10-Q 1 v67221e10-q.txt FORM 10-Q FOR PERIOD ENDED SEPT.30, 2000 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to__________ Commission File Number 0-25215 WEBTRENDS CORPORATION (Exact name of registrant as specified in its charter) OREGON 93-1123283 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 851 SW SIXTH AVENUE, SUITE 1200 PORTLAND, OREGON 97204 (Address of principal executive offices) (503) 294-7025 (Registrant's telephone number) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of common stock, no par value, outstanding on October 31, 2000, was 26,332,078. 2 WEBTRENDS CORPORATION INDEX

~~OREGON~~PART 93I. FINANCIAL INFORMATION PAGE NO. -~~1123283~~------- ~~(State~~Item or1. ~~other~~Condensed ~~jurisdiction~~Consolidated Financial Statements Condensed Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 ............................................ 3 Condensed Consolidated Statements of ~~(IRS~~Operations ~~Employer~~for ~~Identification~~the Nothree and nine months ended September 30, 2000 and 1999 .)............... ~~incorporation~~4 orCondensed ~~organization)~~Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999..................................5 Notes to Condensed Consolidated Financial Statements.................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................7 Item 3. Quantitative and Qualitative Disclosures about Market Risk.............7 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds............................13 Item 6. Exhibits and Reports on Form 8-K.....................................13 Signatures....................................................................14

3 PART I -- FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2 4 WEBTRENDS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS

~~PART~~SEPTEMBER I.30, ~~FINANCIAL~~DECEMBER ~~INFORMATION~~31, ~~PAGE~~2000 ~~NO.~~1999 ------------- ------------- (UNAUDITED) (AUDITED) Assets CURRENT ASSETS: Cash and cash equivalents $ 7,956,125 $ 29,397,650 Short-term investments 78,897,917 49,885,523 Accounts receivable, net 13,285,519 4,968,544 Prepaid expenses and other 2,792,653 1,547,119 ------------- ------------- TOTAL CURRENT ASSETS 102,932,214 85,798,836 Property and equipment, net 7,852,794 2,375,750 Goodwill, net 1,579,464 -- Other assets -- 2,060,662 ------------- ------------- TOTAL ASSETS $ 112,364,472 $ 90,235,248 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,858,764 $ 1,307,690 Accrued liabilities 6,896,598 3,971,504 Accrued income taxes 1,432,770 297,397 Deferred revenue 10,018,484 4,122,882 ------------- ------------- ~~Item~~TOTAL 1.LIABILITIES ~~Condensed~~21,206,616 ~~Consolidated~~9,699,473 ~~Financial~~------------- ~~Statements~~------------- ~~Condensed~~COMMITMENTS ~~consolidated~~AND ~~Balance~~CONTINGENCIES ~~Sheets~~SHAREHOLDERS' atEQUITY ~~June~~Preferred 30stock, ~~2000~~no ~~and~~par ~~December~~value. 31Authorized, ~~1999......3~~15,000,000 ~~Condensed~~shares; ~~consolidated~~no ~~Statements~~shares ofoutstanding ~~Operations~~-- ~~for~~-- ~~the~~Common ~~three and six months ended June 30~~stock, ~~2000~~no ~~and~~par ~~1999~~value.~~............................................4~~ ~~Condensed~~Authorized ~~consolidated~~300,000,000 ~~Statements~~shares; of26,322,791 ~~Cash~~and ~~Flows~~25,817,568, ~~for~~respectively, ~~the~~issued ~~six~~and ~~months~~outstanding ~~ended~~at ~~June~~September 30, 2000 and ~~1999....................................................5~~December ~~Notes~~31, to1999, ~~condensed~~respectively ~~consolidated~~82,327,687 ~~financial~~77,661,491 ~~statements..............................6~~Deferred ~~Item~~compensation, 2.net ~~Management's~~(255,568) ~~Discussion~~(405,391) ~~and~~Accumulated ~~Analysis~~other ofcomprehensive ~~Financial~~loss ~~Condition~~(8,873) ~~and~~-- ~~Results~~Retained ofearnings ~~Operations...............................................7~~9,094,610 ~~PART~~3,279,675 ~~II.~~------------- ~~OTHER~~------------- ~~INFORMATION~~TOTAL ~~Item~~SHAREHOLDERS' 2.EQUITY ~~Changes~~91,157,856 in80,535,775 ~~Securities~~------------- ~~and~~------------- ~~Use~~TOTAL ofLIABILITIES ~~Proceeds...........................................13~~AND ~~Item~~SHAREHOLDERS' 4.EQUITY ~~Submission~~$ of112,364,472 ~~Matters~~$ to90,235,248 ~~vote~~============= of Security Holders...................................13 Item 6. Exhibits and Reports on Form 8-K....................................................13 Signatures ....................................................................................14=============

