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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

 

COMMISSION FILE NUMBER: 000-26273

 

 

PRIMUS KNOWLEDGE SOLUTIONS, INC.

(Exact name of Registrant as specified in its charter)

 

 

WASHINGTON   91-1350484

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

1601 Fifth Avenue, Suite 1900

Seattle, Washington 98101

(Address of principal executive offices)

 

(206) 834-8100

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

As of August 3, 2004 there were 23,853,519 shares of the Registrant’s Common Stock outstanding.

 

Table of Contents

Primus Knowledge Solutions, Inc.

Form 10-Q

June 30, 2004

 

INDEX

 

         PAGE

PART I. FINANCIAL INFORMATION

    

ITEM 1.

   Condensed Consolidated Financial Statements (Unaudited)     
   

•       Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003

   3
   

•       Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003

   4
   

•       Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Loss for the three months ended March 31, 2004 and June 30, 2004

   5
   

•       Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003

   6
   

•       Notes to Condensed Consolidated Financial Statements

   7

ITEM 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    14

ITEM 3.

   Quantitative and Qualitative Disclosures About Market Risk    41

ITEM 4.

   Controls and Procedures    42

PART II. OTHER INFORMATION

    

ITEM 1.

   Legal Proceedings    42

ITEM 2.

   Change in Securities    43

ITEM 4.

   Submission of Matters to a Vote of Security Holders    43

ITEM 6.

   Exhibits and Reports on Form 8-K    44

 

Page 2 of 45

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PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

     June 30, 2004
     December 31, 2003
  

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

    $ 8,335     $ 12,154  

Accounts receivable, net of allowance for doubtful accounts of $139 and $174 at June 30, 2004 and December 31, 2003, respectively

      2,730       5,475  

Prepaid expenses and other current assets

      827       1,001  
    
 

Total current assets

      11,892       18,630  

Property and equipment, net of accumulated depreciation and amortization of $8,189 and $7,743 at June 30, 2004 and December 31, 2003, respectively

      1,166       1,415  

Goodwill

      11,841       11,785  

Other intangible assets, net of accumulated amortization of $651 and $68 at June 30, 2004 and December 31, 2003, respectively

      3,075       3,608  

Other assets

      225       225  
    
 

Total assets

    $ 28,199     $ 35,663  
    
 

LIABILITIES AND SHAREHOLDERS’ EQUITY

                 

Current liabilities:

                 

Accounts payable

    $ 2,028     $ 2,555  

Accrued and other liabilities

      1,457       2,170  

Compensation-related accruals

      980       1,733  

Obligations due under credit facility

      349       395  

Deferred revenue, including related party amounts of $121 and $94 at June 30, 2004 and December 31, 2003, respectively

      7,230       8,797  
    
 

Total current liabilities

      12,044       15,650  
    
 

Commitments and contingencies

                 

Shareholders’ equity:

                 

Common stock, $.025 par value, authorized 50,000,000 shares, issued and outstanding 23,851,794 and 23,257,082 shares at June 30, 2004 and December 31, 2003, respectively

      596       581  

Additional paid-in-capital

      123,110       122,051  

Accumulated other comprehensive income

      337       188  

Accumulated deficit

      (107,888 )     (102,807 )
    
 

Total shareholders’ equity

      16,155       20,013  
    
 

Total liabilities and shareholders’ equity

    $ 28,199     $ 35,663  
    
 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 3 of 45

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

 

     Three Months Ended June 30,
     Six Months Ended June 30,
  
     2004
     2003
     2004
     2003
  

Revenue:

                                 

License:

                                 

Third party

    $ 1,517     $ 455     $ 3,031     $ 2,541  

Related party–Primus KK

      —         11       139       300  
    
 
 
 
       1,517       466       3,170       2,841  

Service:

                                 

Third party

      4,175       3,142       8,546       6,124  

Related party–Primus KK

      63       109       113       240  
    
 
 
 
       4,238       3,251       8,659       6,364  
    
 
 
 

Total revenue

      5,755       3,717       11,829       9,205  
    
 
 
 

Cost of revenue:

                                 

License

      134       57       366       154  

Service

      1,431       1,242       2,946       2,381  

Amortization of purchased intangibles

      374       —         587       —    
    
 
 
 

Total cost of revenue

      1,939       1,299       3,899       2,535  
    
 
 
 

Gross profit

      3,816       2,418       7,930       6,670  

Operating expenses:

                                 

Sales and marketing

      2,307       2,527       5,207       5,125  

Research and development

      2,135       1,874       4,487       3,690  

General and administrative

      1,469       702       2,766       1,675  

Restructuring charges

      —         —         461       —    
    
 
 
 

Total operating expenses

      5,911       5,103       12,921       10,490  
    
 
 
 

Loss from operations

      (2,095 )     (2,685 )     (4,991 )     (3,820 )

Other income (expense), net

      2       12       (24 )     67  
    
 
 
 

Loss before income

      (2,093 )     (2,673 )     (5,015 )     (3,753 )

Income tax expense

      (24 )     (31 )     (66 )     (81 )
    
 
 
 

Net loss

    $ (2,117 )   $ (2,704 )   $ (5,081 )   $ (3,834 )
    
 
 
 

Basic and diluted net loss per share amounts

    $ (0.09 )   $ (0.14 )   $ (0.22 )   $ (0.20 )
    
 
 
 

Weighted average shares used in computing basic and diluted net loss per share amounts

      23,766,889       19,053,898       23,610,565       19,053,860  
    
 
 
 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 4 of 45

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

(In thousands, except share amounts)

(Unaudited)

 

     Common stock
   

Additional

paid-in
Capital

   

Accumulated

other

comprehensive
Income (loss)

     Accumulated
deficit
    

Total

shareholders’
equity

  
     Shares
    Par value
          

Balance at December 31, 2003

    23,257,082    $ 581    $ 122,051    $ 188     $ (102,807 )   $ 20,013  

Exercise of stock options

    406,532      10      683      —         —         693  

Stock issued in exchange for services

    35,000      1      176      —         —         177  

Comprehensive income:

                                            

Foreign currency translation gain

    —        —        —        320       —         —    

Net loss

    —        —        —        —         (2,964 )     —    
                       
 
       

Total comprehensive loss

    —        —        —        320       (2,964 )     (2,644 )
    
  
  
  
 
 

Balance at March 31, 2004

    23,698,614      592      122,910      508       (105,771 )     18,239  

Exercise of stock options

    96,152      2      166      —         —         168  

Stock issued from employee stock

purchase plan

    57,028      2      34      —         —         36  

Comprehensive loss:

                                            

Foreign currency translation loss

    —        —