<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
June 30, 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 5. Other Events
Attached to this current report on Form 8-K are the Registrant's audited
consolidated financial statements as of December 31, 1999 and 1998, for each of
the years in the three-year period ended December 31, 1999, and the related
consolidated financial statement schedule, selected financial data and
management's discussion and analysis of financial condition and results of
operations.
ITEM 7. Financial Statements and Exhibits.
(c) Exhibits
The following Exhibits are filed as part of this report:
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
<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.
Date: June 30, 2000 By: /s/ Elizabeth Huebner
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal financial and chief accounting officer)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data and other operating
information are derived from our consolidated financial statements. The
consolidated statement of operations and balance sheet data presented below were
derived from our audited consolidated financial statements. When you read this
selected consolidated financial data, it is important that you also read the
historical consolidated financial statements and related notes included in this
Form 8-K, as well as the section of this Form 8-K related to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:(1)
Revenue............................................. $ 27,318 $ 12,219 $ 7,496 $ 4,654 $ 3,304
Cost of revenue..................................... 7,725 4,653 3,212 2,039 1,996
Sales and marketing................................. 19,180 12,537 5,716 3,972 2,118
Research and development............................ 10,177 5,957 3,577 2,882 1,744
General and administrative.......................... 6,657 4,518 2,313 1,869 1,760
Merger related costs................................ 1,520 -- -- -- --
------------ ----------- ----------- ----------- -----------
Loss from operations............................... (17,941) (15,446) (7,322) (6,108) (4,314)
Other income (expense), net......................... 1,093 (52) 390 113 (48)
------------ ----------- ----------- ----------- -----------
Loss before income taxes........................... (16,848) (15,498) (6,932) (5,995) (4,362)
Income tax expense (benefit)........................ 267 (57) 34 68 --
------------ ----------- ----------- ----------- -----------
Net loss........................................... (17,115) (15,441) (6,966) (6,063) (4,362)
============ =========== =========== =========== ===========
Net loss available to common
shareholders...................................... (18,234) (16,278) (7,339) (6,271) (4,362)
============ =========== =========== =========== ===========
Basic and diluted net loss per
common share(2)..................................... (1.81) (3.49) (1.60) (1.43) (1.25)
Shares used in computing basic and diluted net loss
per common share..................................... 10,081,183 4,668,404 4,594,113 4,392,778 3,495,638
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:(1)
Cash and cash equivalents........................... $ 17,602 $ 7,708 $ 3,900 $ 2,439 $ 277
Working capital (deficit)........................... 44,538 4,981 1,337 2,687 (716)
Total assets........................................ 67,406 21,574 9,800 7,006 2,319
Total current liabilities........................... 19,591 13,141 6,815 2,600 1,934
Long-term debt, net of current portion.............. 60 1,265 551 798 240
Redeemable convertible preferred stock.............. 9,054 31,523 10,399 8,128 --
Shareholders' equity (deficit)...................... 38,701 (24,355) (7,966) (4,520) 144
</TABLE>
(1) Reflects restatement for pooling-of-interests business combination. See
Note 13 of Notes to Consolidated Financial Statements.
(2) For further discussion of loss per share see Note 1 of Notes to
Consolidated Financial Statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial information contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward looking statements within the meaning of Section
27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the
Securities and Exchange Act of 1934, as amended. Forward looking statements
include, without limitation, statements containing the words "anticipates",
"believes", "expects", "intends", "future", and words of similar import which
express management's belief, expectations or intentions regarding the company's
future performance. All forward looking statements included in this report are
based on information available to us on the date hereof, and the we have no
obligation to update any such forward looking statements. Our actual results
could differ materially from our historical operating results and from those
anticipated in these forward looking statements.
Overview
We are a leading provider of eCRM software that enables companies to maximize
the value of customer interactions across multiple communication channels and
business processes thereby enhancing customer relationships. Our solution
addresses the unique challenges faced by companies implementing an e-business
strategy. Our product suite is designed to be a comprehensive software solution
that enables companies to effectively manage all major points of customer
contact, from marketing to sales to customer support, and create value for both
the company and the customer with every interaction. Our software solutions can
be deployed as a suite or as individual products, depending on the company's
preference and/or immediate need.
To remain competitive in today's business environment, companies are
implementing e-business initiatives to enable them to interact with their
customers using both traditional and e-business communication channels,
including the Internet, in a way that will maximize the value of each customer
interaction. More specifically, these initiatives allow companies to market
their products, transact sales, manage customer service, and interact and
communicate with customers, partners and suppliers using the Internet and other
electronic means. Ultimately, each customer interaction must be maximized for
purposes of customer retention, cross-sell and up-sell opportunities, and
customer satisfaction to enhance customer relationships.
On December 12, 1999, we acquired Imparto Software Corporation (Imparto), a
privately held software company and developer of emarketing software. In
connection with the transaction, we issued 913,788 shares of our common stock in
exchange for all outstanding shares of preferred stock, preferred stock
warrants, and common stock of Imparto, and we converted all outstanding options
to purchase Imparto common stock into options to purchase up to 86,212 shares of
Primus common stock. The transaction was accounted for as a pooling of
interests. The consolidated financial statements have been prepared to reflect
the restatement of all periods presented to include the accounts of Imparto. The
historical results of the pooled entities reflect each of their actual operating
cost structures and, as a result, do not necessarily reflect the cost structure
of the newly combined entity.
On January 21, 2000, we acquired 2order.com, Inc. (2order.com), a privately held
software company which develops and markets software that acts as a personal
sales assistant, helping buyers define requirements and configure custom
solutions. 2order.com was incorporated in Georgia in 1991 under the name
Business Systems Design, Inc. As a result of the acquisition, we issued
1,506,127 shares of our common stock, $.025 par value per share, in exchange for
all issued and outstanding capital stock and assumed all outstanding options and
warrants of 2order.com, which represents, on a converted basis, 150,378 shares
of our common stock. The acquisition was accounted for as a pooling of interests
business combination, and accordingly, the consolidated financial statements
have been prepared to reflect the restatement of all periods presented to
include the accounts of 2order.com. The historical results of the pooled
entities reflect each of their actual operating cost structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity. The combined consolidated financial statements are now considered the
historical financial statements of Primus.
Before 1998, we recognized software license revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Beginning in 1998, we have recognized software license revenue in accordance
with AICPA Statement of Position 97-2, "Software Revenue Recognition," which
provides specific industry guidance and stipulates that revenue recognized from
software arrangements is to be allocated to each element of the arrangement
based
<PAGE>
on the relative fair value of the elements. Under SOP 97-2, the determination of
fair value is based on objective evidence that is specific to the vendor. If
such evidence of fair value for each element of the arrangement does not exist,
all revenue from the arrangement is deferred until such time that evidence of
fair value does exist or until all elements of the arrangement have been
delivered. The AICPA recently issued its Statement of Position 98-9, which
provides certain amendments to its Statement of Position 97-2 and is effective
for transactions entered into beginning January 1, 2000. We do not expect
implementation of this latest AICPA pronouncement to materially impact our
revenue recognition practices.
Our revenue consists of software license revenue and related client services
revenue. For the foreseeable future, we expect substantially all of our revenue
will be derived from our eCRM software and related services. We market our
software and services on a worldwide basis through our direct sales organization
in the United States and the United Kingdom. In Japan, Primus KK, a Japanese
joint venture in which we hold a 14.3% minority interest, distributes our
products. Our international sales constituted 16% of our 1999, 12% of our 1998
revenue and less than 1% of our 1997 revenue. We believe that international
revenue, as a percentage of our total revenue, will fluctuate in the future.
Our services revenue consists of consulting, training and maintenance and
support fees. We provide consulting and training services relating to our
products on a time-and-materials basis under installation services agreements
with our customers. We provide maintenance and support services to our customers
under renewable one-year maintenance and support agreements, which we price as a
percentage of our license fees.
We currently recognize license revenue over the implementation period if
implementation services are included in the original license arrangement. As a
result, even where we have a signed license agreement for the purchase of our
software and have shipped the software, license revenue recognition depends on
whether we have begun implementation. For license agreements under which we have
no implementation responsibility, or where implementation is not considered to
be essential to the functionality of the software, we generally recognize
revenue from the agreement upon shipping the software.
For new customers, we generally enter into services agreements to implement our
software. Most of our new customers begin implementation within 30 to 60 days of
signing a license agreement. Once commenced, implementation of our products
typically ranges from 30 to 45 days, an improvement from prior years when
installations took 60 to 90 days. Examples of situations under which we have no
implementation responsibility include additional license sales to existing
customers or customers who elect to use internal or third party resources to
implement the software.
We have invested heavily in product development and in building our sales,
marketing, finance and administrative and client services organizations. From
November 1997 through December 1999, we made a strategic investment in building
our executive management team to help us execute our long-term growth strategy.