See accompanying notes to condensed consolidated financial statements. 3 5 WEBTRENDS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

~~JUNE~~THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2000 ~~DECEMBER~~1999 ~~31,~~2000 1999 ----------- ----------- ----------- ----------- (~~UNAUDITED~~Unaudited) (~~AUDITED~~Unaudited) ~~ASSETS CURRENT ASSETS~~Revenue: ~~Cash~~Software ~~and~~licenses ~~cash equivalents~~ $ 2413,~~659~~512,~~719~~037 $ 294,~~397~~401,~~650~~974 ~~Short-term investments 58~~$32,~~511~~733,~~895~~651 49$10,~~885~~370,~~523~~935 ~~Accounts~~Support ~~receivable,~~services ~~net 10~~3,~~623~~505,~~215~~594 4906,~~968,544~~460 ~~Prepaid expenses and other 2~~8,~~826~~182,~~722~~684 1,~~547~~950,~~119~~406 ----------- ----------- ----------- ----------- ~~TOTAL~~Total ~~CURRENT~~revenue ~~ASSETS~~17,017,631 965,~~621~~308,~~551~~434 8540,~~798~~916,~~836~~335 ~~Property~~12,321,341 ~~and~~Cost ~~equipment,~~of ~~net~~revenue 61,~~078~~917,~~104~~303 2406,~~375,750~~843 ~~Other assets 1~~4,~~755~~557,~~419~~820 21,~~060~~040,~~662~~293 ----------- ----------- ----------- ----------- ~~TOTAL~~Gross ~~ASSETS~~margin $15,100,328 ~~104~~4,~~455~~901,~~074~~591 $36,358,515 9011,~~235~~281,~~248~~048 ~~=============~~----------- ~~=============~~----------- ~~LIABILITIES~~----------- ~~AND~~----------- ~~SHAREHOLDERS'~~Operating ~~EQUITY CURRENT LIABILITIES~~expenses: ~~Accounts~~Research ~~payable~~and $development 2,~~021~~858,~~723~~418 $ 1,~~161~~137,~~679~~288 ~~Accrued~~6,918,676 ~~liabilities~~2,640,643 5Sales and marketing 7,~~969~~878,~~569~~629 42,~~117~~549,~~515~~518 ~~Accrued~~19,226,387 ~~income~~6,107,360 ~~taxes~~General and administrative 1,~~230~~803,~~995~~004 ~~297~~828,~~397~~368 ~~Deferred revenue 9~~5,~~299~~019,~~028~~057 41,~~122~~845,~~882~~508 ----------- ----------- ----------- ----------- ~~TOTAL~~Total ~~LIABILITIES~~operating 18expenses 12,~~521~~540,~~315~~051 94,~~699~~515,~~473~~174 31,164,120 10,593,511 ----------- ----------- ----------- ----------- ~~COMMITMENTS~~Income ~~AND~~from ~~CONTINGENCIES~~operations ~~SHAREHOLDERS' EQUITY Preferred stock~~2,560,277 ~~no par value. Authorized~~386,417 155,~~000~~194,~~000~~395 ~~shares;~~687,537 noOther ~~shares outstanding - - Common stock~~income, nonet ~~par value. Authorized 300~~1,~~000~~410,~~000~~808 ~~shares; 26~~1,~~172~~018,~~120~~254 ~~and 25~~4,~~817~~050,~~568~~248 1,843,415 ~~issued~~----------- ~~and~~----------- ~~outstanding~~----------- at----------- ~~June~~Income ~~30,~~before ~~2000~~income ~~and~~taxes ~~December 31~~3, ~~1999~~971,085 ~~respectively 79~~1,~~605~~404,~~339~~671 779,~~661~~244,~~491~~643 ~~Deferred compensation~~2, ~~net (337~~530,~~261)~~952 ~~(405,391)~~Provision ~~Retained~~for ~~earnings~~income 6taxes 1,~~665~~542,~~681~~157 526,659 3,~~279~~429,~~675~~708 949,287 ------------- ------------- ~~TOTAL SHAREHOLDERS' EQUITY 85,933,759 80,535,775~~ ------------- ------------- ~~TOTAL~~Net ~~LIABILITIES~~income ~~AND~~$ ~~SHAREHOLDERS'~~2,428,928 ~~EQUITY~~$ 878,012 $ ~~104~~5,~~455~~814,~~074~~935 $ 901,~~235~~581,~~248~~665 =========== =========== =========== =========== Net income per share: Basic $ 0.09 $ 0.03 $ 0.22 $ 0.07 =========== =========== =========== =========== Diluted $ 0.09 $ 0.03 $ 0.21 $ 0.06 =========== =========== =========== =========== Weighted average shares: Basic 26,234,362 25,409,870 26,071,655 22,959,094 =========== =========== =========== =========== Diluted 28,406,846 27,607,536 28,334,542 25,207,476 =========== =========== =========== ===========

