<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
January 21, 2000
Date of Report (Date of earliest event reported)
PRIMUS KNOWLEDGE SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
WASHINGTON 0-26273 91-1350484
(State of incorporation) (Commission file number (I.R.S. Employer)
Identification No.)
1601 FIFTH AVENUE, SUITE 1900
SEATTLE, WASHINGTON 98101
(Address of principal executive offices, including zip code)
(206) 292-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2.
On February 4, 2000, Primus Knowledge Solutions, Inc. filed a Form 8-K to report
its completing the merger of 2order.com, Inc. Pursuant to Item 7 of Form 8-K,
Primus indicated that it would file certain financial information no later than
the date required by Item 7 of Form 8-K. This Amendment No. 1 is being filed to
provide such financial information.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
See exhibit 20.1 for the audited financial statements of 2order.com, Inc.
as of and for the years ended December 31, 1999 and 1998.
(b) UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the merger between Primus Knowledge Solutions, Inc. ("Primus" or
the "Company") and 2order.com, Inc. ("2order.com"), which occurred on January
21, 2000. The 2order.com merger was accounted for under the pooling-of-interests
method of accounting in accordance with APB Opinion No. 16. Under the pooling-
of-interests method of accounting, all periods prior to the merger are restated
to include the accounts and results of operations as though the companies were
combined for all periods presented.
The unaudited pro forma condensed combined balance sheet has been prepared
to reflect the 2order.com merger as if it occurred on December 31, 1999. The
unaudited pro forma condensed combined statements of operations reflect the
results of operations of Primus and 2order.com for the years ended December 31,
1999, 1998 and 1997 as if the 2order.com merger occurred on January 1, 1997.
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the combined financial position or results of operations in future periods or
the results that actually would have been realized had Primus and 2order.com
been a combined company during the specified periods. In the opinion of
management, all adjustments necessary to present fairly such pro forma financial
information have been made to the condensed combined financial statements and
are reflected in the accompanying notes. The unaudited pro forma condensed
combined financial statements, including the notes thereto, are qualified in
their entirety by reference to, and should be read in conjunction with the
historical consolidated financial statements and the related notes thereto of
Primus included in its annual report on Form 10-K for the year ended December
31, 1999 as filed with the SEC and the audited financial statements of
2order.com included in this filing.
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
PRO FORMA
PRIMUS 2ORDER.COM ADJUSTMENTS COMBINED
---------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,023 $ 1,579 $ -- $ 17,602
Short-term investments 37,055 -- -- 37,055
Accounts receivable, net 8,110 369 -- 8,479
Prepaid expenses and other current assets 950 43 -- 993
---------- ------------ ------------- ----------
Total current assets 62,138 1,991 -- 64,129
Property and equipment, net 2,548 305 -- 2,853
Other assets 424 -- -- 424
---------- ------------ ------------- ----------
Total assets $ 65,110 $ 2,296 $ -- $ 67,406
========== ============ ============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 1,318 97 -- 1,415
Accrued liabilities 3,781 409 -- 4,190
Compensation-related accruals 2,888 361 -- 3,249
Current portion of long-term debt -- 319 -- 319
Deferred revenue 10,190 228 -- 10,418
Accrued merger expenses -- -- 500 500
---------- ------------ ------------- ----------
Total current liabilities 18,177 1,414 500 20,091
---------- ------------ ------------- ----------
Long-term debt, net of current portion -- 60 -- 60
Redeemable convertible preferred stock -- 9,054 (9,054) --
Shareholders' equity (deficit):
Common stock 390 34 3 427
Additional paid-in capital 93,214 -- 9,051 102,265
Deferred stock-based compensation (114) -- -- (114)
Accumulated other comprehensive loss (110) -- -- (110)
Accumulated deficit (46,447) (8,266) (500) (55,213)
---------- ------------ ------------- ----------
Total shareholders' equity (deficit) 46,933 (8,232) 8,554 47,255
---------- ------------ ------------- ----------
Total liabilities and shareholders' equity (deficit) $ 65,110 $ 2,296 $ -- $ 67,406
========== ============ ============= ==========
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial statements.
