<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER: 000-26273
PRIMUS KNOWLEDGE SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
WASHINGTON 91-1350484
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 Fifth Avenue, Suite 1900
Seattle, Washington 98101
(Address of principal executive offices)
(206) 292-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [_]
As of August 9, 2000 there were 17,914,941 shares of the Registrant's Common
Stock outstanding.
<PAGE>
Primus Knowledge Solutions, Inc.
Form 10-Q
June 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
. Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999........ 3
. Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2000 and 1999........................................................... 4
. Condensed Consolidated Statement of Shareholders' Equity for the three months
ended March 31, 2000 and June 30, 2000................................................. 5
. Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and June 30, 1999.................................................. 6
. Notes to Condensed Consolidated Financial Statements................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................. 23
PART II. OTHER INFORMATION
ITEM 2. Change in Securities and Use of Proceeds................................................... 24
ITEM 6. Exhibits and Reports on Form 8-K........................................................... 24
</TABLE>
Page 2 of 25
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PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,682 $ 17,602
Short-term investments 24,694 37,055
Accounts receivable, net 12,377 8,479
Prepaid expenses and other current assets 696 993
-------- --------
Total current assets 54,449 64,129
Property and equipment, net 3,622 2,853
Other assets 335 424
-------- --------
Total assets $ 58,406 $ 67,406
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,047 $ 1,415
Accrued and other liabilities 1,576 4,190
Compensation-related accruals 4,274 3,249
Current portion of long-term debt - 319
Deferred revenue, including related-party amounts of $36
and $1,516 at June 30, 2000 and December 31, 1999, respectively 7,707 10,418
-------- --------
Total current liabilities 15,604 19,591
-------- --------
Long-term debt, net of current portion - 60
Redeemable convertible preferred stock - 9,054
Shareholders' equity:
Common stock 445 404
Additional paid-in-capital 104,847 92,891
Deferred stock-based compensation (82) (114)
Accumulated other comprehensive loss (131) (110)
Accumulated deficit (62,277) (54,370)
-------- --------
Total shareholders' equity 42,802 38,701
-------- --------
Total liabilities and shareholders' equity $ 58,406 $ 67,406
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 25
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
License, including amounts from
related parties of $443 and $377
for the three months ended June 30,
2000 and 1999, respectively; $1,480
and $1,072 for the six months ended
June 30, 2000 and 1999 respectively. $ 9,909 $ 4,671 $ 17,089 $ 7,930
Services 3,152 1,844 6,430 3,163
----------- ---------- ----------- ----------
Total revenues 13,061 6,515 23,519 11,093
----------- ---------- ----------- ----------
Cost of revenues:
License 330 315 653 475
Services 2,439 1,521 5,047 2,856
----------- ---------- ----------- ----------
Total cost of revenues 2,769 1,836 5,700 3,331
----------- ---------- ----------- ----------
Gross profit 10,292 4,679 17,819 7,762
Operating expenses:
Sales and marketing 6,936 4,760 13,762 8,488
Research and development 3,717 2,107 7,728 4,172
General and administrative 2,714 1,262 5,014 2,582
Merger related costs - - 505 -
----------- ---------- ----------- ----------
Total operating expenses 13,367 8,129 27,009 15,242
----------- ---------- ----------- ----------
Loss from operations (3,075) (3,450) (9,190) (7,480)
Other income, net 710 4 1,365 31
----------- ---------- ----------- ----------
Loss before income taxes (2,365) (3,446) (7,825) (7,449)
Income tax expense 50 173 82 200
----------- ---------- ----------- ----------
Net loss (2,415) (3,619) (7,907) (7,649)
Preferred stock accretion - (388) (43) (776)
----------- ---------- ----------- ----------
Net loss available to common
shareholders $ (2,415) $ (4,007) $ (7,950) $ (8,425)
=========== ========== =========== ==========
Basic and diluted net loss per common share $(0.14) $(0.77) $(0.45) $(1.65)
=========== ========== =========== ==========
Shares used in computing basic and diluted
net loss per common share 17,657,822 5,187,069 17,488,959 5,108,655
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 25
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Deferred other
paid-in stock-based comprehensive Accumulated
Common stock capital compensation loss deficit
------------ ------- ------------ ----
Shares Par value
---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999............ 16,180,886 $404 $ 92,891 $(114) $(110) $(54,370) $38,701
Preferred stock accretion............... -- -- (43) -- -- -- (43)
Exercise of stock options and warrants.. 515,497 14 1,446 -- -- -- 1,460
Stock options and warrants issued in
exchange for services.................. -- -- 178 -- -- -- 178
Deferred stock-based compensation....... -- -- -- 19 -- -- 19
Conversion of 2order.com redeemable
convertible preferred stock............ 916,918 23 9,074 -- -- -- 9,097
Comprehensive loss:
Foreign currency translation loss...... -- -- -- -- (6) --
Unrealized loss on short-term
investments........................... -- -- -- -- (62) --
Net loss............................... -- -- -- -- -- (5,492)
-------------------
Total comprehensive loss....... -- -- -- -- (68) (5,492) (5,560)
----------------------------------------------------------------------------------
Balance at March 31, 2000.............. 17,613,301 $441 $103,546 $ (95) $(178) $(59,862) $43,852
Exercise of stock options and warrants.. 87,496 3 655 -- -- -- 658
Shares purchased through employee
stock purchase plan.................... 42,123 1 646 -- -- -- 647
Deferred stock-based compensation....... -- -- -- 13 -- -- 13
Comprehensive loss:
Foreign currency translation loss...... -- -- -- -- (17) --
Unrealized gain on short-term
investments........................... -- -- -- -- 64 --
Net loss............................... -- -- -- -- -- (2,415)
-------------------
Total comprehensive loss........... -- -- -- -- 47 (2,415) (2,368)
----------------------------------------------------------------------------------
Balance at June 30, 2000............... 17,742,920 $445 $104,847 $ (82) $(131) $(62,277) $42,802
==================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 25
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,907) $(7,649)
Adjustments to reconcile net loss to net cash used in
operating activities:
Option and warrant expense 210 353
Depreciation and amortization 1,528 461
Changes in assets and liabilities:
Accounts receivable (3,898) 1,938
Prepaid expenses and other current assets 297 26
Other assets 89 (1,022)
Accounts payable and accrued and other liabilities (1,982) 515
Compensation-related accruals 1,025 (96)
Deferred revenue (2,711) (696)
-------- -------
Net cash used in operating activities (13,349) (6,170)
-------- -------
Cash flows from investing activities:
Purchases of short-term investments (6,780) (1,780)
Proceeds from maturity of short-term investments 19,143 3,809
Purchases of property and equipment (2,297) (534)
-------- -------
Net cash provided by investing activities 10,066 1,495
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 1,045
Repayments on long-term debt (379) (92)
Proceeds from the issuance of common stock, net 2,765 1,476
Proceeds from issuance of Imparto convertible preferred stock, net 350
Repurchase of common stock - (104)
Proceeds from issuance of preferred stock - 1,200
-------- -------
Net cash provided by financing activities 2,386 3,875
Effect of exchange rate changes on cash (23) (11)
-------- -------
Net decrease in cash and cash equivalents (920) (811)
Cash and cash equivalents at beginning of period 17,602 7,708
-------- -------
Cash and cash equivalents at end of year $ 16,682 $ 6,897
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6 of 25
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of the Company
Primus Knowledge Solutions, Inc. (Primus) is 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. Sales are primarily generated
through a domestic and European field sales organization. Products sold
domestically and internationally are developed by us at our Seattle
headquarters and at our Atlanta and Palo Alto offices. We were incorporated in
the state of Washington in 1986.
Basis of Presentation
The condensed consolidated financial statements include the accounts of Primus
and our wholly-owned subsidiaries, including our foreign subsidiary, Primus UK
Ltd. All significant intercompany balances and transactions have been
eliminated.
In December 1999 and January 2000, Primus merged with Imparto Software
Corporation (Imparto) and 2order.com, Inc. (2order.com), respectively, in
combinations accounted for as pooling-of-interests. The condensed consolidated
financial statements and notes thereto for all periods prior to the combinations
are restated to include the accounts and results of operations of Imparto and
2order.com.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In our
opinion, the statements include all adjustments necessary (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with our audited financial statements for the year ended December 31, 1999
included in our Annual Report on Form 10-K filed with the SEC. The results of
operations for any interim period are not necessarily indicative of the results
of operations for any other interim period or for a full fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
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 on the
relative fair value of the elements. 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.
The implementation of this latest AICPA pronouncement did not materially impact
our revenue recognition practices.
Page 7 of 25
<PAGE>
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.
In addition, there may be arrangements where we are contractually restricted
from invoicing a customer until a later date. In these cases, we will record
the accounts receivable and recognize the revenue when we invoice the customer,
which is generally 30-60 days prior to the due date.
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.
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.
NOTE 3. EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," we 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 for certain periods, convertible preferred stock. Net loss
available to common shareholders includes net loss and preferred stock
accretion. As we 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. All
outstanding warrants, stock options, and convertible preferred stock to acquire
common shares were excluded from the computation of diluted earnings per share
at June 30, 2000 and June 30, 1999 because the effect was anti-dilutive.
Potential common shares consisted of options and warrants to purchase 4,577,182
and 3,425,860, and preferred stock convertible into zero and 6,175,244 common
shares at June 30, 2000 and 1999, respectively.
NOTE 4. COMPREHENSIVE LOSS
The following table reconciles net loss as reported to total comprehensive loss
for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net loss $(2,415) $(3,619) $(7,907) $(7,649)
</TABLE>
Page 8 of 25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other comprehensive income (loss):
Unrealized foreign currency loss (17) (7) (23) (11)
Unrealized gain on short-term
investments 64 -- 2 --
------- ------- ------- -------
Total comprehensive loss $(2,368) $(3,626) $(7,928) $(7,660)
======= ======= ======= =======
</TABLE>
NOTE 5. BUSINESS SEGMENT INFORMATION
Primus and subsidiaries are principally engaged in the design, development,
marketing and support of our eService family of eProducts: eSupport, eSales and
eMarketing. Substantially all revenues result from the licensing of our software
products and related consulting and customer support (maintenance) services.
Our chief operating decision-maker reviews financial information presented on a
consolidated basis, accompanied by disaggregated revenue information.
The majority of our revenues are derived from customers in the United States.
Our international sales are principally in Europe and Japan. The following
geographic information is presented for three and six months ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------------------------------------
2000 1999 2000 1999
-------------------- ------------------ ------------------- -------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
United States $ 8,570 $6,014 $17,273 $ 9,171
International 4,491 501 6,246 1,922
--------------- ---------------- --------------- ---------------
Total revenues $13,061 $6,515 $23,519 $11,093
=============== ================ =============== ===============
</TABLE>
Page 9 of 25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. These forward-looking statements involve risks and
uncertainties, including, but not limited to, those identified in the section of
this Form 10-Q entitled "Factors Affecting Our Future Operating Results," which
may cause actual results to differ materially from those discussed in such
forward-looking statements. When used in this document, the words "believes,"
"expects," "anticipates," "intends," "plans" and similar expressions, are
intended to identify certain of these forward-looking statements. However,
these words are not the exclusive means of identifying such statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. The cautionary statements made in this document should be read as
being applicable to all related forward-looking statements wherever they appear
in this document. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed in our Annual Report
on Form 10-K, a copy of which is on file at the Securities and Exchange
Commission. We undertake no obligation to release publicly the results of any
revision to these forward-looking statements that may be made to reflect events
or circumstances occurring subsequent to the filing of this Form 10-Q with the
SEC. Readers are urged to review and carefully consider the various disclosures
made by us in this report and in our other reports filed with the SEC that
attempt to advise interested parties of the risk and factors that may affect our
business.
