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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] 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
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NET PERCEPTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 41-1844584
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
ONE LANDMARK SQUARE, STAMFORD, CONNECTICUT 06901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 428-2040
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
(TITLE OF CLASS)
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of voting and non-voting stock held by non-affiliates
of the registrant, based upon the last sale price of the registrant's Common
Stock, par value $0.0001 per share, reported on the Nasdaq Small Cap Market on
June 30, 2004 was $14,559,511.
As of March 15, 2005, there were outstanding 28,917,745 shares of the
registrant's Common Stock, $0.0001 par value.
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NET PERCEPTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 38
ITEM 9A. CONTROLS AND PROCEDURES 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 38
ITEM 11. EXECUTIVE COMPENSATION 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 39
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 39
SIGNATURES 41
EXHIBIT INDEX 42
2
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
following the sale of substantially all of our electronic commerce business,
which represented substantially all of our revenue generating operations and
related assets, and the risks and uncertainties set forth in the section headed
"Factors That May Affect Our Future Results" of Part I of this report and
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Part II of this report. The Company cannot guarantee
its future performance.
References in this report 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"), prior to its merger with and into
the Company on September 9, 2003.
PART I
ITEM 1. BUSINESS
OVERVIEW
Net Perceptions was formerly a provider of software solutions designed to enable
customers to improve their marketing, selling and merchandising effectiveness.
We are currently seeking to redeploy our cash and cash equivalent assets to
enhance stockholder value and are seeking, analyzing and evaluating potential
acquisition and merger candidates. We were incorporated in Delaware in July
1996. Our principal corporate office is located at One Landmark Square,
Stamford, Connecticut 06901 and our telephone number is (203) 428-2040.
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.
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 business 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 are attempting to limit our cash expenditure rate by, among other things,
awarding executive management only non-cash deferred equity compensation at this
time. In connection with the consummation of an asset redeployment transaction,
it is expected that management and/or Kanders & Company, Inc. will be awarded
cash and/or equity compensation based upon the completion of the redeployment
transaction.
3
BUSINESS
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. ("Tornago"), a
corporation formed by three former non-officer employees, to fulfill existing
prepaid customer support obligations in exchange for future cash payments of
approximately $60,000. This amount represented approximately 60% of the
remaining prepaid deferred maintenance revenue amounts under the existing end
user contracts when measured from April 1, 2004. The Company will continue to
recognize the deferred revenue as earned and the payments to Tornago 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. Under the
agreement, we will 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. 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.
On April 21, 2004, we announced the simultaneous signing and closing of the
investment into the Company by Olden, 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 the Company as of the closing date. Proceeds to the
Company from this transaction totaled approximately $2.5 million before
transaction costs of $288,000.
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 September 3,
2004. The delisting followed a determination by the Nasdaq Listing
Qualifications Panel that the Company was a "public shell" and should be
delisted due to policy concerns raised under Nasdaq Marketplace Rules 4300 and
4300(a)(3). The Company's common stock is now quoted on the Pink Sheets
Electronic Quotation Service under the symbol "NETP.PK."
PRIOR BUSINESS
We previously developed and marketed software solutions designed to enable our
customers to interact more intelligently with their customers. Our solutions
integrated and analyzed information about customers, products and transaction
activity to generate specific actions our customers could take to improve their
marketing, selling and merchandising effectiveness. We combined our software
products with industry expertise and professional services to create
industry-specific solutions that were designed to integrate with and add value
to existing custom or purchased systems, including customer relationship
management, or CRM, systems and processes.
Our initial product was shipped in January 1997. From inception through late
2000, we expanded our organization by hiring personnel in key areas. Our total
number of employees was 315 on December 31, 2000. During 2001, 2002 and 2003, we
instituted certain restructuring plans to align our cost structure with our
business outlook and general economic conditions. In connection with our
restructuring activities, our total number of employees was reduced to 98 as of
December 31, 2001, 52 as of December 31, 2002, and nine as of December 31, 2003.
As of December 31, 2004, the Company has four employees, two of whom are
executive officers.
We have sustained losses on an annual basis since inception. As of December 31,
2004, we had an accumulated deficit of $222.2 million. Our net loss was $61,000
for the year ended December 31, 2004, compared to a net loss of $5.3 million in
the prior year. The losses referred to in this paragraph resulted from
significant costs incurred related to restructuring activities, significant
4
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 U.S. Bancorp 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.
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.
EMPLOYEES
All of our employees are based in the United States. As of December 31, 2004, we
had four employees, two of whom are executive officers, and all of whom are
located in our Stamford, Connecticut headquarters. None of our employees are
represented by a labor union or are subject to a collective bargaining
agreement. We have not experienced any work stoppages and consider our
relationship with our employees to be good.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
In addition to other information in this annual report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. However, the risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or which are currently deemed immaterial
may also impair our financial condition. If any of these risks actually occur,
our financial condition could be materially adversely affected.
RISKS RELATED TO NET PERCEPTIONS
WE CONTINUE TO INCUR OPERATING LOSSES.
We are not profitable and have incurred an accumulated deficit of $222.2 million
from our inception through December 31, 2004. Our current ability to generate
revenues and to achieve profitability and positive cash flow will depend on our
ability to redeploy our assets and use our cash and cash equivalent assets to
reposition our business whether it is through a merger or acquisition. Our
ability to become profitable will depend, among other things, (i) on our success
in identifying and acquiring a new operating business, (ii) on our development
of new products or services relating to our new operating business, and (iii) on
our success in distributing and marketing our new products or services.
WE MAY BE UNABLE TO REDEPLOY OUR ASSETS SUCCESSFULLY.
As part of our strategy to limit operating losses and enable the Company to
redeploy its assets and use its cash and cash equivalent assets to enhance
stockholder value, we have sold our electronic commerce business, which
represented substantially all of our revenue-generating operations and related
assets. We are pursuing a strategy of identifying suitable merger partners and
acquisition candidates that will serve as a platform company. Although we are
not targeting specific business industries for potential acquisitions, we plan
to seek businesses with cash flow, experienced management teams, and operations
in markets offering stability and growth opportunities. We may not be successful
in acquiring such a business or in operating any business that we acquire.
Failure to redeploy successfully will result in our inability to become
profitable.
Even if we identify an appropriate acquisition opportunity, we may be unable to
negotiate favorable terms for that acquisition. We may be unable to select,
manage or absorb or integrate any future acquisitions successfully. Any
acquisition, even if effectively integrated, may not benefit our stockholders.
5
Any acquisitions that we attempt or complete may involve a number of unique
risks including: (i) executing successful due diligence; (ii) our exposure to
unforeseen liabilities of acquired companies; and (iii) our ability to integrate
and absorb the acquired company successfully. We may be unable to address these
problems successfully.
WE WILL INCUR SIGNIFICANT COSTS IN CONNECTION WITH OUR EVALUATION OF SUITABLE
MERGER PARTNERS AND ACQUISITION CANDIDATES.
As part of our plan to redeploy our assets, our management is seeking, analyzing
and evaluating potential acquisition and merger candidates. We have incurred and
will continue to incur significant costs, such as due diligence and legal and
other professional fees and expenses, as part of these redeployment efforts
during due diligence and negotiation of potential acquisitions. Notwithstanding
these efforts and expenditures, we cannot give any assurance that we will
identify an appropriate acquisition opportunity in the near term, or at all.
WE WILL LIKELY HAVE NO OPERATING HISTORY IN OUR NEW LINE OF BUSINESS, WHICH IS
YET TO BE DETERMINED, AND THEREFORE WE WILL BE SUBJECT TO THE RISKS INHERENT IN
ESTABLISHING A NEW BUSINESS.
We have not identified what our new line of business will be; therefore, we
cannot fully describe the specific risks presented by such business. It is
likely that we will have had no operating history in the new line of business
and it is possible that the target company may have a limited operating history
in its business. Accordingly, there can be no assurance that our future
operations will generate operating or net income, and as such our success will
be subject to the risks, expenses, problems and delays inherent in establishing
a new line of business for the Company. The ultimate success of such new
business cannot be assured.
WE MAY BE UNABLE TO REALIZE THE BENEFITS OF OUR NET OPERATING LOSS ("NOL") AND
TAX CREDIT CARRYFORWARDS.
NOLs may be carried forward to offset federal and state taxable income in future
years and eliminate income taxes otherwise payable on such taxable income,
subject to certain adjustments. Based on current federal corporate income tax
rates, our NOL and other carryforwards could provide a benefit to us, if fully
utilized, of significant future tax savings. However, our ability to use these
tax benefits in future years will depend upon the amount of our otherwise
taxable income. If we do not have sufficient taxable income in future years to
use the tax benefits before they expire, we will lose the benefit of these NOL
carryforwards permanently. Consequently, our ability to use the tax benefits
associated with our substantial NOL will depend significantly on our success in
identifying suitable merger partners and/or acquisition candidates, and once
identified, successfully consummate a merger with and/or acquisition of these
candidates.