See accompanying notes to condensed consolidated financial statements. 4 6 WEBTRENDS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~THREE~~NINE MONTHS ENDED ~~SIX~~SEPTEMBER ~~MONTHS ENDED JUNE~~ 30, ~~JUNE 30,~~ ------------------------------ --~~---------------------------~~ 2000 1999 ~~2000 1999~~ ------------ -~~-----------~~ ------------- ~~-------------~~ (Unaudited) ~~(Unaudited)~~CASH ~~Revenue~~FLOWS FROM OPERATING ACTIVITIES: ~~Software~~Net ~~licenses~~income $ 105,~~818~~814,~~060~~935 $ 31,~~381~~581,~~988~~665 $Adjustment ~~19,221,614~~to $reconcile ~~5,968,961~~net ~~Support~~income ~~services~~to 2net cash provided by operating activities: Depreciation and amortization 1,~~700~~615,~~874~~864 ~~624~~142,~~593~~126 4Provision for doubtful accounts 520,~~677~~000 110,~~090~~000 1Amortization of deferred compensation 99,~~043~~723 109,~~946~~608 ~~------------~~Disposal ~~------------~~of ~~------------~~assets --~~----------~~ ~~Total~~30,738 ~~revenue~~Tax 13benefit from employee stock option plans 2,~~518~~556,~~934~~271 41,~~006~~205,~~581~~901 23Changes in assets and liabilities,~~898~~ net of assets acquired: Accounts receivable (8,~~704~~215,344) 7(2,~~012~~431,~~907~~528) ~~Cost~~Prepaid ofexpenses ~~revenue~~and other (1,~~571~~245,~~857~~534) ~~343~~(689,~~141~~013) 2Accounts payable 1,~~640~~027,~~517~~119 ~~633~~150,~~451~~198 ~~------------~~Accrued ~~------------~~liabilities ~~------------~~2,640,628 ~~------------~~1,553,613 ~~Gross~~Accrued ~~margin~~income 11taxes 1,~~947~~135,~~077~~373 3(329,~~663,440~~621) 21Deferred revenue 5,~~258~~895,~~187~~603 62,~~379~~035,~~456~~965 ------------- ------------- Net cash provided by operating activities 11,844,638 3,469,652 ------------- ------------- ~~Operating~~CASH ~~expenses~~FLOWS FROM INVESTING ACTIVITIES: ~~Research~~Acquisition of property and ~~development~~equipment 2(6,~~163~~827,~~833~~085) ~~759~~(1,~~863 4~~296,~~060,258~~041) Business acquired (1,~~398~~658,~~996~~470) ~~Sales~~-- ~~and~~Purchase ~~marketing~~of ~~6,380,737~~investments 2(189,~~156~~523,~~663~~760) 11(308,~~347~~378,~~758~~784) ~~3,662,201~~Proceeds ~~General~~from ~~and~~the ~~administrative~~maturity ~~1,951,544~~of ~~561,675~~investments 3162,~~216~~572,~~053~~000 1262,~~017~~949,~~140~~000 ------------ -~~-----------~~ ------------ -~~-----------~~ ~~Total~~Net ~~operating~~cash ~~expenses~~used ~~10,496,114~~for ~~3,478,201~~investing 18activities (35,~~624~~437,~~069~~315) 6(46,~~078~~725,~~337~~825) ------------ -~~-----------~~ ------------ -~~-----------~~ ~~Income~~CASH ~~from~~FLOWS ~~operations~~FROM ~~1,450,963~~FINANCING ~~185,239~~ACTIVITIES: ~~2,634,118~~Proceeds ~~301,119~~from ~~------------~~issuance ~~------------~~of ~~------------~~common stock --~~----------~~ ~~Other income (expense)~~74,135,623 ~~net~~Stock ~~Interest~~issued ~~income~~pursuant ~~1,406,575~~to ~~657,977~~benefit plans 2,~~639~~160,~~439~~025 ~~844~~236,~~880~~765 ~~Interest~~Principal ~~expense~~payments -on ~~(1,867)~~borrowings from shareholders -- (19150,~~719~~000) ------------ -~~-----------~~ ------------ -~~-----------~~ ~~Other~~Net ~~income,~~cash ~~net~~provided ~~1,406,575~~by ~~656,110~~financing activities 2,~~639~~160,~~439~~025 ~~825~~74,~~161~~222,388 ------------- ------------- Effect of foreign currency exchange rate changes on cash (8,873) -- ------------- ------------- ~~Income~~INCREASE ~~before~~(DECREASE) ~~income~~IN ~~taxes~~CASH ~~2,857,538~~AND ~~841,349~~CASH 5EQUIVALENTS (21,~~273~~441,~~557~~525) 130,~~126~~966,~~280~~215 ~~Provision~~CASH ~~for~~AND ~~income~~CASH ~~taxes 983~~EQUIVALENTS,~~245~~ ~~315~~BEGINNING OF PERIOD 29,~~777~~397,650 1,~~887~~098,~~551~~847 ~~422,627~~ ------------ -~~-----------~~ ------------ -~~-----------~~ ~~Net~~CASH ~~income~~AND $CASH 1EQUIVALENTS,~~874,293~~ $END ~~525,572~~OF PERIOD $ 37,~~386~~956,~~006~~125 $ ~~703~~32,~~653~~065,062 ============ =~~===========~~ ============ =~~===========~~ ~~Net~~SUPPLEMENTAL ~~income~~DISCLOSURE ~~per~~OF ~~share:~~CASH ~~Basic~~FLOW $INFORMATION: ~~0.07~~Cash $paid ~~0.02~~during $the ~~0.13~~period $for: ~~0.03~~Interest ~~============ ============ ============ ============ Diluted~~ $ ~~0.07~~-- $ ~~0.02~~18,478 $Income ~~0.12~~taxes $ ~~0.03 ============ ============ ============ ============ Weighted average shares: Basic 26~~6,~~099,373~~625 ~~23,862,578~~$ 25147,~~999,374 21,525,798 ============ ============ ============ ============ Diluted 28,245,059 26,349,304 28,481,931 23,974,716 ============ ============ ============ ============~~000

