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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] 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)
ONE LANDMARK SQUARE
STAMFORD, CONNECTICUT 06901
(Address of principal executive offices, Zip Code)
(203) 428-2040
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
AS OF OCTOBER 31, 2004, THERE WERE OUTSTANDING 29,282,283 SHARES OF THE
REGISTRANT'S COMMON STOCK, $0.0001 PAR VALUE.
NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2004
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TABLE OF CONTENTS
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 2
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2004 and 2003 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits 21
SIGNATURE 22
EXHIBIT INDEX 23
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NET PERCEPTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
==========================================================================================
September 30, December 31,
2004 2003
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,526 $ 11,932
Accounts receivable, net 25 355
Prepaid expenses and other current assets 146 481
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Total current assets 14,697 12,768
Other assets 282 35
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Total assets $ 14,979 $ 12,803
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21 $ -
Accrued liabilities 270 751
Deferred revenue 3 380
Accrued restructuring costs - 37
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Total current liabilities 294 1,168
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Long term debt 2,503 -
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Total liabilities 2,797 1,168
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Commitments and contingencies
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 234,262 233,761
Deferred compensation (249) -
Accumulated deficit (221,833) (222,128)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 12,182 11,635
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Total liabilities and stockholders' equity $ 14,979 $ 12,803
==========================================================================================
See accompanying notes to the consolidated financial statements.
2
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
=====================================================================================================
Revenues:
Product $ - $ 95 $ 405 $ 576
Service and maintenance 25 343 492 1,391
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Total revenues 25 438 897 1,967
Cost of revenues:
Product - - - 8
Service and maintenance 11 164 216 635
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Total cost of revenues 11 164 216 643
Gross Margin 14 274 681 1,324
Operating expenses:
Sales and marketing - 157 - 1,344
Research and development - 427 250 1,616
General and administrative 170 568 2,096 1,280
Gain on sale of patents - - (1,800) -
Restructuring related charges - 1,051 (7) 2,251
- -----------------------------------------------------------------------------------------------------
Total operating expenses 170 2,203 539 6,491
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Operating income (loss) (156) (1,929) 142 (5,167)
Other income (expense):
Interest income 48 115 106 610
Interest expense (26) - (48) -
Other income 41 101 95 229
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Total other income, net 63 216 153 839
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Net income (loss) $ (93) $(1,713) $ 295 $ (4,328)
=====================================================================================================
Net incomes (loss) per share:
Basic $ (0.00) $ (0.06) $ 0.01 $ (0.16)
Diluted $ (0.00) $ (0.06) $ 0.01 $ (0.16)
Shares used in computing basic and
diluted net income (loss) per share:
Basic 29,277 27,796 28,662 27,735
Diluted 29,277 27,796 29,065 27,735
=====================================================================================================
See accompanying notes to the consolidated financial statements.
3
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
========================================================================================================
Nine Months Ended
September 30,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 295 $ (4,328)
Reconciliation of net income (loss) to net cash used in operating
activities:
Gain on sale of patents (1,800) -
Depreciation and amortization - 477
Recovery of doubtful accounts (28) (65)
Restructuring related charges (reversals) (15) 2,251
Amortization of debt issuance costs 13 -
Amortization of discount on debt 26 -
Stock-based compensation 43 -
Amortization of premiums on investments - 183
Changes in assets and liabilities:
Accounts receivable 358 301
Prepaid expenses and other assets 363 (224)
Accounts payable 21 (52)
Accrued expenses and other liabilities (503) (8,042)
Deferred revenue (377) (124)
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Net cash used in operating activities (1,604) (4,847)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of patents 1,800 -
Purchases of short-term investments - (16,121)
Sales and maturities of short-term investments - 39,046
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Net cash provided by investing activities 1,800 22,925
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distribution to stockholders - (42,198)
Proceeds from issuance of convertible subordinated note, net of
offering costs of $288 2,245 -
Proceeds from exercise of stock options, net of stock repurchases 153 893
Proceeds from issuance of stock under employee stock purchase plan - 12
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Net cash provided by (used in) financing activities 2,398 (41,293)
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Net increase (decrease) in cash and cash equivalents 2,594 (27,543)
Cash and cash equivalents at beginning of period 11,932 39,729
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Cash and cash equivalents at end of period $ 14,526 $ 12,187
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See accompanying notes to the consolidated financial statements.
4
NET PERCEPTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to fairly present the Company's
financial position, results of operations and cash flows for the periods
presented. These adjustments consist of normal, recurring items. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts therein. Due to the inherent
uncertainty involved in making estimates, actual results in future periods may
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, 2003, which are contained in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission on April 13,
2004. 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 inter-company accounts and
transactions have been eliminated. The Company views its operations and manages
its business as one segment, the development and marketing of computer software
and related services. Factors used to identify the Company's single operating
segment include the organizational structure of the Company and the financial
information available for evaluation by the chief operating decision maker in
making decisions about how to allocate resources and assess performance. In
addition, the Company does not allocate operating expenses to any segments nor
does it allocate specific assets to any segments. Therefore, segment information
is identical to the consolidated balance sheet and consolidated statement of
operations.
Comprehensive income (loss) consists of net income (loss) and unrealized
gain (loss) on available-for-sale investments. During the three and nine month
periods ended September 30, 2004, comprehensive income (loss) consisted entirely
of net income (loss) as the Company had no available-for-sale investments.
Changes in unrealized gain (loss) on available-for-sale investments were $(90)
and $(122) for the three and nine months ended September 30, 2003, respectively.
Comprehensive loss was $1,803 and $4,450 for the three and nine months ended
September 30, 2003, respectively.
NOTE 2. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an Amendment to FASB Statement No.
123." The Company has chosen to continue with its current practice of applying
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
adopted the disclosure requirements of SFAS No. 148 in its discussion of
stock-based employee compensation but the alternative transition options made
available by the standard have not been implemented.
