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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, 2000
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 16,
2001, as reported on Nasdaq National Market System was approximately $38.3
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
16, 2001, was 18,092,134.
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
---- ----
PART I
1. BUSINESS.......................................................... 3
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.......................................................... 19
6. SELECTED CONSOLIDATED FINANCIAL DATA.............................. 21
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 22
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 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.
2
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 knowledge-
enabling software that empowers customer relationship management (CRM)
implementations and drives customer satisfaction for Global 2000 companies.
Primus software is designed to give customers fast access to the information
they need--via self- and assisted service--and to enable businesses to share
valuable customer and product knowledge across the enterprise. Primus(R)
software products can be implemented as a suite or as individual products,
depending on the company's preference and/or immediate need.
To compete in today's business environment, companies must maximize their
relationships with their customers. The need to develop and sell more deeply
into their existing customer base has led many companies to implement CRM
initiatives and software. CRM software is designed to enable companies to
interact with their customers using both traditional and eBusiness
communication channels--including the phone, web, email, chat, and voice over
IP (VOIP)--and to manage customer information in a way that helps companies
maximize the value of each customer interaction. Facilitating more efficient
communications with customers can help to improve the level and quality of
customer service companies deliver and, in turn, increase customer
satisfaction and retention and cross-sell and up-sell opportunities.
CRM vendors offer a variety of solutions, ranging from point solutions that
fulfill a specific CRM need, to more comprehensive solutions, which are often
built via the extension of a smaller application or acquisition of third-party
software. All are intended to manage some piece of the customer interaction,
and all promise to add value to the customer-company relationship.
Increasingly, however, companies are looking with a critical eye at CRM
applications, considering which of the myriad solutions available will be most
appropriate for their business and operating environments--which will most
effectively improve their customer service offerings, which will integrate
into their current and future CRM infrastructures, and which will offer the
best potential fiscal results.
Primus software offers a significant measurable value to businesses by
providing an infrastructure for knowledge capture and sharing that can
increase the efficiency and effectiveness of customer service, while
delivering a measurable return on their investment. Primus software is
flexible, to meet a variety of business needs and integrates with leading CRM
applications, including those from Nortel Networks/Clarify, Kana, Oracle,
Remedy, and Siebel. Primus(R) Professional Services organization assists
customers with software implementation, integration, training and support.
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Industry Background
The emergence of the Internet as a business medium has made it imperative
for companies across a variety of industries to recreate the way they do
business. Early eBusiness initiatives focused on providing basic websites that
offered customers little more than product information for marketing purposes.
Today, eBusiness initiatives are designed to manage most, if not all, of a
customer's interactions with a company. The fast-growing CRM market has
focused on enabling 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. As such, even the
most traditional companies have found it difficult to ignore the need to
implement a CRM 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 are realizing that they must
personalize each customer experience by providing products and support based
on each customer's needs and that exceed each customer's expectations. To
accomplish these goals, businesses must communicate with customers via the
media of the customer's choice and deliver rich, relevant information to
customers. Companies realize that they must 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.
There are inherent challenges associated with interacting with customers in
this new and dynamic business environment. Customers have higher expectations
and experience lower switching costs when a new vendor 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 view
their customers in an integrated way, providing visibility to each customer's
information across their organizations. Further, companies must realize that
their customers are now active, informed participants in the business process
and that each customer interaction must be maximized for purposes of customer
retention, cross-sell and up-sell opportunities, and customer satisfaction to
enhance customer relationships.
While companies recognize the need to implement initiatives that enhance
customer relationships, previously available solutions have not been to
address all of these challenges in a comprehensive manner. There are many and
various point solutions designed to address each distinct business process,
specifically marketing, sales and support, but they are limited to addressing
the needs of each specific business function. 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. Although the value of integrating these various point
solutions to maximize the benefit of each customer interaction is apparent,
previous attempts to do so have proven inefficient and costly and have often
not resulted in a seamless business process.
To adequately address today's market requirements, companies need
integrated, comprehensive solutions that enable them to maximize the value of
customer interactions across multiple communication channels and business
processes. The value created by integrating disparate internal systems with a
knowledge-enabling software system benefits both the business and the
customer. The Internet and advances in technology enable companies 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 business value becomes immediately apparent when customers
believe that the businesses they interact with are responding to and working
to proactively meet their needs.
Primus Solutions
Primus solutions are predicated on the belief that the intellectual capital
resident within a company's workforce is its most valuable asset. Primus
provides knowledge-enabling software that allows companies to enhance customer
relationships by managing and sharing the company's valuable internal
knowledge and
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expertise with customers, partners, and employees, across multiple
communication channels and business processes. Primus software addresses the
unique challenges faced by companies implementing a CRM strategy.
Primus software has the following key characteristics:
Intangible asset management. Primus software enables companies to capture,
manage, and share a variety of knowledge, including requests for information,
service, or support, technical information, and institutional knowledge gained
from interactions with customers, partners, and employees, across a multitude
of communication channels--including the Internet--so that the entire
enterprise can apply this knowledge to future interactions.
Integration. Primus software integrates with leading CRM implementations,
including applications from Nortel Networks/Clarify, Oracle, Remedy, Kana, and
Siebel. Integration with these broad CRM applications enables companies to
easily capture and access knowledge during the course of the customer
interaction. Fast access to current, relevant knowledge is key to achieving
the verifiable return on investment (ROI) that today's buyers demand.
Scalable web architecture. Primus solutions scale from small to large-scope
usage. Primus customers have demonstrated the scalability of Primus software
in demanding, transaction heavy environments. For example, one company
experience shows that Primus eSupport is scalable to support several hundred
thousand user accesses per month. In addition, companies have purchased Primus
software to be used by thousands of employees, and hundreds of thousands of
their customers and partners, on a global basis.
Rapid ROI. Primus software offers a significant, measurable ROI: one
networking software company reported a reduction of service escalations by 20%
in six months; a manufacturing company reduced escalations from level 2 to
level 3 by 60% in three months. Many other demonstrated ROI metrics are
available from Primus. Our solution can be rapidly implemented and easily
customized, thus allowing for minimum downtime before companies enjoy the
benefits of choosing Primus software. In addition, the extensive business
functionality provided by our software allows companies to realize more
immediate benefits such as reduced support costs, enhanced customer
satisfaction, and increased productivity.
Primus Strategy
Primus' objective is to further establish its leadership position in
providing knowledge-enabling software that empowers CRM implementations and
drives customer satisfaction for Global 2000 companies. Our strategy to
achieve this objective is to:
Expand our presence in current markets and target new verticals. Primus
software can be used in a variety of business environments--wherever a company
needs to make knowledge available to its customers and employees. Initially,
Primus primarily focused its efforts on the customer support operations of
technology-based industries, including software, hardware, and
telecommunications. Over the past year, we have broadened our efforts to
encompass customer service, support, and knowledge sharing in the financial
services, data communications, health care, and utilities markets--industries
with characteristics similar to those of the technology-based industries.
Grow our international presence. Primus continues to grow its European
presence while increasing its distribution in Japan through its joint venture,
Primus KK. The Primus product architecture is designed to support multiple
languages. It supports localized user interface and the display of content in
Japanese, French, Dutch, Italian, and German.