See accompanying notes to condensed consolidated financial statements. 5 7 WEBTRENDS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1999. Certain prior period amounts have been reclassified to conform to the presentation in the current year. 2. Net Income Per Common and Common Equivalent Share Basic and diluted net income per share are computed using the weighted average number of common shares outstanding during the period, with diluted net income per share including the effect of potentially dilutive common stock equivalents. Dilutive common equivalent shares consist of stock options. Basic and diluted net income per share have been calculated using the treasury stock method. 3. Research and Development Costs 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 as incurred. 4. Cash, Cash Equivalents, and Short-term Investments The Company classifies highly liquid investments purchased with an original maturity of three months or less as cash equivalents. Short-term investments consist of certificates of deposit, commercial paper and corporate debt securities with original maturities in excess of three months and 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. 5. Acquisition of United Kingdom Distributor On June 30, 2000, the Company acquired all the outstanding stock of OpenSoft Communications Ltd., the Company's United Kingdom distributor, for $1.7 million in cash and incurred approximately $150,000 in expenses. The acquisition has been accounted for as a purchase and resulted in approximately $1.7 million in goodwill that is being amortized on a straight-line basis over 7 years. An acquisition related charge of $317,500 was also recorded in the three-month period ended June 30, 2000, and is included as a component of general and administrative expense. 6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION Certain statements in this Form 10-Q contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933, as amended) that involve risks and uncertainties which may cause actual results to differ materially from those predicted in the forward-looking statements. In particular, there are forward-looking statements concerning the Company's expectations for expense levels in both absolute and relative dollars during future periods. Forward-looking statements can be identified by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of the Company's assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, the Company's 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 "Business - Risk Factors" section of the Company's Annual Report on Form 10-K filed on March 30, 2000. OVERVIEW WebTrends is a leading provider of enterprise class software and eServices solutions for Visitor Relationship Management(TM), eBusiness Intelligence and Systems Management. 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), government entities, educational institutions and corporate clients. WebTrends was incorporated in Delaware in 1993 and reorganized in Oregon in 1997. An initial public offering was completed in February 1999 and a follow-on offering was completed in May 1999. Our common stock is listed on the Nasdaq National Market under the symbol "WEBT." WebTrends, WebTrends Commerce Trends, WebTrends Enterprise Reporting Server 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. RESULTS OF OPERATIONS REVENUE Software license revenue consists of fees for licenses of WebTrends' software products while support services revenue consists of annual subscriptions for upgrades, post-sale customer support services, and professional consulting services. Total revenue increased 220.6% to $17.0 million for the third quarter of 2000 from $5.3 million for the third quarter of 1999, and 232.1% to $40.9 million for the nine months ended September 30, 2000 from $12.3 million for the nine months ended September 30, 1999. Primary contributing factors for these changes are discussed below. 7 9 Software Licenses

