<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION) ISSUED APRIL 1, 1999
[LOGO]
3,650,000 SHARES
COMMON STOCK
Net Perceptions, Inc. is offering 3,650,000 shares. This is our initial
public offering and no public market currently exists for our stock. We
anticipate that the initial public offering price will be between $10.00 and
$12.00 per share. We have filed an application for the common stock to be quoted
on the Nasdaq National Market under the symbol "NETP."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------- ---------------
<S> <C> <C>
Public Offering Price......................................................... $ $
Underwriting Discounts and Commissions........................................ $ $
Proceeds to Net Perceptions................................................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Net Perceptions, Inc. has granted the underwriters the right to purchase up
to an additional 547,500 shares of common stock to cover over-allotments.
BancBoston Robertson Stephens expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION
WIT CAPITAL CORPORATION
as E-MANAGER-TM-
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. INFORMATION CONTAINED ON NET PERCEPTIONS' WEB SITE
IS NOT PART OF THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, "NET
PERCEPTIONS," "WE," "US" AND "OUR" REFER TO NET PERCEPTIONS, INC.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 7
Forward-looking Statements May Prove Inaccurate............................................................ 19
Use of Proceeds............................................................................................ 20
Dividend Policy............................................................................................ 20
Capitalization............................................................................................. 21
Dilution................................................................................................... 22
Selected Financial Data.................................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 24
Business................................................................................................... 33
Management................................................................................................. 49
Certain Transactions....................................................................................... 57
Principal Stockholders..................................................................................... 58
Description of Capital Stock............................................................................... 60
Shares Eligible for Future Sale............................................................................ 63
Underwriting............................................................................................... 65
Legal Matters.............................................................................................. 66
Experts.................................................................................................... 66
Additional Information..................................................................................... 67
Index to Financial Statements.............................................................................. F-1
</TABLE>
We have the following registered trademarks:
GroupLens-Registered Trademark-. We also have the following unregistered
trademarks: Net Perceptions and the Net Perceptions logo. This prospectus also
includes trademarks of other companies.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR
FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. NET PERCEPTIONS' ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION
CONTAINED IN THIS PROSPECTUS (A) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED, (B) ASSUMES THE CONVERSION OF ALL OUTSTANDING PRINCIPAL
AND ACCRUED INTEREST ON A $4.0 MILLION CONVERTIBLE PROMISSORY NOTE INTO COMMON
STOCK UPON THE CLOSING OF THIS OFFERING, (C) REFLECTS THE 2-FOR-1 SPLIT OF ALL
OUTSTANDING CAPITAL STOCK TO BE COMPLETED PRIOR TO THE CLOSING OF THIS OFFERING,
AND (D) EXCEPT IN THE FINANCIAL STATEMENTS, REFLECTS THE CONVERSION OF ALL
OUTSTANDING PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING.
NET PERCEPTIONS
Net Perceptions is a leading provider of marketing solutions that enable
Internet retailers to market to customers on a personalized, one-to-one basis in
real time. With our software solutions, a retailer learns from each customer
interaction and, based on the information received, adjusts marketing messages
and product offerings to that customer in real time. Net Perceptions defines its
product offerings as real-time relationship marketing solutions. We believe that
retailers that implement our solutions can attract more customers, generate more
products per order and increase customer loyalty. To date, we have focused on
providing solutions to electronic commerce retailers. Our customers currently
include Barnesandnoble.com, CDnow, Egghead.com, Preview Travel, Ticketmaster
Online and Value America.
With the size and growth of electronic commerce, the opportunity for
one-to-one marketing on the Internet is potentially large. International Data
Corporation estimates that the amount of Internet commerce worldwide will
increase from $32 billion in 1998 to over $400 billion in 2002. Electronic
commerce retailers must find ways to compete more effectively and distinguish
themselves in this rapidly-growing market. As a result, these retailers are
beginning to personalize the online shopping experiences of their customers. A
Jupiter Communications survey conducted in June 1998 reported that 40% of online
retailers used some form of personalization and 93% of the remaining online
retailers planned to implement the practice in the next 12 months.
Our products enable effective real-time relationship marketing by analyzing
past and current customer behavior, including purchase history, stated
preferences, demographic information and Internet browsing behavior. Based on
this analysis, our products use proprietary collaborative filtering technology
to anticipate other merchandise or information a customer is likely to be
interested in purchasing or viewing. Our product suite consists of:
- NET PERCEPTIONS FOR E-COMMERCE, which is a leading real-time relationship
marketing solution for electronic commerce retailers;
- NET PERCEPTIONS FOR CALL CENTERS, which is designed to provide call center
operators with caller-specific recommendations to deliver during customer
interactions. A call center is a department within an organization in
which operators make and receive telephone calls related to customer
orders and inquiries; and
- NET PERCEPTIONS RECOMMENDATION ENGINE, which is a general-purpose
relationship marketing platform that can be used to leverage data across
multiple customer points of contact.
4
<PAGE>
We design each of our products to provide high recommendation accuracy while
reliably meeting the real-time and volume requirements of large retailers. In
addition, we base our solutions on a distributed architecture that is flexible
enough to integrate with our customers' new or existing marketing
implementations, including web site and call center software.
We also provide our customers with a comprehensive array of services,
including training and consulting services, software updates, documentation
updates, telephone support and web-based support. We market our products and
services through our direct sales organization and through indirect distribution
channels, including resellers, systems integrators and original equipment
manufacturers.
Our objective is to extend our leadership position in providing real-time
marketing solutions to Internet and traditional retailers. To achieve this
objective, we intend to:
- Maintain and extend our technological leadership in real-time relationship
marketing solutions through continued investment in the development of our
proprietary recommendation engine;
- Leverage this technology investment into additional online and traditional
markets;
- Continuously increase the value of our solutions to customers by offering
additional and improved professional services;
- Develop our international presence to address the global adoption of the
Internet and to address international demand for real-time relationship
marketing solutions; and
- Expand our indirect distribution channels by recruiting additional
resellers, systems integrators and original equipment manufacturers.
Net Perceptions was incorporated in Delaware on July 3, 1996. Our principal
sales, marketing, research and development and administrative facility is in
Minneapolis, and we lease sales and support offices in San Francisco and New
York. Our telephone number is (612) 903-9424.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............. 3,650,000 shares
Common stock to be outstanding
after this offering............. 21,321,705 shares(1)
Over-allotment option............. 547,500 shares
Use of proceeds................... For working capital and general corporate purposes.
Dividend policy................... We do not intend to pay dividends on our common stock.
We plan to retain any earnings for use in the operation
of our business and to fund future operations.
Proposed Nasdaq National Market
symbol.......................... NETP
</TABLE>
- ---------
(1) Based on 17,302,008 shares outstanding as of December 31, 1998. Also
includes 369,697 shares of common stock issuable upon conversion of a
convertible promissory note upon the closing of this offering at an assumed
conversion price of $11.00 per share. This number does not include (A)
1,408,564 shares of common stock subject to outstanding options under our
1996 Stock Plan as of December 31, 1998, and (B) 11,982 shares of common
stock issuable upon exercise of an outstanding warrant. Subsequent to
December 31, 1998, we granted options to purchase an additional 524,936
shares of common stock. See "Capitalization," "Management--1999 Equity
Incentive Plan," "--Employee Stock Purchase Plan," "--1999 Non-Employee
Director Option Plan" and Note 7 of Notes to Financial Statements.
5
<PAGE>
SUMMARY FINANCIAL DATA
(table in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JULY 3, 1996 DECEMBER 31,
(INCEPTION) TO ------------------
DECEMBER 31, 1996 1997 1998
----------------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues......................................... $ 4 $ 317 $ 4,477
Gross margin........................................... 2 273 4,052
Operating expenses..................................... 1,042 5,020 9,084
Loss from operations................................... (1,040) (4,747) (5,032)
Net loss............................................... (1,027) (4,722) (4,968)
Basic and diluted net loss per share................... $ (3.40) $ (3.01) $ (1.40)
------- ------- -------
------- ------- -------
Shares used in computing basic and diluted net loss per
share................................................ 302 1,569 3,546
------- ------- -------
------- ------- -------
Pro forma basic and diluted net loss per share......... $ (0.35)
-------
-------
Shares used in computing pro forma basic and diluted
net loss per share................................... 14,113
-------
-------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $ 972 $ 41,311
Working capital............................................................................ 468 40,807
Total assets............................................................................... 5,637 45,976
Long-term liabilities, net of current portion.............................................. 538 538
Redeemable convertible preferred stock..................................................... 650 --
Total stockholders' equity................................................................. 421 41,410
</TABLE>
See Note 2 of Notes to Financial Statements for an explanation of the
methods used to determine the number of shares used in computing net loss per
share data.
The numbers displayed in the "As Adjusted" column are adjusted to reflect
the conversion of preferred stock into 10,668,700 shares of common stock, the
issuance of a convertible promissory note in the amount of $4,000,000 subsequent
to December 31, 1998, the issuance of 369,697 shares of common stock upon
conversion of the convertible promissory note upon the closing of this offering
at an assumed conversion price of $11.00 per share, and the sale of 3,650,000
shares of common stock in this offering at an assumed initial public offering
price of $11.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE INVESTING IN OUR COMMON
STOCK.
NET PERCEPTIONS IS AN EARLY-STAGE COMPANY AND WE EXPECT TO ENCOUNTER RISKS AND
DIFFICULTIES FREQUENTLY ENCOUNTERED BY EARLY-STAGE COMPANIES IN NEW AND
RAPIDLY EVOLVING MARKETS.
Net Perceptions was founded in July 1996. We began shipping product in the
first quarter of 1997. The market for our products is unproven. Our limited
operating history makes an evaluation of our future prospects very difficult. We
will encounter risks and difficulties frequently encountered by early-stage
companies in new and rapidly evolving markets. We may not successfully address
any of these risks. If we do not successfully address these risks, our business,
financial condition and results of operations would be seriously harmed.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied in the past and may vary
significantly in the future. Because our operating results are volatile and
difficult to predict, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It is
likely that in some future quarter or quarters our operating results will be
below the expectations of public market analysts and investors. In such event,
the market price of our common stock may decrease significantly.
Our quarterly operating results will vary depending on a number of factors,
including:
- Demand for our products and services;
- Amount and timing of sales transactions for our products and services;
- Actions taken by our competitors, including new product introductions;
- Our ability to develop, introduce and market new products and enhancements
to our existing products on a timely basis;
- Market readiness for our products;
- Changes in our pricing policies or those of our competitors;
- Our ability to expand our sales and marketing operations, including hiring
additional sales personnel;
- Our success in developing indirect sales channels;
- The deferral of significant revenues until acceptance of software or
delivery of services as required by an individual license transaction;
- Our ability to control costs;
- Technological changes in our markets;
- The mix of sales among our direct and indirect channels and between
domestic and international markets;
- Deferrals of customer orders in anticipation of product enhancements or
new products;
- The rate of growth in the use of the Internet for commerce and
communication;
7
<PAGE>
- Customer budget cycles and changes in these budget cycles;
- Difficulties experienced by our customers or us as a result of Year 2000
issues; and
- General economic factors.
We cannot predict our future quarterly revenues with any degree of certainty
for several reasons, including:
- Product revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter, because we operate with very little
order backlog;
- The market in which we compete is relatively new and rapidly evolving;
- We expect that, for the foreseeable future, revenues will come from
licenses to a small number of customers, so delays or cancellations of
orders by a few customers can significantly impact revenues within a
quarter;
- Our sales cycle varies substantially from customer to customer; and
- The timing of large orders can significantly affect revenues within a
quarter.
Historically, we have recognized a substantial portion of our revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last two weeks of the quarter. Accordingly, we cannot predict our financial
results for any quarter until very late in the quarter. A delay in an
anticipated sale near the end of a quarter can seriously harm our operating
results for that quarter.
Our expense levels are relatively fixed in the short term and are based, in
part, on our expectations as to our future revenues. As a result, any delay in
generating or recognizing revenues could cause significant variations in our
operating results from quarter to quarter and could result in increased
operating losses.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We had net losses of $4.7 million in 1997 and $5.0 million in 1998. As of
December 31, 1998, we had an accumulated deficit of $10.7 million. We have not
had a profitable quarter and do not expect to have a profitable quarter in 1999
or 2000. We expect that our losses will continue to increase in 1999. We expect
to continue to incur significant sales and marketing, research and development
and general and administrative expenses. As a result, we will need to generate
significant quarterly revenues to achieve profitability. We may never achieve
profitability. Although our revenues have grown in recent quarters, we do not
believe that we can sustain these growth rates, or that such growth rates are
indicative of future revenue growth rates. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE DEPEND ON OUR NET PERCEPTIONS FOR E-COMMERCE PRODUCT. A DECLINE IN THE PRICE
OF, OR DEMAND FOR, OR MARKET ACCEPTANCE OF NET PERCEPTIONS FOR E-COMMERCE
WOULD SERIOUSLY HARM OUR BUSINESS.
We currently derive a substantial portion of our revenues from our Net
Perceptions for E-commerce product. We anticipate that Net Perceptions for
E-commerce will continue to account for a substantial portion of our revenues
for the foreseeable future. Consequently, a decline in the price of or demand
for Net Perceptions for E-commerce, or its failure to achieve broad market
acceptance, would seriously harm our business, financial condition and results
of operations.
8
<PAGE>
WE FACE INTENSE COMPETITION AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY OUR
BUSINESS WILL BE SERIOUSLY HARMED.
The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of electronic commerce
products, we primarily encounter competition from the LikeMinds division of
Andromedia, the Aptex division of HNC Software and Personify. Microsoft
Corporation recently acquired FireFly Network Inc., a company with collaborative
filtering technology and, as a result, we expect that we will encounter
competition from Microsoft in the future. We expect that if we are successful in
our strategy to leverage our technology into new vertical markets, we will
encounter many additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, we expect
additional competition from other established and emerging companies as the
Internet software market continues to develop and expand.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of software industry consolidations.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm our
business, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors.
OUR PRODUCTS HAVE A LENGTHY SALES CYCLE. AS A RESULT, IT IS DIFFICULT TO PREDICT
THE QUARTER IN WHICH A SALE MAY OCCUR.
We are one of the first companies to market real-time relationship marketing
software. As a result, we must educate potential customers on the use and
benefits of our products. In addition, we believe that the purchase of our
products is relatively discretionary and involves a significant commitment of
capital and other resources by a customer. As a result, it usually takes our
sales organization several months to finalize a sale. This makes it difficult to
predict the quarter in which a sale may occur.
WE HAVE A LENGTHY IMPLEMENTATION CYCLE. IN ADDITION, ONLY A SMALL NUMBER OF OUR
CUSTOMERS HAVE A DEPLOYED AND OPERATING APPLICATION UTILIZING OUR PRODUCTS. AS
A RESULT, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL PERFORM AND BE RECEIVED
AS WE EXPECT.
The implementation, including application design and deployment, of our
products requires a significant commitment of resources by our customers. The
time required for implementation of Net Perceptions for E-commerce has varied
depending on the customer's application of the product. Additionally,
implementation often does not begin until a customer otherwise undertakes to
update its web site, which generally occurs only once or twice per year. We
anticipate that implementation of our Net Perceptions for Call Centers product
may take longer than Net Perceptions for E-commerce due to more extensive
integration requirements.
9
<PAGE>
We have currently licensed our products to more than 70 customers. However,
only a small number of these customers have a deployed and operating application
utilizing our products. Because most of our customers have not yet fully
implemented and deployed our products, we cannot be certain that our products
will:
- Perform as designed;
- Deliver the desired level of economic benefit to our customers;
- Meet the other expectations and needs of our customers;
- Achieve any significant degree of market acceptance; or
- Perform to the level necessary to generate good customer references and
repeat customers.
If implementation services constitute a significant part of a product sales
transaction, we recognize a substantial portion of our revenues from such sales
transaction upon the delivery of these services. As a result, delays in service
delivery could cause significant reduction in our license revenues and operating
results for any particular period. The occurrence of any of these events could
seriously harm our business, financial condition and results of operations.
WE NEED TO SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS IF WE ARE TO
INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND SERVICES. IF WE FAIL
TO DO SO, OUR BUSINESS WILL BE SERIOUSLY HARMED.
We need to substantially expand our direct sales operations if we are to
increase market awareness and sales of our products and services. If we fail to
increase our direct sales capabilities as we have planned, our business,
financial condition and results of operations would be seriously harmed. Our
products and services require a sophisticated sales effort targeted at senior
management of our prospective customers. We have recently expanded our direct
sales force and plan to hire additional sales personnel. As of February 28,
1999, our direct sales organization consisted of 25 employees. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. New hires will require extensive
training and typically take several months to achieve productivity. We cannot be
certain that our recent hires will be as productive as necessary.
WE ARE DEPENDENT ON AND PLAN TO INCREASE THE SIZE OF OUR PROFESSIONAL SERVICES
ORGANIZATION. IF WE DO NOT ADD MORE CUSTOMER SUPPORT PERSONNEL, OUR BUSINESS
WILL BE SERIOUSLY HARMED.
Customers that license our software typically engage our professional
services organization to assist with support, training, consulting and
implementation. We believe that growth in our product sales depends on our
ability to provide our clients with these services and to educate resellers on
how to use our products. From time to time, we receive customer complaints about
the timeliness and accuracy of our customer support. We plan to add more
customer support personnel in order to address current customer support needs.
If we are not successful hiring such personnel, our business, financial
condition and results of operations could be seriously harmed. As of February
28, 1999, our professional services organization consisted of 11 employees. We
are in a new market and there are a limited number of people who have the skills
needed to provide the services that our customers demand. Competition for
qualified service personnel is intense. We cannot be certain that we can attract
or retain a sufficient number of the highly-qualified service personnel that our
business needs.
OUR BUSINESS COULD BE SERIOUSLY IMPACTED BY THE PRIVACY CONCERNS OF ELECTRONIC
COMMERCE USERS.
Typically, our Net Perceptions for E-commerce product captures customer
preference and profile information each time a customer visits a web site or
volunteers information in response to survey questions. Privacy concerns may
cause visitors to resist providing the personal data necessary to support
10
<PAGE>
this profiling capability. More importantly, even the perception of privacy
concerns, whether or not valid, may indirectly inhibit market acceptance of our
products. In addition, legislative or regulatory requirements may heighten such
concerns if web site users must be notified that the data captured after
visiting web sites may be used by marketing entities to unilaterally direct
product promotion and advertising to that user. We are not aware of any such
legislation or regulatory requirements currently in effect in the United States.
Various other countries and political entities, such as the European Economic
Community, have adopted such legislation or regulatory requirements. The United
States may adopt similar legislation or regulatory requirements. If customer
privacy concerns are not adequately addressed or if restrictive legislation is
adopted in the United States, our business, financial condition and results of
operations could be seriously harmed.
Our Net Perceptions for E-commerce product can use data captured with
"cookies" to track demographic information and user preferences. A "cookie" is a
bit of information keyed to a specific server, file pathway or directory
location that is stored on a computer user's hard drive, possibly without the
user's knowledge, but generally removable by the user. Some countries have
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If such laws
are passed, our business, financial condition and results of operations could be
seriously harmed.
WE RECENTLY ANNOUNCED NET PERCEPTIONS FOR CALL CENTERS, WHICH MAY NOT ACHIEVE
MARKET ACCEPTANCE.
We announced the commercial launch of Net Perceptions for Call Centers in
November 1998 and expect to make our initial shipments in 1999. Net Perceptions
for Call Centers has not received any degree of market acceptance. There are
significant risks inherent in product introductions such as Net Perceptions for
Call Centers. This product may not address some or all of the needs of customers
and may contain undetected errors or failures. A lack of necessary features or
errors or failures in Net Perceptions for Call Centers will likely result in
loss or delay of market acceptance for this product. We expect that our future
financial performance will depend significantly on the successful sales,
implementation and market acceptance of Net Perceptions for Call Centers, which
may not occur on a timely basis or at all.
WE ARE DEPENDENT ON POTENTIAL NEW PRODUCTS. IF THESE POTENTIAL NEW PRODUCTS ARE
NOT LAUNCHED ON A TIMELY BASIS OR DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BUSINESS WILL BE SERIOUSLY HARMED.
We currently have plans to introduce and market potential new products in
1999. If these potential new products are not launched on a timely basis or do
not achieve market acceptance, our business, financial condition and results of
operations will be seriously harmed. Our potential new products are:
- Net Perceptions for Marketing Campaigns, which is being designed to be a
tool for producing targeted promotional electronic mail messages; and
- Net Perceptions for Knowledge Management, which is being designed to apply
the real-time relationship management capabilities of our recommendation
platform to knowledge management.
Our potential new products are subject to significant technical risks. We
may fail to introduce or deploy such potential new products on a timely basis,
or at all. In the past, we have experienced significant delays in the
commencement of commercial shipments of our new releases and new products. These
delays caused customer frustrations and delay or loss of product revenues. Some
of our competitors currently offer products with features and functionality
similar to those that may be offered in our potential new products. In the past,
we have also experienced delays in purchases of our products by customers
anticipating our launch of new releases or new products. Our business, financial
11
<PAGE>
condition and results of operations would be seriously harmed if customers defer
material orders in anticipation of new releases or new product introductions.
The software products we offer are complex and may contain undetected errors
or failures when first introduced or as new versions are released. We have in
the past discovered software errors in our new releases and new products after
their introduction. We experienced delays in release or lost revenues during the
period required to correct these errors. We may discover errors in new releases
or new products after the commencement of commercial shipments, despite testing
by our personnel and our current and potential customers. This may result in
loss of or delay in market acceptance of our products, which could seriously
harm our business, financial condition and results of operations.