We have incurred quarterly net losses since inception, and as of December 31,
1999, had an accumulated deficit of $54.4 million. We anticipate that our
operating expenses will continue to increase substantially for the foreseeable
future as we continue to expand our product development, sales and marketing and
client-services staff.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by each item reflected in our Consolidated Statements
of Operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
----------------------------------------------------------------- ------------ ------------ ------------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C>
Revenue:
License......................................................... 69% 64% 59%
Services........................................................ 31 36 41
------------ ------------ ------------
Total revenue............................................. 100 100 100
------------ ------------ ------------
Cost of revenue:
License......................................................... 4 4 3
Services........................................................ 24 34 40
------------ ------------ ------------
Total cost of revenue..................................... 28 38 43
------------ ------------ ------------
Gross profit.............................................. 72 62 57
------------ ------------ ------------
Operating expenses:
Sales and marketing............................................. 70 103 76
Research and development........................................ 37 49 48
General and administrative...................................... 24 37 31
Merger related costs............................................ 6 -- --
------------ ------------ ------------
Total operating expenses.................................. 137 189 155
------------ ------------ ------------
Loss from operations...................................... (65) (127) (98)
Other income, net................................................ 4 (1) 5
------------ ------------ ------------
Loss before income taxes.................................. (61) (128) (93)
Income tax expense (benefit)..................................... 1 (1) --
------------ ------------ ------------
Net loss.................................................. (62)% (127)% (93)%
============ ============ ============
</TABLE>
REVENUE
We derive our revenue from the sale of software licenses and related services
including support and maintenance contracts. Revenue was $27.3 million, $12.2
million, and $7.5 million in 1999, 1998 and 1997, respectively, representing
increases of $15.1 million, or 124%, from 1998 to 1999 and $4.7 million, or 63%,
from 1997 to 1998. During 1999 and 1997, no single customer accounted for 10%
or more of total revenue. During 1998, one customer's purchases represented 11%
of total revenue.
License Revenue. License revenue was $18.8 million, $7.8 million and $4.4
million in 1999, 1998 and 1997, respectively. The increase was due to
widespread acceptance of our eCRM software in the marketplace, increased
international sales and increases in both the size and productivity of the sales
force. License revenue as a percentage of total revenue was 69%, 64% and 59% in
1999, 1998 and 1997, respectively. Sales personnel totaled 57, 51 and 23 as of
December 31, 1999, 1998 and 1997, respectively. The increase in international
license revenue was $2.0 million from 1998 to 1999 and $1.1 million from 1997 to
1998. This increase was due primarily to the increased size and productivity of
our sales force and increased international sales as a result of the opening of
our United Kingdom sales office and sales through our Japanese distributor.
Services Revenue. Services revenue was $8.5 million, $4.4 million and $3.1
million in 1999, 1998 and 1997, respectively. Maintenance and support contract
revenue increased $2.6 million from 1998 to 1999 and consulting fees increased
$1.4 million over the same period. Services revenue increased 50% from $3.1
million in 1997 to $4.4 million in 1998. The increase in services revenue from
1997 to 1998 was a result of a $1.3 million increase in maintenance and support
contract revenue and $100,000 in consulting revenue. The increase in maintenance
and support contract revenue was a result of the increasing number of licenses
sold.
Services revenue represented 31%, 36% and 41% of our total revenue in 1999, 1998
and 1997, respectively. Services revenue as a percentage of total revenue is
declining due to the fact that license revenue is growing at a faster pace than
services revenue. The decline is primarily due to the fact that the
implementation period for our software has shortened. We expect the proportion
of services
<PAGE>
revenue to total revenue to fluctuate in the future, depending in part on our
customers' use of third-party consulting and implementation services providers.
COST OF REVENUE
Cost of License Revenue. Cost of license revenue includes royalties and fees
paid to third parties under license arrangements and costs related to media and
duplication of our products and manuals. Cost of license revenue was $1.1
million, $508,000, and $203,000 in 1999, 1998 and 1997, respectively. The cost
of license revenue increased $604,000, or 119%, from 1998 to 1999 and $305,000,
or 150%, from 1997 to 1998. Cost of license revenue as a percentage of license
revenue was 6%, 7% and 5% in 1999, 1998 and 1997, respectively. We anticipate
that our cost of license revenue will continue to increase in absolute dollars
and as a percent of license revenue which has varied in the past due to the
expected increase in the volume of software product sales and the type of
royalty agreements in place at the time.
Cost of Services Revenue. Cost of services revenue includes personnel and other
costs related to professional services and customer support. Cost of services
revenue was $6.6 million, $4.1 million and $3.0 million in 1999, 1998 and 1997,
respectively. Cost of services revenue increased $2.5 million, or 60%, from 1998
to 1999 and $1.1 million, or 38%, from 1997 to 1998. The increases in cost of
services revenue for the comparable years was primarily a result of hiring and
training a consulting organization to implement our eCRM products. Professional
services and customer support personnel totaled 63, 42 and 24 as of December 31,
1999, 1998 and 1997, respectively. Cost of services revenue as a percentage of
services revenue was 77%, 93% and 98% in 1999, 1998 and 1997, respectively. The
decrease in cost of services revenue as a percentage of services revenue from
1997 and 1998 to 1999 was primarily due to higher utilization of consulting-
services personnel and growth of maintenance revenue.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
bonuses and commissions earned by sales and marketing personnel, travel and
costs associated with marketing programs, such as trade shows, public relations
and new product launches. Sales and marketing expenses were $19.2 million, $12.5
million and $5.7 million in 1999, 1998 and 1997, respectively. Sales and
marketing expenses increased $6.6 million, or 53%, from 1998 to 1999 and $6.8
million, or 119%, from 1997 to 1998. The increases in each year from 1997 to
1999 are primarily due to the continued growth in the number of our sales and
marketing personnel as well as an increase in commissions paid as a result of
revenue growth. Sales and marketing employees totaled 79, 68 and 37 as of
December 31, 1999, 1998 and 1997, respectively. Sales and marketing expenses as
a percentage of total revenue was 70%, 103% and 76% in 1999, 1998 and 1997,
respectively. The decrease in sales and marketing expense as a percentage of
revenues from 1998 to 1999 reflects a slower growth in the number of sales and
marketing personnel. The fluctuation from 1997 to 1998 reflects the building of
the sales and marketing infrastructure to generate increased revenue and the
launch of our United Kingdom office. We believe that a significant increase in
our sales and marketing efforts is essential for us to maintain market position
and further increase market acceptance of our products. Accordingly, we
anticipate that we will continue to invest significantly in sales and marketing
for the foreseeable future, and the dollar amount of sales and marketing
expenses will increase in future periods, although they may decline as a
percentage of total revenue.
Research and Development. Research and development expenses consist primarily of
salaries and benefits for software developers, program managers and quality
assurance personnel and payments to outside contractors. Research and
development expenses were $10.2 million, $6.0 million and $3.6 million in 1999,
1998 and 1997, respectively. Research and development expenses increased $4.2
million, or 71%, from 1998 to 1999 and $2.4 million, or 67%, from 1997 to 1998.
The increases in each year from 1997 to 1999 were primarily due to increased
hiring of software developers and quality-assurance staff to support development
of our new products, enhancements to our existing products and an increase in
compensation levels for development and quality-assurance personnel. Research
and development personnel totaled 88, 59 and 44 as of December 31, 1999, 1998
and 1997, respectively. Research and development expenses as a percentage of
total revenue were 37%, 49% and 48% for 1999, 1998 and 1998, respectively. We
believe that a significant increase in our research and development investment
is essential for us to maintain our market position, to continue to expand our
eCRM software and to develop additional applications. Accordingly, we anticipate
that we will continue to invest significantly in product research and
development for the foreseeable future, and research and development expenses
are likely to increase in future periods. As such, we expect research and
development costs as a percentage of total revenue to fluctuate. In the
development of our new products and enhancements of existing products, the
technological feasibility of our software is not established until substantially
all product development is complete. Accordingly, software development costs
eligible for capitalization were insignificant, and all costs related to
internal research and development have been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative and information services personnel. General and administrative
expenses were $6.7 million, $4.5 million and $2.3 million in 1999, 1998 and
1997, respectively. General and administrative expenses increased $2.1 million,
or 47%, from 1998 to 1999 and $2.2 million, or 95%, from 1997 to 1998. The
increase in general and administrative expenses was primarily the result of our
hiring additional executive, finance, and administrative personnel to support
the growth of our business during these periods as well as an increase in legal
and professional fees associated with becoming a public company. The increase in
expense also reflects an increase in our provision for doubtful accounts.
General and administrative employees totaled 35, 32 and 22 as of
<PAGE>
December 31, 1999, 1998 and 1997, respectively. General and administrative
expenses as a percentage of total revenue were 24%, 37% and 31% in 1999, 1998
and 1997, respectively. The fluctuation of general and administrative expense as
a percentage of total revenue from 1998 to 1999 reflects the building of our
infrastructure in 1998. We believe that our general and administrative expenses
will continue to increase as a result of the continued expansion of our
administrative staff and the expenses associated with being a public company,
including, but not limited to, annual and other public-reporting costs,
directors' and officers' liability insurance, investor-relations programs and
professional-services fees.
Merger Related Costs. Merger related costs were approximately $1.5 million or 6%
of net sales in 1999. These costs were recorded in connection with the December
1999 merger with Imparto that was accounted for under the pooling of interests
method of accounting.
Other Income, Net. Other income (expense) was $1.1 million, $(52,000), and
$390,000 in 1999, 1998 and 1997, respectively. The variances from period to
period are due to fluctuations in the average combined cash and cash equivalents
and short-term investment balances. The Company expects to continue to yield
investment income on its average balance of combined cash and cash equivalents
and short-term and long-term investments at an average rate comparable to that
experienced in 1999.
Income Taxes. We have not recorded income tax benefits related to the net
operating losses in 1999, 1998 and 1997 as a result of the uncertainties
regarding the realization of the net operating losses. Income tax expense
recorded in 1999 primarily relates to our foreign operations. The tax benefit
recorded in 1998 primarily relates to a tax benefit from the separate results of
Imparto, net of tax expense from our foreign operations. Tax expense recorded in
1997 primarily relates to tax expense from the separate results of Imparto.
Net operating loss carryforwards for federal and state income tax reporting
purposes of $56.0 million, of which $13.9 million is related to deductions
related to the exercise of non-qualified stock options, begin to expire in 2001
if not utilized. The Internal Revenue Code contains provisions that limit the
use in any future period of net operating loss and credit carryforwards upon the
occurrence of certain events, including significant change in ownership
interests.