~~SIX~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~JUNE~~Nine ~~30,~~Months ~~--------------------------------~~Ended ~~2000~~September ~~1999 ---------------- -------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3~~30,~~386,006~~ $September ~~703~~30,~~653~~ Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 702,917 188,398 Provision for doubtful accounts 356,000 60,000 Amortization of deferred compensation 68,130 73,072 Tax benefit from employee stock option plans 1,130,515 359,621 Changes in assets and liabilities, net of assets acquired: Accounts receivable (5,389,040) (1,338,140) Prepaid expenses and other 780,520 269,079 Accounts payable 190,078 8,781 Accrued liabilities 1,713,597 651,476 Accrued income taxes 933,598 - ~~Deferred revenue 5,176,146 1,648,690~~ ------------ ------------ ~~Net cash provided by operating activities 9,048,467 2,624,630~~ ------------ ------~~------~~ ~~CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (4,202,121) (846,684) Business acquisition, net of cash acquired (1,771,238)~~ - ~~Purchase of investments, net (8,626,372) (30,335,788)~~ ------------ ------------ ~~Net cash used for investing activities (14,599,731) (31,182,472)~~ ------------ -----~~-------~~ ~~CASH~~2000 ~~FLOWS~~1999 ~~FROM~~Change ~~FINANCING~~2000 ~~ACTIVITIES:~~1999 ~~Proceeds~~Change ~~from~~Software ~~issuance~~Licenses of$ ~~common stock - 74~~13,~~037,698~~512 ~~Stock~~$ ~~issued pursuant to benefit plans 813~~4,~~333~~402 ~~199,674~~207.0% ~~Principal~~$ ~~payments on borrowings from shareholders - (150~~32,~~000)~~734 ~~------------~~$ ~~------------ Net cash provided by financing activities 813~~10,~~333~~371 ~~74,087,372~~215.6% ~~------------~~Percent ~~------------~~of ~~INCREASE~~Revenues ~~(DECREASE)~~79.4% IN82.9% ~~CASH~~80.0% ~~AND~~84.2% ~~CASH EQUIVALENTS~~ (~~4,737,931)~~Dollar ~~45,529,530~~amounts ~~CASH~~in ~~AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,397,650 1,098,847 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,659,719 $ 46,628,377 ============ ============~~thousands)