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
PRIMUS 2ORDER.COM COMBINED
---------------- ------------------- ----------------
<S> <C> <C> <C>
Revenue:
License $ 17,784 $ 985 $ 18,769
Services 7,360 1,189 8,549
---------------- ------------------- ----------------
Total revenue 25,144 2,174 27,318
---------------- ------------------- ----------------
Cost of revenue:
License 989 123 1,112
Services 5,358 1,255 6,613
---------------- ------------------- ----------------
Total cost of revenue 6,347 1,378 7,725
---------------- ------------------- ----------------
Gross profit 18,797 796 19,593
---------------- ------------------- ----------------
Operating expenses:
Sales and marketing 17,161 2,019 19,180
Research and development 8,077 2,100 10,177
General and administrative 5,924 733 6,657
Merger related costs 1,520 -- 1,520
---------------- ------------------- ----------------
Total operating expenses 32,682 4,852 37,534
---------------- ------------------- ----------------
Loss from operations (13,885) (4,056) (17,941)
Other income 1,533 -- 1,533
Other expense (399) (41) (440)
---------------- ------------------- ----------------
Loss before income taxes (12,751) (4,097) (16,848)
Income tax expense 267 -- 267
---------------- ------------------- ----------------
Net loss (13,018) (4,097) (17,115)
Preferred stock accretion (431) (688) (1,119)
---------------- ------------------- ----------------
Net loss available to common shareholders $ (13,449) $ (4,785) $ (18,234)
================ =================== ================
Basic and diluted net loss per common share $ (1.41) $ (1.81)
================ ================
Shares used in computing basic and diluted net
loss per common share 9,523,586 10,081,183
================ ================
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial statements.
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
PRIMUS 2ORDER.COM COMBINED
---------------- ------------------- ----------------
<S> <C> <C> <C>
Revenue:
License $ 6,173 $ 1,611 $ 7,784
Services 3,389 1,046 4,435
---------------- ------------------- ----------------
Total revenue 9,562 2,657 12,219
---------------- ------------------- ----------------
Cost of revenue:
License 375 133 508
Services 3,098 1,047 4,145
---------------- ------------------- ----------------
Total cost of revenue 3,473 1,180 4,653
---------------- ------------------- ----------------
Gross profit 6,089 1,477 7,566
---------------- ------------------- ----------------
Operating expenses:
Sales and marketing 10,707 1,830 12,537
Research and development 4,137 1,820 5,957
General and administrative 3,888 630 4,518
---------------- ------------------- ----------------
Total operating expenses 18,732 4,280 23,012
---------------- ------------------- ----------------
Loss from operations (12,643) (2,803) (15,446)
Other income 187 39 226
Other expense (247) (31) (278)
---------------- ------------------- ----------------
Loss before income taxes (12,703) (2,795) (15,498)
Income tax benefit (57) -- (57)
---------------- ------------------- ----------------
Net loss (12,646) (2,795) (15,441)
Preferred stock accretion (545) (292) (837)
---------------- ------------------- ----------------
Net loss available to common shareholders $ (13,191) $ (3,087) $ (16,278)
================ =================== ================
Basic and diluted net loss per common share $ (3.21) $ (3.49)
================ ================
Shares used in computing basic and diluted net
loss per common share 4,111,270 4,668,404
================ ================
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial statements.
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
PRIMUS 2ORDER.COM COMBINED
---------------- ------------------- ----------------
<S> <C> <C> <C>
Revenue:
License $ 3,558 $ 876 $ 4,434
Services 2,925 137 3,062
---------------- ------------------- ----------------
Total revenue 6,483 1,013 7,496
---------------- ------------------- ----------------
Cost of revenue:
License 97 106 203
Services 2,929 80 3,009
---------------- ------------------- ----------------
Total cost of revenue 3,026 186 3,212
---------------- ------------------- ----------------
Gross profit 3,457 827 4,284
---------------- ------------------- ----------------
Operating expenses:
Sales and marketing 4,762 954 5,716
Research and development 2,766 811 3,577
General and administrative 1,789 524 2,313
---------------- ------------------- ----------------
Total operating expenses 9,317 2,289 11,606
---------------- ------------------- ----------------
Loss from operations (5,860) (1,462) (7,322)
Other income 103 449 552
Other expense (143) (19) (162)
---------------- ------------------- ----------------
Loss before income taxes (5,900) (1,032) (6,932)
Income tax expense 34 -- 34
---------------- ------------------- ----------------
Net loss (5,934) (1,032) (6,966)
Preferred stock accretion (301) (72) (373)
---------------- ------------------- ----------------
Net loss available to common shareholders $ (6,235) $ (1,104) $ (7,339)
================ =================== ================
Basic and diluted net loss per common share $ (1.54) $ (1.60)
================ ================
Shares used in computing basic and diluted net
loss per common share 4,036,979 4,594,113
================ ================
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial statements.
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pursuant to an agreement and Plan of Merger, Primus Knowledge Solutions,
Inc. ("Primus" or the "Company") issued 1,506,127 shares of common stock in
exchange for all issued and outstanding shares of 2order.com, Inc.