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
Primus and the customer with every interaction. Our software solutions can be
deployed as a suite or as individual products, depending on our 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.
Page 10 of 25
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The following table sets forth certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three and six months ended
June 30, 2000 and 1999 are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C>
Revenues:
License 75.9% 71.7% 72.7% 71.5%
Services 24.1 28.3 27.3 28.5
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
License 2.5 4.8 2.8 4.3
Services 18.7 23.3 21.5 25.7
------ ------ ------ ------
Total cost of revenues 21.2 28.2 24.2 30.0
------ ------ ------ ------
Gross profit 78.8 71.8 75.8 70.0
------ ------ ------ ------
Operating expenses:
Sales and marketing 53.1 73.1 58.5 76.5
Research and development 28.5 32.3 32.9 37.6
General and administrative 20.8 19.4 21.3 23.3
Merger related costs -- -- 2.1 --
------ ------ ------ ------
Total operating expenses 102.4 124.8 114.8 137.4
------ ------ ------ ------
Loss from operations (23.6) (53.0) (39.1) (67.4)
Other income 5.4 .1 6.2 .3
Other expense -- -- (.4) --
------ ------ ------ ------
Loss before income taxes (18.2) (52.9) (33.3) (67.1)
Income tax expense .4 2.7 .6 1.8
------ ------ ------ ------
Net loss (18.6)% (55.5)% (33.9)% (68.9)%
====== ====== ====== ======
</TABLE>
Revenues
We derive our revenue from the sale of software licenses and related services
including support and maintenance contracts. Revenue was approximately $13.1
million and $6.5 million for the three months ended June 30, 2000 and 1999,
respectively, representing an increase in the second quarter of 2000 of
approximately $6.6 million, or 101%, over the comparable quarter of the prior
year. Revenue was approximately $23.5 million and $11.1 million for the six
months ended June 30, 2000 and 1999, respectively, representing an increase of
approximately $16.9 million, or 112%, over the comparable period in the prior
year.
License Revenue. License revenue was approximately $9.9 million and $4.7 million
for the three months ended June 30, 2000 and 1999, respectively, representing an
increase in the second quarter of 2000 of approximately $5.2 million, or 111%,
over the comparable quarter of the prior year. License revenue was approximately
$17.1 million and $7.9 million for the six months ended June 30, 2000 and 1999,
respectively, representing an increase of approximately $9.2 million, or 116%,
over the comparable period of the prior year. The increases were due to
increased sales of our eCRM products and continued increases in both the size
and productivity of our sales force. International license revenues were
approximately $4.5 million and $501,000 for the three months ended
Page 11 of 25
<PAGE>
June 30, 2000 and 1999, respectively and approximately $6.2 million and $1.9
million for the six months ended June 30, 2000 and 1999, respectively. Sales
personnel totaled 74 and 61 as of June 30, 2000 and 1999, respectively.
Services Revenue. Services revenue was approximately $3.2 million and $1.8
million for the three months ended June 30, 2000 and 1999, respectively,
representing an increase in the second quarter of 2000 of approximately $1.4
million, or 78%, over the comparable quarter of the prior year. Services revenue
was approximately $6.4 million and $3.2 million for the six months ended June
30, 2000 and 1999, respectively, representing an increase of approximately $3.2
million, or 100%, over the comparable period of the prior year. Maintenance and
support contract revenues increased approximately $1.2 million in the second
quarter of 2000 over the comparable quarter of the prior year and increased
approximately $2.2 million in the first six months of 2000 over the same period
of the prior year. Consulting fees increased approximately $239,000 in the
second quarter of 2000 over the comparable quarter of the prior year and
increased approximately $1.0 million in the first six months of 2000 over the
same period of the prior year.
Services revenue represented 24.1% and 28.3% of our total revenue for the three
months ended June 30, 2000 and 1999, respectively and approximately 27.3% and
28.5% of our total revenue for the first six months of 2000 and 1999,
respectively . We expect the proportion of services 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
approximately $330,000 and $315,000 for the three months ended June 30, 2000 and
1999, respectively. Cost of license revenue as a percentage of license revenue
was 2.5% and 4.8% for the three months ended June 30, 2000 and 1999,
respectively. Cost of license revenue was approximately $653,000 and $475,000
for the six months ended June 30, 2000 and 1999, respectively. Cost of license
revenue as a percentage of license revenue was 2.8% and 4.3% for the six months
ended June 30, 2000 and 1999, respectively. We anticipate that our cost of
license revenue will continue to fluctuate 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 approximately $2.4 million and $1.5 million for the three months
ended June 30, 2000 and 1999, respectively. While cost of services revenue
increased approximately $900,000, or 60%, for the three months ended June 30,
2000 compared to the same period in 1999, cost of services as a percentage of
service revenues decreased from 82.5% to 77.4% for the same period. Cost of
services revenue was approximately $5.0 million and $2.9 million for the six
months ended June 30, 2000 and 1999, respectively. While cost of services
revenue increased approximately $2.1 million, or 72%, for the six months ended
June 30, 2000 compared to the same period in 1999, cost of services as a
percentage of service revenues decreased from 90.3% to 78.5% for the same
period. The decrease in cost of services revenue as a percentage of services
revenue was primarily due to higher utilization of consulting-services personnel
and growth of maintenance revenue. Professional services and customer support
personnel totaled 66 and 47 as of June 30, 2000 and 1999, respectively.
