<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
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 JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
--------------------------------------------------------------------------------
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)
(612) 903-9424
(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 JULY 31,
2000 WAS 26,713,957.
<PAGE> 2
NET PERCEPTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
================================================================================
INDEX
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<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six Months Ended June 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>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NET PERCEPTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
=================================================================================================================
June 30, December 31,
2000 1999
----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,431 $ 17,457
Short-term investments 34,778 19,397
Accounts receivable, net 10,058 7,663
Royalties receivable, net 1,702 1,135
Prepaid expenses and other current assets 2,279 1,373
----------------------------------------------------------------------------------------------------------------
Total current assets 96,248 47,025
Marketable securities 33,329 6,317
Investment in joint venture - 197
Property and equipment, net 8,075 4,749
Goodwill & other intangible assets, net 107,371 -
Other assets 644 460
----------------------------------------------------------------------------------------------------------------
Total assets $ 245,667 $ 58,748
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,564 $ 2,550
Accrued expenses 5,943 3,296
Deferred revenue 5,476 3,336
Current portion of long-term liabilities 663 471
----------------------------------------------------------------------------------------------------------------
Total current liabilities 13,646 9,653
Long-term liabilities, net of current portion 840 707
----------------------------------------------------------------------------------------------------------------
Total liabilities 14,486 10,360
----------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 273,209 71,231
Accumulated other comprehensive income (loss) 36 (89)
Accumulated deficit (42,066) (22,756)
----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 231,181 48,388
----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 245,667 $ 58,748
=================================================================================================================
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE> 4
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
===================================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product $ 9,508 $ 2,104 $ 17,032 $ 3,665
Service and maintenance 2,894 710 4,862 1,044
-----------------------------------------------------------------------------------------------------------------
Total revenues 12,402 2,814 21,894 4,709
Cost of revenues:
Product 553 59 828 95
Service and maintenance 2,724 491 4,533 804
-----------------------------------------------------------------------------------------------------------------
Total cost of revenues 3,277 550 5,361 899
Gross profit 9,125 2,264 16,533 3,810
Operating expenses:
Sales and marketing 6,278 2,558 12,179 4,295
Research and development 4,852 2,033 8,510 3,569
General and administrative 2,750 813 5,009 1,387
Lease abandonment expense 800 - 800 -
Amortization of intangibles 7,256 - 10,883 -
Stock compensation expense 174 364 367 867
-----------------------------------------------------------------------------------------------------------------
Total operating expenses 22,110 5,768 37,748 10,118
-----------------------------------------------------------------------------------------------------------------
Loss from operations (12,985) (3,504) (21,215) (6,308)
Other income (loss), net 1,255 381 1,905 309
-----------------------------------------------------------------------------------------------------------------
Net loss $(11,730) $ (3,123) $ (19,310) $ (5,999)
=================================================================================================================
-----------------------------------------------------------------------------------------------------------------
Net loss per share:
Basic and diluted $ (0.46) $ (0.20) $ (0.80) $ (0.60)
Shares used in computing basic and
diluted net loss per share 25,744,809 5,476,110 24,151,681 10,007,654
==================================================================================================================
Pro forma basic and $ (0.46) $(0.17) $ (0.80) $ (0.35)
diluted net loss per share
Shares used in computing pro forma basic and
diluted net loss per share 25,744,809 18,676,720 24,151,681 16,942,309
=================================================================================================================
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE> 5
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
==============================================================================================================
Six Months Ended
June 30,
2000 1999
--------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,310) $ (5,999)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization 12,691 307
Provision for doubtful accounts 1,056 -
Stock compensation expense 367 867
Lease abandonment expense 800 -
Equity in losses of joint venture 197 -
Changes in operating assets and liabilities, net of effect from
acquisition:
Accounts receivable (2,314) (173)
Royalties receivable (567) -
Prepaid expenses & other current assets (727) -
Other noncurrent assets (163) -
Accounts payable (1,813) 688
Accrued expenses 862 1,906
Deferred revenue 1,623 171
Other long-term liabilities (9) (256)
--------------------------------------------------------------------------------------------------------------
Total adjustments 12,003 3,510
--------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (7,307) (2,489)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,982) (1,317)
Purchase of short-term investments
and marketable securities (71,165) (14,219)
Sales of short-term investments
and marketable securities 28,897 -
Cash paid in acquisition, net of cash acquired (1,156) -
--------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (47,406) (15,536)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 84,661 53,558
Proceeds from exercise of stock options and warrants, net of
redemptions 597 93
Proceeds from issuance of stock under employee stock
purchase plan 713 -
Proceeds from issuance of debt obligations - 3,862
Repayment of acquired entity bank loan (1,000) -
Principal payments under capital leases and notes payable (284) -
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 84,687 57,513
--------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 29,974 39,488
Cash and cash equivalents at beginning of period 17,457 972
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 47,431 $ 40,460
==============================================================================================================
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE> 6
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 aggregated 555,336
and 1,588,908 at June 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. Unaudited pro forma basic and diluted net loss per share have 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. All preferred stock outstanding was converted to common stock in
connection with the Company's initial public offering in 1999 (See Note 4).