("2order.com") capital stock and assumed all issued and outstanding stock
options and warrants of 2order.com, which represents, on a converted basis,
150,378 shares of the Company's common stock. The merger has been accounted for
as a pooling-of-interests in accordance with APB No. 16 and accordingly, the
Company's historical financial statements presented in future reports will be
restated to include the results of operations of 2order.com. The pro forma
condensed combined statements of operations reflect the restatement of Primus'
financial statements as if the companies had been combined for all periods
presented, and the pro forma condensed combined balance sheet has been adjusted
to reflect the merger as if it had occurred on December 31, 1999.
2. PRO FORMA ADJUSTMENTS
Pro forma adjustments to the December 31, 1999 unaudited pro forma
condensed combined balance sheet have been prepared to reflect the conversion of
the 2order.com redeemable convertible preferred stock to Primus common stock, to
reflect the conversion of 2order.com's common stock par value to that of Primus
and to reflect the accrual of approximately $500,000 of merger related costs
consisting primarily of financial advisory fees, attorneys, accountants,
financial printing, and other related charges.
3. PRO FORMA LOSS PER COMMON SHARE
The unaudited pro forma condensed combined net loss per share, basic and
diluted, is based upon the weighted average number of common shares of Primus
and 2order.com. 2order.com shares are converted using the applicable merger
exchange ratio.
4. CONFORMING AND RECLASSIFICATION ADJUSTMENTS
There were no adjustments required to conform the accounting policies of
2order.com. There were no intercompany transactions in the periods presented.
<PAGE>
(c) EXHIBITS
The following exhibits are filed herewith:
20.1 2order.com, Inc. audited financial statements for the years ended
December 31, 1999 and 1998
23.1 Consent of KPMG LLP, Independent Auditors
<PAGE>
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 hereunto duly authorized.
PRIMUS KNOWLEDGE SOLUTIONS, INC.
/s/ Elizabeth J. Huebner
Date: April 3, 2000 By: Elizabeth J. Huebner
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal financial and chief accounting
officer)
<PAGE>
EXHIBIT 20.1
Independent Auditors' Report
The Board of Directors
2order.com, Inc.:
We have audited the accompanying balance sheets of 2order.com, Inc. (formerly BT
Squared Technologies, Inc.) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's 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 2order.com, Inc. (formerly BT
Squared Technologies, Inc.) as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Atlanta, Georgia
March 6, 2000
1
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents (includes restricted cash of
$403,115 and $394,279 at December 31, 1999 and 1998) $ 1,579,420 3,465,139
Trade accounts receivable, less allowances of $127,082
at December 31, 1999 368,556 726,690
Due from investor -- 1,200,000
Prepaid and other current assets 43,223 33,355
----------- ---------
Total current assets 1,991,199 5,425,184
Property and equipment, net 304,622 462,617
----------- ---------
$ 2,295,821 5,887,801
=========== =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Obligations due under line of credit agreement $ -- 84,979
Current installments of long-term debt 319,167 57,624
Current installments of capital lease obligations 72,054 86,814
Trade accounts payable 97,075 181,935
Accrued compensation 361,045 66,261
Other accrued liabilities 147,416 96,791
Deferred revenues 228,310 328,663
Customer deposits 120,325 6,866
----------- ---------
Total current liabilities 1,345,392 909,933
Long-term debt, excluding current installments 60,038 46,059
Capital lease obligations, excluding current installments 68,437 135,750
----------- ---------
Total liabilities 1,473,867 1,091,742
----------- ---------
Redeemable preferred stock, $.01 par value. 10,000,000
shares authorized, stated at redemption value, net
of unaccreted discount:
Series A Convertible Participating Preferred Stock,
2,720,455 shares designated, issued and
outstanding at December 31, 1999 and 1998 4,127,106 3,813,380
Series B Convertible Participating Preferred Stock,
2,873,564 shares designated; 2,643,679 shares
issued and outstanding at December 31, 1999 and 1998 4,926,839 4,552,959
Stockholders' equity (deficit):
Common stock, $0.01 par value. 20,000,000 shares authorized;
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
3,382,500 and 3,260,000 shares
issued and outstanding at December 31, 1999
and 1998, respectively 33,825 32,600
Additional paid-in capital -- 222,220
Accumulated deficit (8,265,816) (3,825,100)
----------- ---------
Total stockholders' deficit (8,231,991) (3,570,280)
----------- ---------
$ 2,295,821 5,887,801
=========== =========
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Statements of Operations
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Revenues:
Software $ 922,920 1,269,007
Professional services 821,515 801,658
Maintenance 367,317 244,011
Royalty 61,944 342,588
----------------- -----------------
Total revenues 2,173,696 2,657,264
Cost of revenues 1,377,901 1,179,747
----------------- -----------------
Gross profit 795,795 1,477,517
Sales and marketing expense 2,019,167 1,830,608
