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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, 2001
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 (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
1601 Fifth Avenue, Suite 1900
Seattle, WA 98101
(Address of principal executive offices, including zip code)
(206) 834-8100
(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 15, 2002,
as reported on Nasdaq National Market System was approximately $15.4 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
15, 2002, was 18,945,513.
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 2002, which definitive proxy
statement shall be filed not later than 120 days after the end of the fiscal
year to which this report relates.
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PRIMUS KNOWLEDGE SOLUTIONS, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
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PART I
1. BUSINESS......................................................... 3
2. PROPERTIES....................................................... 26
3. LEGAL PROCEEDINGS................................................ 26
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 27
PART II
5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS........................................................ 28
6. SELECTED CONSOLIDATED FINANCIAL DATA............................. 29
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 30
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 44
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 45
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 45
11. EXECUTIVE COMPENSATION........................................... 45
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 45
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 45
PART IV
14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND EXHIBITS 46
"Primus(R)," "Primus(R) eServer," "Primus(R) eSupport," "Primus(R) Answer
Engine," "Primus(R) Interchange," and "Primus(R) eSales" 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 ("Form 10-K" or "Report") contains
forward-looking statements. These statements relate to future events, plans or
objectives 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 "Risks Associated with our Business and
Future Operating Results" contained in Item 1 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
We provide application software that enables companies to improve customer
service by accessing, analyzing and improving information. Primus(R) software
offers a significant measurable value to businesses by providing an
infrastructure that captures and shares knowledge, increasing the efficiency
and effectiveness of customer service. Our software products can be implemented
as a suite or as individual products, depending on the customer's preference
and/or business need. Our software is flexible and easily implemented. Our
solutions can be combined with leading customer relationship management (CRM)
and knowledge management applications, including those from Amdocs/Clarify,
Kana, Onyx, Oracle, PeopleSoft, Peregrine Systems/Remedy, and Siebel. In
addition to software applications, we offer professional services to assist
customers with software implementation, integration, hosting, training and
support.
We target mid- to large-sized organizations, marketing and selling our
software and services primarily through a direct sales force and a
minority-owned Japanese joint venture. We have offices throughout the United
States and in the United Kingdom and France. Our principal executive offices
are located at 1601 Fifth Avenue, Suite 1900, Seattle, WA 98101.
We incorporated in Washington State in 1986 and our common shares began
publicly trading on the Nasdaq National Market(R) under the symbol PKSI on June
30, 1999.
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, manage the sales process,
transact sales, manage customer service, and interact and communicate with
customers, partners and suppliers using both traditional and emerging
communication channels--including the phone, web, email, chat, and voice over
the Internet. Because of competitive pressures and customer expectations, 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 on emerging
communication channels has fundamentally changed the way that companies
interact with and think about their customers. Increasingly,
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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
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. Customers are now active, informed
participants in the business process and each customer interaction must be
maximized to retain and increase sales to existing customers and improve
customer satisfaction.
To compete in today's business environment, companies must maximize their
relationships with prospective and 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 and 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 of these solutions are intended to manage some piece of the
customer interaction, and purport to add value to the customer-company
relationship. Increasingly, however, companies are looking with a critical eye
at CRM applications and are 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, integrate into
their current and future CRM infrastructures, and offer the best potential
fiscal results.
Primus Solutions
We offer complete knowledge solutions that enable companies to deliver great
service by accessing, analyzing and improving information. Our products are
used by call centers, IT helpdesks, human resources organizations, marketing
organizations, and eService businesses.
Our solutions are predicated on the belief that the intellectual capital
resident within a company's workforce is its most valuable asset. We provide
knowledge-enabling solutions that allow companies to enhance customer
relationships by managing and sharing the company's valuable internal knowledge
and expertise with customers, partners and employees, across multiple
communication channels and business processes. Our software helps address the
unique challenges faced by companies implementing a CRM strategy.
Primus software has the following key characteristics:
Intangible asset management. Our 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.
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Integration. Our software integrates with leading CRM implementations,
including applications from Amdocs/Clarify, Kana, Onyx, Oracle, Peoplesoft,
Peregrine Systems/Remedy Siebel and others. 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
buyers demand.
Scalable architecture. Our solutions scale from small to large-scope usage.
Our customers have demonstrated the scalability of our 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 our software to be used by
thousands of employees, and hundreds of thousands of their customers and
partners, on a global basis.
Rapid Return on Investment. Our software offers a significant, measurable
return on investment. For example, a networking software company reported a
reduction of service escalations by 20% in six months; a manufacturing company
reduced support escalations from level 2 support representatives to level 3
support representatives by 60% in three months. Our solutions can be rapidly
implemented and easily customized, thus allowing for minimum downtime before
companies experience 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. The extent of return on
investment of Primus products is specific to our customer's experience.
Primus Strategy
Our objective is to establish and maintain a leadership position in
providing Internet-based problem resolution software applications for the
extended enterprise and its end-user customers. Our strategy to achieve this
objective is to:
Leverage the Internet. We intend to continue to develop Internet-based
products to enable our users to access, analyze and improve knowledge with
their extended enterprise and customers. We believe that businesses will
increasingly adopt the Internet as the means of providing fast and efficient
customer support for the extended enterprise.
Enhance our product suite. We plan to enhance the capabilities of our
product family by developing and licensing additional products and
technologies. We intend to focus on applications and technologies that further
Internet-based customer self-service.
Target additional vertical markets. Initially, we focused our sales and
markets marketing efforts on serving the customer-support and
problem-resolution needs of technology-based industries, such as software,
hardware and telecommunications. We have broadened the reach of our
problem-resolution products to customer-service and support organizations in
other industries and government.
Build additional strategic relationships. We intend to strengthen our
market reach by further developing partner relationships with leading
implementation consulting, systems integration, and technology vendors. We
believe that these strategic relationships will provide us with additional
sales opportunities, further leverage our implementation resources, and broaden
our current CRM integration capabilities. Concurrently, we intend to expand our
indirect distribution channels to complement our direct sales force.
Extend our solutions to other functional areas. Our products currently
provide information and reports that are used in functional areas other than
customer support. We intend to continue to enhance the features of our
solutions to provide benefits to other functional business areas, such as Human
Resources, Sales and Marketing.
5
Products
Our 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-processor basis, per-user basis or based on the
number of user sessions authorized to use 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(R) eServer
Primus eServer enables 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 and marketing, 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 and
creation of knowledge during the course of an interaction with a 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 newly released product that will solve their
service issues.
Primus(R) eSupport
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(R) Answer Engine
Primus Answer Engine enables companies that want to leverage existing
enterprise content, including websites, technical documentation and user
manuals, to provide the first line of customer service. Customers can quickly
get relevant answers from more than 225 types of files, including Adobe PDF,
Adobe Frame Maker, HTML, Microsoft Word, Microsoft PowerPoint, Microsoft Excel,
and more. Primus Answer Engine uses natural language processing (NLP) to
analyze the meaning and context of the customer's question and provides
specific answers from enterprise content. Used in conjunction with Primus
eServer, customers can accelerate the creation of a knowledge base to more
effectively share information across the enterprise. Primus Answer Engine also
provides detailed reports to identify frequently requested documents, and
information that needs to be updated or created within the organization.