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 approximately $6.9
million and $4.8 million for the three months ended June 30, 2000 and 1999,
respectively. Sales and marketing expenses increased approximately $2.1 million,
or 44% for the three months ended June 30, 2000 as compared to
Page 12 of 25
<PAGE>
the three months ended June 30, 1999. Sales and marketing expenses were
approximately $13.8 million and $8.5 million for the six months ended June 30,
2000 and 1999, respectively. Sales and marketing expenses increased
approximately $5.3 million, or 62% for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. This increase is primarily due
to the continued growth in the number of our sales and marketing personnel as
well as an increase in commissions as a result of revenue growth. Sales and
marketing employees totaled 96 and 80 for the six months ended June 30, 2000 and
1999, respectively. Sales and marketing expenses as a percentage of total
revenue was 53.1% and 73.1% for the three months ended June 30, 2000 and 1999,
respectively. Sales and marketing expenses as a percentage of total revenue was
58.5% and 76.5% for the six months ended June 30, 2000 and 1999, respectively.
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 approximately $3.7 million and $2.1 million for the
three months ended June 30, 2000 and 1999, respectively. Research and
development expenses increased approximately $1.6 million, or 76%, for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999.
Research and development expenses were approximately $7.7 million and $4.2
million for the six months ended June 30, 2000 and 1999, respectively. Research
and development expenses increased approximately $3.5 million, or 83%, for the
six months ended June 30, 2000 compared to the same period in the prior year.
The increase was 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 111
and 74 for the six months ended June 30, 2000 and 1999, respectively. Research
and development expenses as a percentage of total revenue was 28.5% and 32.3%
for the three months ending June 30, 2000 and June 30, 1999, respectively.
Research and development expenses as a percentage of total revenue was 32.9% and
37.6% for the six months ending June 30, 2000 and June 30, 1999, 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 was not established until
substantially all product development was 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 approximately $2.7 million and $1.3 million for the three months
ended June 30, 2000 and 1999, respectively. General and administrative expenses
increased approximately $1.4 million, or 108%, for the three months ended June
30, 2000 compared to the three months ended June 30, 1999. General and
administrative expenses were approximately $5.0 million and $2.6 million for the
six months ended June 30, 2000 and 1999, respectively. General and
administrative expenses increased approximately $2.4 million, or 92%, for the
six months ended June 30, 2000 compared to the same period in the prior year.
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.
General and administrative employees totaled 30 and 28 for the six months ended
June 30, 2000 and 1999. General and administrative expenses as a percentage of
total revenue were 20.8% and 19.4% for the three months ended June 30, 2000 and
1999, respectively and 21.3% and 23.3% for the six months ended June 30, 2000
and 1999, respectively. The fluctuation of general and administrative expense
as a percentage of total revenue reflects the building of our infrastructure
during these
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periods. 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 $505,000 for the
six months ended June 30, 2000. All merger related costs were incurred during
the first quarter of 2000 as these costs were recorded in connection with the
January 2000 merger with 2order.com that was accounted for under the pooling-of-
interests method of accounting.
Other Income, Net. Other income was $710,000 and $4,000 for the three
months ended June 30, 2000 and 1999, respectively. Other income was
$1.4 million and $31,000 for the six months ended June 30, 2000 and 1999,
respectively. The variances from period to period were due to fluctuations in
the average combined cash and cash equivalents and short-term investment
balances. We expect to continue to yield investment income on our 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 and the
first six months of 2000.
Income Taxes. We have not recorded income tax benefits related to the net
operating losses in 1999 and the first six months of 2000 as a result of the
uncertainties regarding the realization of the net operating losses. Tax
expense recorded in both the second quarter of 2000 and 1999 and the first six
months of 2000 and 1999 primarily relates to tax expense from our foreign
operations.
Liquidity and Capital Resources
As of June 30, 2000, we had cash and cash equivalents of approximately $16.7
million, a decrease from $17.6 million of cash and cash equivalents held as of
December 31, 1999. As of June 30, 2000, we had short-term investments of
approximately $24.7 million, representing a decrease of approximately $12.4
million from investments held as of December 31, 1999. As of June 30, 2000, our
working capital was approximately $38.8 million compared to approximately $44.5
million at December 31, 1999.
Our accounts receivable was approximately $12.4 million and $8.5 million as of
June 30, 2000 and December 31, 1999, respectively, representing an increase of
approximately $3.9 million or 46%. This increase was principally a result of an
increase in revenues during the first six months of 2000, offset in part by cash
collections during the six months ended June 30, 2000. Days sales outstanding
("DSO") in accounts receivable was 85 days as of June 30, 2000. We expect that
DSO will fluctuate significantly in future quarters.
Our total liabilities were approximately $15.6 million as of June 30, 2000 and
$28.7 million as of December 31, 1999, including our redeemable preferred stock,
representing a decrease of $13.1 million, or 46%. This decrease was mainly the
result of the conversion of approximately $9.1 million in redeemable convertible
preferred stock to common stock in connection with the merger of 2order.com in
the first quarter of 2000.
Our operating activities resulted in net cash outflows of approximately $13.3
million for the six months ended June 30, 2000. Adjustments to the $7.9 million
net loss to reconcile to cash used in operating activities includes a decrease
of approximately $2.7 million in deferred revenue, of which $1.9 million relates
to the write-off of the deferred revenue against a receivable from a customer,
approximately $3.9 million for the increase in accounts receivable and $1.5
million for depreciation and amortization. Net cash used in operating activities
was approximately $6.5 million for the six months ended June 30, 1999.
Investing activities provided cash of approximately $10.1 million for the six
months ended June 30, 2000. Investing activities for this period consisted
primarily of approximately $19.1 million in proceeds from the maturity of short-
term investments offset by approximately $6.8 million in purchases of short-term
investments. Further activities included the purchase of approximately $2.3
million in capital equipment. Net cash provided by
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investing activities was approximately $1.5 million for the six months ended
June 30, 1999.