WebTrends benefited from a very strong market for Internet infrastructure products and the strategic contribution of our solutions to our customers' eBusiness success. Software license revenue increased as a result of continued strong growth across each of our product categories as new releases of existing products in late 1999 and early 2000 gained increasing customer acceptance. The large investment made in significantly increasing our sales force to more than 65 as of September 30, 2000 also increased sales for the three and nine-month periods ended September 30, 2000. Despite the fast growth in software license revenue, the pace of growth in support services was even more rapid and, as a consequence, software license revenue decreased as a percentage of total revenue in the three and nine month periods ended September 30, 2000, compared to the prior year periods. Support Services

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, ---------------------------~~------~~ ---------------------------~~-----~~ 2000 1999 Change 2000 1999 Change ~~(Dollar~~Support ~~amounts~~Services ~~in thousands) Software Licenses~~ $ 103,~~818~~506 $ ~~3,382~~906 ~~219~~286.97% $ 198,~~222~~183 $5 1,~~969~~950 ~~222~~319.05% Percent of Revenues 8020.06% 8417.41% 8020.40% 8515.18% (Dollar amounts in thousands)

The increase in support services revenue resulted primarily from additional consulting, training and support services associated with the sale of our new Enterprise Reporting Service and Commerce Trends products which accounted for approximately 65% of the increase. The remaining increase was derived primarily from increased subscription revenue as we experience continued growth in the installed base of customers. To support these new products our support services staff grew to more than 80 as of September 30, 2000. Cost of Revenue

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, ----------------------------~~-----~~ ----------------------------~~----~~ 2000 1999 Change 2000 1999 Change ~~(Dollar~~Cost ~~amounts~~of inRevenue ~~thousands) Support Services~~ $ 21,~~701~~917 $ ~~625~~407 ~~332~~371.43% $ 4,~~677~~558 $ 1,~~044~~040 ~~348~~338.01% Percent of Revenues 2011.03% 157.67% 1911.61% 148.94% (Dollar amounts in thousands)

Cost of revenue includes product packaging, software documentation, duplication, labor, and other costs associated with product fulfillment, royalties associated with the sale of WebTrends' products, and costs associated with providing technical support and consulting services to customers. The increase in cost of revenue resulted primarily from the hiring of customer support and professional service personnel to meet the demands of a larger customer base. 8 10 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