WE DEPEND ON THE CONTINUED GROWTH OF OUR CUSTOMER BASE AND THE RETENTION OF OUR
CUSTOMERS. IF WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT
AND FUTURE CUSTOMERS, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Our success is dependent on the continued growth of our customer base and
the retention of our customers. We currently depend on a limited number of key,
high-profile customers. Our ability to attract new customers will depend on a
variety of factors, including the accuracy, scalability, reliability and
cost-effectiveness of our products and services and our ability to effectively
market such products and services. In the past, we have lost potential customers
to competitors for various reasons, including lower prices and other incentives
not matched by us. Many of our current customers initially purchase a limited
license for our products and services for evaluation. If such evaluation is
successful, the customer may purchase a license to expand the use of our
products in its organization or license additional products and services. If we
fail to generate repeat and expanded business from our current and future
customers, our business, financial condition and results of operations would be
seriously harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS WILL BE SERIOUSLY HARMED.
The life cycles of our products are difficult to predict because the markets
for our products are characterized by rapid technological change, changing
customer needs, frequent new software product introductions, and evolving
industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards could render our existing products obsolete and
unmarketable. To be successful, we need to develop and introduce new software
products and enhancements to existing products on a timely basis that:
- Keep pace with technological developments and emerging industry standards;
and
- Address the increasingly sophisticated needs of our customers.
In addition, we may:
- Fail to develop and market new products and enhancements to existing
products that respond to technological changes or evolving industry
standards;
- Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
enhancements to existing products; and
- Fail to develop new products and enhancements to existing products that
adequately meet the requirements of the marketplace or achieve market
acceptance.
In any such event, our business, financial condition and results of operations
would be seriously harmed.
12
<PAGE>
WE RELY ON RESELLERS AND NEED TO DEVELOP THIS SALES CHANNEL. IF OUR RESELLER
CHANNEL DOES NOT PERFORM ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We intend to increase the proportion of our customers licensed through our
reseller channels, which include distributors, resellers and systems
integrators. Our failure to achieve this could seriously harm our business,
financial condition and results of operations. Our agreements with such
resellers are generally not exclusive and in many cases may be terminated by
either party without cause. Many of these resellers do not have minimum purchase
or resale requirements. Many of these resellers carry product lines that are
competitive with our product lines. These resellers may not give a high priority
to the marketing of our products or may not continue to carry our products. They
may give a higher priority to other products, including the products of
competitors. We may not retain any of our current resellers or successfully
recruit new resellers. Events or occurrences of this nature could seriously harm
our business, financial condition and results of operations. In addition, any
sales through resellers will have lower gross margins than direct sales.
WE RELY ON ORIGINAL EQUIPMENT MANUFACTURERS AND NEED TO DEVELOP THIS SALES
CHANNEL. IF OUR ORIGINAL EQUIPMENT MANUFACTURER CHANNEL DOES NOT PERFORM
ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We intend to increase sales through original equipment manufacturers. We may
fail to implement this strategy, which could seriously harm our business,
financial condition and results of operations. We are currently investing, and
intend to continue to invest, resources to develop this sales channel. Such
investments could seriously harm our operating margins. We depend on our
original equipment manufacturers' abilities to develop product enhancements or
new products on a timely and cost-effective basis that will meet changing
customer needs and respond to emerging industry standards and other
technological changes. Our original equipment manufacturers may not effectively
meet these technological challenges. These original equipment manufacturers:
- Are not within our control;
- May incorporate into their products the technologies of other companies in
addition to or in place of our technologies; and
- Are not obligated to purchase our products.
Our original equipment manufacturers may not continue to carry our products. Our
inability to recruit, or our loss of, important original equipment manufacturers
could seriously harm our business, financial condition and results of
operations. In addition, any sales through original equipment manufacturers will
have lower gross margins than direct sales.
WE DEPEND ON INTERNATIONAL SALES AND, THEREFORE, OUR BUSINESS IS SUSCEPTIBLE TO
NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We recognized 13% of our total revenues in 1998 through licenses and
services sold to customers located outside of the United States. We expect
international revenues to account for a significant percentage of total revenues
in the future, and we believe that we must continue to expand our international
sales and marketing activities in order to be successful. To successfully expand
international sales, we must:
- Establish international operations;
- Hire international personnel; and
- Recruit additional international resellers.
13
<PAGE>
This will require significant management attention and financial resources
and could seriously harm our operating margins. We have very limited experience
in marketing, selling and distributing our products and services
internationally. We currently have no employees located outside of the United
States and Canada. The acceptance and use of the Internet in international
markets are in earlier stages of development than in the United States,
particularly with the Internet as a method for conducting commerce. If the
Internet or electronic commerce fail to gain sufficient acceptance in
international markets or we fail to further expand our international operations
in a timely manner, our business, financial condition and results of operations
could be seriously harmed. In addition, we may fail to maintain or increase
international market demand for our products.
WE DEPEND ON TECHNOLOGY LICENSED FROM OTHER PARTIES. IF WE ARE UNABLE TO
CONTINUE TO UTILIZE SUCH TECHNOLOGY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We license personalization screening and collaborative filtering technology
known as the "GroupLens" technology from the University of Minnesota pursuant to
an exclusive, worldwide, license agreement. The exclusive rights granted are
subject to non-exclusive rights retained by:
- AT&T Corporation, for portions of the technology funded by AT&T;
- The United States government, for government-funded aspects of the
technology, but solely for government purposes; and
- The University of Minnesota, for its own educational and research
purposes.
The license agreement also provides that for the three academic years ending
in the spring of 2000, we will pay research fees to the University of Minnesota
for exclusive rights to commercial applications that the research may produce
related to improvements to the GroupLens technology. If the agreement is
terminated prior to the end of the 1999-2000 academic year or if we are unable
to renew the agreement, we will no longer have access to the research conducted
by the University of Minnesota, which could result in an increased burden on our
product development department, as well as a reduction in improvements to our
core technology. We may not be able to renew the agreement, hire adequate
personnel to meet any increased demands on our product development department,
or continue to advance our technology on a timely basis. If we are unable to
renew the agreement, hire sufficient personnel or develop product improvements
in a timely manner, our business, financial condition and results of operations
would be seriously harmed.
We integrate third-party software in our software products. For instance, we
license the Orbix object request broker from IONA Technologies for use in our
Net Perceptions for E-commerce, Net Perceptions for Call Centers and Net
Perceptions Recommendation Engine products. The agreement expires in July 2001.
The third-party software may not continue to be available to us on commercially
reasonable terms. We may not be able to renew this agreement or develop
alternative technology. If we cannot maintain licenses to key third-party
software, such as Orbix, develop similar technology or license similar
technology from another source on a timely or commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed.
WE ARE DEPENDENT UPON KEY PERSONNEL. THE LOSS OF THE SERVICES OF ONE OR MORE OF
OUR KEY PERSONNEL, OR OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN OTHER
HIGHLY QUALIFIED PERSONNEL IN THE FUTURE WOULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends on the continued service of our senior
management, product development and sales personnel. The loss of the services of
one or more of our key personnel could seriously harm our business, financial
condition and results of operations. None of these persons is bound by an
employment agreement. As of February 28, 1999, Net Perceptions consisted of only
92 employees. We only carry key person life insurance on Steven J. Snyder, our
President and Chief
14
<PAGE>
Executive Officer. The amount of such policy is $1,000,000. Our future success
also depends on our continuing ability to attract, hire, train and retain a
substantial number of highly skilled managerial, technical, sales, marketing and
customer support personnel. Competition for such personnel is intense, and we
may fail to retain our key employees, or attract, assimilate or retain other
highly qualified personnel in the future. If so, our business, financial
condition and results of operations could be seriously harmed.
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ELECTRONIC
COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS
ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Our future revenues depend upon the increased acceptance and use of the
Internet and other online services as a medium of commerce. Rapid growth in the
use of the Internet, the web and online services is a recent phenomenon.
Acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of customers may not adopt or continue to use the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently-introduced services and products over the Internet are
subject to a high level of uncertainty and few proven services and products
exist.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability as a commercial medium due to delays in the development
or adoption of new standards and protocols required to handle increased levels
of Internet activity, or due to increased governmental regulation. Changes in,
or insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally.
Our business, financial condition and results of operations would be
seriously harmed if:
- Use of the Internet, the web and other online services does not continue
to increase or increases more slowly than expected;
- The infrastructure for the Internet, the web and other online services
does not effectively support expansion that may occur; or
- The Internet, the web and other online services do not become a viable
commercial marketplace, which would inhibit the development of electronic
commerce and of the need for our Net Perceptions for E-commerce product.
PROTECTION OF OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE.
We are a technology company. Our success depends on protecting our
intellectual property, which are our most important assets. If we do not
adequately protect our intellectual property, our business, financial condition
and results of operations will be seriously harmed.
We license our software and require our customers to enter into license
agreements, which impose restrictions on our customers' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets,
including but not limited to requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source code. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.
15
<PAGE>
We have four pending U.S. patent applications. We also have license rights
to two issued U.S. patents and one pending U.S. patent application from the
University of Minnesota. We have no issued foreign patents, nor do we have any
pending foreign patent applications. It is possible that no patents will issue
from the currently pending patent applications. It is also possible that our
current patents or potential future patents may be found invalid or
unenforceable, or otherwise be successfully challenged. It is also possible that
any patent issued to us may not provide us with any competitive advantages. It
is also possible that we may not develop future proprietary products or
technologies that are patentable, and that the patents of others may seriously
limit our ability to do business. In this regard, we have not performed any
comprehensive analysis of patents of others that may limit our ability to do
business.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. We have from time to time received
claims that we are infringing third parties' intellectual property rights. It is
possible that in the future third parties may claim that our current or
potential future products infringe their intellectual property. We expect that
software developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm our
business, financial condition and results of operations.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. In addition, we have recently hired a significant number of employees
and plan to further increase our total headcount. Our headcount has increased
from 14 at December 31, 1996 to 34 at December 31, 1997 to 70 at December 31,
1998 to 92 at February 28, 1999. We also plan to expand the geographic scope of
our customer base and operations. This expansion has resulted and will continue
to result in substantial demands on our management resources. Our ability to
compete effectively and to manage future expansion of our operations, if any,
will require us to continue to improve our financial and management controls,
reporting systems and procedures on a timely basis, and expand, train and manage
our employee work force. Our failure to do so could seriously harm our business,
financial condition and results of operations.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES.
"Year 2000 Issues" refer generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
16
<PAGE>
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
- Function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
- Respond to two-digit date input in a way that resolves the ambiguity as to
century in a disclosed, defined and predetermined manner;
- Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and
- Recognize the Year 2000 as a leap year.
We designed our current products to be Year 2000 compliant when configured
and used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. However, we have
not tested our products for Year 2000 compliance. We continue to respond to
customer questions about prior versions of our products on a case-by-case basis.
We have not tested software obtained from third parties. However, we are
seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite assurances from developers of products incorporated into our
products, our products may contain undetected errors or defects associated with
Year 2000 date functions. Known or unknown errors or defects in our products
could result in delay or loss of revenues, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of which
could seriously harm our business, financial condition and results of
operations. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether or to what extent we may be affected by it.
We are assessing our material internal information technology systems,
including both our own software products and third-party software and hardware
technology, but we have not initiated an assessment of our non-information
technology systems. We expect to complete testing of our information technology
systems in 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from such vendors
that their systems are Year 2000 compliant. We are not currently aware of any
significant operational issues or costs associated with preparing our internal
information technology and non-information technology systems for the Year 2000.
However, we may experience significant unanticipated problems and costs caused
by undetected errors or defects in the technology used in our internal
information technology and non-information technology systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, they may face
litigation costs and they may delay purchases or implementation of our products.
Year 2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our products and services. As a result,
our business, financial condition and results of operations could be seriously
harmed.
We have funded our Year 2000 plan from cash balances and have not separately
accounted for these costs in the past. To date, these costs have not been
significant. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In
17
<PAGE>
addition, we may experience material problems and costs with Year 2000
compliance that could seriously harm our business, financial condition and
results of operations.
We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing such a plan may itself be
significant. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company interruptions caused by Year 2000 compliance failures.
OUR CURRENT REVENUE RECOGNITION PRACTICES MAY NEED TO CHANGE, WHICH COULD
SERIOUSLY HARM OUR BUSINESS.
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," in October 1997 and
amended it by Statement of Position 98-4. We adopted SOP 97-2 effective January
1, 1998. We believe our current revenue recognition policies and practices are
consistent with SOP 97-2 and SOP 98-4. However, full implementation guidelines
for these standards have not yet been issued. Once available, our current
revenue accounting practices may need to change and such changes could seriously
harm our future revenues and earnings. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. If enacted, such laws, rules or
regulations could limit the market for our products and services, which could
seriously harm our business, financial condition and results of operations.
Although many of these regulations may not apply to our business directly, we
expect that laws regulating the solicitation, collection or processing of
personal/customer information could indirectly affect our business. The
Telecommunications Act of 1996 prohibits some types of information and content
from being transmitted over the Internet. The prohibition's scope and the
liability associated with a Telecommunications Act violation are currently
unsettled. In addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be certain that similar
legislation will not be enacted and upheld in the future. It is possible that
such legislation could expose companies involved in Internet commerce to
liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth in web usage and decrease its acceptance as a
communications and commercial medium.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We expect that the net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure needs for at least the next 12
months. After that, we may need to raise additional funds and we cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all. If we cannot raise funds, if needed, on acceptable terms, we may not
be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and capital resources."
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<PAGE>
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
Because our customers use our products for mission-critical applications
such as electronic commerce, errors or defects in or other performance problems
with our products could result in financial or other damages to our customers.
Our customers could seek damages for losses from us. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate such limitation of liability provisions. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time-consuming
and costly. A product liability claim could seriously harm our business,
financial condition and results of operations.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business, financial condition and
results of operations.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
All statements, trend analyses and other information contained in this
prospectus relating to markets for our products and trends in total revenues,
gross margin and anticipated expense levels, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect"
and "intend" and other similar expressions, are forward-looking statements.
These forward-looking statements are subject to business and economic risks, and
our actual results of operations may differ substantially from those anticipated
in the forward-looking statements. The cautionary statements made in this
prospectus apply to all forward-looking statements wherever they appear in this
prospectus.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to Net Perceptions from the sale of the 3,650,000 shares of
common stock offered hereby are estimated to be $36,300,000, assuming an initial
public offering price of $11.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. The net
proceeds of this offering are estimated to be $41,900,000 if the underwriters'
over-allotment option is exercised in full. The primary purposes of this
offering are to obtain additional equity capital, create a public market for our
common stock, and facilitate future access to public markets. We expect to use
the net proceeds for general corporate purposes, including working capital. A
portion of the net proceeds may also be used for the acquisition of businesses,
products and technologies that are complementary to ours. We have no current
plans, agreements or commitments and are not currently engaged in any
negotiations with respect to any such transaction. Pending such uses, we will
invest the net proceeds of this offering in investment grade, interest-bearing
securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend to
pay any cash dividends in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
on a pro forma basis after giving effect to a 2-for-1 split of our capital
stock, the conversion of all outstanding shares of preferred stock into common
stock and the filing of an amended and restated certificate of incorporation
upon the closing of this offering, and as adjusted to reflect the receipt of the
estimated net proceeds from the sale by us of 3,650,000 shares of common stock
pursuant to this offering at an assumed initial offering price of $11.00 per
share (after deducting the estimated underwriting discounts and commissions and
estimated offering expenses) and the issuance of 369,697 shares of common stock
upon the conversion of a convertible promissory note on the closing of this
offering at an assumed conversion price of $11.00 per share:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
PRO FORMA AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities, less current portion(1)...................... $ 538 $ 538
Stockholders' equity:
Preferred stock, $.0001 par value per share, 10,000,000 shares
authorized; no shares issued or outstanding pro forma or as
adjusted........................................................ -- --
Common stock, $.0001 par value per share, 100,000,000 shares
authorized, 17,302,008 shares issued and outstanding pro forma,
21,321,705 shares issued and outstanding as adjusted............ 1 2
Additional paid-in capital........................................ 11,787 52,192
Accumulated deficit............................................... (10,717) (10,784)
----------- -----------
Total stockholders' equity...................................... 1,071 41,410
----------- -----------
Total capitalization.......................................... $ 1,609 $ 41,948
----------- -----------
----------- -----------
</TABLE>
- ---------
(1) See Note 6 of Notes to Financial Statements.
The number of shares of common stock issued and outstanding pro forma and as
adjusted excludes 1,408,564 shares of common stock issuable upon exercise of
stock options outstanding under our 1996 Stock Plan as of December 31, 1998 at a
weighted average exercise price of $0.52 per share, and 1,058,128 shares of
common stock reserved for grant of future options under our 1996 Stock Plan.
These numbers also exclude 11,982 shares of common stock issuable upon the
exercise of a warrant outstanding as of December 31, 1998 at an exercise price
of $1.535 per share. Subsequent to December 31, 1998, we granted options to
purchase 524,936 shares of common stock. The number of shares of common stock
issued and outstanding as adjusted includes the 369,697 shares of common stock
issuable upon conversion of a convertible promisory note upon the closing of
this offering at an assumed conversion price of $11.00 per share. The number of
shares of common stock issued and outstanding pro forma excludes these shares.
On February 4, 1999, we adopted, subject to stockholder approval, our 1999
Equity Incentive Plan as a successor plan to replace our 1996 Stock Plan,
whereby an additional 800,000 shares were reserved for issuance thereunder. In
addition, on February 4, 1999, we adopted, subject to stockholder approval, our
Employee Stock Purchase Plan and reserved 1,000,000 shares of common stock for
issuance under such plan and our 1999 Non-Employee Director Option Plan and
reserved 500,000 shares of common stock for issuance under such plan. See
"Management-- 1999 Equity Incentive Plan," "--Employee Stock Purchase Plan,"
"--1999 Non-Employee Director Option Plan," and Note 7 of Notes to Financial
Statements.
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<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of December 31,
1998 was $1,071,000, or approximately $0.06 per share. Pro forma net tangible
book value per share represents the amount of our stockholders' equity, less
intangible assets, divided by 17,302,008 shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of preferred
stock into shares of common stock upon completion of this offering.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving effect
to the sale by us of 3,650,000 shares of common stock in this offering at an
assumed initial offering price of $11.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
and the application of the estimated net proceeds therefrom and after giving
effect to the issuance of 369,697 shares of common stock upon conversion of a
convertible promissory note at the closing of this offering at an assumed
conversion price of $11.00 per share, our pro forma net tangible book value as
of December 31, 1998, would have been $41,410,000, or $1.94 per share. This
represents an immediate increase in net tangible book value of $1.88 per share
to existing stockholders and an immediate dilution in net tangible book value of
$9.06 per share to purchasers of common stock in this offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $ 11.00
Pro forma net tangible book value per share as of
December 31, 1998..................................... $ 0.06
Increase per share attributable to new investors........ 1.88
---------
Pro forma net tangible book value per share after this
offering................................................ 1.94
---------
Net tangible book value dilution per share to new
investors............................................... $ 9.06
---------
---------
</TABLE>
The following table sets forth as of December 31, 1998, after giving effect
to the conversion of all outstanding shares of preferred stock into common stock
upon completion of this offering, the difference between the existing
stockholders and the purchasers of shares in this offering (at the assumed
initial offering price of $11.00 per share) with respect to the number of shares
purchased from us, the total consideration paid and the average price per share
paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......................... 17,302,008 81.1% $ 11,856,579 21.1% $ 0.685
New stockholders.............................. 4,019,697 18.9 44,216,667 78.9 $ 11.000
------------ --------- ------------- -----
Totals.................................... 21,321,705 100.0% $ 56,073,246 100.0%
------------ --------- ------------- -----
------------ --------- ------------- -----
</TABLE>
As of December 31, 1998, there were options outstanding to purchase a total
of 1,408,564 shares of common stock at a weighted average exercise price of
$0.52 per share under our 1996 Stock Plan. In addition, as of December 31, 1998,
there was a warrant outstanding to purchase a total of 11,982 shares of common
stock at an exercise price of $1.535 per share. Subsequent to December 31, 1998,
we granted options to purchase 524,936 shares of common stock. To the extent
outstanding options or warrants are exercised, there will be further dilution to
new investors. In addition, subsequent to December 31, 1998, we issued a $4.0
million convertible promissory note, which note will convert into common stock
upon the closing of this offering. See "Management--1999 Equity Incentive Plan,"
"--Employee Stock Purchase Plan," "--1999 Non-Employee Director Stock Option
Plan" and Note 7 of Notes to Financial Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are included elsewhere in this prospectus. The statement of operations data for
the period from July 3, 1996 (inception) to December 31, 1996, and for each of
the two years in the period ended December 31, 1998, and the balance sheet data
at December 31, 1997 and 1998, are derived from, and are qualified by reference
to, the audited financial statements included in this prospectus. The balance
sheet data at December 31, 1996 are derived from audited financial statements
not included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JULY 3, 1996 DECEMBER 31,
(INCEPTION) TO --------------------
DECEMBER 31, 1996 1997 1998
----------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product................................................................ $ -- $ 284 $ 3,955
Maintenance and service................................................ 4 33 522
------- --------- ---------
Total revenues....................................................... 4 317 4,477
------- --------- ---------
Cost of revenues:
Product................................................................ -- 14 52
Maintenance and service................................................ 2 30 373
------- --------- ---------
Total cost of revenues............................................... 2 44 425
------- --------- ---------
Gross margin............................................................. 2 273 4,052
------- --------- ---------
Operating expenses:
Sales and marketing.................................................... 454 3,063 5,238
Research and development............................................... 378 1,372 2,372
General and administrative............................................. 210 585 1,474
------- --------- ---------
Total operating expenses............................................. 1,042 5,020 9,084
------- --------- ---------
Loss from operations..................................................... (1,040) (4,747) (5,032)
Other income (expense), net.............................................. 13 25 64
------- --------- ---------
Net loss................................................................. $ (1,027) $ (4,722) $ (4,968)
------- --------- ---------
------- --------- ---------
Basic and diluted net loss per share..................................... $ (3.40) $ (3.01) $ (1.40)
------- --------- ---------
------- --------- ---------
Shares used in computing basic and diluted net loss per share(1)......... 302 1,569 3,546
------- --------- ---------
------- --------- ---------
Pro forma basic and diluted net loss per share........................... $ (0.35)
---------
---------
Shares used in computing pro forma basic and diluted net loss per
share(1)............................................................... 14,113
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997 1998
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 2,064 $ 1,407 $ 972
Working capital.................................................................. 3,554 4,442 468
Total assets..................................................................... 4,099 5,575 5,637
Long-term liabilities, net of current portion.................................... 87 345 538
Redeemable convertible preferred stock........................................... 650 650 650
Total stockholders' equity....................................................... 2,950 3,879 421
</TABLE>
- ---------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
methods used to determine the number of shares used in computing net loss
per share data.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF NET PERCEPTIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED
FINANCIAL DATA" AND NET PERCEPTIONS' FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING, BUT NOT
LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We develop, market and support real-time relationship marketing software
solutions. We were incorporated in Delaware in July 1996. In connection with our
formation, we licensed technology that had been developed at the University of
Minnesota. From inception through December 31, 1996, we were considered to be in
the development stage, with activities primarily relating to raising capital,
recruiting personnel, conducting research and development, developing our
initial product, establishing the market for our initial product and purchasing
operating assets. During 1997 and 1998, we continued to invest in research and
development, built sales channels, expanded marketing activities and developed
administrative operations. We began shipping our first product in the first
quarter of 1997.