Primus(R) Interchange
Primus Interchange is an open-interface, auto-response application that
integrates with existing email management systems. This application delivers
automatic, knowledge-enabled responses to user inquiries via
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email, chat, and collaboration. With Primus Interchange, customers have fast
access to answers, and organizations have an efficient and cost-effective means
to respond to customer inquiries.
Product license revenues and related service revenues from our Primus
eServer and Primus eSupport products accounted for over 90% of our total
revenues for the three year period ended December 31, 2001, and we expect these
products to continue to account for a substantial portion of our revenues for
2002.
Product Architecture
Our products use a multi-tiered architecture to meet the knowledge-enabled
needs of 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 Microsoft Windows NT, Microsoft Windows 2000
or Sun Solaris UNIX systems in single-or multi-processor configurations. Our
client software runs in a fully customizable interface accessed through a web
browser. We currently support IBM DB-2, Microsoft SQL Server, Oracle and
Versant databases.
Primus Answer Engine software runs on Windows systems in single- or
multi-processor configurations. We integrate with leading search engines,
including those from AltaVista, Verity, and RetrievalWare. Primus(R) Answer
Engine complements the keyword search capabilities of these products with its
ability to provide direct answers to natural language questions.
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 in our support and services organization in the past
and plan to continue to do so in the future.
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 may install, integrate and implement our software
in the user's environment.
Training. We provide training in conjunction with our products, including
end-user training and advanced technical training regarding the implementation
and administration of our products. Training is offered to customers and
third-party partners, such as service providers and systems integrators.
Customer Support. We recognize the importance of product support and
quality service to the success of our customers by offering world wide
technical product support to ensure quick response and resolution of their
issues. Our customers can contact our support engineers via telephone, fax, and
email 7 days a week, 24 hours per day. The use of our eServer product by our
support engineers facilitates the quick, accurate resolution of those issues.
In addition, thru the implementation of our eSupport and Answer Engine products
we allow our customers direct, Internet-based access to a robust and collective
solution database for their self service needs.
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Customers
Initially, our 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, 2001,
we had licensed our solutions to approximately 200 companies worldwide. A
sample, but not inclusive, list of our customers and their respective
industries is as follows:
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IT-Software Agile Software Attachmate
BCC Software Concerto Software
Hyperion Solutions Intuit
Microsoft Netscreen Technologies
Novell VeriSign
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IT-Hardware 3Com Brocade Communications
Systems
Compaq EMC
Enterasys Networks Hewlett-Packard
Hitachi Data Systems IBM
Silicon Graphics Storage Technology
- -------------------------------------------------------------------------------
IT Services Acxiom BellTech.logix
ClientLogic CompuCom Systems
Digital Island (UK) International Computers
Limited
Origin Outtask.com
Saba Turin Networks
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Telecommunications Affinity Wireless Cable & Wireless
Ericsson KPN Telecom
Lucent Technologies Motorola
Nokia Mobile Phones Nortel Networks
Southwestern Bell Sprint
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Manufacturing Caterpillar 3M
Rockwell Electronic BMW
Commerce
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Other Aradigm Capita Business Services
CGU Life Cinergy Services
City of Edmonton Danka Office Imaging
Oce Printing Systems Safeco Insurance
Shell Services Sony Online Entertainment
International
Starbucks Telfort
Teradyne The Boeing Company
Washington Software Xerox
Alliance
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Primus KK Customers Fujitsu Limited Fujitsu Chubu Systems
Limited
Mitsubishi Electric Mitsubishi Electric
Corporation Information Technology
Corporation
NEC Corporation Osaka Gas Information
NTT Software Corporation System Research
Institute Co., Ltd.
PIONEER Corporation SonyLife Insurance Co.,
Ltd.
Sony Information System Toshiba Information
Solutions Corporation Systems (Japan)
Corporation
Trans Cosmos, Inc.
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Sales and Marketing
We market and sell our products primarily through a direct sales force. Our
sales strategy is to pursue targeted accounts through a combination of our
direct sales force and strategic relationships with third parties. Our field
sales force, which includes both sales representatives and sales engineers, is
organized into regional teams, complemented by direct telesales based at our
headquarters in Seattle. We have sales offices in the United States, the United
Kingdom and France. Our international sales constituted 23% of our 2001
revenue, 20% of our 2000 revenue, and 16% of our 1999 revenue.
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.
Our software is marketed, distributed and supported in Japan by Primus
Knowledge Solutions, K.K. (Primus KK), a joint venture owned by Trans Cosmos,
Inc. and us. Our relationship with Primus KK is described in this Item under
the subheading "Joint Venture and Subsidiaries."
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.
Our development efforts are essential for us to remain competitive. Costs
related to product development are among our single greatest operating
expenses. For a complete description of our development-related expenses, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Operating Expenses."
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
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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 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 e-mail management,
support, knowledge management, and web-based customer self-service and assisted
service. We also face competition from in-house designed products and
third-party custom development efforts.
In addition, competition may increase as a result of software industry
consolidations and formations of alliances among industry participants or with
third parties. Some current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources, and thus may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many current and
potential competitors have wider name recognition and more extensive customer
bases. They might be able to undertake more extensive promotional activities,
adopt more aggressive pricing strategies, and offer purchasers more attractive
terms. Some of the companies providing e-commerce and traditional customer
relationship management solutions that may compete with us include
Amdocs/Clarify, Autonomy, eGain, Kana, Oracle, Peoplesoft, Right Now
Technologies, ServiceWare and Siebel. Competitors to our Primus Answer Engine
product offerings may include Answerfriend, Ask Jeeves and Kanisa.
The principal competitive factors in our industry include:
. vendor and product reputation
. the availability of products on the Internet and multiple operating
platforms
. measurable economic return on investment
. customer referenceability
. product quality, performance and price
. breadth of product functionality and features
. product scalability
. product ease-of-use
. the quality of customer support services, documentation and training
. the quality, speed and effectiveness of application development services
. the effectiveness of sales and marketing efforts
. product integration with other enterprise applications
. breadth of product application suite
As the market for CRM and knowledge management 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.
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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.
Joint Venture and Subsidiaries
Primus Knowledge Solutions, K.K.