Build partnerships with leading consulting, systems integration, and
technology vendors. Primus intends to strengthen its market reach by further
developing partner relationships with leading implementation consulting,
systems integration, and technology vendors. We believe that these strategic
relationships will
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provide us with additional sales opportunities, further leverage our
implementation resources, and broaden our current CRM integration
capabilities.
Products
Primus software can be deployed as a suite, as individual products, or as
an integrated solution with other leading CRM applications, depending on the
customer's preference and/or the immediacy of their need.
License fees for our software vary with each application, but our products
are typically licensed 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
software suite:
Primus eServer
Primus(R) eServer empowers the enterprise by enabling organizations to
dynamically create, capture, and share knowledge to enhance their customers'
experiences and increase the effectiveness of their businesses. Primus eServer
can be used in a variety of business environments, including, but not limited
to, customer service and support, field engineering, human resources, and
sales--wherever a company needs to make knowledge available to its employees
or customers, particularly when there is a large volume of information
relating to products or systems.
Primus eServer is built on the Primus(R) Associative Search Engine, which
provides sophisticated search functionality and enables the capture of
knowledge during the course of interaction with a customer. This is based on
the precept that the creation of the most relevant knowledge and problem
resolutions results from dialectical interaction between company and customer.
Unlike text search engines that deliver large volumes of sometimes irrelevant
answers or case-based systems that--due to their design--may deliver too
limited a response, Primus eServer delivers answers that are both useful and
manageable. 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. Further, companies can use this knowledge to proactively serve
their customers. For example, knowing that a customer has experienced
repetitive customer service issues with a specific product, a company can
proactively offer that customer a discounted upgrade for a newly released
product that will solve their service issues.
Primus eServer provides:
. A flexible workflow system for supporting a variety of 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 eSupport
Primus(R) eSupport is industry-leading software for customer self-service.
Primus eSupport enables customer service and support organizations to publish
knowledge--real solutions to real problems--for direct customer access via the
web, 24 hours a day, seven days a week. Primus eSupport leverages the Primus
Associative Search Engine capabilities of Primus eServer to deliver fast,
reliable answers to users and capture information for future use by the
company.
Primus eSupport provides:
. An intuitive user interface and flexible workflow system to support
individual problem solving preferences
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. 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
Other Primus Product Offerings
Primus(R) Interchange is sophisticated email management software that
provides automated knowledge-enabled responses to user inquiries. When a user
sends an email inquiry, Primus Interchange automatically searches the
knowledgebase and returns an email message with suggested answers to the
question. The system also performs intelligent email routing of escalated
customer inquiries for increased operational efficiency. Primus Interchange
leverages the Primus Associative Search Engine to deliver fast, reliable
answers to users and capture information for future use by the company.
Primus(R) Interchange Chat provides chat management and response
capabilities and leverages the existing email management and response
capabilities of Primus Interchange 1.1 for integrated channel queuing,
routing, response, and reporting. Customers can open a chat session simply by
clicking a button on a Primus-equipped self-service website. The system
automatically queues and routes requests--along with a history of the
customer's self-service session--to the most appropriate service professional
available. Customer service representatives can use the Primus Associative
Search Engine capabilities of Primus eServer--an integrated component of
Primus Interchange software--to deliver fast, reliable answers. Solutions,
files, and web pages can all be pushed to customers. In addition, Primus
Interchange Chat captures all information from each interaction for future use
by the company.
Primus(R) eSales is robust sales configuration and personalization software
that enables the sales of customized products and services over the Internet.
Acting as a "personal sales assistant," Primus eSales helps buyers define
requirements, find appropriate products and services, compare the benefits and
tradeoffs of alternatives, and configure custom solutions to fit their needs.
Primus eSales helps companies drive revenue and close business by increasing
loyalty among existing customers and sales channels, increasing market share,
increasing revenues, and reducing operational costs. Primus eSales software is
developed by 2order.com, Inc. ("2order") which was acquired by Primus and
became a wholly owned subsidiary in January 2000.
Product Architecture
Primus products use a multi-tiered architecture to meet the knowledge-
enabled needs of today's businesses. We use industry-standard platforms,
components, and communications interfaces to provide knowledge-enabling
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.
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 first tier of our
solution is the database server. The second tier is the application search
server that contains the search logic and knowledge domain model. The third
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.
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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.
Customers
Initially, Primus' sales efforts targeted large enterprises in dynamic,
technology-related industries that offer external customer support. We have
broadened our sales focus to include additional vertical markets and
enterprises of a wide variety of sizes that need to make knowledge available
to their employees or customers, and particularly companies where there is a
large volume of information relating to products or systems. As of December
31, 2000, we had licensed our solution to approximately 170 companies
worldwide. A sample, but not inclusive, list of our customers and their
respective industries is as follows:
IT--Software Attachmate Corporation Network Associates, Inc.
FirstLogic, Inc. Oracle Corporation
Microsoft Corporation
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IT--Hardware 3Com Corporation Micron Electronics, Inc.
Compaq Computer Corporation Network Appliance, Inc.
EMC Corporation
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IT Services Client Logic Operating Corporation International Computers Limited
ENTEX IT Service, Inc. Origin Nederland B.V.
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Telecommunications Cable and Wireless plc Nokia Inc.
KPN Telecom B.V. Nortel Networks Incorporated
Motorola, Inc.
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Internet Service Cable & Wireless USA, Inc. RCN Corporation
Providers Genuity Inc. UUNet Technologies, Inc.
PSInet Inc.
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Manufacturing Minnesota Mining & Manufacturing Caterpillar Inc.
Co. Simplex Time Recorder Co.
BMW AG (Indirect Customer via
Softlab)
Robicon Corporation
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Other The Boeing Company Safeco Insurance Co. of America
LSI Logic Corporation CGU Life
PowerQuest Corporation DIGEO Broadband, Inc.
Starbucks Corporation Turin Networks, Inc.
Verizon Avenue Corp. Aradigm Corporation
Sales and Marketing
Primus markets and sells its 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. Our
field sales force, which includes both sales representatives and sales
engineers, is organized into regional
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teams, complemented by direct telesales based at our headquarters in Seattle.
We continue to grow our sales force in the US and international locations. We
have sales offices in Seattle, Atlanta, Boston, Chicago, Dallas, Minneapolis,
and Reston, VA, and in the United Kingdom and France.
Our marketing department has a three-fold purpose: understanding the
evolving needs of the marketplace and providing direction to the product
development function, sustaining relationships with existing customers and
industry analysts, and managing all outbound communications with the
marketplace to create awareness and generate interest in our products and
services.
Primus software is marketed, distributed and supported in Japan by Primus
KK, a joint venture owned by Trans Cosmos Inc. and Primus. Our distribution
arrangements provide Primus KK with exclusive rights to the Japanese and
English versions of our Primus eServer distribution products in Japan, and
nonexclusive distribution rights in Korea, China and Hong Kong.
