PRIMUS KNOWLEDGE SOLUTIONS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 1999

Commission File Number: 0-26273

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PRIMUS KNOWLEDGE SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)

Washington 91-1350484
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

1601 Fifth Avenue, Suite 1900
Seattle, WA 98101
(Address of principal executive offices, including zip code)

(206) 292-1000
(Registrant's telephone number, including area code)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock $0.025 par value per share

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 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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the common stock on March 20,
2000, as reported on Nasdaq National Market System was approximately $793.7
million. Shares of common stock held by each executive officer and director
and by each person who owned 5% or more of the outstanding common stock as of
such date have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

The number of shares of the registrant's common stock outstanding on March 20,
2000, was 17,600,914.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report is incorporated by
reference from the registrant's definitive proxy statement, relating to the
Annual Meeting of Shareholders to be held in May 2000, which definitive proxy
statement shall be filed not later than 120 days after the end of the fiscal
year to which this report relates.

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PRIMUS KNOWLEDGE SOLUTIONS, INC.
FORM 10-K
TABLE OF CONTENTS

Item Page
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PART I
1. BUSINESS.......................................................... 2
2. PROPERTIES........................................................ 18
3. LEGAL PROCEEDINGS................................................. 18
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 18
4A. EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 18
PART II
5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.......................................................... 20
6. SELECTED CONSOLIDATED FINANCIAL DATA.............................. 21
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 21
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 29
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 30
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 30
11. EXECUTIVE COMPENSATION............................................ 30
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 30
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 30
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 30

"Primus," "Primus eServer," "Primus Interchange," "Primus eMarketing,"
"Primus eSales," and "Primus eSupport" are trademarks, registered trademarks,
or service marks of Primus. This Annual Report on Form 10-K also contains
trademarks and service marks of other companies, which are the property of
their respective owners.

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PART I

This Annual Report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
may, will, should, expect, plan, intend, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the "Factors
Affecting Our Operating Results" below. These factors may cause our actual
results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this annual report to conform such
statements to actual results or to changes in our expectations.

ITEM 1. BUSINESS

Overview

Primus Knowledge Solutions, Inc. 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. 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.
This market phenomenon where companies must provide an integrated, seamless
approach to engaging their customers, sales, marketing and support across all
communication channels is commonly referred to as eCRM.

Industry Background

The emergence of the Internet as a business medium has made it imperative
for companies across various industries to recreate the way they do business.
To remain competitive, 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. Early e-business initiatives
focused on providing basic Web sites that offered customers little more than
product information for marketing purposes. Today, e-business initiatives are
designed to provide customers with a unique online experience. 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. Even the most traditional companies have found it difficult to ignore
the need to implement an e-business strategy.

The shift from traditional business practices to doing business online has
fundamentally changed the way that companies interact with and think about
their customers. Increasingly, companies now realize that they must

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personalize each customer experience by providing products and support based
on each customer's needs that exceed each customer's expectations. To
accomplish these goals, businesses must use the Internet as a primary channel
to communicate with customers by developing their Web presence. Companies must
also find ways to proactively target customers with rich, relevant
information. Therefore, companies now realize that they must leverage the Web
to proactively reach out to customers, create a personalized rich selling
environment and learn from each customer interaction, in order to respond to
customer inquiries in real-time and provide a consistent level of service 24
hours a day, seven days a week.

Given the changing nature of business today, there are inherent challenges
associated with becoming an e-business and interacting with customers in this
new environment. Customers now have higher expectations and experience lower
switching costs when changing vendors because competition is just a click
away. Customers also expect to have the same experience regardless of the
communication channel used to interact with a business. Companies must also
view each customer in an integrated way, meaning that their marketing, sales
and support business processes must work together. Further, companies must
realize that the customer is now an active, informed participant. 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.

Although companies have recognized the need to implement eCRM initiatives
that leverage the Internet to enhance customer relationships, the solutions
previously available have not been comprehensive enough to address all of
these challenges. There are various point solutions designed to address each
distinct business process, specifically marketing, sales and support, but
these solutions are limited to addressing the needs of each specific business
function. For example, the knowledge that a customer had a support interaction
about a product last week, can guide a company's next marketing initiative as
much as the knowledge of what a customer bought last quarter, can drive an
additional sale the next day. The value created by taking these disparate
internal systems and connecting them by using a knowledge-enabled approach
that benefits both the business and the customer is a valuable resource.
Although the value of integrating these various point solutions to maximize
the benefit of each customer interaction is apparent, previous attempts have
proven to be costly and inefficient and have failed to integrate each business
process in a seamless manner. There are also various solutions focused on
addressing specific communication channels like telephone, email or the Web,
but these solutions typically create discrete silos of information that are
not readily accessible across other communication channels the solutions are
servicing.

To adequately address today's market requirements, companies need an
integrated, comprehensive eCRM software solution that enables them to maximize
the value of customer interactions across multiple communication channels and
business processes thereby enhancing customer relationships. The Internet and
advances in technology enable e-businesses to actively enhance individual
customer interactions and leverage the knowledge captured on an individual
basis to enhance a company's interactions with all of its customers. The value
of this to an e-business becomes immediately apparent when customers believe
that they are being responded to in a proactive and holistic fashion. This is
the area where eCRM systems can have the most dramatic impact.