The intrinsic value method is used to account for stock-based compensation
plans. If compensation expense had been determined based on the fair value
method, net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicated below:
5
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------
2004 2003 2004 2003
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Net income (loss), as reported $ (93) $ (1,713) $ 295 $ (4,328)
Add: Stock-based employee compensation expense
included in reported net loss 24 -- 43 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (26) (304) (73) (1,157)
-------------------------------------------------------------
Pro forma net income (loss) $ (95) $ (2,017) $265 $ (5,485)
=============================================================
Net income (loss) per share:
Basic
As reported $(0.00) $(0.06) $0.01 $(0.16)
=============================================================
Pro forma $(0.00) $(0.07) $0.01 $(0.20)
=============================================================
Diluted
As reported $(0.00) $(0.06) $0.01 $(0.16)
=============================================================
Pro forma $(0.00) $(0.07) $0.01 $(0.20)
=============================================================
NOTE 3. PER SHARE DATA
Basic earnings per share is computed using net income (loss) and the
weighted average number of common shares outstanding. Diluted earnings per share
reflects the weighted average number of common shares outstanding plus any
potentially dilutive shares outstanding during the period. Potentially dilutive
shares consist of shares issuable upon the exercise of stock options and
restricted stock. Shares used in the diluted net income (loss) per share for the
three months ended September 30, 2004, exclude the impact of 350 potential
common shares from the exercise of stock options and restricted stock, which
were anti-dilutive. Shares used in the diluted net income (loss) per share for
the three and nine months ended September 30, 2003, exclude the impact of 4,014
potential common shares from the exercise of stock options, which were
anti-dilutive.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------
2004 2003 2004 2003
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BASIC EARNINGS PER SHARE
CALCULATION:
----------------------------------------------------------
Net income (loss) $(93) $(1,713) $295 $ (4,328)
==========================================================
Weighted average common
shares - basic 29,277 27,796 28,662 27,735
Basic net income (loss)
per share $(0.00) $(0.06) $0.01 $(0.16)
==========================================================
DILUTED EARNINGS PER
SHARE CALCULATION:
Net income (loss) $(93) $ (1,713) $295 $(4,328)
==========================================================
6
Weighted average common
shares - basic 29,277 27,796 28,662 27,735
Effect of dilutive stock
options and restricted - - 403 -
stock
Weighted average common
shares - diluted 29,012 27,796 29,065 27,735
Diluted net income
(loss) per share $(0.00) $(0.06) $0.01 $(0.16)
==========================================================
NOTE 4. RESTRUCTURING RELATED CHARGES AND IMPAIRMENTS
During 2003, 2002 and 2001, the Company instituted certain restructuring
plans to better align its cost structure with its business outlook and general
economic conditions. Under the restructuring plans, the Company recorded
restructuring related charges totaling $2,300, $768 and $15,600 during 2003,
2002 and 2001, respectively.
In March 2001 the Company reduced its workforce by approximately 46%, or 124
positions throughout the organization, and recorded a charge of $13,920 to
reorganize the Company and exit certain facilities in various United States and
international locations. This $13,920 charge included $10,200 related to
facility consolidation, $1,190 of employee termination costs and $2,530 of
losses on the disposal of assets and other restructuring charges. During the
third quarter of 2001, the Company reduced its workforce by 45 employees and
recorded an additional $1,771 restructuring related charge. This $1,771 charge
included $878 for estimated losses on the disposal of fixed assets, $449 for
leasehold write-offs related to facility consolidation and $444 for employee
severance payments. During the fourth quarter of 2001, the total restructuring
charge was decreased by $140 to reflect the actual costs of exiting certain
marketing activities in connection with the restructuring.
In the first quarter of 2002 the Company further reduced its workforce by
15% or 15 positions, and recorded $367 in related employee termination costs.
During the second quarter of 2002 the Company recorded restructuring related
charges of $401, of which $139 related to employee termination costs due to a
reduction in workforce by 18 positions or 21%, $291 represented the write-down
of certain fixed assets and $(29) was a reversal of previously recorded
restructuring related charges resulting from revised estimates of other costs.
The Company recorded restructuring related charges of $1,200 in the first
quarter of 2003 related primarily to the closure of operations in three
satellite offices, employee termination costs due to a reduction of workforce by
22 positions and $413 for estimated losses on the disposal of fixed assets. The
Company recorded additional restructuring related charges of $1,051 in the third
quarter of 2003 related primarily to the termination of three real estate lease
agreements, and employee termination costs due to a reduction of workforce by 12
positions. The aggregate cash payments for the lease terminations were
approximately $5.4 million. The Company had no remaining commitments as of
September 30, 2004. The following table presents a summary of the restructuring
related activities and accrued restructuring charges as of September 30, 2004:
7
EMPLOYEE FIXED
LEASE SEVERANCE ASSET
COMMITMENTS AND DISPOSALS
AND RELATED TERMINATION AND OTHER
ITEMS COSTS SUBTOTAL COSTS TOTAL
------------ ----------- ---------- --------- ---------
Restructuring Related Charges and Impairments Net of
Reversal $ 10,649 $ 1,634 $ 12,283 $ 3,268 $ 15,551
Restructuring Payments (2,233) (1,523) (3,756) (195) (3,951)
Sublease Income and proceeds from the Sale of Fixed Assets 280 - 280 261 541
Non-Cash Asset Disposals and Deferred Rent Write-Off (1,800) - (1,800) (2,908) (4,708)
-------- -------- --------- -------- ---------
ACCRUED RESTRUCTURING AS OF DECEMBER 31, 2001 $ 6,896 $ 111 $ 7,007 $ 426 $ 7,433
-------- -------- --------- -------- ---------
Restructuring Related Charges and Impairments - 506 506 262 768
Restructuring Payments (4,024) (547) (4,571) (66) (4,637)
Sublease Income and Proceeds from the Sale of Fixed Assets 1,299 - 1,299 68 1,367
Non Cash Asset Disposals - - - (642) (642)
Reclassification of Accrued Lease Exit Costs 383 - 383 - 383
-------- -------- --------- -------- ---------
ACCRUED RESTRUCTURING AS OF DECEMBER 31, 2002 $ 4,554 $ 70 $ 4,624 $ 48 $ 4,672
-------- -------- --------- -------- ---------
Restructuring Related Charges and Impairments 1,249 589 1,838 413 2,251
Restructuring Payments (8,094) (652) (8,746) (51) (8,797)
Sublease Income and Proceeds from the Sale of Fixed Assets 1,832 - 1,832 165 1,997
Non Cash Asset Disposals and Deferred Rent Write-Off 489 - 489 (575) (86)
-------- -------- --------- -------- ---------
ACCRUED RESTRUCTURING AS OF DECEMBER 31, 2003 $ 30 $ 7 $ 37 $ - $ 37
======== ======= ========= ===== =========
Restructuring Related Reversal - (7) (7) - (7)
Restructuring Payments (30) - (30) - (30)
ACCRUED RESTRUCTURING AS OF SEPTEMBER 30, 2004 $ - $ - $ - $ - $ -
======== ======= ========= ===== =========
NOTE 5. COMMITMENTS AND CONTINGENCIES
Litigation
On November 2, 2001, Timothy J. Fox filed a purported class action lawsuit
against the Company, FleetBoston Robertson Stephens, Inc., the lead underwriter
of the Company's April 1999 initial public offering, several other underwriters
who participated in the initial public offering, Steven J. Snyder, the Company's
then president and chief executive officer, and Thomas M. Donnelly, the
Company's chief financial officer. The lawsuit was filed in the United States
District Court for the Southern District of New York and has been assigned to
the judge who is also the pretrial coordinating judge for substantially similar
lawsuits involving more than 300 other issuers. An amended class action
complaint, captioned In re Net Perceptions, Inc. Initial Public Offering
Securities Litigation, 01 Civ. 9675 (SAS), was filed on April 22, 2002,
expanding the basis for the action to include allegations relating to the
Company's March 2000 follow-on public offering in addition to those relating to
its initial public offering.