Additionally, if we underwent an ownership change, the NOL carryforward
limitations would impose an annual limit on the amount of the taxable income
that may be offset by our NOL generated prior to the ownership change. If an
ownership change were to occur, we may be unable to use a significant portion of
our NOL to offset taxable income. In general, an ownership change occurs when,
as of any testing date, the aggregate of the increase in percentage points of
the total amount of a corporation's stock owned by "5-percent stockholders"
within the meaning of the NOL carryforward limitations whose percentage
ownership of the stock has increased as of such date over the lowest percentage
of the stock owned by each such "5-percent stockholder" at any time during the
three-year period preceding such date is more than 50 percentage points. In
general, persons who own 5% or more of a corporation's stock are "5-percent
stockholders," and all other persons who own less than 5% of a corporation's
stock are treated, together, as a single, public group "5-percent stockholder,"
regardless of whether they own an aggregate of 5% of a corporation's stock.
The amount of NOL and tax credit carryforwards that we have claimed has not been
audited or otherwise validated by the U.S. Internal Revenue Service. The IRS
could challenge our calculation of the amount of our NOL or our determinations
as to when a prior change in ownership occurred and other provisions of the
Internal Revenue Code, may limit our ability to carry forward our NOL to offset
taxable income in future years. If the IRS was successful with respect to any
such challenge, the potential tax benefit of the NOL carryforwards to us could
be substantially reduced.
WE COULD BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940, WHICH COULD SIGNIFICANTLY LIMIT OUR ABILITY TO OPERATE AND
ACQUIRE AN ESTABLISHED BUSINESS.
The Investment Company Act of 1940 (the "Investment Company Act") requires
registration, as an investment company, for companies that are engaged primarily
6
in the business of investing, reinvesting, owning, holding or trading
securities. We have sought to qualify for an exclusion from registration
including the exclusion available to a company that does not own "investment
securities" with a value exceeding 40% of the value of its total assets on an
unconsolidated basis, excluding government securities and cash items. This
exclusion, however, could be disadvantageous to us and/or our stockholders. If
we were unable to rely on an exclusion under the Investment Company Act and were
deemed to be an investment company under the Investment Company Act, we would be
forced to comply with substantive requirements of Investment Company Act,
including: (i) limitations on our ability to borrow; (ii) limitations on our
capital structure; (iii) restrictions on acquisitions of interests in associated
companies; (iv) prohibitions on transactions with affiliates; (v) restrictions
on specific investments; (vi) limitations on our ability to issue stock options;
and (vii) compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations. Registration as an investment company would
subject us to restrictions that would significantly impair our ability to pursue
our fundamental business strategy of acquiring and operating an established
business. In the event the Securities and Exchange Commission or a court took
the position that we were an investment company, our failure to register as an
investment company would not only raise the possibility of an enforcement action
by the Securities and Exchange Commission or an adverse judgment by a court, but
also could threaten the validity of corporate actions and contracts entered into
by us during the period we were deemed to be an unregistered investment company.
Moreover, the Securities and Exchange Commission could seek an enforcement
action against us to the extent we were not in compliance with the Investment
Company Act during any point in time.
RISKS RELATED TO OUR COMMON STOCK
OUR COMMON STOCK IS NO LONGER LISTED ON THE NASDAQ SMALL CAP MARKET
On September 3, 2004, our common stock was delisted from the Nasdaq Small Cap
Market. The delisting followed a determination by the Nasdaq Listing
Qualifications Panel that the Company was a "public shell" and should be
delisted due to policy concerns raised under Nasdaq Marketplace Rules 4300 and
4300(a)(3). Additional information concerning the delisting is set forth in the
Company's Report on Form 8-K filed with the Securities and Exchange Commission
on September 1, 2004. The Company's common stock is now quoted on the Pink
Sheets Electronic Quotation Service under the symbol "NETP.PK." As a result of
the delisting, stockholders may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of our common stock, the liquidity of
our stock may be reduced, making it difficult for a stockholder to buy or sell
our stock at competitive market prices or at all, we may lose support from
institutional investors and/or market makers that currently buy and sell our
stock and the price of our common stock could decline.
WE ARE VULNERABLE TO VOLATILE MARKET CONDITIONS.
The market prices of our common stock have been highly volatile. The market has
from time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Please see the
table contained in Item 5 of this Report which sets forth the range of high and
low closing prices of our common stock for the calendar quarters indicated.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
Although our stockholders may receive dividends if, as and when declared by our
Board of Directors, we do not intend to pay dividends on our common stock in the
foreseeable future. Therefore, you should not purchase our common stock if you
need immediate or future income by way of dividends from your investment.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF
SHARES OF PREFERRED STOCK.
Our Amended and Restated Certificate of Incorporation provides that our Board of
Directors will be authorized to issue from time to time, without further
stockholder approval, up to 5,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series. Such shares of preferred stock could have
preferences over our common stock with respect to dividends and liquidation
rights. We may issue additional preferred stock in ways, which may delay, defer
or prevent a change in control of the Company without further action by our
stockholders. Such shares of preferred stock may be issued with voting rights
that may adversely affect the voting power of the holders of our common stock by
increasing the number of outstanding shares having voting rights, and by the
creation of class or series voting rights.
7
WE MAY ISSUE A SUBSTANTIAL AMOUNT OF EQUITY AND CASH COMPENSATION AND OTHER
SHARES OF OUR COMMON STOCK IN THE FUTURE WHICH COULD CAUSE DILUTION TO OLD
INVESTORS AND OTHERWISE ADVERSELY AFFECT OUR STOCK PRICE.
A key element of our growth strategy is to make acquisitions. As part of our
acquisition strategy, we may issue additional shares of common stock as
consideration for such acquisitions. In addition, we have limited cash
compensation to management pending consummation of a redeployment transaction
and expect to award cash and equity compensation to management in connection
with such a transaction. These issuances could be significant. To the extent
that we make acquisitions and issue our shares of common stock as consideration
or as compensation to management, your equity interest in us will be diluted.
Any such issuance will also increase the number of outstanding shares of common
stock that will be eligible for sale in the future. Persons receiving shares of
our common stock in connection with these acquisitions may be more likely to
sell off their common stock, which may influence the price of our common stock.
In addition, the potential issuance of additional shares in connection with
anticipated acquisitions could lessen demand for our common stock and result in
a lower price than might otherwise be obtained. We may issue common stock in the
future for other purposes as well, including in connection with financings, for
compensation purposes, in connection with strategic transactions or for other
purposes. Cash payments as compensation or otherwise can also significantly
diminish cash that is available to the Company for working capital and other
purposes, which could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
Our corporate headquarters is currently located in Stamford, Connecticut, where
we occupy space made available to us by Kanders & Company, Inc., an entity owned
and controlled by the Company's Executive Chairman, Warren B. Kanders. This
arrangement is subject to termination at any time.
The Company believes that its current facilities are suitable and adequate for
its present and anticipated near-term needs.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, we are not a party to nor are any of our properties
subject to any pending legal, administrative or judicial proceedings other than
routine litigation incidental to our business.
Initial and Follow-On Public Offering Securities 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 then 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
The parties have negotiated a settlement that is subject to approval by the
Court. On February 15, 2005, the Court issued an Opinion and Order preliminarily
approving the settlement, provided that the defendants and plaintiffs agree to a
modification narrowing the scope of the bar order set forth in the original
settlement agreement.
The Company believes that the allegations against it are without merit. After
reviewing this proceeding (including the probable outcome, reasonably
anticipated costs and expenses, availability and limits of insurance coverage)
the Company believes the outcome of this proceeding will not have a material
adverse effect on our liquidity, financial condition or results of operations.
However, the results of complex legal proceedings are difficult to predict. An
unfavorable resolution of the proceeding could adversely affect the Company's
business, results of operations, liquidity or financial condition.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock was previously listed on the Nasdaq National Market System and
the Nasdaq SmallCap Market until September 3, 2004, when our common stock was
delisted from the Nasdaq SmallCap Market following a determination by the Nasdaq
Listing Qualifications Panel that the Company was a "public shell" and should be
delisted due to policy concerns raised under Nasdaq Marketplace Rules 4300 and
4300(a)(3). Additional information concerning the delisting is set forth in the
Company's Report on Form 8-K filed with the Securities and Exchange Commission
on September 1, 2004. The Company's common stock is now quoted on the Pink
Sheets Electronic Quotation Service under the symbol "NETP.PK".
The following table sets forth, for the indicated periods, the high and low
closing sales prices for our common stock as reported by the Nasdaq National
Market System and the Nasdaq SmallCap Market prior to September 3, 2004 and the
range of high and low bids for our common stock as reported by the Pink Sheets
Electronic Quotation Service on and after September 3, 2004. The quotes listed
below on and after September 3, 2004 reflect inter-dealer prices or transactions
solely between market-makers, without retail mark-up, mark-down or commission
and may not represent actual transactions.
PRICE RANGE OF
COMMON STOCK
--------------
HIGH LOW
----- -----
2003
First Quarter $1.56 $1.22
Second Quarter $1.68 $1.41
Third Quarter $1.88 $0.36
Fourth Quarter $0.51 $0.32
2004
First Quarter $0.43 $0.39
Second Quarter $1.03 $0.41
Third Quarter $0.92 $0.68
Fourth Quarter $0.91 $0.72
2005
First Quarter $0.86 $0.70
(through March 15, 2005)
As of March 15, 2005, there were 217 stockholders of record registered with our
transfer agent, Wells Fargo Bank Minnesota, N.A. Because many of these shares
are held by brokers and other institutions on behalf of stockholders, we are
unable to estimate the total number of stockholders represented by the record
holders.