Primus Solution

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 solution has the following key characteristics:

Comprehensive eCRM platform. Our solution is designed to enable companies to
integrate marketing, sales and support business processes seamlessly across
multiple communication channels. This eliminates the need to purchase various
point products designed to address discrete business functions and provides
for a more

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easily deployable, complete e-business solution. Companies can ensure that
institutional knowledge gained from interactions across all communication
channels, including the Internet, will be absorbed and communicated company-
wide so that the entire enterprise can apply this knowledge to future
interactions.

Holistic approach. Companies can maximize each customer interaction by
gaining a holistic view of the customer. Companies are able to enhance ongoing
customer relationships by integrating the three core front office business
processes, marketing, sales and support. In addition, from the customer's
perspective, it allows for seamless interaction throughout the customer
lifecycle.

Scalable Web architecture. Companies have proven our solution in demanding,
transaction heavy environments. For example, one company demonstrated that
Primus e-Support is scalable to over 500,000 user accesses per month. In
addition, many companies have purchased our solution to be used by thousands
of employees, and hundreds of thousands of their customers and partners on a
global basis.

Rapid ROI. Our solution can be rapidly implemented and easily customized,
thus allowing for minimum downtime before companies realize the benefits of
choosing our solution. In addition, the extensive business functionality
provided by our solution allows companies to realize more immediate benefits
such as reduced support costs, enhanced customer satisfaction and increased
productivity. By providing a comprehensive application suite, our solution
reduces the need for companies to go through the time-consuming task of
integrating various business processes.

Primus Strategy

Our objective is to further establish our leadership position in providing
Web-based, interactive customer relationship management software applications.

Our strategy to achieve this objective is to:

Extend our leadership in integrated eCRM solutions. In the near term, we
believe that our customers will demand greater functionality and product depth
from their eCRM solutions. We intend to broaden our current product suite to
integrate with all aspects of e-business solutions. This integration will both
extend across internal business functions, marketing, sales and support and
others, as well as extend across channels of customer communication, both
internal and external. Using this integrated approach, we will provide an even
more complete eCRM solution for leading-edge companies so that they can better
serve their customers' needs.

Target additional vertical markets and capitalize on business-to-business
opportunities. Initially, we focused our sales and marketing efforts on
serving the electronic support and problem-resolution needs of technology-
based industries such as software, hardware and telecommunications. More
recently, we have broadened the reach of our product suite to encompass
customer service and support in other industries with characteristics similar
to those of technology-based industries. In the emerging business-to-business
market space, companies are confronted with challenges such as a dynamic and
rapidly changing business environment, advanced technological functionality
and competitive differentiation based on service and support. We have
broadened our product functionality in order to pursue companies in the
emerging business-to-business vertical markets. Specifically, we have
established relationships with companies in the manufacturing, consumer
electronics and financial services industries. We will continue to pursue
companies in these sectors as well as additional opportunities in other
vertical markets.

Build additional strategic and distribution relationships. We intend to
strengthen and expand our current relationships and build new ones with
leading systems consultants and integrators. We believe that these strategic
relationships will provide us with additional sales opportunities and further
leverage our implementation resources. In addition, we are exploring
relationships with complementary software and other technology vendors.
Concurrently, we intend to establish an indirect distribution channel to
complement our direct sales force.

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Grow our international presence. To capitalize on the Internet as a global
communications medium we have established international offices in the United
Kingdom. Our product architecture is designed to support multiple languages.
Our product currently supports the display of content in Japanese, and we plan
to offer versions of our product in other languages as well.

Products

The Primus eCRM 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 business 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. License fees for
our software depend upon the specific application licensed and typically are
based on a per-user basis, or, based on the number of users authorized to
access our software at any given time. Our typical license agreement provides
the licensee a perpetual, nontransferable license to use our software.

The following summarizes the current products that comprise the Primus eCRM
software suite:

Primus eServer

Primus eServer is the foundation of the Primus eCRM suite. It enables
eBusinesses to dynamically capture, share, and manage knowledge to enhance
their customers' experiences and increase the effectiveness of each
interaction. Primus eServer can be used to support all phases of the customer
lifecycle, from new requests for information or service, to secondary customer
interactions that would benefit from previous knowledge captured in the
knowledge base. An example of this is capturing the knowledge that a customer
has experienced repetitive customer service issues with a specific product,
and using that knowledge proactively to offer that customer a discounted
upgrade for a newly-released product that will solve their service issues.
Primus eServer is built on the Primus Associative Search Engine, which
provides sophisticated search functionality. Primus eServer provides:

. a flexible workflow system for integrating business processes

. natural language searching that allows users to query in their own words

. fast, accurate search results based on the Primus Associative Search
Engine, a Primus proprietary search algorithm

. real-time knowledge capture and publishing via the Web

Primus Interchange

Primus Interchange manages customer interactions across multiple channels of
communication. The product also includes sophisticated email management and
response software. When a customer email is submitted to the company, Primus
Interchange automatically analyzes the content of the email and searches the
knowledge base of Primus eServer, to return an email message that includes a
relevant solution or response to the inquiry. If a solution is unavailable,
the request is intelligently routed to the appropriate personnel within the
company. Primus Interchange provides:

. robust email management and routing

. auto-response email through integration with Primus eServer

. multi-channel communication management

. a fully customizable user interface

. integration capabilities to legacy systems

Primus eMarketing

Primus eMarketing provides an end-to-end integrated solution for creating,
managing and maintaining Web marketing content and managing personalized
Internet and email marketing campaigns. The application is