Product Development
Our product development team is responsible for designing, developing and
releasing our products. The group is organized into five disciplines:
architecture, development, quality assurance, documentation and program
management. Members from each of these disciplines, along with a product
manager from our marketing department, form separate product teams that work
closely with sales, marketing, and professional services members, and with
customers and prospects to better understand market needs and requirements.
When required, we also use third-party development firms to expand the
capacity and technical expertise of our internal product development teams.
Additionally, we sometimes license third-party technology that is incorporated
into our products. We believe this approach significantly shortens our time to
market without compromising our competitive position or product quality.
Therefore, we expect to continue to draw on third-party resources in the
foreseeable future.
We have a software development methodology that we believe allows us to
deliver products that satisfy real business needs and meet commercial quality
expectations. This methodology is based on the following key components:
. specification and review of business and functional requirements
. quality assurance of code and documentation
. test of functions, components, systems, integration, performance,
scaling, stress and internationalization
. regression testing before beta or general availability releases
. trial deployments in an internal production environment prior to release
. external beta releases
. general availability release of English and localized products
Our goal is to implement quality assurance processes throughout the
software development life cycle. We believe that strong emphasis placed on
analysis and design early in the project life cycle reduces the number and
costs of defects that may be found in later stages.
Competition
The market for Primus products is rapidly evolving and is expected to
become increasingly competitive as current competitors expand their product
offerings and new companies enter the market. Our knowledge enabling software
competes against various vendor software tools designed to address a specific
element or elements of the knowledge-enabled CRM market. These vendors
include, but are not limited to, Broadbase and ServiceWare. We also face
competition from in-house designed products and third-party custom development
efforts and alternative vendor solutions.
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In addition, companies providing eCommerce and traditional customer
relationship management solutions that may compete with Primus include Nortel
Networks/Clarify, Oracle, Peoplesoft, and Siebel.
The principal competitive factors in our industry include:
. Vendor and product reputation
. Product ease-of-use
. Customer referenceability
. Quality of customer support services, documentation, and training
. Measurable economic return
. Quality, speed, and effectiveness of application deployment services
. Product quality, performance, and price
. Effectiveness of sales and marketing efforts
. Breadth of product functionality and features
. Product integration with other Enterprise applications
. Product scalability
. Availability of products on the Internet and multiple operating
platforms
As the market 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, 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, 2000, we had 300 employees, including 20 European-based
employees. These included 104 in sales and marketing, 68 in client services
and support, 93 in product development and 35 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,
train and retain qualified personnel.
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Factors Affecting Our Future Operating Results
You should carefully consider the risks and uncertainties described below
and the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we
currently deem immaterial also may impair our business. If any of the
following risks actually occur, our business, financial condition and
operating results could be materially adversely affected and the trading price
of our common stock could decline.
We have incurred operating losses and we may not be profitable in the future.
We have incurred net losses in each quarter since inception and we could
continue to incur net losses for the foreseeable future. As of December 31,
2000, we had an accumulated deficit of $67.4 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.
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 or
customer order deferrals in anticipation of new products or product
enhancements introduced by us or our competitors 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. Furthermore, general economic conditions may affect our customers'
capital investment levels in CRM systems. As a result, we believe that period-
to-period comparisons of our operating results are not meaningful, and you
should not rely on such comparisons to predict our future performance. We will
continue to base our decisions regarding our operating expenses on anticipated
revenue trends. To the extent these expenses are not followed by increased
revenues, our operating results will suffer. Fluctuations in our operating
results, particularly compared to the expectations of market analysts or
investors, could cause severe volatility in the price of our common stock.
Our quarterly operating results depend on a small number of large orders.
We derive a significant portion of our product license revenues in each
quarter from a small number of relatively large orders. Our operating results
for a particular fiscal quarter could be materially adversely affected if we
are unable to complete one or more substantial license sales or
implementations planned for that quarter.
Factors outside our control may cause the timing of our license revenues to
vary from quarter-to-quarter, possibly adversely affecting our operating
results.
Under applicable accounting rules, we may experience further variability in
our license revenues from quarter to quarter due to factors outside our
control, including:
. whether we are providing implementation services
. whether implementation is delayed or takes longer than expected
. variability in the mix of new and existing customers
Where we are implementing the software, we will account for the agreement
as an item of deferred revenue and will recognize the license revenue over the
period of core implementation. Most of our new customers typically begin
implementation within 30 days of signing a license agreement. Once commenced,
implementation of our products can typically be completed within 30 days.
Although both implementation and deployment can vary significantly by
customer. We can not, 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.
11
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,
business in the last quarter of a year could be greater than new business in
the first quarter of the following year.
The limited sales history of our products makes it difficult to evaluate our
business and prospects.
We released our first knowledge-enabling software product in August 1996.
Accordingly, the basis upon which you can evaluate our prospects in general,
and market acceptance of our products in particular, is limited. For our
business to succeed, the market for this software will have to grow
significantly, and we will have to achieve broad market acceptance of our
products.
If e-business sales and marketing solutions are not widely adopted, we may
not be successful.
We are broadening our current product suite to integrate with various
aspects of e-business solutions. These products address a new and emerging
market for e-business sales and marketing solutions. The failure of this
market to develop, or a delay in the development of this market, would
seriously harm our business. The success of e-business sales and marketing
solutions depends substantially upon the continued growth and the widespread
adoption of the Internet as a primary medium for commerce and business
applications. The Internet infrastructure may not be able to support the
demands placed on it by the continued growth upon which our success depends.
Moreover, reliability, cost, accessibility, security and quality of service
remain unresolved and may negatively affect the growth of Internet use or the
attractiveness of commerce and business communication over the Internet.
We rely on sales of only one product family.
Product license revenues and related services from our Primus eServer and
Primus eSupport products accounted for over 90% of our total revenues through
December 31, 2000, and we expect these products to continue to account for a
substantial portion of our revenues in 2001. As a result, factors adversely
affecting the demand for these products and our 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 products and our ability to develop and sell
enhanced versions of our products.
Factors outside our control may make our products less useful.
The effectiveness of our software depends in part on widespread adoption
and effective use of our software by an enterprise's personnel, partners, and
customers and the value derived by each such usage. In addition, the
effectiveness of our knowledge-enabled approach is dependent upon a current
database. If customer-support personnel do not adopt and effectively use our
products, necessary solutions will not be added to the database, and the
database will be inadequate. If an enterprise deploying our software fails to
maintain a current database, the value of our software to our users will be
impaired. Thus, successful deployment and broad acceptance of our 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 element
or elements of the complete set of CRM processes, including Internet
communications, esupport, knowledge management, and web-based customer self-
service. We also face competition from in-house designed products and third-
party custom development efforts.
12
In addition, some of the companies providing e-commerce and traditional
customer relationship management solutions that may compete with us include
Broadbase, Kana, Nortel Networks/Clarify, Oracle, Peoplesoft, ServiceWare and
Siebel.
The principal competitive factors in our industry include:
. product ease-of-use
. vendor and product reputation
. the quality of customer support
. the availability of products on services, documentation and
the Internet and multiple training
operating platforms
. the quality, speed and
. measurable economic return effectiveness of application
development services
. customer referenceability
. the effectiveness of sales and
. product quality, performance and marketing efforts
price
. product integration with other
. breadth of product functionality enterprise applications
and features
. product scalability
As the market for CRM 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.
