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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER: 000-25781
NET PERCEPTIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1844584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7700 FRANCE AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55435
(Address of principal executive offices, Zip Code)
(952) 842-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF OCTOBER
31, 2000 WAS 26,914,020.
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NET PERCEPTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
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INDEX
<TABLE>
<CAPTION>
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PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 4
2000 and 1999
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NET PERCEPTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
================================================================================================================
September 30, December 31,
2000 1999
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,609 $ 17,457
Short-term investments 50,737 19,397
Accounts receivable, net 5,943 7,663
Royalties receivable, net 518 1,135
Prepaid expenses and other current assets 2,261 1,373
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Total current assets 76,068 47,025
Marketable securities 41,793 6,317
Investment in joint venture - 197
Property and equipment, net 13,064 4,749
Goodwill and other intangible assets, net 99,782 -
Other assets 1,375 460
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Total assets $ 232,082 $ 58,748
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,447 $ 2,550
Accrued expenses 6,953 3,296
Deferred revenue 4,871 3,336
Current portion of long-term liabilities 576 471
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Total current liabilities 13,847 9,653
Long-term liabilities, net of current portion 2,205 707
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Total liabilities 16,052 10,360
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Commitments and contingencies
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 273,541 71,231
Accumulated other comprehensive income (loss) 322 (89)
Accumulated deficit (57,835) (22,756)
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Total stockholders' equity 216,030 48,388
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Total liabilities and stockholders' equity $ 232,082 $ 58,748
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
===============================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product $ 4,424 $ 3,035 $ 21,456 $ 6,700
Service and maintenance 3,301 1,079 8,162 2,123
---------------------------------------------------------------------------------------------------------------
Total revenues 7,725 4,114 29,618 8,823
Cost of revenues:
Product 526 32 1,354 127
Service and maintenance 3,019 782 7,551 1,586
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Total cost of revenues 3,545 814 8,905 1,713
Gross profit 4,180 3,300 20,713 7,110
Operating expenses:
Sales and marketing 6,311 3,275 18,490 7,570
Research and development 5,464 2,270 13,974 5,839
General and administrative 2,628 1,169 7,637 2,556
Lease abandonment expense -- -- 800 --
Amortization of intangibles 7,255 -- 18,139 --
Stock compensation expense 198 339 564 1,206
---------------------------------------------------------------------------------------------------------------
Total operating expenses 21,856 7,053 59,604 17,171
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Loss from operations (17,676) (3,753) (38,891) (10,061)
Other income, net 1,907 735 3,812 1,044
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Net loss $ (15,769) $ (3,018) $ (35,079) $ (9,017)
===============================================================================================================
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Net loss per share:
Basic and diluted $ (0.60) $ (0.15) $ (1.41) $ (0.68)
Shares used in computing basic and
diluted net loss per share 26,339,150 20,587,072 24,892,510 13,281,169
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
==============================================================================================================
Nine Months Ended
September 30,
2000 1999
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(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (35,079) $ (9,017)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization 21,213 535
Provision for doubtful accounts 1,249 283
Stock compensation expense 564 1,206
Lease abandonment expense 800 -
Equity in losses of joint venture 197 -
Changes in operating assets and liabilities, net of effect from
acquisition:
Accounts receivable 1,608 (1,227)
Royalties receivable 617 (669)
Prepaid expenses & other current assets (709) (727)
Other noncurrent assets (894) (739)
Accounts payable (2,146) 207
Accrued expenses 2,463 3,091
Deferred revenue 1,018 696
Other liabilities (297) 339
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Total adjustments 25,683 2,995
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Net cash used in operating activities (9,396) (6,022)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,508) (2,545)
Purchase of short-term investments and marketable securities (115,569) (22,695)
Sales of short-term investments and marketable securities 49,164 -
Cash paid in acquisition, net of cash acquired (1,156) -
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Net cash used in investing activities (76,069) (25,240)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 84,661 53,573
Proceeds from exercise of stock options and warrants, net of
redemptions 731 98
Proceeds from issuance of stock under employee stock purchase plan 713 -
Proceeds from issuance of debt obligations - 3,925
Repayment of acquired entity bank loan (1,000) -
Principal payments under capital leases and notes payable (488) (180)
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 84,617 57,416
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Net increase in cash and cash equivalents (848) 26,154
Cash and cash equivalents at beginning of period 17,457 972
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Cash and cash equivalents at end of period $ 16,609 $ 27,126
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
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NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position, results of
operations and cash flows for the periods presented. 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
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto for the
year ended December 31, 1999, which are contained in the Company's Annual Report
on Form 10-K (File No. 000-25781). The results of operations for the interim
periods presented are not necessarily indicative of results that may be expected
for any other interim period or for the full fiscal year.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The equity method of accounting is used to
account for the Company's equity investment in a Japanese joint venture.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The new
statement establishes accounting and reporting standards for derivative
instruments and hedging activities related to those instruments, as well as
other hedging activities. SFAS No. 133, as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," is effective for the Company beginning January 1,
2001. The Company does not expect SFAS No. 133 to materially affect its
financial position or results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements," in December 1999. SAB
No.101, as amended, provides further interpretive guidance on revenue
recognition for public companies and will be effective for the Company's fourth
quarter of fiscal 2000. The Company anticipates that the adoption of SAB No. 101
will not have a material impact on its current licensing or revenue recognition
practices.