Substantially all of our product revenues through December 31, 1998 were
attributable to our Net Perceptions for E-commerce product. Net Perceptions for
E-commerce was originally marketed under the name "GroupLens Recommendation
Engine," which we launched in the first quarter of 1997. We anticipate that Net
Perceptions for E-commerce will continue to account for a substantial portion of
our product revenues for the foreseeable future. Consequently, a decline in the
price of or demand for Net Perceptions for E-commerce, or its failure to achieve
broad market acceptance, would seriously harm our business, financial condition
and results of operations. We expect to deliver our Net Perceptions for Call
Centers product in 1999.
We market the majority of our products through our direct sales force. Sales
derived through indirect channels, which consist of resellers, systems
integrators and original equipment manufacturers, accounted for approximately 8%
of our total revenues in 1998. We expect that sales derived through indirect
channels will increase as a percentage of total revenues. Sales through indirect
channels have lower average selling prices and gross margins than direct sales.
As a result, we expect that our gross margins on product sales will decline if
sales through indirect channels increase.
We license our products to our customers on a perpetual or annual basis. Net
Perceptions for E-commerce is licensed based on the number of web sites the
product supports and the number of user profiles the recommendation engine
stores. To date, we have licensed the Net Perceptions for E-commerce product
primarily on a perpetual basis. We are currently transitioning our license
arrangements for the Net Perceptions for E-commerce product to allow for
increased recurring revenues on an annual basis. We may not be successful in
this transition. Net Perceptions for Call Centers is licensed on an annual basis
based on the number of call center operators utilizing the product. Net
Perceptions Recommendation Engine is licensed based on the number of user
profiles the recommendation engine stores. Selling prices for our products have
typically ranged from $40,000 to several hundred thousand dollars. Annual
support and maintenance contracts, which can be purchased in conjunction with
the licensing of all products, are sold separately and entitle customers to
telephone support and some upgrade rights. The price for the support and
maintenance program is based on a percentage of the list price of the software
the customer has licensed. Consulting fees for implementation services and
training are charged at a per diem rate or on a fixed fee basis for a package of
services.
24
<PAGE>
License revenues are generally recognized upon product delivery to
customers, provided there are no significant post-delivery obligations or
uncertainties and collection of the related account receivable is probable.
Where multiple products or services are sold together under one contract,
revenues are allocated to each element based on its relative fair value, with
fair value being determined using the price charged when that element is sold
separately. An allowance for estimated future returns is recorded at the time
revenues are recognized based on our return policy. Service revenues are
recognized as services are rendered or ratably over the term of the service
agreement.
Deferred compensation related to stock options granted below fair market
value through December 31, 1998 was approximately $1,639,000 and during the
first quarter of 1999 was approximately $1,507,000. Of these amounts, we
amortized approximately $366,000 in 1998. Amortization of deferred stock
compensation expense is allocated to all operating expense lines identified in
the statement of operations. These amounts represent the difference between the
exercise price of certain stock option grants and the deemed fair value of the
common stock at the time of such grants. Deferred stock compensation expense is
amortized over the vesting period of the options, generally four years. As a
result, the amortization of deferred compensation will impact our reported
results of operations through 2003.
We have sustained losses on a quarterly and an annual basis since inception.
As of December 31, 1998, we had an accumulated deficit of $10.7 million. Our net
loss was $4.7 million in 1997 and $5.0 million in 1998. These losses resulted
from significant costs incurred in the development and sale of our products and
services. We expect to experience significant growth in our operating expenses
for the foreseeable future in order to execute our business plan, particularly
research and development and sales and marketing expenses. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. As a result,
we expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and such losses are anticipated to
increase significantly from current levels. We do not expect to achieve
profitability in 1999 or 2000.
Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future performance.
Our prospects must be considered in light of the risks, expenses and
difficulties encountered by companies at an early state of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties. We have experienced
significant percentage growth in revenues in recent periods; however, we do not
believe that prior growth rates are sustainable or indicative of future growth
rates.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, statement of
operations data for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues:
Product.................................................................................. 90 % 88 %
Maintenance and service.................................................................. 10 12
------ ---
Total revenues......................................................................... 100 100
Cost of revenues:
Product.................................................................................. 4 1
Maintenance and service.................................................................. 9 8
------ ---
Total cost of revenues................................................................. 13 9
------ ---
Gross margin............................................................................... 87 91
Operating expenses:
Sales and marketing...................................................................... 966 117
Research and development................................................................. 433 53
General and administrative............................................................... 185 33
------ ---
Total operating expenses............................................................... 1,584 203
------ ---
Loss from operations....................................................................... (1,497) (112)
Other income (expense), net................................................................ 7 1
------ ---
Net loss................................................................................... (1,490)% (111)%
------ ---
------ ---
</TABLE>
PERIODS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES
Total revenues were $4,000 for the period from inception to December 31,
1996, $317,000 in 1997 and $4.5 million in 1998.
PRODUCT REVENUES. Revenues from product licenses were $284,000 in 1997 and
$4.0 million in 1998. We had no product revenues in 1996. The majority of the
period-to-period growth in product revenues was due to higher unit sales
volumes. We anticipate that revenues from product licenses will continue to
represent a substantial majority of our revenues for the foreseeable future. We
expect that prior percentage growth rates of our product revenues will not be
sustainable in the future.
Revenues from international sales were $85,000 in 1997 and $603,000 in 1998,
which accounted for 27% of total revenues in 1997 and 13% of total revenues in
1998. The majority of international sales were made in Canada, Europe and Asia
by our direct sales force located in the United States. Our international sales
are generally denominated in U.S. dollars
MAINTENANCE AND SERVICE REVENUES. Maintenance and service revenues were
$4,000 for the period from inception to December 31, 1996, $33,000 in 1997 and
$522,000 in 1998. This growth is primarily due to increased licensing activity,
which has resulted in increased revenues from services related to maintenance
and support, training and consulting. We expect that prior percentage growth
rates of our maintenance and service revenues will not be sustainable in the
future.
26
<PAGE>
COST OF REVENUES
Gross margins increased from 87% in 1997 to 91% in 1998, primarily as a
result of increased product sales. In the future, we expect that royalties paid
to third parties will increase. In addition, we expect that sales derived
through indirect channels will increase as a percentage of total revenues. Sales
through indirect channels have lower average selling prices and gross margins
than direct sales. We also expect that maintenance and service revenues will
increase as a percentage of total revenues. Maintenance and service revenues
have lower gross margins than product revenues. For all of these reasons, we
expect that our gross margins will decline.
COST OF PRODUCT REVENUES. Cost of product revenues consists primarily of
royalties paid to third parties, the cost of manuals and product media, and
shipping costs. Cost of product revenues was $14,000 in 1997 and $52,000 in
1998. We had no cost of product revenues in 1996. The increase in the dollar
amount of cost of product revenues from 1997 to 1998 reflects the higher volumes
of product shipped in 1998. The decrease in costs as a percentage of the related
product revenues from 1997 to 1998 is primarily due to economies of scale
realized as a result of shipping greater quantities of product in 1998. Because
all development costs incurred in the research and development of software
products and enhancements to existing software products have been expensed as
incurred, cost of product revenues includes no amortization of capitalized
software development costs.
COST OF MAINTENANCE AND SERVICE REVENUES. Cost of maintenance and service
revenues consists primarily of personnel-related costs incurred in providing
support, consulting services and training to customers. Cost of maintenance and
service revenues was $2,000 for the period from inception to December 31, 1996,
$30,000 in 1997 and $373,000 in 1998, representing 91% of the related
maintenance and service revenues in 1997 and 71% in 1998. Cost of maintenance
and service revenues increased significantly from 1997 to 1998 as a result of
increased personnel-related costs as we began to build our customer support,
education and training, and consulting services organizations. We believe that
the cost of maintenance and service revenues will increase in dollar amounts but
decrease as a percentage of maintenance and service revenues in the future.
OPERATING EXPENSES
Operating expenses were $1.0 million for the period from inception to
December 31, 1996, $5.0 million in 1997 and $9.1 million in 1998.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses of sales and marketing personnel, and
promotional expenses. Sales and marketing expenses were $454,000 for the period
from inception to December 31, 1996, $3.1 million in 1997 and $5.2 million in
1998. Increased headcount in our sales and marketing organizations accounted for
approximately $1.2 million of the increase in sales and marketing expenses from
1996 to 1997 and approximately $1.3 million of the increase from 1997 to 1998.
Increased marketing expenses accounted for approximately $1.4 million of the
increase in sales and marketing expenses from 1996 to 1997 and approximately
$900,000 of the increase from 1997 to 1998. We believe that sales and marketing
expenses will increase in dollar amount but decrease as a percentage of total
revenues in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses were $378,000
for the period from inception to December 31, 1996, $1.4 million in 1997 and
$2.4 million in 1998. The increases in research and development expenses were
primarily attributable to increased staffing and associated support for software
engineers required to expand and enhance our product line. We believe that
research and development expenses will increase in dollar amount but decrease as
a percentage of total revenues in the future.
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold,
27
<PAGE>
Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on our product development process, technological feasibility is
established upon completion of a working model. The costs incurred between
completion of the working model and the point at which the product is ready for
general release have been insignificant. Through December 31, 1998, all research
and development costs have been expensed.
We license technology from various third parties for use in our products.
Third-party technology may not continue to be available to us on commercially
reasonable terms. We may not be able to renew our agreements with third parties
or develop alternative technology. If we cannot maintain rights or licenses to
key third-party technology, develop similar technology or license similar
technology from another source on a timely and commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed. See "Risk Factors--We depend on technology licensed from other parties.
If we are unable to continue to utilize such technology, our business would be
seriously harmed."
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$210,000 for the period from inception to December 31, 1996, $585,000 in 1997
and $1.5 million in 1998. The increases in general and administrative expenses
were primarily the result of increased staffing and associated expenses
necessary to manage and support our growth. In addition, the allowance for
doubtful accounts receivable increased by $28,000 from 1996 to 1997 and by
$266,000 from 1997 to 1998. We believe that general and administrative expenses
will increase in dollar amount as we continue to increase staffing to manage
expanding operations and facilities and incur the additional expenses associated
with operating as a public company. However, we believe that general and
administrative expenses will decrease as a percentage of total revenues in the
future.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of interest income, income expense and
other expense. Other income (expense), net was $13,000 for the period from
inception to December 31, 1996, $25,000 in 1997 and $64,000 in 1998.
PROVISION FOR INCOME TAXES
As of December 31, 1998, we had net operating loss carryforwards of
approximately $9.1 million available to reduce future taxable income expiring at
various dates beginning in 2011. In addition, as of December 31, 1998, we had
$258,000 of tax credit carryforwards expiring at various dates beginning in
2011. Under the provisions of the Internal Revenue Code, certain substantial
changes in our ownership may limit in the future the amount of net operating
loss and tax credit carryforwards that could be utilized annually to offset
future taxable income.
We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the future realization of the tax benefit is not
currently likely.
28
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth statement of operations data for the eight
quarters ended December 31, 1998, as well as the percentage of our total
revenues represented by each item. This information has been derived from our
unaudited financial statements. The unaudited financial statements have been
prepared on the same basis as the audited financial statements contained in this
prospectus and include all adjustments, consisting only of normal recurring
accruals, that we consider necessary for a fair presentation of such information
when read in conjunction with our annual audited financial statements and notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS AND AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product............................... $ 86 $ 23 $ 55 $ 120 $ 617 $ 889 $ 993 $ 1,456
Maintenance and service............... 7 4 4 18 53 100 163 206
--------- -------- --------- -------- --------- -------- --------- --------
Total revenues...................... 93 27 59 138 670 989 1,156 1,662
--------- -------- --------- -------- --------- -------- --------- --------
Cost of revenues:
Product............................... 4 1 3 6 6 9 10 27
Maintenance and service............... 7 3 4 16 35 65 106 167
--------- -------- --------- -------- --------- -------- --------- --------
Total cost of revenues.............. 11 4 7 22 41 74 116 194
--------- -------- --------- -------- --------- -------- --------- --------
Gross margin............................ 82 23 52 116 629 915 1,040 1,468
Operating expenses:
Sales and marketing................... 653 906 740 764 935 1,154 1,222 1,927
Research and development.............. 290 345 391 346 371 513 623 865
General and administrative............ 129 141 163 152 227 298 402 547
--------- -------- --------- -------- --------- -------- --------- --------
Total operating expenses............ 1,072 1,392 1,294 1,262 1,533 1,965 2,247 3,339
--------- -------- --------- -------- --------- -------- --------- --------
Loss from operations.................... (990) (1,369) (1,242) (1,146) (904) (1,050) (1,207) (1,871)
Other income (expense), net............. 33 14 2 (24) 28 38 24 (26)
--------- -------- --------- -------- --------- -------- --------- --------
Net loss................................ $ (957) $(1,355) $(1,240) $(1,170) $ (876) $(1,012) $(1,183) $(1,897)
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
PERCENT OF TOTAL REVENUES:
Revenues:
Product............................... 93% 85% 93% 87% 92% 90% 86% 88%
Maintenance and service............... 7 15 7 13 8 10 14 12
--------- -------- --------- -------- --------- -------- --------- --------
Total revenues...................... 100 100 100 100 100 100 100 100
Cost of revenues:
Product............................... 4 4 5 4 1 1 1 2
Maintenance and service............... 8 11 7 12 5 7 9 10
--------- -------- --------- -------- --------- -------- --------- --------
Total cost of revenues.............. 12 15 12 16 6 8 10 12
--------- -------- --------- -------- --------- -------- --------- --------
Gross margin............................ 88 85 88 84 94 92 90 88
Operating expenses:
Sales and marketing................... 702 3,356 1,254 554 140 117 106 116
Research and development.............. 312 1,278 663 251 55 52 54 52
General and administrative............ 139 522 276 110 34 30 35 33
--------- -------- --------- -------- --------- -------- --------- --------
Total operating expenses............ 1,153 5,156 2,193 915 229 199 195 201
--------- -------- --------- -------- --------- -------- --------- --------
Loss from operations.................... (1,065) (5,071) (2,105) (831) (135) (107) (105) (113)
Other income (expense), net............. 35 52 3 (17) 4 4 2 (2)
--------- -------- --------- -------- --------- -------- --------- --------
Net loss................................ (1,030)% (5,019)% (2,102)% (848)% (131)% (103)% (103)% (115)%
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
</TABLE>
Our quarterly operating results are expected to vary significantly from
quarter to quarter and are difficult to predict. See "Risk Factors--Our
quarterly operating results are volatile and difficult to predict. If we fail to
meet the expectations of public market analysts and investors, the market price
of our common stock may decrease significantly."
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through private sales of
preferred stock, with net proceeds of $11.3 million, bank loans and equipment
leases. We used $802,000 of cash in operations for the period from inception to
December 31, 1996, $4.6 million in 1997 and $4.4 million in 1998. We used cash
primarily to fund our net losses from operations. At December 31, 1998, we had
$972,000 in cash and cash equivalents and $468,000 in working capital.
In 1998, $3.0 million of cash was provided by investing activities. We had
sales of short-term investments of $3.4 million, offset by purchases of property
and equipment of $442,000. In 1996 and 1997, our investing activities consisted
of net purchases of short-term investments. We used $1.8 million net cash in
investing activities in 1996 and $1.7 million in 1997. We expect that, in the
future, cash in excess of current requirements, if any, will be invested in
investment grade, interest-bearing securities.
On February 4, 1999, we borrowed $4.0 million from a foreign corporate
investor pursuant to a convertible promissory note. The note is due January 31,
2000 and bears interest at the rate of 8% per annum. The note will automatically
convert into our equity securities upon our next equity financing at the price
per share in such financing. Accordingly, at the closing of this offering, all
principal and accrued but unpaid interest on the note will convert into our
common stock at a conversion price equal to the price per share in this
offering.
Capital expenditures, including capital leases, were $117,000 for the period
from inception to December 31, 1996, $414,000 in 1997 and $914,000 in 1998. Our
capital expenditures consisted of purchases of property and equipment, primarily
computer equipment and software. We expect that our capital expenditures will
continue to increase in the future. Since inception, we have generally funded
the purchase of property and equipment with capital leases. We have an equipment
loan agreement that allows us to borrow up to $1.0 million for the purchase of
property and equipment through December 1999. The initial term of the loan is 42
months from the borrowing date. The loan has an effective interest rate of 14%.
At December 31, 1998, the entire $1.0 million was available under the loan. As
of December 31, 1998, our primary commitments consisted of obligations
outstanding under operating leases and $794,000 of capital lease obligations.
We expect to experience significant growth in our operating expenses for the
foreseeable future in order to execute our business plan, particularly research
and development and sales and marketing expenses. As a result, we anticipate
that such operating expenses, as well as planned capital expenditures, will
constitute a material use of our cash resources. In addition, we may utilize
cash resources to fund acquisitions or investments in complementary businesses,
technologies or product lines. We believe that the net proceeds from the sale of
the common stock in this offering will be sufficient to meet our working capital
and capital expenditure requirements for at least the next 12 months.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
YEAR 2000 READINESS
"Year 2000 Issues" refer generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
- Function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
30
<PAGE>
- Respond to two-digit date input in a way that resolves the ambiguity as to
century in a disclosed, defined and predetermined manner;
- Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and
- Recognize the Year 2000 as a leap year.
We designed our current products to be Year 2000 compliant when configured
and used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. However, we have
not tested our products for Year 2000 compliance. We continue to respond to
customer questions about prior versions of our products on a case-by-case basis.
We have not tested software obtained from third parties. However, we are
seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite assurances from developers of products incorporated into our
products, our products may contain undetected errors or defects associated with
Year 2000 date functions. Known or unknown errors or defects in our products
could result in delay or loss of revenues, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of which
could seriously harm our business, financial condition and results of
operations. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether or to what extent we may be affected by it.
We are assessing our material internal information technology systems,
including both our own software products and third-party software and hardware
technology, but we have not initiated an assessment of our non-information
technology systems. We expect to complete testing of our information technology
systems in 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from such vendors
that their systems are Year 2000 compliant. We are not currently aware of any
significant operational issues or costs associated with preparing our internal
information technology and non-information technology systems for the Year 2000.
However, we may experience significant unanticipated problems and costs caused
by undetected errors or defects in the technology used in our internal
information technology and non-information technology systems.
We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, they may face
litigation costs and they may delay purchases or implementation of our products.
Year 2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our products and services. As a result,
our business, financial condition and results of operations could be seriously
harmed.
We have funded our Year 2000 plan from cash balances and have not separately
accounted for these costs in the past. To date, these costs have not been
significant. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
Year 2000 compliance that could seriously harm our business, financial condition
and results of operations.
We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing such a plan may itself be
significant. Finally, we are also subject to external forces that
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might generally affect industry and commerce, such as utility or transportation
company interruptions caused by Year 2000 compliance failures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We do not expect SFAS No. 133 to have a significant effect on our financial
condition or results of operations.
In November 1998, the FASB cleared for issuance SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,"
which will retain the limitations of SOP 97-2 on what constitutes vendor
specific objective evidence of fair value. SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. We
believe that our current revenue recognition policies and practices are
consistent with the provisions of the new guidance.