General and administrative expense 732,632 629,978
Research and development expense 2,099,945 1,819,722
----------------- -----------------
Loss from operations (4,055,949) (2,802,791)
Interest expense (25,743) (29,582)
Other (expense) income (14,330) 39,032
Loss on sale of equipment (583) (1,452)
----------------- -----------------
Loss before income taxes (4,096,605) (2,794,793)
Income taxes -- --
----------------- -----------------
Net loss $ (4,096,605) (2,794,793)
================= =================
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common stock
------------------------------- Additional
Number of paid-in Accumulated
shares Amount capital deficit Total
---------------- ------------ ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 3,260,000 $ 32,600 514,076 (1,030,307) (483,631)
Accretion of original issue
discount and cumulative
annual return on
Series A Convertible
Participating
Preferred Stock -- -- (291,856) -- (291,856)
Net loss -- -- -- (2,794,793) (2,794,793)
---------------- ----------- --------- ------------- --------------
Balance at December 31, 1998 3,260,000 32,600 222,220 (3,825,100) (3,570,280)
Accretion of original issue
discount and cumulative
annual return on Series A
Convertible Participating
Preferred Stock -- -- (313,726) -- (313,726)
Accretion of original issue
discount and cumulative
annual return on Series B
Convertible Participating
Preferred Stock -- -- (29,769) (344,111) (373,880)
Exercise of employee options 97,500 975 96,525 -- 97,500
Exercise of warrants 25,000 250 24,750 -- 25,000
Net loss -- -- -- (4,096,605) (4,096,605)
---------------- ----------- --------- ------------- --------------
Balance at December 31, 1999 3,382,500 $ 33,825 -- (8,265,816) (8,231,991)
================ =========== ========= ============= ==============
</TABLE>
See accompanying notes to the financial statements
5
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Statements of Cash Flows
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,096,605) (2,794,793)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 207,871 229,754
Stock option compensation expense 213,250 --
Loss on disposal of equipment 583 1,452
Changes in operating assets and liabilities:
Trade accounts receivable 358,134 (249,986)
Prepaid and other current assets (9,868) (5,184)
Trade accounts payable (84,860) 105,328
Accrued liabilities 132,159 25,161
Deferred revenues (100,353) (32,891)
Customer deposits 113,459 (6,500)
----------------- -----------------
Net cash used in operating activities (3,266,230) (2,727,659)
----------------- -----------------
Cash flows from investing activities - purchases of
property and equipment (50,459) (235,110)
----------------- -----------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreement (84,979) 84,979
Proceeds from issuance of long-term debt 350,000 50,000
Principal repayments on long-term debt (74,478) (55,626)
Principal repayments on capital lease obligations (82,073) (78,104)
Sale of Series B Convertible Participating Preferred
Stock, net of $47,042 in offering costs 1,200,000 3,352,959
Issuance of common stock 122,500 --
----------------- -----------------
Net cash provided by financing activities 1,430,970 3,354,208
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (1,885,719) 391,439
Cash and cash equivalents at beginning of year 3,465,139 3,073,700
----------------- -----------------
Cash and cash equivalents at end of year $ 1,579,420 3,465,139
================= =================
Supplemental disclosures of cash paid during the year
for interest $ 8,543 8,503
================= =================
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
Supplemental disclosure of noncash financing activities:
Equipment purchased through capital lease obligations $ -- 161,040
=============== ===============
Due from investor balance resulting from sale of Series B
Convertible Participating Preferred Stock $ -- 1,200,000
=============== ===============
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(1) Summary of Significant Accounting Policies
(a) Description of Business
2order.com, Inc. (formerly BT Squared Technologies, Inc.) - (the
"Company") develops and sells a category of software known as
"Interactive Selling Systems" that enables the manufacturers of
complex products to sell more effectively. The Company has also
developed certain software products from which they receive royalties.
The Company services customers throughout the United States, primarily
in the manufacturing industry.
(b) Cash Equivalents
Cash equivalents of $453,966 and $1,513,616 at December 31, 1999 and
1998, respectively, consist principally of investments in money market
funds. For purposes of the statement of cash flows, the Company
considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(c) Due From Investor
Due from investor at December 31, 1998 relates to a wire transfer for
the purchase of Series B Convertible Participating Preferred Stock
which was not received until January 1999.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment
under capital leases are stated at the present value of minimum lease
payments. Depreciation is calculated on the double-declining balance
method over estimated useful lives ranging from two to seven years.