NOTE 3. NET LOSS 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 totaled 275,981
and 1,121,707 at September 30, 2000 and 1999, respectively. Diluted net loss per
share does not differ from basic net loss per share since potential shares of
common stock from the exercise of stock options and warrants and outstanding
shares of common stock subject to repurchase are anti-dilutive for all periods
presented.
6
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NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(In thousands, except share and per share amounts)
NOTE 4. PUBLIC STOCK OFFERINGS
In April and May 1999, the Company completed an initial public offering, selling
4,197,500 shares of common stock at a price of $14 per share, including 547,500
shares sold pursuant to the exercise of an over-allotment option, raising a
total of $53,213 in net proceeds after payment of underwriting discounts,
commissions and offering expenses. Concurrent with the initial public offering,
all shares of preferred stock outstanding were converted into 10,668,700 shares
of common stock on a 1-to-1 basis.
In March 2000, the Company completed a secondary public stock offering, selling
2,000,000 shares of common stock at a price of $45.25 per share, raising a total
of $84,661 in net proceeds after payment of underwriting discounts, commissions
and offering expenses.
NOTE 5. ACQUISITION
In February 2000, the Company completed the acquisition of Knowledge Discovery
One, Inc. ("KD1"), a leading developer and marketer of advanced data analysis
solutions for multi-channel retailers. In this transaction, the Company acquired
all of the outstanding securities of KD1 in exchange for 1,969,630 shares of
common stock. The value of the Company's common stock issued for the KD1
acquisition was determined by the average of the Company's stock price shortly
before and after the announcement of the acquisition. As part of the
acquisition, the Company also assumed all outstanding options to purchase KD1
common stock. The Company reserved 268,297 shares of its common stock for
issuance upon the exercise of these options. The transaction was accounted for
under the purchase method of accounting. Accordingly, the total purchase price
of $117,815 was allocated to the acquired assets and liabilities assumed at
their fair values as of the closing date of the transaction, and the Company's
consolidated statements of operations do not include any revenues or expenses
related to the acquisition prior to the closing date. Such acquired assets
included intangible assets related to acquired technology, customer list,
workforce and goodwill of $4,000, $3,000, $1,000 and $110,755, respectively, and
net assumed liabilities of approximately $940. The intangible assets are being
amortized on a straight-line basis over their estimated useful lives of three to
four years.
The following table presents the consolidated results of operations on an
unaudited pro forma basis as if the acquisition of KD1 had taken place at the
beginning of the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
2000 1999
---------------------------------------
<S> <C> <C>
Total revenues $ 30,082 $ 11,194
Net loss $ (40,438) $ (36,991)
Net loss per share $ (1.60) $ (2.43)
</TABLE>
The unaudited pro forma results of operations are for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
acquisition occurred at the beginning of the periods presented or the results
which may occur in the future.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains both historical and
forward-looking statements that involve risks and uncertainties. The statements
contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding our expectations, beliefs, intentions or
strategies for the future. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Our actual
results could differ materially from those described in our forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed under the heading "Risk Factors" in our
filings with the Securities and Exchange Commission.
OVERVIEW
Net Perceptions is a leading provider of precision merchandising and
personalization infrastructure software solutions that allow companies to
translate knowledge into profitable business action. Our solutions are
designed to help retailers understand customers individually, optimize product
assortments, prices and inventories and offer the right product to the right
customer at the right price.
Through September 30, 2000, we focused on providing solutions to electronic
commerce and brick-and-mortar retailers, and most of our product revenues
through September 30, 2000 were attributable to our Net Perceptions for
E-commerce and Net Perceptions Recommendation Engine products. In 1999, we
expanded our product suite by introducing new applications for Internet sales
channels and other markets, including Net Perceptions for Marketing Campaigns,
Net Perceptions for Call Centers and Net Perceptions for Knowledge Management.
In addition, we introduced the Net Perceptions Recommendation Engine, which is a
product designed for other software and solution providers on an original
equipment manufacturer (OEM) basis.