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designed to help a business acquire new customers and build relationships with
the customers they already have. Our emarketing applications were obtained as
a result of our December 1999 acquisition of Imparto Software Corporation.
Primus eMarketing provides:

. customizable, Web-based content templates to easily create and publish
marketing content and to execute Internet and email marketing campaigns

. Web response forms to capture customer input

. reporting and management tools to evaluate the effectiveness and results
of electronic campaigns

. a workflow management system that can be customized to unique internal
marketing processes

Primus eSales

Primus eSales is a Web-based application that offers a customer the ability
to define their purchase requirements, find the most appropriate product or
service, configure custom solutions that fit their needs and compare purchase
alternatives before placing an order. Primus eSales can enhance the
effectiveness of direct and indirect sales approaches, help drive revenues and
enable reduced operational costs. Our esales applications were obtained as a
result of our January 2000 acquisition of 2order.com, Inc. Primus eSales
provides:

. Web-based sales assistance based on customer input preferences and needs

. real-time sales configuration, price quotes and product/service
availability

. comparative purchasing capabilities

. personalization based on unique customer attributes

. real-time sales negotiation based on sale attribute tradeoff system

. integration tools for seamless integration to commerce and supply-chain
systems

. cross-selling and up-selling capabilities to maximize revenue potential
of each customer interaction

Primus eSupport

Primus eSupport provides a Web-based front end for customer self-service and
access to customer service solutions through the web 24 hours a day, seven
days a week. Primus eSupport application can be utilized by a company to
support multiple groups, including customers, partners and internal employees.
Consistent with our knowledge enabled approach, information captured from
unresolved self-service sessions is passed along to company personnel to avoid
re-entry and to ensure efficient resolution for the customer and the company.
Primus eSupport provides:

. an intuitive user interface and flexible workflow system to support
individual problem solving preferences

. natural language searching that allows users to query in their own words

. customer feedback capabilities for the self-service system

. an escalation workflow system

. real-time availability to new solutions added to the knowledge base

. standard reports to monitor and manage the effectiveness of the support
system

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Product Architecture

The following diagram illustrates the architecture of our Primus eCRM suite:

[FLOWCHART OF OUR eCRM PRODUCT SUITE]

Our products use a multi-tiered architecture to meet the eCRM needs of
today's businesses. We use industry-standard platforms, components and
communications interfaces to provide eCRM software that is designed to be
reliable, maintainable and scalable, and to provide high performance on a 24
hour basis. Our flexible architecture adapts to a range of needs, from a
single desktop to enterprise systems that support thousands of users.

Our Primus eServer software runs on either Windows NT or Sun Solaris systems
in single- or multi-processor configurations. Our client software runs in a
fully customizable interface accessed through a Web browser. The core tier of
our solution is the database server. The next tier is the application search
server that contains the search logic and knowledge domain model. The last
tier is comprised of web server interfaces that contain the personalization
and customization layers of the solution. We currently support Microsoft SQL
Server, Oracle and Versant databases.

Customer Support and Professional Services

We believe that high-quality customer support and professional services are
required for continued growth and increased sales of our products. We have
made significant investments to increase the size of our support and services
organization in the past and plan to continue to do so in the future. As of
December 31, 1999, our customer support and professional services organization
consisted of 51 employees.

Consulting. Our consulting teams work closely with our customers prior to
product implementation to review a customer's business objectives and
information technology infrastructure in order to assist the customer in
determining Primus solutions that will best suit the customer's needs.
Thereafter, our consultants install, integrate and implement our software in
the user's environment.

Training. We provide training classes in conjunction with our products,
including end-user training and advanced technical training regarding the
implementation and administration of our products. Classes are offered at
customer sites and at our Seattle office. We also provide training classes for
third-party partners, such as service providers and systems integrators.

Customer Support. We typically provide technical support 12 hours a day,
five days a week in North America. We offer similar services in the United
Kingdom and Japan. On-call support for priority matters is also available 24
hours a day, 7 days a week. We offer support via telephone, fax, email and
Web-based self-service.

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Customers

Initially, our sales efforts targeted large enterprises in dynamic,
technology-related industries that offer external customer support. Recently,
we have broadened our sales focus to include additional verticals and
enterprises of a wide variety of sizes that are interested in implementing, or
in the process of building, an e-business strategy. As of December 31, 1999,
we had licensed our solution to approximately 95 domestic and international
customers. The following is a list of our customers that have purchased in
excess of $100,000 of software and related services:

IT--Software Accrue Software Novell
Attachmate Peregrine Systems
Best Software Pervasive Software
Brio Technology QAD
Checkpoint Software Sterling Commerce
MAPICS Versant
Microsoft Wind River
Network Associates

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IT--Hardware 3Com Micron
Amdahl Network Appliance
Compaq SGI
EMC Teradyne
Fujitsu Xerox
IBM (formerly Sequent)

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IT Services Client Logic Origin
EDS Softlab
Entex

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Telecommunications AT&T Motorola
EHPT Sweden AB Nortel Networks
Ericsson Rockwell
Jetstream Communications Sprint
KPN Williams
Lucent

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Internet Service Cable & Wireless RCN
Providers GTE Internetworking UUNet
PSInet

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Manufacturing 3M Caterpillar
BMW Simplex