DIVIDENDS
We currently anticipate that we will retain our cash and all potential future
earnings for use in our business and do not anticipate that we will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of our Board of Directors and will depend upon, among other
things, our results of operations, capital requirements, general business
conditions, contractual restrictions on payment of dividends, if any, legal and
regulatory restrictions on the payment of dividends, and other factors our Board
of Directors deems relevant.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
In the tables below we provide you with selected historical financial data of
the Company, which should be read in conjunction with the financial statements
and the notes to the financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
elsewhere in this report. The statement of operations data for each of the years
in the periods ended December 31, 2004, 2003, and 2002, and the balance sheet
data at December 31, 2004 and 2003, are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this
report. The statement of operations data for the years ended December 31, 2001
and 2000 and the balance sheet data at December 31, 2001 and 2000 are derived
from audited financial statements not included in this report, and have been
reclassified to conform with current period presentation relating to
reimbursable expenses that were previously recorded net to cost of revenue.
FIVE YEAR CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA
Revenues:
Product $ 405 $ 962 $ 1,703 $ 2,979 $ 25,087
Service and maintenance 522 1,622 3,541 7,535 12,342
--------- --------- --------- --------- ---------
Total revenues 927 2,584 5,244 10,514 37,429
--------- --------- --------- --------- ---------
Cost of revenues:
Product -- 12 292 943 1,807
Service and maintenance 220 755 2,101 5,143 11,532
--------- --------- --------- --------- ---------
Total cost of revenues 220 767 2,393 6,086 13,339
--------- --------- --------- --------- ---------
Gross margin 707 1,817 2,851 4,428 24,090
--------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing -- 1,347 4,550 15,215 25,589
Research and development 250 2,112 5,933 10,572 19,354
General and administrative 2,428 2,261 2,819 6,198 11,146
Lease abandonment expense -- -- -- 225 1,250
Restructuring related charges and impairments(1) (7) 2,251 768 15,551 --
Gain on sale of patents (1,800) -- -- -- --
Amortization of intangibles -- -- 110 9,650 25,394
Impairment of goodwill and other intangibles(2) -- -- 6,546 75,298 --
--------- --------- --------- --------- ---------
Total operating expenses 871 7,971 20,726 132,709 82,733
--------- --------- --------- --------- ---------
Loss from operations (164) (6,154) (17,875) (128,281) (58,643)
Other income, net 103 861 1,141 4,483 5,096
--------- --------- --------- --------- ---------
Net loss $ (61) $ (5,293) $ (16,734) $(123,798) $ (53,547)
========= ========= ========= ========= =========
Basic and diluted net loss per share $ 0.00 $ (0.19) $ (0.61) $ (4.59) $ (2.12)
========= ========= ========= ========= =========
Shares used in computing basic and diluted net
loss per share 28,574 27,683 27,216 26,951 25,209
========= ========= ========= ========= =========
Cash distributions paid (3) $ -- $ 1.50 $ -- $ -- $ --
BALANCE SHEET DATA
Cash, cash equivalents and short-term investments $ 14,444 $ 11,932 $ 62,959 $ 73,605 $ 68,880
Working capital 14,306 11,600 57,031 64,321 66,364
Total assets 14,723 12,803 65,796 88,878 211,834
Long-term liabilities, net of current portion 2,517 -- 510 577 1,951
Total stockholders' equity 12,028 11,635 58,342 75,407 198,518
(1) In 2001, we incurred a restructuring related charge of $15.6 million,
consisting of charges relating to facility consolidation and employee
terminations, losses and estimated losses on the disposal of assets and
other restructuring related charges. In 2002, we incurred a restructuring
related charge of $768,000 consisting primarily of charges relating to
employee terminations. In 2003, we incurred a restructuring related charge
of $2.3 million, consisting of charges relating to facility consolidation,
lease terminations and employee terminations. See Note 5 to the Consolidated
Financial Statements.
(2) At March 31, 2001, we performed an impairment assessment of the goodwill and
other intangible assets recorded in connection with the acquisition of
Knowledge Discovery One, Inc. ("KD1"). As a result of our review, we
recorded a $75.3 million impairment charge to reduce goodwill and other
intangible assets to their estimated fair values. At December 31, 2002, we
performed an additional impairment assessment of the remaining goodwill and
other intangible assets recorded in connection with the acquisition of KD1.
11
As a result of our review, we recorded a $6.5 million impairment charge to
reduce goodwill and other intangible assets to zero value. See Note 4 to the
Consolidated Financial Statements.
(3) 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. See Note 8 to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
AS PART OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND
ENABLE THE COMPANY TO REDEPLOY ITS ASSETS AND USE ITS CASH AND CASH EQUIVALENT
ASSETS TO ENHANCE STOCKHOLDER VALUE, ALL OF OUR OPERATIONS OTHER THAN
ADMINISTRATIVE FUNCTIONS HAVE BEEN TERMINATED. THE INFORMATION APPEARING BELOW,
WHICH RELATES TO PRIOR PERIODS, IS THEREFORE NOT INDICATIVE OF THE RESULTS THAT
MAY BE EXPECTED FOR ANY SUBSEQUENT PERIODS. THE YEAR ENDED DECEMBER 31, 2004
PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS ARE
EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.
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 our initial product was
shipped in January 1997. From inception through late 2000, we expanded our
organization by hiring personnel in key areas. Our total number of employees was
315 on December 31, 2000. During 2001, 2002 and 2003, we instituted certain
restructuring plans to align our cost structure with our business outlook and
general economic conditions. In connection with our restructuring activities,
our total number of employees was reduced to 98 as of December 31, 2001, 52 as
of December 31, 2002, and nine as of December 31, 2003. As of December 31, 2004,
the Company has four employees, two of whom are executive officers.
We have sustained losses on an annual basis since inception. As of December 31,
2004, we had an accumulated deficit of $222.2 million. Our net loss was $61,000
for the year ended December 31, 2004, compared to a net loss of $5.3 million in
the prior year. The losses referred to in this paragraph resulted from
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 U.S. Bancorp 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 12 positions to ten full-time employees.
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 75% 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.
12
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. ("Tornago"), a
corporation formed by three former non-officer employees, to fulfill existing
prepaid customer support obligations in exchange for future cash payments of
approximately $60,000. This amount represented approximately 60% of the
remaining prepaid deferred maintenance revenue amounts under the existing end
user contracts when measured from April 1, 2004. The Company will continue to
recognize the deferred revenue as earned and the payments to Tornago 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. Under the
agreement, we will 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. 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.
On April 21, 2004, we announced the simultaneous signing and closing of the
investment into the Company by Olden Acquisition LLC ("Olden"), for the purpose
of initiating a strategy to redeploy our assets and use our cash and cash
equivalent assets to enhance stockholder value.
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 foregoing and the risks identified below under the heading "Risks That
May Affect Future Results." 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 in
Financial Statements." 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 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.
13
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.
Allowance for doubtful accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Actual collection results could differ
materially from those estimated and have a significant impact on our
consolidated financial statements.
Litigation. We have not recorded an estimated liability related to the pending
class action lawsuit 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.
14
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
The following table sets forth certain items in our statements of operations as
a percentage of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
---- ---- ----
Revenues:
Product 44% 37% 32%
Service and maintenance 56 63 68
---- ---- ----
Total revenues 100 100 100
Cost of revenues:
Product -- 1 6
Service and maintenance 24 29 40
---- ---- ----
Total cost of revenues 24 30 46
Gross margin 76 70 54
Operating expenses:
Sales and marketing -- 52 87
Research and development 27 82 113
General and administrative 262 87 54
Restructuring related charges
and impairments (1) 87 14
Gain on sale of patents (194) -- --
Amortization of intangibles -- -- 2
Impairment of goodwill and
other intangibles -- -- 125
---- ---- ----
Total operating expenses 94 308 395
---- ---- ----
Loss from operations (18) (238) (341)
---- ---- ----
Other income, net 11 33 22
---- ---- ----
Net loss (7)% (205)% (319)%
==== ==== ====
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003
AND 2002
THE COMPANY HAS TERMINATED ITS OPERATING ACTIVITIES AND IS NOW EVALUATING
ALTERNATIVE WAYS TO REDEPLOY ITS ASSETS INTO NEW BUSINESSES. THE DISCUSSION
BELOW IS THEREFORE NOT MEANINGFUL TO AN UNDERSTANDING OF FUTURE REVENUE,
EARNINGS, OPERATIONS, BUSINESS OR PROSPECTS OF THE COMPANY FOLLOWING SUCH A
REDEPLOYMENT OF ITS ASSETS.
REVENUES
Total revenues. Total revenues decreased 65% to $0.9 million for the year ended
December 31, 2004 from $2.6 million in 2003. Total revenues decreased 50% to
$2.6 million for the year ended December 31, 2003 from $5.2 million in 2002.
Revenues from sales in the United States were $0.9 million in 2004 compared to
$2.3 million in 2003 and $4.5 million in 2002 representing 100%, 89% and 86% of
total revenues, respectively. There were no revenues from international sales in
2004, compared to $284,000, or 11% of total revenues, in 2003 and $719,000, or
14% of total revenues, in 2002. As a result of the downsizing of our business
and operations, we no longer maintain a direct sales force. International sales
have generally been denominated in United States dollars.
As described in this Item 7 under "Overview", we are no longer actively
marketing our products, and we do not expect that future revenues from these
product or services related to these products, if any, will be significant.