Net Perceptions, Inc. was incorporated in Delaware in July 1996 and we shipped
our initial product in January 1997. In the period from our inception through
September 30, 2000, we expanded our organization by hiring personnel in key
areas, particularly marketing, sales and research and development. We grew from
34 employees at December 31, 1997, to 70 employees at December 31, 1998, to 213
employees at December 31, 1999 and to 390 employees at September 30, 2000. In
October 2000, the company reduced its workforce by 65 employees, or about 17%,
to align the company's cost structure and skill sets more closely with its
strategic direction and financial outlook. In the fourth quarter of 2000, we
expect to record cash charges of approximately $500,000 and a non-cash stock
compensation charge of approximately $500,000 in connection with the reduction
in workforce. See also additional discussion under "Revenues" below.
Prior to the third quarter of 1999, substantially all of our product revenues
were attributable to Net Perceptions for E-commerce and the Net Perceptions
Recommendation Engine and their predecessor products. In the third quarter of
1999, we recognized initial product revenues from our Net Perceptions for Call
Centers and Net Perceptions for Knowledge Management products. In the second
quarter of 2000, we recognized initial product revenues from Net Perceptions for
Marketing Campaigns, as well as from our Knowledge Refinery and Retail Discovery
Suite products acquired in the Knowledge Discovery One ("KD1") acquisition
discussed below.
We sell our products and services worldwide through a direct sales force,
original equipment manufacturers and resellers. Sales derived through indirect
channels accounted for approximately 45% of our total revenues for the third
quarter of 2000 compared to 9% of our total revenues for the third quarter of
1999. Sales through indirect channels have lower average selling prices and
gross margins than direct sales. During the third quarter of 2000, the company
renegotiated a license agreement with one of its primary resellers, which calls
for a significant reduction of product license royalties in exchange for a
significantly reduced license scope, effective November 1, 2000. Consequently,
revenues through indirect channels may decline in future quarters.
We license our products under various pricing plans, such as per stored profile,
per user, per e-mail, per CPU, per site and per enterprise. We grant licenses on
both a term and perpetual basis. License fees for our products range from
$50,000 to in excess of $1,000,000. The price of our annual maintenance
contracts is typically based on a percentage of the related product license
price and is generally paid in advance. Professional service fees for
implementation support and training are generally priced on a per hour or per
class basis. In addition, we offer certain of our products on a hosted, or
Application Service Provider ("ASP") basis. Charges for ASP services vary across
service offerings, but generally include an initial setup fee and a recurring
monthly charge based on usage.
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We recognize revenues in accordance with the Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-4,
"Deferral of the Effective Date of a Provision of Statement of Position 97-2"
and Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." We derive revenues from
software licenses, software maintenance, professional services and data
warehousing and processing services. Maintenance includes telephone and
Web-based technical support, bug fixes and rights to unspecified upgrades on a
when-and-if available basis. Professional services include implementation,
training and consulting. In multiple-element software arrangements that include
rights to multiple software products, maintenance or services, we allocate the
total arrangement fee using the residual method. Under the residual method, the
fair value of the undelivered maintenance and services elements, as determined
based on vendor-specific objective evidence, is deferred and the remaining
(residual) arrangement fee is recognized as software product revenue. In
software arrangements in which we do not have vendor-specific objective
evidence, we defer revenue until the earlier of when vendor-specific objective
evidence is determined for the undelivered elements or when all elements have
been delivered. We recognize revenues from license fees when persuasive evidence
of an agreement exists, delivery of the product has occurred, no significant
company obligations with regard to implementation remain, the fee is fixed or
determinable and collection is probable. If the fee due from the customer is not
fixed or determinable, we recognize revenues as payments become due from the
customer. If we do not consider collection to be probable, then we recognize
revenues when the fee is collected. We recognize revenues allocable to
maintenance on a straight-line basis over the periods in which it is provided.
We evaluate arrangements that include professional and/or data processing
services to determine whether those services are essential to the functionality
of other elements of the arrangement. When professional services are considered
essential, we recognize revenues from the arrangement using contract accounting,
generally on a percentage of completion basis. When we do not consider the
professional services to be essential, we recognize the revenues allocable to
the services as they are performed. License revenues related to license terms
less than twenty-four months are recognized ratably over the term of the license
period. When we offer our products on an ASP basis, up front set-up fees are
deferred and recognized ratably over the estimated service period.
We have sustained losses on a quarterly and annual basis since inception. As of
September 30, 2000, we had an accumulated deficit of $57.8 million. Our net loss
was $15.8 million for the third quarter ended September 30, 2000 (including
amortization of intangibles and non-cash stock compensation expense of $7.8
million) compared to a $3.0 million net loss for the third quarter of 1999
(including $339,000 in non-cash stock compensation expense). For the nine months
ended September 30, 2000, our net loss was $35.1 million (including amortization
of intangibles and stock compensation expense of $19.5 million) compared to a
loss of $9.0 million for the nine months ended September 30, 1999 (including
stock compensation expense of $1.2 million). These losses resulted from
significant costs incurred in the development and sale of our products and
services. While we expect to experience continued year-over-year absolute dollar
increases in our operating expenses for the foreseeable future (particularly
sales and marketing and research and development expenses) the percent increases
are likely to decline as the company more aggressively manages headcount and
expenses. We anticipate that our operating expenses, as well as planned capital
expenditures, will continue to constitute a material use of our cash resources.