The loss of access to, or a problem with, Versant's database could adversely
affect our business.
Historically, we incorporated a database licensed from Versant into our
products. Presently, our products support Microsoft SQL Server, Oracle and
Versant databases. Because most of the products we have shipped historically,
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 effectively expand our sales and marketing resources.
Our inability to sufficiently expand 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
13
companies and the low unemployment in the region. Our success depends in large
part upon our continued ability to attract and retain highly skilled technical
employees, particularly software architects and engineers. Our failure to
attract and retain the highly-trained technical personnel that are integral to
our direct sales, product development and customer support teams may limit the
rate at which we can generate sales and develop new products or product
enhancements. This could have a material adverse effect on our business,
financial condition and operating results.
The market price of our common stock has been volatile since our initial
public offering in July 1999. Consequently, potential employees may perceive
our equity incentives such as stock options as less attractive. In that case,
our ability to attract and retain employees may 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, unrecorded and warranty 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.
We may be adversely affected if we lose key personnel.
Our success depends largely on the skills, experience and performance of
some key members of our management. If we lose one or more of these key
employees, our business, operating results and financial condition could be
materially adversely affected. Much of our success also depends on Michael A.
Brochu, our President and Chief Executive Officer. The loss of Mr. Brochu's
services could harm our business.
Our international operations are subject to additional risks.
Revenues from customers outside the United States represented approximately
$9.7 million in the 12 months ended December 31, 2000, or 20.3% of our total
revenue for the same period. We currently customize our products for select
foreign markets. 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 and complexity 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
14
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 and Yen. 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
Nortel Networks/Clarify, Kana, Onyx, Peoplsoft, Remedy, Siebel and others.
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.
Our stock price has been volatile and could fluctuate in the future.
The market price of our common stock has been highly volatile and is
subject to wide fluctuations. We expect our stock price to continue to
fluctuate:
. in response to quarterly variations in operating results
. in response to announcements of technological innovations or new
products by us or our competitors
. because of market conditions in the enterprise software industry
. in reaction to changes in financial estimates by securities analysts,
and our failure to meet or exceed the expectations of analysts or
investors
. in response to our announcements of significant acquisitions, strategic
relationships or joint ventures
. in response to sales of our common stock
Our efforts to protect our proprietary rights may be inadequate.
Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely primarily on a combination
of copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as
those contained in license agreements with consultants, vendors and customers.
We have not signed such agreements in every case. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. Other
parties may breach confidentiality agreements and other protective contracts
we have entered into. We may not become aware of, or have adequate remedies in
the event of, such breaches.
15
We pursue the registration of some of our trademarks and service marks in
the United States and in certain other countries, but we have not secured
registration of all our marks. A significant portion of our marks include the
word "Primus." Other companies use "Primus" in their marks alone or in
combination with other words, and we cannot prevent all third-party uses of
the word "Primus." We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would adversely
affect our trademarks.
Other companies may claim that we infringe their intellectual property or
proprietary rights.
If any of our products violate third party proprietary rights, we may be
required to reengineer our products or seek to obtain licenses from third
parties, and such efforts may not be successful. We do not conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. Product development is
inherently uncertain in a rapidly evolving technological environment in which
there may be numerous patent applications pending, which are confidential when
filed, with regard to similar technologies. In addition, other companies have
filed trademark applications for marks similar to the names of our products.
Although we believe that our products do not infringe the proprietary rights
of any third parties, third parties could assert infringement claims against
us in the future. The defense of any such claims would require us to incur
substantial costs and would divert management's attention and resources to
defend against any claims relating to proprietary rights, which could
materially and adversely affect our financial condition and operations.
Parties making such claims could secure a judgment awarding them substantial
damages, as well as injunctive or equitable relief that could effectively
block our ability to sell our products and services. Any such outcome could
have a material adverse effect on our business, financial condition and
operating results.
Control by inside shareholders of a large percentage of our voting stock may
permit them to influence us in a way that adversely affects our stock price.
Our officers, directors and affiliated entities together beneficially own
approximately one-third of the outstanding shares of our common stock. As a
result, these shareholders are able to influence all matters requiring
shareholder approval and, thereby, our management and affairs. Some matters
that typically require shareholder approval include:
. election of directors
. certain amendments to our articles of incorporation
. merger or consolidation
. sale of all or substantially all our assets
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock.
Our articles of incorporation and bylaws and Washington law contain
provisions that could discourage a takeover.
Specific provisions of our articles of incorporation and bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders.
Our articles of incorporation and bylaws establish a classified board of
directors, eliminate the ability of shareholders to call special meetings,
eliminate cumulative voting for directors and establish procedures for advance
notification of shareholder proposals. The presence of a classified board and
the elimination of cumulative voting may make it more difficult for an
acquirer to replace our board of directors. Further, the elimination of
cumulative voting substantially reduces the ability of minority shareholders
to obtain representation on the board of directors.
16
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 Position 98-4. We adopted
Statement of Position 97-2 effective January 1, 1998. The AICPA has also
issued Statement of Position 98-9, which was effective for transactions we
enter into beginning January 1, 2000 and the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition,"
which was effective October 1, 2000. We adopted Statement of Position 98-9 and
SAB No. 101 during 2000. Based on our interpretation of the AICPA and SEC's
positions, we believe our current revenue recognition policies and practices
are consistent with Statement of Position 97-2 , 98-4, 98-9 and SAB No. 101.
Additionally, the accounting standard setters, including the Securities and
Exchange Commission and the Financial Accounting Standards Board (FASB), are
continuing to review the accounting standards related to stock-based
compensation. Any changes to these standards or any other accounting standards
could materially adversely affect our business, financial condition and
operating results.
You should not unduly rely on forward-looking statements because they are
inherently uncertain.
You should not rely on forward-looking statements in this document. This
document contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future" and "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this document.
The forward-looking statements contained in this document are subject to the
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks described above and elsewhere in this document.
17
ITEM 2. PROPERTIES
We lease principal administrative, engineering, manufacturing, marketing
and sales facilities consisting of approximately 50,000 square feet in an
office tower in Seattle. The lease for this space extends to October 31, 2005.
We also lease other domestic sales and services offices in Boston, Chicago,
Dallas, Minneapolis, and Reston, as well as a 10,000 square feet location in
Atlanta primarily dedicated to engineering. The hub of our European Operations
is located in the UK with an additional support facility in Paris. 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
On December 20, 2000, MAC Equipment, Inc. ("MAC") filed a claim against
2order, a wholly owned subsidiary of the Company. MAC licensed computer
software, maintenance and support and consulting services from 2order in
November 1998. We acquired 2order in a stock-for-stock merger in January 2000.
MAC paid 2order approximately $450,000 in license, support and services fees.
MAC claims that the Mobile Marketplace software it licensed from 2order has
not performed as represented, resulting in substantial damages to MAC. While
2order vigorously disputes MAC's claims, an amount has been accrued for its
estimate of probable liability in this matter.