Product revenues. Product revenues decreased 58% to $405,000 for the year ended
December 31, 2004, compared to $962,000 for the year ended December 31, 2003.
Product revenues declined 44% in 2003 from $1.7 million in 2002. Product
revenues comprised 44% of total revenues for 2004 compared to 37% and 32% for
2003 and 2002, respectively. We do not expect any product revenues for the
foreseeable future.
Service and maintenance revenues. Service and maintenance revenues consist
primarily of professional and maintenance services. Our professional service
revenues include business consulting, implementation support, and educational
15
services and are generally offered on a time and materials basis. Maintenance
revenues are generally derived from annual service agreements and are recognized
ratably over the term of the agreement. Service and maintenance revenues
decreased 68% to $0.5 million for the year ended December 31, 2004 from $1.6
million for the year ended December 31, 2003. Service and maintenance revenues
decreased 54% in 2003 from $3.5 million in 2002. Service and maintenance
revenues comprised 56%, 63% and 68% of total revenues for the years ended
December 31, 2004, 2003 and 2002, respectively. The decrease in service and
maintenance revenues reflects a decline in our customer base. As described in
this Item 7 under "Overview", we entered into an agreement on April 1, 2004 with
Tornago, Inc. to fulfill our existing prepaid customer support obligations. We
do not anticipate entering into additional service and maintenance agreements
with customers. Therefore, we expect there will be no service and maintenance
revenues in 2005.
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. For the year ended December 31, 2004 the cost of product
revenues was zero. Cost of product revenues decreased 96% to $12,000 for the
year ended December 31, 2003 from $292,000 for the year ended December 31, 2002.
Cost of product revenue in 2004, 2003 and 2002 represented 0%, 1% and 17% of the
product revenues, respectively. As a result of the termination of the Company's
revenue generating operations in connection with its efforts to redeploy its
assets as discussed earlier, we do not expect to incur costs of product revenues
for the foreseeable 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, consulting and educational related services to
customers. Cost of service and maintenance revenues decreased 71% to $220,000
for the year ended December 31, 2004 from $755,000 for the year ended December
31, 2003. Cost of service and maintenance revenue decreased 64% in 2003 from
$2.1 million in 2002. Cost of service and maintenance revenue in 2004, 2003 and
2002 represented 24%, 47% and 59% of the related service and maintenance
revenues, respectively. The decrease in cost of services and maintenance
revenues in absolute dollars and as a percentage of revenues is primarily due to
continued headcount reductions in our technical organization as a result of our
restructuring efforts. As described above in this Item 7 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 decrease in 2005.
OPERATING EXPENSES
In the first quarter of 2003, we reduced our operating expenses through the
closure of three remote offices and a reduction in workforce affecting 22
employees. On August 6, 2003, we reduced our workforce by an additional 12
employees. At December 31, 2003 we had nine full-time employees, which was
determined to be the minimum number necessary at that time to serve customers,
preserve the value of our intellectual property and administer our limited
ongoing business affairs. In March 2004, we terminated the employment of the
remaining members of our engineering staff. At December 31, 2004, we had four
employees, two of whom are executive officers. As described in this Item 7 under
"Overview", we are no longer actively marketing our products and do not expect
to incur any operating expenses in 2005 relating to sales and marketing of our
products.
Sales and marketing. Sales and marketing expenses 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 zero for the year ended
December 31, 2004 compared to $1.3 million recorded for the year ended December
31, 2003. Sales and marketing expenses decreased 70% in 2003 compared to $4.6
million in 2002. Sales and marketing expenses were 0%, 52% and 87% of total
revenues for the years ended December 31, 2004, 2003 and 2002, 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 actively market our products.
Research and development. Research and development expenses consisted primarily
of salaries, other employee-related costs and consulting fees related to the
development of our products. Research and development expenses decreased 88% to
$250,000 for the year ended December 31, 2004 compared to $2.1 million for the
year ended December 31, 2003. Research and development expenses decreased 64% in
2003 compared to $5.9 million in 2002. Research and development expenses were
27%, 82% and 113% of total revenues for the years ended December 31, 2004, 2003
and 2002, 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 and no future support of the products. As described
above in this Item 7 under "Overview", we terminated the employment of the
remaining members of our engineering staff effective March 31, 2004 and we do
not expect to incur future research and development costs for the foreseeable
future.
16
General and administrative. General and administrative expenses consist
primarily of salaries, other employee-related costs, provision for doubtful
accounts and professional service fees. Current executive management did not
receive salaries in 2004. General and administrative expenses increased 7% to
$2.4 million for the year ended December 31, 2004 compared to $2.3 million for
the year ended December 31, 2003. General and administrative expenses decreased
20% in 2003 compared to $2.8 million in 2002. General and administrative
expenses were 262%, 87% and 54% of total revenue for the years ended December
31, 2004, 2003 and 2002, respectively. The increase in general and
administrative expenses in absolute dollars during the year ended December 31,
2004 was primarily due to the increased professional fees associated with the
settlement or other resolution of our existing obligations and liabilities, the
exploration of asset dispositions, and our continued consideration and
evaluation of strategic alternatives. The decrease in general and administrative
expenses in absolute dollars during the year ended December 31, 2003 was
primarily due to headcount reductions as part of our restructuring efforts,
offset by increased professional fees associated with the settlement or other
resolution of our existing obligations and liabilities, our continued
exploration of asset dispositions, and our continued consideration and
evaluation of strategic alternatives. Although we expect personnel-related and
other general and administrative expenses to decline in 2005, 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.
Restructuring related charges and impairments. For the year ended December 31,
2004, the Company reduced its accrual by $7,000 relating to restructuring
charges. During 2003 and 2002, we continued instituting certain restructuring
plans to better align our cost structure with our business outlook and general
economic conditions that we started in 2001. Under the restructuring plans, we
recorded restructuring related charges totaling $2.3 million and $768,000 during
2003 and 2002, respectively. These amounts represented (1)%, 87% and 14% of
total revenues for the years ended December 31, 2004, 2003 and 2002,
respectively. All restructuring related charges had been paid as of December 31,
2004.
Sale of patents. 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. There was no comparable amount for 2003 and 2002.
Amortization of intangibles. Amortization expense was $0 for the year ended
December 31, 2004 and 2003. This is compared to $110,000 for the year ended
December 31, 2002. These amounts represented 0%, 0% and 2% of total revenues for
the years ended December 31, 2004, 2003 and 2002, respectively. Total
amortization was $0 during 2004 due to the $6.5 million impairment charge
recorded in the fourth quarter of 2002 to reduce goodwill and other intangible
assets to zero value.
Other income, net. Other income, net, consists of interest income, interest
expense, foreign currency transaction losses or gains and other expenses. Net
other income decreased 88% in 2004 to $0.1 million from $0.9 million in 2003.
Net other income decreased 25% in 2003 compared to $1.1 million in 2002. The
decrease in net other income for the year ended December 31, 2004 compared to
the same period in 2003 was due to lower cash balances and lower interest rates.
The decrease in net other income for the year ended December 31, 2003 compared
to the same period in 2002 was primarily due to lower cash and investment
balances as a result of the special cash distribution to stockholders on
September 2, 2003 and lower interest rates. The decrease in net other income for
2002 compared to 2001 was attributable to a decrease in interest income earned
and the $1.6 million loss on investment resulting from our sale of $2.1 million
in WorldCom bonds upon announcement of accounting issues by WorldCom, offset
against $200,000 received as a result of a related dispute settlement.
PROVISION FOR INCOME TAXES
We have incurred significant operating losses for all periods from inception
through December 31, 2004. For income tax purposes, the Company has available
federal net operating loss carry-forwards of approximately $121.4 million and
research and development credit carry-forwards of approximately $151,000 at
December 31, 2004. The net operating loss and research and development credit
carry-forwards expire in 2011 through 2024 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. If the Company were to be acquired at its recent stock value such
that Section 382 is applicable, this would eliminate the ability to use a
substantial majority of these carry-forwards. Future tax benefits have not been
recognized in the financial statements, as their utilization is not considered
probable based on the weight of available information.
17
SELECTED CONSOLIDATED QUARTERLY OPERATING RESULTS
The following tables set forth quarterly unaudited financial data for 2004 and
2003, as well as the percentage of our total revenues represented by each item.
This unaudited financial data has been prepared on the same basis as the audited
financial statements included in this report and includes all adjustments,
consisting only of normal recurring accruals that are considered necessary for a
fair presentation of such information when read in conjunction with our audited
financial statements and notes thereto appearing elsewhere in this report. You
should not draw any conclusions from the operating results for any quarter.