We also expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and these losses may increase
significantly from current levels. We do not expect to achieve profitability
(including amortization of intangibles and stock compensation expense) in 2000
or 2001.
Our relatively 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 stage of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties. Prior to the third
quarter of 2000, we experienced significant sequential percentage quarterly
growth in revenues. We do not believe that prior revenue growth rates are
indicative of future growth rates.
THE KD1 ACQUISITION
In February 2000, we acquired Knowledge Discovery One, Inc., a leading developer
and marketer of advanced data analysis solutions for multi-channel retailers.
KD1 developed a proprietary retail software suite that allows customers to
accurately forecast demand, measure promotion effectiveness, optimize inventory
levels and allocations and predict customer loyalty. As a result of the
acquisition, KD1 became a wholly owned subsidiary of Net Perceptions. In
connection with the transaction, we acquired all of the outstanding shares of
KD1 in exchange for 1,969,630 shares of our common stock. In addition, options
of KD1 were converted into options to purchase approximately 268,297 shares of
our common stock.
We accounted for the KD1 acquisition using the purchase method of accounting.
Under the purchase method, the purchase price of KD1 was allocated to the assets
and liabilities that we acquired from KD1. As a result, we will record
9
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non-cash charges against our future operating results, which will adversely
affect our reported financial results. Net Perceptions recorded approximately
$118.8 million in goodwill and other intangible assets in connection with the
acquisition. We recorded related amortization expense on these intangibles of
$7.6 million in the third quarter of 2000 and anticipate recording total
amortization expense of $26.5 million in 2000, $30.4 million in 2001, $30.4
million in 2002, $28.0 million in 2003 and $3.5 million in the first quarter of
2004. The unamortized intangible asset balances are subject to realizability
analysis under FAS 121, which could accelerate these amortization amounts.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
The following table sets forth certain items in the Company's statements of
operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
====================================================================================================================
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues:
Product 57% 74% 72% 76%
Service and maintenance 43 26 28 24
--------------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100 100
Cost of revenues:
Product 7 1 5 1
Service and maintenance 39 19 25 18
--------------------------------------------------------------------------------------------------------------------
Total cost of revenues 46 20 30 19
Gross margin 54 80 70 81
Operating expenses:
Sales and marketing 82 80 62 86
Research and development 71 55 47 66
General and administrative 34 28 26 29
Lease abandonment expense - - 3 -
Amortization of intangibles 94 - 61 -
Stock compensation expense 2 8 2 14
--------------------------------------------------------------------------------------------------------------------
Total operating expenses 283 171 201 195
--------------------------------------------------------------------------------------------------------------------
Loss from operations (229) (91) (131) (114)
Other income, net 25 18 13 12
--------------------------------------------------------------------------------------------------------------------
Net loss (204%) (73%) (118%) (102%)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
REVENUES
Total revenues. Revenues increased 88% to $7.7 million in the quarter ended
September 30, 2000, from $4.1 million in the third quarter of 1999. Revenue
increased 236% to $29.6 million for the nine months ended September 30, 2000,
from $8.8 million for the nine months ended September 30, l999. The increase in
total revenues is primarily the result of increased sales of our Net Perceptions
for E-commerce and Net Perceptions Recommendation Engine products and, to a
lesser extent, increased sales of our Net Perceptions for Knowledge Management,
Net Perceptions for Call Centers, Net Perceptions for Marketing Campaigns
products (which were introduced in 1999), and sales of Retail Discovery Suite
and Knowledge Refinery products, acquired in the KD1 acquisition.
Revenues from sales in the United States were $6.4 million in the third quarter
of 2000 compared to $3.5 million in the third quarter of 1999, representing 83%
and 85% of total revenues, respectively. Revenue for the nine months ended
September 30, 2000 derived from sales in the United States was $22.7 million or
77% of total revenues, compared to $7.2 million or 82% of total revenues for the
same period in 1999. Revenues from international sales in the third quarter of
2000 were $1.3 million or 17% of total revenues compared to $598,000 or 15% of
total revenues in the third quarter of
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the prior year. For the nine months ended September 30, 2000, international
revenues accounted for 23% of total revenues, compared to 18% for the nine
months ended September 30, 1999. The majority of international sales were made
in Europe and Asia by our direct sales organizations located in the United
States and the United Kingdom. International sales are generally denominated in
United States dollars. Purchases by one customer represented 11% of our revenues
in 1999.