Property and equipment held under capital leases are amortized on the
double-declining balance method over the shorter of the lease term or
estimated useful life of the asset.
(e) Revenue Recognition and Deferred Revenue
Revenues from software sales are recorded in accordance with Statement
of Position 97-2, Software Revenue Recognition, whereby revenue is
recognized upon delivery of the product or upon customer acceptance in
instances where there are significant post-delivery obligations prior
to acceptance.
Revenues from professional services, including software installation,
training and implementation, are recognized upon performance of the
related services. Revenues derived from maintenance and support
contracts are recognized ratably over the terms of the related
contract, usually one year. Royalty revenues are recorded on the
accrual basis in accordance with the terms of the contract.
Deferred revenues represent amounts billed to or payments received
from customers for products prior to delivery or acceptance and
services billed in advance of performance.
8
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(1) Summary of Significant Accounting Policies - (Continued)
(f) Research and Development Costs and Software Development Costs
Software development costs consist principally of compensation and
benefits paid to the Company's employees. All software development
costs incurred prior to establishing technological feasibility are
expensed as research and development costs when incurred. Because the
Company's products reached this stage of development almost
concurrently with general release, the Company did not capitalize any
software development costs during 1999 or 1998.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(h) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for its fixed plan stock options. As such, compensation
expense would generally be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. The Company has also provided pro forma disclosures as if the
fair value-based method of accounting prescribed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), had been used to account for its fixed
plan stock options.
The Company also applies the provisions of SFAS No. 123 in valuing the
issuance of equity instruments to nonemployees.
(i) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
9
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(1) Summary of Significant Accounting Policies - (Continued)
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(k) Reclassifications
Certain amounts in the accompanying 1998 financial statements have
been reclassified to conform to the presentation adopted in the 1999
financial statements.
(l) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. The Company has no "other comprehensive
income" to report for the years ended December 31, 1999 and 1998.
(m) Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, trade accounts
receivable, trade accounts payable, accrued liabilities, and
promissory notes approximate fair value because of the short maturity
of these financial instruments. The carrying amount of the term loan
payable approximates fair value because the debt bears interest at a
variable rate.
10
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(2) Property and Equipment
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Furniture and fixtures $ 204,415 204,415
Telecommunications equipment 93,062 93,062
Office equipment 77,279 64,262
Computer equipment 505,156 471,389
Purchased software 109,004 109,004
---------------- ---------------
988,916 942,132
Less accumulated depreciation and amortization 684,294 479,515
---------------- ---------------
Property and equipment, net $ 304,622 462,617
================ ===============
</TABLE>
(3) Financing Agreements and Long-Term Debt
The Company had an equipment financing agreement with a commercial bank
that permitted the Company to borrow through April 30, 1997 up to $157,730
in loans for equipment purchases at interest rates of 200 basis points over
the Treasury Rate corresponding to the final maturity of each loan. Loans
were made as equipment was purchased and were secured by such equipment.
Loans outstanding at December 31, 1998 accrue interest at rates ranging
from 7.85% to 8.54% and mature three years after the date of borrowing. All
balances outstanding were repaid during 1999.
In November and December 1998, the Company issued $300,000 in 10%
subordinated convertible notes pursuant to a Securities Purchase Agreement
executed November 30, 1998. The notes provided bridge financing for the
Company and were due the earlier of January 31, 1999 or the closing date of
the next round of equity financing of preferred shares. In connection with
this financing, the Company issued warrants to purchase 17,242 shares of
the Company's common stock at an exercise price of $1.74 per share. On
December 31, 1998, all outstanding notes were converted at a rate of $1.74
per share into Series B Convertible Participating Preferred Stock.
In December 1999, the Company issued $300,000 in promissory notes to the
preferred stockholders of the Company pursuant to a Securities Purchase
Agreement executed December 27, 1999. The notes provided bridge financing
for the Company and were due the earlier of December 29, 2000 or the date
of sale of all or substantially all of the business of the Company. These
notes accrue interest at 10% per annum. The outstanding balance on these
notes was repaid in January 2000.
11
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(3) Financing Agreements and Long-Term Debt - (Continued)
On May 18, 1998, the Company entered into a line of credit agreement with a
financial institution which permitted the Company to borrow up to $300,000
for working capital needs through December 31, 1998 at an interest rate
equal to the 30-day commercial paper rate plus 2.6%. On July 29, 1998,
$50,000 in borrowings were converted into a term loan as disclosed below,
thereby reducing the available borrowings under the line of credit to
$250,000.