Financing activities provided cash of approximately $2.4 million for the six
months ended June 30, 2000. Financing activities for this period included
approximately $2.8 million in proceeds from the exercise of stock options and
warrants offset by approximately $379,000 in repayments of debt obligations.
Net cash provided by financing activities was approximately $4.2 million for the
six months ended June 30, 1999.
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. We believe
that our existing cash and cash equivalents and available line of credit 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.
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, 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
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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.
Factors Affecting Our Future Operating Results
You should carefully consider the risks and uncertainties described below and
the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
deem immaterial also may impair our business. If any of the following risks
actually occur, our business, financial condition and operating results could be
materially adversely affected and the trading price of our common stock could
decline.
We have incurred operating losses and we may not be profitable in the future.
We have incurred net losses in each quarter since inception and we could
continue to incur net losses for the foreseeable future. As of June 30, 2000, we
had an accumulated deficit of $62.3 million. We expect to continue to devote
substantial resources to expand our product development, sales and marketing and
our customer support and professional service groups. As a result, we will need
to generate significant revenues to achieve and maintain profitability. We may
not be profitable in any future period.
Quarterly fluctuations in our operating results may adversely affect our stock
price.
Our license revenues have fluctuated substantially from quarter to quarter in
the past and are likely to continue to fluctuate substantially in the future. In
addition, the fiscal or quarterly budget cycles of our users can cause our
revenues to fluctuate from quarter to quarter and applicable accounting policies
may cause us to report new license agreements as deferred revenue until
implementation begins. As a result, we believe that period-to-period comparisons
of our operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. We will continue to base our
decisions regarding our operating expenses on anticipated revenue trends. To the
extent these expenses are not followed by increased revenues, our operating
results will suffer. Fluctuations in our operating results, particularly
compared to the expectations of market analysts or investors, could cause severe
volatility in the price of our common stock.
Our quarterly operating results depend on a small number of large orders.
We derive a significant portion of our product license revenues in each
quarter from a small number of relatively large orders. Our operating results
for a particular fiscal quarter could be materially adversely affected if we are
unable to complete one or more substantial license sales or implementations
planned for that quarter.
Factors outside our control may cause the timing of our license revenues to vary
from quarter-to-quarter, possibly adversely affecting our operating results.
Under applicable accounting rules, we may experience further variability in
our license revenues from quarter to quarter due to factors outside our control,
including:
. whether we are providing implementation services
. whether implementation is delayed or takes longer than expected
. variability in the mix of new and existing customers
Where we are implementing the software, we will account for the agreement as
an item of deferred revenue and will recognize the license revenue over the
period of implementation. Most of our new customers begin implementation within
30 to 60 days of signing a license agreement. Once commenced, implementation of
our
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<PAGE>
products typically ranges from 30 to 45 days, an improvement from prior years
when installations took 60 to 90 days. We can't, however, guarantee that
customers will begin implementation or that we will always be able to implement
our software within those time periods. Thus, all of our deferred license
revenue may not be recognized within the originally expected time period.
Seasonality may adversely affect our quarterly operating results.
We expect to experience seasonality in our license revenue. To date, we
believe that seasonality has been masked by other factors, such as large orders
and the timing of personnel changes in our sales staff. Our customers' purchase
decisions are often affected by fiscal budgetary factors and by efforts of our
direct sales force to meet or exceed sales quotas. As a result, we expect new
business in the last quarter of a year to be greater than new business in the
first quarter of the following year. One effect of our revenue recognition
policy, however, is that revenue recognized in a quarter will typically not
reflect all of the new license agreements signed and shipped in that quarter.
Because revenue recognized in a given quarter may be primarily associated with
new business in prior quarters, revenue in the first quarter may be higher than
revenue recognized in the previous fourth quarter.
The limited sales history of our products makes it difficult to evaluate our
business and prospects.
We released our first eCRM product in August 1996. Accordingly, the basis
upon which you can evaluate our prospects in general, and market acceptance of
our products in particular, is limited. For our business to succeed, the market
for eCRM software will have to grow significantly, and we will have to achieve
broad market acceptance of our products.
If e-business sales and marketing solutions are not widely adopted, we may not
be successful.
We are broadening our current product suite to integrate with various aspects
of e-business solutions. These products address a new and emerging market for e-
business sales and marketing solutions. The failure of this market to develop,
or a delay in the development of this market, would seriously harm our business.
The success of e-business sales and marketing solutions depends substantially
upon the continued growth and the widespread adoption of the Internet as a
primary medium for commerce and business applications. The Internet
infrastructure may not be able to support the demands placed on it by the
continued growth upon which our success depends. Moreover, reliability, cost,
accessibility, security and quality of service remain unresolved and may
negatively affect the growth of Internet use or the attractiveness of commerce
and business communication over the Internet.
We rely on sales of only one product family.
Product license revenues and related services from our Primus eServer and
Primus eSupport products accounted for over 90% of our total revenues through
June 30, 2000, and we expect these products to continue to account for a
substantial portion of our revenues for the remainder of 2000. As a result,
factors adversely affecting the demand for these products and our eCRM products
in general, such as competition, pricing or technological change, could
materially adversely affect our business, financial condition and operating
results. Our future financial performance will substantially depend on our
ability to sell current versions of our entire suite of eCRM products and our
ability to develop and sell enhanced versions of our eCRM products.
Factors outside our control may make our products less useful.
The effectiveness of our eCRM products depends in part on widespread adoption
and effective use of our software by an enterprise's personnel, partners and
customers and the value derived by each such usage. In addition, the
effectiveness of our knowledge-enabled approach is dependent upon a current
database. If customer-support personnel do not adopt and effectively use our
products, necessary solutions will not be added to the database, and the
database will be inadequate. If an enterprise deploying our software fails to
maintain a current database, the value of our eCRM products to our users will be
impaired. Thus, successful deployment and broad
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<PAGE>
acceptance of our eCRM products will depend in part on the quality of the users'
existing database of solutions, which is outside our control.