In February 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. We do not expect
SOP 98-1, which is effective for us beginning January 1, 1999, to have a
significant effect on our financial condition or results of operations.
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BUSINESS
INTRODUCTION
Net Perceptions is a leading provider of marketing solutions that enable
Internet retailers to market to customers on a personalized, one-to-one-basis in
real time. With our software solutions, a retailer learns from each customer
interaction and, based on the information received, adjusts marketing messages
and product offerings to that customer in real time. Net Perception defines its
product offerings as real-time relationship marketing solutions. We believe that
retailers that implement our solutions can attract more customers, generate more
products per order and increase customer loyalty. To date, we have focused on
providing solutions to electronic commerce retailers. Our customers currently
include Barnesandnoble.com, CDnow, Egghead.com, Preview Travel, Ticketmaster
Online and Value America.
Our products enable effective real-time relationship marketing by analyzing
past and current customer behavior, including purchase history, stated
preferences, demographic information and Internet browsing behavior. Based on
this analysis, our products use proprietary collaborative filtering technology
to anticipate other merchandise or information a customer is likely to be
interested in purchasing or viewing.
INDUSTRY BACKGROUND
MARKETING IN RETAIL INDUSTRIES
Over the past several decades, the retail industry has experienced
significant consolidation, which has been accompanied by a change in how
retailers market their goods and services to customers. Prior to the emergence
of national chain stores and other large retailers, many retailers knew their
customers personally. By learning the unique needs, tastes and preferences of
each customer, the retailer could deliver a high level of personalized service.
In many cases the retailer was able to recommend goods and services specifically
tailored to the needs of a particular customer, providing value and saving time
for the customer and increasing sales for the retailer. In addition, by knowing
customer tastes, the retailer was able to buy more efficiently, resulting in
less wasted or unsold inventory.
Customers now make many of their purchases at national chain stores and
other large retailers. These retailers compete primarily on the basis of price,
convenience, location and selection. The personalized service delivered by the
traditional retailer is often too expensive for large, modern retailers because
the service delivery cost conflicts with the price savings the retailer aims to
provide customers. Many large retailers communicate with their customers through
unfocused mass marketing channels, such as television and print advertisements,
direct mail and coupons. These mass marketing techniques provide an inexpensive
way of reaching a large group of potential customers. However, these approaches
are impersonal and do not allow for personalized communications with potential
customers. Furthermore, they are inefficient in that the messages are received
by large groups of people who are not likely customers of a given retailer or
buyers of a particular product.
ONE-TO-ONE MARKETING OPPORTUNITIES
In recent years, competition for the attention of customers has intensified.
Customers are confronted with a variety of purchase choices, in many cases at
similar prices. As a result, many retailers now seek to distinguish themselves
by satisfying the unique needs of each customer through one-to-one marketing.
Instead of selling one product at a time to as many customers as possible in a
particular sales period, one-to-one marketing uses customer databases, computer
technology and interactive communications to sell to each customer as many
products and services as possible. This approach requires companies to manage
customers individually rather than managing only products, sales channels and
programs. One-to-one marketing is designed to increase the number of products
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sold by helping customers find the products they want to purchase and by
generating repeat sales. The challenge is to automate one-to-one marketing so it
can be implemented effectively and inexpensively across large customer
populations.
ONE-TO-ONE MARKETING FOR ELECTRONIC COMMERCE. Because the Internet has
emerged as an interactive and individually addressable communications and
commerce medium, retailers now have the opportunity to implement one-to-one
marketing on a mass basis. One-to-one marketing can occur on the Internet each
time a customer interacts with a retailer's electronic commerce web site. The
retailer can observe and record customer behavior on its web site and solicit
preference information. This data can be processed to generate an understanding
of the customer's interests and recommend appropriate products and services,
often referred to as "personalization." With the size and tremendous growth of
electronic commerce, the opportunity for one-to-one marketing on the Internet is
potentially large. International Data Corporation estimates that the amount of
Internet commerce worldwide will increase from $32 billion in 1998 to over $400
billion in 2002. A Jupiter Communications survey conducted in June 1998 reported
that 40% of online retailers used some form of personalization and 93% of the
remaining online retailers planned to implement the practice in the following 12
months.
ONE-TO-ONE MARKETING IN TRADITIONAL CHANNELS. The one-to-one marketing
model on the Internet creates new opportunities in more traditional sales
channels, such as in retail stores and in outbound or inbound call centers.
One-to-one marketing can occur each time a customer interacts with a retailer.
In a retail store or call center, a retailer can use technology to track
customer behavior and develop an understanding of the customer's tastes and
preferences. The retailer can then recommend products and services that match
those tastes and preferences. For example, point-of-sale terminals in retail
stores can print personalized coupons. For inbound call centers, software can
collect data about current and past purchases, and suggest, through the sales
agent, additional products to recommend to the customer. In outbound call
centers, data can be leveraged to recommend which customers should be called for
a particular product offering, based on products those customers have purchased
in the past.
ONE-TO-ONE MARKETING ACROSS MULTIPLE TOUCH-POINTS. A touch-point is a point
of contact between a retailer and a customer, such as a retail store, web site
or call center. Those retailers that interact with customers through multiple
channels or touch-points have the opportunity to learn about their customers
through these interactions. We believe that retailers that are most successful
in learning from all of their touch-point interactions will build the strongest
relationships with their customers. Retailers need a means of sharing this
learning across multiple touch-points so that activity on one touch-point can be
used in recommendations produced for another touch-point.
Realizing the potential of one-to-one marketing requires software that is:
- ACCURATE: Recommendations generated by the software, whether for products
to promote or content to display, must accurately reflect customer
preferences. The more accurate the recommendations, the more effective
they will be in driving customer behavior.
- REAL-TIME: The response time for producing recommendations must be
virtually unnoticeable to customers. Customers may not wait for the
recommendations if they slow the interaction.
- SCALABLE: The software must scale to allow retailers to market millions
of products to millions of customers.
- RELIABLE: The software must be reliable, so it can run 24 hours a day, 7
days a week.
- EASY TO INTEGRATE: The software must integrate easily and effectively
with external systems, including web servers, electronic commerce servers
and customer management systems in call centers.
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Existing one-to-one marketing tools have not been able to maximize the full
potential of one-to-one marketing. They are unable to automatically learn from
customers or to deliver recommendations in real time, thus they are unable to
provide real-time relationship marketing for a retailer. In real-time
relationship marketing, a retailer learns a customer's preferences during each
interaction and adjusts the marketing message in real-time based on the
information received. A real-time relationship marketing solution must allow for
retailers to leverage the learning from all customer interactions to serve each
individual customer better.
THE NET PERCEPTIONS SOLUTION
Net Perceptions is a leading provider of real-time relationship marketing
solutions that enable Internet retailers to market to customers on a
personalized, one-to-one basis. With our software solutions, a retailer learns
from each customer interaction and, based on the information received, can
adjust marketing messages and product offerings to that customer in real time.
We believe that retailers that implement our solutions can achieve the following
results:
- MORE CUSTOMERS. More of the visitors who interact with the retailer may
decide to purchase, as the visitors are better able to navigate the
retailer's large product offerings, and retailers can present more
personalized product offerings.
- MORE PRODUCTS PER ORDER. Because the retailer is able to present
personalized product offerings to each customer, customers may purchase
more products during each interaction.
- INCREASED CUSTOMER LOYALTY. Customers value the recommendations that help
them find products they like, so they may come back to the retailer that
has built the relationship with them by catering to their individual
tastes. The retailer benefits because the cost of keeping an existing
customer is lower than the cost of acquiring a new customer.
Our products enable effective real-time relationship marketing by analyzing
past and current customer behavior, including purchase history, stated
preferences, demographic information and Internet browsing behavior. Based on
this analysis, our products use proprietary collaborative filtering to
anticipate other merchandise or information a customer would be most interested
in purchasing or viewing. Our product suite consists of the following:
- NET PERCEPTIONS FOR E-COMMERCE. Our Net Perceptions for E-commerce
product is a leading real-time relationship marketing solution for
electronic commerce. It offers retailers the ability to automatically
target their merchandise to customers who visit their web sites based on
each customer's individual tastes, preferences and behavior.
- NET PERCEPTIONS FOR CALL CENTERS. Our Net Perceptions for Call Centers
product is designed to provide personalized recommendations to the call
center operator for products a caller is likely to purchase based on the
caller's individual tastes and preferences.
- NET PERCEPTIONS RECOMMENDATION ENGINE. Our recommendation engine provides
a robust platform for implementing real-time relationship marketing
solutions. We leverage our development effort by investing in this
general-purpose relationship marketing platform that supports the analysis
and prediction requirements of all of our market-specific products. This
platform can be used to leverage data across multiple customer
touch-points.
Each of our products has the following characteristics:
- ACCURACY. We design our products to provide high recommendation accuracy
for our customers.
- REAL-TIME. Our solutions are designed to meet the real-time requirements
of large web sites, call centers and other retailers by delivering
personalized responses in fractions of a second.
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- SCALABILITY. We design our products to satisfy the volume requirements of
the large web sites, call centers and other retailers.
- RELIABILITY. We design our products to provide high reliability,
including support for online database backups, and rapid database
restoration, if necessary.
- INTEGRATION. We base our solutions on a distributed architecture that is
flexible enough to integrate with new or existing marketing
implementations, including web site and call center software.
Our solutions provide real-time relationship marketing both on the Internet
and in traditional marketing applications.
STRATEGY
Our objective is to extend our leadership position in providing real-time
relationship marketing solutions to Internet and traditional retailers. Key
elements of our strategy to achieve this objective include the following:
MAINTAIN AND EXTEND TECHNOLOGY LEADERSHIP. We intend to maintain and extend
our technological leadership in real-time relationship marketing solutions
through continued investment in the development of our proprietary
recommendation engine and other predictive technologies. We believe that we are
currently a technology leader in collaborative filtering and in real-time
relationship marketing because of the accuracy, real-time functionality,
scalability, reliability and ease of integration of our products. We intend to
maintain an open architecture so that our recommendation engine will continue to
integrate with major platforms and technologies as they evolve. We believe that
maintaining and enhancing our products and services is critical to solidifying
our technology leadership and strengthening our customer relationships.
LEVERAGE TECHNOLOGY INVESTMENTS IN NEW VERTICAL APPLICATION SOLUTIONS. We
intend to leverage our investment in our recommendation platform into additional
on-line and traditional markets, including applications for corporate intranets,
direct marketing and retail environments. We believe that there are
complementary vertical applications of our technology beyond our current
offerings in electronic commerce and call center systems. We believe many of our
customers will use our technology across many of their customer touch-points,
leveraging both our recommendation platform as well as our existing vertical
applications.
PROVIDE VALUE-ADDED PROFESSIONAL SERVICES. We intend to continuously
increase the value of our solutions to customers by offering additional and
improved professional services. We provide our customers with a comprehensive
array of services, including training and consulting services, software updates,
documentation updates, telephone support and web-based support. We believe the
relationships developed with our customers by providing services are critical to
understanding customer needs and thereafter designing our solutions to satisfy
these needs. In addition, by providing superior professional services, we can
heighten customer awareness of real-time relationship marketing, which creates
opportunities for us to sell new products and services to existing customers.
BUILD GLOBAL PRESENCE. We intend to develop our international presence to
address the global adoption of the Internet and to address international demand
for real-time relationship marketing solutions. We believe that international
markets present an attractive growth opportunity and that an early presence in
international markets will enhance our long-term competitive position in these
regions. We intend to increase our international sales capabilities by
developing a direct sales and support presence in selected European and Asian
markets, adding international distributors in targeted countries, developing
joint marketing programs with distributors and developing localized versions of
our product.
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BROADEN DISTRIBUTION CHANNELS AND BUILD STRATEGIC ALLIANCES. We intend to
expand our indirect distribution channels by recruiting additional resellers,
systems integrators, original equipment manufacturers and strategic alliance
partners. Over time, we expect that indirect sales will represent a higher
percentage of total sales. We believe that designing our products to interface
with the products of leading vendors of web site and call center software will
make our products more attractive to strategic alliance partners, resellers,
systems integrators and original equipment manufacturers. We believe these
distribution partners will provide an additional sales and marketing channel and
facilitate the successful deployment of our products.
PRODUCTS
Our product line includes the following: Net Perceptions for E-commerce, Net
Perceptions for Call Centers and Net Perceptions Recommendation Engine.
NET PERCEPTIONS FOR E-COMMERCE
Net Perceptions for E-commerce allows on-line retailers to create a
personalized shopping environment using real-time relationship marketing. Net
Perceptions for E-commerce can be used to dynamically predict which products to
recommend to each customer browsing an electronic commerce site, based on past
and current customer behavior, including purchase history, stated preferences,
demographic information and Internet browsing behavior. These recommendations
are presented to the customer, who may find additional appealing products and
purchase them.
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The following graphic shows a typical customer interacting with a commerce
web site that is using Net Perceptions for E-commerce.
[GRAPHIC]
There are five parts to the graphic with arrows connecting them. The first part
is a photo of a woman in front of a computer, pointing at the monitor. The
caption "1 Customer visits a retailer's electronic commerce web site that
utilizes Net Perceptions for E-commerce software." appears under the photo. An
arrow leads down to the second part. The second part consists of the title
"Retailer's Web Site" centered over a computer screen with the word "Welcome!"
appearing on the computer screen. The caption "2 The customer browses the
retailer's web site." appears under the computer screen. An arrow leads up to
the third part. The third part consists of the title "Net Perceptions for
E-commerce" centered over an oval with the words "Net Perceptions Recommendation
Engine" contained within the oval and a hexagon with the words "Customer
Preference Database" contained within the hexagon. The oval and hexagon are
superimposed over a picture of a computer keyboard. The caption "3 The web site
solicits customer preference information and tracks the customer's browsing
behavior and purchases." appears below the oval. Adjacent to this caption below
the hexagon is the caption "4 The recommendation engine predicts other products
likely to to be appealing to the customer." Below these captions, an arrow leads
to a picture of three computer screens superimposed on each other with the top
screen containing the words "Recommended Merchandise" and the letters "A", "B"
and "C". An arrow leads across to a picture of a computer screen containing the
letter "C" and the word "Buy". Directly below this computer screen is the
caption "5 The web site presents appealing products for the customer to
purchase."
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Net Perceptions for E-commerce can also be used in many other ways,
including the following:
- PERSONALIZED SPECIAL OFFERS. A "special offers" list can be personalized
to include products likely to appeal to the customer.
- PRODUCT RECOMMENDATION CENTER. A product recommendation center can allow
customers to express opinions about products and receive recommendations
of other products likely to be appealing.
- GIFT CENTER. A gift center can help customers choose gifts for others by
allowing the customer to name a few items liked by the intended recipient
of the gift. The gift center recommends other products the recipient will
like based on the stated preferences.
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NET PERCEPTIONS FOR CALL CENTERS
Net Perceptions for Call Centers allows call center retailers to recommend
products to customers using real-time relationship marketing. Net Perceptions
for Call Centers can be used to create product recommendations for customers
based on their past and present interaction with the call center, including past
purchases and customer inquiries. Net Perceptions for Call Centers is more
powerful than a traditional cross-sell table, because the recommendations are
created in real-time and updated based on the interests of a particular
customer.
The following graphic illustrates the operation of Net Perceptions for Call
Centers.
[GRAPHIC]
Graphic depicting Net Perceptions for Call Centers. Underneath are four parts to
the graphic with arrows connecting them. The first part is a photo of a woman
using a telephone. The caption "1 Caller phones a call center supported by Net
Perceptions for Call Centers to place an order." appears under the photo. An
arrow leads down to the second part. The second part consists of the title
"Retailer's Call Center" centered over a photo of an operator pointing at a
computer monitor. A caption to the bottom right of the photo reads "2 The
operator takes the order and enters it into the order processing system (OPS)."
An arrow leads from part two to a black square with the words "Retailer's Order
Processing System" in white text in the black square. An arrow runs from the
black square back to part two. Under this arrow is the caption "5 The products
recommended by the Recommendation Engine are displayed on the operator's
screen." Another arrow leads up from the black square to the third part. This
consists of the title "Net Perceptions for Call Centers" centered over an oval
with the words "Net Perceptions Recommendation Engine" contained within the oval
and a hexagon with the words "Preference Database" contained within the hexagon.
The oval and hexagon are superimposed over a picture of a computer keyboard. The
caption "3 The OPS forwards the content of the current order to the Net
Perceptions Recommendation Engine" appears below the oval. Below the hexagon is
the caption "4 The recommendation engine predicts other products likely to to be
appealing to the customers." An arrow runs from the oval back down to the black
square.
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We announced the commercial launch of Net Perceptions for Call Centers in
November 1998 and expect to make our initial shipments in 1999. Net Perceptions
for Call Centers has not received any degree of market acceptance. See "Risk
Factors--We recently announced Net Perceptions for Call Centers, which may not
achieve market acceptance."
Net Perceptions for Call Centers can be integrated with other parts of call
center systems for more sophisticated applications, including:
- The inventory database, so only products with sufficient inventory levels
are recommended;
- The product database, so recommendations can be based on additional
information about the products; and
- The pricing database, so only products with sufficient profit margins are
recommended.
NET PERCEPTIONS RECOMMENDATION ENGINE
The Net Perceptions Recommendation Engine allows customers to deploy the
recommendation engine technology within their own, unique applications. The Net
Perceptions Recommendation Engine evolved from our original GroupLens
Recommendation Engine, which was a general-purpose tool for real-time
relationship marketing. The Net Perceptions Recommendation Engine has evolved
into a
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general platform that supports Net Perceptions for E-commerce and Net
Perceptions for Call Centers. In addition, we license the Net Perceptions
Recommendation Engine separately to customers who would prefer to apply the
functionality of the recommendation engine in markets for which we do not yet
have a specific vertical product. For example, customers have incorporated the
Net Perceptions Recommendation Engine into:
- Content-based applications, for helping customers find the news and
information in which they are most interested; and
- Original equipment manufacturer software applications, in which the
recommendation engine is embedded.
PRODUCTS UNDER DEVELOPMENT
We are developing new products planned for introduction later in 1999. These
products consist of Net Perceptions for Marketing Campaigns and Net Perceptions
for Knowledge Management.
NET PERCEPTIONS FOR MARKETING CAMPAIGNS. Net Perceptions for Marketing
Campaigns is being designed as a tool for managing and personalizing outbound
promotional electronic mail campaigns. It is being designed to analyze past
customer responses and purchase behavior to select a personalized set of
products to target to each set of customers, or to select a set of customers to
target for a particular product. The set of products can then be recommended to
the customers through promotional e-mail. Net Perceptions for Marketing
Campaigns is being designed to include a graphical user interface that visually
shows the effectiveness of the ongoing promotional campaign. We believe that the
ability of the recommendation engine to better tailor message content to the
recipient on a one-to-one basis should yield higher response rates per mailing
and will provide a core competitive advantage.
NET PERCEPTIONS FOR KNOWLEDGE MANAGEMENT. Net Perceptions for Knowledge
Management is being designed to apply the real-time relationship management
capabilities of the recommendation platform to knowledge management. Knowledge
Management means proactively planning and managing a company's process for
leveraging information and employee knowledge to achieve a competitive advantage
in a marketplace. Net Perceptions for Knowledge Management is being designed to
integrate with existing information management systems, such as search engines,
document management systems, Lotus Notes and the web, and to track the everyday
interactions between these systems and their users. Using the interaction
information, Net Perceptions for Knowledge Management is being designed to
automatically locate documents and data repositories containing relevant
information for each user. It is also being designed to help users locate other
users with knowledge and interest in specific subject areas. We believe these
applications will improve the efficiency of employees in working with an
enterprise's existing knowledge database.
Software products as complex as those currently under development by us are
subject to frequent delays, and we may encounter difficulties that could delay
or prevent the successful and timely development, introduction and marketing of
these products under development. Moreover, even if such products under
development are completed and introduced, they may never achieve any significant
degree of market acceptance. Failure to release these products under development
on a timely basis, or failure of these products under development, if and when
released, to achieve any degree of market acceptance, could seriously harm our
business, financial condition and results of operations.
PROFESSIONAL SERVICES
Our professional services organization provides consulting services,
education and training and customer support. We believe that providing a high
level of customer service and technical support is critical to the satisfaction
of our customers and our own success. As of February 28, 1999, our professional
services staff consisted of 11 employees.
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CONSULTING SERVICES. We offer a variety of professional services focused on
providing customers solutions that are delivered either by our specialists or
through one of our regional or national partners trained in the use and
implementation of our products. These services include project management,
in-depth application design and implementation. Fees for professional services
are typically charged separately from our software license fees. We believe
consulting services are strategically valuable to our customers because they
provide customers with a source of technical and personalization expertise to
support the timely and efficient implementation of our products.
EDUCATION AND TRAINING. We offer extensive education and training programs
to our customers. Training classes are offered at our offices in Minneapolis,
San Francisco and New York. We also provide training at our customers'
facilities upon their request. Fees for education and training services are
typically charged separately from our software license fees.
CUSTOMER SUPPORT. We provide our customers with an array of support
services, including telephone support, web-based support and updates to our
products and documentation. Our web-based support is available 24 hours a day
and provides answers to frequently asked questions, technical advice and an area
for downloading product updates. We enter into maintenance and support contracts
separate from our product license agreements. Fees are typically 18% of the
license fees for the associated software product. These contracts are renewable
for an annual fee typically equivalent to 18% of the current list price of the
software licensed by the customer.