The amended complaint generally alleges that the defendants violated federal
securities laws by not disclosing certain actions taken by the underwriter
defendants in connection with the Company's initial public offering and
follow-on public offering. The amended complaint alleges specifically that the
underwriter defendants, with the Company's direct participation and agreement
and without disclosure thereof, conspired to and did raise and increase their
underwriters' compensation and the market prices of the Company's common stock
following its initial public offering and in its follow-on public offering by
requiring their customers, in exchange for receiving allocations of shares of
the Company's common stock sold in its initial public offering, to pay excessive
commissions on transactions in other securities, to purchase additional shares
of the Company's common stock in the initial public offering aftermarket at
pre-determined prices above the initial public offering price, and to purchase
shares of the Company's common stock in its follow-on public offering. The
amended complaint seeks unspecified monetary damages and certification of a
plaintiff class consisting of all persons who acquired the Company's common
stock between April 22, 1999 and December 6, 2000. The plaintiffs have since
agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without
prejudice, in return for their agreement to toll any statute of limitations
applicable to those claims; and those claims have been dismissed without
prejudice. On July 15, 2002, all of the issuer defendants filed a joint motion
to dismiss the plaintiffs' claims in all of the related cases. On February 19,
2003, the court ruled against the Company on this motion.
8
A special committee of the Company's board of directors has authorized the
Company to negotiate a settlement of the pending claims substantially consistent
with a memorandum of understanding negotiated among class plaintiffs, issuer
defendants and their insurers. The parties have negotiated a settlement which is
subject to approval by the Court.
The Company believes that the allegations against it are without merit.
However, the Company is unable to predict the outcome or ultimate effect of this
litigation.
On October 29, 2003, a purported class action lawsuit was filed against the
Company, its current directors and unnamed defendants in the District Court,
Fourth Judicial District, of the State of Minnesota, County of Hennepin
captioned Don Blakstad, on Behalf of Himself and All others Similarly Situated,
vs. Net Perceptions, Inc., John F. Kennedy, Ann L. Winblad, John T. Riedl and
Does 1-25, inclusive, File No. 03-17820. The complaint alleged, among other
things, that defendants breached their fiduciary duties of loyalty, due care,
independence, good faith and fair dealing and sought to enjoin the proposed
liquidation of the Company and to recover reasonable attorneys' and experts'
fees. On November 24, 2003, defendants filed a motion to dismiss the lawsuit,
and by order dated March 8, 2004, the court dismissed the complaint with
prejudice. By letter dated March 9, 2004, the plaintiff requested the court's
permission to file a motion to reconsider the decision dismissing the complaint
with prejudice. On March 18, 2004, the court denied the plaintiff's request. On
April 9, 2004, the plaintiff filed a notice of appeal and statement of the case
with the Court of Appeals of the State of Minnesota and, on April 22, 2004,
defendants filed their statement of the case with the Court of Appeals. In June
2004 plaintiffs informed counsel for defendants of their desire to dismiss the
appeal, and, on June 3, 2004, the parties submitted to the Court of Appeals a
stipulation of voluntary dismissal "without any right to further appeal." The
Court of Appeals dismissed the appeal by order dated June 8, 2004.
NOTE 6. INCOME TAXES
For federal income tax purposes, the Company estimates that it has available
federal net operating loss carry-forwards of approximately $119,000 and research
and development credit carry-forwards of $151 at December 31, 2003. The net
operating loss and research and development credit carry-forwards expire in 2011
through 2022 if not previously utilized. The utilization of these carry-forwards
may be subject to limitations based on past and future changes in ownership of
the Company pursuant to Internal Revenue Code Section 382. A change in ownership
of the Company at this time may result in a substantial limitation to these net
operating loss carry-forwards under Internal Revenue Code Section 382. Future
tax benefits have not been recognized in the financial statements, as their
utilization is considered uncertain based on the weight of available
information.
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51". FIN No. 46 requires certain variable interest
entities, or VIEs, to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest, or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN No. 46-R,
"Consolidation of Variable Interest Entities", which represents a revision to
FIN No. 46. The provisions of FIN No. 46-R applied immediately to entities
created after December 31, 2003. For VIEs created before December 31, 2003, FIN
467 is effective for the first period beginning after December 15, 2004. The
Company currently has no contractual relationship or other business relationship
with a variable interest entity and therefore the adoption of FIN No. 46 and FIN
No. 46-R did not have a material effect on its consolidated financial position,
results of operations or cash flows.
NOTE 8. GAIN ON SALE OF PATENTS
On March 31, 2004, the Company completed the sale of its patent portfolio to
Thalveg Data Flow LLC for $1,800 pursuant to a patent purchase agreement entered
into on December 30, 2003 and amended on March 31, 2004. The patent purchase
agreement includes a royalty-free, non-exclusive license back to the Company.
The license is transferable, subject to certain restrictions applicable to the
transferee relating to revenues that can be generated by products covered by the
license.
9
NOTE 9. CONVERTIBLE SUBORDINATED NOTE
On April 21, 2004, the Company announced the simultaneous signing and
closing of an investment into the Company by Olden Acquisition LLC ("Olden"), an
affiliate of Kanders & Company, Inc., an entity owned and controlled by the
Company's Executive Chairman, Warren B. Kanders, for the purpose of initiating a
strategy to redeploy the Company's assets and use its cash and cash equivalent
assets to enhance stockholder value. The Company issued and sold to Olden a 2%
ten-year Convertible Subordinated Note, which is convertible after one year (or
earlier upon a call by the Company and in certain other circumstances) at a
conversion price of $0.45 per share of the Company's common stock into
approximately 19.9% of the outstanding common equity of the Company as of the
closing date. Proceeds to the Company from this transaction totaled
approximately $2,533 before transaction costs of $288. The transaction costs are
being amortized to interest expense over ten years, the term of the debt.
Interest on the note accrues semi-annually but is not payable currently or upon
conversion of the note.
The convertible subordinated note was deemed to include a beneficial
conversion feature. At the date of issue, the Company allocated $56 to the
beneficial conversion feature and is amortizing the beneficial conversion
feature over one year (the period after which the note is convertible). The
Company recorded $14 and $26 of interest expense relating to the beneficial
conversion feature during the three and nine month periods ended September 30,
2004, respectively.
In connection with this transaction, the Company also entered into a
Registration Rights Agreement, which requires the Company, upon request of the
purchaser of the note or its assignee, to register under the Securities Act of
1933, as amended, the resale of the shares of common stock into which the note
is convertible.
Also in connection with this transaction, the board of directors adopted an
amendment to the Company's Rights Agreement such that the transaction would not
trigger the rights thereunder.