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, ----------------------------~~-----~~ ----------------------------~~----~~ 2000 1999 Change 2000 1999 Change ~~(Dollar~~Reseach ~~amounts~~and inDevelopment ~~thousands)~~$ ~~Cost~~2,858 ~~of Revenue~~ $ 1,~~572~~137 151.3% $ ~~343~~6,919 ~~358.1%~~$ 2,641 ~~$ 633 316~~162.80% Percent of Revenues 1116.68% 821.64% 1116.09% 921.04%

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 research and development expenses in absolute dollars is attributable to the doubling of research and development employees between December 31, 1999 and September 30, 2000. Research and development expenses decreased as a percentage of total revenue primarily due to the rapid growth in total revenue. 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

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, ----------------------------~~-----~~ -----------------------------~~---~~ 2000 1999 Change 2000 1999 Change ~~(Dollar~~Sales ~~amounts in thousands) Research~~ and ~~Development~~Marketing $ 27,~~164~~879 $ ~~760~~2,550 ~~184~~209.80% $ 419,~~060~~226 $ 16,~~399~~107 ~~190~~214.28% Percent of Revenues 1646.03% 1948.0% 1747.0% 1949.96% (Dollar amounts in thousands)

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. Sales and marketing expenses decreased as a percentage of sales as the increased costs associated with building the sales force were more than offset by the increases in sales resulting from the headcount increase. We expect sales and marketing expenses will continue to increase in absolute dollars as we continue to expand our marketing programs and sales force to increase brand awareness, but they may vary as a percent of total revenue. 9 11 General and Administrative

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, -----------------------------~~----~~ ---------------------------~~-----~~ 2000 1999 Change 2000 ~~1999~~2000 Change ~~(Dollar~~General ~~amounts in thousands) Sales~~ and ~~Marketing~~Administrative $ 61,~~381~~803 $ ~~2,157~~828 ~~195~~117.97% $11 5,~~348~~019 $ 31,~~662~~846 ~~209~~172.90% Percent of Revenues 4710.26% 5315.86% 4712.53% 5215.20% (Dollar amounts in thousands)