Product revenues. Product revenues increased 46% to $4.4 million in the third
quarter of 2000 compared to $3.0 million for the same period in the prior year.
Product revenues increased 220% to $21.5 million for the nine months ended
September 30, 2000 from $6.7 million for the same period in the prior year. The
growth of product revenues in absolute dollars is attributable to an increase in
the average size of license transactions recognized and increased sales and
marketing efforts, specifically the expansion of both our direct and indirect
sales and distribution channels. We anticipate that revenues from product
licenses will continue to represent the majority of our total revenues in the
foreseeable future. In addition, we expect that prior percentage growth rates of
our product revenues will not be sustainable in the future.
While product revenues increased on a year-over-year basis, product revenues for
the third quarter of 2000 declined $5.1 million, or 53%, from $9.5 million in
the second quarter of 2000. This decline was attributable to a combination of
external and internal factors. External factors contributing to the revenue
decline included the rapid deterioration of the pure dot-com e-tailer, a
lengthening of the sales cycle for multi-channel retailers and increased
competition. Internal factors contributing to the decline included delays
related to product pilot implementations, poorly qualified accounts (especially
in the dot-com sector), the slower-than-planned training of field sales
operations to the skill sets required to close and manage large,
enterprise-class customers and the slower-than-planned integration and promotion
of our analytical product suite. This decline in product revenues contributed to
management's decision in October 2000 to reduce our workforce by 65 employees,
and to adjust the company's total revenue goals to $8 to $9 million for the
fourth quarter of 2000 and $45 to $60 million for the full year 2001.
Service and maintenance revenues. Service and maintenance revenues consist
primarily of professional and maintenance services and ASP-related services. Our
professional service revenues include business consulting, implementation
support, data warehousing and processing and educational services and are
generally offered on a time and material basis. Maintenance revenues are
generally derived from annual service agreements and are recognized ratably over
the period of the agreement. Total service and maintenance revenues in the third
quarter of 2000 increased 206% to $3.3 million, or 43% of total revenues, from
$1.1 million, or 26% of total revenues, in the third quarter of 1999. Service
and maintenance revenues for the third quarter 2000 increased 14% sequentially
over the second quarter. For the nine months ended September 30, 2000, total
service and maintenance revenue increased 284% to $8.2 million from $2.1
million for the same period in the prior year. Service and maintenance revenues
were 28% of total revenue for the nine months ended September, 30, 2000,
compared to 24% of total revenues for the same period in 1999. All increases
reflect higher levels of consulting service and maintenance support revenues
connected with a growing installed base.
COST OF REVENUES
Cost of product revenues. Cost of product revenues consists primarily of the
cost of royalties paid to third-party vendors, amortization of acquired
technology costs, product media and duplication, manuals, packaging materials
and shipping expenses. Cost of product revenues increased 1,544% to $526,000 in
the third quarter of 2000 from $32,000 for the third quarter of 1999,
representing 12% and 1% of the related product revenues, respectively. Cost of
product revenues were 6% and 2% of total product revenues for the nine months
ended September 30, 2000 and 1999, respectively. The increase in cost of product
revenues in absolute dollars and as a percentage of total product revenues from
1999 to 2000 is primarily attributable to amortization of acquired technology
and royalties in connection with the acquisition of KD1, as well as to lower
product revenue in the third quarter of 2000. Because all internal development
costs incurred in the research and development of new 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. We believe that the cost of product revenues will be relatively flat in
absolute dollar amounts and may decline slightly as a percentage of product
revenues over the next five quarters.
Cost of service and maintenance revenues. Cost of service and maintenance
revenues consists primarily of personnel-related and infrastructure costs
incurred in providing telephone and Web-based support of our software products,
as well as professional, consulting, educational and ASP services to customers.
Cost of service and maintenance revenues increased 286% to $3.0 million in the
third quarter of 2000, from $782,000 in the third quarter of the prior year,
representing 91% and 72% of the related services and maintenance revenues,
respectively. Cost of service and maintenance revenues were 93% and 75% of
service and maintenance revenues for the nine months ended September 30, 2000
and 1999, respectively. The increase in cost of services and maintenance
revenues in absolute dollars and as a percentage of revenues is due primarily to
staff increases and the related recruiting and training costs associated with
increased personnel in our service organization, lower than planned utilization
of our consultants, and increased costs for
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<PAGE> 12
third-party contractors used to staff consulting engagements. Cost of service
and maintenance revenues as percentage of service and maintenance revenues are
expected to improve modestly in the fourth quarter of 2000 as well as in 2001.
We also believe that the cost of service and maintenance revenues will increase
in absolute dollar amounts in the future as we expand our service capacity to
meet anticipated demand. Cost of service and maintenance revenues may vary
significantly from quarter to quarter depending upon the mix of services that we
provide and the utilization rate of our service personnel.