NOTE 10. RESTRICTED STOCK
Mr. Nigel Ekern, the Company's Chief Administrative Officer, and Mr. Gray
Hudkins, formerly the Company's Director of Corporate Development, received a
restricted stock grant of 364,583 and 243,750 shares, respectively, of the
Company's common stock under the Company's incentive plans, vesting over three
years, on April 21, 2004, on which day the closing price of the Company's common
stock was $0.48 per share. Mr. Hudkins' restricted shares were vested in
connection with his resignation on October 1, 2004 as an employee of the
Company. The Company recorded compensation expense of $24 and $43 relating to
the restricted stock during the three and nine month periods ended September 30,
2004.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, including
information about or related to our future results, certain projections and
business trends. Assumptions relating to forward-looking statements involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate," "project," "intend," "believe,"
"expect" and similar expressions are intended to identify forward-looking
statements. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any or all of the assumptions could
prove inaccurate, and we may not realize the results contemplated by the
forward-looking statements. Management decisions are subjective in many respects
and susceptible to interpretations and periodic revisions based upon actual
experience and business developments, the impact of which may cause us to alter
our business strategy or capital expenditure plans that may, in turn, affect our
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included in this report, you should not regard the
inclusion of such information as our representation that we will achieve any
strategy, objectives or other plans. The forward-looking statements contained in
this report speak only as of the date of this report, and we have no obligation
to update publicly or revise any of these forward-looking statements.
These and other statements, which are not historical facts, are based
largely upon our current expectations and assumptions and are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those contemplated by such forward-looking statements. These
risks and uncertainties include, among others, our planned effort to redeploy
our assets and use our cash and cash equivalent assets to enhance stockholder
value and the risks and uncertainties set forth in the section headed "Factors
That May Affect Our Future Results" of Part 1, Item 2 ("Management's Discussion
and Analysis of Financial Condition and Results of Operations") of our Quarterly
Report on Form 10-Q, for the quarter ended March 31, 2004, and described below.
The Company cannot guarantee its future performance.
References in this Quarterly Report on Form 10-Q to "Net Perceptions," the
"Company," "we," "our" and "us" refer to Net Perceptions, Inc. and, if so
indicated or the context so requires, includes our wholly owned subsidiary
Knowledge Discovery One, Inc. (which we refer to in this report as "KD1"). On
September 9, 2003, KD1 was merged with and into the Company.
OVERVIEW
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
report.
We were incorporated in Delaware in July 1996, and have sustained losses
since inception. During 2001, 2002 and 2003, we instituted certain restructuring
plans to align our cost structure with our business outlook and general economic
conditions. As of November 10, 2004, the Company has two employees, each of whom
is an executive officer. As of September 30, 2004, we had an accumulated deficit
of $222 million. Our net loss was $5.3 million for the year ended December 31,
2003, compared to a net loss of $16.7 million in the prior year. The losses
referred to in this paragraph resulted from costs incurred in the development
and marketing of our products and services, significant costs incurred related
to restructuring activities, significant costs for outside professional services
related to the exploration of various strategic alternatives for the Company, as
well as a decline in our revenues since the third quarter of 2000.
In February 2003, we engaged Piper Jaffray to act as our financial advisor
in connection with the potential sale of the Company. On September 2, 2003, we
paid a return of capital cash distribution to stockholders of record as of
August 18, 2003 in the amount of $1.50 per share or a total of approximately
$42.2 million, which was reflected as a reduction to additional paid-in capital.
We also reduced our workforce by twelve positions to ten full-time employees. In
addition, as a result of the cash distribution paid on September 2, 2003, our
board of directors approved an adjustment to our outstanding options that took
effect on the close of business on September 3, 2003. The adjustment was to in
no event reduce the exercise price of any options to less than $0.01 per share
or increase the number of shares subject to such options to a number exceeding
the number of shares of common stock that are
11
registered and available for issuance. In accordance with Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB No. 25," there was no
accounting consequence due to the changes made to the exercise price or the
number of shares other than future potential dilution to stockholders because
the aggregate intrinsic value of each award immediately after the change was not
greater than the aggregate intrinsic value of the award immediately before the
change and the ratio of the exercise price per share to the market value per
share was not reduced.
On October 21, 2003, we announced that our board of directors had
unanimously approved a Plan of Complete Liquidation and Dissolution, referred to
as the plan of liquidation. The plan of liquidation was submitted to the
Company's stockholders for approval and adoption at a special meeting of
stockholders originally scheduled for March 12, 2004, which was adjourned and
was reconvened on March 23, 2004. At the reconvened special meeting, the
proposal to approve and adopt the plan of liquidation did not receive the
affirmative vote of a majority of the 28,145,338 shares of common stock
outstanding as of the record date for the special meeting required to approve
the proposal. Of the 15,773,134 shares represented in person or by proxy at the
reconvened special meeting, 13,810,233 shares voted in favor of the proposal,
1,925,694 shares voted against and 37,207 shares abstained.
On March 31, 2004, we and Thalveg Data Flow, LLC, ("Thalveg") executed an
amendment to the patent purchase agreement which had been entered into on
December 30, 2003, and we completed the sale of our patent portfolio provided
for therein for a purchase price of $1.8 million in cash. The patent purchase
agreement, as amended, includes a royalty-free, non-exclusive license back to
us. The license is transferable, subject to certain restrictions applicable to
the transferee relating to revenues that can be generated by products covered by
the license. This transaction did not involve any of our other intellectual
property rights or assets, including our proprietary software products.
In addition, on March 31, 2004 we announced that we had granted to a
software company a non-exclusive source code license to a portion of the
Company's intellectual property and sold certain technology related to a product
discontinued in 2002. The aggregate consideration for this sale and license was
$325,000 which was recognized as license revenue in the first quarter of 2004.
On April 1, 2004, we entered into an agreement with Tornago, Inc., or
Tornago, a corporation formed by three non-officer former employees, to fulfill
existing prepaid customer support obligations in exchange for future cash
payments of approximately $60,000. This amount represents approximately 60% of
the remaining prepaid deferred maintenance revenue amounts under the existing
end user contracts when measured from April 1, 2004. The Company expects to
continue to recognize the deferred revenue as earned and the $60,000 will be
reflected as cost of revenue. Under the terms of the agreement, Tornago received
a non-transferable license to relevant intellectual property solely to provide
support and consulting services to end users of our products. The agreement
provides that, we receive a 15% royalty on any follow-on services sold by
Tornago through April 1, 2006.
In connection with the agreement with Tornago, we terminated the employment
of the remaining members of our engineering staff, effective March 31, 2004, and
paid severance to these employees in accordance with existing agreements.
On April 21, 2004, we announced the simultaneous signing and closing of an
investment into the Company by Olden Acquisition LLC ("Olden"), an affiliate of
Kanders & Company, Inc., an entity owned and controlled by the Company's
Executive Chairman, Warren B. Kanders, for the purpose of initiating a strategy
to redeploy our assets and use our cash and cash equivalent assets to enhance
stockholder value. We issued and sold to Olden a 2% ten-year Convertible
Subordinated Note, which is convertible after one year (or earlier upon a call
by the Company and in certain other circumstances) at a conversion price of
$0.45 per share of Company common stock into approximately 19.9% of the
outstanding common equity of Net Perceptions as of the closing date. Proceeds to
the Company from this transaction totaled approximately $2.5 million before
transaction costs. Interest on the note accrues semi-annually but is not payable
currently or upon conversion of the note.