TECHNOLOGY
REAL-TIME RECOMMENDATION ENGINE PLATFORM
The Net Perceptions real-time recommendation engine platform is the
foundation of our real-time relationship marketing solutions. Our platform is
designed to integrate easily and effectively with external systems, such as web
servers, electronic commerce servers, on-line ad servers and call center
software systems. Our platform is designed to provide accurate customer
recommendations and to exploit the performance and scalability advantages of
modern, multiple-processor, shared memory computers.
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The platform contains the recommendation engine, a database of customer
preferences and an application programmer's interface. The customer preference
database is a specially structured database in a commercial database management
system, such as Microsoft SQL server or Oracle databases. The recommendation
engine in the platform is independent from the customer interaction environment.
Vertical applications are built on the platform to leverage the technology
investment. The figure below shows our current products, which utilize the
real-time recommendation engine platform.
[GRAPHIC]
The graphic consists of three levels of shapes arranged vertically. The top
level is an oval containing the words "Client Applications" above the words "web
servers - call centers." The second level is directly below the first level and
contains two smaller ovals adjacent to one another. The first oval contains the
words "Net Perceptions for E-commerce." The second oval contains the words "Net
Perceptions for Call Centers." The third level is located directly below the
first and second ovals from the second level. The third level contains a
rectangle containing the words "Application Programmer's Interface." The
rectangle is located directly above an oval containing the words "Net
Perceptions Recommendation Engine." The oval is located above a hexagon
containing the words "Customer Preference Database." The oval and hexagon are
separated by a two-way arrow pointing at each of the oval and hexagon. A dotted
line runs the length of the third level. The dotted line is intersected in the
middle with the words "Real-Time Recommendation Engine Platform."
The customer preference database stores customer preference data used by the
recommendation engine to produce recommendations. The data may include customer
purchasing behavior, statements of preference explicitly made by the customer,
demographic information about the customer and behavioral information about the
customer. The preference database may also contain information supplied by a
marketer, for example groups of products the marketer explicitly wants to be
recommended together or products that are substitutes for one another.
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The engine responds to requests for recommendations and applies a series of
predictive algorithms to produce recommendations in real time. Examples of the
types of questions the analytical engine can be used to answer include:
- What is the customer's likely opinion of a specific product?
- What is the customer's propensity to purchase any of the following ten
products?
- Given the contents of his or her shopping basket, what else is this
customer likely to buy?
- Who are other customers similar to this customer?
The application programmer's interface provides the link between the
recommendation engine and other applications and allows applications such as web
servers and call center systems to "ask questions" of the recommendation engine,
which provides answers to drive the interaction with customers.
COLLABORATIVE FILTERING
Our core predictive technology resides in the recommendation engine and
incorporates a base of research and development in collaborative filtering
initiated in 1992 at the University of Minnesota. Collaborative filtering
compares selected attributes of a customer's preferences, opinions and behavior
to the attributes of large customer populations. Groups of customers exhibiting
attributes similar to the specific customer are analyzed to determine the likely
preferences of the customer. The following figure illustrates the process of
producing product recommendations using collaborative filtering:
[GRAPHIC]
Four part graphic depicting the process of producing product recommendations
using collaborative filtering. The first part is a photo of a man's face with a
caption underneath that reads "1 Information about the customer is gathered." A
large arrow points from the photo to part two, a photo of numerous faces, with
three of the faces separated from the group by an encircling line. Underneath
part two, the caption read, "2 A "neighborhood" of similar customers is
identified." A large arrow points to part three. Part three is a photo of the
encircled three faces from part two, but without the background of additional
faces. The caption under part three reads, "3 The "neighborhood" is analyzed." A
large arrow leads from part three to part four, a fuzzy photo of the three faces
without the encircling line, with the text "Recommendations", "A", "B" and "C"
printed over the faces. The caption under part four reads, "4 Recommendations
based on the analysis of the neighborhood are made."
Collaborative filtering is driven by information about customer preferences,
such as explicit statements of preference, and implicit statements of
preference, such as time spent looking at an item and purchasing behavior. Known
customer preference information is used to identify a group or "neighborhood" of
other customers who share preferences with the customer in question. The
collective preferences of the neighborhood are used to predict unknown
preferences of the customer in question, such as which products the customer is
most likely to purchase.
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CUSTOMERS
As of December 31, 1998, we had licensed products to more than 70 customers.
These customers are in various stages of deployment of our products. The
following is a representative list of our customers that accounted for at least
$25,000 in bookings to us during the period from January 1, 1997 to December 31,
1998:
<TABLE>
<CAPTION>
BOOKS MUSIC GENERAL RETAIL
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Audio Book Club CDnow Bluefly
Barnesandnoble.com Musicland/Sam Goody iMall
Bertlesmann (MLG Internet) J.C. Penney Company
Chapters MuZic Depot Petters Company
Computer Book Shops Launch Media Skymall
Indigo Books Seneca Media Group Value America
Soundstone Entertainment
Tower Records
MOVIES GROCERIES/FOOD SOFTWARE/COMPUTERS
- ------------------------------------ ------------------------------------ ------------------------------------
Digital Courier Technologies Digital Chef Buy.com
DVD Express HomeGrocer.com Egghead.com
Millenium Communications Let's Eat Out Chumbo.com
Trans World Entertainment TechWave
Wherehouse.com
ENTERTAINMENT OTHER
- ------------------------------------ ------------------------------------
Billboard TalentNet Action World
City Online Art.com
Ticketmaster Online ASKUL Corporation
Bass Pro
Bid.com
BrainPlay.com
iVillage
Preview Travel
</TABLE>
An example of the manner in which our products may be used to address
specific application needs is set forth below.
CDNOW. CDnow (cdnow.com) is an online music store that wanted to provide
its electronic shoppers with item suggestions quickly and easily. In the fall of
1997, CDnow presented us with the challenge of personalizing its large inventory
for each single visitor. CDnow selected the Net Perceptions Recommendation
Engine because of its collaborative filtering technology and ease of
implementation. The CDnow Gift Selector was created utilizing the Net
Perceptions Recommendation Engine with CDnow's existing customer purchase
history data. Visitors to the CDnow site are able to enter the names of musical
artists to obtain a list of corresponding gift recommendations. This feature was
launched in November 1997. Shortly after the holidays, it was renamed "Album
Advisor" and made a permanent part of the CDnow site. "Album Advisor" became one
of the most popular pages on the CDnow site. In the fall of 1998, CDnow expanded
its use of personalization technology when it launched the "My CDnow" section of
its site. These personalized pages, which use the Net Perceptions for E-commerce
product, allow visitors to combine their personalized music recommendations with
order history and wish list for a satisfying shopping experience.
44
<PAGE>
SALES AND MARKETING
We market our software and services through our direct sales organization
and through indirect distribution channels, including resellers, systems
integrators and original equipment manufacturers. We have sales offices in
Minneapolis, San Francisco and New York.
As of February 28, 1999, our direct sales organization included 25 sales
representatives, managers, business development representatives and support
personnel. We intend to increase our North American sales force as demand
requires by opening additional field sales offices. However, competition for
such personnel is intense, and we may not be able to attract highly qualified
sales and marketing personnel. Additionally, we intend to expand our presence in
international markets by building our international sales force. We believe that
this will be necessary in order to grow our revenues. We may also need to
localize our products in various markets. However, we have limited experience in
developing localized versions of our products and marketing and distributing our
products internationally. Accordingly, we may not be successful in international
markets. See "Risk Factors--We are dependent upon key personnel" and "--We
depend on international sales, and, therefore, our business is susceptible to
numerous risks associated with international operations."
Our sales organization is complemented by distribution partners, including
resellers, systems integrators and original equipment manufacturers. These
partners license our products at a discount for re-licensing, and may provide
training, support and customer service to end users. In 1998, our distribution
partners were responsible for 8% of our product revenues. We anticipate that the
percentage of our total revenues derived from indirect sales will increase in
the future. However, we may not be able to attract or retain resellers, systems
integrators and original equipment manufacturers. We expect that a material
increase in our indirect sales as a percentage of revenues will adversely affect
our average selling prices and gross margins due to the lower unit prices that
we receive when selling through indirect channels. See "Risk Factors--We rely on
resellers and need to develop this sales channel. If our reseller channel does
not perform adequately, our business could be seriously harmed." and "--We rely
on original equipment manufacturers and need to develop this sales channel. If
our original equipment manufacturer channel does not perform adequately, our
business could be seriously harmed."
As of February 28, 1999, our marketing organization consisted of 13
employees primarily engaged in marketing research, producing marketing
materials, product planning, managing press coverage and other public relations,
identifying potential customers, attending and exhibiting at trade shows,
seminars and conferences, creating presentations and sales tools, establishing
and maintaining close relationships with industry analysts and maintaining our
web site. In addition, we rely on various outside consultants to supplement our
marketing organization for various public relations and market research
requirements.
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for product
architecture, core technology, product testing and quality assurance, writing
product user documentation, and expanding the ability of our products to operate
with the leading hardware platforms, operating systems and database management
systems. In addition, this organization supports some pre-sale and customer
support activities. Our research and development organization is divided into
teams consisting of development engineers, product managers, quality assurance
engineers and technical writers.
As of February 28, 1999, our research and development staff consisted of 31
employees. Our total expenses for research and development were $378,000 in
1996, $1.4 million in 1997 and $2.4 million in 1998. We believe that research
and development expenses will continue to increase in the future. To date, our
development efforts have not resulted in any capitalized software development
costs.
45
<PAGE>
We believe that our future performance will depend in large part on our
ability to:
- Maintain and enhance our current product line;
- Develop new products that achieve market acceptance;
- Maintain technological competitiveness; and
- Meet an expanding range of customer requirements.
We currently plan to introduce and market several potential new products
later in 1999. These potential new products are subject to significant technical
risks. We may experience delays in the commencement of commercial shipments of
potential new products, resulting in delay or loss of product revenues. If the
potential new products do not achieve market acceptance, or we are unable, for
technological or other reasons, to develop, introduce and sell such potential
new products in a timely manner, our business, financial condition and results
of operations will be seriously harmed. Software products as complex as those we
offer may contain undetected errors or failures when first introduced or when
new versions are released. We have in the past discovered software errors in our
new products after their introduction. Although we have not experienced serious
harm from any such errors to date, we may, despite testing by us and by current
and potential customers, discover errors in new versions of existing products or
potential new products after commencement of commercial shipments, resulting in
loss of or delay in market acceptance, which could seriously harm our business,
financial condition and results of operations. See "Risk Factors--We are
dependent on potential new products. If these potential new products are not
launched on a timely basis or do not achieve market acceptance, our business
will be seriously harmed" and "--We recently announced Net Perceptions for Call
Centers, which may not achieve market acceptance."
COMPETITION
The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of electronic commerce
products, we primarily encounter competition from the LikeMinds division of
Andromedia, the Aptex division of HNC Software and Personify. Microsoft
Corporation recently acquired FireFly Network Inc., a company with collaborative
filtering technology and, as a result, we expect that we will encounter
competition from Microsoft in the future. We expect that if we are successful in
our strategy to leverage our technology into new vertical markets, we will
encounter many additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, we expect
additional competition from other established and emerging companies as the
Internet software market continues to develop and expand.
We believe that the principal competitive factors affecting our market
include core technology, product features, product quality and performance,
customer service and price. Although we believe that our products currently
compete favorably with respect to such factors, our market is relatively new and
is rapidly evolving. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of software industry consolidations.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm our
business, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors.
46
<PAGE>
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We are a technology company. Our success depends on protecting our
intellectual property, which are our most important assets. If we do not
adequately protect our intellectual property, our business, financial condition
and results of operations would be seriously harmed.
We license our software and require our customers to enter into license
agreements, which impose restrictions on our customers' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets,
including but not limited to requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source code. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.
We have four pending U.S. patent applications. We also have license rights
to two issued U.S. patents and one pending U.S. patent application from the
University of Minnesota. We have no issued foreign patents, nor do we have any
pending foreign patent applications. It is possible that no patents will issue
from the currently pending patent applications. It is also possible that our
current patents or potential future patents may be found invalid or
unenforceable, or otherwise be successfully challenged. It is also possible that
any patent issued to us may not provide us with any competitive advantages. It
is also possible that we may not develop future proprietary products or
technologies that are patentable, and that the patents of others may seriously
limit our ability to do business. In this regard, we have not performed any
comprehensive analysis of patents of others that may limit our ability to do
business.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. We have from time to time received
claims that we are infringing third parties' intellectual property rights. It is
possible that in the future third parties may claim that our current or
potential future products infringe their intellectual property. We expect that
software developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm our
business, financial condition and results of operations.
We license personalization screening and collaborative filtering technology
known as the "GroupLens" technology from the University of Minnesota pursuant to
an exclusive, worldwide, license agreement. The exclusive rights granted are
subject to non-exclusive rights retained by:
- AT&T Corporation, for portions of the technology funded by AT&T;
- The United States government, for government-funded aspects of the
technology, but solely for government purposes; and
- The University of Minnesota, for its own educational and research
purposes.
The license agreement also provides that for the three academic years ending
in the spring of 2000, we will pay research fees to the University of Minnesota
for exclusive rights to commercial
47
<PAGE>
applications that the research may produce related to improvements to the
GroupLens technology. If the agreement is terminated prior to the end of the
1999-2000 academic year or if we are unable to renew the agreement, we will no
longer have access to the research conducted by the University of Minnesota,
which could result in an increased burden on our product development department,
as well as a reduction in improvements to our core technology. We may not be
able to renew the agreement, hire adequate personnel to meet any increased
demands on our product development department, or continue to advance our
technology on a timely basis. If we are unable to renew the agreement, hire
sufficient personnel or develop product improvements in a timely manner, our
business, financial condition and results of operations would be seriously
harmed.
We integrate third-party software in our software products. For instance, we
license the Orbix object request broker from IONA Technologies for use in our
Net Perceptions for E-commerce, Net Perceptions for Call Centers and Net
Perceptions Recommendation Engine products. The agreement expires in July 2001.
The third-party software may not continue to be available to us on commercially
reasonable terms. We may not be able to renew this agreement or develop
alternative technology. If we cannot maintain licenses to key third-party
software, such as Orbix, develop similar technology or license similar
technology from another source on a timely or commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed.
EMPLOYEES
As of February 28, 1999, we had a total of 92 employees, including 38 in
sales and marketing, 31 in research and development, 11 in customer support and
12 in administration. All of these employees were located in the United States.
None of our employees is represented by a collective bargaining agreement, nor
have we experienced any work stoppage. We consider our relations with our
employees to be good.
FACILITIES
Our principal sales, marketing, research and development, and administrative
facility occupies approximately 23,000 square feet in Minneapolis, pursuant to a
lease that expires on December 31, 2003. In addition, we also lease sales and
support offices in the metropolitan areas of San Francisco and New York. We
believe that our existing facilities are adequate for our current needs and that
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
48
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of Net Perceptions, and their ages as
of February 28, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Steven J. Snyder.............. 44 President, Chief Executive Officer and Director
Nanci Anderson................ 42 Vice President of Customer Solutions
Paul Bieganski................ 34 Chief Technical Officer
Thomas M. Donnelly............ 35 Chief Financial Officer and Secretary
P. Stephen Larsen............. 48 Vice President of Marketing and Business Development
Bradley N. Miller............. 34 Vice President of Product Development
George E. Moser............... 43 Vice President of Worldwide Sales
John T. Riedl................. 37 Director and Chief Scientist
Douglas J. Burgum............. 42 Director and Member of the Audit and Compensation
Committees
Ann L. Winblad................ 48 Director and Member of the Audit and Compensation
Committees
</TABLE>
Dr. Snyder co-founded Net Perceptions in July 1996 and since such time has
served as our President and Chief Executive Officer and as a director. From
January 1996 to July 1996, Dr. Snyder served as an independent consultant. From
July 1993 to December 1995, Dr. Snyder served as Vice President of Software
Development at Personnel Decisions International, Inc., a human resources
consulting firm. Dr. Snyder pursued his doctorate in psychology from 1988 to
1994. From 1983 to 1988 Dr. Snyder was employed by Microsoft Corporation, a
software company, where he held several posts including IBM Account Manager and
General Manager of the Language Business Unit. Dr. Snyder holds a B.S. in
mathematics from Drexel University, an M.B.A. from Harvard University and an
M.A. and a Ph.D. in psychology from the University of Minnesota.
Ms. Anderson joined Net Perceptions in September 1998 as our General Manager
of Customer Solutions, and in March 1999 was promoted to Vice President of
Customer Solutions. From February 1998 to September 1998, Ms. Anderson was
Technology Services Practice Director for Oracle Corporation, a software
company. From December 1996 to February 1998, Ms. Anderson was General
Manager/COO for KeyTech, LLC, a software development firm specializing in
object-oriented and internet application development services. From April 1995
to December 1996, Ms. Anderson was Area Services Director for Lawson Software
Corporation, a software company. From June 1994 to April 1995, Ms. Anderson was
Regional Services Manager for Lawson Software. From May 1993 to June 1994, Ms.
Anderson served as Vice President of Customer Support and Services for ONTOS
Corporation, a vendor of object-oriented database and software tools.
Previously, Ms. Anderson was Director of U.S. Client Services for Cognos
Corporation, a software company.
Dr. Bieganski joined Net Perceptions in August 1997, as our Director of
Algorithm Development, and in November 1998 became Net Perceptions' Chief
Technical Officer. From September 1995 to August 1997, Dr. Bieganski was the
Vice President of Research and Development at Signum Systems, a manufacturer of
embedded systems software and hardware development tools. From January 1994 to
September 1995, Dr. Bieganski co-founded and served as President at TeleMedical,
Inc., a medical services company. From June 1990 to January 1994, Dr. Bieganski
served as Vice President of Research and Development of Advanced Medical
Systems, a manufacturer of medical diagnostic devices. From September 1988 to
June 1990, Dr. Bieganski served as Chief Engineer of Advanced Medical Systems.
Dr. Bieganski holds a B.S., an M.S. and a Ph.D. in computer science from the
University of Minnesota.
49
<PAGE>
Mr. Donnelly joined Net Perceptions in March 1997 as our Corporate
Controller, and in March 1998 became Net Perceptions' Chief Financial Officer.
In February 1999, Mr. Donnelly was appointed Secretary. From March 1995 to March
1997, Mr. Donnelly served as a financial and management consultant in the
capacity of chief financial officer or corporate controller for various public
and private companies and partnerships, including Net Perceptions from September
1996 to March 1997. From December 1992 to March 1995, Mr. Donnelly was the Chief
Financial Officer of Medical Documenting Systems, Inc., a medical software
company. Prior to 1994, Mr. Donnelly was employed by Marshall Financial Group,
Inc., a merchant banking company, and Staats International, Inc., an
architectural company. Mr. Donnelly holds a B.A. in economics from St. Olaf
College.
Mr. Larsen joined Net Perceptions in June 1997 as our Vice President of
Marketing and Business Development. From August 1996 to June 1997, Mr. Larsen
served as Vice President of Business Development for CitySearch, Inc., a
community-based information service. From July 1995 to August 1996, Mr. Larsen
was President and Managing Partner of Digital Dynamics, a consulting company.
Previously, Mr. Larsen led new business units at Prodigy Services Company, an
Internet company, and at AT&T Corporation, a telecommunications company. Mr.
Larsen holds an A.A. from Rochester State College.
Mr. Miller co-founded Net Perceptions in July 1996 and since such time has
served as our Vice President of Product Development. From September 1992 to July
1996, Mr. Miller was a Ph.D. candidate in Computer Science at the University of
Minnesota. From August 1990 to July 1992, Mr. Miller was a project leader at
Apertus Technologies, Inc., a software company, for an enterprise database
synchronization product. From June 1986 to August 1990, Mr. Miller was an
engineer in the artificial intelligence research group at the energy management
systems division of Control Data, a software company. Mr. Miller holds a B.A. in
physics and computer science from Luther College, and an M.S. in computer
science from the University of Minnesota.
Mr. Moser joined Net Perceptions in January 1997 as our Regional Director of
Sales, East Region. In September 1997, Mr. Moser was appointed Vice President of
Worldwide Sales. From March 1993 to December 1996, Mr. Moser was the Director,
East Region for Autodesk, Inc., a software company. From February 1983 to
February 1993, Mr. Moser was employed by the technology division of Schlumberger
Inc., an oil field services company, as Director of Worldwide Major Accounts.
Mr. Moser holds a B.S. in management and an M.B.A. from the University of
Hartford.
Dr. Riedl co-founded Net Perceptions in July 1996 and since such time has
served as a director. In November 1998, Dr. Riedl became our Chief Scientist.
From July 1996 until November 1998, Dr. Riedl served as our Chief Technical
Officer. Dr. Riedl has been a professor in the computer science department at
the University of Minnesota since March 1990. Dr. Riedl holds a B.S. in
mathematics from the University of Notre Dame and an M.S. and a Ph.D. in
computer science from Purdue University.
Mr. Burgum became a director of Net Perceptions in January 1999. Mr. Burgum
has served as President of Great Plains Software, Inc., a software company,
since March 1984, Chief Executive Officer since September 1991 and Chairman of
the Board since January 1996. Mr. Burgum served as Vice President and a director
of Great Plains Software from March 1983 to March 1984. Before joining Great
Plains Software, Mr. Burgum was a management consultant in the Chicago office of
McKinsey & Company, Inc. Mr. Burgum holds a B.U.S. from North Dakota State
University and an M.B.A. from Stanford University.