DEC. 31 SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
2004 2004 2004 2004 2003 2003 2003 2003
------- ------- ------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
RESULTS OF OPERATIONS:
Revenues:
Product $ -- $ -- $ 51 $ 354 $ 386 $ 95 $ 343 $ 138
Service and maintenance 30 25 321 146 231 343 570 478
------- ------- ------- ------- ------- ------- ------- -------
Total revenues 30 25 372 500 617 438 913 616
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product -- -- -- -- 4 -- 8 --
Service and maintenance 4 11 103 102 120 164 255 216
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues 4 11 103 102 124 164 263 216
------- ------- ------- ------- ------- ------- ------- -------
Gross margin 26 14 269 398 493 274 650 400
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing -- -- -- -- 3 157 481 706
Research and development -- -- -- 250 496 427 524 665
General and administrative 332 170 898 1,028 981 568 276 436
Gain on sale of patents -- -- -- (1,800) -- -- -- --
Restructuring related charges and impairments -- -- -- (7) -- 1,051 -- 1,200
Amortization of intangibles -- -- -- -- -- -- -- --
Impairment of goodwill and other intangibles -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 332 170 898 (529) 1,480 2,203 1,281 3,007
------- ------- ------- ------- ------- ------- ------- -------
(Loss)/Income from operations (306) (156) (629) 927 (987) (1,929) (631) (2,607)
Other income (expense), net (50) 63 39 51 22 216 415 208
------- ------- ------- ------- ------- ------- ------- -------
Net (loss)/income $ (356) $ (93) $ (590) $ 978 $ (965) $(1,713) $ (216) $(2,399)
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted net (loss)/income per share $ (0.01) $ (0.00) $ (0.02) $ 0.03 $ (0.03) $ (0.06) $ (0.01) $ (0.09)
======= ======= ======= ======= ======= ======= ======= =======
18
DEC. 31 SEP. 30 JUN. 30 MAR. 31 DEC. 31 SEP. 30 JUN. 30 MAR. 31
2004 2004 2004 2004 2003 2003 2003 2003
------- ------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
PERCENTAGE OF TOTAL REVENUES
Revenues:
Product --% --% 14% 71% 62% 22% 38% 22%
Service and maintenance 100 100 86 29 38 78 62 78
------ ------ ------ ------ ------ ------ ------ ------
Total revenues 100 100 100 100 100 100 100 100
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Product -- -- -- -- 1 -- 1 --
Service and maintenance 13 44 28 20 19 37 28 35
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues 13 44 28 20 20 37 29 35
------ ------ ------ ------ ------ ------ ------ ------
Gross margin 87 56 72 80 80 63 71 65
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing -- -- -- -- -- 36 53 115
Research and development -- -- -- 50 81 97 57 108
General and administrative 1,107 680 241 205 159 130 30 71
Gain on sale of patent
rights -- -- -- (360) -- -- -- --
Restructuring related
charges and impairments -- -- -- (1) -- 240 -- 194
Amortization of intangibles -- -- -- -- -- -- -- --
Impairment of goodwill and
other intangibles -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses 1,107 680 241 (106) 240 503 150 488
------ ------ ------ ------ ------ ------ ------ ------
(Loss)/income from operations (1,020) (624) (169) 186 (160) (440) (69) (423)
Other income (expense), net (167) 252 10 10 3 49 45 34
------ ------ ------ ------ ------ ------ ------ ------
Net (loss)/income (1,187)% (372)% (159)% 196% (157)% (391)% (24)% (389)%
====== ====== ====== ====== ====== ====== ====== ======
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the sale of
equity securities. At December 31, 2004, we had $14.4 million of cash and cash
equivalents compared to $11.9 million at December 31, 2003. The overall increase
of $2.5 million in cash and cash equivalents is primarily due to the investment
in the Company by Olden Acquisition LLC in the second quarter of 2004.
Cash provided by operations was $0.1 million for the twelve months ended
December 31, 2004. The cash provided was primarily attributable to adjustments
for non-cash expenses, decreases in accounts receivables and prepaids and other
assets and increases in accrued liabilities and deferred revenue. Cash used in
operations was $9.4 million for 2003 and $9.8 million for 2002. Cash used in
operations for 2003 and 2002 resulted primarily from net losses, as adjusted for
non-cash expenses. In addition, in 2003 the Company used $5.4 million to
terminate its obligations under three real estate leases. The decrease in cash
used in operations in the twelve months of 2003 as compared to the same period
in 2002 is principally a function of the reduced operating expenses and cost of
revenues that have resulted from the restructuring plans described below, as
adjusted for non-cash expenses. We do not expect to receive any significant
amounts of cash from future operations, and we expect that we will continue to
incur legal fees, transaction costs and other ongoing costs that will constitute
a material use of cash.
There was no cash provided by or used by investing activities for 2004. A total
of $22.9 million in net cash was provided by investing activities for the twelve
months ended December 31, 2003, compared to $34.6 million of cash provided from
investing activities in the same period for 2002. 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.
Cash provided by financing activities during 2004 was attributable to the
issuance of long-term debt and stock option exercises. Cash provided by
financing activities was approximately $2.4 million during 2004 compared to net
cash used in financing activities of $41.3 million for 2003 and net cash
19
generated of $33,000 for 2002. Net cash was used in financing activities during
2003 due to the $42.2 million cash distribution paid on September 2, 2003,
partially offset by proceeds from sales of our common stock pursuant to the
exercise of options. Net cash in financing activities in 2002 was primarily
attributable to proceeds from sales of our common stock pursuant to the exercise
of options, offset by principal payments on capital leases.
As described in Item 1 under "Prior Business", 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 an aggregate amount of approximately
$42.2 million.
During 2003 and 2002, 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 and $768,000 during 2003 and 2002, respectively. A total
of approximately $6.9 million was charged against the restructuring reserve
during 2003, and in 2004 the balance of approximately $37,000 was fully utilized
bringing the restructuring liability to zero.
Capital expenditures were $0 for the twelve months ended December 31, 2004, 2003
and 2002. Capital expenditures were higher in years prior to 2002 and reflected
a significantly larger employee base and level of operations. As of December 31,
2004, we had no long-term commitments for capital expenditures and we do not
anticipate entering into any further commitments for capital expenditures.
CONTRACTUAL OBLIGATIONS
The Company had no contractual obligations and commercial commitments at
December 31, 2004. The operating lease obligation for the vacated facility in
San Francisco, California was terminated in August 2004.
We believe that existing cash and investments will be sufficient to meet our
expected working capital needs for at least the next twelve months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS 123(R),
"Share Based Payment". SFAS 123(R) requires that the compensation cost relating
to share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. Public entities will be required to apply Statement 123(R)
as of the first interim or annual reporting period that begins after June 15,
2005. We are currently evaluating the impact of this statement. We believe the
adoption of this statement, effective July 1, 2005, will have an impact on our
consolidated financial statements
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through December 31, 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 elsewhere in this report, 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.
All of our investments are now held in money market accounts in order to
preserve principal. Therefore, due to the conservative nature of our
investments, our future interest income sensitivity is limited.
We do not have any derivative financial instruments and do not hold any
instruments for trading purposes.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NET PERCEPTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm 22
Consolidated Balance Sheets 23
Consolidated Statements of Operations 24
Consolidated Statement of Stockholders' Equity and Comprehensive Income 25
Consolidated Statements of Cash Flows 26
Notes to the Consolidated Financial Statements 27
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Net Perceptions, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Net Perceptions, Inc. and its subsidiaries ("the Company") at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company has
curtailed substantially all of its business operations.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 29, 2005
22
NET PERCEPTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
----------------------
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 14,444 $ 11,932
Accounts receivable, net -- 355
Prepaid expenses and other current assets 40 481
--------- ---------
Total current assets 14,484 12,768
Other assets 239 35
--------- ---------
Total assets $ 14,723 $ 12,803
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued liabilities $ 178 $ 751
Deferred revenue -- 380
Accrued restructuring costs -- 37
--------- ---------
Total current liabilities 178 1,168
Note Payable 2,517 --
--------- ---------
Total liabilities 2,695 1,168
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock -- $.0001 par value; 5,000 shares
authorized; no shares issued or outstanding -- --
Common stock -- $.0001 par value; 100,000 shares
authorized; 29,282 and 28,145 shares issued and
28,574 and 28,145 oustanding at December 31, 2004 and
2003 respectively, 2 2
Additional paid-in capital 234,350 233,761
Unearned stock compensation (135) --
Accumulated deficit (222,189) (222,128)
--------- ---------
Total stockholders' equity 12,028 11,635
--------- ---------
Total liabilities and stockholders' equity $ 14,723 $ 12,803
========= =========
See accompanying notes to the consolidated financial statements.
23
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Revenues:
Product $ 405 $ 962 $ 1,703
Service and maintenance 522 1,622 3,541
-------- -------- --------
Total revenues 927 2,584 5,244
-------- -------- --------
Cost of revenues:
Product -- 12 292
Service and maintenance 220 755 2,101
-------- -------- --------
Total cost of revenues 220 767 2,393
-------- -------- --------
Gross margin 707 1,817 2,851
-------- -------- --------
Operating expenses:
Sales and marketing -- 1,347 4,550
Research and development 250 2,112 5,933
General and administrative 2,428 2,261 2,819
Gain on sale of patents (1,800) -- --
Restructuring related charges and impairments (7) 2,251 768
Amortization of intangibles -- -- 110
Impairment of goodwill and other intangibles -- -- 6,546
-------- -------- --------
Total operating expenses 871 7,971 20,726
-------- -------- --------
Loss from operations (164) (6,154) (17,875)
-------- -------- --------
Other income (expense):
Interest income 172 610 2,108
Interest expense (75) -- (24)
Other income (expense) 6 251 (943)
-------- -------- --------
Total other income, net 103 861 1,141
-------- -------- --------
Net loss $ (61) $ (5,293) $(16,734)
======== ======== ========
Basic and diluted net loss per share $ (0.00) $ (0.19) $ (0.61)
======== ======== ========
Shares used in computing basic and diluted net loss per share 28,574 27,683 27,216
======== ======== ========
See accompanying notes to the consolidated financial statements.