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 16, 2001 are as follows:
Name Age Position
---- --- --------
Michael A. Brochu....... 47 President, Chief Executive Officer and Chairman of the Board
Ronald M. Stevens....... 37 Vice President, Chief Financial Officer and Treasurer
Kim M. Nelson........... 45 Executive Vice President of Worldwide Sales and Marketing
Michael A. Brochu has served as our President and Chief Executive Officer
since November 1997. 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 received his B.B.A. in accounting and finance from
the University of Texas at El Paso.
Ronald M. Stevens has served as our Chief Financial Officer, Vice President
and Treasurer since October 2000. From August 1999 to September 2000, Mr.
Stevens served as Chief Financial Officer and then President and Chief
Operating Officer of OnHealth Network, Inc., a consumer healthcare internet
company, which was acquired by WebMD Corporation in September 2000. From May
1996 to August 1999, he served as General Manager and Senior Vice President of
Sierra On-Line, Inc., an interactive software publisher. From May 1994 to May
1996, he served as Corporate and Divisional Controller of Sierra On-Line. Mr.
Stevens received his B.A. in accounting and business administration from
Western Washington University.
Kim M. Nelson has served as our Vice President of Worldwide Sales and
Marketing since February 2001. From January 1999 to February 2001, Mr. Nelson
served as our Vice President of Worldwide Sales. From June 1993 to December
1998, Mr. Nelson held several positions at Oracle Corporation, a database
enterprise software company, including Area Vice President of Sales, Vice
President of Field Operations, and Vice President of Sales. Mr. Nelson
received his B.S. in business from the University of Colorado.
18
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 bid quotations for 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.......................... $ 35.63 $14.00
October 1, 1999 - December 31, 1999........................ $ 58.13 $23.88
January 1, 2000 - March 31, 2000........................... $137.25 $39.75
April 1, 2000 - June 30, 2000.............................. $ 86.88 $24.13
July 1, 2000 - September 30, 2000.......................... $ 53.00 $12.25
October 1, 2000 - December 31, 2000........................ $ 14.84 $ 4.25
The closing sale price of the common stock on December 31, 2000 was $6.50.
On March 16, 2001 the closing price reported on the Nasdaq National Market
System for the common stock was $5.125.
The market price of our common stock has fluctuated significantly.
Holders of Common Stock
As of March 16, 2001, there were approximately 276 shareholders of record
of our common stock and 18,092,134 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 January 7, 2000, we issued 1,000 shares of our common stock, valued
at $3.00 per share, pursuant to an exercise of a warrant.
19
. On January 7, 2000, we issued 5,000 shares of our common stock, valued
at $9.00 per share, pursuant to an exercise of a warrant.
. On January 21, 2000, we issued an aggregate of 1,506,126 shares of our
common stock for all of the issued and outstanding capital stock of
2order.com. In addition, options and warrants to acquire capital stock
of 2order.com were converted into options and warrants to acquire
150,378 shares of our common stock.
. On March 6, 2000, we issued a total of 2,040 shares of our common stock,
valued at $13.03 per share, pursuant to exercises of warrants.
. On April 18, 2000, we issued 5,666 shares of our common stock, valued at
$3.00 per share, pursuant to an exercise of a warrant.
The sales and issuances of these 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.
Use of Proceeds from Registered Securities
We are using the net proceeds raised in our initial public offering for
additional working capital, repayment of short-term indebtedness, and general
corporate purposes, including increased domestic and international sales and
marketing expenditures, increased research and development expenditures and
capital expenditures made in the ordinary course of business. Pending such
uses, the net proceeds will be invested in investment-grade, interest-bearing
instruments, the majority of which are short-term.
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 data 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,
-------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- ---------
(In thousands, except per share data)
Consolidated Statement
of Operations Data(1):
Revenue............... $ 47,669 $ 27,318 $ 12,219 $ 7,496 $ 4,654
Cost of revenue....... 10,892 7,725 4,653 3,212 2,039
Sales and marketing... 27,653 19,180 12,537 5,716 3,972
Research and
development.......... 14,669 10,177 5,957 3,577 2,882
General and
administrative....... 9,401 6,657 4,518 2,313 1,869
Merger related costs.. 505 1,520 -- -- --
---------- ---------- --------- --------- ---------
Loss from operations.. (15,451) (17,941) (15,446) (7,322) (6,108)
Other income (expense),
net.................... 2,655 1,093 (52) 390 113
---------- ---------- --------- --------- ---------
Loss before income
taxes................ (12,796) (16,848) (15,498) (6,932) (5,995)
Income tax expense
(benefit).............. 217 267 (57) 34 68
---------- ---------- --------- --------- ---------
Net loss.............. $ (13,013) $ (17,115) $ (15,441) $ (6,966) $ (6,063)
========== ========== ========= ========= =========
Net loss available to
common shareholders.... $ (13,056) $ (18,234) $ (16,278) $ (7,339) $ (6,271)
========== ========== ========= ========= =========
Basic and diluted net
loss per common
share(2)............... $ (0.74) $ (1.81) $ (3.49) $ (1.60) $ (1.43)
Shares used in computing
basic and diluted net
loss per common share.. 17,705,757 10,081,183 4,668,404 4,594,113 4,392,778
December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- ---------
(In thousands)
Consolidated Balance
Sheet Data(1):
Cash and cash
equivalents.......... $ 10,502 $ 17,602 $ 7,708 $ 3,900 $ 2,439
Short-term
investments.......... 29,457 37,055 2,833 610 300
Working capital....... 34,398 44,538 4,981 1,337 2,687
Total assets.......... 56,938 67,406 21,574 9,800 7,006
Total current
liabilities.......... 17,091 19,591 13,141 6,815 2,600
Long-term debt, net of
current portion...... -- 60 1,265 551 798
Redeemable convertible
preferred stock...... -- 9,054 31,523 10,399 8,128
Shareholders' equity
(deficit)............ 39,847 38,701 (24,355) (7,966) (4,520)
- --------
(1) Reflects restatement for pooling-of-interests business combination. See
Note 13 of Notes to Consolidated Financial Statements.
(2) For further discussion of loss per share see Note 1 of Notes to
Consolidated Financial Statements.
21
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 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
Primus Knowledge Solutions, Inc. is a leading provider of knowledge-
enabling software that empowers customer relationship management (CRM)
implementations and drives customer satisfaction for Global 2000 companies.
Primus software is designed to give customers fast access to the information
they need--via self- and assisted service--and to enable businesses to share
valuable customer and product knowledge across the enterprise. Primus(R)
software products can be implemented as a suite or as individual products,
depending on the company's preference and/or immediate need.
To compete in today's business environment, companies must maximize their
relationships with their existing customers. The need to develop and sell more
deeply into their existing customer base has led many companies to implement
CRM initiatives and software. CRM software is designed to enable companies to
interact with their customers using both traditional and eBusiness
communication channels--including the phone, web, email, chat, and voice over
IP (VOIP)--and to manage customer information in a way that helps companies
maximize the value of each customer interaction. Facilitating more efficient
communications with customers can help to improve the level and quality of
customer service companies deliver and, in turn, increase customer
satisfaction and retention and cross-sell and up-sell opportunities.