On March 5, 1999, an additional $50,000 in borrowings were converted into a
term loan as discussed below, and the maturity date for the remaining
$200,000 in available borrowings under the line of credit agreement was
extended to December 31, 1999.
The line of credit is secured by $403,115 of cash on deposit with the
financial institution as of December 31, 1999, and substantially all other
assets of the Company. There were no borrowings outstanding under the line
of credit as of December 31, 1999.
Long-term debt at December 31, 1999 and 1998 consists of:
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Term loan payable in 60 monthly installments of $833
plus interest at the 30-day commercial paper rate
plus 2.6%, through September 1, 2003 $ 37,500 46,667
Term loan payable in 60 monthly installments of $833
plus interest at the 30-day commercial paper rate
plus 2.6%, through March 1, 2004 41,705 --
Promissory notes under bridge financing agreement,
as described above 300,000 --
Loans under equipment financing agreement, as
described above -- 57,016
--------------- --------------
Total long-term debt 379,205 103,683
Less current installments of long-term debt (319,167) (57,624)
--------------- --------------
Long-term debt, excluding
current installments $ 60,038 46,059
=============== ==============
</TABLE>
12
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(3) Financing Agreements and Long-Term Debt - (Continued)
Principal Payments
At December 31, 1999, future long-term debt payments are as follows:
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
2000 $ 319,167
2001 19,992
2002 19,992
2003 16,713
2004 3,341
---------------
Total $ 379,205
===============
</TABLE>
(4) Income Taxes
The Company has not recorded any income tax expense during the years ended
December 31, 1999 and 1998 because of operating losses. As a result, the
effective income tax rate is different from amounts computed by applying
the statutory U.S. Federal income tax rate of 34% to loss before provision
for income taxes because of the Company's provision for a valuation
allowance on substantially all deferred income tax assets.
Income tax expense (benefit) for the years ended December 31, 1999 and 1998
differed from the amounts computed by applying the statutory U.S. Federal
income tax rate of 34% to loss before provision for income taxes as a
result of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- ---------------
<S> <C> <C>
Computed expected income tax benefit $ (1,392,846) (950,230)
(Increase) decrease in income tax benefit resulting from:
State income tax benefit, net of Federal income
tax effect (47,969) (67,924)
Increase in valuation allowance 1,436,041 1,037,181
Other, net 4,774 (19,027)
----------------- ---------------
Total income tax expense (benefit) $ -- --
================= ===============
</TABLE>
13
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(4) Income Taxes - (Continued)
The income tax effects of temporary differences that give rise to the
Company's deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred income tax assets:
Current - conversion to hybrid cash basis for
income tax reporting $ 74,818 --
Noncurrent:
Net operating loss carryforwards 2,466,407 1,201,100
Research and experimentation credit carryforwards 11,642 97,037
Other 148,067 12,426
------------- ------------
Total gross deferred income tax assets 2,700,934 1,310,563
Valuation allowance (2,700,744) (1,264,703)
------------- ------------
Deferred income tax assets, net of valuation
allowance 190 45,860
Deferred income tax liabilities:
Current - conversion to hybrid cash basis for
income tax reporting -- (45,860)
Noncurrent - property and equipment due to
differences in depreciation (190) --
------------- ------------
Net deferred income tax asset $ -- --
============= ============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment.
At December 31, 1999, the Company had net operating loss and research and
experimentation credit carryforwards for Federal income tax purposes of
approximately $6,532,000 and $11,600, respectively, which are available to
offset future federal taxable income, if any, through the year 2019.
14
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(5) Employee Benefit Plan
The Company sponsors the 2order.com, Inc. (formerly BT Squared
Technologies, Inc.) 401(k) Plan (the "Plan") for all employees who are at
least 21 years of age and have been employed for at least three months. The
Plan allows participants to contribute by salary reduction up to 15% of
eligible compensation, subject to Internal Revenue Service limitations. The
Plan also provides for discretionary employer matching contributions, of
which none were made during the years ended December 31, 1999 or 1998.
(6) Stockholders' Equity
(a) Amendments to the Articles of Incorporation
Effective December 31, 1998, the Company's Board of Directors amended
and restated the Articles of Incorporation to authorize 20,000,000
shares of $.01 par value common stock, and 10,000,000 shares of $.01
par value preferred stock. Of the total authorized shares of preferred
stock, 2,720,455 shares were designated as Series A Convertible
Participating Preferred Stock ("Series A") and 2,873,564 shares were
designated as Series B Convertible Participating Preferred Stock
("Series B"). All common stock, stock options, and warrants have been
presented to reflect these amendments as if they had occurred prior to
December 31, 1997.