While we expect to continue to service our existing customers through
Tornago and may continue to derive a declining level of revenues from software
licenses and royalties, software maintenance and professional services relating
to existing customers, we are no longer directly marketing or supporting our
products and have not retained any employees to do so. We anticipate that our
operating expenses will continue to decline in 2004, but will continue to
constitute a material use of our cash resources. We expect to incur additional
losses and continued negative cash flow for the foreseeable future. While we
reported a net profit for the first nine months of 2004 due to the Thalveg
transaction, we do not expect to generate an operating profit for 2004 or the
foreseeable future. Our
12
ability to become profitable will depend, among other things, on our
identification and acquisition of a new operating business and the success of
that business.
As part of our asset redeployment strategy, we are currently working to
identify suitable merger or acquisition opportunities that can serve as a
platform for future growth. Although we are not targeting specific industries
for potential mergers or acquisitions, we plan to seek businesses with cash
flow, experienced management teams, and operations in markets offering stability
and growth potential.
SIGNIFICANT EVENTS
As previously disclosed in our Report on Form 8-K filed with the Securities
and Exchange Commission on September 1, 2004, our securities were delisted from
the Nasdaq SmallCap Market effective with the opening of business on Friday,
September 3, 2004. On September 2, 2004, the Company's common stock commenced
trading on the OTC Pink Sheets, under the symbol "NETP.PK".
AS PREVIOUSLY ANNOUNCED WE HAVE INITIATED A STRATEGY TO REDEPLOY OUR ASSETS AND
USE OUR CASH AND CASH EQUIVALENT ASSETS TO ENHANCE STOCKHOLDER VALUE. THE
INFORMATION APPEARING BELOW, WHICH RELATES TO PRIOR PERIODS, IS THEREFORE NOT
INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR ANY SUBSEQUENT PERIODS.
FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS ARE EXPECTED TO PRIMARILY
REFLECT GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH THE CONTINUING
ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS. OUR
PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE FOREGOING AND THE RISKS AND
UNCERTAINTIES SET FORTH IN THE SECTION HEADED "FACTORS THAT MAY AFFECT OUR
FUTURE RESULTS" OF PART 1, ITEM 2 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS") OF OUR QUARTERLY REPORT ON FORM
10-Q, FOR THE QUARTER ENDED MARCH 31, 2004. WE MAY NOT BE SUCCESSFUL IN
ADDRESSING THESE RISKS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
investments, intangible assets, restructuring liabilities, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements. Events occurring subsequent to the preparation of the consolidated
financial statements, such as those described in the section of this report
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview," may cause us to re-evaluate these policies.
Revenue Recognition. Our revenues are recognized in accordance with the
American Institute of Certified Public Accountants Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9, as
well as Technical Practice Aids issued from time to time by the American
Institute of Certified Public Accountants and in accordance with the Securities
and Exchange Commission Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition." We derive revenues from software licenses, software maintenance
and professional 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 project planning, implementation
and testing, consulting, and ongoing customer support.
For software arrangements that include 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
13
maintenance and services elements, as determined by vendor-specific objective
evidence, is deferred and the remaining (residual) arrangement fee is recognized
as software product revenue. For software arrangements in which we do not have
vendor-specific objective evidence of undelivered elements, revenue is deferred
until the earlier of when vendor-specific objective evidence is determined for
the undelivered elements or when all elements for which we do not have
vendor-specific objective evidence have been delivered.
Revenues from license fees are recognized when a non-cancelable agreement
has been executed, the product has been shipped or electronically delivered,
there are no uncertainties surrounding product acceptance, the fee is fixed or
determinable and collection of the related receivable is considered probable. If
the fee due from the customer is not fixed or determinable, revenues are
recognized as payments become due from the customer. If we do not consider
collection to be probable, then revenues are recognized when the fee is
collected.
License revenues related to license terms of less than twenty-four months
are recognized ratably over the term of the license period. When we offer
products and services on a hosted basis, up front set-up fees are deferred and
recognized ratably over the estimated service period.
We recognize revenues allocable to maintenance ratably over the term of the
agreement. 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. If services are considered
essential, revenues from the arrangement are recognized 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.
Revenue recognition rules for software companies are very complex. We follow
specific and detailed guidelines in determining the proper amount of revenue to
be recorded; however, certain judgments affect the application of our revenue
recognition policy.
The most significant judgments for revenue recognition typically involve
whether there are any significant uncertainties regarding customer acceptance
and whether collectibility can be considered probable. In addition, our
transactions often consist of multiple element arrangements that must be
analyzed to determine the relative fair value of each element, the amount of
revenue to be recognized upon shipment, if any, and the period and conditions
under which deferred revenue should be recognized.
Litigation. We have not recorded an estimated liability related to the
pending class action lawsuit related to our initial and follow-on public
offerings in which we are named. For a discussion of this matter, see the
section of this report entitled "Legal Proceedings." Due to the uncertainties
related to both the likelihood and the amount of any potential loss, no estimate
was made of the liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess the potential liability
and make or revise our estimate(s) accordingly, which could materially impact
our results of operations and financial position.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
SEPTEMBER 30, 2003
The following table sets forth certain items in the Company's consolidated
statements of operations as a percentage of total revenues for the periods
indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Product -% 22% 45% 29%
Service and maintenance 100 78 55 71
- ----------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100 100
Cost of revenues:
Product - - - -
14
Service and maintenance 44 37 24 33
- ----------------------------------------------------------------------------------------------------------------
Total cost of revenues 44 37 24 33
Gross Margin 56 63 76 67
Operating expenses:
Sales and marketing - 36 - 68
Research and development - 97 28 82
General and administrative 680 130 234 65
Gain on sale of patents - - (201) -
Restructuring related charges - 240 (1) 114
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 680 503 60 329
- ----------------------------------------------------------------------------------------------------------------
Income (loss) from operations (624) (440) 16 (263)
Other income (expense), net: 252 49 17 43
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) (372)% (391)% 33% (220)%
- ----------------------------------------------------------------------------------------------------------------
REVENUES
Total revenues. Total revenues decreased 94% to $25,000 for the three months
ended September 30, 2004, from $438,000 for the same period in 2003. Total
revenues decreased 54% to $897,000 for the nine months ended September 30, 2004,
from $2.0 million for the same period in 2003. Revenues from sales in the United
States were $25,000 in the third quarter of 2004 compared to $352,000 in the
same period of 2003, representing 100% and 80% of total revenues respectively.