The high level of competition in our market may result in pricing pressures,
reduced margins or the failure of our products to achieve market acceptance.
The market for our products is new and rapidly evolving, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our suite of products competes
against various vendor software tools designed to address a specific or elements
of the complete set of eCRM processes, including Internet communications,
esupport, esales and emarketing. We also face competition from in-house designed
products and third-party custom development efforts.
In addition, companies providing e-commerce and traditional customer
relationship management solutions that may compete with us include Broadvision,
Clarify, Oracle, Peoplesoft, Siebel and Vignette.
The principal competitive factors in our industry include:
<TABLE>
<CAPTION>
<S> <C>
. vendor and product reputation . product ease-of-use
. customer referenceability . the quality of customer support services,
documentation and training
. measurable economic return . the quality, speed and effectiveness of
application development services
. product quality, performance and price . the effectiveness of sales and marketing efforts
. breadth of product functionality and features . product integration with other enterprise
applications
. product scalability
. the availability of products on the Internet and
multiple operating platforms
</TABLE>
As the market for eCRM software matures, it is possible that new and larger
companies will enter the market, existing competitors will form alliances or
current and potential competitors could acquire, be acquired by or establish
cooperative relationships with third parties. The resulting organizations could
have greater technical, marketing and other resources and improve their products
to address the needs of our existing and potential users, thereby increasing
their market share. Increased competition could result in pricing pressures,
reduced margins or the failure of our products to achieve or maintain market
acceptance.
If we do not integrate Imparto's and 2order.com's technology quickly and
effectively, many of the potential benefits of these acquisitions may not be
realized.
We intend to integrate Imparto's and 2order.com's technology into our own
products. We cannot assure you that we will be able to integrate Imparto's and
2order.com's technology quickly and effectively. In order to obtain the benefits
of these acquisitions, we must make Imparto's and 2order.com's technology,
products and services operate together with our technology, products and
services. We may be required to spend additional time or money on integration
which would otherwise be spent on developing our business and services or other
matters. If we do not integrate these technologies effectively or if management
and technical staff spend too much time on integration issues, it could harm our
business, financial condition and results of operations. In addition, the
success of these acquisitions will also depend on our ability to successfully
integrate and manage the acquired operations and retain or replace the key
employees of the companies we acquired.
The loss of access to, or a problem with, Versant's database could adversely
affect our business.
Historically, we incorporated a database licensed from Versant into our
products. Presently, our products support Microsoft SQL Server, Oracle and
Versant databases. Because most of the products we have shipped to
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date, however, rely on Versant's database, we continue to depend on Versant's
ability to support the database in a timely and effective manner.
Failure to sufficiently expand our sales and marketing infrastructure would
adversely affect our sales.
To date, we have licensed our products primarily through our direct sales
force. Our future revenue growth will depend in large part on our ability to
recruit, train and manage additional sales and marketing personnel and to expand
our indirect distribution channels. We have experienced and continue to
experience difficulty in recruiting qualified sales and marketing personnel and
in establishing third-party relationships. We may not be able to successfully
expand our direct sales force or other distribution channels and any such
expansion may not result in increased revenues. Our business, financial
condition and operating results will be materially adversely affected if we fail
to expand our sales and marketing resources.
Our inability to expand sufficiently our implementation and consulting
capabilities would limit our ability to grow.
If sales of new licenses increased rapidly or if we were to sign a license
agreement for a particularly large or complex implementation, our customer
support and professional services personnel may be unable to meet the demand for
implementation services. In that case, if we were unable to retain or hire
highly trained consulting personnel or establish relationships with third-party
systems-integrators and consultants to implement our products, we would be
unable to meet customer demands for implementation and educational services
related to our products.
Our failure to attract and retain skilled technical personnel in a tight labor
market may adversely affect our product development, sales and customer
satisfaction.
Qualified technical personnel are in great demand throughout the software
industry. The demand for qualified technical personnel is particularly acute in
the Pacific Northwest, due to the large number of software companies and the low
unemployment in the region. Our success depends in large part upon our continued
ability to attract and retain highly skilled technical employees, particularly
software architects and engineers. Our failure to attract and retain the highly-
trained technical personnel that are integral to our direct sales, product
development and customer support teams may limit the rate at which we can
generate sales and develop new products or product enhancements. This could have
a material adverse effect on our business, financial condition and operating
results.
The market price of our common stock has been volatile since our initial
public offering in July 1999. Consequently, potential employees may perceive our
equity incentives such as stock options as less attractive. In that case, our
ability to attract and retain employees will be adversely affected.
Acquisitions could disrupt our business and harm our financial condition.
In order to remain competitive, we may find it necessary to acquire additional
businesses, products and technologies. In the event that we do complete an
acquisition, we could be required to do one or more of the following:
. issue equity securities, which would dilute current shareholders'
percentage ownership
. assume contingent liabilities
. incur a one-time charge
. amortize goodwill and other intangible assets
We may not be able to successfully integrate any technologies, products,
personnel or operations of companies that we acquire. These difficulties could
disrupt our ongoing business, divert management resources and increase our
expenses.
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Failure to properly integrate our management team would adversely affect our
business.
In the last year we added three new members to our senior management team,
none of whom worked together prior to joining Primus. Our success depends on the
performance of our senior management and their ability to work together. Failure
to properly integrate them would harm our business. Much of our success also
depends on Michael A. Brochu, our President and Chief Executive Officer. The
loss of Mr. Brochu's services would harm our business.
Our international operations are subject to additional risks.
