stop-transfer instructions with respect to the purchased shares until the
end of the applicable standoff period.
SECTION 14. AMENDMENT AND TERMINATION OF PLAN
14.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board in such respects as it shall
deem advisable; provided, however, to the extent required for compliance with
Section 422 of the Code or any applicable law or regulation, shareholder
approval shall be required for any amendment that would (a) increase the total
number of shares available for issuance under the Plan, (b) modify the class of
persons eligible to receive Options or (c) otherwise require shareholder
approval under any applicable law or regulation. Any amendment made to this Plan
that would constitute a "modification" to Incentive Stock Options outstanding on
the date of such amendment shall not, without the consent of the Participant, be
applicable to such outstanding Incentive Stock Options but shall have
prospective effect only.
14.2 TERMINATION OF PLAN
The Board may suspend or terminate the Plan at any time. Unless sooner
terminated as provided herein, the Plan shall terminate ten years after the
earlier of the Plan's adoption by the Board and approval by the shareholders.
14.3 CONSENT OF PARTICIPANT
The amendment or termination of the Plan or the amendment of an
outstanding Award shall not, without the Participant's consent, impair or
diminish any rights or obligations under any Award theretofore granted to the
Participant under the Plan; provided, however, that adjustments made pursuant to
Section 12 shall not be subject to these restrictions. Any change or adjustment
to an outstanding Incentive Stock Option shall not, without the consent of the
Participant, be made in a manner so as to constitute a "modification" that would
cause such Incentive Stock Option to fail to continue to qualify as an Incentive
Stock Option.
SECTION 15. GENERAL
15.1 EVIDENCE OF AWARDS
Awards granted under the Plan shall be evidenced by a written instrument
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
15.2 NO INDIVIDUAL RIGHTS
Nothing in the Plan or any Award granted under the Plan shall be deemed
to constitute an employment contract or confer or be deemed to confer on any
Participant any right to continue in the employ of, or to continue any other
relationship with, the Company or any Related Corporation or limit in any way
the right of the Company or any Related Corporation of the Company to terminate
a Participant's employment or other relationship at any time, with or without
Cause.
15.3 REGISTRATION
Notwithstanding any other provision of the Plan, the Company shall have no
obligation to issue or deliver any shares of Common Stock under the Plan or make
any other distribution of benefits under the Plan unless such
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<PAGE> 12
issuance, delivery or distribution would comply with all applicable laws
(including, without limitation, the requirements of the Securities Act), and the
applicable requirements of any securities exchange or similar entity.
The Company shall be under no obligation to any Participant to register
for offering or resale or to qualify for exemption under the Securities Act, or
to register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
To the extent that the Plan or any instrument evidencing an Award
provides for issuance of stock certificates to reflect the issuance of shares of
Common Stock, the issuance may be effected on a non-certificated basis, to the
extent not prohibited by applicable law or the applicable rules of any stock
exchange.
15.4 NO RIGHTS AS A SHAREHOLDER
No Option or Stock Award denominated in units shall entitle the
Participant to any cash dividend, voting or other right of a shareholder unless
and until the date of issuance under the Plan of the shares that are the subject
of such Award.
15.5 COMPLIANCE WITH LAWS AND REGULATIONS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator, in its sole discretion, may bifurcate the Plan so as to restrict,
limit or condition the use of any provision of the Plan to Participants who are
officers or directors subject to Section 16 of the Exchange Act without so
restricting, limiting or conditioning the Plan with respect to other
Participants. Additionally, in interpreting and applying the provisions of the
Plan, any Option granted as an Incentive Stock Option pursuant to the Plan
shall, to the extent permitted by law, be construed as an "incentive stock
option" within the meaning of Section 422 of the Code.
15.6 PARTICIPANTS IN FOREIGN COUNTRIES
The Plan Administrator shall have the authority to adopt such
modifications, procedures, and subplans as may be necessary or desirable to
comply with provisions of the laws of foreign countries in which the Company or
its Related Corporations may operate to assure the viability of the benefits
from Awards granted to Participants employed in such countries and to meet the
objectives of the Plan.
15.7 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
15.8 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
15.9 CHOICE OF LAW
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<PAGE> 13
The Plan and all determinations made and actions taken pursuant hereto,
to the extent not otherwise governed by the laws of the United States, shall be
governed by the laws of the State of Oregon without giving effect to principles
of conflicts of laws.
SECTION 16. EFFECTIVE DATE
The Plan's Effective Date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption.
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<PAGE> 14
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
SUMMARY PAGE
<TABLE>
<CAPTION>
SECTION/EFFECT OF DATE OF SHAREHOLDER
DATE OF BOARD ACTION ACTION AMENDMENT APPROVAL
- -------------------- ------ --------- --------
<S> <C> <C> <C>
December 16, 1998 Initial Plan Adoption December 16, 1998
February 25, 2000 Amendment and All share numbers in
Restatement to (1) plan reflect all
increase size of stock splits
pool; (2) add effective on or prior
Section 162(m) to February 29, 2000
limitations;
(3) delete CA Appendix
</TABLE>
-1-
<PAGE> 1
EXHIBIT 10.5
FIRST ADDENDUM TO LEASE
THIS FIRST ADDENDUM TO LEASE, made and entered into this 15th day of
October, 1999, by and between VOIT MANAGEMENT COMPANY, L.P., MANAGING AGENTS FOR
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (hereinafter called "Lessor"), and
WEBTRENDS CORPORATION (hereinafter called "Lessee").