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations for
1999 and 1998. You should read the following table in conjunction with our
consolidated financial statements and the notes related thereto. We have
prepared this unaudited information on a basis consistent with the audited
consolidated financial statements. This table includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. You should not draw any conclusions about our future results
from our quarterly results of operations.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept.30, June 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
--------- -------- -------- -------- --------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
License......................... $ 6,392 $ 4,447 $ 4,671 $ 3,259 $ 2,867 $ 1,664 $ 1,897 $ 1,356
Services........................ 2,890 2,496 1,844 1,319 1,214 1,206 1,065 950
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Total revenue.................... 9,282 6,943 6,515 4,578 4,081 2,870 2,962 2,306
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Cost of revenue:
License......................... 396 241 315 160 263 71 117 57
Services........................ 2,119 1,638 1,521 1,335 1,241 1,184 869 851
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Total cost of revenue............ 2,515 1,879 1,836 1,495 1,504 1,255 986 908
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Gross profit..................... 6,767 5,064 4,679 3,083 2,577 1,615 1,976 1,398
Operating expenses:
Sales and marketing............. 5,383 5,309 4,760 3,728 4,252 3,886 2,695 1,704
Research and development........ 3,488 2,517 2,107 2,065 1,489 1,672 1,606 1,190
General and administrative...... 2,507 1,568 1,262 1,320 1,954 1,086 797 681
Merger related costs......... 1,520 -- -- -- -- -- -- --
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Total operating expenses......... 12,898 9,394 8,129 7,113 7,695 6,644 5,098 3,575
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Loss from operations............. (6,131) (4,330) (3,450) (4,030) (5,118) (5,029) (3,122) (2,177)
Other income (expense), net...... 557 505 4 27 21 (4) (84) 15
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Loss before income taxes......... (5,574) (3,825) (3,446) (4,003) (5,097) (5,033) (3,206) (2,162)
Income tax expense (benefit)..... 40 27 173 27 (57) -- -- --
--------- ---------- --------- ---------- --------- --------- ---------- ----------
Net loss......................... $(5,614) $(3,852) $(3,619) $(4,030) $(5,040) $(5,033) $(3,206) $(2,162)
========= ========== ========= ========== ========= ========= ========== ==========
</TABLE>
The following table sets forth unaudited quarterly results of operations as a
percentage of revenue for 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1999 1998 1998 1998 1998
---------- ---------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
License......................... 68.9% 64.0% 71.7% 71.2% 70.3% 58.0% 64.0% 58.8%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Services........................ 31.1 36.0 28.3 28.8 29.7 42.0 36.0 41.2
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Total revenue.................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Cost of revenue:
License......................... 4.3 3.5 4.8 3.5 6.4 2.5 4.0 2.5
Services........................ 22.8 23.6 23.4 29.2 30.5 41.2 29.3 36.9
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Total cost of revenue............ 27.1 27.1 28.2 32.7 36.9 43.7 33.3 39.4
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Gross profit..................... 72.9 72.9 71.8 67.3 63.1 56.3 66.7 60.6
Operating expenses:
Sales and marketing............. 58.0 76.5 73.1 81.4 104.2 135.4 91.0 73.9
Research and development........ 37.6 36.2 32.3 45.1 36.5 58.3 54.2 51.6
General and administrative...... 27.0 22.6 19.4 28.8 47.8 37.8 26.9 29.5
Merger related costs......... 16.4 -- -- -- -- -- -- --
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Total operating expenses......... 139.0 135.3 124.8 155.3 188.5 231.5 172.1 155.0
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Loss from operations............. (66.1) (62.4) (53.0) (88.0) (125.4) (175.2) (105.4) (94.4)
Other income (expense), net...... 6.0 7.3 0.1 0.6 0.5 (0.2) (2.8) 0.6
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Loss before income taxes......... (60.1) (55.1) (52.9) (87.4) (124.9) (175.4) (108.2) (93.8)
Income tax expense (benefit)..... 0.4 0.4 2.7 0.6 (1.4) -- -- --
-------- --------- ----------- ----------- ----------- ----------- -------- ---------
Net loss......................... (60.5)% (55.5)% (55.6)% (88.0)% (123.5)% (175.4)% (108.2)% (93.8)%
======== ========= =========== =========== =========== =========== ======== =========
</TABLE>
The trends discussed above in the annual comparisons of operating results
generally apply to the comparison of operating results for the four quarters in
the 12-month period ended December 31, 1999 and 1998. The fourth quarter of
1999 also included costs related to the merger with Imparto. Our quarterly
operating results have varied widely in the past, and we expect that they will
continue to fluctuate in the future as a result of a number of factors, many of
which are outside our control.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we have primarily financed our operations
through the private sale of our equity securities. To a lesser extent, we have
financed our operations through equipment financing and traditional lending
arrangements. In July 1999, we completed our initial public offering and issued
4,622,500 shares of common stock at an initial public offering price of $11.00
per share. We received approximately $46.2 million in cash, net of underwriting
discounts, commissions, and other offering costs.
As of December 31, 1999, we had cash and cash equivalents of $17.6 million and
available-for-sale securities of $37.1 million, representing an increase of
$44.1 million from cash and investments held as of December 31, 1998. As of
December 31, 1999, our working capital was $44.5 million compared to $5.0
million at December 31, 1998.
Our operating activities resulted in net cash outflows of $10.8 million and
$11.6 million in 1999 and 1998, respectively. The decrease in operating cash
outflows from 1998 to 1999 was due primarily to a decrease in deferred revenue
offset by a decrease in accounts receivable.
Investing activities used cash of $36.1 million and $4.0 million in 1999 and
1998, respectively. Investing activities used cash primarily for the purchase
of short-term securities following our initial public offering and the purchase
of capital equipment.
Financing activities provided cash of $56.8 million and $19.4 million in 1999
and 1998, respectively. In 1999 cash provided by financing activities was
primarily due to the proceeds from our initial public offering in July, offset
in part by payments on our credit facility and capital lease obligations.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future as we:
. enter new markets for our products and services
. increase research and development spending
. increase sales and marketing activities
. develop new distribution channels
. improve our operational and financial systems
. broaden our professional services capabilities
Such operating expenses will consume a material amount of our cash resources,
including a portion of the net proceeds from our initial public offering. We
believe that the net proceeds from our initial public offering, together with
our existing cash and cash equivalents, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months. Thereafter, we may require additional funds to support
our working capital requirements or for other purposes and may seek to raise
such additional funds through public or private equity financing or from other
sources. We may not be able to obtain adequate or favorable financing at that
time. Any financing we obtain may dilute our current shareholders' ownership
interest in Primus.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of interest rate changes and change in the market
values of our investments.
Interest Rate Risk. The Company is exposed to the impact of short-term changes
in interest rates. The Company's exposure primarily relates to the Company's
investment portfolio. The Company invests its excess cash in high quality
corporate and municipal debt instruments. Investments in both fixed rate and
floating rate interest earning instruments carries a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
by a rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. As a result, changes in interest
rates may cause the Company to suffer losses in principal if forced to sell
securities that have declined in market value or may cause the Company's future
investment income to fall short of expectations. Our investment portfolio is
designated as available-for-sale, and accordingly is presented at fair value in
the consolidated balance sheet.
The Company protects and preserves its invested funds with investment policies
and procedures that limit default, market and reinvestment risk. The Company has
not utilized derivative financial instruments in its investment portfolio.
In 1999, the effects of changes in interest rates on the fair market value of
our marketable investment securities and our earnings were insignificant. At
December 31, 1999, our investment portfolio included approximately $4.5 million
in variable rate investments, primarily all of which are due after 2000. Fixed
rate investments at December 31, 1999 of approximately $32.6 million had a
weighted average interest rate of 6.34% and are primarily due in 2000. We
believe that the impact on the fair market value of our securities and our
earnings in 2000 from a hypothetical 10% increase in interest rates would be
insignificant.
<PAGE>
Foreign Currency Risk. We develop products in the United States and sell them in
North America, Asia and Europe. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Since our sales are currently priced in
U.S. dollars and translated to local currency amounts, a strengthening of the
dollar could make our products less competitive in foreign markets. The Company
has one foreign subsidiary whose expenses are incurred in its local currency. As
exchange rates vary, its expenses, when translated, may vary from expectations
and adversely impact overall expected profitability.
Our operating results have not been significantly affected by exchange rate
fluctuations in 1999. If, in 2000, the US dollar uniformly decreases in strength
by 10% relative to the currency of our foreign sales subsidiary, our operating
results would likely not be significantly effected.
Impact of Year 2000 Issue
We have experienced no disruption to our operations as a result of the "Year
2000" issue. The "Year 2000" issue is the result of computer programs being
unable to differentiate between the year 1900 and the year 2000 because they
were written using two digits rather than four to define the applicable year.
This programming flaw could result in a system failure or miscalculations with
respect to current programs. We established a Year 2000 Committee with
representatives from all of the functional areas at Primus to engage in a
comprehensive review of our computer systems and software applications and
equipment that utilize date sensitive computer chips. Based on this review, we
determined that some of our software, hardware and equipment had to be modified
or replaced so that they would properly utilize dates beyond December 31, 1999.
These replacements and modifications were completed by December 31, 1999.
Furthermore, we contacted key business partners, including third-party
suppliers, services providers, distributors, wholesalers and other entities with
whom we have a business to determine their compliance with year 2000
requirements. All mission-critical facilities, equipment and systems were
monitored by an on-site team on December 31, 1999 with no reported disruptions.