Revenues from customers outside the United States represented approximately
$6.2 million in the 6 months ended June 30, 2000, or 26.6% of our total revenue
for the same period. We currently customize our products for the Japanese
market. In the future, we plan to develop additional localized versions of our
products. Localization of our products will create additional costs and would
cause delays in new product introductions. In addition, our international
operations will continue to be subject to a number of other risks, including:
. costs of customizing products for foreign countries
. laws and business practices favoring local competition
. compliance with multiple, conflicting and changing laws and regulations
. longer sales cycles
. greater difficulty or delay in accounts receivable collection
. import and export restrictions and tariffs
. difficulties in staffing and managing foreign operations
. political and economic instability
Our international operations also face foreign-currency-related risks. To
date, substantially all of our revenues have been denominated in U.S. dollars,
but we believe that in the future, an increasing portion of our revenues will be
denominated in foreign currencies, including the Euro. The Euro is an untested
currency and may be subject to economic risks that are not currently
contemplated. Fluctuations in the value of the Euro or other foreign currencies
may have a material adverse effect on our business, operating results and
financial condition.
Our failure to adapt to technology trends and evolving industry standards would
hinder our competitiveness.
Our market is susceptible to rapid changes due to technology innovation,
evolving industry standards, and frequent new service and product introductions.
New services and products based on new technologies or new industry standards
expose us to risks of technical or product obsolescence. We will need to use
leading technologies effectively, continue to develop our technical expertise
and enhance our existing products on a timely basis to compete successfully in
this industry. We cannot be certain that we will be successful in using new
technologies effectively, developing new products or enhancing existing products
on a timely basis or that any new technologies or enhancements used by us or
offered to our customers will achieve market acceptance.
Our inability to continue integration of our products with other third-party
software could adversely affect market acceptance of our products.
Our ability to compete successfully also depends on the continued
compatibility and interoperability of our products with products and systems
sold by various third parties, including traditional CRM software sold by
Clarify, Onyx, Remedy, Siebel and Peoplesoft. Currently, these vendors have open
applications program interfaces, which facilitate our ability to integrate with
their systems. If any one of them should close their programs' interface or if
they should acquire one of our competitors, our ability to provide a close
integration of our products could become more difficult and could delay or
prevent our products' integration with future
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systems.
Our stock price has been volatile and could fluctuate in the future.
The market price of our common stock has been highly volatile and is subject
to wide fluctuations. We expect our stock price to continue to fluctuate:
. in response to quarterly variations in operating results
. in response to announcements of technological innovations or new products
by us or our competitors
. because of market conditions in the enterprise software industry
. in reaction to changes in financial estimates by securities analysts, and
our failure to meet or exceed the expectations of analysts or investors
. in response to our announcements of significant acquisitions, strategic
relationships or joint ventures
. in response to sales of our common stock
Our efforts to protect our proprietary rights may be inadequate.
Our success depends in part on our ability to protect our proprietary rights.
To protect our proprietary rights, we rely primarily on a combination of
copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as those
contained in license agreements with consultants, vendors and customers. We have
not signed such agreements in every case. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products and
obtain and use information that we regard as proprietary. Other parties may
breach confidentiality agreements and other protective contracts we have entered
into. We may not become aware of, or have adequate remedies in the event of,
such breaches.
We pursue the registration of some of our trademarks and service marks in the
United States and in certain other countries, but we have not secured
registration of all our marks. A significant portion of our marks include the
word "Primus." Other companies use "Primus" in their marks alone or in
combination with other words, and we cannot prevent all third-party uses of the
word "Primus." We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would adversely
affect our trademarks.
Other companies may claim that we infringe their intellectual property or
proprietary rights.
If any of our products violate third party proprietary rights, we may be
required to reengineer our products or seek to obtain licenses from third
parties, and such efforts may not be successful. We do not conduct comprehensive
patent searches to determine whether the technology used in our products
infringes patents held by third parties. Product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, which are confidential when filed, with
regard to similar technologies. In addition, other companies have filed
trademark applications for marks similar to the names of our products. Although
we believe that our products do not infringe the proprietary rights of any third
parties, third parties could assert infringement claims against us in the
future. The defense of any such claims would require us to incur substantial
costs and would divert management's attention and resources to defend against
any claims relating to proprietary rights, which could materially and adversely
affect our financial condition and operations. Parties making such claims could
secure a judgment awarding them substantial damages, as well as injunctive or
equitable relief that could effectively block our ability to sell our products
and services. Any such outcome could have a material adverse effect on our
business, financial condition and operating results.
Control by inside shareholders of a large percentage of our voting stock may
permit them to influence us in a way that adversely affects our stock price.
Our officers, directors and affiliated entities together beneficially own
approximately one-third of the
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outstanding shares of our common stock. As a result, these shareholders are able
to influence all matters requiring shareholder approval and, thereby, our
management and affairs. Some matters that typically require shareholder approval
include:
. election of directors
. certain amendments to our articles of incorporation
. merger or consolidation
. sale of all or substantially all our assets
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock.
Our articles of incorporation and bylaws and Washington law contain provisions
that could discourage a takeover.
Specific provisions of our articles of incorporation and bylaws and Washington
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our shareholders.
Our articles of incorporation and bylaws establish a classified board of
directors, eliminate the ability of shareholders to call special meetings,
eliminate cumulative voting for directors and establish procedures for advance
notification of shareholder proposals. The presence of a classified board and
the elimination of cumulative voting may make it more difficult for an acquirer
to replace our board of directors. Further, the elimination of cumulative voting
substantially reduces the ability of minority shareholders to obtain
representation on the board of directors.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by our shareholders. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change of control of Primus and
may adversely affect the market price of the common stock and the voting and
other rights of the holders of common stock.
Washington law imposes restrictions on some transactions between a corporation
and significant shareholders. Chapter 23B.19 of the Washington Business
Corporation Act prohibits a target corporation, with some exceptions, from
engaging in particular significant business transactions with an acquiring
person, which is defined as a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation, for a period of
five years after the acquisition, unless the transaction or acquisition of
shares is approved by a majority of the members of the target corporation's
board of directors prior to the acquisition. Prohibited transactions include,
among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person
. termination of 5% or more of the employees of the target corporation
. allowing the acquiring person to receive any disproportionate benefit as a
shareholder
A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Primus.