Revenues from sales in the United States were $849,000 for the nine month period
ended September 30, 2004 compared to $1.7 million in the same period of 2003,
representing 95% and 89% of total revenues respectively. Revenues from
international sales in the third quarter of 2004 were $0, or 0% of total
revenues, compared to $86,000, or 20% of total revenues in the same period of
2003. Revenues from international sales for the nine months ended September 30,
2004 were $48,000, or 5% of total revenues, compared to $218,000, or 11% of
total revenues in the same period of 2003. As part of the downsizing of our
business and operations, we no longer maintain a direct sales force resulting in
a decrease in our revenue. International sales have generally been denominated
in United States dollars.
As described in this Item 2 under "Overview", we are no longer directly
marketing our products, and we do not expect that future revenues from these
products or services related to these products will be significant.
Product revenues. Product revenues decreased 100% to $0 for the three months
ended September 30, 2004, compared to $95,000 for the same period of 2003.
Product revenues decreased 30% to $405,000 for the nine months ended September
30, 2004, compared to $576,000 for the same period of 2003. Product revenues
comprised 0% of total revenues for the third quarter of 2004 compared to 22% for
the same period of 2003. Product revenues comprised 45% of total revenues for
the nine months ended September 30, 2004 compared to 29% for the same period of
2003. Product revenues have decreased because we no longer maintain a direct
sales force and a decline in our customer base. We expect limited product
revenues for the foreseeable future.
Service and maintenance revenues. Service and maintenance revenues consist
primarily of professional and maintenance services. Maintenance revenues are
generally derived from annual service agreements and are recognized ratably over
the term of the agreement. Service and maintenance revenues decreased 94% to
$25,000 for the quarter ended September 30, 2004 from $343,000 for the quarter
ended September 30, 2003. Service and maintenance revenues decreased 65% to
$492,000 for the nine month period ended September 30, 2004 from $1.4 million
for the nine month period ended September 30, 2003. Service and maintenance
revenues comprised 100% and 78% of total revenues for the quarters ended
September 30, 2004 and 2003, respectively. Service and maintenance revenues
comprised 55% and 71% of total revenues for the nine month period ended
September 30, 2004 and 2003, respectively. The decrease in service and
maintenance revenues in absolute dollars reflected lower levels of consulting
and maintenance services due to our decision to no longer directly support our
customers. As described in this Item 2 under "Overview", we entered into an
agreement on April 1, 2004 with Tornago, Inc. to
15
fulfill our existing prepaid customer support obligations. We do not anticipate
entering into additional service and maintenance agreements with customers other
than in association with Tornago. Therefore, we expect service and maintenance
revenues to continue to decline.
COST OF REVENUES
Cost of product revenues. Cost of product revenues consists primarily of the
cost of royalties paid to third-party vendors and amortization of acquired
technology costs. No royalties were payable to third parties and no amortization
expense existed during the periods presented relating to intangible assets which
historically represented the costs of product revenues. We do not expect any
future costs of product revenues to be significant.
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 and educational related services to
customers.
Cost of service and maintenance revenues decreased 93% to $11,000 for the
quarter ended September 30, 2004 from $164,000 for the quarter ended September
30, 2003. Cost of service and maintenance revenues decreased 66% to $216,000 for
the nine month period ended September 30, 2004 from $635,000 for the nine month
period ended September 30, 2003. Cost of service and maintenance revenue for the
third quarter of 2004 and 2003 represented 44%, and 48% of the related service
and maintenance revenues, respectively. Cost of service and maintenance revenue
for the nine month periods ended September 30, 2004 and 2003 represented 44%,
and 46% of the related service and maintenance revenues, respectively. The
decrease in cost of services and maintenance revenues in absolute dollars is
primarily due to continued headcount reductions in our technical organization as
a result of our restructuring efforts. Due to the further headcount reductions
undertaken in August 2003 and thereafter, and, as described above in this Item 2
under "Overview", because we entered into a contract with Tornago to fulfill
certain prepaid support obligations and in connection therewith terminated the
employment of the remaining members of our engineering staff, we expect that our
cost of service and maintenance revenues will continue to decrease in 2004.
OPERATING EXPENSES
As described in this Item 2 under "Overview", we are no longer directly
marketing or supporting our products and do not expect to incur significant
operating expenses in 2004 relating to sales and marketing and research and
development. Also as described in this Item 2 under "Overview", on April 21,
2004 we announced the simultaneous signing and closing of an investment into the
Company by Olden Acquisition LLC for the purpose of initiating a strategy to
redeploy our assets and use our cash and cash equivalent assets to enhance
stockholder value.
As part of our asset redeployment strategy, we are currently working to
identify suitable merger or acquisition opportunities that can serve as a
platform for future growth. Although we are not targeting specific industries
for potential mergers or acquisitions, we plan to seek businesses with cash
flow, experienced management teams, and operations in markets offering stability
and growth potential. We anticipate that we may incur significant expenses in
connection with this process, consisting principally of professional fees and
expenses, as well as costs associated with maintaining our public company
status.
Sales and marketing. Historically, our sales and marketing expenses have
consisted 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 decreased 100% to $0 for the
three month period ended September 30, 2004 compared to $157,000 for the three
months ended September 30, 2003. Sales and marketing expenses decreased 100% to
$0 for the nine month period ended September 30, 2004 compared to $1.3 million
for the nine months ended September 30, 2003. Sales and marketing expenses were
0% and 36% of total revenues for the three months ended September 30, 2004 and
2003, respectively. Sales and marketing expenses were 0% and 68% of total
revenues for the nine months ended September 30, 2004 and 2003, respectively.
The decrease in sales and marketing expenses in absolute dollars is primarily
due to headcount reductions as a result of our restructuring efforts and our
decision to no longer directly market our products. We expect sales and
marketing expenses will be minimal, if any, for the balance of 2004.
16
Research and development. Historically, our research and development
expenses consist primarily of salaries, other employee-related costs and
consulting fees related to the development of our products. Research and
development expenses decreased 100% to $0 for the three months ended September
30, 2004 compared to $427,000 for the three months ended September 30, 2003.
Research and development expenses decreased 85% to $250,000 for the nine months
ended September 30, 2004 compared to $1.6 million for the nine months ended
September 30, 2003. Research and development expenses were 0%, and 97% of total
revenues for the three months ended September 30, 2004 and 2003, respectively.
Research and development expenses were 28%, and 82% of total revenues for the
nine months ended September 30, 2004 and 2003, respectively. The decrease in
research and development expenses in absolute dollars is primarily due to
continued headcount reductions as a result of our restructuring efforts. As
described above in this Item 2 under "Overview", we terminated the employment of
the remaining members of our engineering staff effective March 31, 2004. We
expect to incur minimal, if any, research and development expenses for the
balance of 2004.