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Other Acxiom Inacom
CGU Life Janeros Corporation
Dixons RSA Security
Giddings and Lewis Starbucks
Hello Direct

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Sales and Marketing

We market and sell our products primarily through a direct sales force. Our
sales strategy is to pursue targeted accounts through a combination of our
direct sales force and strategic relationships with third parties. We have
sales offices in Seattle, Atlanta, Boston, Chicago, Dallas, Minneapolis, Palo
Alto and Reston and in the United Kingdom. Our field sales force, which
includes both sales representatives and sales engineers, is organized into
regional teams, complemented by direct telesales based at our headquarters in
Seattle. We currently plan to add a significant number of sales
representatives and sales engineers in other domestic and international
locations. To date, significantly all of our efforts have been targeted at
customer-service and support organizations in the information technology and
telecommunications industries. These efforts are directed at key executives
and personnel responsible for the organizations' customer service and support
strategies and operations.

Our marketing department is focused on creating awareness of our products
and services and generating interest in our solution. We conduct comprehensive
marketing and branding programs, which may include direct mail, public
relations, Web-based lead generation, telemarketing lead generation,
advertising, trade shows and seminars. Many of our marketing activities are
done in collaboration with our strategic consulting and software partners. Our
marketing department also coordinates our participation in industry tradeshows
and forums, secures speaking engagements for our executives and establishes
and maintains close relationships with recognized industry analysts and our
customer base. As of December 31, 1999, our sales and marketing staff
consisted of 69 employees.

Our products are marketed and distributed in Japan by Primus KK, a joint
venture owned by Trans Cosmos Inc. and Primus. Our distribution arrangements
provide Trans Cosmos with exclusive worldwide distribution rights to the
Japanese version of our Primus eServer products and provide Primus KK with
exclusive distribution rights in Japan, and nonexclusive distribution rights
in Korea, to the English and Japanese versions of our Primus eServer and
Primus eSupport products. The rights regarding our Primus eServer product
expire in September 2000. The other rights are renewable for one-year terms.
The agreements are terminable by either party upon breach.

Product Development

We have been a leader in developing innovative eCRM software and were one of
the first companies to use associative problem-solving technology. We believe
that a technically skilled, highly productive software development
organization will continue to be a key component of our success. As of
December 31, 1999, our product development team consisted of 73 full-time
employees. Our current development efforts include completing the integration
of the products we obtained in the Imparto and 2order.com acquisitions with
our existing products.

Competition

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 compete
against various vendor software tools designed to address a specific element
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. Below
is a table of eCRM competitive vendors:

eCRM element Vendor(s)

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Internet Communications eGain, Kana and Mustang

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eSupport Brightware, Quintus and Servicesoft

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eSales Calico, Firepond, Selectica and Trilogy

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eMarketing Annuncio, Broadbase and E.piphany

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Combination Onyx and Silknet

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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:

. product ease-of-use
. vendor and product reputation
. the quality of customer support
. customer referenceability services, documentation and
training
. measurable economic return
. the quality, speed and
. product quality, performance and effectiveness of application
price deployment services

. breadth of product functionality . the effectiveness of sales and
and features marketing efforts

. product scalability . product integration with other
enterprise applications
. the availability of products on
the Internet and multiple
operating platforms

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, 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 failure of our products to achieve or maintain
market acceptance.

Although we believe that our products and services currently compete
favorably with respect to such factors and that we hold a leadership position
compared to our competitors in the eCRM market, we can't provide any assurance
that we can maintain our competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.

Proprietary Information

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 pursue the registration of certain 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.

Employees

As of December 31, 1999, we had 223 employees, including 11 U.K.-based
employees. These included 69 in sales and marketing, 51 in client services and
support, 73 in product development and 30 in general and administration. None
of our employees are represented by a labor union. We have not experienced any
work stoppages, and we believe our relationship with our employees is good. In
addition, we regularly supplement our workforce with consultants.

Competition for qualified personnel in our industry is intense. We believe
that our future success will depend in part on our continued ability to hire,
assimilate and retain qualified personnel.

Recent Acquisitions

On December 14, 1999, pursuant to an Agreement and Plan of Merger dated as
of December 12, 1999 we acquired Imparto Software Corporation. Imparto is a
provider of business-to-business mid-market solutions for building
relationship enabled websites that drive customer acquisition and customer
satisfaction. As a result of the acquisition, we issued 913,788 shares of our
common stock for all of the issued and outstanding capital stock of Imparto.
In addition, options and warrants to purchase capital stock of Imparto were
converted into options and warrants to acquire 86,212 shares of our common
stock. We have accounted for this transaction as a pooling of interest.

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On January 21, 2000, pursuant to an Agreement and Plan of Merger, dated as
of January 8, 2000, we acquired 2order.com, Inc. 2order.com develops and
markets software that acts as a personal sales assistant, helping buyers
define requirements and configure custom solutions. As a result of the
acquisition, we issued 1,506,127 shares of our common stock for all of the
issued and outstanding capital stock of 2order. In addition, options and
warrants to acquire capital stock of 2order were converted into options and
warrants to acquire 150,378 shares of our common stock. We have accounted for
this transaction as a pooling of interest.