(b) Stock Option Plan
The Company sponsors the 2order.com, Inc. (formerly BT Squared
Technologies, Inc.) 1996 Stock Option Plan (the "1996 Plan") which
provides for the grant of stock options for up to 1,245,000 shares of
common stock. The 1996 Plan remains in effect until the earlier of
December 31, 2005 or the date on which all reserved shares have been
issued or are no longer available for use under the Plan.
Options granted under the 1996 Plan may be incentive stock options,
which qualify for certain tax benefits, or nonqualified stock options.
Incentive stock options must be granted at not less than the fair
market value of the stock on the date granted (110% of the fair market
value if granted to a 10% stockholder) and nonqualified stock options
must be granted at the greater of $0.01 or the minimum price required
by applicable state law or the Company's governing instrument. Option
vesting terms are established by the Board of Directors at the time of
grant and presently range up to five years. All options expire ten
years from the date of grant (five years if granted to a 10%
stockholder). There were 270,500 options available for grant at
December 31, 1999 under the 1996 Plan. Additionally, options (not
issued under the 1996 Plan) to purchase 75,000 shares of the Company's
common stock were exercised during 1999.
15
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(6) Stockholders' Equity - (Continued)
The following summarizes stock option activity for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------- ----------------------------------------
Weighted- Weighted-
Number of average Number of average
shares exercise price shares exercise price
----------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 781,500 0.86 724,450 $ .84
Granted 324,500 1.00 243,250 1.00
Exercised (97,500) 1.00 -- --
Canceled or expired (134,000) 1.00 (186,200) .96
----------------- ------------------ --------------- -------------------
Outstanding at end of year 874,500 0.88 781,500 $ .86
================= ================== =============== ===================
</TABLE>
The following summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------------------------------------ -------------------------------------
Weighted-
Weighted- average Weighted-
Range of average remaining average
exercise Number exercise contractual Number exercise
prices outstanding price life exercisable price
---------------- --------------- ------------------ ------------------ --------------- ------------------
<S> <C> <C> <C> <C> <C>
$ .14 - .20 130,250 .17 4.4 years 126,810 $ .17
1.00 744,250 1.00 8.5 years 356,792 1.00
---------------- --------------- ------------------ ------------------ --------------- ------------------
$ .14 - 1.00 874,500 .88 8.5 years 483,602 $ .88
================ =============== ================== ================== =============== ==================
</TABLE>
The Company applies the provisions of APB No. 25 in accounting for its
fixed plan stock options and, accordingly, no compensation cost has
been recognized in the financial statements for its stock options
granted with exercise prices at fair market value. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Net loss As reported $ (4,096,605) (2,794,793)
Pro forma (4,137,051) (2,843,349)
</TABLE>
The per share weighted-average fair value of all stock options granted
during the years ended December 31, 1999 and 1998 was $.24 on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for 1999 and 1998: expected
16
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(6) Stockholders' Equity - (Continued)
dividend yield -0-%, volatility -0-%, risk-free interest rate of 5.5%,
and an expected life of five years.
(c) Warrants
During the year ended December 31, 1996, the Company made two warrant
grants to individuals: one to purchase 15,000 shares of $.01 par value
common stock at an exercise price of $.20 per share through May 13,
2006 (as discussed in note 7); and one to purchase 25,000 shares of
common stock at an exercise price of $1.00 per share through December
31, 2001.
During the year ended December 31, 1997, the Company issued to a
financial institution warrants to purchase 37,500 shares of $.01 par
value common stock through September 30, 2007 at an exercise price of
$2.50 per share, subject to certain exercise price adjustments as
defined in the warrant agreement. The Company also issued option
dilution warrants to the Series A stockholders which entitle them to
purchase common stock at a reduced exercise price in situations where
specified levels of dilution have been exceeded, as defined in the
warrant agreement.
During the year ended December 31, 1998, the Company issued warrants
to purchase 17,242 shares of $.01 par value common stock at an
exercise price of $1.74. The warrants were issued pursuant to the
terms of the Securities Purchase Agreement dated November 30, 1998 and
expire three years from the date of issue.
As of December 31, 1999, 25,000 warrants had been exercised.
(d) Sales of Convertible Participating Preferred Stock
On September 30, 1997, the Company executed a Securities Purchase
Agreement to sell 2,720,455 shares of Series A for $1.286 per share,
resulting in net proceeds to the Company of $3,449,960. On December
31, 1998, the Company executed a Securities Purchase Agreement to sell
2,643,679 shares of Series B for $1.74 per share, resulting in net
proceeds to the Company of $4,552,959.
The Company is recording accretion on Series A and B equal to the
difference between the net proceeds received and the redemption amount
using the effective interest method from the original issuance date
through the final redemption date of January 1, 2007.