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses consist primarily of salaries,
other employee related costs, commissions and other incentive compensation,
travel and entertainment and expenditures for marketing programs such as
collateral materials, trade shows, public relations and creative services. Sales
and marketing expenses were $6.3 million in the third quarter of 2000 compared
to $3.3 million in the third quarter of 1999, an increase of 93%. Sales and
marketing expenses were 82% and 80% of total revenues in the third quarters of
2000 and 1999, respectively. Sales and marketing expenses were $18.5 million and
$7.6 million, or 62% and 86% of total revenues, for the nine months ended
September 30, 2000 and 1999, respectively. The overall increase in sales and
marketing expenses in absolute dollar amounts reflects the cost of hiring
additional sales and marketing personnel, developing and expanding our sales and
distribution channels, launching new products and expanding promotional
activities. Sales and marketing expenses as a percent of total revenues are
expected to decline 4% to 5% in the fourth quarter of 2000. In addition, sales
and marketing expenses as a percent of total revenues are targeted to be in the
45% to 50% range by the fourth quarter of 2001.
Research and development. Research and development expenses consist primarily of
salaries, other employee related costs and consulting fees relating to the
development of our products. Research and development expenses were $5.5 million
in the third quarter of 2000, an increase of 141% from the $2.3 million in
research and development expenses in the third quarter of 1999. Research and
development expenses were 71% and 55% of total revenues in the third quarters of
2000 and 1999, respectively. Research and development expenses were $14.0
million and $5.8 million, or 47% and 66% of total revenues, for the nine months
ended September 30, 2000 and 1999, respectively. The increase in research and
development expenses in absolute dollars is primarily due to the cost of hiring
additional research and development personnel for the enhancement of existing
products and the development of new products. Research and development expenses
as a percent of total revenues are expected to decline 10% to 12% in the fourth
quarter of 2000, partially the result of the elimination of 20 research and
development positions in the October 2000 reduction in workforce. We do not
believe that these eliminations will significantly impact any current product
development efforts. In addition, research and development expenses as a percent
of total revenues are targeted to be in the 23% to 28% range by the fourth
quarter of 2001.
General and administrative. General and administrative expenses consist
primarily of salaries, other employee related costs and professional service
fees. General and administrative expenses were $2.6 million in the third quarter
of 2000, an increase of 125% from $1.2 million in the third quarter of the prior
year. General and administrative expenses were 34% and 28% of total revenues in
the third quarters of 2000 and 1999, respectively. General and administrative
expenses were $7.6 million and $2.6 million, or 26% and 29% of total revenues,
for the nine months ended September 30, 2000 and 1999, respectively. The overall
increase in general and administrative expenses in absolute dollar amounts
reflects the cost of hiring additional general and administrative personnel,
increased professional fees, additional provision for doubtful accounts and
additional infrastructure to support our expanding operations. General and
administrative expenses as a percent of total revenues are expected to decline
2% to 3% in the fourth quarter of 2000. In addition, general and administrative
expenses as a percent of total revenues are targeted to be in the 13% to 17%
range by the fourth quarter of 2001.
Lease abandonment expense. We recorded lease abandonment expense of $800,000 in
the second quarter of 2000, representing 3% of total revenues for the nine
months ended September 30, 2000. This charge reflects estimated lease
abandonment expenses related to the company's August 2000 move to new corporate
headquarters.
Amortization of intangibles. Amortization of intangibles, related to goodwill
and other intangibles acquired in the acquisition of KD1, was $7.6 million for
the third quarter of 2000 (including amortization of $333,000 included in cost
of product revenues), or 98% of total revenues. Amortization of intangibles
totaled $19.0 million ($833,000 included in cost of product revenues), or 64% of
total revenues, for the nine months ended September 30, 2000. Total amortization
charges will be approximately $7.6 million for the fourth quarter of 2000, with
amortization charges continuing into early 2004.
Stock compensation expense. Compensation charges related to granted stock
options were $198,000 in the third quarter of 2000 and $339,000 in the third
quarter of 1999, representing 2% and 8% of total revenues, respectively. Stock
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<PAGE> 13
compensation expense was $564,000 and $1,206,000, or 2% and 14% of total
revenues, for the nine months ended September 30, 2000 and 1999, respectively.
If stock compensation expense for the nine months ended September 30, 2000 and
1999, had been allocated across all relevant functional expense categories
within operating expenses, it would be allocated as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------- ------------------
2000 1999
-------------------- ------------------
<S> <C> <C>
Sales and marketing $ 246,000 $ 627,000
Research and development 255,000 331,000
General and administrative 63,000 248,000
-------------------- ------------------
$ 564,000 $ 1,206,000
</TABLE>
Stock compensation expense represents the difference between the exercise price
of certain stock option grants and the deemed fair value of the common stock at
the time of the grants. Stock compensation expense is recognized over the
vesting period of the options, which is generally four years. As a result, the
recognition of stock compensation will impact our reported results of operations
through early 2003. We expect to record stock compensation expense of
approximately $800,000 in the fourth quarter of 2000, which includes $500,000
related to the October 2000 restructuring and related reduction in workforce. We
also expect to record stock compensation expense of approximately $200,000 per
quarter in 2001.