The foregoing provisions of our charter documents and Washington law could
have the effect of making it more difficult or more expensive for a third party
to acquire, or could discourage a third party from attempting to acquire Primus.
These provisions may therefore have the effect of limiting the price that
investors might be willing to pay in the future of our common stock.
Changes in accounting standards could affect the calculation of our future
operating results.
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<PAGE>
In October 1997, the American Institute of Certified Public Accountants issued
its Statement of Position 97-2, "Software Revenue Recognition," and later
amended its position by its Statement of Position 98-4. We adopted Statement
of Position 97-2 effective January 1, 1998. Based on our interpretation of the
AICPA's position, we believe our current revenue recognition policies and
practices are consistent with Statement of Position 97-2 and Statement of
Position 98-4. The AICPA has also issued Statement of Position 98-9, which is
effective for transactions we enter into beginning January 1, 2000 and the
Securities and Exchange Commission has issued Staff Accounting Bulletin No. 101
"Revenue Recognition," which has a deferred effective date under SAB 101B until
October 1, 2000. However, full implementation guidelines for these standards
have not yet been issued. Once available, such implementation guidelines could
lead to unanticipated changes in our current revenue accounting practices which
could materially adversely affect our business, financial condition and
operating results. Additionally, the accounting standard setters, including the
Securities and Exchange Commission and the Financial Accounting Standards Board
(FASB), are continuing to review the accounting standards related to stock-based
compensation. Recently the FASB issued FAS Interpretation No. 44 "Accounting
for Certain Transactions involving Stock Compensation." Any changes to these
standards or any other accounting standards could materially adversely affect
our business, financial condition and operating results.
You should not unduly rely on forward-looking statements because they are
inherently uncertain.
You should not rely on forward-looking statements in this document. This
document contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future" and "intends," and similar expressions to identify forward-
looking statements. You should not place undue reliance on these forward-
looking statements, which apply only as of the date of this document. The
forward-looking statements contained in this document are subject to the
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks described above and elsewhere in this document
ITEM 3. 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. We are exposed to the impact of short-term changes in
interest rates. Our exposure primarily relates to our investment portfolio. We
invest our 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 usto suffer losses in principal if
forced to sell securities that have declined in market value or may cause our
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.
We protect and preserve our invested funds with investment policies and
procedures that limit default, market and reinvestment risk. We have not
utilized derivative financial instruments in our investment portfolio.
During the three months ended March 31, 2000, the effects of changes in interest
rates on the fair market value of our marketable investment securities and our
earnings were insignificant. At June 30, 2000, our investment portfolio included
approximately $4.5 million in variable rate investments, primarily all of which
are due during 2000. Fixed rate investments at June 30, 2000 of approximately
$20.2 million had a weighted average interest rate of 6.50% and are primarily
due in 2000. We believe that the impact on the fair market value of our
securities and our earnings for the remainder of 2000 from a hypothetical 10%
increase in interest rates would be insignificant.
Foreign Currency Exchange Risk. We develop products in the United States and
sell them in North America,
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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. We have 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 for the remainder of 2000 would
likely not be significantly effected.
PART II -- OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the period covered by this report on Form 10-Q, we issued and sold
unregistered securities as follows:
On April 18, 2000, we issued 5,666 shares of our common stock,
valued at $3.00 per share, pursuant to an exercise of a warrant.
The sales and issuances of these shares were exempt from registration
under the Securities Act pursuant to Rule 701 promulgated thereunder on the
basis that these options and warrants were offered and sold either pursuant to a
written compensatory benefit plan or pursuant to written contracts relating to
consideration, as provided by Rule 701, or pursuant to Section 4(2) of the
Securities Act on the basis that the transactions did not involve a public
offering.
(d) Use of Proceeds
On June 30, 1999, the SEC declared effective our Registration Statement on
Form S-1 (Registration No. 333-77477) as filed with the SEC in connection with
our Initial Public Offering. The offering consisted of 4,772,500 shares of
Primus common stock, including 622,500 shares of common stock offered pursuant
to the exercise of the underwriters' over-allotment option and 150,000 shares
offered by selling shareholders. 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 $1.0 million in other expenses were $46.2 million.
We are using the net proceeds raised in the initial public offering for
additional working capital, repayment of short-term indebtedness, and general
corporate purposes, including increased domestic and international sales and
marketing expenditures, increased research and development expenditures and
capital expenditures made in the ordinary course of business. Pending such
uses, the net proceeds will be invested in investment-grade, interest-bearing
instruments, the majority of which are short-term.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.19 Lease Amendment III, dated May 31, 2000, by and between the
registrant and Westlake Center Associates Limited Partnership.
27.1 Financial Data Schedule.
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(b) Reports on Form 8-K.
We filed the following reports on Form 8-K during the quarter covered by
this Form 10-Q:
On June 30, 2000, we filed a Form 8-K reporting the Company's annual
consolidated financial statements as of December 31, 1999 and 1998 and for
each of the years in the three year period ended December 31, 1999 and
related consolidated financial statement schedule, which have been restated
to reflect the merger of 2order.com as a pooling-of-interest business
combination.
On April 3, 2000, we filed a Form 8-K/A, amending a current report that we
filed on February 4, 2000, reporting certain financial information pursuant
to Item 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMUS KNOWLEDGE SOLUTIONS, INC.
Date: August 14, 2000 By: /s/ Elizabeth J. Huebner
--------------------------
Elizabeth J. Huebner
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal financial and chief accounting officer)
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
10.19 Lease Amendment III, dated May 31, 2000, by and between the
registrant and Westlake Center Associates Limited
Partnership.
27.1 Financial Data Schedule.
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