The holders of Series A and B shares are entitled to, among other
substantial rights as defined in the amended and restated Articles of
Incorporation, the Securities Purchase Agreements and other related
documents: (1) voting rights equivalent to the voting rights they
would hold as if their holdings were converted to common stock; (2)
the right to name three members of the Company's Board of Directors;
(3) preferred dividends and distributions; (4) liquidation
17
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(6) Stockholders' Equity - (Continued)
preferences, and preemptive registration and piggyback rights; (5) the
option to convert to common stock at any time (initial conversion
ratio of one-to-one subject to adjustment); (6) automatic conversion
upon the vote of 51% of outstanding Series A and B stockholders or
upon the effective date of a qualified initial public offering; (7)
certain anti-dilution provisions, including, but not limited to,
contingent nominal warrant issuances if certain events take place; (8)
certain covenants requiring Series A and B stockholder authorization
of transactions; (9) certain participation rights and (10) a mandatory
redemption provision whereby the Series A and B stockholders may give
notice and cause the Company to redeem their shares at the original
cost plus an 8% cumulative annual return plus any declared and unpaid
dividends in eight consecutive quarterly installments commencing with
the quarter ending January 1, 2005 and ending in the quarter ending
January 1, 2007.
(e) Shareholders' Agreement
All owners of the Company's preferred stock and all significant
owners, as defined, of the Company's common stock are parties to the
Company's shareholders' agreement. This agreement provides, among
other specific rights and restrictions, for a right of first refusal
to the Company and then to the preferred shareholders, to purchase any
selling shareholders' shares at a price equal to that agreed by a
third party.
(7) Related Party Transactions
In accordance with the terms of a revolving loan and warrant purchase
agreement executed in 1996 and terminated in 1997, a warrant was issued to
a relative of the President to purchase 15,000 shares of $.01 par value
common stock of the Company at an exercise price of $.20 per share through
May 13, 2006. This warrant remains outstanding and exercisable as of
December 31, 1999.
(8) Major Customers
For the year ended December 31, 1999, two customers accounted for
approximately 32% of total revenues. For the year ended December 31, 1998,
three customers accounted for approximately 55% of total revenues.
Total accounts receivable from these major customers were $110,635 and
$501,897 at December 31, 1999 and 1998, respectively.
18
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(9) Commitments
The Company is obligated under operating and capital leases for certain
property and equipment. At December 31, 1999 and 1998, the gross amount of
property and equipment and related accumulated amortization recorded under
capital leases is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Furniture and fixtures $ 165,527 165,527
Telecommunications equipment 67,777 67,777
Computer equipment 81,483 81,483
-------------- --------------
314,787 314,787
Less accumulated amortization (185,028) (116,856)
-------------- --------------
$ 129,759 197,931
============== ==============
</TABLE>
The Company also leases office space and equipment under noncancelable
operating leases which expire over the next three years. Total rental
expense under operating lease agreements was approximately $321,000 and
$237,000 for the years ended December 31, 1999 and 1998, respectively.
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating
Capital leases leases
------------------ ---------------
Year ending December 31:
<S> <C> <C>
2000 $ 81,555 327,498
2001 40,466 19,285
2002 24,704 3,767
2003 6,483 --
------------------ ---------------
Total future minimum lease payments 153,208 $ 350,550
===============
Less amounts representing interest at rates
ranging from 7.8% to 8.5% (12,717)
------------------
Present value of future minimum capital
lease payments 140,491
Less current portion of capital lease obligations (72,054)
------------------
Capital lease obligations, less current portion $ 68,437
==================
</TABLE>
19
<PAGE>
2order.com, Inc.
(formerly BT Squared Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(10) Subsequent Event
On January 21, 2000, Primus Knowledge Solutions, Inc. ("Primus") acquired
the Company. The acquisition is to qualify as a tax-free exchange and be
accounted for under the pooling-of-interests method of accounting for
business combinations. Pursuant to the Agreement and Plan of Merger, Primus
issued shares of its common stock, with a total value of approximately $90
million, in exchange for all the outstanding stock of the Company.
20
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors
2order.com, Inc.
We consent to the incorporation by reference in the registration statements
(Nos. 333-82059 and 333-33088) on Form S-8 of Primus Knowledge Solutions, Inc.
of our report dated March 6, 2000, with respect to the balance sheets of
2order.com, Inc. as of December 31, 1999 and 1998 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1999 and 1998, which report appears in the Form 8-K/A of Primus
Knowledge Solutions, Inc. dated January 21, 2000.
KPMG LLP
Atlanta, Georgia
April 3, 2000