Ms. Winblad became a director of Net Perceptions in August 1996. Ms. Winblad
has been a General Partner of Hummer Winblad Venture Partners, a venture capital
investment firm, since 1989. Ms. Winblad is also a director of Hyperion
Solutions, Inc., a software company. Ms. Winblad holds a B.A. in mathematics and
business administration from the College of Saint Catherine and an M.A. in
education with an economics focus from the University of St. Thomas.
50
<PAGE>
Net Perceptions currently has authorized four directors. Each director holds
office until the next annual meeting of stockholders or until a successor is
duly elected and qualified. The officers serve at the discretion of the board of
directors. There are no family relationships among the directors and officers of
Net Perceptions.
BOARD COMMITTEES
The audit committee consists of Mr. Burgum and Ms. Winblad. The audit
committee makes recommendations to the board of directors regarding the
selection of independent accountants, reviews the results and scope of audit and
other services provided by our independent accountants and reviews and evaluates
our audit and control functions.
The compensation committee consists of Mr. Burgum and Ms. Winblad. The
compensation committee makes recommendations regarding our stock plans and makes
decisions concerning salaries and incentive compensation for our employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently or has been,
at any time since the formation of Net Perceptions, an officer or employee of
Net Perceptions. No member of our compensation committee serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
compensation committee.
DIRECTOR COMPENSATION
We do not currently provide our directors with cash compensation for their
services as members of the board of directors, although members are reimbursed
for some expenses in connection with attendance at board and committee meetings.
Mr. Burgum received an option to purchase 30,000 shares of common stock at an
exercise price of $5.50 per share. The option is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by us at the original
exercise price paid per share upon the optionee's cessation of service prior to
vesting in such shares. The repurchase right lapses as to the option shares in a
series of 24 equal monthly installments from the grant date, but will become
fully vested if the board deems it desirable to avoid adverse accounting
treatment with respect to the option. Directors are eligible to participate in
our stock plans, and beginning in 1999, employee directors will also be able to
participate in our 1999 Equity Incentive Plan, and non-employee directors will
receive periodic option grants under our 1999 Non-Employee Director Option Plan.
See "Management--1999 Equity Incentive Plan."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation we
paid in 1998 for services to us by our Chief Executive Officer and our four
other highest-paid executive officers whose
51
<PAGE>
total salary and bonus for such fiscal year exceeded $100,000. Such officers are
referred to in this prospectus as the "Named Executive Officers."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
NUMBER OF
ANNUAL SHARES OF
COMPENSATION(1) COMMON STOCK
-------------------- UNDERLYING ALL OTHER
SALARY($) BONUS($) OPTIONS COMPENSATION($)(4)
--------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Steven J. Snyder ....................... 130,000 10,000 -- (3) --
President and Chief Executive Officer
P. Stephen Larsen ...................... 175,000 23,500 140,000 --
Vice President of Marketing and
Business Development
Bradley N. Miller ...................... 105,000 10,000 -- (3) --
Vice President of Product Development
Paul Bieganski ......................... 120,000 20,000 -- 9,000
Chief Technical Officer
George E. Moser ........................ 122,500 82,500(2) 140,000 50,000
Vice President of Worldwide Sales
</TABLE>
- ---------
(1) Includes amounts deferred under our 401(k) plan.
(2) Includes commissions of $72,500.
(3) Dr. Snyder holds 792,832 shares of restricted stock purchased on July 3,
1996. Mr. Miller holds 606,282 shares of restricted stock purchased on July
3, 1996.
(4) Represents relocation expenses.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options in 1998 to each
of the Named Executive Officers. No stock appreciation rights were granted
during such fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL
NUMBER OF RATES OF
SHARES OF STOCK PRICE
COMMON PERCENT OF TOTAL APPRECIATION
STOCK OPTIONS GRANTED TO EXERCISE FOR OPTION
UNDERLYING EMPLOYEES IN PRICE TERM (4)
OPTIONS 1998 ($/SHARE) EXPIRATION --------------------
GRANTED (1) (2) (3) DATE 5%($) 10%($)
----------- ------------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Snyder.............. -- -- -- -- -- --
P. Stephen Larsen............. 100,000 8.4% 0.25 5/26/08 15,722 39,844
40,000 3.3% 1.125 11/15/08 28,300 71,718
Bradley N. Miller............. -- -- -- -- -- --
Paul Bieganski................ -- -- -- -- -- --
George E. Moser............... 100,000 8.4% 0.25 5/26/08 15,722 39,844
40,000 3.3% 0.50 7/8/08 12,578 31,875
</TABLE>
- ---------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by us at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses and the
optionee vests in a series of 48 equal monthly installments. The option
shares will vest upon an acquisition of Net Perceptions by merger or asset
sale, unless our repurchase right with respect to
52
<PAGE>
the unvested option shares is transferred to the acquiring entity. Each of
the options has a ten year term, subject to earlier termination in the event
of the optionee's cessation of service with us.
(2) Based on an aggregate of 1,196,564 options granted to employees of Net
Perceptions under the 1996 Stock Plan during the 12 months ended December
31, 1998.
(3) The exercise price was equal to the fair market value of our common stock as
valued by the board of directors on the date of grant. The exercise price
may be paid in cash, in shares of our common stock valued at fair market
value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares, together with any federal and state income
tax liability incurred by the optionee in connection with such exercise.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable values at 5% and 10% appreciation are
calculated by assuming that the exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
In addition to the options listed in the table, in 1999 Dr. Bieganski
received an option to purchase 40,000 shares of common stock at an exercise
price of $5.50 per share. The option is immediately exercisable. The shares
purchasable thereunder are subject to repurchase by us at the original exercise
price paid per share upon the optionee's cessation of service prior to vesting
in such shares. The repurchase right lapses and optionee vests in a series of 48
equal monthly installments.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth for each of the Named Executive Officers
options exercised in 1998 and the number and value of the shares of common stock
underlying unexercised options that are held by the Named Executive Officers as
of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
NUMBER OF VALUE 1998(2) 1998($)(3)
SHARES ACQUIRED REALIZED ------------------- ------------------
NAME ON EXERCISE ($)(1) VESTED UNVESTED VESTED UNVESTED
- ------------------------- --------------- ------------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Snyder......... -- -- -- -- -- --
P. Stephen Larsen........ -- -- 15,414 124,586 41,660 308,339
Bradley N. Miller........ -- -- -- -- -- --
Paul Bieganski........... -- -- 46,666 93,334 134,164 268,335
George E. Moser.......... 120,000 93,000 29,166 160,834 80,988 437,762
</TABLE>
- ---------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) The options are immediately exercisable for all the option shares, but any
shares purchased under those options will be subject to repurchase by us, at
the original exercise price paid per share, upon the optionee's cessation of
service with us, prior to the vesting in such shares. The heading "Vested"
refers to shares no longer subject to repurchase as of December 31, 1998;
the heading "Unvested" refers to shares subject to repurchase as of December
31, 1998.
(3) Based on the fair market value of our common stock at the end of 1998 as
determined by our board of directors, $3.00, less the exercise price payable
for such shares.
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<PAGE>
CHANGE OF CONTROL ARRANGEMENTS/EMPLOYMENT AGREEMENTS
The compensation committee of the board of directors, as administrator of
the 1999 Equity Incentive Plan, can provide for accelerated vesting of the
shares of common stock subject to outstanding options held by any employee or
director of Net Perceptions in connection with certain changes in control of Net
Perceptions. The accelerated vesting may be conditioned on the termination of
the individual's employment following the change in control event.
On January 23, 1999, we entered into a severance agreement with George E.
Moser whereby we agreed to pay Mr. Moser three months' salary if his employment
with us is terminated without cause on or before October 31, 1999.
All of our executive officers are eligible to participate in our Change in
Control Severance Plan. Under the Change in Control Severance Plan, if an
officer's employment is involuntarily terminated within 18 months after a change
in control or the officer declines a position with the acquiror in a change in
control, we will pay the officer severance benefits equal to six months of
salary.
1999 EQUITY INCENTIVE PLAN
The 1999 Equity Incentive Plan was adopted by the board of directors on
February 4, 1999 and our stockholders will also be asked to approve the adoption
of the plan. We have reserved 800,000 shares of common stock for issuance under
the 1999 Equity Incentive Plan. Any shares not yet issued under our 1996 Stock
Plan as of the date of this offering will also be available for grant under the
1999 Equity Incentive Plan. No additional shares or options will be issued under
our 1996 Stock Plan after the completion of this offering. As of January 1 of
each year, commencing with the year 2000 and ending with the year 2002, the
number of shares reserved for issuance under the 1999 Equity Incentive Plan will
be increased automatically by 5% of the total number of shares of common stock
then outstanding or, if less, by 1,500,000 shares. Under the 1999 Equity
Incentive Plan, the eligible individuals are: employees, non-employee members of
the board of directors and consultants. The types of awards that may be made
under the 1999 Equity Incentive Plan are options to purchase shares of common
stock, stock appreciation rights, restricted shares and stock units. Options may
be incentive stock options that qualify for favorable tax treatment for the
optionee under Section 422 of the Internal Revenue Code of 1986 or nonstatutory
stock options not designed to qualify for such favorable tax treatment. With
limited restrictions, if shares awarded under the 1999 Equity Incentive Plan or
the 1996 Stock Plan are forfeited, then those shares will again become available
for new awards under the 1999 Equity Incentive Plan.
Outstanding options under the 1996 Stock Plan will be incorporated into the
1999 Equity Incentive Plan at the time of this offering and no further option
grants will be made under the 1996 Stock Plan. The incorporated options will
continue to be governed by their existing terms, unless the committee elects to
extend one or more features of the 1999 Equity Incentive Plan to those options
or to other outstanding shares. The committee has elected to extend the change
in control acceleration feature of the 1999 Equity Incentive Plan to all
outstanding options and unvested shares. Previously, options granted under the
1996 Stock Plan provided that the shares would accelerate upon an acquisition
only if not assumed by the acquiring entity. The outstanding options under the
1996 Stock Plan contain substantially the same terms and conditions as specified
below for options granted under the 1999 Equity Incentive Plan.
The compensation committee of our board of directors administers the 1999
Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of the 1999 Equity
Incentive Plan, including the discretion to determine which eligible individuals
are to receive any award, and to determine the type, number, vesting
requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999 Equity
Incentive Plan may not be less than 100% of the fair market value of the common
stock on the option grant date. The
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<PAGE>
exercise price for non-qualified options granted under the 1999 Equity Incentive
Plan may not be less than 85% of the fair market value of the common stock on
the option grant date. The exercise price may be paid in cash or in outstanding
shares of common stock. The exercise price may also be paid by using a cashless
exercise method, a pledge of shares to a broker or promissory note. The purchase
price for newly issued restricted shares awarded under the 1999 Equity Incentive
Plan may be paid in cash, by promissory note or by the rendering of past or
future services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.
Upon certain defined events causing a change in control of Net Perceptions,
an option or other award under the 1999 Equity Incentive Plan will become fully
exercisable or fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another award on substantially the same terms. An
option or award will become fully exercisable or fully vested if the holder's
employment or service is involuntarily terminated within 18 months following the
change in control. Change in control includes:
- A merger or consolidation of Net Perceptions after which our then current
stockholders own less than 50% of the surviving corporation;
- Sale of all or substantially all of the assets of Net Perceptions;
- A proxy contest that results in replacement of more than one-third of the
directors over a 24-month period; or
- An acquisition of 50% or more of Net Perceptions' outstanding stock by a
person other than by a person related to Net Perceptions, such as a
corporation owned by the stockholders of Net Perceptions.
In the event of a merger or other reorganization, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by us if we are a surviving corporation, shall have
accelerated vesting and then expire early or shall be cancelled for a cash
payment.
The board of directors may amend or terminate the 1999 Equity Incentive Plan
at any time. If the board of directors amends the plan, stockholder approval of
the amendment will be sought only if required by an applicable law. The 1999
Equity Incentive Plan will continue in effect indefinitely unless the board of
directors decides to terminate the plan.
EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted our Employee Stock Purchase Plan on February
4, 1999, and our stockholders will also be asked to approve the adoption of the
plan. We have reserved 1,000,000 shares of common stock for issuance under the
Employee Stock Purchase Plan. As of January 1 each year, the number of shares
reserved for issuance under the Employee Stock Purchase Plan will be increased
automatically by 2% of the total number of shares of common stock outstanding
or, if less, 600,000 shares. The Employee Stock Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code. Two offering periods
each with a duration of 6 months will commence on May 1 and November 1 each
calendar year. However, the first offering period will commence on the effective
date of this offering and end on October 31, 1999. Purchases of common stock
will occur on April 30 and October 31 each calendar year. The Employee Stock
Purchase Plan will be administered by the compensation committee of the board of
directors. Each employee of Net Perceptions is eligible to participate if he or
she is employed by us for at least 20 hours per week and for more than five
months per year.
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<PAGE>
The Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions may
not exceed 15% of the employee's cash compensation. The initial period during
which payroll deductions will be accumulated will begin on the effective date of
this offering and end on October 31, 1999. No more than 4,000 shares may be
purchased on any purchase date. The price of each share of common stock
purchased under the Employee Stock Purchase Plan will be 85% of the lower of (A)
the fair market value per share of common stock on the date immediately before
the first date of the applicable offering period or (B) the fair market value
per share of common stock on the purchase date. In the case of the first
offering period, the price per share under the plan will be 85% of the price
offered to the public in this offering. Employees may end their participation in
the Employee Stock Purchase Plan at any time. Participation ends automatically
upon termination of employment with us.
In the event of a change in control of Net Perceptions, the Employee Stock
Purchase Plan will end and shares will be purchased with the payroll deductions
accumulated to date by participating employees. The board of directors may amend
or terminate the Employee Stock Purchase Plan at any time. If the board of
directors increases the number of shares of common stock reserved for issuance
under the Employee Stock Purchase Plan, it must seek the approval of our
stockholders.
1999 NON-EMPLOYEE DIRECTOR OPTION PLAN
Our 1999 Non-Employee Director Option Plan was adopted by the board of
directors on February 4, 1999, and our stockholders will also be asked to
approve the adoption of the plan. Under the 1999 Non-Employee Director Option
Plan, non-employee members of the board of directors will be eligible for
automatic option grants.
A maximum of 500,000 shares of common stock has been authorized for issuance
under the 1999 Non-Employee Director Option Plan. No shares have been issued yet
under the 1999 Non-Employee Director Option Plan.
The compensation committee of the board of directors will make any
administrative determinations under the 1999 Non-Employee Director Option Plan.
The exercise price for options granted under the 1999 Non-Employee Director
Option Plan may be paid in cash or in outstanding shares of common stock.
Options may also be exercised on a cashless basis through the same-day sale of
the purchased shares.
Each individual who first joins the board of directors as a non-employee
director on or after the effective date of this offering will receive at that
time an option grant for 20,000 shares of common stock. Each 20,000-share option
will vest over 24 months from the grant date, but vesting will accelerate to the
extent the Board deems it necessary to avoid adverse accounting treatment for
these options. Immediately prior to this offering, each non-employee director
will automatically be granted a stock option to purchase 10,000 shares of common
stock at the offering price. In addition, at each annual stockholders meeting,
beginning in 2000, each non-employee director will automatically be granted at
that meeting, whether or not he or she is standing for re-election at that
particular meeting, a stock option to purchase 10,000 shares of common stock.
Each 10,000-share option will become exercisable for 100% of the shares at
grant. Each option will have an exercise price equal to the fair market value of
the common stock on the automatic grant date. Each option will have a maximum
term of ten years, but will terminate earlier if the optionee ceases to be a
member of the board of directors. Each option will fully vest automatically upon
a change in control.
The board of directors may amend or modify the 1999 Non-Employee Director
Option Plan at any time. The 1999 Non-Employee Director Option Plan will
terminate on February 3, 2009, unless the board of directors decides to
terminate the plan sooner.
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<PAGE>
CERTAIN TRANSACTIONS
Since July 3, 1996 (inception), we have issued and sold preferred stock to
the following persons who are our principal stockholders or directors.
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK
- ---------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Entities affiliated with Hummer Winblad Venture Partners........ 2,034,798 772,948 407,168
Vulcan Ventures Inc............................................. -- 1,932,368 407,168
Entities affiliated with St. Paul Fire & Marine Insurance
Company....................................................... -- 1,159,420 488,600
London Pacific Life & Annuity Company........................... -- -- 2,605,864
Entities affiliated with JAFCO Co., Ltd......................... -- -- 651,462
</TABLE>
Shares held by all affiliated persons and entities have been aggregated. See
"Principal Stockholders" for more detail on shares held by these purchasers. The
per share purchase price for the Series A Preferred Stock was $0.30 on August 2,
1996. The per share purchase price for the Series B Preferred Stock was $1.035
on December 4, 1996. The per share purchase price for the Series C Preferred
Stock was $1.535 on December 18, 1997 and February 20, 1998. Ann L. Winblad, one
of our directors, is an affiliate of each of the entities affiliated with Hummer
Winblad Venture Partners.
On January 23, 1999, we entered into a severance agreement with George E.
Moser whereby we agreed to pay Mr. Moser three-months salary if his employment
with us is terminated without cause on or before October 31, 1999.
In addition, we have granted options to some of our directors and executive
officers. See "Management--Option grants in last fiscal year" and "Principal
Stockholders."
We have entered into an indemnification agreement with each of our officers
and directors.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors on the board of directors, and will continue to
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of December 31, 1998, and as adjusted to reflect the sale of
shares offered hereby by (A) each person who we know to own beneficially more
than five percent of our common stock and one additional investor, (B) each of
the Named Officers, (C) each of our directors, and (D) all current directors and
executive officers as a group.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock.
The number of shares of common stock deemed outstanding prior to this
offering includes the shares issuable pursuant to stock options and warrants
that may be exercised within 60 days after December 31, 1998. The number of
shares of common stock outstanding after this offering includes the 3,650,000
shares of common stock we are offering in this offering and the 369,697 shares
of common stock issuable upon conversion of a convertible promissory note as of
the closing of this offering. The number of shares of common stock outstanding
after this offering assumes no exercise of the underwriters' over-allotment
option. Douglas J. Burgum joined our board of directors on January 26, 1999 and
was granted options immediately exercisable for 30,000 shares. The principal
stockholders table does not reflect Mr. Burgum's stock options.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
NUMBER OF OWNED
SHARES --------------
5% STOCKHOLDERS, NAMED OFFICERS, DIRECTORS, BENEFICIALLY BEFORE AFTER
AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP OWNED OFFERING OFFERING
- ------------------------------------------------------------ ---------- ----- -----
<S> <C> <C> <C>
Entities Affiliated with Hummer Winblad Venture 3,214,914 18.6% 15.1%
Partners(1) ..............................................
Two South Park, 2nd Floor
San Francisco, California 94107
London Pacific Life & Annuity Company ...................... 2,605,864 15.1% 12.2%
3109 Poplarwood Court, Suite 108
Raleigh, North Carolina 27604
Vulcan Ventures Inc.(2) .................................... 2,339,536 13.5% 11.0%
10 110th Avenue, N.E., Suite 550
Bellevue, Washington 98004
Steven J. Snyder ........................................... 2,002,944 11.6% 9.4%
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
Entities Affiliated with St. Paul Fire & Marine Insurance 1,648,020 9.5% 7.7%
Company(3) .
8500 Normandale Lake Blvd.
Suite 1940
Bloomington, Minnesota 55437
Bradley N. Miller .......................................... 1,531,662 8.9% 7.2%
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
John T. Riedl .............................................. 1,119,294 6.5% 5.2%
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
NUMBER OF OWNED
SHARES --------------
5% STOCKHOLDERS, NAMED OFFICERS, DIRECTORS, BENEFICIALLY BEFORE AFTER
AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP OWNED OFFERING OFFERING
- ------------------------------------------------------------ ---------- ----- -----
<S> <C> <C> <C>
Entities affiliated with JAFCO Co., Ltd.(4) ................ 651,462 3.8% 3.1%
One Boston Place, Suite 3320
Boston, Massachusetts 02108
P. Stephen Larsen(5)........................................ 420,000 2.4% 2.0%
George E. Moser(6).......................................... 310,000 1.8% 1.4%
Paul Bieganski(7)........................................... 140,000 * *
Ann L. Winblad(1)........................................... 3,214,914 18.6% 15.1%
Kevin Ober(2)............................................... 2,339,536 13.5% 11.0%
All directors and executive officers as a group(8) (9 11,238,350 62.9% 51.3%
persons)..................................................
</TABLE>
- ---------
* Less than 1%.
(1) Consists of 2,695,434 shares held by Hummer Winblad Venture Partners II,
L.P., 95,464 shares held by Hummer Winblad Technology Fund II, L.P., 16,848
shares held by Hummer Winblad Technology Fund IIA, L.P., 386,810 shares held
by Hummer Winblad Venture Partners III, L.P., and 20,358 shares held by
Hummer Winblad Technology Fund III, L.P. Ms. Winblad, one of our directors,
is an affiliate of Hummer Winblad Venture Partners. Ms. Winblad disclaims
beneficial ownership of the shares held by the entities affiliated with
Hummer Winblad Venture Partners, except to the extent of her pecuniary
interest therein.
(2) Mr. Ober is an affiliate of Vulcan Ventures Inc. Mr. Ober resigned from our
board of directors in January 1999. Mr. Ober disclaims beneficial ownership
of the shares held by Vulcan Ventures Inc., except to the extent of his
pecuniary interest therein.
(3) Consists of 1,159,420 shares held by St. Paul Fire & Marine Insurance
Company and 488,600 shares held by St. Paul Venture Capital IV, LLC.