W I T N E S S E T H
WHEREAS by Lease Agreement dated November 20, 1998, (the "Lease"),
Lessee leased from Lessor certain premises located on the 12th, 7th, and 6th
floors of Pacific First Center, 851 Southwest Sixth Avenue, Portland, Oregon
consisting of approximately 36,956 rentable square feet (the "Premises"),
WHEREAS the parties desire to modify certain provisions of the Lease,
NOW THEREFORE it is mutually agreed as follows:
1. PREMISES: On the Effective Date, as defined below the Premises shall
be modified to include, in addition to the space heretofore leased, 14,957
rentable square feet of space on the eighth floor known as suite 800 (the
"Expansion Space" ) as shown on the attached Exhibit A.
2. RENTAL: On the Effective Date, base rent for the Premises shall be
increased to include $24,305.13 per month for the Expansion Space, or a total of
$81,771.70 per month ($57,466.58 plus $24,305.13). On July 1, 2001 base rent for
the Premises shall be increased to $87,490.91 per month ($26,174.75 for the
Expansion Space and $61,316.16 for the Original Space). Such sums shall be
payable in advance without deduction or offset on the first day of each month.
3. ADDITIONAL RENT: Effective on the Effective Date Lessee's percentage
share for purposes of Additional Rent as defined in the Lease shall be increased
by 6.54% or a total of 22.76%. (16.22% + 6.54%). The Base Year for the Expansion
Space shall be 2000, the Base year for all prior space Leased shall remain 1999.
4. TENANT IMPROVEMENTS: Lessee accepts the Expansion Space in its "as
is" condition. Lessor will provide an allowance for improvements to the space of
up to a total of $187,411.00 ($12.53 psf), to include required work per Lessees
plans and specifications and shall be subject to Lessor's prior written
1
<PAGE> 2
approval, and shall include all costs for plans, specifications and all
necessary governmental approval, permit fees, etc., and meet building standard
construction and finishes, and is subject to all provisions of Lessor's standard
Work Letter. Should total costs of Lessee's required work exceed $187,411.00
such additional cost shall be completed by Lessor for Lessee's account. Lessee
agrees to provide Lessor on or before December 1, 1999 complete plans and
specifications of Lessee's required improvements to the Expansion Space. Lessor
will provide an estimate of the cost to complete the work outlined and Lessor
and Lessee shall agree on the scope of work and maximum estimated cost to
complete the work on or before 12/31/99.
5. This First Addendum to Lease is conditioned upon Lessor securing from
the existing eighth floor tenant a satisfactory Termination Agreement and the
existing eighth floor tenant vacating the eighth floor on or before 12/31/99.
Such agreement was executed by the eighth floor tenant on 11/4/99.
6. EFFECTIVE DATE: The "Effective Date" of this First Addendum to Lease
shall be March 1, 2000, provided that if Lessor is delayed in receiving
possession 12/31/99, the Effective Date will be deferred on a day-for-day basis.
7. PARKING: On the Effective Date Lessor agrees to allocate (3)
additional parking spaces in the Building garage, for a total of (13) spaces (10
+ 3), at the prevailing rate for parking in effect from time to time.
Except as specifically modified herein, all other terms, covenants and
conditions of the Lease, shall remain in full force and effect.
TIME IS OF THE ESSENCE OF THIS AGREEMENT.
IN WITNESS WHEREOF the parties hereto have signed and dated this First
Addendum to Lease in triplicate originals.
LESSEE: LESSOR:
WEBTRENDS CORPORATION VOIT MANAGEMENT COMPANY,
L.P., managing agents for
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
BY: /s/ James T. Richardson BY: /s/
---------------------------------- ---------------------------------
Senior Portfolio Manager
DATE: 11/16/99 DATE: 11-22-99
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
WebTrends Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
333-72653 and 333-76913) on Form S-8 of WebTrends Corporation of our report
dated January 21, 2000, with respect to the balance sheets of WebTrends
Corporation as of December 31, 1998 and 1999, and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999, which report appears in the annual
report on Form 10-K of WebTrends Corporation
/s/ KPMG LLP
Portland, Oregon
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1999
<CASH> 29,397,650
<SECURITIES> 49,885,523
<RECEIVABLES> 4,968,544
<ALLOWANCES> 230,000
<INVENTORY> 63,889
<CURRENT-ASSETS> 85,798,836
<PP&E> 3,192,209
<DEPRECIATION> 816,459
<TOTAL-ASSETS> 90,235,248
<CURRENT-LIABILITIES> 9,699,473
<BONDS> 0
0
0
<COMMON> 77,661,491
<OTHER-SE> 2,874,284
<TOTAL-LIABILITY-AND-EQUITY> 90,235,248
<SALES> 16,523,352
<TOTAL-REVENUES> 19,725,852
<CGS> 1,604,208
<TOTAL-COSTS> 1,604,208
<OTHER-EXPENSES> 16,751,755
<LOSS-PROVISION> 218,405
<INTEREST-EXPENSE> 67,101
<INCOME-PRETAX> 4,296,682
<INCOME-TAX> 1,560,742
<INCOME-CONTINUING> 2,735,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,735,940
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.11
</TABLE>