As of December 31, 1999, we had completed all phases of our year 2000 project,
including contingency planning for critical aspects of our operations. Although
we have experienced no year 2000 compliance problems to date, some problems may
not surface until several months after January 1, 2000. Accordingly, we are
continuing to monitor our operations and our business partners for year 2000
compliance problems. Were any such problems to arise that we were unable to
identify and correct in a timely manner, our operations could be adversely
affected. In addition, although we do not expect that the cost to fix any year
2000 problems that may be identified would be material, the costs of upgrading
or replacing any non-compliant systems or equipment could exceed our
expectations and adversely affect our operating results.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of this
statement is not expected to have a material impact on our consolidated
financial statements.
In June 2000 the SEC updated Staff Accounting Bulletin No. 101 (SAB 101)
"Revenue Recognition in Financial Statements". The most recent update delays
the effective date of SAB 101 to the fourth quarter for fiscal years beginning
after December 15, 1999. SAB 101 provides guidance on revenue recognition and
the SEC staff's views on the application of accounting principles to selected
revenue recognition issues. We will adopt the provisions of SAB 101 in the
fourth quarter of 2000 and anticipate that such adoptions will not have a
material impact on our consolidated financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25. Interpretation No. 44
clarifies the application of APB Opinion 25, Accounting for Stock Issued to
Employees, for issues, among others, regarding; (a) the definition of employees,
(b) defining non-compensatory plans, (c) modifications to previously fixed stock
option awards, and (d) accounting for an exchange of stock compensation awards
in a business combination. We will adopt Interpretation No. 44 in the third
quarter of 2000 and do not expect the adoption of the Interpretation to have a
material impact on the consolidated financial statements.
The American Institute of Certified Public Accountants recently issued Statement
of Position No. 98-9 that provides certain amendments to SOP No. 97-2 and is
effective for transactions entered into beginning January 1, 2000. This
pronouncement is not expected to materially impact our revenue recognition
practices.
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report............................... F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998................................. F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1999, 1998 and 1997................ F-4
Consolidated Statements of Shareholders'
Equity (Deficit) and Comprehensive Loss for the Years
Ended December 31, 1999, 1998 and 1997...................... F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997................ F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II Valuation and Qualifying Accounts Exhibit 23
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
Primus Knowledge Solutions, Inc.:
We have audited the consolidated financial statements of Primus Knowledge
Solutions, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Primus Knowledge
Solutions, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as whole presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Seattle, Washington
March 6, 2000
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998
--------------- ----------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $403 and $394 at
December 31, 1999 and 1998, respectively $ 17,602 $ 7,708
Short-term investments 37,055 2,833
Accounts receivable, net of allowance for doubtful accounts
of $823 and $378 at December 31, 1999 and 1998 respectively 8,479 5,851
Investor note receivable -- 1,200
Prepaid expenses and other current assets 993 530
------------- ------------
Total current assets 64,129 18,122
------------- ------------
Property and equipment, net 2,853 2,540
Accounts receivable, long-term -- 600
Other assets 424 312
------------- ------------
Total assets $ 67,406 $ 21,574
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 1,415 844
Accrued and other liabilities 4,190 2,286
Compensation-related accruals 3,249 1,556
Current portion of long-term debt 319 502
Deferred revenue, including related-party amounts of $1,516
and $1,395 at December 31, 1999 and 1998, respectively 10,418 7,953
------------- ------------
Total current liabilities 19,591 13,141
------------- ------------
Long-term debt, net of current portion 60 1,265
Redeemable convertible preferred stock issued and outstanding
916,918 and 13,727,486 shares at December 31, 1999 and 1998,
respectively 9,054 31,523
Commitments, contingencies and subsequent event
Shareholders' equity (deficit):
Preferred stock, $.001 par value; authorized 15,000,000 shares:
Convertible preferred stock; issued and outstanding no shares and 763,193
at December 31, 1999 and 1998, respectively -- 1
Common stock, $.025 par value; authorized 50,000,000
shares; issued and outstanding 16,180,886 and 4,995,393
shares at December 31, 1999 and 1998, respectively 404 125
Additional paid-in capital 92,891 12,775
Deferred stock-based compensation (114) --
Accumulated other comprehensive loss (110) (1)
Accumulated deficit (54,370) (37,255)
------------- ------------
Total shareholders' equity (deficit) 38,701 (24,355)
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 67,406 $ 21,574
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
License, including amounts from related parties of $1,353,
$575 and $30 in 1999, 1998 and 1997, respectively $ 18,769 $ 7,784 $ 4,434
Services 8,549 4,435 3,062
-------------- ------------ ------------
Total revenue 27,318 12,219 7,496
-------------- ------------ ------------
Cost of revenue:
License 1,112 508 203
Services 6,613 4,145 3,009
-------------- ------------ ------------
Total cost of revenue 7,725 4,653 3,212
-------------- ------------ ------------
Gross profit 19,593 7,566 4,284
-------------- ------------ ------------
Operating expenses:
Sales and marketing 19,180 12,537 5,716
Research and development 10,177 5,957 3,577
General and administrative 6,657 4,518 2,313
Merger related costs 1,520 -- --
-------------- ------------ ------------
Total operating expenses 37,534 23,012 11,606
-------------- ------------ ------------
Loss from operations (17,941) (15,446) (7,322)
Other income 1,533 226 552
Other expense (440) (278) (162)
-------------- ------------ ------------
Loss before income taxes (16,848) (15,498) (6,932)
Income tax expense (benefit) 267 (57) 34
-------------- ------------ ------------
Net loss (17,115) (15,441) (6,966)
Preferred stock accretion (1,119) (837) (373)
-------------- ------------ ------------
Net loss available to common shareholders $ (18,234) $ (16,278) $ (7,339)
============== ============ ============
Basic and diluted net loss per common share $ (1.81) $ (3.49) $ (1.60)
============== ============ ============
Shares used in computing basic and diluted net
loss per common share 10,081,183 4,668,404 4,594,113
============== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Convertible preferred stock Common stock
-------------------------------- -------------------------
Shares Par value Shares Par value
------------ -------------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 500,000 $ 1 4,574,276 $ 114
Exercise of stock options and warrants -- -- 30,718 1
Stock options and warrants issued in
exchange for services -- -- -- --
Sale of Imparto convertible preferred stock, net 28,391 -- -- --
Redeemable convertible preferred stock accretion -- -- -- --
Shares granted under stock incentive plan -- -- -- --
Comprehensive loss - net loss -- -- -- --
Total comprehensive loss
------------ -------------- ---------- -----------
Balance at December 31, 1997 528,391 1 4,604,994 115
Exercise of stock options and warrants -- -- 469,292 12
Stock options and warrants issued in
exchange for services -- -- -- --
Repurchase of common stock -- -- (78,889) (2)
Sale of Imparto convertible preferred stock, net 234,802 -- -- --
Redeemable convertible preferred stock accretion -- -- -- --
Comprehensive loss:
Foreign currency translation loss -- -- -- --
Net loss -- -- -- --
Total comprehensive loss
------------ -------------- ---------- -----------
Balance at December 31, 1998 763,193 1 4,995,397 125
Exercise of stock options and warrants -- -- 715,681 18
Stock options and warrants issued in
exchange for services -- -- 19,700 --
Repurchase of common stock -- -- (14,099) --
Sale of common stock in initial public offering, net of
offering costs -- -- 4,622,500 116
Conversion of redeemable convertible preferred
stock into common stock -- -- 4,799,992 120
Conversion of convertible preferred stock into
common stock (500,000) (1) 166,666 4
Sale of common stock, net -- -- 129,972 3
Sale of Imparto convertible preferred stock, net 481,884 -- -- --
Conversion of Imparto convertible preferred stock (745,077) -- 745,077 18
Deferred stock-based compensation -- -- -- --
Redeemable convertible preferred stock accretion -- -- -- --
Comprehensive loss:
Foreign currency translation loss -- -- -- --
Unrealized loss on short-term investments -- -- -- --
Net loss -- -- -- --
Total comprehensive loss
------------ ------------- ---------- -----------
Balance at December 31, 1999 -- $ -- 16,180,886 $ 404
============ ============= ========== ===========
<CAPTION>
Deferred
stock- Accumu- Total
Additional based lated other Accumu- Shareholder's
paid-in compen- comprehensive lated Equity
capital sation loss deficit (deficit)
------------ -------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 10,213 $ -- $ -- $ (14,848) $ (4,520)
Exercise of stock options and warrants 80 -- -- -- 81
Stock options and warrants issued in
exchange for services 9 -- -- -- 9
Sale of Imparto convertible preferred stock, net 257 -- -- -- 257
Redeemable convertible preferred stock accretion (373) -- -- -- (373)
Shares granted under stock incentive plan 24 -- -- -- 24
Comprehensive loss - net loss -- -- -- (6,966)
----------- ---------
Total comprehensive loss -- (6,966) (6,966)
------------ -------------- ----------- --------- ----------
Balance at December 31, 1997 10,210 -- -- (21,814) (11,488)
Exercise of stock options and warrants 822 -- -- -- 834
Stock options and warrants issued in
exchange for services 36 -- -- -- 36
Repurchase of common stock (471) -- -- -- (473)
Sale of Imparto convertible preferred stock, net 3,015 -- -- -- 3,015
Redeemable convertible preferred stock accretion (837) -- -- -- (837)
Comprehensive loss:
Foreign currency translation loss -- -- (1) --
Net loss -- -- -- (15,441)
----------- ---------
Total comprehensive loss (1) (15,441) (15,442)
------------ -------------- ----------- --------- ----------
Balance at December 31, 1998 12,775 -- (1) (37,255) (24,355)
Exercise of stock options and warrants 2,107 -- -- -- 2,125
Stock options and warrants issued in
exchange for services 672 -- -- -- 672
Repurchase of common stock (104) -- -- -- (104)
Sale of common stock in initial public offering, net of 46,105 -- -- -- 46,221
offering costs
Conversion of redeemable convertible preferred
stock into common stock 23,468 -- -- -- 23,588
Conversion of convertible preferred stock into
common stock (3) -- -- -- --
Sale of common stock, net 1,239 -- -- -- 1,242
Sale of Imparto convertible preferred stock, net 7,584 -- -- -- 7,584
Conversion of Imparto convertible preferred stock (18) -- -- -- --
Deferred stock-based compensation 185 (114) -- -- 71
Redeemable convertible preferred stock accretion (1,119) -- -- -- (1,119)
Comprehensive loss:
Foreign currency translation loss -- -- (4) --
Unrealized loss on short-term investments -- -- (105) --
Net loss -- -- -- (17,115)
----------- ---------
Total comprehensive loss (109) (17,115) (17,224)
------------ -------------- ----------- --------- ----------
Balance at December 31, 1999 $ 92,891 $ (114) $ (110) $ (54,370) $ 38,701
============ ============== =========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (17,115) $ (15,441) $ (6,966)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock-based compensation 956 36 33