Other income, net. Other income, net consists of interest income, interest
expense, the company's share in losses of a joint venture, foreign currency
transaction losses or gains and other expense. Net other income was $1.9
million in the third quarter of 2000, up 159% from net other income of
$735,000 in the third quarter of the prior year. Net other income totaled $3.8
million and $1.0 million for the nine months ended September 30, 2000 and 1999,
respectively. The increase in net other income for both the three and nine
month periods is due substantially to interest income on the proceeds from our
secondary public offering completed in March 2000.
PROVISION FOR INCOME TAXES
We have incurred significant operating losses for all periods from inception
through September 30, 2000. As of December 31, 1999, we had net operating loss
carryforwards of approximately $18.1 million available to reduce future taxable
income expiring at various dates beginning in 2011. In addition, as of December
31, 1999, we had $140,000 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 realization of the future tax benefit is presently not
likely.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Net Perceptions has financed its operations primarily through
the sale of equity securities. At September 30, 2000, we had $109.1 million of
cash, cash equivalents and short-term investments, compared to $43.2 million at
December 31, 1999. In March 2000 we completed a public stock offering, selling
2,000,000 shares of common stock at a price of $45.25 per share, raising a total
of $84.7 million in net proceeds after payment of underwriting discounts and
commissions and estimated offering expenses.
Cash used in operations was $9.4 million for the nine months ended
September 30, 2000, compared to $6.0 million for the same period in 1999. Cash
used in operations resulted primarily from net losses, as adjusted for non-
cash expenses. Other significant changes included the pay down of accounts
payable, offset in part by the net collection of accounts receivable and growth
in both accrued liabilities and deferred revenues.
We used $76.1 million in net cash for investing activities in the first nine
months of 2000 compared to using $25.2 million in investing activities in the
first nine months of 1999. Our investing activities consisted primarily of
purchases and sales of short-term investments and property and equipment. To
date, we have not invested in financial instruments that involve a high level of
complexity or risk. We expect that, in the future, cash in excess of current
requirements will be invested in investment grade, interest-bearing securities.
Net cash provided by financing activities was $84.6 million for the first nine
months of 2000, reflecting the receipt of net proceeds from the company's
secondary public stock offering. Cash provided by financing activities was
$57.4 million for the first nine months of 1999, reflecting the net proceeds
from the company's initial public offering of $53.6 million and borrowings
under a short-term convertible note payable.
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Capital expenditures were $8.5 and $2.5 million for the nine months ended
September 30, 2000 and 1999, respectively. Our capital expenditures consist of
leasehold improvements and purchases of property and equipment, primarily
computer equipment, software and furniture, for our growing employee base and
expanding operations infrastructure. Since 1999, we have purchased property and
equipment with cash balances. From inception through 1998, we generally funded
the purchase of property and equipment with capital leases. At September 30,
2000, we had approximately $2.8 million in short and long-term liabilities, of
which $1.8 million is deferred rent credits. Approximately $1.0 million
represents loans and notes payable, consisting primarily of capital lease
obligations. These obligations include installment loans with third-party
financing sources that are secured by the equipment financed by the third
parties. The loans bear interest at rates between 14.4% and 16.8% and mature
between November 2000 and August 2002.
Although we have no material long-term commitments for capital expenditures, we
anticipate increases in our capital expenditures, facilities and lease
commitments consistent with anticipated growth in operations, infrastructure
and personnel. In April 2000 we signed a ten-year lease for a new corporate
facility with annual total rent payments beginning at $1.4 million per year,
excluding operating expenses. As a result, we will incur increased rent
expense in the future. The move to the new headquarters facility was completed
in August 2000 and required a net investment in the third quarter of 2000 of
approximately $3.0 million in leasehold improvements, furniture and equipment.
We believe that existing cash and investments will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
However, we may need to raise additional funds in order to support more rapid
expansion of our sales force, develop new or enhanced products or services,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If we seek to raise
additional funds, we may not be able to obtain funds on terms which are
favorable or otherwise acceptable to us. If we raise additional funds through
the issuance of equity securities, the percentage ownership of our stockholders
would be reduced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through September 30, 2000 the majority of our recognized revenues were
denominated in United States dollars and were primarily from customers in the
United States, and our exposure to foreign currency exchange rate changes has
been immaterial. We expect, however, that future product license and service
revenues may increasingly be derived from international markets and may be
denominated in the currency of the applicable market. As a result, our operating
results may become subject to significant fluctuations based upon changes in the
exchange rates of certain currencies in relation to the United States dollar.