Primus software is marketed, distributed and supported in Japan by Primus
Knowledge Solutions, K.K. ("Primus KK"), a joint venture in which we hold a
19.6% minority interest. Trans Cosmos, Inc., Japan's oldest and largest
outsourced customer service and information technology support solutions
provider, holds the remaining 80.4% of Primus KK. Trans Cosmos currently holds
approximately 10% of our common stock. Our distribution arrangements provide
Primus KK with exclusive rights to the Japanese and English versions of our
Primus(R) eServer and Primus(R) eSupport products in Japan, and nonexclusive
distribution rights for these products in Korea, China and Hong Kong. The
distribution arrangement continues until terminated by mutual agreement or, if
Primus KK has not completed the listing of its common stock on a recognized
public stock exchange by December 31, 2004 or if certain performance goals are
not met, its expiration on March 31, 2006. The distribution agreement provides
for sublicense fees based on a percentage of list prices. Sublicense fees are
generally recognized upon delivery of software if pervasive evidence of an
arrangement between Primus KK and their customer exists, collection is
probable, the fee is fixed or determinable and vendor-specific objective
evidence for all undelivered elements exists. Primus' agreement with Primus KK
does not contain product return rights. Revenues recognized under the reseller
agreement totals approximately $3,134,000, $2,609,000, and $1,353,000 in 2001,
2000 and 1999, respectively, and revenue deferred at December 31, 2001 and 2000
was approximately $353,000 and $401,000, respectively, and accounts receivable
at December 31, 2001 and 2000 were approximately $326,000 and $862,000,
respectively. Primus KK is accounted for using the cost method, as management
believes it does not have significant influence over its operations, has not
guaranteed any of its obligations and does not have any commitment or intent to
provide any funding. The carrying value of Primus KK is zero at December 31,
2001 and 2000.
European Subsidiaries
Primus Knowledge Solutions (UK) Limited and Primus Knowledge Solutions
France are wholly-owned Primus subsidiaries conducting sales and marketing
activities for Primus in Europe. The assets, liabilities and results of
operations of these subsidiaries are consolidated into our financial statements.
AnswerLogic, Inc.
AnswerLogic, Inc. is a wholly-owned Primus subsidiary holding the technology
assets arising from our subsidiary merger with Answerlogic, Inc. on May 31,
2001. This subsidiary's assets, liabilities and results of operations are
consolidated into our financial statements.
Imparto Software Corporation and 2order.com, Inc.
Imparto Software Corporation and 2order.com, Inc. are two inactive,
wholly-owned subsidiaries which resulted from subsidiary mergers prior to 2001.
The assets, liabilities and results of operations of these inactive
subsidiaries, if any, are consolidated into our financial statements.
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We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Further, we have not guaranteed any obligations of
unconsolidated entities nor do we have any commitment or intent to provide any
funding to any such entity. As such, we are not exposed to any market, credit,
liquidity or financing risk that could arise if we had engaged in such
relationships.
Employees
As of December 31, 2001, we had 200 employees, including 19 European-based
employees. These included 64 in sales and marketing, 40 in client services and
support, 71 in product development and 25 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 occasionally 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.
Recent Acquisitions and Dispositions
On May 31, 2001, we acquired AnswerLogic, Inc. (AnswerLogic). AnswerLogic's
technology provides us with natural language capabilities that are a logical
extension to our product suite. These new capabilities allow our customers to
provide direct answers to customer questions from unstructured data
sources--HTML, PDF and text formats--as well as structured information
contained in the Primus knowledgebase. We have included AnswerLogic's operating
results in our consolidated operating results beginning on June 1, 2001.
During the third quarter of 2001, we discontinued funding future product
development for 2order.com, Inc., a wholly owned subsidiary. On September 29,
2001, 2order.com, Inc. sold the intellectual property associated with the
current shipping versions of the Primus eSales product line and certain other
assets to its leading reseller. As a result of this transaction, our reseller
rights for the eSales product line were cancelled. The gain on the disposal of
substantially all of the 2order.com, Inc. assets was recorded as an
extraordinary gain in our consolidated financial statements, since the disposed
assets were acquired in an acquisition accounted for using the
pooling-of-interests method of accounting and were disposed of within two years
of the business combination.
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, 2002 are as follows:
Name Age Position
---- --- --------
Michael A. Brochu 48 President, Chief Executive Officer and Chairman of the Board...
Ronald M. Stevens 38 Executive Vice President, Chief Financial Officer and Treasurer
Michael A. Brochu has served as our President, Chief Executive Officer and
Chairman of the Board 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.
12
Ronald M. Stevens has served as our Chief Financial Officer, Executive 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.
Risks Associated with Our Business and Future Operating Results
Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future, and an investment
in our common stock is subject to a variety of risks, including but not limited
to the specific risks identified below. The risks described below are not the
only risks facing our company. Additional risks and uncertainties not presently
known to us, or that we currently deem immaterial, may impair our business
operations. Prospective and existing investors are strongly urged to carefully
consider the various cautionary statements and risks set forth in this report
and our other public filings. 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 a history of losses and may not be profitable in the future and may
not be able to generate sufficient revenue or funding to continue as a going
concern.
Since we began operations our revenues have not been sufficient to support
our operations, and we have incurred substantial operating losses in every
quarter. As of December 31, 2001, our accumulated deficit was approximately $89
million. Our history of losses has caused some of our potential customers to
question our viability and hampered our ability to sell some of our products.
Our revenue has been affected by the increasingly uncertain economic conditions
both generally and in our market. Although our revenues grew significantly in
2000, we have experienced a significant decline in sales over the twelve months
ended December 31, 2001. Although we have restructured our operations to reduce
operating expenses, we will need to significantly increase our revenue and/or
further reduce our operating expenses to achieve profitability and positive
cash flows from operations, and our revenue may decline, or fail to grow, in
future periods. Our expectations as to when we can achieve positive cash flows
from operations, and as to our future cash balances, are subject to a number of
assumptions, including assumptions regarding improvements in general economic
conditions and customer purchasing and payment patterns, many of which are
beyond our control. In addition we may require additional financing, which
might not be available on acceptable terms, if at all.
As a result of uncertainties in our business and the general economic
slowdown, we have experienced and expect to continue to experience difficulties
in collecting outstanding receivables from our customers and attracting new
customers. As a result, we may continue to experience losses, even if sales of
our products and services grow.
Quarterly fluctuations in our operating results may adversely affect our
stock price.