6
<PAGE> 7
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"). KD1 is a leading supplier 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 has 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.
7
<PAGE> 8
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 forward-looking statements fall 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 regarding 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 Registration Statement
on Form S-1 declared effective on March 23, 2000 by the Securities and Exchange
Commission (File No. 333-31230).
OVERVIEW
Net Perceptions is a leading provider of real time personalization and precision
marketing software solutions for Internet and multi-channel retailers. 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 June 30, 2000, we focused on providing solutions to electronic commerce
and brick-and-mortar retailers, and most of our product revenues through June
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 shipped our
initial product in January 1997. In the period from our inception through June
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 369 employees at June 30, 2000.
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 38% of our total revenues for the second
quarter of 2000 compared to 14% of our total revenues for the second quarter of
1999. 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 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 $500,000. 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 up front setup fee and a recurring monthly charge based on
usage.
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,
8
<PAGE> 9
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 or equal
to twenty-four months are recognized ratably over the term of the license
period.
We have sustained losses on a quarterly and an annual basis since inception. As
of June 30, 2000, we had an accumulated deficit of $42.1 million. Our net loss
was $11.7 million for the second quarter ended June 30, 2000 (including
amortization of intangibles of $7.6 million) compared to a $3.1 million net loss
for the second quarter of 1999. For the six months ended June 30, 2000, our net
loss was $19.3 million (including amortization of intangibles of $11.4 million)
compared to a loss of $6.0 million for the six months ended June 30, 1999. These
losses resulted from significant costs incurred in the development and sale of
our products and services. We expect to experience significant increases in our
operating expenses for the foreseeable future, particularly research and
development and sales and marketing expenses. Accordingly, we anticipate that
our operating expenses, as well as planned capital expenditures, will 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 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. 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.
We expect to incur additional expenses across all departments to build and
integrate our direct sales force and marketing organizations, increase our
indirect sales activities, increase our investment in the development of
technology and expand general and administrative infrastructure. We expect that
these investments will cause all operating expense categories to increase in
absolute dollars and could result in an increase in expense categories as a
percentage of revenues. In addition, this expansion will place significant
demands on our management and operational resources.
THE KD1 ACQUISITION
In February 2000, we acquired Knowledge Discovery One, Inc., a developer and
marketer of decision support products and services for retail applications. 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 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 second 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 quarterly
realizability analysis under FAS 121 which could accelerate these amortization
amounts.
9
<PAGE> 10
RESULTS OF OPERATIONS
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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product 77% 75% 78% 78%
Service and maintenance 23 25 22 22
------------------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100 100
Cost of revenues:
Product 4 2 4 2
Service and maintenance 22 17 20 17
------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 26 19 24 19
Gross margin 74 81 76 81
Operating expenses:
Sales and marketing 51 91 55 91
Research and development 39 72 39 76
General and administrative 22 29 23 29
Lease abandonment expense 6 - 4 -
Amortization of intangibles 59 - 50 -
Stock compensation expense 2 13 2 18
------------------------------------------------------------------------------------------------------------------------
Total operating expenses 179 205 173 214
------------------------------------------------------------------------------------------------------------------------
Loss from operations (105) (124) (97) (133)
Other income (expense), net 10 14 9 7
------------------------------------------------------------------------------------------------------------------------
Net loss (95%) (110%) (88%) (126%)
========================================================================================================================
</TABLE>
10
<PAGE> 11
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES
Total revenues. Our revenues increased 341% to $12.4 million in the quarter
ended June 30, 2000, from $2.8 million in the second quarter of 1999. Revenue
increased 365% to $ 21.9 million for the six months ended June 30, 2000, from
$4.7 million for the six months ended June 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 Call Centers, Net Perceptions
for Marketing Campaigns and Net Perceptions for Knowledge Management products
(which were introduced in 1999) and to sales of Retail Discovery Suite and
Knowledge Refinery products, acquired in the KD1 acquisition.