On December 12, 1999, the Company entered into an Agreement and Plan of
Merger with a California corporation, Imparto Software Corporation (Imparto),
a privately held software company and developer of emarketing software. In
connection with the transaction, we issued 913,788 shares of our common stock
in exchange for all outstanding shares of preferred stock, preferred stock
warrants, and common stock of Imparto, and we converted all outstanding
options to purchase Imparto common stock into options to purchase up to 86,212
shares of Primus common stock. The transaction was accounted for as a pooling
of interests. The consolidated financial statements have been prepared to
reflect the restatement of all periods presented to include the accounts of
Imparto. The historical results of the pooled entities reflect each of their
actual operating cost structures and, as a result, do not necessarily reflect
the cost structure of the newly combined entity.
On January 21, 2000, pursuant to an Agreement and Plan of Merger, dated
January 8, 2000, the Company acquired ownership of 2order.com, Inc. (2order),
a privately held software company, which developed and marketed software that
acts as a personal sales assistant, helping buyers define requirements and
configure custom solutions. 2order was incorporated in Georgia in 1991 under
the name Business Systems Design, Inc. As a result of the merger, we issued
1,506,126 shares of our common stock, $.025 par value per share, in exchange
for all issued and outstanding capital stock and assumed all outstanding
options and warrants of 2order, which represents, on a converted basis,
150,378 shares of our common stock. The transaction was accounted for as a
pooling of interests business combination, and accordingly, the consolidated
financial statements have been prepared to reflect the restatement of all
periods presented to include the accounts of 2order. 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.
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
22
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 subsequently issued its Statement
of Position 98-9, which provides certain amendments to its Statement of
Position 97-2 and is effective for transactions entered into beginning January
1, 2000. The implementation of this latest AICPA pronouncement did not
materially impact our revenue recognition practices. In June 2000, the SEC
updated Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in
Financial Statements". SAB 101 provides guidance on revenue recognition and
the SEC staff's views on the application of accounting principles to selected
revenue recognition issues. The adoption SAB 101 did not have a material
effect on revenue recognition or the Company's results of operations.
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 knowledge-enabling software and related
services. We market our software and services on a worldwide basis through our
direct sales organization in the United States and Europe. In Japan, Primus
KK, a Japanese joint venture in which we hold a 19.6% minority interest,
distributes our products. The rights granted Primus KK expire December 31,
2002, and are subject to meeting certain performance obligations. Our
international sales constituted 20% of our 2000 revenue, 16% of our 1999
revenue and 12% of our 1998 revenue. We believe that international revenue, as
a percentage of our total revenue, will continue to fluctuate in the future.
Our services revenue consists of consulting, training and maintenance and
support fees. We provide consulting and training services relating to our
products on a time-and-materials basis under installation services agreements
with our customers. We provide maintenance and support services to our
customers under renewable one-year maintenance and support agreements, which
we price as a percentage of our license fees.
We currently recognize license revenue over the core implementation period
if implementation services are included in the original license arrangement
and are considered to be essential to the functionality of the software. 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 core 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 recognize
revenue upon shipping the software. 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.
For new customers, we generally enter into services agreements to implement
our software. Most of our new customers typically begin implementation within
30 days of signing a license agreement. Once commenced, implementation of our
products can typically be completed within 30 days. Although both
implementation and deployment can vary significantly by customer. We can not,
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.
To help us execute our long-term growth strategy, we have invested heavily
in product development and in building our sales, marketing, finance,
administrative and professional services organizations. We have incurred
quarterly net losses since inception, and as of December 31, 2000, had an
accumulated deficit of approximately $67.4 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.
23
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,
------------------
2000 1999 1998
---- ---- ----
(As a
percentage of
total revenue)
Revenue:
License.................................................. 70% 69% 64%
Services................................................. 30 31 36
--- --- ----
Total revenue.......................................... 100 100 100
--- --- ----
Cost of revenue:
License.................................................. 2 4 4
Services................................................. 21 24 34
--- --- ----
Total cost of revenue.................................. 23 28 38
--- --- ----
Gross profit........................................... 77 72 62
--- --- ----
Operating expenses:
Sales and marketing...................................... 58 70 103
Research and development................................. 31 37 49
General and administrative............................... 20 24 37
Merger related costs..................................... 1 6 --
--- --- ----
Total operating expenses............................... 110 137 189
--- --- ----
Loss from operations................................... (33) (65) (127)
Other income, net.......................................... 6 4 (1)
--- --- ----
Loss before income taxes............................... (27) (61) (128)
Income tax expense (benefit)............................... 1 1 (1)
--- --- ----
Net loss............................................... (28)% (62)% (127)%
=== === ====
Revenue
We derive our revenue from the sale of software licenses and related
services including support and maintenance contracts. Revenue was $47.7
million, $27.3 million, and $12.2 million in 2000, 1999 and 1998,
respectively, representing increases of $20.4 million, or 74%, from 1999 to
2000 and $15.1 million, or 124%, from 1998 to 1999. During 2000 and 1999, no
single customer accounted for 10% or more of total revenue. During 1998, one
customer's purchases represented 11% of total revenue.
License Revenue. License revenue was $33.2 million, $18.8 million and $7.8
million in 2000, 1999 and 1998, respectively. The increase was due to
acceptance of our knowledge-enabling software in the marketplace, increased
international sales and a growing sales force organization. License revenue as
a percentage of total revenue was 70%, 69% and 64% in 2000, 1999 and 1998,
respectively. The increase in international license revenue was $4.0 million
from 1999 to 2000 and $2.0 million from 1998 to 1999. This increase was due
primarily to the increased size and productivity of our sales force and
increased international sales through our United Kingdom sales office and our
Japanese distributor.
Services Revenue. Services revenue was $14.5 million, $8.5 million and $4.4
million in 2000, 1999 and 1998, respectively. Maintenance and support contract
revenue increased $5.3 million from 1999 to 2000 and consulting fees increased
$700,000 over the same period. The increase in services revenue from 1998 to
1999 was a result of a $2.6 million increase in maintenance and support
contract revenue and $1.4 million in consulting revenue. The increase in both
types of services revenue was due primarily to an increase in the number of
customers and product license sales, which generally include or lead to
contracts to perform professional services and purchases of software
maintenance and support service contracts.