24
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
ACCUMULATED COMPREHEN-
ADDITIONAL OTHER UNEARNED TOTAL SIVE
COMMON STOCK PAID-IN COMPREHENSIVE STOCK ACCUMULATED STOCKHOLDERS' INCOME/
SHARES AMOUNT CAPITAL INCOME (LOSS) COMPENSATION DEFICIT EQUITY (LOSS)
-------- ------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2001 27,129 $ 2 $ 274,869 $ 637 $ -- $(200,101) $ 75,407 $(123,522)
Exercise of stock options 136 -- 64 -- -- -- 64 --
Repurchase of unvested
common stock (1) -- (1) -- -- -- (1) --
Compensation relating to
stock options -- -- 54 -- -- -- 54 --
Issuance of common stock
under employee stock
purchase plan 68 -- 67 -- -- -- 67 --
Change in unrealized gain
(loss) on available-for-sale
investments -- -- -- (515) -- -- (515) (515)
Net loss -- -- -- -- -- (16,734) (16,374) (16,374)
-------- ------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2002 27,332 2 275,053 122 -- (216,835) 58,342 (17,249)
Exercise of stock options 801 -- 894 -- -- -- 894 --
Issuance of common stock
under employee stock
purchase plan 12 -- 12 -- -- -- 12 --
Change in unrealized gain
(loss) on available-for-sale
investments -- -- -- (122) -- -- (122) (122)
Cash Distribution to
Stockholders -- -- (42,198) -- -- -- (42,198) --
Net loss -- -- -- -- -- (5,293) (5,293) (5,293)
-------- ------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2003 28,145 2 233,761 -- -- (222,128) 11,635 (5,415)
Exercise of stock options 529 -- 153 -- -- -- 153 --
Discount on note payable
related to beneficial
conversion feature -- -- 56 -- -- -- 56 --
Restricted stock grants and
related compensation 608 -- 380 -- (135) -- 245 --
Net loss -- -- -- -- -- (61) (61) (61)
- ------------------------------ -------- ------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2004 29,282 $ 2 $ 234,350 $ -- $ (135) $(222,189) $ 12,028 $ (61)
======== ======= ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
25
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Cash flows from operating activities:
Net loss $ (61) $ (5,293) $(16,734)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization -- 484 2,196
Provision for doubtful accounts (22) (54) 79
Amortization of debt issuance costs 49 -- --
Amortization of discount on notes payable 40 -- --
Stock based compensation 245 -- 42
Restructuring related charges and impairments (7) 2,251 768
Impairment of goodwill and other intangibles -- -- 6,546
Amortization of premiums on investments -- 183 372
Changes in assets and liabilities:
Accounts receivable 377 88 841
Prepaid expenses and other current assets 441 146 1,674
Other assets 35 690 457
Accounts payable -- (52) (262)
Accrued liabilities (573) (6,993) (4,619)
Deferred revenue (380) (370) (1,085)
Other liabilities (30) (510) (67)
-------- -------- --------
Net cash provided by (used in) operating activities 114 (9,430) (9,792)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments and marketable securities -- (16,121) (47,555)
Sales and maturities of short-term investments and marketable securities -- 39,046 82,114
-------- -------- --------
Net cash provided by investing activities -- 22,925 34,559
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of stock under employee stock purchase plan -- 12 67
Proceeds from exercise of stock options and warrants, net of stock repurchases 153 894 63
Cash distribution to stockholders -- (42,198) --
Proceeds from issuance of convertible subordinate note, net of offering costs
of $288 2,245 -- --
Principal payments under capital lease obligations and notes payable -- -- (97)
-------- -------- --------
Net cash (used in) provided by financing activities 2,398 (41,292) 33
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 2,512 (27,797) 24,800
Cash and cash equivalents at beginning of year 11,932 39,729 14,929
-------- -------- --------
Cash and cash equivalents at end of year $ 14,444 $ 11,932 $ 39,729
======== ======== ========
Supplemental schedule of cash-flow information:
Interest paid $ -- $ -- $ 24
See accompanying notes to the consolidated financial statements.
26
NET PERCEPTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
Net Perceptions, Inc. (the "Company") was incorporated in Delaware on July 3,
1996. The Company developed and marketed software solutions that enabled its
customers to interact more intelligently with their customers. On April 21,
2004, we announced the simultaneous signing and closing of an investment into
the Company by Olden Acquisition LLC, 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.
The Company has curtailed substantially all of its business operations and at
March 1, 2005 had four employees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include accounts of the Company and its
wholly owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts therein.
Management's estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances.
Management's estimates and assumptions are evaluated on an on-going basis. Due
to the inherent uncertainty involved in making estimates, actual results may
differ from those estimates.
Revenue recognition
The Company recognizes revenues in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" and SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain Transactions" and in
accordance with the Securities and Exchange Commission Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition in Financial Statements." The Company
derives 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 and management, implementation
and testing, data analysis, data warehousing, user and partner training,
consulting, product hosting and ongoing customer support.
For software arrangements that include multiple elements (e.g., software
products, and/or maintenance or services), the Company allocates the total
arrangement fee using the residual method. Under the residual method, the fair
value of the undelivered maintenance and service elements, as determined by
vendor-specific objective evidence, is deferred and the remaining (residual)
arrangement fee is recognized as software product revenue. In software
arrangements in which the Company does 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 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 the Company does not
consider collection to be probable, then revenues are recognized when the fee is
collected.
27
License revenues related to license terms with less than twenty-four months are
recognized ratably over the term of the license period. When the Company offers
products and services on a hosted basis, up front set-up fees are deferred and
recognized ratably over the estimated service period.
Revenues allocable to maintenance are recognized ratably over the term of the
agreement. The Company evaluates 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 professional services
are considered essential, revenues from the arrangement are recognized using
contract accounting, generally on a percentage-of-completion basis. When the
Company does not consider the professional services to be essential, revenues
allocable to the services are recognized as they are performed.
Under general contract terms, the Company includes an indemnification clause in
its software licensing agreement that indemnifies the licensee against liability
and damages arising from any claims of patent, copyright, trademark or trade
secret infringement by the Company's software. The Company has incurred
insignificant costs as a result of this type of indemnification clause and the
Company does not maintain a product warranty liability related to such
indemnification clauses.
Concentrations of credit risk and significant customers
Financial instruments that potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company granted credit to
customers in the ordinary course of business. Three customers accounted for 54%,
11% and 6% of total revenues for 2004. As of December 31, 2004 there was no
accounts receivable. Three customers accounted for 14%, 13% and 10% of total
2003 revenues and one customer accounted for 84% of accounts receivable at
December 31, 2003. One customer accounted for 22% of total 2002 revenues. and
three customers accounted for 33%, 27% and 20% of accounts receivable at
December 31, 2002.
Cash equivalents, short-term investments and marketable securities
Cash equivalents, short-term investments and marketable securities consist
principally of commercial paper, government agency notes and money market funds.
Cash equivalents are all highly liquid temporary cash investments purchased with
original maturities of 90 days or less. The Company determines the appropriate
classification of short-term investments and marketable securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Available-for-sale securities are stated at fair market value with unrealized
holding gains or losses recorded as a separate component of stockholders'
equity. As of December 31, 2004 and 2003, substantially all of the Company's
cash was held in money market accounts.
Fair value of financial instruments
The carrying amounts of the Company's financial instruments, which include cash
equivalents, short-term investments, marketable securities, accounts receivable,
accounts payable, accrued liabilities and note payable, approximate their fair
values at December 31, 2004 and 2003.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
individual assets; or the shorter of the estimated useful lives or underlying
lease term (in the case of leasehold improvements and capital lease equipment).
Estimated useful lives generally range from three to ten years.
Long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets," the Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss shall be recognized only if the carrying amount of a long-lived
asset (asset group) is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset (asset group) is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset (asset group). That assessment shall be based on the
carrying amount of the asset (asset group) at the date it is tested for
recoverability, whether in use or under development. An impairment loss shall be
measured as the amount by which the carrying amount of a long-lived asset (asset
group) exceeds its fair value.
28
Other assets
Other assets consist primarily of costs associated with the issuance of
long-term debt related to the investment in the Company by Olden Acquisition LLC
in the second quarter of 2004.
Research and development
Research and development expenditures, which include software development costs,
are expensed as incurred. SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed," requires the capitalization
of certain software development costs once technological feasibility is
established, which the Company defines as the completion of a working model. The
period between achieving technological feasibility and the general availability
of such software had been short and software development costs qualifying for
capitalization were insignificant. Accordingly, the Company did not capitalize
any software development costs.
Income taxes
The Company calculates income taxes in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes," which requires the use of the liability
method of accounting for income taxes. Income taxes are deferred for all
temporary differences between the financial statement and income tax basis of
assets and liabilities. Deferred taxes are recorded using the enacted tax rates
scheduled by tax law to be in effect when the temporary differences are expected
to settle or be realized. Deferred tax assets are reduced by a valuation
allowance to the extent that utilization is considered uncertain.
Advertising expense
The Company recognized advertising expense as incurred. Advertising expense has
been insignificant since inception.
Net loss per share
Net loss per share is computed under SFAS No. 128, "Earnings Per Share." Basic
net loss per share is computed using the weighted-average number of shares of
common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase aggregated 0, 0,
and 1 shares at December 31, 2004, 2003 and 2002, respectively (see Note 8).