Revenues from sales in the United States were $10.4 million in the second
quarter of 2000 compared to $2.2 million in the second quarter of 1999,
representing 84% and 77% of total revenues, respectively. Revenue for the six
months ended June 30, 2000 derived from sales in the United States was $16.3
million or 74 % of total revenues, compared to $3.7 million or 79% of total
revenues for the same period in 1999. Revenues from international sales in the
second quarter of 2000 were $2.0 million or 16% of total revenues compared to
$650,000 or 23% of total revenues in the second quarter of the prior year. For
the six months ended June 30, 2000, international revenues accounted for 26% of
total revenues, compared to 21% for the six months ended June 30, 1999. The
majority of international sales were made in Europe and Asia by our direct sales
force 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. We do not expect any single customer to
account for 10% or more of total revenues in 2000.
Product revenues. Product revenues increased 352% to $9.5 million in the second
quarter of 2000 compared to $2.1 million for the same period in the prior year.
Product revenues increased 365% to $17.0 million for the six months ended June
30, 2000 from $3.7 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, increased sales and marketing
efforts, specifically the expansion of both our direct and indirect sales and
distribution channels, and increased sales volumes of our products. 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.
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
second quarter of 2000 increased 308% to $2.9 million or 23% of total revenues
from $710,000, or 25% of total revenues in the second quarter of 1999. For the
six months ended June 30, 2000, total service and maintenance revenue increased
366% to $4.9 million from $1.0 million for the same period in the prior year,
and was 22% of total revenues for both years.
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 837% to $553,000 in
the second quarter of 2000 from $59,000 for the second quarter of 1999,
representing 6% and 3% of the related product revenues, respectively. Cost of
product revenues were 5% and 3% of total product revenues for the six months
ended June 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. 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
increase in dollar amounts and as a percentage of product revenues in the
future.
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, educational and ASP services to customers. Cost of
service and maintenance revenues increased 455% to $2.7 million in the second
quarter of 2000, from $491,000 in the second quarter of the prior year,
representing 94% and 69% of the related services and maintenance revenues,
respectively. Cost of service and maintenance revenues were 93% and 77% of
service and maintenance revenues for the six months ended June 30, 2000 and
1999, respectively. The
11
<PAGE> 12
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 to
increased costs for third-party contractors used to staff consulting
engagements. We believe that the cost of service and maintenance revenues will
increase in dollar amounts in the future as we expand our service capacity to
meet anticipated demand. In addition, 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 second quarter of 2000 compared
to $2.6 million in the second quarter of 1999, an increase of 145%. Sales and
marketing expenses were 51% and 91% of total revenues in the second quarters of
2000 and 1999, respectively. Sales and marketing expenses were $12.2 million and
$4.3 million, or 56% and 91% of total revenues, for the six months ended June
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. We
believe that sales and marketing expenses will continue to increase in absolute
dollar amounts in the future as we continue to expand our sales and marketing
efforts for all of our product lines.
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 $4.9 million
in the second quarter of 2000, an increase of 139% from the $2.0 million in
research and development expenses in the second quarter of 1999. Research and
development expenses were 39% and 72% of total revenues in the second quarters
of 2000 and 1999, respectively. Research and development expenses were $8.5
million and $3.6 million, or 39% and 76% of total revenues, for the six months
ended June 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. We believe that continued
investment in research and development is critical to attaining our strategic
objectives and, as a result, expect research and development expenses to
increase in absolute dollars in future periods.
General and administrative. General and administrative expenses consist
primarily of salaries, other employee related costs and professional service
fees. General and administrative expenses were $2.8 million in the second
quarter of 2000, an increase of 238% from $813,000 in the second quarter of the
prior year. General and administrative expenses were 22% and 29% of total
revenues in the first quarters of 2000 and 1999, respectively. General and
administrative expenses were $5.0 million and $1.4 million, or 23% and 29% of
total revenues, for the six months ended June 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. We
expect to continue to add administrative staff to support broadened operations.
As a result, general and administrative expenses will increase in absolute
dollar amounts in the future.
Lease abandonment expense. The company recorded lease abandonment expense of
$800,000 in the second quarter of 2000, representing 6% and 4% of total revenues
for the three and six months ended June 30, 2000, respectively. This charge
reflects estimated lease abandonment expenses and costs from the company's
planned 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 second quarter of 2000 (including amortization of $333,000 included in cost
of product revenues), or 61% of total revenues. Amortization of intangibles
totaled $11.4 million ($500,000 included in cost of product revenues), or 52% of
total revenues, for the six months ended June 30, 2000. Total amortization
charges will be approximately $7.6 million per quarter for the balance of 2000,
with amortization charges continuing into early 2004.
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<PAGE> 13
Stock compensation. Compensation charges related to granted stock options were
$174,000 in the second quarter of 2000 and $364,000 in the second quarter of
1999, representing 2% and 13% of total revenues, respectively. Stock
compensation expense was $367,000 and $867,000, or 2% and 18% of total revenues,
for the six months ended June 30, 2000 and 1999, respectively. 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 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.