Factors Affecting Our Future Operating Results

You should carefully consider the risks and uncertainties described below
and the other information in this Annual 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 expect to
continue to incur net losses for the foreseeable future. As of December 31,
1999, we had an accumulated deficit of $46.4 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. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

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

11

Where we are implementing the software, we will account for the agreement as
an item of deferred revenue and will recognize the 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
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. As of December 31, 1999,
approximately 95 companies licensed one or more of our eCRM products.
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 approximately 96% of our total revenues
during fiscal 1999, and we expect these products to continue to account for a
substantial portion of our revenues through the first six months of fiscal
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 use of our software by an enterprise's personnel, partners and
customers and the value derived by each such usage. In addition, the

12

effectiveness of our knowledge-enabled approach is dependent upon a current
database. If customer-support personnel do not adopt and 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 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:

. vendor and product reputation . product ease-of-use

. customer referenceability . the quality of customer support
services, documentation and
. measurable economic return training

. product quality, performance . the quality, speed and
and price effectiveness of application
development services
. breadth of product
functionality and features . the effectiveness of sales and
marketing efforts
. product scalability
. product integration with other
. the availability of products on enterprise applications
the Internet and multiple
operating platforms

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.

13

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 the products we have shipped to 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 increased substantially 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 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.

14

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
$4.3 million in fiscal 1999, or 17% of our total 1999 revenues. 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 systems.

15

Our stock price has been volatile.

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 32.8% of the outstanding shares of our common stock as of
December 31, 1999. As a result, these shareholders are able to

16

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.

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

17

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. 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, are reviewing the accounting
standards related to stock-based compensation. Any changes to these standards
or any other accounting standards could materially adversely affect our
business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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 2. PROPERTIES

Our principal administrative, engineering, manufacturing, marketing and
sales facilities total approximately 49,750 square feet in an office tower in
Seattle. Our principal lease expires on October 31, 2005. We also lease other
domestic sales and services offices in Atlanta, Boston, Chicago, Dallas,
Minneapolis, Palo Alto and Reston. We maintain international offices in the
United Kingdom. We believe that our existing facilities are adequate to meet
current requirements and that additional or substitute space will be available
as needed to accommodate any expansion of operations.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders during our
fourth quarter.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by Item 10 of Form 10-K with respect to executive
officers of Primus is set forth below. Our executive officers are appointed by
the Board of Directors. There are no family relationships among any our
executive officers or directors.

Our executive officers as of March 20, 2000 are as follows:

Name Age Position
---- --- --------

Michael A. Brochu....... 46 President, Chief Executive Officer and Chairman of the Board
Elizabeth J. Huebner.... 42 Chief Financial Officer, Executive Vice President, Secretary and Treasurer
Patricia L. Cox......... 39 Vice President of Customer Services
Norman S. Guadagno...... 36 Vice President of Worldwide Marketing
Kim M. Nelson........... 44 Vice President of Worldwide Sales and Services
Edward L. Walter........ 50 Vice President of Product Development and Technology
Diana K. Wong........... 49 Vice President of Human Resources

18

Michael A. Brochu has served as our President and Chief Executive Officer
since November 1997 and was named Chairman of our Board in December 1998.
Mr. Brochu was President and Chief Operating Officer of Sierra On-Line, Inc.,
an interactive software publisher, from June 1994 until October 1997. Mr.
Brochu is also a member of the board of directors of Primus KK and is chairman
of the board of directors of OnHealth Network Company, a publicly-traded
Internet content provider of public-health information. Mr. Brochu received
his B.B.A. in accounting and finance from the University of Texas at El Paso.

Elizabeth J. Huebner has served as our Executive Vice President since August
1999 and our Chief Financial Officer since June 1998. Ms. Huebner was named
Secretary and Treasurer in April 1999. From June 1998 to August 1999 Ms.
Huebner was a Vice President of Primus. From March 1996 to July 1998, Ms.
Huebner was the Chief Financial Officer of Fluke Corporation, a manufacturer
of electronic test tools. From March 1992 until March 1996, Ms. Huebner was a
Vice President of Finance for AT&T Wireless. Ms. Huebner received her B.S. in
accounting from the University of Utah.

Patricia L. Cox has served as our Vice President of Customer Services since
March 1998. From January 1997 to March 1998, Ms. Cox was a Regional Services
Manager for Lawson Software. From April 1993 to December 1996, Ms. Cox was a
Regional Consulting Manager for Platinum Software Corporation. Ms. Cox
received her B.S. in computer information systems from Bentley College.

Norman S. Guadagno has served as our Vice President of Worldwide Marketing
since June 1999. From February 1999 to June 1999, Mr. Guadagno was Vice
President of Product Management at MyGeek.com, a privately held electronic
commerce company. From April 1998 to February 1999, Mr. Guadagno was Vice
President of Marketing and General Manager of Pentawave, a software electronic
commerce company. Mr. Guadagno held several marketing and product management
positions at Oracle Corporation from February 1994 to February 1996 and
February 1997 to April 1998. From August 1996 to February 1997, he held a
senior product marketing and management position with Portal Software. Mr.
Guadagno received his B.A. in psychology from the University of Rochester and
his M.A. in psychology from Rice University.

Kim M. Nelson has served as our Vice President of Worldwide Sales and
Services since January 1999. From June 1993 to December 1998, Mr. Nelson held
several positions at Oracle Corporation, including Area Vice President of
Sales, Vice President of Field Operations and Vice President of Sales for
Oracle Business Online. Mr. Nelson received his B.S. in business from the
University of Colorado.