Depreciation and amortization 1,452 797 613
Equity in loss of joint venture -- -- 50
Changes in assets and liabilities:
Accounts receivable (2,028) (3,143) (1,269)
Prepaid royalties and other current assets (463) (196) 176
Other assets (112) (260) (2)
Accounts payable and accrued liabilities 2,560 1,735 346
Compensation-related accruals 1,480 844 355
Deferred revenue 2,465 4,021 2,849
--------- --------- --------
Net cash used in operating activities (10,805) (11,607) (3,815)
--------- --------- --------
Cash flows from investing activities:
Purchases of short-term investments (39,576) (2,833) (1,311)
Maturities of short-term investments 5,249 610 1,000
Purchases of property and equipment (1,765) (1,737) (588)
--------- --------- --------
Net cash used in investing activities (36,092) (3,960) (899)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,157 1,872 266
Repayments of long-term debt (2,545) (1,023) (348)
Proceeds from (repayments of) line of credit (85) (415) 500
Proceeds from issuance of common stock, net 47,463 -- --
Proceeds from issuance of Imparto convertible preferred stock, net 7,584 3,015 257
Proceeds from issuance of 2order redeemable convertible preferred
stock, net 1,200 3,353 3,450
Proceeds from issuance of redeemable preferred stock, net -- 12,213 1,969
Repurchase of common stock (104) (473) --
Proceeds from exercise of stock options and warrants 2,125 834 81
--------- --------- --------
Net cash provided by financing activities 56,795 19,376 6,175
--------- --------- --------
Effect of exchange rate changes on cash (4) (1) --
--------- --------- --------
Net increase in cash and cash equivalents 9,894 3,808 1,461
Cash and cash equivalents at beginning of year 7,708 3,900 2,439
--------- --------- --------
Cash and cash equivalents at end of year $ 17,602 $ 7,708 $ 3,900
========= ========= ========
Supplemental disclosure of cash flow information - cash paid
during the year for interest $ 159 $ 196 $ 157
Non-cash financing and investing activities:
Accretion on redeemable convertible preferred stock $ 1,119 $ 837 $ 373
Conversion of redeemable convertible preferred stock into common
stock 23,588 -- --
Common stock issued in exchange for options and warrants -- 473 --
2order redeemable convertible preferred stock issued for investor
note receivable -- 1,200 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Primus Knowledge Solutions, Inc. and subsidiaries (Primus or the Company) is a
leading provider of electronic customer relationship management (eCRM) software
that enables companies to maximize the value of customer interactions across
multiple communication channels and business processes thereby enhancing
customer relationships.
The Company's primary market is comprised largely of technology companies.
Sales are primarily generated through a domestic and European field sales
organization. The Company develops their products, which are sold domestically
and internationally, at its Seattle, Washington headquarters.
The Company is subject to certain business risks that could affect future
operations and financial performance. These risks include changing computing
environments, rapid technological change, development of new products, limited
protection of proprietary technology, and competitive pricing.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries including its foreign subsidiary, Primus UK Ltd.
All significant intercompany balances and transactions have been eliminated.
In December 1999, the Company merged with Imparto Software Corporation (Imparto)
in a combination accounted for as a pooling-of-interests (note 13). In January
2000, the Company merged with 2order.com, Inc. (2order) in a combination
accounted for as a pooling-of-interests (note 13). The consolidated financial
statements and notes thereto for all periods prior to the combinations have been
restated to include the accounts and results of operations of Imparto and 2order
and have become the historical consolidated financial statements of the Company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
The Company considers all short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value and unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a separate component of other comprehensive loss until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale security below cost that
is deemed to be other than temporary results in a reduction in its carrying
amount to fair value. The impairment is charged to earnings and a new cost
basis for the security is established. Premiums and discounts are amortized or
accreted over the life of the related security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided on a straight-line or double-declining basis over the estimated useful
lives of the assets (two to seven years) or over the lease term, if shorter for
leasehold improvements.
F-7
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
PROPERTY AND EQUIPMENT, CONTINUED
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) No. 98-1, "Accounting for
the Costs of Software Developed or Obtained for Internal Use." The adoption of
SOP No. 98-1 did not have a material effect on the Company's capitalization
policy. The Company's capitalized software consists primarily of external
direct costs for software licenses.
INVESTMENT IN PRIMUS KK
In December 1995, Primus invested $50,000 for a 50% interest in Primus KK, a
Japanese distributor, with Trans Cosmos Inc., a Japanese company (TCI), a
significant shareholder of the Company. Primus accounted for its investment
using the equity method and wrote down its investment to zero in March 1997 as a
result of recognizing the Company's portion of the investee's losses to date.
In September 1997, Primus and TCI renegotiated their agreement, reducing Primus'
ownership to 14.3%. The investment is accounted for using the cost method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the recorded amounts of cash and cash
equivalents, short-term investments, due from investor, accounts receivable and
payable, prepaid expenses and other current assets, accrued liabilities and
compensation-related accruals reflected in the financial statements approximate
fair value due to the short-term nature of the instruments. It was not
practicable to estimate the fair value of the Company's investment in Primus KK.
REVENUE RECOGNITION
The Company generates revenues through two sources: (1) software license
revenues and (2) service revenues. Software license revenues are generated from
licensing the rights to use the Company's products directly to end-users and
indirectly through resellers. Service revenues are generated from sales of
maintenance services, consulting services, and training services performed for
customers that license the Company's products.
On January 1, 1998, the Company adopted the provisions of Statement of Position
97-2, "Software Revenue Recognition" (SOP 97-2), which provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence that is
specific to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered. The adoption of SOP 97-2 did not have a material
effect on revenue recognition or the Company's results of operations.
Revenues from software license agreements are recognized over the software
implementation period (if sold with initial implementation services) or upon
delivery of software (if sold without implementation services) if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to elements of the arrangement. Elements included in multiple element
arrangements consist of software products, upgrades, enhancements, customer
support services, or consulting services. If an acceptance period is required,
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. The Company enters into reseller
arrangements that typically provide for sublicense fees based on a percentage of
list price. Sublicense fees are generally recognized when reported by the
reseller upon relicensing of the Company's product to end-users. The Company's
agreements with its customers and resellers do not contain product return
rights.
F-8
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
REVENUE RECOGNITION, CONTINUED
Revenues from maintenance services are recognized ratably over the term of the
contract, typically one year. Consulting revenues are primarily related to
implementation services performed on a time-and-material basis under separate
service arrangements. Revenues from consulting and training services are
recognized as services are performed. In cases where license fee payments are
contingent on the acceptance of services, the Company defers recognition of
revenues from both the license and the service elements until the acceptance
criteria are met.
RESEARCH AND DEVELOPMENT
Costs incurred in the research and development of new software products and
enhancement to existing software products are expensed as incurred until
technological feasibility has been established. The Company believes its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility; accordingly, software costs
incurred after the establishment of technological feasibility have not been
material, and therefore, have been expensed.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
approximately $467,000, $394,000 and $220,000 during the years ended December
31, 1999, 1998, and 1997, respectively.
FEDERAL 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.
2order historically elected to be taxed as an S Corporation pursuant to the
Internal Revenue Code. As such, the Company did not record any provisions for
Federal or state income taxes since all losses were passed through to, and the
related income tax effects were the responsibility of, the shareholders of the
Company. On September 30, 1997, 2order terminated its election to operate as an
S Corporation and became taxable as a C Corporation from that date forward.
2order established deferred tax balances on the conversion date, net of a
valuation allowance. From October 1, 1997 forward, income taxes are accounted
for under the asset and liability method.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to a concentration of
credit risk consist principally of accounts receivable. The Company's customer
base is dispersed across different geographic areas throughout North America,
Europe, and Japan. One customer's purchases represented approximately 11% of
1998 revenues. During 1999 and 1997, no single customer accounted for 10% or
more of total revenues. The Company does not require collateral or other
security to support credit sales, but provides an allowance for bad debts based
on historical experience and specifically identified risks.
The Company is also subject to risks related to the significant balances of
cash, cash equivalents, short-term and long-term investments. The Company's
portfolio, however, is diversified and consists primarily of highly rated money
market funds and short-term investment-grade securities.
F-9
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiary is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the exchange rate in effect on the balance sheet date. Revenues and expenses are
translated at the average rates of exchange prevailing during the year. The net
gain or loss resulting from translation is shown as foreign currency translation
adjustment within accumulated other comprehensive loss as a component of
stockholders' equity (deficit). Gains and losses on foreign currency
transactions are included in the consolidated statement of operations. There
were no significant foreign currency transaction gains or losses in 1999, 1998
or 1997.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plans for employees in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense related to fixed employee stock options is recorded only
if, on the date of grant, the fair value of the underlying stock exceeded the
exercise price. The Company has adopted the disclosure-only requirements of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees and provide pro
forma net income and pro forma earnings per share disclosures as if the fair-
value based method of accounting in SFAS No. 123 had been applied to employee
stock option grants.
LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the Company has reported
both basic and diluted net loss per common share for each period presented.
Basic net loss per common share is computed on the basis of the weighted-average
number of common shares outstanding for the year. Diluted net loss per common
share is computed on the basis of the weighted-average number of common shares
plus dilutive potential common shares outstanding. Dilutive potential common
shares are calculated under the treasury stock method. Securities that could
potentially dilute basic income per share consist of outstanding stock options
and warrants and convertible preferred stock. Loss available to common
shareholders includes net loss and preferred stock accretion. As the Company
had a net loss available to common shareholders in each of the periods
presented, basic and diluted net loss per common share are the same. Dilutive
potential securities outstanding at year-end were not included in the
computation of diluted net loss per common share, because to do so would have
been anti-dilutive. Dilutive potential securities for the years ended December
31, 1999, 1998 and 1997 included preferred stock convertible into approximately
917,000, 6,149,000 and 3,826,000 common shares and options and warrants to
purchase approximately 3,721,000, 2,857,000 and 3,003,000 common shares,
respectively.
OTHER COMPREHENSIVE LOSS
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 (loss) and its components in a full set of financial
statements. Comprehensive loss consists of net loss, foreign currency
translation adjustments and net unrealized losses from securities available-for-
sale and is presented in the accompanying statements of stockholders' equity
(deficit) and comprehensive loss. SFAS No. 130 requires only additional
disclosures in the financial statements; it does not affect the Company's
financial position or operations.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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 periods. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain balances have been reclassified to conform to the current year
presentation.
F-10
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of this
statement is not expected to have a material impact on the Company's
supplemental consolidated financial statements.
In March 2000 the SEC issued Staff Accounting Bulletin No. 101A (SAB 101A). SAB
101A delays the effective date of Staff Accounting Bulletin No. 101 (SAB 101)
"Revenue Recognition in Financial Statements," to the second quarter for fiscal
years beginning between December 15, 1999 and March 16, 2000. SAB 101 provides
guidance on revenue recognition and the SEC staff's views on the application of
accounting principles to selected revenue recognition issues. We will adopt the
provisions of SAB 101 in the second quarter of 2000 and anticipate that such
adoptions will not have a material impact on our consolidated financial
statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25. Interpretation No. 44
clarifies the application of APB Opinion 25, Accounting for Stock Issued to
Employees, for issues, among others, regarding; (a) the definition of employees,
(b) defining non-compensatory plans, (c) modifications to previously fixed stock
option awards, and (d) accounting for an exchange of stock compensation awards
in a business combination. We will adopt Interpretation No. 44 in the third
quarter of 2000 and do not expect the adoption of the Interpretation to have a
material impact on the consolidated financial statements.
The American Institute of Certified Public Accountants recently issued Statement
of Position (SOP) No. 98-9 that provides certain amendments to SOP No. 97-2 and
is effective for transactions entered into beginning January 1, 2000. This
pronouncement is not expected to materially impact the Company's revenue
recognition practices.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
December 31,
--------------
1999 1998
---- ----
(In thousands)
Cash............................. $6,190 $2,627
Commercial paper................. 5,971 2,285
Money market funds............... 5,441 2,796
------- ------
$17,602 $7,708
======= ======
3. SHORT-TERM INVESTMENTS
Short-term investments consist of the following available-for-sale securities:
December 31,
--------------
1999 1998
------ ------
(In thousands)
Commercial paper and short-term obligations............. $8,031 $2,432
Corporate notes and bonds............................... 24,524 401
Market auction preferreds............................... 4,500 --
------- ------
$37,055 $2,833
======= ======
Amortized cost approximated fair value at December 31, 1999 and 1998, and gross
unrealized holding loss was $105,000 in 1999 and insignificant in 1998.
F-11
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SHORT-TERM INVESTMENTS, CONTINUED
Maturities of available-for-sale securities were as follows at December 31,
1999:
AMORTIZED COST FAIR VALUE
-------------- -----------
(In thousands)
Due within one year.......................... $28,672 $28,624
Due within two years......................... 8,488 8,431
The gross realized gains and losses on sales of available-for-sale securities
were insignificant in 1999, 1998 and 1997.
4. LICENSE AGREEMENTS
The Company has entered into various agreements that allow for incorporation of
licensed technology into its products. The Company incurs royalty fees under
these agreements that are based on a predetermined fee per license sold.
Royalty costs incurred under these agreements are recognized over the periods
that the related revenues are recognized and are included in cost of revenues.
These amounts totaled approximately, $810,000, $166,000 and $287,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
--------------
1999 1998
------ ------
(In thousands)
Computer equipment..................................... $4,212 $3,062
Furniture, fixtures, and equipment..................... 1,366 993
Software............................................... 632 470
Leasehold improvements................................. 61 19
------ ------
6,271 4,544
Less accumulated depreciation and amortization......... (3,418) (2,004)
------ ------
$2,853 $2,540
====== ======
Depreciation and amortization expense was approximately $1,452,000, $797,000 and
$613,000 for the years ended December 31, 1999, 1998 and 1997. Effective July
1999, the Company changed its estimated useful life of computer equipment from
five years to three years. The Company changed its estimated useful life based
upon management's belief that three years is a better match to the actual use of
the computer equipment and a three year life is predominant in the industry.
For computer equipment held in July 1999, the change in their remaining
estimated useful lives resulted in the Company recognizing an additional
$382,007, or $0.04 per weighted average basic and diluted common share, of
depreciation expense in 1999. All computer equipment additions since July 1999
have been depreciated using estimated useful lives of three years.
F-12
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
------------------------
December, 31
------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
$157,730 loans under equipment financing agreement for 2order.com at
interest rates ranging from 7.85% to 8.54%. The loans mature three years
after borrowing and are secured by the equipment purchased.
All amounts were repaid in 1999. $ -- 57
$ 3,000,000 line of credit and $2,000,000 term loan; the line of credit
bears interest at a rate of prime plus 0.75% and expires April 2000.
All amounts were repaid in 1999. -- 1,463
$600,000 note payable with a bank; interest payable at prime plus
0.75%; due January 2000, all assets of the Company secure the note.
In connection with the note, the Company issued warrants to
purchase 1,534 shares of common stock for $13.04 per share (note
9). All amounts were repaid in 1999. -- 200
$300,000 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. All amounts were repaid in 1999. -- 47
$200,000 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. All amounts were repaid in 2000. 79 --
$300,000 promissory notes under bridge financing agreement were
issued to 2order's preferred stockholders pursuant to a Securities
Purchase Agreement in December 1999. The notes are due the
earlier of December 29, 2000 or the date of sale of 2order and
accrue interest at 10% per annum. All amounts were repaid in 2000. 300 --
---------- ----------
Total long-term debt 379 1,767
Less current portion of long-term debt (319) (502)
---------- ----------
Long-term debt, excluding
current portion $ 60 1,265
========== ==========
</TABLE>
In March 1998, the Company entered into a financing arrangement with a bank that
provided up to $3,000,000 under a line of credit to support working capital and
up to $2,000,000 under a term loan to purchase capital equipment. The line of
credit expired in March 1999. In April 1999, the Company restructured this
financing arrangement to provide a $5 million line of credit and a $1 million
term loan. The line of credit matures in April 2000 and bears interest at a rate
of prime plus 0.75%. The term loan is available for advances for one year during
which time interest only is payable at prime plus 1% and after which principal
and interest payments are due in equal monthly payments over 3 years beginning
April 2000. The Company had no borrowings outstanding under the line of credit
or term loan at December 31, 1999. All assets of the Company secure the
arrangement. The agreement includes certain financial covenants including those
requiring the Company to maintain minimum levels of working capital, liquidity
and profitability, which the Company was in compliance with at December 31,
1999. In connection with the financing arrangement, the Company issued warrants
to purchase 23,333 and 22,500 shares of common stock at an exercise price of
$10.50 and $6.00 in 1999 and 1998, respectively (note 9).
F-13
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. FINANCING ARRANGEMENTS, CONTINUED
In May 1998, 2order 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%. In July 1998, $50,000 in borrowings were
converted into a term loan, thereby reducing the available borrowings under the
line of credit to $250,000. In March 1999, an additional $50,000 in borrowings
under the 2order line of credit agreement was converted into a term loan, and
the maturity date for the remaining $200,000 in available borrowings 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 2order. There were no borrowings outstanding
under the line of credit as of December 31, 1999.
In November and December 1998, 2order 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, 2order issued
warrants to purchase 2,947 shares of the Company's common stock at an exercise
price of $10.18 per share. On December 31, 1998, all outstanding notes were
converted at a rate of $10.18 per share into 2order redeemable convertible
preferred stock.
In January 1999, the Company entered into an agreement with a bank to provide an
additional $400,000 of working capital in the form of a note payable. Imparto
borrowed approximately $400,000 under the note, all of which was repaid prior to
December 31, 1999. The note was due January 2000 and bore interest at prime plus
0.75%. In connection with the note, Imparto issued warrants to purchase 767
shares of common stock for $13.04 per share (note 9).