24
Services revenue represented 30%, 31% and 36% of our total revenue in 2000,
1999 and 1998, respectively. Services revenue as a percentage of total revenue
is declining primarily due to license revenue growing at a faster pace than
services revenue. The decline is primarily due to the shortening of the
implementation period for our software. 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
$1.1 million in both 2000 and 1999, and $508,000 in 1998. The cost of license
revenue remained flat from 1999 to 2000 and increased $604,000, or 119%, from
1998 to 1999. Cost of license revenue as a percentage of license revenue was
3%, 6% and 7% in 2000, 1999 and 1998, respectively. We anticipate that our
cost of license revenue will increase in absolute dollars and be relatively
flat as a percent of license revenue. License revenue as a percentage of sales
has varied in the past due to increases 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 $9.8 million, $6.6 million and $4.1 million in 2000, 1999
and 1998, respectively. Cost of services revenue increased $3.2 million, or
48%, from 1999 to 2000 and $2.5 million, or 60%, from 1998 to 1999. The
increases in cost of services revenue for the comparable years was primarily a
result of the corresponding increase in services revenue along with the
related costs from increased hiring and training within the consulting
organization. Professional services and customer support personnel increased
significantly each year. Cost of services revenue as a percentage of services
revenue was 68%, 77% and 93% in 2000, 1999 and 1998, respectively. The
decrease in cost of services revenue as a percentage of services revenue from
1998 and 1999 to 2000 was primarily due to higher utilization of consulting-
services personnel and growth of maintenance revenue.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, bonuses and commissions earned by sales and marketing personnel,
travel and costs associated with sales and marketing programs, such as
advertising, trade shows, public relations and new product launches. Sales and
marketing expenses were $27.7 million, $19.2 million and $12.5 million in
2000, 1999 and 1998, respectively. Sales and marketing expenses increased $8.5
million, or 44%, from 1999 to 2000 and $6.6 million, or 53%, from 1998 to
1999. The increases in each year from 1998 to 2000 are primarily due to the
significant growth in the number of our sales and marketing personnel,
increased marketing efforts and an increase in commissions paid as a result of
revenue growth. Sales and marketing expenses as a percentage of total revenue
was 58%, 70% and 103% in 2000, 1999 and 1998, respectively. The decrease in
sales and marketing expense as a percentage of revenues for each year from
1998 to 2000 is reflective of total revenues increasing at a much faster pace
than variable sales and marketing expenses. We believe that a significant
sales and marketing effort is essential for us to maintain market position and
further increase market acceptance of our products, and we anticipate that we
will continue to invest significantly in sales and marketing for the
foreseeable future. We expect that sales and marketing expenses as an absolute
dollar amount will increase in future periods.
Research and Development. Research and development expenses consist
primarily of salaries, benefits and contractors fees for software developers,
program managers and quality assurance personnel. Research and development
expenses were $14.7 million, $10.2 million and $6.0 million in 2000, 1999 and
1998, respectively. Research and development expenses increased $4.5 million,
or 44%, from 1999 to 2000 and $4.2 million, or 71%, from 1998 to 1999. The
increase for each year from 1998 to 2000 was primarily due to increased
staffing of software developers and quality-assurance staff (both employees
and contractors) to support development of our new products and enhancements
to our existing products, and an increase in compensation levels for
development and quality-assurance personnel. Research and development expenses
as a percentage of total revenue were 31%, 37% and 49% for 2000, 1999 and
1998, respectively. We believe that a significant research
25
and development investment is essential for us to maintain our market
position, to continue to expand our knowledge-enabling 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. We expect that research and development expenses as an absolute dollar
amount will increase in future periods.
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,
human resource, administrative and information services personnel and costs
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. General
and administrative expenses were $9.4 million, $6.7 million and $4.5 million
in 2000, 1999 and 1998, respectively. General and administrative expenses
increased $2.7 million, or 41%, from 1999 to 2000 and $2.1 million, or 47%,
from 1998 to 1999. The increase in general and administrative expenses in 2000
from 1999 was primarily the result of us incurring costs associated with being
a public company for the entire year, transition and severance costs related
to our acquisitions and an increase in our provision for doubtful accounts.
The increase in general and administrative expenses in 1999 from 1998 was
primarily the result of our hiring additional executive, finance, and
administrative personnel to support the growth of our business during this
period 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 expenses as
a percentage of total revenue were 20%, 24% and 37% in 2000, 1999 and 1998,
respectively. The decrease of general and administrative expense as a
percentage of total revenue for the years 1998 through 2000 is directly
attributable to revenue growing at a much faster pace than general and
administrative expenses. We believe that our general and administrative
expenses will fluctuate as an absolute dollar amount in future periods.
Merger Related Costs. Merger related costs were approximately $505,000 and
$1.5 million in 2000 and 1999, respectively, which represented 1% and 6% of
net sales in 2000 and 1999, respectively. These costs were recorded in
connection with the January 2000 2order merger and the December 1999 Imparto
merger, both of which were accounted for under the pooling of interests method
of accounting.
Other Income, Net. Other income (expense) was $2.6 million, $1.1 million,
and $(52,000) in 2000, 1999 and 1998, respectively. The variances from period
to period are due to fluctuations in the average combined cash and cash
equivalents and short-term investment balances. The Company expects to
continue to yield investment income on its average balance of combined cash
and cash equivalents and short-term and long-term investments at an average
rate comparable to that experienced in 2000.
Income Taxes. We have not recorded income tax benefits related to the net
operating losses in 2000, 1999 and 1998 as a result of the uncertainties
regarding the realization of the net operating losses. Income tax expense
recorded in 2000 and 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.
Net operating loss carryforwards at December 31, 2000 for federal and state
income tax reporting purposes were $82.5 million, $200,000 of which will begin
to expire in 2001 if not utilized and $18.7 million is related to deductions
for the exercise of non-qualified stock options. 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 2000 and 1999. 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
26
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,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands)
Consolidated Statement of Operations Data:
Revenue:
License................ $ 9,864 $ 6,254 $ 9,909 $ 7,180 $ 6,392 $ 4,447 $ 4,671 $ 3,259
Services............... 4,152 3,880 3,152 3,278 2,890 2,496 1,844 1,319
------- ------- ------- ------- ------- ------- ------- -------
Total revenue.......... 14,016 10,134 13,061 10,458 9,282 6,943 6,515 4,578
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License................ 219 212 330 323 396 241 315 160
Services............... 2,347 2,414 2,439 2,608 2,119 1,638 1,521 1,335
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue.. 2,566 2,626 2,769 2,931 2,515 1,879 1,836 1,495
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 11,450 7,508 10,292 7,527 6,767 5,064 4,679 3,083
Operating expenses:
Sales and marketing.... 7,541 6,350 6,936 6,826 5,383 5,309 4,760 3,728
Research and
development........... 3,237 3,704 3,717 4,011 3,488 2,517 2,107 2,065
General and
administrative........ 2,525 1,862 2,714 2,300 2,507 1,568 1,262 1,320
Merger related costs... -- -- -- 505 1,520 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 13,303 11,916 13,367 13,642 12,898 9,394 8,129 7,113
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,853) (4,408) (3,075) (6,115) (6,131) (4,330) (3,450) (4,030)
Other income, net....... 616 674 710 655 557 505 4 27
------- ------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (1,237) (3,734) (2,365) (5,460) (5,574) (3,825) (3,446) (4,003)
------- ------- ------- ------- ------- ------- ------- -------
Income tax expense...... 96 39 50 32 40 27 173 27
------- ------- ------- ------- ------- ------- ------- -------
Net loss............... $(1,333) $(3,773) $(2,415) $(5,492) $(5,614) $(3,852) $(3,619) $(4,030)
======= ======= ======= ======= ======= ======= ======= =======
The following table sets forth unaudited quarterly results of operations as
a percentage of revenue for 2000 and 1999.