Diluted net loss per share does not differ from basic net loss per share since
potential shares of common stock from conversion of preferred stock, stock
options and warrants and outstanding shares of common stock subject to
repurchase are anti-dilutive for all periods presented. Options to purchase 188,
2,029, and 2,757 shares of the Company's common stock were outstanding as of
December 31, 2004, 2003 and 2002, respectively, and could potentially dilute
earnings per share in future periods.
Comprehensive income (loss)
Comprehensive income (loss), as defined by SFAS No. 130, "Reporting
Comprehensive Income," includes net loss and items defined as other
comprehensive income. SFAS No. 130 requires that items defined as other
comprehensive income (loss), such as foreign currency translation adjustments
and unrealized gains and losses on certain investments in debt securities, be
separately classified in the financial statements. Such disclosures are included
in the consolidated statements of stockholders' equity and comprehensive loss.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of "SFAS" No. 123, "Accounting for Stock-Based Compensation" and SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of Financial Accounting Standards Board Statement No. 123".
The Company has adopted the disclosure-only provisions of SFAS No. 123. For
purposes of the pro forma disclosures below, the estimated fair value of the
29
Company's stock options is amortized to expense over the options' vesting
period. Had compensation cost for the Company's stock options been recognized
based on the fair value at the grant date consistent with the provisions of SFAS
No. 123, the Company's net income (loss) would have been adjusted to the pro
forma amounts indicated below:
YEAR ENDED DECEMBER 31
--------------------------------
2004 2003 2002
-------- -------- --------
Net loss, as reported $ (61) $ (5,293) $(16,734)
Add: Stock-based employee compensation
expense included in reported net loss 245 -- 54
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (277) (1,274) (2,358)
-------- -------- --------
Pro forma net loss $ (93) $ (6,597) $(19,038)
======== ======== ========
Basic and diluted net loss per share:
As reported $ (0.00) $ (0.19) $ (0.61)
======== ======== ========
Pro forma $ (0.00) $ (0.24) $ (0.69)
======== ======== ========
Compensation expense for pro forma purposes is reflected over the vesting
period. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2004, 2003 and 2002, respectively: dividend yield
of 0% for option grants in all years; risk-free interest rates of 3.0%, 3.0% and
3.9%; expected lives of ten years for option grants in all years; and volatility
factors of 50%, 50% and 70%. The weighted-average fair value of options
adjustments during 2004, 2003 and 2002 using the Black-Scholes option-pricing
model was $0.31, $0.16 and $0.77 per share, respectively.
Recently issued accounting pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), "Share Based Payments." SFAS 123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. Public entities will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. We are currently evaluating the impact of this statement.
We believe the adoption of this statement, effective July 1, 2005, will have an
impact on our consolidated financial statements
3. FINANCIAL STATEMENT COMPONENTS
Certain balance sheet components consist of the following:
Rollforward of the allowance for doubtful accounts:
Balance December 31, 2001 $ 149
Provision 79
Write-offs (151)
Recoveries 8
----------
Balance, December 31, 2002 85
Provision (54)
Write-offs (3)
Recoveries 2
----------
Balance, December 31, 2003 30
Provision (22)
Write-offs (8)
----------
Balance, December 31, 2004 $ --
----------
30
Property and equipment consist of the following:
DECEMBER 31,
-----------------
2004 2003
------- -------
Computer hardware $ -- $ 128
Leasehold improvements -- --
Purchased computer software -- 458
Furniture, fixtures and equipment -- 82
------- -------
-- 668
Less: Accumulated depreciation and amortization -- (668)
------- -------
$ -- $ --
======= =======
Depreciation and amortization expense was $0, $484 and $1,940 for the years
ended December 31, 2004, 2003 and 2002, respectively.
Accrued liabilities consist of the following:
DECEMBER 31,
--------------------
2004 2003
------ ------
Accrued wages and benefits $ -- $ 225
Other accrued liabilities, primarily
professional fees 178 526
------ ------
$ 178 $ 751
====== ======
4. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 141 AND NO. 142
Effective January 1, 2002, in accordance with SFAS No. 141 and No. 142, the
Company ceased amortizing goodwill and certain other identified intangible
assets that had a net book value of approximately $6,500 as of January 1, 2002.
The adoption of these statements resulted in the Company not recognizing $3,100
of amortization expense for 2002 that would have been recognized had the old
standards been in effect. At December 31, 2002, the Company performed an
impairment assessment of the remaining goodwill and other intangible assets
recorded in connection with the acquisition of KDI. As a result of this review,
the Company recorded a $6,500 impairment charge to reduce goodwill and other
intangible assets to zero value.
5. RESTRUCTURING RELATED CHARGES AND IMPAIRMENTS
During 2003 and 2002, continuing from 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 $2,251 and $768 during 2003 and
2002, respectively.
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.
As of December 31, 2004 the Company had no outstanding lease obligations. The
operating lease obligation for the San Francisco facility terminated in August
2004 according to the terms of the lease.
31
The following table presents a summary of the restructuring related activities
and accrued restructuring charges as of December 31, 2004:
EMPLOYEE FIXED
LEASE SEVERANCE ASSET
COMMITMENTS AND DISPOSALS
AND RELATED TERMINATION AND OTHER
ITEMS COSTS SUBTOTAL COSTS TOTAL
------- ------- ------- ------- -------
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 Payments (30) -- (30) -- (30)
Restructuring Related (Reversal) -- (7) (7) -- (7)
------- ------- ------- ------- -------
ACCRUED RESTRUCTURING AS OF DECEMBER 31, 2004 $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
6. INCOME TAXES
For income tax purposes, the Company has available federal net operating loss
carry-forwards of approximately $121,400 and research and development credit
carry-forwards of $151 at December 31, 2004. 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 future changes in ownership of the Company
pursuant to 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.
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets (liabilities) are as follows:
DECEMBER 31,
---------------------
2004 2003
--------- ---------
Deferred tax assets:
Net operating loss carry-forwards $ 43,273 $ 45,134
Restructuring related costs -- 20
Research and development credit carry-forwards 151 196
Accrued vacation and other current liabilities 12 843
Accounts receivable allowance -- 12
--------- ---------
Total deferred tax assets 43,436 46,205
Valuation allowance (43,436) (46,205)
--------- ---------
Total net deferred income taxes $ -- $ --
========= =========
7. NOTE PAYABLE
On April 21, 2004, the Company closed on an investment into the Company by Olden
Acquisition LLC ("Olden"), for the purpose of initiating a strategy to redeploy
the Company's assets and use the Company's 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
32
price of $0.45 per share of Company 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 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 note matures on April 21, 2014.
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). As of December 31, 2004,
$16 remains to be amortized of the note discount due to the beneficial
conversion feature. Also in connection with this transaction, the Company
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. 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.
8. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock designated as common and
preferred. As of December 31, 2004, the total number of shares that the Company
was authorized to issue was 105,000 shares, of which 100,000 were common stock
and 5,000 were preferred stock. On August 6, 2003 the Company announced a cash
distribution to stockholders of $1.50 per share, payable on September 2, 2003 to
stockholders of record as of August 18, 2003. On September 2, 2003, the Company
distributed $42,198 to the common stockholders that was reflected as a reduction
to additional paid in capital.
Stock option plans
In April 2000, the Company's board of directors adopted the 2000 Stock Plan (the
"2000 Plan"), which provides for the issuance of nonqualified stock options to
employees who are not officers. The options allow the holder to purchase shares
of the Company's common stock at fair market value on the date of the grant.
During fiscal year 2002, no options were granted under the 2000 Plan. The total
number of options available for future grants under the 2000 Plan was 447 at
December 31, 2004. Stock options granted under the 2000 Plan typically vest over
four years and generally expire ten years from the date of grant.
In February 1999, the Company's board of directors adopted the 1999 Equity
Incentive Plan (the "1999 Plan"), which provides for the issuance of both
incentive and nonqualified stock options. The options allow the holder to
purchase shares of the Company's common stock at fair market value on the date
of the grant. For options granted to holders of more than 10% of the outstanding
common stock, the option price at the date of the grant must be at least equal
to 110% of the fair market value of the stock. During fiscal year 2003, 1,000
options were granted under the 1999 Plan. Each year, beginning January 1, 2000
and ending January 1, 2002, the number of shares of common stock reserved for
issuance under the 1999 Plan will, in accordance with the terms of the 1999
Plan, be increased automatically by the lesser of 5% of the total number of
common shares then outstanding or 1,500 shares. Accordingly, the number of
shares of common stock reserved for issuance under the 1999 Plan increased by 0
and 1,356 shares in 2003 and 2002, respectively. The total number of options
available for future grants under the 1999 Plan was 2,524 at December 31, 2002.
Stock options granted under the 1999 Plan typically vest over four years and
generally expire ten years from the date of grant.
In February 1999, the Company's board of directors adopted the 1999 Non-Employee
Director Option Plan (the "1999 Non-Employee Plan") under which nonqualified
stock options are granted to non-employee directors of the Company. The 1999
Non-Employee Plan was amended and restated in April 2001. Under the 1999
Non-Employee Plan, 60, 195, and 30 options were granted in fiscal year 2003,
2002 and 2001, respectively. As of December 31, 2003, 0 options were available
for future grant under the 1999 Non-Employee Plan. Stock options granted under
the 1999 Non-Employee Plan to a director upon his or her initial election or
appointment typically become exercisable over a two-year period after issuance
and expire ten years from the date of grant. Stock options granted under the
1999 Non-Employee Plan to a director at each annual meeting of the Company's
stockholders typically are immediately exercisable and expire ten years from the
date of grant. The Company did not issue stock options to its directors at its
2004 annual meeting of stockholders.