General and administrative. General and administrative expenses consist
primarily of employee-related costs, provision for doubtful accounts and
professional service fees. General and administrative expenses decreased 70% to
$170,000 for the three months ended September 30, 2004 compared to $568,000 for
the three months ended September 30, 2003. General and administrative expenses
increased 64% to $2.1 million for the nine months ended September 30, 2004
compared to $1.3 million for the nine months ended September 30, 2003. General
and administrative expenses were 680% and 130% of total revenue for the three
months ended September 30, 2004 and 2003, respectively. General and
administrative expenses were 234% and 65% of total revenue for the nine months
ended September 30, 2004 and 2003, respectively. The increase in general and
administrative expenses during the nine months ended September 30, 2004 was
primarily due to increased professional fees associated with our continued
exploration and negotiation of asset disposition and license agreements, fees
associated with an unsolicited exchange offer for the Company by Obsidian
Enterprises, Inc., costs associated with our special stockholders meeting to
vote on the plan of liquidation, including in connection with Obsidian's proxy
solicitation opposing the plan of liquidation, defense costs associated with the
Blakstad litigation described in Item 1 of Part II of this report, costs
associated with the termination of our former executive officers and employees,
our continued consideration and evaluation of strategic alternatives and costs
associated with our annual meeting held on June 23, 2004. Although we expect
personnel-related and other general and administrative expenses to decline in
2004, continued high levels of outside professional fees, and other costs, such
as directors and officers liability insurance, associated with continuing as a
public reporting company, may offset any such decrease.
Gain on sale of patents. On March 31, 2004, the Company completed the sale
of its patent portfolio to Thalveg Data Flow LLC for $1.8 million pursuant to a
patent purchase agreement entered into on December 30, 2003 and amended on March
31, 2004. The patent purchase agreement includes a royalty-free, non-exclusive
license back to the Company. The license is transferable, subject to certain
restrictions applicable to the transferee relating to revenues that can be
generated by products covered by the license.
Restructuring related charges and impairments. We recorded restructuring
related charges of $2.3 million in the first nine months of 2003 related
primarily to the closure of operations in three satellite offices, and real
estate lease and employee termination costs. This represented 114% of total
revenue for the nine month period ended September 30, 2003. During 2003, 2002
and 2001, we instituted certain restructuring plans to better align our cost
structure with our business outlook and general economic conditions. Under the
restructuring plans, we recorded restructuring related charges totaling $2.3
million, $768,000 and $15.6 million during 2003, 2002 and 2001, respectively.
All restructuring related charges have been paid as of September 30, 2004.
Other income, net. Other income, net, consists of interest income, interest
expense, and foreign currency transaction losses or gains. Net other income
decreased 70% for the quarter ended September 30, 2004 to $63,000 from $216,000
in 2003. Net other income decreased 82% for the nine month period ended
September 30, 2004 to $153,000 from $839,000 in 2003. The decrease in net other
income was primarily due to lower interest income due to lower cash and
investment balances as a result of the special cash distribution to stockholders
on September 2, 2003.
PROVISION FOR INCOME TAXES
We have incurred significant operating losses from inception through
December 31, 2003. For income tax purposes, the Company estimates that it has
available federal net operating loss carry-forwards of approximately $119
million and research and development credit carry-forwards of approximately
$151,000 at December 31, 2003. The net operating loss and research and
development credit carry-forwards expire in 2011 through 2023 if not previously
utilized. The utilization of these carry-forwards may be subject to limitations
based on past and
17
future changes in ownership of the Company pursuant to Internal Revenue Code
Section 382. If the Company were to be acquired at its recent stock value such
that Section 382 is applicable, this may eliminate the ability to use a
substantial majority of these carry-forwards. In addition, a change in ownership
of the Company may result in a substantial limitation of these carry-forwards.
Further, if our historic business were not substantially continued for two years
after a Section 382 change in ownership, the full amount of carry-forwards would
be eliminated. Future tax benefits have not been recognized in the financial
statements, as their utilization is considered uncertain based on the weight of
available information.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the sale
of equity securities. At September 30, 2004, we had $14.5 million of cash and
cash equivalents.
Cash used in operations was $1.6 million for the nine months ended September
30, 2004, compared to cash used in operations of $4.8 million for the same
period of 2003. Cash used in operations for the nine months ended September 30,
2004 resulted primarily from net losses, as adjusted for non-cash expenses and
the gain on the sale of patent rights. We do not expect to receive any
significant amounts of cash from our current operations, and we expect that we
will continue to incur legal fees and other ongoing costs that will constitute a
material use of cash.
A total of $1.8 million in net cash was provided by investing activities for
the nine months ended September 30, 2004, compared to $22.9 million of net cash
provided by investing activities in the same period for 2003. Cash provided by
investing activities during the nine month period ended September 30, 2004 was
primarily attributable to the sale of our patent portfolio to Thalveg as
described in this Item 2 under "Overview". Prior to September 2003, our
investing activities consisted primarily of net purchases of short-term
investments and marketable securities. Since the special cash distribution paid
on September 2, 2003, we have held all of our cash in money market accounts and
we plan to continue this policy pending implementation of our asset redeployment
strategy.
Net cash provided in financing activities was $2.4 million for the nine
months ended September 30, 2004, compared to net cash used in financing
activities of $41.3 million for the nine months ended September 30, 2003. Net
cash was provided in financing activities in the nine month period ended
September 30, 2004 through the issuance of a convertible subordinated note in
the amount of $2.5 million net of $288,000 of transaction costs and was provided
by proceeds from sales of our common stock pursuant to the exercise of options.
Net cash was used in financing activities for the nine month period ended
September 30, 2003 due to the $42.2 million special cash distribution to
stockholders paid on September 2, 2003, partially offset by cash provided
pursuant to the exercise of options.
During 2003 and 2002 and 2001, we instituted certain restructuring plans to
better align our cost structure with our business outlook and general economic
conditions. Under the restructuring plans, we recorded restructuring related
charges totaling $2.3 million, $768,000 and $15.6 million during 2003, 2002 and
2001, respectively. A total of approximately $6.9 million was charged against
the restructuring reserve during 2003. As of September 30, 2004, the total
accrued restructuring liability was satisfied.
Capital expenditures were $0 for the nine months ended September 30, 2004
and 2003, respectively. Capital expenditures were higher in years prior to 2002
and reflected a significantly larger employee base and level of operations. As
of September 30, 2004, we had no material long-term commitments for capital
expenditures and we do not anticipate entering into any further material
commitments for capital expenditures pending implementation of our asset
redeployment strategy. Since 1999, we have purchased property and equipment with
cash. From inception through 1998, we generally funded the purchase of property
and equipment with capital leases.
As described above in this Item 2 under "Overview", on April 21, 2004, the
Company issued and sold to Olden Acquisition LLC a 2% ten-year Convertible
Subordinated Note. Proceeds to the Company from this transaction totaled
approximately $2.5 million before transaction costs of $288,000. Interest on the
note accrues semi-annually but is not payable currently or upon conversion of
the note.
As of September 30, 2004, we have no remaining commitments under operating
leases.