Three Months Ended
-------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands)
Consolidated Statement of Operations Data:
Revenue:
License................ 70.4% 61.7% 75.9% 68.7% 68.9% 64.1% 71.7% 71.2%
Services............... 29.6 38.3 24.1 31.3 31.1 35.9 28.3 28.8
----- ----- ----- ----- ----- ----- ----- -----
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenue:
License................ 1.6 2.1 2.5 3.1 4.3 3.5 4.8 3.5
Services............... 16.7 23.8 18.7 24.9 22.8 23.6 23.4 29.2
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenue.. 18.3 25.9 21.2 28.0 27.1 27.1 28.2 32.7
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........... 81.7 74.1 78.8 72.0 72.9 72.9 71.8 67.3
Operating expenses:
Sales and marketing.... 53.8 62.7 53.1 65.3 58.0 76.5 73.1 81.4
Research and
development........... 23.1 36.6 28.5 38.4 37.6 36.3 32.3 45.1
General and
administrative........ 18.0 18.4 20.8 22.0 27.0 22.6 19.4 28.8
Merger related costs... -- -- -- 4.8 16.4 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.............. 94.9 117.7 102.4 130.5 139.0 135.4 124.8 155.3
----- ----- ----- ----- ----- ----- ----- -----
Loss from operations.... (13.2) (43.6) (23.6) (58.5) (66.1) (62.5) (53.0) (88.0)
Other income, net....... 4.4 6.7 5.4 6.2 6.0 7.3 0.1 0.6
----- ----- ----- ----- ----- ----- ----- -----
Loss before income
taxes.................. (8.8) (36.9) (18.2) (52.3) (60.1) (55.2) (52.9) (87.4)
Income tax expense...... 0.7 0.3 0.4 0.3 0.4 0.3 2.6 0.6
----- ----- ----- ----- ----- ----- ----- -----
Net loss............... (9.5)% (37.2)% (18.6)% (52.6)% (60.5)% (55.5)% (55.5)% (88.0)%
===== ===== ===== ===== ===== ===== ===== =====
27
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, 2000 and 1999. The first quarter of
2000 and the fourth quarter of 1999 also included costs related to the merger
with 2order and 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 had primarily financed our
operations through the private sale of our equity securities. To a lesser
extent, we have financed our operations through equipment financing and
traditional lending arrangements. In July 1999, we completed our initial
public offering and issued 4,622,500 shares of common stock at an initial
public offering price of $11.00 per share. We received approximately $46.2
million in cash, net of underwriting discounts, commissions, and other
offering costs.
As of December 31, 2000, we had cash and cash equivalents of $10.5 million
and available-for-sale securities of $29.5 million, representing a decrease of
$14.7 million from cash and investments held as of December 31, 1999. As of
December 31, 2000, our working capital was $34.4 million compared to $44.5
million at December 31, 1999.
Our operating activities resulted in net cash outflows of $15.1 million and
$10.8 million in 2000 and 1999, respectively. The increase in operating cash
outflows from 1999 to 2000 was due primarily to a decrease in deferred revenue
and accounts receivable offset by an increase in accounts payable and accrued
liabilities.
Investing activities provided cash of $3.6 million in 2000 and used cash of
$36.1 million in 1999. Investing activities provided cash in 2000 primarily
from the maturity of short term securities. Cash used in investing activities
in 2000 was primarily for the purchase of short-term securities and the
purchase of capital equipment to meet our domestic and international expansion
requirements. Cash used in investing activities in 1999 was primarily for the
purchase of short-term securities following our initial public offering and
the purchase of capital equipment.
Financing activities provided cash of $4.4 million and $56.8 million in
2000 and 1999, respectively. In 2000, cash provided by financing activities
primarily represented the proceeds from issuance of our common stock upon the
exercise of employee stock options. In 1999 cash provided by financing
activities was primarily due to the proceeds from our initial public offering
in July, offset in part by payments on our credit facility and capital lease
obligations.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we:
. enter new markets for our products and services
. increase research and development spending
. increase sales and marketing activities
. develop new distribution channels
. improve our operational and financial systems
. broaden our professional services capabilities
Such operating expenses will consume a material amount of our cash
resources, including a portion of the net proceeds from our initial public
offering. We believe that the net proceeds from our initial public offering,
together with our existing cash and cash equivalents, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next twelve months. Thereafter, we may require additional
funds to support our working capital requirements or for other purposes and
may seek to raise such additional funds through public or private equity
financing or from other sources. We may not be able to obtain adequate or
favorable financing at that time. Any financing we obtain may dilute our
current shareholders' ownership interest in the Company.
28
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. SFAS No. 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of this
statement on January 1, 2001 did not have a material impact on our
consolidated financial statements.
In June 2000, the SEC updated Staff Accounting Bulletin No. 101 (SAB 101)
"Revenue Recognition in Financial Statements". The most recent update delayed
the effective date of SAB 101 to the fourth quarter for fiscal years beginning
after December 15, 1999. SAB 101 provides guidance on revenue recognition and
the SEC staff's views on the application of accounting principles to selected
revenue recognition issues. We adopted the provisions of SAB 101 in the fourth
quarter of 2000 and the implementation of these provisions did not have a
material impact on our consolidated financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. Interpretation No. 44
clarifies the application of APB Opinion 25, Accounting for Stock Issued to
Employees, for issues, among others, regarding; (a) the definition of
employees, (b) defining non-compensatory plans, (c) modifications to
previously fixed stock option awards, and (d) accounting for an exchange of
stock compensation awards in a business combination. We adopted Interpretation
No. 44 in the third quarter of 2000 and it did not have a material impact on
our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and change in the
market values of our investments.
Interest Rate Risk. The Company is exposed to the impact of short-term
changes in interest rates. The Company's exposure primarily relates to the
Company's investment portfolio. The Company invests its excess cash in high
quality corporate and municipal debt instruments. Investments in both fixed
rate and floating rate interest earning instruments carries a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted by a rise in interest rates, while floating rate securities
may produce less income than expected if interest rates fall. As a result,
changes in interest rates may cause the Company to suffer losses in principal
if forced to sell securities that have declined in market value or may cause
the Company's future investment income to fall short of expectations. Our
investment portfolio is designated as available-for-sale, and accordingly is
presented at fair value in the consolidated balance sheet.
The Company protects and preserves its invested funds with investment
policies and procedures that limit default, market and reinvestment risk. The
Company has not utilized derivative financial instruments in its investment
portfolio.
In 2000, the effects of changes in interest rates on the fair market value
of our marketable investment securities and our earnings were insignificant.
At December 31, 2000, our investment portfolio included approximately $3.8
million in variable rate investments, all of which are due in 2001. Fixed rate
investments at December 31, 2000 of approximately $25.7 million had a weighted
average interest rate of 6.57% and are due in 2001. We believe that the impact
on the fair market value of our securities and our earnings in 2001 from a
hypothetical 10% increase or decrease in interest rates would be
insignificant.
Foreign Currency Risk. We develop products in the United States and sell
them in North America, Asia and