Fluctuations in our operating results, particularly compared to the
expectations of investors or market analysts, could cause severe volatility in
the price of our common stock. Our revenues and operating results have
fluctuated substantially from quarter to quarter and are likely to continue to
do so in the future. Our quarterly revenues and operating results are difficult
to predict and may fluctuate significantly from quarter to quarter particularly
because our products and services are relatively new and our prospects are
uncertain. We believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely on these comparisons as
an indication of our future performance. We will continue to base our decisions
regarding operating expenses on anticipated revenue trends. Therefore, to the
extent our actual revenues fall short of our expectations, our operating
results will suffer and our stock price will likely decline. If quarterly
revenues or operating results fall below the expectations of investors or
market analysts, the price of our common stock could
13
decline substantially. Factors that might cause quarterly fluctuations in our
operating results include the factors described under the subheadings of this
"Risks Associated with Primus' Business and Future Operating Results" section
as well as:
. general economic conditions that adversely affect our customers' capital
investment levels in CRM and knowledge management systems
. the evolving and varying demand for our software products and services
. budget and spending decisions by information technology departments of
our customers
. order deferrals in anticipation of new products or product enhancements
introduced by our competitors or us
. our ability to manage our expenses
. the timing of new releases of our products
. changes in our pricing policies or those of our competitors
. the timing of execution of large contracts that materially affect our
operating results
. uncertainty regarding the timing of delivery of our products
. changes in the level of sales of professional services as compared to
product licenses
. the mix of sales channels through which our products and services are
sold
. the mix of our domestic and international sales
. costs related to the customization of our products
. our ability to expand our operations, and the amount and timing of
expenditures related to this expansion
. decisions by customers and potential customers to delay purchasing of
our products
. a trend of continuing consolidation in our industry
. global economic and political conditions, as well as those specific to
our customers or our industry
Due to the slowdown in the national and global economy and the uncertainties
resulting from recent acts of terrorism, we believe that many existing and
potential customers are reducing or reassessing their planned technology and
Internet-related investments and deferring purchasing decisions. As a result,
there is increased uncertainty with respect to our expected revenues, and
further delays or reductions in business spending for information technology
could have a material adverse effect on our revenues, operating results and
stock price.
Our expenses are generally fixed and we will not be able to reduce these
expenses quickly if we fail to meet our revenue forecasts.
Most of our expenses, such as employee compensation and rent, are relatively
fixed in the short term. Moreover, our budget is based, in part, on our
expectations regarding future revenue levels. As a result, if total revenues
for a particular quarter are below expectations, we could not proportionately
reduce operating expenses for that quarter. Accordingly, such a revenue
shortfall would have a disproportionate effect on our expected operating
results for that quarter.
14
Our continued Nasdaq National Market listing is not assured, which could make
it more difficult to raise capital and which could result in a default under
our convertible notes.
Our common stock is presently authorized for quotation on the Nasdaq
National Market. We remain subject to all requirements of our listing agreement
with The Nasdaq Stock Market, Inc. (Nasdaq). Among the events which could cause
us to have our status as a Nasdaq National Market issuer terminated are:
. failure to maintain a minimum bid price for the common stock of either
$1.00 per share or $5.00 per share, depending on, among other things,
whether or not tangible net assets for the company are greater than or
less than $4 million;
. failure to maintain an audit committee which comports to the
independence and other standards of the Nasdaq and the U.S. Securities
and Exchange Commission (SEC); and
. failure to timely hold annual meetings of stockholders and comply with
other corporate governance requirements.
Our common stock has at times been trading below the $1.00 minimum bid
requirement, which could lead to Nasdaq initiating delisting procedures at any
time. Our failure to maintain a sufficient number of independent directors on
the board of directors to satisfy Nasdaq's audit committee requirements could
also lead to Nasdaq initiating delisting procedures.
If we lose our Nasdaq National Market status, our common stock would trade
either as a Nasdaq Small Cap issue or in the over-the-counter market, both of
which are viewed by most investors as less desirable, less liquid marketplaces.
Among other things, our common stock would then constitute "penny stock," which
would place increased regulatory burden upon brokers, making them less likely
to make a market in the stock. Loss of our Nasdaq National Market status could
make it more difficult for us to raise capital or complete acquisitions and
would also complicate compliance with state blue sky laws.
We may incur non-cash charges resulting from acquisitions, which could harm
our operating results.
A new standard for accounting for goodwill acquired in a business
combination has recently been adopted. This new standard requires recognition
of goodwill as an asset but does not permit amortization of goodwill. Instead
goodwill must be separately tested for impairment. As a result, our goodwill
amortization charges will cease in 2002 and we believe that we will incur a
transitional impairment loss as a result of the adoption of this new standard,
which will be required to be recognized on January 1, 2002 as the cumulative
effect of a change in accounting principle of approximately $2.3 million.
In the future, we may incur less frequent, but potentially larger,
impairment charges related to goodwill arising out of future acquisitions, if
any. Current and future accounting charges like these could delay our
achievement of net income.
Our quarterly operating results may depend on a small number of large orders.
We may 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 forecasted for
that quarter. Additionally, we also often offer volume-based pricing, which may
affect operating margins.
Factors outside our control may cause the timing of our license revenues to
vary from quarter-to-quarter, possibly adversely affecting our operating
results.
Applicable accounting policies may cause us to report new license agreements
as deferred revenue. We generally recognize revenue from a customer sale when
persuasive evidence of an agreement exists, the product has been delivered, the
arrangement does not involve significant customization of the software, the
license fee is fixed or determinable and collection of the fee is probable. If
an arrangement requires acceptance testing or
15
significant customization services from Primus, recognition of the associated
license and service revenue could be delayed. The timing of the commencement
and completion of the these services is subject to factors that may be beyond
our control, as this process may require access to the customer's facilities
and coordination with the customer's personnel after delivery of the software.
In addition, customers could delay product implementations. Implementation
typically involves working with sophisticated software, computing and
communications systems. If we experience difficulties with implementation or do
not meet project milestones in a timely manner, we could be obligated to devote
more customer support, engineering and other resources to a particular project.
Some customers may also require us to develop customized features or
capabilities. If new or existing customers have difficulty deploying our
products or require significant amounts of our professional services support
for customized features, our revenue recognition could be further delayed and
our costs could increase, causing increased variability in our operating
results.
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 e-mail management,
support, knowledge management, and web-based customer self-service and assisted
service. We also face competition from in-house designed products and
third-party custom development efforts.
In addition, competition may increase as a result of software industry
consolidations and formations of alliances among industry participants or with
third parties. Some current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing, service,
support and other resources, and thus may be able to respond more quickly to
new or changing opportunities, technologies and customer requirements. Also,
many current and potential competitors have wider name recognition and more
extensive customer bases that they could leverage. They might be able to
undertake more extensive promotional activities, adopt more aggressive pricing
strategies, and offer purchasers more attractive terms. Some of the companies
providing e-commerce and traditional customer relationship management solutions
that may compete with us include Amdocs/Clarify, Autonomy, eGain, Kana, Oracle,
Peoplesoft, Right Now Technologies, ServiceWare and Siebel. Competitors to our
Primus Answer Engine product offerings may include Answerfriend, Ask Jeeves and
Kanisa.
The principal competitive factors in our industry include:
. vendor and product reputation
. the availability of products on the Internet and multiple operating
platforms
. measurable economic return on investment
. ability to use customers as references
. product quality, performance and price
. breadth of product functionality and features
. product scalability
. product ease-of-use
. the quality of customer support services, documentation and training
. the quality, speed and effectiveness of application development services
. the effectiveness of sales and marketing efforts
. product integration with other enterprise applications
. breadth of product application suite
16
As the market for CRM and knowledge management software matures, it is
possible that additional and possibly 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.
Seasonality may adversely affect our quarterly operating results.