(4) Includes 521,168 shares held by U.S. Information Technology No. 2 Investment
Partnership, 52,118 shares held by JAFCO G-6(B) Investment Partnership, and
52,118 shares held by JAFCO G-6(A) Investment Partnership.
(5) Includes options immediately exercisable for 140,000 shares.
(6) Includes options immediately exercisable for 190,000 shares.
(7) Includes options immediately exercisable for 140,000 shares. Excludes
options immediately exercisable for 40,000 shares, which were granted in
January 1999.
(8) Includes options immediately exercisable for 566,000 shares.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
$.0001 par value, and 10,000,000 shares of preferred stock, $.0001 par value,
after giving effect to the amendment and restatement of our certificate of
incorporation to delete references to Series A, Series B and Series C Preferred
Stock, which will occur upon conversion of such preferred stock into common
stock upon the closing of this offering, and the subsequent authorization of
shares of undesignated preferred stock, as described below.
COMMON STOCK
As of December 31, 1998, there were 17,302,008 shares of common stock
outstanding that were held of record by approximately 41 stockholders after
giving effect to the conversion of our Series A, Series B and Series C Preferred
Stock into common stock at a one-to-one ratio. There will be 21,321,705 shares
of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and assuming no exercise after December 31, 1998 of
outstanding options) after giving effect to the sale of the shares of common
stock to the public offered hereby, the issuance of 369,697 shares of common
stock upon conversion of a convertible promissory note as of the closing of this
offering and the conversion of our Series A, Series B and Series C Preferred
Stock into common stock at a one-to-one ratio.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up of
Net Perceptions, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
On the closing of this offering, our amended and restated certificate of
incorporation will authorize 10,000,000 shares of preferred stock. The board of
directors has the authority to issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of Net
Perceptions without further action by the stockholders. For example, the board
of directors could issue preferred stock that has the power to prevent a change
of control transaction. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. We currently have no
plans to issue any of the preferred stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The Amended and Restated Certificate of Incorporation provides that all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. This provision could discourage
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<PAGE>
potential acquisition proposals and could delay or prevent a change of control
of Net Perceptions because a potential acquisition of Net Perceptions could not
be approved by the stockholders without a duly called meeting.
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
- Prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned
- by persons who are directors and also officers and
- by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
- On or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- Any merger or consolidation involving the corporation and the interested
stockholder;
- Any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- Subject to various exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- Any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- The receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of 16,764,663 shares of common stock will
be entitled to rights with respect to the registration of such shares under the
Securities Act of 1933. The holders of registration rights are those investors
that purchased shares of our Series A, Series B and Series C Preferred Stock,
and the holder of a convertible promissory note, as well as some of our present
and former officers and founders. Under the terms of the agreements between us
and the holders of such registrable securities, if we propose to register any of
our securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such common stock in such registration.
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<PAGE>
Some of such stockholders benefiting from these rights may also require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our diligent
reasonable efforts to effect such registration. Further, holders may require us
to file additional registration statements on Form S-3 at our expense. These
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration in certain circumstances.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is Norwest Bank
Minnesota, N.A.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Therefore, future sales of substantial amounts of our common stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of existing contractual and legal
restrictions on resale (as described below), sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.
Upon completion of this offering, we will have 21,321,705 shares of common
stock outstanding assuming no exercise of options and warrants outstanding as of
December 31, 1998, the conversion of all outstanding shares of preferred stock
and the conversion of a convertible promissory note upon the closing of this
offering. Of these shares, 3,650,000 shares sold in this offering will be freely
transferable without restriction or registration under the Securities Act,
except for any shares purchased by one of our existing "affiliates," as that
term is defined by the Securities Act, which shares will be subject to the
resale limitations of Rule 144 adopted under the Securities Act. The remaining
17,671,705 shares of common stock existing are "restricted shares" as defined in
Rule 144. Restricted shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or 701 of
the Securities Act. As a result of the contractual restrictions described below
and the provisions of Rules 144 and 701, additional shares will be available for
sale in the public market as follows:
- No restricted shares will be eligible for immediate sale on the date of
this prospectus;
- 17,302,008 restricted shares will be eligible for sale upon expiration of
lock-up agreements 180 days after the date of this prospectus subject to
Rule 144; and
- 369,697 restricted shares will be eligible for sale one year after the
date of this prospectus, subject to Rule 144.
All officers, directors and stockholders have agreed not to offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of BancBoston Robertson Stephens. However, these contractual
restrictions may be released prior to expiration of the lock-up period.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who owns shares that were purchased from us (or any affiliate) at
least one year previously, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of our then-outstanding
shares of common stock (213,217 shares immediately after this offering) or the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to manner of sale provisions, notice requirements and the availability
of current public information about us. Any person (or persons whose shares are
aggregated) who is not deemed to have been one of our affiliates at any time
during the three months preceding a sale, and who owns shares within the
definition of "restricted securities" under Rule 144 that were purchased from us
(or any affiliate) at least two years previously, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by
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<PAGE>
our employees, directors, officers, consultants or advisers prior to the date we
become subject to the reporting requirements of the Securities Exchange Act of
1934, or the Exchange Act, pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its minimum holding period requirements.
After this offering pursuant to this prospectus, the holders of 16,764,663
shares of common stock, or their transferees, will be entitled to various rights
with respect to the registration of such shares under the Securities Act.
Registration of such shares under the Securities Act would result in such shares
becoming freely tradable without restriction under the Securities Act (except
for shares purchased by affiliates) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration rights."
We have agreed not to offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of BancBoston Robertson Stephens,
subject to limited exceptions.
As of December 31, 1998, options to purchase a total of 1,408,564 shares of
common stock pursuant to our 1996 Stock Plan were outstanding and exercisable.
All of the shares subject to options are subject to lock-up agreements. As of
December 31, 1998, a warrant to purchase up to 11,982 shares of common stock was
outstanding and exercisable. An additional 1,058,128 shares of common stock were
available for future option grants under the 1996 Stock Plan. On February 4,
1999, we adopted, subject to stockholder approval, the 1999 Equity Incentive
Plan to replace the 1996 Stock Plan, with an increase of shares available for
issuance thereunder of 800,000 shares, plus an additional number of shares equal
to 5% of the shares outstanding on the first day of 2000, 2001 and 2002. In
addition, on February 4, 1999, we adopted, subject to stockholder approval, the
Employee Stock Purchase Plan, and reserved 1,000,000 shares of common stock for
issuance thereunder, and the 1999 Non-Employee Director Option Plan, and
reserved 500,000 shares of common stock for issuance thereunder. See
"Management--1999 Equity Incentive Plan," "--Employee Stock Purchase Plan,"
"--1999 Non-Employee Director Option Plan" and Note 7 of Notes to Financial
Statements.
We intend to file registration statements under the Securities Act covering
approximately 3,766,692 shares of common stock subject to outstanding options or
issuable pursuant to our 1999 Equity Incentive Plan and 1999 Non-Employee
Director Option Plan, and 1,000,000 shares of common stock issuable pursuant to
our Employee Stock Purchase Plan. We expect to file the registration statement
covering shares issuable pursuant to the Employee Stock Purchase Plan on the
effective date of this offering and to file the registration statement covering
shares offered pursuant to the 1999 Equity Incentive Plan and 1999 Non-Employee
Director Option Plan approximately 30 days after the closing of this offering.
Shares registered under such registration statements will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with us or the contractual restrictions described above. See
"Management--1999 Equity Incentive Plan," "--Employee Stock Purchase Plan" and
"--1999 Non-Employee Director Option Plan."
64
<PAGE>
UNDERWRITING
The Underwriters, BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC,
U.S. Bancorp Piper Jaffray Inc. and Wit Capital Corporation acting as
e-Manager-TM-, have severally agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from us the numbers of shares of common
stock set forth opposite their respective names below. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc................................................
Hambrecht & Quist LLC............................................................
U.S. Bancorp Piper Jaffray Inc...................................................
Wit Capital Corporation..........................................................
----------
Total.......................................................................... 3,650,000
----------
----------
</TABLE>
The Underwriters have advised us that the Underwriters propose to offer the
shares of common stock to the public at the price to the public set forth on the
cover page of this prospectus and to certain dealers at such price less a
concession of not more than $ per share, of which $ may be reallowed
to other dealers. After the public offering, the public offering price,
concession and reallowance to dealers may be reduced by the Underwriters. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus.
We have granted to the Underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to an aggregate of
547,500 additional shares of common stock at the initial public offering price
per share set forth on the cover of this prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the total number of shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters on
the same terms as those on which the shares offered hereby are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and us against enumerated civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Pursuant to the terms of lock-up agreements, the holders of 17,671,705
shares of our common stock (including 10,668,700 shares of common stock issuable
upon conversion of outstanding preferred stock and 369,697 shares issuable upon
conversion of an outstanding convertible promissory note), have agreed, for a
period of up to 180 days after the date of this prospectus, that, subject to
exceptions, they will not contract to sell or otherwise dispose of any shares of
common stock, any options or warrants to purchase shares of common stock or any
securities convertible into, or exchangeable for, shares of common stock, owned
directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Robertson Stephens.
BancBoston Robertson Stephens may, in its sole discretion, and at any time
without notice, release all or any portion of the securities subject to the
lock-up agreements. All of the shares of common stock subject to the lock-up
agreements will be eligible for sale in the public market upon the expiration of
the lock-up agreements, subject in the case of any restricted shares to Rule
144.
65
<PAGE>
In addition, we have agreed that until 180 days after the date of this
prospectus, we will not, without the prior written consent of BancBoston
Robertson Stephens, subject to exceptions, offer, sell, contract to sell or
otherwise dispose of any shares of common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock other than our sale
of shares in this offering, the issuance of shares of common stock upon the
exercise of outstanding options and warrants and the conversion of shares of
preferred stock and the grant of options to purchase shares of common stock
under existing employee stock option or stock purchase plans. See "Shares
Eligible for Future Sale."
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered hereby was determined through negotiations among us and the
Underwriters. Among the factors considered in such negotiations were prevailing
market conditions, our financial information, market valuations of other
companies that we and the Underwriters believe to be comparable to us, estimates
of our business potential, our present state of development and other factors
deemed relevant.
At the request of Net Perceptions, the Underwriters have reserved up to
192,500 shares of common stock to be issued by Net Perceptions and offered
hereby for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of Net Perceptions. The
number of shares of common stock available for sale to the general public will
be reduced to the extent such individuals purchase such reserved shares. Any
reserved shares that are not so purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital Corporation. In addition, pursuant to an e-Dealer
Agreement, all dealers purchasing shares from Wit Capital Corporation in the
offering (the "e-Dealers") similarly have agreed to make a prospectus in
electronic format available on Web sites maintained by each of the e-Dealers.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Underwriters have advised us that, pursuant to Regulation M under the
Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Underwriters to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the common
stock originally sold by such Underwriter or syndicate member is purchased by
the Underwriters in a syndicate covering transaction and has therefore not been
effectively placed by such Underwriter or syndicate member. The Underwriters
have advised us that such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California. Members of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, participating in the consideration of legal matters
relating to the common stock offered in this offering are the beneficial owners
of 66,666 shares of our common stock. Legal matters in connection with this
offering will be passed upon for the underwriters by Cooley Godward LLP, San
Francisco, California.
66
<PAGE>
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for the period
from July 3, 1996 to December 31, 1996 and for each of the two years in the
period ended December 31, 1998 included in this Prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
us and such common stock offered hereby, reference is made to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the registration statement. Each such statement is
qualified in all respects by such reference to such exhibit. The registration
statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission.
67
<PAGE>
NET PERCEPTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Financial Statements:
Balance Sheet as of December 31, 1997 and 1998........................................................... F-3
Statement of Operations for the Period from July 3, 1996 (Inception) to December 31, 1996 and for the
Years Ended December 31, 1997 and 1998................................................................. F-4
Statement of Stockholders' Equity for the Period from July 3, 1996 (Inception) to December 31, 1996 and
for the Years Ended December 31, 1997 and 1998......................................................... F-5
Statement of Cash Flows for the Period from July 3, 1996 (Inception) to December 31, 1996 and for the
Years Ended December 31, 1997 and 1998................................................................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Net Perceptions, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Net Perceptions, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from July 3, 1996 (inception) to December 31, 1996 and for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Net Perceptions' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 4, 1999, except as to Note
10, which is as
of March 22, 1999
F-2
<PAGE>
NET PERCEPTIONS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 1,407 $ 972
Short-term investments.................................................................... 3,439 --
Accounts receivable, net.................................................................. 164 3,382
Prepaid expenses and other current assets................................................. 133 142
--------- ----------
Total current assets.................................................................... 5,143 4,496
--------- ----------
Property and equipment, net................................................................. 389 1,019
Other assets................................................................................ 43 122
--------- ----------
Total assets............................................................................ $ 5,575 $ 5,637
--------- ----------
--------- ----------
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 280 $ 256
Accrued expenses.......................................................................... 222 1,410
Deferred revenue.......................................................................... 81 2,107
Current portion of capital lease obligations.............................................. 118 255
--------- ----------
Total current liabilities............................................................... 701 4,028
--------- ----------
Long-term liabilities:
Capital lease obligations, net of current portion......................................... 345 538
--------- ----------
Total liabilities....................................................................... 1,046 4,566
--------- ----------
Commitments and contingencies (Notes 7 and 8)
Series A Convertible Redeemable Preferred Stock; $.0001 par value; 2,170,000 shares
authorized; 2,168,130 shares issued and outstanding at redemption value................... 650 650
--------- ----------
Stockholders' equity:
Series B Convertible Preferred Stock; $.0001 par value; 4,000,000 shares authorized;
3,864,736 shares issued and outstanding................................................. -- --
Series C Convertible Preferred Stock; $.0001 par value; 4,800,000 shares authorized;
3,919,224 and 4,635,834 shares issued and outstanding, respectively..................... -- --
Common stock; $.0001 par value; 60,000,000 shares authorized; 6,277,392 and 6,633,308
shares issued and outstanding, respectively............................................. 1 1
Additional paid-in capital................................................................ 9,627 11,137
Accumulated deficit....................................................................... (5,749) (10,717)
--------- ----------
Total stockholders' equity.............................................................. 3,879 421
--------- ----------
Total liabilities, convertible redeemable preferred stock and stockholders' equity...... $ 5,575 $ 5,637
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
NET PERCEPTIONS, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FROM JULY 3,
1996
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
--------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Product.......................................................... $ -- $ 284 $ 3,955
Service and maintenance.......................................... 4 33 522
------- ------------ ------------
Total revenues................................................. 4 317 4,477
------- ------------ ------------
Cost of revenues:
Product.......................................................... -- 14 52
Service and maintenance.......................................... 2 30 373
------- ------------ ------------
Total cost of revenues......................................... 2 44 425
------- ------------ ------------
Gross margin....................................................... 2 273 4,052
------- ------------ ------------
Operating expenses:
Sales and marketing.............................................. 454 3,063 5,238
Research and development......................................... 378 1,372 2,372
General and administrative....................................... 210 585 1,474
------- ------------ ------------
Total operating expenses....................................... 1,042 5,020 9,084
------- ------------ ------------
Loss from operations............................................... (1,040) (4,747) (5,032)
------- ------------ ------------
Other income (expense):
Interest income.................................................. 18 87 197
Interest expense................................................. (3) (56) (89)
Other expense.................................................... (2) (6) (44)
------- ------------ ------------
Total other income............................................. 13 25 64
------- ------------ ------------
Net loss........................................................... $ (1,027) $ (4,722) $ (4,968)
------- ------------ ------------
------- ------------ ------------
Basic and diluted net loss per share............................... $ (3.40) $ (3.01) $ (1.40)
------- ------------ ------------
------- ------------ ------------
Shares used in computing basic and diluted net loss per share...... 302,140 1,569,244 3,545,516
------- ------------ ------------
------- ------------ ------------
Unaudited pro forma basic and diluted net loss per share........... $ (0.35)
------------
------------
Shares used in computing unaudited pro forma basic and diluted net
loss per share................................................... 14,112,696
------------
------------
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
NET PERCEPTIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- --------- ----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock to
founders in July 1996....... -- $ -- -- $ -- 5,931,142 $ 1 $ 3 $ --
Sale of common stock from
September - November 1996... -- -- -- -- 222,000 -- 7 --
Sale of Series B Preferred
Stock in December 1996, net
of $33 of issuance costs.... 3,864,736 -- -- -- -- -- 3,966 --
Net loss...................... -- -- -- -- -- -- -- (1,027)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
Balance, December 31, 1996.... 3,864,736 -- -- -- 6,153,142 1 3,976 (1,027)
Repurchase of common stock.... -- -- -- -- (182,000) -- (5) --
Exercise of stock options..... -- -- -- -- 306,250 -- 31 --
Sale of Series C Preferred
Stock in December 1997, net
of $391 of issuance costs... -- -- 3,919,224 -- -- -- 5,625 --
Net loss...................... -- -- -- -- -- -- -- (4,722)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
Balance, December 31, 1997.... 3,864,736 -- 3,919,224 -- 6,277,392 1 9,627 (5,749)
Exercise of stock options..... -- -- -- -- 355,916 -- 54 --
Compensation relating to stock
options..................... -- -- -- -- -- -- 366 --
Sale of Series C Preferred
Stock in February 1998, net
of $9 of issuance costs..... -- -- 716,610 -- -- -- 1,090 --
Net loss...................... -- -- -- -- -- -- -- (4,968)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
Balance, December 31, 1998.... 3,864,736 $ -- 4,635,834 $ -- 6,633,308 $ 1 $ 11,137 $ (10,717)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
--------- ----------- --------- ----------- --------- ----- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Sale of common stock to
founders in July 1996....... $ 4
Sale of common stock from
September - November 1996... 7
Sale of Series B Preferred
Stock in December 1996, net
of $33 of issuance costs.... 3,966
Net loss...................... (1,027)
-------------
Balance, December 31, 1996.... 2,950
Repurchase of common stock.... (5)
Exercise of stock options..... 31
Sale of Series C Preferred
Stock in December 1997, net
of $391 of issuance costs... 5,625
Net loss...................... (4,722)
-------------
Balance, December 31, 1997.... 3,879
Exercise of stock options..... 54
Compensation relating to stock
options..................... 366
Sale of Series C Preferred
Stock in February 1998, net
of $9 of issuance costs..... 1,090
Net loss...................... (4,968)
-------------
Balance, December 31, 1998.... $ 421
-------------
-------------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
NET PERCEPTIONS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FROM JULY 3,
1996
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
--------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (1,027) $ (4,722) $ (4,968)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization.................................. 6 140 284
Provision for doubtful accounts................................ -- 28 294
Compensation related to stock options.......................... -- -- 366
Changes in assets and liabilities:
Accounts receivable.......................................... (5) (187) (3,512)
Prepaid expenses and other current assets.................... (139) 6 (9)
Accounts payable............................................. 232 48 (24)
Accrued expenses............................................. 153 68 1,188
Deferred revenue............................................. -- 81 2,026
Other assets................................................. (22) (25) (79)
------- ------------ ------------
Net cash used by operating activities...................... (802) (4,563) (4,434)
------- ------------ ------------
Cash flows from investing activities:
Purchases of short-term investments.............................. (1,757) (3,439) --
Sales of short-term investments.................................. -- 1,757 3,439
Purchases of property and equipment.............................. (2) -- (442)
------- ------------ ------------
Net cash provided (used) by investing activities........... (1,759) (1,682) 2,997
------- ------------ ------------
Cash flows from financing activities:
Principal payments under capital lease obligations............... (2) (63) (142)
Proceeds from sale of preferred stock............................ 4,616 5,625 1,090
Proceeds from the sale of common stock........................... 11 -- --
Proceeds from exercise of stock options, net of redemptions...... -- 26 54
------- ------------ ------------
Net cash provided by financing activities.................. 4,625 5,588 1,002
------- ------------ ------------
Net increase (decrease) in cash and cash equivalents............... 2,064 (657) (435)
Cash and cash equivalents at beginning of period................... -- 2,064 1,407
------- ------------ ------------
Cash and cash equivalents at end of period......................... $ 2,064 $ 1,407 $ 972
------- ------------ ------------
------- ------------ ------------
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligations incurred............................... $ 115 $ 414 $ 472
Supplemental schedule of cash activity:
Interest paid.................................................... $ 2 $ 52 $ 91
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION
Net Perceptions, Inc. was incorporated under the laws of the state of
Delaware on July 3, 1996. Net Perceptions develops, markets and supports
real-time relationship marketing software solutions. Net Perceptions' core
technology, the Net Perceptions Recommendation Engine, enables these
capabilities to be embedded in a variety of applications offered over the web
and in other environments. Substantially all product and service revenues
through December 31, 1998 have been attributable to the Net Perceptions for
E-commerce product. Sales to customers located outside of the United States
totaled 27% and 13% of total revenues in 1997 and 1998, respectively.
International sales to one customer in Japan totaled 22% of total 1997 revenues.
International sales to customers in any one individual foreign country were not
material in 1998.
Net Perceptions is subject to risks and uncertainties common to rapidly
growing technology-based companies, including rapid technological change, growth
of the Internet and electronic commerce, dependence on principal products and
third-party technology, new product development and acceptance, actions of
competitors, dependence on key personnel, international expansion, lengthy sales
cycle and limited operating history.