Edward L. Walter has served as our Vice President of Product Development and
Technology since February 1999. Mr. Walter founded Simplications, LLC, a
developer of seminars on interactive product creations in June 1998 and served
as its managing partner until December 1998. From October 1995 to May 1998,
Mr. Walter was the Vice President of Engineering of Lexant, a software
company. From March 1991 to October 1994, he was the Vice President of
Engineering of Aldus Corporation, a software company. Mr. Walter currently
serves as an associate professor for the Institute of Design at the Illinois
Institute of Technology. Mr. Walter received his B.S. in psychology from Duke
University.

Diana K. Wong has served as our Vice President of Human Resources since
October 1999. From December 1998 to October 1999, Ms. Wong was the Executive
Vice President of Human Resources for Data Dimensions, a technical consulting
firm. From February 1993 to November 1998, Ms. Wong was a Vice President of
Human Resources for AT&T Wireless. Ms. Wong received her B.A. from California
State University Sacramento and her M.B.A. from the University of Washington.

19

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

Market Price of Common Stock

On June 30, 1999, the SEC declared effective the Company's Registration
Statement on Form S-1 (Registration No. 333-77477) as filed with the SEC in
connection with the Company's 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.

Since our initial public offering, our common stock has traded on the Nasdaq
National Market under the symbol PKSI. The following table sets forth, for the
period indicated, the high and low closing prices of the common stock as
reported on the Nasdaq National Market. These prices do not include retail
markups, markdowns, or commissions.

COMMON STOCK PRICE

Period High Low
------ ------ ------

July 1, 1999--September 30, 1999............................ $31.88 $17.56
October 1, 1999--December 31, 1999.......................... $56.13 $24.38

The closing sale price of the common stock on December 31, 1999 was $45.31.
On March 20, 2000 the closing price reported on the Nasdaq National Market
System for the common stock was $100.88.

The market price of our common stock has fluctuated significantly.

Holders of Common Stock

As of March 20, 2000, there were approximately 246 shareholders of record of
our common stock and 17,600,914 shares of common stock outstanding.

Dividend Policy

We have never paid any cash dividends on the common stock and do not
anticipate paying dividends in the foreseeable future. We intend to retain any
future earnings for use in our business. In addition, the terms of our current
credit facilities prohibit us from paying dividends without our lender's
consent.

Recent Sales of Unregistered Securities

During the period covered by this report on Form 10-K, we issued and sold
unregistered securities as follows:

. On March 18, 1999, we issued 1,333 shares of common stock, valued at
$6.00 per share, to an accredited investor in conjunction with a
donation for a charitable auction.

. On March 31, 1999, we issued 91,389 shares of common stock to five
current shareholders and five new accredited investors for $9.00 per
share or an aggregate price of $1,128,924.

. From January 1, 1999 through June 30, 1999, we granted stock options to
purchase an aggregate of 940,703 shares of common stock with exercise
prices ranging from $6.00 to $11.00 per share, under three of our stock
option plans.

. On December 14, 1999, we issued an aggregate of approximately 1,000,000
shares of our common stock in exchange for all of the outstanding
capital stock and options and warrants to purchase capital stock of
Imparto.

The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to Rule 701 promulgated thereunder on the
basis that these options 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.

20

ITEM 6. 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 10-K, as well as the section of this Form 10-K related to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Historical results are not necessarily indicative of future
results.

Fiscal Year Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands, except per share data)

Consolidated Statement
of Operations Data:(1)
Revenue............... $ 25,144 $ 9,562 $ 6,483 $ 2,874 $ 620
Cost of revenue....... 6,347 3,473 3,026 1,252 375
Sales and marketing... 17,161 10,707 4,762 3,501 2,118
Research and
development.......... 8,077 4,137 2,766 2,459 1,545
General and
administrative....... 5,924 3,888 1,789 1,483 1,111
Merger related costs.. 1,520 -- -- -- --
--------- --------- --------- --------- ---------
Loss from operations.. (13,885) (12,643) (5,860) (5,821) (4,529)
Other income (expense),
net.................... 1,134 (60) (40) 113 (53)
--------- --------- --------- --------- ---------
Loss before income
taxes................ (12,751) (12,703) (5,900) (5,708) (4,582)
Income tax expense
(benefit).............. 267 (57) 34 68 --
--------- --------- --------- --------- ---------
Net loss.............. $ (13,018) $ (12,646) $ (5,934) $ (5,776) $ (4,582)
========= ========= ========= ========= =========
Net loss available to
common shareholders.... $ (13,449) $ (13,191) $ (6,235) $ (5,984) $ (4,582)
========= ========= ========= ========= =========
Basic and diluted net
loss per common
share(2)............... $ (1.41) $ (3.21) $ (1.54) $ (1.53) $ (1.49)
Shares used in computing
basic and diluted net
loss per common share.. 9,523,586 4,111,270 4,036,979 3,914,998 3,068,301

December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands)

Consolidated Balance
Sheet Data:(1)
Cash and cash
equivalents.......... $ 16,023 $ 4,243 $ 826 $ 2,037 $ 227
Working capital
(deficit)............ 43,961 605 (1,564) 2,204 (923)
Total assets.......... 65,110 15,685 5,923 6,122 1,737
Total current
liabilities.......... 18,177 12,092 6,137 2,372 1,720
Long-term debt, net of
current portion...... -- 1,219 391 738 240
Redeemable convertible
preferred stock...... -- 23,157 10,399 8,128 --
Shareholders' equity
(deficit)............ 46,933 (20,783) (11,004) (5,115) (223)

- --------
(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 common share see Note 1 of Notes to
Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by

21

terminology such as may, will, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined in
the "Factors Affecting Future Operating Results" in Part I of this Annual
Report.