We expect to experience seasonality in our revenue. To date, we believe that
other factors, such as large orders and the timing of personnel changes in our
sales staff, have masked seasonality. 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.
The limited sales history of our products makes it difficult to evaluate our
business and prospects.
We released our first knowledge-enabling software product during the first
quarter of 1995. 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 eBusiness 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 eBusiness solutions. These products address a new and emerging
market for eBusiness 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 eBusiness 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 service revenues from our Primus
eServer and Primus eSupport products accounted for over 90% of our total
revenues for the three year period ended December 31, 2001, and we expect these
products to continue to account for a substantial portion of our revenues for
2002. 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,
operating results and value of our stock price. Our future financial
performance will substantially depend on our ability to sell current versions
of our entire suite of products, including products based on the technology
acquired from AnswerLogic, and our ability to develop and sell enhanced
versions of our products.
We may not be able to forecast revenues accurately because our products have
a long and variable sales cycle.
To date, the typical sales cycles for our products have taken 3 to 12
months. The length of our sales cycles may cause license revenue and operating
results to vary significantly from period to period. Our sales cycles have
required pre-purchase evaluation by a significant number of individuals in our
customers' organizations. Along with third parties that jointly market our
software, we invest significant amounts of time and resources educating and
providing information to prospective customers regarding the use and benefits
of our products. Many of our
17
customers evaluate our software deliberately, depending on their specific
technical capabilities, the size of the deployment, the complexity of their
network environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy our products. In the event that the current
national and global economic downturn were to continue, the sales cycle for our
products may become longer and we may require more time and resources to
complete sales.
We depend on increased business from new customers, and if we fail to grow
our customer base or generate repeat business, our operating results could be
harmed.
Our business model generally depends on the sale of our products to new
customers as well as on expanded use of our products within our existing
customers' organizations. If we fail to grow our customer base or generate
repeat and expanded business from our current and future customers, our
business and operating results will be seriously harmed. In some cases, our
customers initially make a limited purchase of our products and services for
pilot programs. These customers may not purchase additional licenses to expand
their use of our products. If these customers do not successfully develop and
deploy initial applications based on our products, they may choose not to
purchase deployment licenses or additional development licenses.
In addition, as we introduce new versions of our products or new products,
our current customers might not require the functionality of our new products
and might not ultimately license these products. Because the total amount of
maintenance and support fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold, any downturn in
our software license revenue would negatively affect our future services
revenue. In addition, if customers elect not to renew their maintenance
agreements, our services revenue could decline significantly. Further, some of
our customers are telecom or information technology companies, which have been
forced to significantly reduce their operations in light of limited access to
sources of financing and the current national and global economic slowdown. If
customers are unable to pay for their current products or are unwilling to
purchase additional products, our revenues will decline and this will likely
materially impact adversely our revenue, operating results and stock price.
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 somewhat dependent upon a
current database. If customer-support personnel do not adopt and effectively
use our Primus eServer and Primus eSupport 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 Primus eServer and Primus eSupport software to our users will be
impaired. Successful deployment and broad acceptance of our Primus eServer and
Primus eSupport products will depend in part on the quality of the users'
existing database of solutions, which is outside our control.
The loss of access to, or a problem with, third party databases could
adversely affect our business.
Historically, we incorporated a database licensed from Versant into certain
of our products. Presently, our products support IBM DB-2, Microsoft SQL
Server, Oracle and Versant databases. Because many of the products we have
shipped historically rely on these databases, we continue to depend on these
companies to support the databases 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, manage and retain additional sales and marketing personnel and
to expand our indirect distribution channels. We may experience difficulty in
recruiting qualified sales and marketing personnel or in establishing
third-party relationships. We may not be able to successfully
18
expand our direct sales force or other distribution channels and any such
expansion may not result in increased revenues. Our business, financial
condition, operating results and stock price may 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 an
agreement for a particularly large or complex implementation, our customer
support and professional services personnel may be unable to meet the demand
for 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 support services related
to our products.
Our workforce reduction and financial performance may adversely affect the
morale and performance of our personnel and our ability to hire new personnel.
In connection with our effort to streamline operations, and reduce costs, we
have engaged in recent restructuring of our organization with substantial
reductions in our workforce. There have been and may continue to be substantial
costs associated with this or other workforce reductions related to severance
and other employee-related costs, and our restructuring plans may yield
unanticipated consequences, such as attrition beyond our planned reductions in
workforce. As a result of these reductions, our ability to respond to
unexpected challenges may be impaired and we may be unable to take advantage of
new opportunities.
In addition, many of the employees who were terminated possessed specific
knowledge or expertise that may prove to be important to our operations. In
that case, their absence may create significant difficulties. Personnel
reductions may also subject us to the risk of litigation, which may adversely
impact our ability to conduct our operations and may cause us to incur
significant expense.
Our failure to attract and retain skilled technical personnel may adversely
affect our product development, sales and customer satisfaction.
Our recent reductions in force may affect employee morale and may create
concern among existing employees about job security, which may lead to
increased turnover and reduce our ability to meet the needs of our current and
future customers. As a result of the reduction in force, we may need to hire to
accommodate attrition, growth in specific customer needs and acquire new skill
sets. We may be unable to hire and/or retain the skilled personnel necessary to
develop and grow our business. Although a number of technology companies have
recently implemented staff reductions, there remains substantial competition
for experienced personnel, particularly in the greater Seattle area, where we
are headquartered, due to the limited number of people available with the
necessary technical skills.
Because our stock price has suffered a significant decline, stock-based
compensation, including options to purchase our common stock, may have
diminished effectiveness as employee hiring and retention devices. If employee
turnover increases, our ability to provide client service and execute our
strategy would be negatively affected. We may also face difficulties in hiring
and retaining qualified sales personnel to sell our products and services,
which could impair our revenue growth.
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 and technical staff. 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.
19
We may face difficulties in hiring and retaining qualified sales personnel to
sell our products and services, which could impair our revenue growth.
Our ability to increase revenues in the future depends considerably upon our
success in recruiting, training, managing and retaining additional direct sales
personnel and the success of the direct sales force. We might not be successful
in these efforts. Our products and services require sophisticated sales
backgrounds. There is a shortage of sales personnel with the qualifications and
experience, and competition for qualified personnel is intense in our industry.
Also, it may take a new salesperson a number of months to become a productive
member of our sales force. Our business will be harmed if we fail to hire or
retain qualified sales personnel, or if newly hired salespeople fail to develop
the necessary sales skills or develop these skills more slowly than anticipated.
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 other intangible assets
. incur future goodwill impairment charges
. restructure our business
These difficulties could disrupt our ongoing business, divert management
resources and/or increase our expenses.
Conversely, we may believe that we need to acquire additional businesses,
products and technologies to remain competitive, however we may be unable to
complete the acquisition due to constrained financial resources.
If we do not integrate acquired technology quickly and effectively, many of
the potential benefits of any acquisition may not be realized.