We believe that existing cash and investments will be sufficient to meet our
expected working capital needs for at least the next twelve months. However,
uncertainties exist as to the amounts we will receive in connection with any
potential sales of assets, the costs of implementing our asset redeployment
strategy and the precise value of our
18
existing obligations and liabilities, which may exceed our available cash and
cash equivalents. Furthermore, we may be unable to settle or otherwise resolve
our remaining obligations and liabilities, and we may incur or be subject to
additional obligations and liabilities, which could collectively exceed our
available cash and cash equivalents.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51". FIN No. 46 requires certain variable interest
entities, or VIEs, to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest, or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN No. 46-R,
"Consolidation of Variable Interest Entities", which represents a revision to
FIN No. 46. The provisions of FIN No. 46-R applied immediately to entities
created after December 31, 2003. For VIEs created before December 31, 2003, FIN
467 is effective for the first period beginning after December 15, 2004. The
Company currently has no contractual relationship or other business relationship
with a variable interest entity and therefore the adoption of FIN No. 46 and FIN
No. 46-R did not have a material effect on its consolidated financial position,
results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through September 30, 2004, 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. As described above in Part 1, Item 2 under the section of this
report entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview," we are no longer actively marketing our
products. Accordingly, we do not consider significant our exposure to foreign
currency exchange rate changes arising from revenues being denominated in
foreign currencies.
Our historical exposure to market risk was 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 were
in debt securities issued by corporations and the United States government.
However, at September 30, 2004, all of our cash was held in money market
accounts and therefore our future interest income sensitivity is limited.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management carried out an evaluation, under the
supervision and with the participation of the Company's Chief Administrative
Officer, its principal executive officer and principal financial officer, of the
design and operation of the Company's disclosure controls and procedures (as
such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act") as of September 30, 2004, pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chief
Administrative Officer, concluded that the Company's disclosure controls and
procedures as of September 30, 2004 are effective for gathering, analyzing and
disclosing the information the Company is required to disclose in the reports it
files under the Exchange Act, within the time periods specified in the
Securities and Exchange Commission's rules and forms. The Company's Chief
Administrative Officer, also concluded that the Company's disclosure controls
and procedures as of September 30, 2004 are effective in timely alerting
management to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act. No changes in the Company's internal control
over financial reporting occurred during the quarter ended September 30, 2004
that have materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Initial and Follow-On Public Offering Securities Litigation
On November 2, 2001, Timothy J. Fox filed a purported class action lawsuit
against us, FleetBoston Robertson Stephens, Inc., the lead underwriter of our
April 1999 initial public offering, several other underwriters who participated
in our initial public offering, Steven J. Snyder, our then president and chief
executive officer, and Thomas M. Donnelly, our chief financial officer. The
lawsuit was filed in the United States District Court for the Southern District
of New York and has been assigned to the judge who is also the pretrial
coordinating judge for substantially similar lawsuits involving more than 300
other issuers. An amended class action complaint, captioned In re Net
Perceptions, Inc. Initial Public Offering Securities Litigation, 01 Civ. 9675
(SAS), was filed on April 22, 2002, expanding the basis for the action to
include allegations relating to our March 2000 follow-on public offering in
addition to those relating to our initial public offering.
The amended complaint generally alleges that the defendants violated federal
securities laws by not disclosing certain actions taken by the underwriter
defendants in connection with our initial public offering and our follow-on
public offering. The amended complaint alleges specifically that the underwriter
defendants, with our direct participation and agreement and without disclosure
thereof, conspired to and did raise and increase their underwriters'
compensation and the market prices of our common stock following our initial
public offering and in our follow-on public offering by requiring their
customers, in exchange for receiving allocations of shares of our common stock
sold in our initial public offering, to pay excessive commissions on
transactions in other securities, to purchase additional shares of our common
stock in the initial public offering aftermarket at pre-determined prices above
the initial public offering price, and to purchase shares of our common stock in
our follow-on public offering. The amended complaint seeks unspecified monetary
damages and certification of a plaintiff class consisting of all persons who
acquired our common stock between April 22, 1999 and December 6, 2000. The
plaintiffs have since agreed to dismiss the claims against Mr. Snyder and Mr.
Donnelly without prejudice, in return for their agreement to toll any statute of
limitations applicable to those claims; and those claims have been dismissed
without prejudice. On July 15, 2002, all of the issuer defendants filed a joint
motion to dismiss the plaintiffs' claims in all of the related cases. On
February 19, 2003, the Court ruled against the Company on this motion.
A special committee of the Company's board of directors has authorized the
Company to negotiate a settlement of the pending claims substantially consistent
with a memorandum of understanding negotiated among class plaintiffs, issuer
defendants and their insurers. The parties have negotiated a settlement which is
subject to approval by the Court.
The Company believes that the allegations against it are without merit.
However, the Company is unable to predict the outcome or ultimate effect of this
litigation.
Blakstad Litigation
On October 29, 2003, a purported class action lawsuit was filed against the
Company, its current directors and unnamed defendants in the District Court,
Fourth Judicial District, of the State of Minnesota, County of Hennepin
captioned Don Blakstad, on Behalf of Himself and All others Similarly Situated,
vs. Net Perceptions, Inc., John F. Kennedy, Ann L. Winblad, John T. Riedl and
Does 1-25, inclusive, File No. 03-17820. The complaint alleged, among other
things, that defendants breached their fiduciary duties of loyalty, due care,
independence, good faith and fair dealing and sought to enjoin the proposed
liquidation of the Company and to recover reasonable attorneys' and experts'
fees. On November 24, 2003, defendants filed a motion to dismiss the lawsuit,
and by order dated March 8, 2004, the court dismissed the complaint with
prejudice. By letter dated March 9, 2004, the plaintiff requested the court's
permission to file a motion to reconsider the decision dismissing the complaint
with prejudice. On March 18, 2004, the court denied the plaintiff's request. On
April 9, 2004, the plaintiff filed a notice of appeal and statement of the case
with the Court of Appeals of the State of Minnesota and, on April 22, 2004,
defendants filed their statement of the case with the Court of Appeals. In June
2004 plaintiffs informed counsel for defendants of their desire to dismiss the
appeal, and, on June 3, 2004, the parties submitted to the Court of Appeals a
stipulation of voluntary dismissal "without any right to further appeal." The
Court of Appeals dismissed the appeal by order dated June 8, 2004.
20
ITEM 6. EXHIBITS
Exhibits listed below are filed with or furnished as a part of this report.
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------
31.1 Certification of Principal Executive Officer and Principal
Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
21
SIGNATURE
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 15, 2004 By: /s/ Nigel P. Ekern
-------------------------------
Nigel P. Ekern
Chief Administrative Officer
(Principal Executive Officer and
Principal Financial Officer)
22
NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2004
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
-------- ---------------------------------------------------------------
31.1 Certification of Principal Executive Officer and Principal
Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
23