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, Primus acquired Imparto Software Corporation, 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. 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 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 17% of our 1999,
15% 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.

22

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 $46.4 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.

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.

Fiscal Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ------------ -----------
(As a percentage of total revenue)

Revenue:
License.......................... 71% 65% 55%
Services......................... 29 35 45
----------- ------------ -----------
Total revenue.................. 100 100 100
----------- ------------ -----------
Cost of revenue:
License.......................... 4 4 1
Services......................... 21 32 46
----------- ------------ -----------
Total cost of revenue.......... 25 36 47
----------- ------------ -----------
Gross profit................... 75 64 53
----------- ------------ -----------
Operating expenses:
Sales and marketing.............. 68 112 73
Research and development......... 32 43 42
General and administrative....... 24 41 28
Merger related costs............. 6 -- --
----------- ------------ -----------
Total operating expenses....... 130 196 143
----------- ------------ -----------
Loss from operations........... (55) (132) (90)
Other income, net.................. 4 (1) (1)
----------- ------------ -----------
Loss before income taxes....... (51) (133) (91)
Income tax expense (benefit)....... 1 (1) 1
----------- ------------ -----------
Net loss....................... (52)% (132)% (92)%
=========== ============ ===========

23

Revenue

We derive our revenue from the sale of software licenses and related
services including support and maintenance contracts. Revenue was $25.1
million and $9.6 million in 1999 and 1998, respectively, representing an
increase in 1999 of $15.6 million, or 163%. Revenue was $9.6 million and $6.5
million in 1998 and 1997, respectively, representing an increase of $3.1
million, or 47%. Except for 1998, when one customer accounted for 11% of total
revenue, no single customer accounted for more that 10% of total revenue.

License Revenue. License revenue was $17.8 million, $6.2 million and $3.6
million in 1999, 1998 and 1997, respectively. The increase was due to greater
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 71%, 65% and 55% in 1999,
1998 and 1997, respectively. Sales personnel totaled 53, 44 and 17 as of
December 31, 1999, 1998 and 1997, respectively. The increase in international
license revenue from 1998 to 1999 was $2.0 million and from 1997 to 1998 was
$1.1 million. 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 $7.4 million, $3.4 million and $2.9
million in 1999, 1998 and 1997, respectively. Maintenance and support contract
revenue increased $2.6 million and consulting fees increased $1.4 million in
1999. Services revenue increased 16% to $3.4 million in 1998 from $2.9 million
in 1997. The increase in services revenue from 1997 to 1998 was a result of a
$1.1 million increase in maintenance and support contract revenue offset by a
$621,000 decrease in consulting revenue. The increase in maintenance and
support contract revenue was a result of the increasing number of licenses
sold. The decrease in consulting revenue was primarily due to a $494,000
decrease in Imparto consulting revenue from 1997 to 1998 when Imparto
refocused its efforts away from a services based consulting organization into
developing web-based marketing automation software applications.

Services revenue represented 29%, 35% and 45% 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 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
$989,000, $375,000, and $97,000 in 1999, 1998 and 1997, respectively. The cost
of license revenue increased $614,000, or 164%, from 1998 to 1999 and
$278,000, or 287% from 1997 to 1998. Cost of license revenue as a percentage
of license revenue was 6%, 6% and 3% 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 $5.4 million, $3.1 million and $2.9 million in 1999, 1998
and 1997, respectively. Cost of services revenue increased $2.3 million, or
73%, from 1998 to 1999 and $169,000, or 6%, 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 software.
Professional services and customer support personnel totaled 51, 29 and 19 as
of December 31, 1999, 1998 and 1997, respectively. Cost of services revenue as
a percentage of services revenue was 73%, 91% and 100% 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.

24

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
$17.2 million, $10.7 million and $4.8 million in 1999, 1998 and 1997,
respectively. Sales and marketing expenses increased $6.5 million, or 60%,
from 1998 to 1999 and $5.9 million, or 125%, 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 69, 56 and 27 as of December 31, 1999, 1998 and 1997, respectively.
Sales and marketing expenses as a percentage of total revenue was 68%, 112%
and 73% in 1999, 1998 and 1997, respectively. 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. The
decrease in sales and marketing expense as a percentage of revenues from 1998
and 1999 reflects a slower growth in the number of sales and marketing
personnel. 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 $8.1 million, $4.1 million and $2.8 million in
1999, 1998 and 1997, respectively. Research and development expenses increased
$3.9 million, or 95%, from 1998 to 1999 and $1.4 million, or 50%, 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 73, 38 and 27 as of
December 31, 1999, 1998 and 1997, respectively. Research and development
expenses as a percentage of total revenue were 32%, 43% and 42% for 1999, 1998
and 1997, 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 $5.9 million, $3.9 million and $1.8 million in 1999, 1998 and
1997, respectively. General and administrative expenses increased $2.0
million, or 52%, from 1998 to 1999 and $2.1 million, or 117%, 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
30, 27 and 17 as of December 31, 1999, 1998 and 1997, respectively. General
and administrative expenses as a percentage of total revenue were 24%, 41% and
28% 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.