From time to time, we evaluate various acquisition opportunities and if we
successfully complete any such acquisition transaction, we cannot assure you
that we will be able to integrate the acquired technology quickly and
effectively. In order to obtain the certain benefits of any such acquisition,
the acquired technology, products and services need to operate together with
our technology, products and services. We may be required to spend additional
time or money on integration, which would otherwise be spent on developing our
business and services or other matters. If we do not integrate the technologies
effectively or if management and technical staff spend too much time on
integration issues, it could harm our business, financial condition and results
of operations, which may adversely affect our stock price. In addition, the
success of any such acquisition may also depend on our ability to successfully
integrate and manage the acquired operations and retain or replace the key
employees of the acquired business.
Our international operations are subject to additional risks.
Revenues from customers outside the United States represented approximately
$6.4 million, or 23% of our total revenues for the year ended December 31,
2001. We currently customize our products for select foreign markets. In the
future, we plan to develop additional localized versions of our products and
localization of our
20
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
. investing at appropriate levels in foreign operations to compete
effectively
. political and economic instability
Our international operations also face foreign-currency-related risks. To
date, substantially all of our revenues have been denominated in U.S. dollars,
but we believe that in the future, an increasing portion of our revenues may be
denominated in foreign currencies, including the Euro, British Pound and Yen.
Fluctuations in the value of foreign currencies may cause further volatility in
our operating results, reduce the accuracy of our financial forecasts and could
have a material adverse effect on our business, operating results and financial
condition.
Fluctuations in the market value of our short-term investments and in
interest rates may affect our operating results.
For additional information regarding the sensitivity of and risks associated
with the market value of short-term investments and interest rates, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this Report.
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
Amdocs/Clarify, Kana, Onyx, Oracle, Peoplesoft, Peregrine Systems/Remedy,
Siebel and others. Currently, these vendors have open applications program
interfaces, which facilitate our ability to integrate with their systems. These
vendors have also been open to licensing us rights to use their development
tools to build integrations to their products. If any one of them should close
their programs' interface, fail to grant us necessary licenses 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.
21
Failure to successfully develop versions and updates of our products that run
on the operating systems used by our current and prospective customers could
reduce our sales.
Many of our products run on the Microsoft Windows NT, Microsoft Windows 2000
or certain versions of the Sun Solaris Unix operating systems, and some require
the use of third party software. Any change to our customers' operating systems
could require us to modify our products and could cause us to delay product
releases. In addition, any decline in the market acceptance of these operating
systems we support may force us to ensure that all of our products and services
are compatible with other operating systems to meet the demands of our
customers. If potential customers do not want to use the Microsoft or Sun
Solaris operating systems we support, we will need to develop more products
that run on other operating systems adopted by our customers. If we cannot
successfully develop these products in response to customer demands, our
business could be adversely impacted. The development of new products in
response to these risks would require us to commit a substantial investment of
resources, and we might not be able to develop or introduce new products on a
timely or cost-effective basis, or at all, which could lead potential customers
to choose alternative products.
We rely on software licensed to us by third parties for features we include
in our solutions.
We incorporate software licensed from third parties into our solutions. As
we develop enhanced versions of our software, some of the additional
functionality and capabilities of our solutions may be a result of additional
third party applications. A significant interruption in the availability of any
of the licensed third-party software could adversely affect our sales, unless
and until we can replace this software with other software that performs
similar functions. Because our solutions incorporate software developed and
maintained by third parties, we depend on these third parties' abilities to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. If third-party software
offered now or in the future in conjunction with our solutions becomes obsolete
or incompatible with future versions of our solutions, we may not be able to
continue to offer some of the features we presently include in our solutions
unless we can license alternative software or develop the features ourselves.
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
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. We are currently subject to a securities
class action and the volatility of our stock price could make us a target for
additional suits. Securities class action litigation could result in
substantial costs and a diversion of our management's attention and resources.
See the discussion of the Company's pending legal matters in Item 3 "Legal
Proceedings." Volatility in our stock price could make it more difficult for us
to raise capital or complete acquisitions on favorable terms.
22
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 customers, consultants and vendors.
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 such confidentiality agreements and other protective
contracts. We may not become aware of, or have adequate remedies in the event
of, such breaches.
We pursue the registration of some of our trademarks and service marks in
the United States and in certain other countries, but we have not secured
registration of all our marks. Significant portions 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 are found to 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 potentially 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. If a party succeeded in making such a claim we could be liable for
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, operating results and stock price. Also see the discussion of our
pending legal matters in Item 3, "Legal Proceedings."
Product liability claims by our customers could result in unexpected costs
and damage to Primus' reputation.
Our license agreements with customers generally contain provisions designed
to limit our exposure to potential product liability claims, such as
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages. In addition, our license agreements
generally cap the amounts recoverable for damages to the amounts paid by the
licensee to Primus for the product or services giving rise to the damages.
However, these contractual limitations on liability may not be enforceable and
we may be subject to claims based on errors in its software or mistakes in
performing its services including claims relating to damages to our customers'
internal systems. A product liability claim, whether or not successful, could
harm our business by increasing our costs, damaging our reputation and
diverting management's attention and resources to defend any such claim, which
could materially and adversely affect our financial condition, our results of
operations and our stock price.
23
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 23% 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.
Specific provisions of our articles of incorporation and bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders.
Our articles of incorporation and bylaws establish a classified board of
directors, eliminate the ability of shareholders to call special meetings,
eliminate cumulative voting for directors and establish procedures for advance
notification of shareholder proposals. The presence of a classified board and
the elimination of cumulative voting may make it more difficult for an acquirer
to replace our board of directors. Further, the elimination of cumulative
voting substantially reduces the ability of minority shareholders to obtain
representation on the board of directors.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by our shareholders. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change of control of Primus and
may adversely affect the market price of the common stock and the voting and
other rights of the holders of common stock.
Washington law imposes restrictions on some transactions between a
corporation and significant shareholders. Chapter 23B.19 of the Washington
Business Corporation Act prohibits a target corporation, with some exceptions,
from engaging in particular significant business transactions with an acquiring
person, which is defined as a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation, for a period of
five years after the acquisition, unless the transaction or acquisition of
shares is approved by a majority of the members of the target corporation's
board of directors prior to the acquisition. Prohibited transactions include,
among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person
. termination of 5% or more of the employees of the target corporation
. allowing the acquiring person to receive any disproportionate benefit as
a shareholder
A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of Primus. The
foregoing provisions of our charter documents and Washington law could have the
effect of making it more difficult or more expensive for a third party to
acquire, or could discourage a third party from attempting to acquire Primus.
These provisions may therefore have the effect of limiting the price that
investors might be willing to pay in the future of our common stock.
24
Security breaches or equipment failure could damage our reputation and deter
customers from using our services.