Net Perceptions has sustained losses and negative cash flows from operations
since inception and expects these conditions to continue for the foreseeable
future. As of December 31, 1998, Net Perceptions had an accumulated deficit of
$10,717. The implementation of Net Perceptions' business plan is dependent on
sufficient capital. In January 1999, the board of directors authorized Net
Perceptions to proceed with an initial public offering ("IPO"). On February 4,
1999, a foreign corporate investor loaned $4,000 to Net Perceptions at an
interest rate of 8.0%. The note and accrued interest will automatically convert
into the same class and series of equity security as issued in Net Perceptions'
next round of equity financing at the price per share in such financing. The
note is unsecured and due with accrued interest on January 31, 2000, unless
previously converted. Assuming Net Perceptions' IPO closes in mid-April 1999 at
an assumed offering price of $11.00 per share, the note and accrued interest
would convert into appproximately 369,697 shares of unregistered common stock.
Net Perceptions expects that the net proceeds from this offering will be
sufficient to meet its working capital and capital expenditure needs for at
least the next 12 months. After that, Net Perceptions may need to raise
additional funds, and it cannot be certain that it will be able to obtain
additional financing on favorable terms, if at all. If Net Perceptions cannot
raise funds, if needed, on acceptable terms, it may not be able to develop or
enhance its products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, which could seriously harm
its business, financial condition and results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Net Perceptions' revenues are derived from licenses for its software as well
as software maintenance and support, training and consulting services. Net
Perceptions adopted American Institute of Certified Public Accountants Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4
effective January 1, 1998. The adoption did not have a material effect on the
timing of Net Perceptions' revenue recognition or cause changes to its revenue
recognition policies.
Revenues derived from software licenses are recognized upon (a) the
execution of a license agreement, (b) delivery of the software product, (c)
reasonable assurance of collectibility of the receivable, and (d) fulfillment of
any other of Net Perceptions' significant contract obligations. For software
provided for demonstration purposes, or where significant post-delivery
obligations exist, revenues are deferred until execution of a license agreement
and fulfillment of all revenue recognition requirements. Under arrangements
where both services and software are sold under one contract, revenue is
allocated to each element based on their respective fair values, with these fair
values being determined using the price charged when that element is sold
separately. Revenues generated by distribution partners are recognized when the
sale to the end customer is completed. The Company does not offer its customers
a right of return.
Maintenance and support revenues are deferred and recognized ratably over
the term of the contract, which is typically twelve months. Revenues from
training and consulting are recognized when the services are performed.
The allowance for doubtful accounts was $28 and $300 at December 31, 1997
and 1998, respectively. A separate allowance for estimated future returns is
recorded as a liability at the time revenue is recognized based on Net
Perceptions' return policies.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject Net Perceptions to credit
risk consist primarily of accounts receivable. To minimize this risk, ongoing
credit evaluations of customers' condition are performed. Net Perceptions grants
credit to customers in the ordinary course of business. Two customers accounted
for approximately 22% and 19% of total revenues during 1997. Receivables from
one customer in 1997 represented approximately 43% of total receivables at
December 31, 1997. There were no customers in 1998 that exceeded 10% of total
revenues or 10% of total receivables at December 31, 1998.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist principally of money market funds with original
maturities of three months or less, are readily convertible to cash and are
stated at cost, which approximates fair value. Short-term investments were
classified in the balance sheet based on their maturity date. At December 31,
1997 all of Net Perceptions' short-term investments were classified as
available-for-sale. At December 31, 1997, the estimated fair value of the
securities approximated their amortized cost and any unrealized holding gains or
losses were not significant.
F-8
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Net Perceptions' financial instruments, which
include cash equivalents, accounts receivable, accounts payable, accrued
expenses and capital lease obligations, approximate their fair values at
December 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The majority of Net Perceptions'
property and equipment have been acquired with capital leases. Depreciation and
amortization are computed using the straight-line method over the shorter of the
estimated useful lives of the individual assets or the lease term. Estimated
useful lives generally range from three to five years.
OTHER ASSETS
Other assets consist primarily of capital and operating lease deposits.
RESEARCH AND DEVELOPMENT
Research and development expenditures, which include software development
costs, are expensed as incurred. Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed," requires the capitalization of certain software
development costs once technological feasibility is established, which Net
Perceptions defines as the completion of a working model. To date, the period
between achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, Net Perceptions has not
capitalized any software development costs.
INCOME TAXES
Net Perceptions calculates income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes", which requires the use of the
liability method of accounting for income taxes. Income taxes are deferred for
all temporary differences between the financial statement and income tax basis
of assets and liabilities. Deferred taxes are recorded using the enacted tax
rates scheduled by tax law to be in effect when the temporary differences are
expected to be settled or realized. Deferred tax assets are reduced by a
valuation allowance to the extent that utilization is not presently likely.
ADVERTISING EXPENSE
Net Perceptions recognizes advertising expense as incurred. Advertising
expense has been immaterial since inception.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Upon the closing of Net Perceptions' IPO, all of the outstanding shares of
preferred stock (Series A, B and C) will automatically convert into 10,668,700
shares of common stock. Net
F-9
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Perceptions' unaudited pro forma stockholders' equity as of December 31, 1998,
as adjusted to reflect these conversions, but not to reflect shares or proceeds
from the planned IPO, is as follows:
<TABLE>
<S> <C>
Common stock; 17,302,008 shares issued and outstanding............ $ 1
Additional paid-in capital........................................ 11,787
Accumulated deficit............................................... (10,717)
---------
Total stockholders' equity.................................... $ 1,071
---------
---------
</TABLE>
NET LOSS PER SHARE
Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted-average number of shares
of common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase, which consisted
primarily of founders' shares, aggregated 5,354,364, 3,675,232 and 2,270,370 at
December 31, 1996, 1997 and 1998, respectively (see Note 7). Diluted net loss
per share does not differ from basic net loss per share since potential shares
of common stock from conversion of preferred stock, stock options and warrants
and outstanding shares of common stock subject to repurchase are anti-dilutive
for all periods presented. Unaudited pro forma basic and diluted net loss per
share has been calculated assuming the conversion of all outstanding shares of
preferred stock into shares of common stock, as if the shares had converted
immediately upon their issuance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Net Perceptions
does not expect SFAS No. 133 to materially affect its financial position or
results of operations.
In November 1998, the FASB cleared for issuance SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,"
which will retain the limitations of SOP 97-2 on what constitutes
vendor-specific objective evidence of fair value. SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. Net
Perceptions believes that its current revenue recognition policies and practices
are consistent with the provisions of the new guidance.
In February 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 establishes the accounting for costs of software
products developed or purchased for internal use, including when such costs
should be capitalized. Net Perceptions does not expect SOP 98-1, which is
effective for Net Perceptions beginning January 1, 1999, to materially affect
its financial position or results of operations.
F-10
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. FINANCIAL STATEMENT COMPONENTS
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Computer hardware.......................................................... $ 339 $ 710
Leasehold improvements..................................................... 11 233
Computer software.......................................................... 56 230
Furniture, fixtures and equipment.......................................... 125 218
--------- ---------
531 1,391
Less: Accumulated depreciation and amortization............................ (142) (372)
--------- ---------
$ 389 $ 1,019
--------- ---------
--------- ---------
</TABLE>
Property and equipment include assets under capital leases of $529 and
$1,001 at December 31, 1997 and 1998, respectively. Generally, all property and
equipment with the exception of leasehold improvements and certain furniture,
fixtures and equipment, were acquired under capital leases.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Accrued wages and benefits................................................... $ 89 $ 626
Accrued leasehold improvements............................................... -- 225
Other accrued expenses....................................................... 133 559
--------- ---------
$ 222 $ 1,410
--------- ---------
--------- ---------
</TABLE>
4. INCOME TAXES
For income tax purposes, Net Perceptions has available net operating loss
carryforwards of approximately $9,100 and research and development credit
carryforwards of $258 at December 31, 1998. The net operating loss and research
and development credit carryforwards expire in 2011 through 2018 if not
previously utilized. The utilization of these carryforwards may be subject to
limitations based on future changes in ownership of Net Perceptions pursuant to
Internal Revenue Code Section 382. Future tax benefits have not been recognized
in the financial statements as their utilization is not presently likely based
on the weight of available information.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-11
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. INCOME TAXES (CONTINUED)
purposes. Net Perceptions has no deferred tax liabilities as of December 31,
1997 and 1998. Significant components of Net Perceptions' deferred tax assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 2,161 $ 3,574
Research and development credit carryforwards.......................... 109 258
Vacation and other accruals............................................ 12 237
Accounts receivable allowance.......................................... 11 98
--------- ---------
Total deferred tax assets............................................ 2,293 4,167
--------- ---------
Valuation allowance...................................................... (2,293) (4,167)
--------- ---------
Total net deferred income taxes...................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
5. TECHNOLOGY LICENSE
Effective July 31, 1996, Net Perceptions entered into a license agreement
with the University of Minnesota. Under the terms of the agreement, Net
Perceptions received a worldwide license to use and sell certain information and
intellectual property rights relating to an information filtering technique
developed by the University of Minnesota. Net Perceptions has further developed
this technology. The license agreement ends upon the expiration of the legal
life of the patents underlying the technology or invalidation of the licensed
technology by other third-party patents. The license may also be terminated by
Net Perceptions with sixty-day notice and by the University of Minnesota if Net
Perceptions has a material breach or default of the terms of the agreement (i.e.
related to diligent efforts for the sale of Net Perceptions products and
financing).
On October 13, 1997, Net Perceptions entered into an amendment to the July
31, 1996 license agreement whereas Net Perceptions has obtained all rights and
licenses relating to improvements resulting from continued research by the
University of Minnesota relating to the information filtering technology.
Research fees payable to the University of Minnesota under the amendment equal
$20 for each of three planned academic research years (1998-2000). In October
1997 and 1998, Net Perceptions paid the University of Minnesota $20 under the
terms of the amendment. For the years ended December 31, 1997 and 1998,
approximately $5 and $20 were recognized as research and development expenses
under this agreement and the final $20,000 is payable on October 1, 1999. Under
the amendment, Net Perceptions may also have to potentially issue up to 18,000
stock options for each of the three academic research years based on
improvements to the information technology which are patentable. Any stock
options granted would have an exercise price based on the fair market value of
Net Perceptions' common stock on the date of grant and would be accounted for in
the financial statements. To date no such options have been granted. The
amendment is cancelable by Net Perceptions prior to the beginning of each of
three research years.
F-12
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. CAPITAL LEASES
Net Perceptions maintains a lease line of credit with a leasing company for
the acquisition of property and equipment under capital lease arrangements. The
current lease line of credit expires on December 31, 1999 and has approximately
$1,000 available at December 31, 1998. The initial term of any loan under the
agreement is forty-two months from the borrowing date and has an effective
interest rate of 14%. Monthly payments are equal to 2.8% of the original amount
borrowed. Existing borrowings bear interest at 15.9% to 19.0% and are due in
varying monthly installments through July 2002. As of December 31, 1997 and
1998, $529 and $1,001, respectively, had been drawn on the lease line of credit,
exclusive of any repayments. Future minimum payments are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1999............................................................. $ 370
2000............................................................. 316
2001............................................................. 220
2002............................................................. 101
---------
Total minimum lease payments..................................... 1,007
Less: Amount representing interest............................... (214)
---------
Present value of net minimum lease payments...................... 793
Less: Current portion............................................ (255)
---------
$ 538
---------
---------
</TABLE>
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK
Net Perceptions is authorized to issue two classes of stock designated as
common and preferred. As of December 31, 1998, the total number of shares that
Net Perceptions was authorized to issue was 90,000,000 shares, of which
60,000,000 were common stock and 30,000,000 were preferred stock. As of December
31, 1998, 2,170,000, 4,000,000 and 4,800,000 shares of the preferred stock have
been designated Series A, Series B, and Series C Preferred Stock, respectively.
In February 1999, subject to certain conditions, the board of directors
authorized the amendment and restatement of Net Perceptions' Certificate of
Incorporation. Upon the closing of Net Perceptions' IPO, the authorized capital
stock will consist of 100,000,000 shares of common stock, $.0001 par value, and
10,000,000 shares of preferred stock, $.0001 par value.
PREFERRED STOCK
The shares of preferred stock are convertible, at the option of the holder,
into common stock on a share for share basis, subject to adjustment for certain
events, have voting rights and provide for certain preferential dividend,
liquidation, redemption and other rights. Net Perceptions has reserved
10,668,700 shares of common stock to satisfy these conversion rights. The
preferred stock will automatically convert into common stock if Net Perceptions
issues common stock in a public offering, pursuant to a registration statement
under the Securities Act of 1933, as amended, in which the net proceeds received
by Net Perceptions equals or exceeds $7,500 and the public offering price equals
or exceeds $3.105 per share, as adjusted for certain events.
F-13
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
Voting rights for the shares of preferred stock are on an "as if converted
to common stock" basis. In addition, an affirmative vote of the majority of the
preferred stockholders is required to sell Net Perceptions and to amend Net
Perceptions' Certificate of Incorporation relating to the preferred stock.
Redemption of the Series A Preferred Stock is mandatory, at the election of
certain holders, at $.30 per share plus any declared but unpaid dividends in
three annual installments commencing August 1, 2002, if not previously converted
or otherwise redeemed. Future redemptions of the Series A Preferred Stock
outstanding at December 31, 1998 are $217 in each of the years ending December
31, 2002, 2003 and 2004. The Series A Preferred Stock is reflected at redemption
value at December 31, 1997 and 1998. Shares of the Series B and Series C
Preferred Stock are not redeemable. No dividends have been declared.
In the event of a liquidation, dissolution, merger or acquisition of Net
Perceptions, preferred stockholders will be entitled to receive in cash, out of
the assets of Net Perceptions, an amount equal to their cost ($.30 per share for
Series A, $1.035 per share for Series B and $1.535 per share for Series C
Preferred Stock), plus an amount equal to declared but unpaid dividends on such
shares (the "Preference Amount"). The Preference Amount will be paid before any
distribution or payment is made to the holders of common stock of Net
Perceptions. Following the payment of the Preference Amount, the remaining
assets of Net Perceptions available for distribution to stockholders shall be
distributed among the holders of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and common stock pro rata based on the number of
shares of common stock held (assuming conversion of all Series A, Series B and
Series C Preferred Stock), except that the Series A, Series B, and Series C
preferred stockholders have a liquidation ceiling of six times, three times and
two times, respectively, of their initial investment (inclusive of the
Preference Amount). The liquidation ceilings as of December 31, 1998 for the
Series A, B and C preferred stockholders are $3,903, $12,000 and $14,232,
respectively.
PREFERRED STOCK WARRANT
On October 28, 1997, Net Perceptions issued a warrant to purchase Series C
Preferred Stock to a bank pursuant to a business loan agreement that expired in
1998. The warrant is for 11,982 shares of Series C Preferred Stock at $1.535 per
share, but converts to a warrant for 11,982 shares of common stock upon the
closing of Net Perceptions' IPO. The warrant expires on the earlier of October
28, 2002 or two years following Net Perceptions' IPO. The warrant had a nominal
value on the date of issuance.
COMMON STOCK
Total shares of common stock outstanding at December 31, 1998 were
6,633,308, of which 2,270,370 are subject to a repurchase option, which is at
Net Perceptions' discretion, at the original sale price in the event the
employee holding the shares leaves Net Perceptions. In general, Net Perceptions'
repurchase option expires to the extent of 25% of the applicable shares after
the first year of service and then in equal amounts over the next 36 months. The
remaining repurchase option on shares of common stock, including common stock
underlying unexercised stock options may be accelerated in the event of a change
in control.
F-14
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
STOCK OPTION PLANS
Net Perceptions' stock option plan (the "1996 Plan"), provides for the
issuance of both incentive and nonqualified stock options. The incentive options
allow the holder to purchase shares of Net Perceptions' common stock at fair
market value (as determined by the Board of Directors) on the date of the grant,
subject to certain repurchase rights held by Net Perceptions. For options
granted to holders of more than 10% of the outstanding common stock, the option
price at the date of the grant must be at least equal to 110% of the fair market
value of the stock. A total of 2,466,692 shares of common stock are reserved for
issuance under the 1996 Plan. Stock options are immediately exercisable but are
subject to certain discretionary repurchase rights by Net Perceptions, and
generally expire ten years from the date of grant. In general, common stock
underlying options are subject to repurchase by Net Perceptions at the original
exercise price. The repurchase feature generally expires for 25% of the shares
after the first year of service and then expires ratably over the next 36
months.
Net Perceptions records compensation related to stock options using the
intrinsic value method of APB No. 25. Compensation related to stock options
granted in 1998 below fair market value was approximately $1,639. Such
compensation is considered deferred compensation and amortized over the four
year repurchase period of the common stock underlying the related options. Stock
compensation expense of approximately $366 was recognized during the year ended
December 31, 1998.
A summary of activity of the Plan is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding, December 31, 1996................................. -- --
Granted...................................................... 1,212,000 $ 0.11
Exercised.................................................... (306,250) $ 0.10
Forfeited.................................................... (275,750) $ 0.10
----------
Outstanding, December 31, 1997................................. 630,000 $ 0.12
Granted...................................................... 1,196,564 $ 0.61
Exercised.................................................... (355,916) $ 0.16
Forfeited.................................................... (62,084) $ 0.16
----------
Outstanding, December 31, 1998................................. 1,408,564 $ 0.52
----------
----------
</TABLE>
F-15
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE -----------------------------
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------- ----------- ---------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$0.10-$0.25 851,000 9.2 years $ 0.19 851,000 $ 0.19
$0.50-$0.88 277,300 9.6 $ 0.78 277,300 $ 0.78
$0.98-$1.13 238,264 9.8 $ 1.03 238,264 $ 1.03
$2.25-$3.00 42,000 9.9 $ 2.59 42,000 $ 2.59
----------- ----------
1,408,564 1,408,564
----------- ----------
----------- ----------
</TABLE>
All outstanding options at December 31, 1998 are exercisable but the common
stock underlying the options are subject to certain repurchase rights by Net
Perceptions. As of December 31, 1998, only 193,514 options were not subject to
repurchase.
Net Perceptions has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." For the purposes of the pro forma
disclosures under SFAS No. 123 below, the estimated fair value of the options is
amortized to expense over the four year repurchase period of the common stock
underlying the related options. Had compensation cost for Net Perceptions' stock
plan been determined based on the minimum value at the grant date for awards
during 1997 and 1998 consistent with the provisions of SFAS No. 123, Net
Perceptions' net loss and basic and diluted net loss per share for the years
ended December 31, 1997 and 1998 would have been the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Net loss:
As reported............................................................ $ (4,722) $ (4,968)
Pro forma.............................................................. (4,734) (4,979)
Basic and diluted net loss per share
As reported............................................................ $ (3.01) $ (1.40)
Pro forma.............................................................. (3.02) (1.40)
</TABLE>
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998, respectively; dividend yield of
0%; risk-free interest rates of 6.1% and 5.4%; and expected lives of 5 years.
Volatility factors are not applicable to non-public companies for these fair
value calculations. The weighted-average fair value of options granted during
1997 and 1998 using the Black-Scholes option-pricing model was $0.03 and $1.56
per share, respectively. Because the determination of the fair value of all
options granted after Net Perceptions becomes a public entity will include an
expected volatility factor and because additional option grants are expected to
be made in 1999, the pro forma effects of applying the fair value method may be
material to reported net income or loss in future years.
F-16
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
In February 1999, Net Perceptions' board of directors adopted, subject to
stockholder approval, the 1999 Equity Incentive Plan (the "1999 Plan") and the
1999 Non-Employee Director Option Plan (the "1999 Non-Employee Plan"). The
number of shares of common stock reserved for issuance under the 1999 Plan is
equal to 800,000, plus the number of remaining shares available for grant under
the Company's 1996 Plan at the effective date of Net Perceptions' IPO. The
number of shares of common stock reserved for issuance under the 1999
Non-Employee Plan is 500,000.
EMPLOYEE STOCK PURCHASE PLAN
In February 1999, Net Perceptions' board of directors adopted, subject to
stockholder approval, the Employee Stock Purchase Plan (the "Purchase Plan").
The number of shares of common stock reserved for issuance under the Purchase
Plan is 1,000,000.
8. OPERATING LEASES
Net Perceptions has entered into operating lease commitments for its office
space. Minimum future lease payments due under the agreements are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1999............................................................ $ 466
2000............................................................ 546
2001............................................................ 554
2002............................................................ 554
---------
$ 2,120
---------
---------
</TABLE>
Rent expense totaled $29, $145 and $214 for the periods ended December 31,
1996, 1997 and 1998, respectively.
9. BENEFIT PLAN
Net Perceptions has adopted a 401(k) employee retirement plan under which
eligible employees may contribute up to 25% of their annual compensation,
subject to certain limitations. Employees vest immediately in their
contributions and earnings thereon. The plan allows for, but does not require,
Net Perceptions matching contributions. Net Perceptions has not made any such
matching contributions.
10. SUBSEQUENT EVENTS
From January 1, 1999 through March 22, 1999, Net Perceptions granted options
to purchase 524,936 shares of common stock to employees and a director with
exercise prices ranging from $4.00 to $11.00 per share. Compensation expense
related to these stock options granted below fair market value is approximately
$1,507. Such compensation will be amortized over the four-year repurchase period
of the common stock underlying the related options.
On March 22, 1999, Net Perceptions' board of directors authorized a 2-for-1
stock split of the then issued and outstanding capital stock. All references to
common stock amounts and preferred stock amounts, shares and per share data
included in the financial statements and related notes have been adjusted to
give retroactive effect to the stock split.
F-17