25

Merger Related Costs. Merger related costs were approximately $1.5 million
or 6% of net sales in 1999 and primarily consisted of brokerage and attorneys
fees. 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. Net other income and other expense was income of $1.1
million, expense of $60,000, and expense of $40,000 in fiscal 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. We expect 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 any significant 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 approximately $49.0 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.

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.

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
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands)

Consolidated Statement of
Operations Data:
Revenue:
License................ $ 6,004 $ 4,407 $ 4,468 $ 2,905 $ 2,449 $ 1,479 $ 1,297 $ 948
Services............... 2,606 2,183 1,503 1,068 892 922 834 741
------- ------- ------- ------- ------- ------- ------- -------
Total revenue.......... 8,610 6,590 5,971 3,973 3,341 2,401 2,131 1,689
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License................ 300 246 298 145 261 58 36 20
Services............... 1744 1,305 1,291 1,018 917 893 611 677
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue.. 2044 1,551 1,589 1,163 1,178 951 647 697
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 6,566 5,039 4,382 2,810 2,163 1,450 1,484 992
Operating expenses:
Sales and marketing.... 4818 4,797 4,270 3,276 3,779 3,384 2,219 1,325
Research and
development........... 2,802 2,081 1,707 1,487 1,013 1,155 1,137 832
General and
administrative........ 2,377 1,397 1,092 1,058 1,783 929 668 508
Merger related costs... 1,520 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 11,517 8,275 7,069 5,821 6,575 5,468 4,024 2,665
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (4,951) (3,236) (2,687) (3,011) (4,412) (4,018) (2,540) (1,673)
Other income (expense),
net.................... 684 481 (33) 2 20 (26) (42) (12)
------- ------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (4,267) (2,755) (2,720) (3,009) (4,392) (4,044) (2,582) (1,685)
------- ------- ------- ------- ------- ------- ------- -------
Income tax expense
(benefit).............. 40 27 173 27 45 -- (82) (20)
------- ------- ------- ------- ------- ------- ------- -------
Net loss............... $(4,307) $(2,782) $(2,893) $(3,036) $(4,437) $(4,044) $(2,500) $(1,665)
======= ======= ======= ======= ======= ======= ======= =======

26

The following table sets forth unaudited quarterly results of operations as
a percentage of revenue for 1999 and 1998.

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
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands)

Consolidated Statement of
Operations Data:
Revenue:
License................ 69.7 % 66.9 % 74.8 % 73.1 % 73.3 % 61.6 % 60.9 % 56.1 %
Services............... 30.3 33.1 25.2 26.9 26.7 38.4 39.1 43.9
----- ----- ----- ----- ------ ------ ------ -----
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ------ ------ ------ -----
Cost of revenue:
License................ 3.5 3.7 5.0 3.5 7.8 2.4 1.7 1.2
Services............... 20.2 19.8 21.6 25.8 27.5 37.2 28.7 40.1
----- ----- ----- ----- ------ ------ ------ -----
Total cost of revenue.. 23.7 23.5 26.6 29.3 35.3 39.6 30.4 41.3
----- ----- ----- ----- ------ ------ ------ -----
Gross profit........... 76.3 76.5 73.4 70.7 64.7 60.4 69.6 58.7
Operating expenses:
Sales and marketing.... 56.0 72.8 71.5 82.5 113.2 140.9 104.1 78.4
Research and
development........... 32.5 31.6 28.6 37.4 30.3 48.1 53.4 49.3
General and
administrative........ 27.6 21.2 18.3 26.6 53.4 38.7 31.3 30.1
Merger related costs... 17.7 -- -- -- -- -- -- --
----- ----- ----- ----- ------ ------ ------ -----
Total operating
expenses.............. 133.8 125.6 118.4 146.5 196.9 227.7 188.8 157.8
----- ----- ----- ----- ------ ------ ------ -----
Loss from operations.... (57.5) (49.1) (45.0) (75.8) (132.2) (167.3) (119.2) (99.1)
Other income (expense),
net.................... 7.9 7.3 (.6) .1 .6 (1.1) (2.0) (0.7)
----- ----- ----- ----- ------ ------ ------ -----
Loss before income
taxes.................. (49.6) (41.8) (45.6) (75.7) (131.6) (168.4) (121.2) (99.8)
----- ----- ----- ----- ------ ------ ------ -----
Income tax expense
(benefit).............. .5 .4 2.9 .7 1.3 -- (3.8) (1.2)
Net loss............... (50.1)% (42.2)% (48.5)% (76.4)% (132.9)% (168.4)% (117.4)% (98.6)%
===== ===== ===== ===== ====== ====== ====== =====

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.

Liquidity and Capital Resources

Prior to our initial public offering, we primarily financed our operations
through the private sale of our equity securities. To a lesser extent, we
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 $16.0 million
and available-for-sale securities of $37.1 million, representing an increase
of $46.0 million from cash and investments held as of December 31, 1998. As of
December 31, 1999, our working capital was $44.0 million compared to $605,000
at December 31, 1998.

Our operating activities resulted in net cash outflows of $7.5 million and
$9.0 million in 1999 and 1998, respectively. The decrease in operating cash
outflows from 1998 to 1999 was due primarily to an increase in deferred
revenue offset by an increase in accounts receivable.

Investing activities used cash of $36.0 million and $3.6 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.

27

Financing activities provided cash of $55.3 million and $15.9 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 long term debt.

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 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.

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