We must protect our computer systems and networks from physical break-ins,
security breaches and other events such as electrical disruptions, equipment
failure, and fire and water damage. Computer break-ins could jeopardize the
security of information stored in and transmitted through our computer systems
and network, which could adversely affect our ability to retain or attract
customers, damage our reputation and subject us to litigation. We could be
subject to denial of service, vandalism and other attacks on our computer
systems by individuals with malicious intentions. Although we intend to
continue to implement security technology and establish operational procedures
to prevent break-ins, damage and failures, these security measures may fail.
Our insurance coverage in certain circumstances may be insufficient to cover
losses that may result from such events.
Future taxation or regulation of the Internet may slow our growth, resulting
in decreased demand for our products and services and increased costs of
doing business.
Local, state, federal and foreign regulators could adopt additional laws and
regulations that impose additional costs or other burdens on those companies
that conduct business online. These laws and regulations could discourage
web-based communications and customer self-service, which could reduce demand
for our products and services.
The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws for law that may inhibit the
use of Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. The imposition of taxes or other charges would
likewise deter the use of the Internet. A decline in the growth of the
Internet, particularly as it relates to online communication and customer
self-service, could decrease demand for our products and services and increase
our costs of doing business, or otherwise harm our business. Any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could harm our growth and increase our costs, which could materially
and adversely affect our financial condition, results of operations and our
stock price.
Changes in accounting standards could affect the calculation of our future
operating results.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, which requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The amortization of goodwill
ceases upon the required adoption date of the Statement, which for calendar
year-end companies was January 1, 2002. As of January 1, 2002, the Company has
unamortized goodwill of approximately $2.3 million subject to the transition
provisions of SFAS No. 142. The Company believes that a transitional impairment
loss as a result of the adoption of SFAS No. 142 will be required to be
recognized as the cumulative effect of a change in accounting principle of
approximately $2.3 million, as the implied fair value of the goodwill as of the
date of adoption was zero.
In the future, we may incur less frequent, but potentially larger,
impairment charges related to goodwill arising out of future acquisitions, if
any. Current and future accounting charges like these could delay our
achievement of net income.
Terrorists attacks such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001 and other attacks or acts of war may
adversely affect the markets on which our Common Stock trades, our financial
condition and our results of operations.
On September 11, 2001, the United States was the target of terrorist attacks
of unprecedented scope. These attacks have caused major instability in the U.S.
and other financial markets. There could be further acts of terrorism in the
United States or elsewhere that could have a similar impact. Leaders of the
U.S. government have announced their intention to actively pursue and take
military and other action against those behind the
25
September 11, 2001 attacks and to initiate broader action against national and
global terrorism. Armed hostilities or further acts of terrorism would cause
further instability in financial markets and could directly impact our
financial condition and our results of operations.
Certain of our facilities are located near known earthquake fault zones, and
the occurrence of an earthquake or other catastrophic disaster could cause
damage to our facilities and equipment, which could require us to cease or
curtail operations.
Our principal facilities are located in Seattle, Washington and are
vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our principal facilities would be seriously, or
potentially completely, impaired. In addition, the unique nature of our
research activities could cause significant delays in our programs and make it
difficult for us to recover from a disaster. The insurance we maintain may not
be adequate to cover our losses resulting from disasters or other business
interruptions. Accordingly, an earthquake or other disaster could materially
and adversely harm our ability to conduct business.
You should not unduly rely on forward-looking statements because they are
inherently uncertain.
You should not rely on forward-looking statements in this Report. 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 Report. The
forward-looking statements contained in this Report 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 Report and in our
other reports and documents on file with the U.S. Securities and Exchange
Commission.
ITEM 2. PROPERTIES
We lease principal administrative, engineering, manufacturing, marketing and
sales facilities consisting of approximately 33,000 square feet in an office
tower in Seattle, WA. The lease for this space extends to October 31, 2005. We
also lease other domestic sales and services offices in Atlanta, GA, Boston,
MA, Clifton Park, NY, Dayton, OH and Dallas, TX, as well as a location in
Washington, DC primarily dedicated to engineering. The hub of our European
Operations is located in the United Kingdom with an additional sales offices in
Paris, France. 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
The Company, an officer, former officer and FleetBoston Robertson Stephens,
Inc., J.P. Morgan Securities Inc., U.S. Bancorp Piper Jaffray Inc., CIBC World
Markets, Dain Rauscher, Inc. and Salomon Smith Barney Holdings Inc., the
underwriters of our initial public offering, have been named as defendants in
an action filed during December 2001 in the United States District Court for
the Southern District of New York on behalf of persons who purchased Primus
common stock during the period from June 30, 1999 through December 6, 2000,
which was issued pursuant to the June 30, 1999 registration statement and
prospectus for the Company's initial public offering. The complaint alleges
that the Company and the individual defendants violated the Securities Act of
1933 by failing to disclose excessive commissions allegedly obtained by the
Company's underwriters pursuant to a secret arrangement whereby the
underwriters allocated IPO shares to certain investors in exchange for the
excessive commissions, referred to as laddering. The complaint also asserts
claims against the underwriters under the 1933 Act and the Securities Exchange
Act of 1934 in connection with the allegedly
26
undisclosed commissions. The Company intends to vigorously defend itself and
its current and former officers against this action. The results of any
litigation matter are inherently uncertain and litigation frequently involves
substantial expenditures and can require significant management attention, even
if the Company ultimately prevails. Accordingly, we cannot provide assurances
that this action will not materially and adversely affect our business, our
results of operation or our stock price.
In January 2002, Mindfabric, Inc. served a complaint against Primus in the
United States District Court for the Northern District of California, which
alleges that aspects of our technology infringe one or more patents alleged to
be held by the plaintiff. We have answered the complaint, but discovery has not
yet begun. We intend to vigorously defend against the allegations asserted in
this complaint and we believe the claims are without merit. The results of any
litigation matter are inherently uncertain. In the event of an adverse result
in this action, or in any other litigation with third parties that could arise
in the future with respect to intellectual property rights relevant to our
products or services, we could be required to pay substantial damages,
including treble damages if we are held to have willfully infringed, to cease
the use of infringing products or services, to expend significant resources to
develop non-infringing technology or to attempt to obtain licenses to the
infringing technology on commercially reasonable terms, if at all. In addition,
litigation frequently involves substantial expenditures and can require
significant management attention, even if the Company ultimately prevails.
Accordingly, we cannot provide assurances that this action will not materially
and adversely affect our business, our results of operation or our stock price.
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.
27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Price of Common Stock
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 on June 30, 1999, 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 quotations
reflect inter-dealer prices and do not include retail markups, markdowns, or
commissions and may not necessarily represent actual transactions.
COMMON STOCK PRICE
Period High Low
------ ------- ------
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
January 1, 2001--March 31, 2001... $ 10.00 $ 3.13
April 1, 2001--June 30, 2001...... $ 5.98 $ 2.13
July 1, 2001--September 30, 2001.. $ 5.00 $ 0.77
October 1, 2001--December 31, 2001 $ 1.40 $ 0.61
The closing sale price of the common stock on December 31, 2001 was $0.84.