Furthermore, to the extent that we engage in international sales denominated in
United States dollars, an increase in the value of the United States dollar
relative to foreign currencies could make our products less competitive in
international markets. Although we will continue to monitor our exposure to
currency fluctuations, and, when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, exchange
rate fluctuations may adversely affect our financial results in the future.
Our exposure to market risk is otherwise limited to interest income sensitivity,
which is affected by changes in the general level of United States interest
rates, particularly because the majority of our investments are in debt
securities issued by corporations. We place our investments with high-quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our investments, we believe that we are not subject to any material
market risk exposure. We do not have any derivative financial instruments.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company is not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the period
covered by this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1** Agreement and Plan of Merger, dated as of January 15,
2000, as amended February 3, 2000, by and among Net Perceptions, Inc.,
Kentucky Acquisition Corporation and Knowledge Discovery One, Inc.
Exhibit 3.1**** Amended and Restated Certificate of Incorporation, as
amended by the Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Net Perceptions, Inc.
Exhibit 3.2* Amended and Restated Bylaws.
Exhibit 4.1* Amended and Restated Investor Rights Agreement, dated
December 18, 1997, among Net Perceptions, Inc. and the investors and
founders named therein, as amended.
Exhibit 4.2** Registration Rights Agreement, dated February 14, 2000,
by and among Net Perceptions, Inc. and the stockholders named therein.
Exhibit 4.3* Specimen Common Stock Certificate.
Exhibit 10.1*** Office Lease Agreement between DRF Holdings LLC and Net
Perceptions, Inc. dated April 5, 2000.
Exhibit 27***** Financial Data Schedule.
-----------------------------------------------------------------------
* Incorporated by reference to Net Perceptions' Registration Statement
on Form S-1 (Registration No. 333-71919).
** Incorporated by reference to Net Perceptions' Registration Statement
on Form S-1 (Registration No. 333-31230).
*** Incorporated by reference to Net Perceptions' Report on Form 10-Q
for the Quarter Ended March 31, 2000 (File No. 000-25781).
**** Incorporated by reference to Net Perceptions' Report on From 10-Q
for the Quarter Ended June 30, 2000 (File No. 000-25781).
***** Filed herewith.
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<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K.
During the period covered by this report, the company filed one
current Report on Form 8-K on September 29, 2000, incorporating by
reference the company's press release regarding third quarter
financial expectations.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET PERCEPTIONS, INC.
Date: November 14, 2000 By: /s/ Thomas M. Donnelly
-------------------------------
Thomas M. Donnelly
Chief Financial Officer
(Duly authorized officer and principal
financial and accounting officer)
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<PAGE> 18
NET PERCEPTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
EXHIBIT INDEX
--------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
--------------------------------------------------------------------------------
2.1** Agreement and Plan of Merger, dated as of
January 15, 2000, as amended February 3, 2000,
by and among Net Perceptions, Inc., Kentucky
Acquisition Corporation and Knowledge Discovery
One, Inc.
--------------------------------------------------------------------------------
3.1**** Amended and Restated Certificate of
Incorporation, as amended by the Certificate of
Amendment to the Amended and Restated
Certificate of Incorporation of Net Perceptions,
Inc.
--------------------------------------------------------------------------------
3.2* Amended and Restated Bylaws.
--------------------------------------------------------------------------------
4.1* Amended and Restated Investor Rights Agreement,
dated December 18, 1997, among Net Perceptions,
Inc. and the investors and founders named
therein, as amended.
--------------------------------------------------------------------------------
4.2** Registration Rights Agreement, dated February
14, 2000, by and among Net Perceptions, Inc. and
the stockholders named therein.
--------------------------------------------------------------------------------
4.3* Specimen Common Stock Certificate.
--------------------------------------------------------------------------------
10.1*** Office Lease Agreement between DRF Holdings LLC
and Net Perceptions, Inc., dated April 5, 2000.
--------------------------------------------------------------------------------
27 Financial Data Schedule (FILED HEREWITH).
--------------------------------------------------------------------------------
* Incorporated by reference to Net Perceptions'
Registration Statement on Form S-1 (Registration
No. 333-71919).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
** Incorporated by reference to Net Perceptions'
Registration Statement on Form S-1 (Registration
No. 333-31230).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
*** Incorporated by reference to Net Perceptions'
Report on Form 10-Q for the Quarter Ended March
31, 2000 (File No. 000-25781).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
**** Incorporated by reference to Net Perceptions'
Report on Form 10-Q for the Quarter Ended June
30, 2000 (File No. 000-25781).
--------------------------------------------------------------------------------
18