General and administrative expenses consist primarily of salaries and other employee-related costs for executive, financial, human resources, and infrastructure personnel. General legal and accounting services, insurance and general facility costs are also included within general and administrative expenses. The nine-month period ended September 30, 2000 includes a charge of $317,500 related the acquisition of OpenSoft Communications Ltd. incurred during the quarter ended June 30, 2000. The increase in absolute dollars, excluding the acquisition charge, is primarily attributable to the addition of accounting and administrative personnel necessary to handle the increased level of transactions. We expect general and administrative expenses will continue to increase in absolute dollars to support the anticipated expansion of sales and operations, but they may vary as a percent of total revenue. INCOME TAXES Income tax provisions for the three and nine-month periods ended September 30, 2000 reflect estimated effective tax rates of 38.8% and 37.1%, respectively while income tax provisions for the three and nine month periods ended September 30, 1999 reflect estimated effective tax rates of 37.5%. The slight year-to-date decrease is primarily due to increased utilization of research and development tax credits associated with the Company's investment in developing new products. The effective tax rate is subject to change in future periods as circumstances affecting the tax rate may change. LIQUIDITY AND CAPITAL RESOURCES WebTrends had cash and cash equivalents and short-term investments of $86.9 million at September 30, 2000, representing the Company's primary source of liquidity, and working capital of approximately $81.7 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 currently have no debt instruments or credit facilities outstanding. Cash and cash equivalents and short-term investments increased by $7.6 million during the nine months ended September 30, 2000, primarily as a result of cash generated by operating and financing activities. Net cash provided by operating activities was approximately $11.8 million for the nine months ended September 30, 2000, and resulted primarily from profitable operations, increases in deferred revenues, accounts payable, accrued liabilities and accrued income taxes, partially offset by increases in accounts receivable and prepaid expenses. Cash used by investing activities, excluding investment activity, was approximately $8.5 million for the nine months ended September 30, 2000 and consisted primarily of purchased computer equipment and furniture and fixtures related to increased personnel as well as the acquisition of OpenSoft Communications Ltd. Cash provided by financing activities of $2.2 million was the result of shares issued under employee benefit plans. While increasing in absolute dollars, for the three and nine-month periods ended September 30, 2000, operating expenses decreased as a percentage of total revenue to 73.7% and 76.2%, respectively, from 85.1% and 86.0% for the same periods in 1999. Since inception, we have continued to increase our operating expenses in terms of absolute dollars. We anticipate that we will continue to reinvest revenues in operating expenses for the foreseeable future, and 10 12 that these expenses plus capital expenditures will constitute a material use of cash resources. Additionally, we may utilize cash resources to fund acquisitions or investments in businesses, technologies, or product lines that are complementary to our business. We believe 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. RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB Opinion No. 25, (FIN 44). FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee, which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock options awards to add a reload feature are effective for awards modified after January 12, 2000. This statement did not have a material impact on our financial condition or results of operations. In March 2000, the Emerging Issues Task Force of the FASB reached consensus on Issue 00-2 "Accounting for Website Development Costs" ("EITF 00-2"). EITF 00-2 establishes how an entity should account for costs incurred to develop a website. It requires that an entity capitalize costs during the web application and infrastructure and graphics development stages of development. The consensus is effective for all costs incurred beginning after June 30, 2000. This statement did not have a material impact on our financial condition or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, SAB 101B was issued which defers the implementation date of SAB 101 until October 1, 2000. We do not expect that this statement will have a significant impact on our financial condition or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of change in the value of short-term investments and financial instruments caused by fluctuations in investment prices, interest rates and foreign currency exchange rates. The Company is exposed to foreign exchange rate fluctuations related to the translation of the financial results of our foreign subsidiary into U.S. dollars during consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of foreign exchange rate fluctuations on the Company for the three and nine months ended September 30, 2000 was immaterial. All other financial transactions of the Company are denominated in U.S. dollars. The Company had no foreign subsidiaries prior to June 30, 2000. WebTrends has not entered into any derivative financial instruments to manage interest rate risk or for speculative purposed and is not currently evaluating the future us 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 form the carrying amount and that the market risk arising from our holdings at September 30, 2000 is not material. 11 13 PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (d) USE OF PROCEEDS On February 18, 1999 WebTrends' registration statement on form S-1, file number 333-69171, became effective. Proceeds to WebTrends were $35,156,421. The proceeds are being applied in part to working capital with the remainder in temporary investments consisting of money market accounts available on a daily basis and short-term commercial paper. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS See Exhibit Index. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter covered by this Form 10-Q. 12 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WEBTRENDS CORPORATION (Registrant) Date: November 14, 2000 By /s/ JAMES T. RICHARDSON --------------------------------- James T. Richardson Senior Vice President and Chief Financial Officer (principal financial and chief accounting officer) 13 15 INDEX TO EXHIBITS

~~Three~~EXHIBIT ~~Months~~NO. ~~Ended~~DESCRIPTION ~~Six Months Ended June 30, June 30,~~ -----------~~----------------------~~ -----------~~---------------------~~ ~~2000~~10.1 ~~1999~~Amended ~~Change 2000 1999 Change (Dollar amounts in thousands) General~~ and ~~Administrative~~Restated $1998 ~~1,952~~Stock $Incentive ~~562~~Compensation ~~247.5%~~Plan ~~$3,216 $~~27.1~~,017~~ ~~216.2%~~Financial ~~Percent~~Data ~~of Revenues 14.4% 14.0% 13.5% 14.5%~~Schedule

EXHIBIT NO. DESCRIPTION 3.1 The Company's Third Restated Articles of Incorporation, as amended on May 26, 2000. 10.1 Lease for certain office space entered into by the Company and Fox Tower, LLC on June 22, 2000 10.2 Amended and Restated 1998 Stock Incentive Compensation Plan 27.1 Financial Data Schedule

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