Other income, net. Other income, net consists of interest income, interest
expense, equity losses or gains of a joint venture, foreign currency transaction
losses or gains and other expense. Net other income was $1.3 million in the
second quarter of 2000, up 229% from net other income of $381,000 in the second
quarter of the prior year. Net other income totaled $1.9 million and $309,000
for the six months ended June 30, 2000 and 1999, respectively. The increase in
net other income for both the three and six 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 June 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 June 30, 2000, we had $115.5 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 $84.8 million in net proceeds after payment of underwriting discounts and
commissions and estimated offering expenses. Cash used in operations was $7.3
million for the six months ended June 30, 2000, compared to $2.5 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 and increases in our accounts receivable, offset in
part by growth in accrued liabilities and deferred revenues.
We used $47.4 million in net cash for investing activities in the first half of
2000 compared to a use of $15.5 million in investing activities in the first
half 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 $84.7 million in the first half of
2000, reflecting the receipt of net proceeds from the company's secondary public
stock offering. Cash provided by financing activities was $57.5 million in the
first half 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.
Capital expenditures were $4.0 and $1.3 million for the six months ended June
30, 2000 and 1999, respectively. Our capital expenditures consisted of leasehold
improvements and purchases of property and equipment, primarily computer
equipment and software, 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 June 30, 2000, we had
approximately $1.2 million in current and non-current loans, including $1.0
million in current and non-current capital lease obligations. This amount
includes 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.
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<PAGE> 14
Although we have no material long-term commitments for capital expenditures, we
anticipate substantial increases in our operating expenses, 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 $1.2 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 will be completed in August 2000 and will require an
investment of approximately $2.5 million in leasehold improvements, furniture
and equipment. We intend to fund this planned increase in operating expenses and
capital expenditures with existing cash, cash equivalents and short-term
investments. We believe that existing cash and investments will be sufficient to
meet our working capital 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 June 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 short-term
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 short-term 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
We are 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
At the company's annual meeting of stockholders held on May 25, 2000,
our stockholders approved an amendment to our Amended and Restated Certificate
of Incorporation to increase the number of shares of Common Stock that we are
authorized to issue from 50,000,000 to 100,000,000 (the "Amendment").
Stockholders holding 21,706,328 shares of Common Stock voted "For" the
Amendment, stockholders holding 1,585,058 shares of Common Stock voted "Against"
the Amendment and stockholders holding 19,423 shares of Common Stock abstained.
At the same annual meeting of stockholders the following nominees were
elected as directors, each until his or her successor is elected and qualified,
by the vote set forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nominee For Withheld
------- --- --------
Steven J. Snyder 23,182,270 128,539
Douglas J. Burgum 23,220,146 90,663
William Lansing 23,180,320 130,489
John T. Riedl 23,180,853 129,956
Ann L. Winblad 23,222,782 88,027
</TABLE>
Also at the same annual meeting the stockholders ratified the
appointment by the Board of Directors of the company of PricewaterhouseCoopers
LLP as the company's independent public accountants for 2000 by the following
vote:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For Against Abstain
--- ------- -------
23,272,002 23,197 15,610
</TABLE>
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.
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<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
Exhibit 10.1*** Office Lease Agreement between DRF Holdings LLC and Net
Perceptions, Inc. dated April 5, 2000.
Exhibit 10.2** Knowledge Discovery One, Inc. 1996 Stock Option/Stock
Issuance Plan.
Exhibit 10.3**** Net Perceptions, Inc. 2000 Stock Plan.
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).
**** Filed herewith.
(b) Reports on Form 8-K.
The company filed a Report on Form 8-K/A on April 21, 2000 related to
the company's acquisition of Knowledge Discovery One, Inc. This report
amended an earlier Report on Form 8-K filed on February 22, 2000.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities 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: August 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 JUNE 30, 2000
EXHIBIT INDEX
<TABLE>
<CAPTION>
--------------------------- ---------------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
--------------------------- ---------------------------------------------------------------------------------------
<S> <C>
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. (FILED HEREWITH).
--------------------------- ---------------------------------------------------------------------------------------
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.
--------------------------- ---------------------------------------------------------------------------------------
10.2** Knowledge Discovery One, Inc. 1996 Stock Option/Stock Issuance Plan.
--------------------------- ---------------------------------------------------------------------------------------
10.3 Net Perceptions, Inc. 2000 Stock Plan (FILED HEREWITH).
--------------------------- ---------------------------------------------------------------------------------------
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).
--------------------------- ---------------------------------------------------------------------------------------
</TABLE>
18