At December 31, 1999, future long-term debt payments are as follows:
2000 $ 319
2001 20
2002 20
2003 17
2004 3
-----
Total $ 379
=====
7. INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
U.S. operations........................... $(17,222) $(15,642) $ (6,932)
International operations.................. 374 144 --
-------- -------- --------
$(16,848) $(15,498) $ (6,932)
======== ======== ========
</TABLE>
F-14
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED
The components of income tax expense (benefit) are as follows:
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Current:
Federal......................... $ -- $ (102) $ 34
Foreign taxes................... 267 45 --
------ ------ ------
Income tax expense (benefit)....... $ 267 $ (57) $ 34
====== ====== ======
Income tax expense (benefit) differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to loss before income taxes as a result of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Income tax benefit at U.S. statutory rate of 34% $(5,728) $(5,269) $(2,357)
Non-deductible expenses, including merger
related costs.................................... 235 (41) (14)
Change in valuation allowance, net of
intra-period allocations......................... 5,616 5,249 2,224
Impact of S Corporation short-year filing......... -- -- 181
Foreign taxes..................................... 144 4 --
------- ------- -------
Income tax expense (benefit)...................... $ 267 $ (57) $ 34
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 19,218 $ 10,469
Research and development tax credits......................... 774 515
Deferred revenue............................................. 2,125 1,590
Accrued expenses not currently deductible.................... 408 482
Other........................................................ 809 232
-------- --------
Total deferred tax assets..................................... 23,334 13,288
Deferred tax liability--accrual to cash adjustments........... (302) (329)
-------- --------
Net deferred tax assets...................................... 23,032 12,959
Valuation allowance.......................................... (23,032) (12,959)
-------- --------
$ -- $ --
======== ========
</TABLE>
F-15
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED
Due to the Company's history of net operating losses, the Company has
established a valuation allowance equal to its net deferred tax assets on the
basis that realization of such assets is not assured. The valuation allowance
increased approximately $10.1 million, $5.6 million and $1.9 million during
1999, 1998, and 1997, respectively.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $56.0 million, which begins to expire in 2001, if not utilized.
Approximately $13.9 million of the net operating loss carryforwards at December
31, 1999 result from deductions associated with the exercise of non-qualified
employee stock options, the realization of which would result in a credit to
shareholders' equity (deficit). The Tax Reform Act of 1986 limits the use of net
operating loss and tax credit carryforwards in certain situations where changes
occur in the stock ownership of a company. The Company may have experienced such
ownership changes as a result of the various stock offerings and the utilization
of the carryforwards could be limited.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In February 1996, Primus completed a private offering of 6,910,568 shares of
Series A redeemable convertible preferred stock (Series A) for approximately
$7.9 million net of offering costs of $580,000. In March 1997, Primus completed
a private offering of 1,000,000 shares of Series C redeemable convertible
preferred stock (Series C) for $1,969,000, net of offering costs. In July 1998,
Primus completed a private offering of 4,900,000 shares of Series D redeemable
convertible preferred stock (Series D) for approximately $12.2 million, net of
offering costs. Concurrent with the Company's initial public offering in 1999,
all outstanding redeemable convertible preferred stock was converted into
4,799,992 shares of common stock. All preferred stock converted into 0.333
shares of common stock, except Series A, which converted into 0.410 shares of
common stock.
The difference between the original net proceeds from redeemable convertible
preferred sock and the conversion value of approximately $23.6 million
represents the accretion of the redemption value of the redeemable convertible
preferred stock through the date of the initial public offering.
Holders of Series A, C, and D had preferential rights to dividends when and if
declared by the Board of Directors. The holders were entitled to the number of
votes equal to the number of shares of common stock into which the preferred
stock could be converted. In the event of liquidation, the holders of Series A,
C, and D had preferential right to liquidation payments of $1.23, $2.00, and
$2.50 per share, respectively, plus any accrued but unpaid dividends. The
holders of a majority of the outstanding Series A, C, and D shares could have
requested redemption on or after January 31, 2003 at $1.48, $2.40, and $3.00 per
share, respectively, subject to adjustment, plus any declared but unpaid
dividends thereon.
Prior to the merger with 2order in 2000, redeemable convertible preferred stock
included 916,731 shares of Series A and B Convertible Participating preferred
stock. On December 31, 1998, the Company sold 451,805 shares of Series B
resulting in net proceeds to the Company of approximately $4.6 million. On
September 30, 1997, the Company sold 464,926 shares of Series A resulting in net
proceeds to the Company of approximately $3.4 million.
The holders of 2order Series A and B shares had preferential rights, including:
(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
2order's Board of Directors; (3) preferred dividends and distributions; (4)
liquidation preferences, and preemptive registration and piggyback rights; (5)
the option to convert to common stock at any time; (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.
The Company recorded accretion on 2order Series A and B redeemable convertible
preferred stock 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.
In January 2000, with the completion of the merger, the 2order.com Series A and
B redeemable preferred stock was converted into 916,918 shares of the Company's
common stock.
F-16
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In September 1996, Primus completed a private offering of 500,000 shares of
Series B convertible preferred stock (Series B) for $981,000, net of offering
costs. Concurrent with the Company's initial public offering, all 500,000 shares
of Series B outstanding were converted into 166,666 shares of common stock.
Series B had preferential rights to dividends when and if declared by the Board
of Directors. The holders were entitled to the number of votes equal to the
number of shares of common stock into which the preferred stock could be
converted. In the event of liquidation, the holders of Series B had preferential
rights to liquidation payments of $2.00 per share, plus any accrued but unpaid
dividends.
Prior to the merger with Imparto in 1999, convertible preferred stock included
745,077 shares of Imparto Series A, B, C and D convertible preferred stock
(Imparto Preferred Stock) (note 13). In 1999, Imparto sold 481,884 shares of
Imparto Preferred Stock for approximately $7.6 million, net of offering costs.
In 1998, Imparto sold 234,802 shares of Imparto Preferred Stock for
approximately $3.0 million net of offering costs. In 1997, Imparto sold 28,391
shares of Imparto Preferred Stock for approximately $257,000, net of offering
costs. Imparto Preferred Stock gave certain rights to holders similar to the
Company's Series B convertible preferred stock. Concurrent with the merger with
Imparto, the Imparto Preferred Stock converted into 745,077 shares of the
Company's common stock.
DUE FROM INVESTOR
Due from investor relates to a wire transfer for the purchase of 2order
redeemable convertible preferred stock which was not received until January
1999.
COMMON STOCK
In April 1999, the Board of Directors authorized a 1-for-3 reverse stock split
of the Company's common stock and, in connection with the stock split, the
Company adjusted the authorized shares in its capitalization. The common stock
and per-share data in the accompanying supplemental consolidated financial
statements have been retroactively restated to reflect the reverse stock split.
In July 1999, the Company sold 4,622,500 shares of common stock in an initial
public offering. The aggregate price of the shares offered and sold by Primus
was approximately $50.8 million. Proceeds to Primus, after accounting for $3.6
million in underwriting discounts and commissions and approximately $1 million
in other expenses, were $46.2 million.
STOCK OPTIONS
The Company's fixed stock option plans include the Employee Stock Option and
Restricted Stock Award Plan, the Nonemployee Director Stock Option Plan, the
1995 Stock Incentive Compensation Plan, the 1999 Stock Incentive Compensation
Plan, and the 1999 Nonofficer Employee Stock Compensation Plan. The use of the
1995 Stock Incentive Option Plan for grants of new awards terminated in 1999. In
connection with the mergers with Imparto in December 1999 and 2order in January
2000, the Company assumed outstanding options to purchase common stock
originally issued under Imparto's and 2order's stock option plan (Acquired
Options) (see note 13). All of the Acquired Options have been adjusted to give
effect to the conversion under the terms of the Agreement and Plan of Merger
with Imparto and Agreement and Plan of Merger with 2order. No additional options
will be granted under the Imparto and 2order stock option plans. The Company's
stock option plans, as well as the assumed stock option plans, are hereby
collectively referred to as the "Option Plans." The Option Plans provide for the
granting of incentive stock options to employees and nonqualified stock options
to employees, directors, and consultants. Options granted under the Option Plans
typically vest over four years and remain exercisable for a period not to exceed
ten years. During 1999, the stockholders increased the number of shares
available under the Option Plans by 2,666,667.
F-17
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY, CONTINUED
A summary of the Company's stock option activity for the years ended December 31
follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------
Shares Weighted-
Available Number Average
for of Exercise
Grant Shares Prices
------------------- ---------- ---------
<S> <C> <C> <C>
Balance at December 31, 1996....................................... 536,906 2,133,142 $ 2.11
Additional shares authorized..................................... 1,333,333 -- --
Options granted.................................................. (1,834,750) 1,834,750 3.10
Options forfeited................................................ 323,203 (1,011,715) 2.07
Options exercised................................................ -- (30,710) 2.66
------------------ --------- ---------
Balance at December 31, 1997...................................... 358,692 2,925,467 2.75
Additional shares authorized..................................... 666,667 -- --
Options granted.................................................. (742,774) 742,774 3.73
Options forfeited................................................ 421,290 (464,900) 3.28
Options exercised................................................ -- (452,618) 1.73
------------------ --------- ---------
Balance at December 31, 1998...................................... 703,881 2,750,723 3.09
Additional shares authorized..................................... 2,666,667
Options granted:
Price less than market......................................... (53,833) 53,833 6.56
Price equal to market.......................................... (1,967,554) 1,967,554 19.12
Options forfeited................................................ 322,176 (459,884) 4.78
Options exercised................................................ -- (617,354) 2.95
------------------ --------- ---------
Balance at December 31, 1999...................................... 1,671,337 3,694,872 $ 11.49
================== ========= =========
</TABLE>
Total exercisable options and their weighted average exercise price at December
31, 1999, 1998 and 1997 were 1,207,185, 1,470,604 and 1,528,381 shares and
$3.22, $2.77 and $2.40, respectively. Additional information regarding options
outstanding and options exercisable at December 31, 1999 for selected exercise
price ranges follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- -----------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Options Life (Years) Price Options Price
--------------- --------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.03 - $ 2.25 270,454 5.57 $ 1.60 239,023 $ 1.66
3.00 - 3.00 1,307,174 7.77 3.00 817,606 3.00
3.65 - 8.25 782,445 8.87 6.55 131,790 5.22
9.00 - 20.41 797,897 9.43 15.88 12,290 10.50
22.44 - 54.81 501,318 9.83 36.57 6,476 33.75
55.56 - 55.56 35,584 9.94 55.56 -- --
--------- ------ --------- ---------
$ 0.03 - $55.56 3,694,872 8.50 $11.49 1,207,185 $ 3.22
========= ====== ========= =========
</TABLE>
F-18
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY, CONTINUED
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Company adopted the Employee Stock Purchase Plan (ESPP).