On March 15, 2002 the closing price reported on the Nasdaq National Market
System for the common stock was $1.52.
Holders of Common Stock
As of March 15, 2002, there were approximately 275 shareholders of record of
our common stock and 18,945,513 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note 6, "Financing
Arrangements," to our attached Consolidated Financial Statements.
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 our business. Pending such
uses, the net proceeds will be invested in investment-grade, interest-bearing
instruments, the majority of which are short-term.
28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data and other operating
information is 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,
-------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- ----------
(In thousands, except per share data)
Consolidated Statement of Operations Data (1):
Revenues......................................... $ 27,550 $ 47,669 $ 27,318 $ 12,219 $ 7,496
Cost of revenues................................. 8,107 10,892 7,725 4,653 3,212
Sales and marketing.............................. 19,812 27,653 19,180 12,537 5,716
Research and development......................... 12,636 14,669 10,177 5,957 3,577
General and administrative....................... 6,551 9,401 6,657 4,518 2,313
Amortization of goodwill......................... 550 -- -- -- --
Restructuring charges............................ 2,530 -- -- -- --
Merger related costs............................. -- 505 1,520 -- --
----------- ----------- ----------- ---------- ----------
Loss from operations.......................... (22,636) (15,451) (17,941) (15,446) (7,322)
Other income (expense), net.......................... 1,232 2,655 1,093 (52) 390
----------- ----------- ----------- ---------- ----------
Loss before income taxes and
extraordinary item........................... (21,404) (12,796) (16,848) (15,498) (6,932)
Income tax expense (benefit)......................... 417 217 267 (57) 34
----------- ----------- ----------- ---------- ----------
Loss before extraordinary item................ (21,821) (13,013) (17,115) (15,441) (6,966)
Extraordinary gain on disposal of assets...... 566 -- -- -- --
----------- ----------- ----------- ---------- ----------
Net loss...................................... $ (21,255) $ (13,013) $ (17,115) $ (15,441) $ (6,966)
=========== =========== =========== ========== ==========
Net loss available to common shareholders............ $ (21,255) $ (13,056) $ (18,234) $ (16,278) $ (7,339)
=========== =========== =========== ========== ==========
Basic and diluted net loss per common share (2):
Loss before extraordinary item................... $ (1.18) $ (0.74) $ (1.81) $ (3.49) $ (1.60)
Extraordinary gain on disposal of assets......... 0.03 -- -- -- --
----------- ----------- ----------- ---------- ----------
$ (1.15) $ (0.74) $ (1.81) $ (3.49) $ (1.60)
=========== =========== =========== ========== ==========
Shares used in computing basic and diluted net loss
per common share.................................... 18,551,628 17,705,757 10,081,183 4,668,404 4,594,113
December 31,
-----------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- -------- -------
(In thousands)
Consolidated Balance Sheet Data (1):
Cash, cash equivalents and short-term investments... $18,499 $39,959 $54,657 $ 10,541 $ 4,510
Working capital..................................... 14,288 34,398 44,538 4,981 1,337
Total assets........................................ 33,294 56,938 67,406 21,574 9,800
Total current liabilities........................... 11,263 17,091 19,591 13,141 6,815
Long-term debt, net of current portion.............. -- -- 60 1,265 551
Redeemable convertible preferred stock.............. -- -- 9,054 31,523 10,399
Shareholders' equity (deficit)...................... 22,031 39,847 38,701 (24,355) (7,966)
- --------
(1) Reflects restatement for pooling-of-interests business combination. See
Note 2 of Notes to Consolidated Financial Statements.
(2) For further discussion of loss per share see Note 1 of Notes to
Consolidated Financial Statements.
29
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 "Risks Associated
with our Business and Future Operating Results" in Part I of this Annual Report.
Overview
We provide application software that enables companies to deliver great
service by accessing, analyzing and improving information. Primus software
offers a significant measurable value to businesses by providing an
infrastructure that captures and shares knowledge, increasing the efficiency
and effectiveness of customer service. Primus software products can be
implemented as a suite or as individual products, depending on the customer's
preference and/or business need. Primus software is flexible and easily
implemented. Our solutions integrate with leading CRM applications, including
those from Amdocs/Clarify, Kana, Onyx, Oracle, Peregrine Systems/Remedy, and
Siebel. In addition to software applications, Primus offers professional
services to assist customers with software implementation, integration,
training and support.
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.
We market our software and services on a worldwide basis through our direct
sales organization in the United States and Europe. Primus KK, a Japanese joint
venture in which we hold a minority interest has exclusive distribution rights
to distribute our Primus eServer and Primus eSupport products in Japan. Our
international sales constituted 23% of our 2001 revenue, 20% of our 2000
revenue, and 16% of our 1999 revenue. We believe that international revenue, as
a percentage of our total revenue, will continue to fluctuate in the future. We
have not guaranteed any obligations of the joint venture nor do we have any
commitment or intent to provide any funding.
The Primus software suite consists of Primus eServer, Primus eSupport,
Primus Answer Engine and Primus Interchange. Product license revenues and
related services from Primus eServer and Primus eSupport products accounted for
over 90% of total revenues for the three year period ended December 31, 2001,
and we expect these products to continue to account for a substantial portion
of our revenues for 2002. 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 and adversely affect our business,
financial condition, operating results and stock price. Our future financial
performance will substantially depend on our ability to sell current versions
of our entire suite of products, including products based on the technology
acquired from AnswerLogic, and our ability to develop and sell enhanced
versions of our products.
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, 2001, had an
accumulated deficit of approximately
30
$89 million. We anticipate that our operating expenses will continue to be
substantial for the foreseeable future as we continue to invest in product
development, sales and marketing, finance, administration and professional
services.
History of Operations
Primus, formerly named Symbologic Corporation, was incorporated in October
1986 and initially focused on a software development tool for creation of
systems to gather organizational expertise. In 1993, we licensed that product
line to another company and founded the Customer Support Consortium, a
consortium of leading software and hardware companies focused on advancing
customer-support strategies, models and standards. From 1993 to 1995, we
directed our attention to customer-support products and began developing our
SolutionSeries products. In 1995, we changed our name to Primus Knowledge
Solutions, Inc. and released SolutionBuilder(R), our first SolutionSeries
product. We launched our first Web-based products, SolutionPublisher(R) and
SolutionExplorer(R), in 1996 and 1997, respectively. In 1997, we also divested
our interest in the Customer Support Consortium in conjunction with its
transition to an independent nonprofit entity. Also in 1997, Primus KK became a
reseller of the Company's products and a provider of support services in Japan.
We completed our initial public offering on June 30, 1999, offering
4,772,500 shares of Primus common stock, at an aggregate offering price of
approximately $50.8 million. Net proceeds after accounting for $3.6 million in
underwriting discounts and commissions and approximately $1.0 million in other
expenses were $46.2 million.
Acquisitions and Restructuring
On December 12, 1999, we 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, a