Under the terms of the ESPP, the Company is authorized to issue up to 600,000
shares of common stock, plus annual increases as defined by the plan document.
The ESPP enables employees to purchase shares of the Company's common stock at a
discounted price through after-tax payroll deductions. Shares are offered to
employees in 24-month offering periods that include four consecutive six-month
purchase periods. Eligible employees elect to have deducted from 1% to 10% of
their base compensation up to $25,000 per year. The amounts deducted can be
used to purchase the Company's common stock at the lesser of 85% of the fair
value on the first day of the offering period or 85% of the fair value on last
day of the purchase period (purchase date). The purchase price for the first
offering beginning in July 1999 shall be the lesser of 100% of the initial
public offering price before underwriter's discount or 85% of fair value on
purchase date. At December 31, 1999, 562,754 shares remained available for
purchase under the plan.
WARRANTS
A summary of the Company's warrant activity for the years ended December 31
follows:
<TABLE>
<CAPTION>
Outstanding Warrants
----------------------
Weighted-
Number Average
of Exercise
Shares Prices
---------- ----------
<S> <C> <C>
Balance at December 31, 1996.................. 56,227 $ 2.93
Warrants issued............................. 21,410 6.48
Warrants exercised.......................... -- --
-------- ------
Balance at December 31, 1997................. 77,637 3.91
Warrants issued............................. 45,647 7.12
Warrants exercised.......................... (16,667) (3.00)
-------- ------
Balance at December 31, 1998................. 106,617 5.43
Warrants issued............................. 35,767 8.95
Warrants exercised.......................... (116,495) (5.81)
-------- ------
Balance at December 31, 1999................. 25,889 $ 8.57
======== ======
</TABLE>
STOCK-BASED COMPENSATION
In 1999, the Company issued certain fixed options to employees under the Option
Plans with an exercise price less than the fair value of the underlying common
stock on the date of grant. The Company also issued certain options and
warrants to purchase common stock to non-employees in connection with, financing
arrangements and consulting agreements in 1999 and prior years. The value of
these awards is being recognized as either compensation or interest expense over
the underlying awards' service periods. The Company recognized expense of
approximately $956,000, $36,000 and $33,000 in 1999, 1998 and 1997 related to
these options and warrants.
F-19
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY, CONTINUED
Pro forma information regarding net loss and net loss per share required by SFAS
No. 123 has been determined as if the Company had accounted for its employee
stock options and stock purchase plan under the fair market value method. The
fair value of options and stock purchase rights was estimated at the date of
grant using the Black-Scholes option pricing model. The fair value of options
granted under the Option Plans was estimated using the following weighted-
average assumptions: risk-free interest rate of 6.15% in 1999; 5.40% in 1998;
and 5.77% in 1997; expected option life of five years, dividend yield rate of
0%, and volatility of 91.16% in 1999. Options granted by the Company in 1998
and 1997 and by Imparto and 2order.com prior to its merger with the Company were
valued using the minimum value method and therefore volatility was not
applicable. The fair value of stock purchase rights under the ESPP was
estimated using the following weighted-average assumptions in 1999: stock price
$17.56, exercise price $11.00, risk-free interest rate of 6.19%; expected life
of 1.25 years, dividend yield rate of 0%, and volatility of 91.16%.
For purposes of pro forma disclosures, the estimated fair value of the employee
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
------- ------- -----
<S> <C> <C> <C>
(In thousands,Except Per Share Data)
Loss available to common shareholders:
As reported.............................................................. $18,234 $16,278 $7,339
SFAS No. 123 pro forma net loss.......................................... $21,949 $16,627 $8,018
Basic and diluted net loss per share:
As reported.............................................................. $ 1.81 $ 3.49 $ 1.60
SFAS No. 123 pro forma................................................... $ 2.18 $ 3.56 $ 1.75
Weighted-average fair value of options
granted during the year:
Price less than market................................................. $ 17.61 $ -- $ --
Price equal to market.................................................. $ 14.00 $ 1.22 $ 0.84
Weighted-average fair value of ESPP........................................ $ 11.09 $ -- $ --
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan for eligible
employees under the provisions of Internal Revenue Code Section 401(k).
Participants may defer up to 15% of their annual compensation on a pretax basis,
subject to maximum limits on contributions. Contributions by the Company are at
the discretion of the Board of Directors. No discretionary contributions have
been made by the Company to date.
11. COMMITMENTS
The Company leases office space under operating leases with various expiration
dates through 2001. Future minimum rental payments, are as follows as of
December 31, 1999:
Operating
Leases
----------
(In thousands)
----------
2000................................................... $1,050
2001................................................... 129
2002................................................... 4
----------
$1,183
==========
Rent expense was approximately $1.7 million , $1.1 million and $671,000, for
1999, 1998 and 1997, respectively.
F-20
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED-PARTY TRANSACTIONS
In 1997, Primus KK, a distributor whose majority shareholder is also a
significant shareholder of the Company, became a reseller of the Company's
products and support services in Japan. The Company does not recognize any
revenue on sales of the Company's product or support services to Primus KK until
it is sold through by Primus KK to end-users. Revenues recognized under the
reseller agreements total approximately $1,353,000, $575,000, and $30,000 in
1999, 1998 and 1997, respectively, and revenue deferred at December 31, 1999 and
1998 was approximately $1,516,000 and $1,395,000, respectively.
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
2order's President to purchase 2,564 shares of common stock at an exercise price
of $1.17 per share through May 2006. This warrant remains outstanding and
exercisable as of December 31, 1999.
13. BUSINESS COMBINATIONS
On December 12, 1999, the Company entered into an Agreement and Plan of Merger
with a California corporation, Imparto Software Corporation (Imparto) and
exchanged 913,788 shares of the Company's common stock for all of the issued and
outstanding capital stock of Imparto. In addition, the Company assumed, on a
converted basis, 86,212 of options and warrants to purchase capital stock of
Imparto outstanding at the time of merger. The combination was accounted for
under the pooling-of-interests method of accounting, and accordingly, the
supplemental consolidated financial statements for all periods prior to the
combination are restated to include the accounts and results of operations of
Imparto. Imparto had the same fiscal year-end as the Company, and there were no
adjustments to conform accounting methods or eliminate intercompany
transactions. In connection with the merger, the Company incurred approximately
$1.5 million in merger-related costs primarily for investment banking, legal and
other professional fees in the fourth quarter of 1999.
On January 21, 2000, pursuant to an Agreement and Plan of Merger, dated as of
January 8, 2000, the Company merged with 2order.com, Inc., a Georgia corporation
(2order.com). 2order.com develops and markets software that acts as a personal
sales assistant, helping buyers define requirements and configure custom
solutions. 2order.com was incorporated in Georgia in 1991 under the name
Business Systems Design, Inc. As a result of the merger, Primus issued
1,506,126 shares of the Company's common stock, $.025 par value per share in
exchange for all issued and outstanding capital shares and assumed all the
outstanding 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 business
combination, and accordingly, the Company's historical consolidated financial
statements have been restated to include the accounts and results of operations
of 2order.com.
Results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying supplemental consolidated
financial statements are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Revenues:
Primus....................... $ 24,179 $ 8,610 $ 5,189
Imparto...................... 965 952 1,294
2order.com................... 2,174 2,657 1,013
--------- -------- -------
$ 27,318 $ 12,219 $ 7,496
========= ======== =======
Net income(loss):
Primus........................ $ (5,287) $(10,603) $(5,985)
Imparto....................... (7,731) (2,043) 51
2order.com.................... (4,097) (2,795) (1,032)
-------- -------- -------
$(17,115) $(15,441) $(6,966)
======== ======== =======
</TABLE>
F-21
<PAGE>
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. BUSINESS SEGMENT INFORMATION
The Company and its subsidiaries are principally engaged in the design,
development, marketing and support of the eService family of eProducts:
eSupport, eMarketing and eSales. Substantially all revenues result from the
licensing of the Company's software products and related consulting and customer
support (maintenance) services. The Company's chief operating decision-maker
reviews financial information presented on a supplemental consolidated basis,
accompanied by disaggregated revenue information. eService product.
The majority of the Company's revenues are derived from customers in the United
States. The Company's international sales are principally in Europe and Japan.
The following geographic information is presented for years ended December 31,
1999, 1998 and 1997:
Year Ended December 31,
--------------------------
1999 1998 1997
------- ------- -------
(In thousands)
United States.......................... $23,069 $10,789 $7,465
International.......................... 4,249 1,430 31
------- ------- -------
Total revenues........................ $27,318 $12,219 $7,496
======= ======= =======
F-22
<PAGE>
SCHEDULE II
PRIMUS KNOWLEDGE SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED BALANCE AT
ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR TO EXPENSE WRITE-OFFS END OF YEAR
------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999..... 378 445 -- 823
Year ended December 31, 1998..... 70 334 (26) 378
Year ended December 31, 1997..... 70 -- -- 70
</TABLE>
F-23