The Company's 1996 stock option plan (the "1996 Plan") provides for the issuance
of both incentive and nonqualified stock options to employees. The incentive
options allow the holder to purchase shares of the Company's common stock at
fair market value on the date of the grant, subject to certain repurchase rights
held by the Company. For options granted to holders of more than 10% of the
outstanding common stock, the option price at the date of the grant must be at
least equal to 110% of the fair market value of the stock. Stock options granted
under the 1996 Plan are immediately exercisable but are subject to certain
discretionary repurchase rights by the Company (all of which rights have expired
with respect to options outstanding under the 1996 Plan), and generally expire
ten years from the date of grant. Upon adoption of the 1999 Plan, the Company
ceased granting options under the 1996 Plan.
Deferred compensation related to stock options granted below fair market value
in 1999 and 1998 totaled $2,826. Such compensation is considered deferred
33
compensation and amortized over the four-year repurchase period of the common
stock underlying the related options. Related amortization of stock compensation
expense was $0, $42 and $173 in fiscal years 2003, 2002 and 2001, respectively.
Stock compensation expense related to accelerated vesting of stock options was
$12 in 2002.
Stock compensation expense recorded in the functional expense categories within
operating expenses in 2004, 2003 and 2002, was allocated as follows:
2004 2003 2002
---- ---- -----
Sales and marketing $ -- $ -- $ 24
Research and development -- -- 8
General and administrative 245 -- 10
Restructuring -- -- 12
---- ---- -----
$245 $ -- $ 54
==== ==== =====
As a result of the September 2, 2003 cash distribution paid to stockholders
discussed above, the board of directors approved an adjustment to the exercise
price of all of our outstanding options to take 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 registered and available for issuance. In addition, no
adjustment was made to any options with exercise prices above $2.00 per share.
As a result of the adjustment, 870 stock options with an average exercise price
of $1.51 were adjusted to 3,715 stock options with an average exercise price of
$0.32. In accordance with FIN 44, "Accounting for Certain Transactions involving
Stock Compensation an interpretation of APB Opinion 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.
A summary of activity of the Company's stock option plans is presented below:
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002
------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 2,029 $1.83 2,757 $3.26 3,719 $4.97
Granted 150 0.66 61 1.63 275 1.37
9/3/03 pre adjustment options -- -- (870) 1.51 -- --
9/3/03 post adjustment options -- -- 3,715 0.32 -- --
Exercised (529) 0.29 (801) 1.12 (136) 0.47
Canceled (1,462) 2.43 (2,833) 1.54 (1,101) 8.91
------ ------ ------
Outstanding at end of year 188 $0.59 2,029 $1.83 2,757 $3.26
====== ====== ======
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ---------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- ------- ---------------- ---------------- ------ ------------------
$0.23 -- $0.23 6 6.25 $ 0.23 6 $ 0.23
$0.35 -- $0.48 82 8.83 0.43 49 0.39
$0.74 -- $0.75 100 9.54 0.75 24 0.74
---- ---
Total 188 9.13 $ 0.59 79 $ 0.49
==== ===
34
Employee Stock Purchase Plan
In February 1999, the Company's board of directors adopted the Employee Stock
Purchase Plan (the "Purchase Plan"). The initial number of shares of common
stock reserved for issuance under the Purchase Plan was 1,000. Each year,
beginning January 1, 2000 and ending January 1, 2004, the number of shares of
common stock reserved for issuance under the Purchase Plan was, in accordance
with the terms of the Purchase Plan, automatically increased by the lesser of 2%
of the total number of common shares then outstanding or 600 shares. The number
of shares of common stock reserved for issuance under the Purchase Plan
increased by 300 in each of 2003 and 2002. The Company terminated the Purchase
Plan effective October 27, 2003. During 2003 and 2002, 12 and 68 shares,
respectively, were issued under the Purchase Plan.
Stockholders' rights plan
In June 2001, the Company entered into a Rights Agreement (the "Rights
Agreement"), commonly known as a "poison pill." Under the Rights Agreement,
stockholders of record on June 14, 2001 were distributed Rights (the "Rights")
to acquire one one-thousandth of a share of the Company's Series A Junior
Participating Preferred Stock (the "Preferred Stock"), at a rate of one Right
for each share of the Company's common stock (the "Common Stock") held by
stockholders on such date. Each share of common stock issued after the June
14th, 2001 record date has an attached Right. The Rights trade together with the
Common Stock and generally become exercisable on the tenth day after a person or
group (i) acquires 15% of more of the outstanding Common Stock or (ii) commences
a tender offer or exchange offer that would result in such a person or group
owning 15% or more of the Common Stock. In the event that a person or group
acquires 15% or more of the Common Stock (a "Stock Acquisition"), each Right not
owned by the 15% or more stockholder (the "Acquiring Person") and its affiliates
would become exercisable for, upon payment of the exercise price of the Right
(currently, $15), either Preferred Stock or Common Stock in an amount equal to
the then current exercise price of the Right divided by one half the then
current market price of the Common Stock. Alternatively, in the event of certain
business combinations following a Stock Acquisition, each Right not owned by the
Acquiring Person and its affiliates would become exercisable for, upon payment
of the exercise price of the Right, common stock of the Acquiring Person in an
amount equal to the then current exercise price of the Right divided by one half
the market price of the Acquiring Person's common stock. At any time until ten
days following a Stock Acquisition, the Rights are redeemable by the Company's
board of directors at a price of $.01 per Right. The Rights have no voting
privileges. The Rights will terminate upon the earlier of the date of their
redemption or ten years from the date of issuance.
On December 22, 2003, the board of directors adopted an amendment to the Rights
Agreement. The amendment provides, in effect, that the rights issued under the
Rights Agreement will not be separately distributed to the Company's
stockholders and become exercisable solely as a result of the commencement of a
tender offer or exchange offer for all outstanding shares of the Company's
common stock. In addition, the amendment provides that the rights will not
"flip-in" and entitle a holder to purchase shares of the Company's common stock
at a discount upon consummation of such an offer that results in the bidder
beneficially owning at least 85% of the outstanding shares of the Company's
common stock, excluding for purposes of determining the number of shares of
common stock outstanding those shares owned by directors who are also officers
of the Company and shares owned by stock plans sponsored by the Company in which
Company employee participants do not have the right to determine confidentially
whether shares of Company common stock held subject to such stock plan(s) will
be tendered in a tender offer or exchange offer. Also, pursuant to the
amendment, the rights will not be triggered by a subsequent merger of the
Company with such a bidder in which the Company's stockholders receive the same
consideration as was paid or issued in the tender offer or exchange offer. The
amendment was intended to remove the Rights Agreement as an impediment to a
bidder completing its offer and a subsequent merger, while also affording
protection to stockholders who did not tender their shares in the bidder's
first-step tender or exchange offer, if the holders of a substantial majority of
the Company's stock elected to accept the bidder's offer. The amendment also
clarified that stockholders who entered into voting agreements or understandings
solely regarding voting on the plan of liquidation would not be deemed, for
purposes of the Rights Agreement, to beneficially own the shares owned by the
other parties to such agreements or understandings. This aspect of the amendment
was intended to allow stockholders to freely consult with one another, form
groups, and enter into agreements, with respect to voting at the special meeting
on the plan of liquidation, without triggering the rights under the Rights
Agreement. However, since the plan of liquidation did not receive the requisite
stockholder vote required for approval, this aspect of the amendment is no
longer applicable.
On April 21, 2004, in connection with the closing of the investment in the
Company by Olden, the board of directors adopted an amendment to the Company's
Rights Agreement such that the transaction would not trigger the rights
thereunder.
On April 21, 2004, the Company granted restricted stock to Nigel Ekern, the
Company's Chief Administrative Officer, and Gray Hudkins, formerly the Company's
Director of Corporate Development, in the amount of 364 and 243 shares,
respectively, of the Company's common stock under the Company's incentive plans,
vesting over three years. The fair value of $292 for the restricted stock will
be amortized over the three-year vesting period. On October 1, 2004, Gray
Hudkins resigned and the Company accelerated o the vesting of his restricted
stock grant resulting in additional compensation expense of $88 as well as
35
immediate expensing of the remaining unamortized balance of the original grant.
The Company recorded total compensation expense of $245 relating to the
restricted stock grants during the year ended December 31, 2004.
9. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company had entered into operating lease commitments for its office space.
In connection with the restructuring described in Note 5, the Company had
terminated all of its office leases as of December 31, 2004.
Our corporate headquarters is currently located in Stamford, Connecticut, where
we occupy space made available to us at no cost by Kanders & Company, Inc., an
entity owned and controlled by the Company's Executive Chairman, Warren B.
Kanders. This arrangement is subject to termination at any time.
Rent expense totaled $7, $300 and $720 for the years ended December 31, 2004,
2003 and 2002, respectively.
Contingencies
Initial and Follow-On Public Offering Securities 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.
The parties have negotiated a settlement that is subject to approval by the
Court. On February 15, 2005, the Court issued an Opinion and Order preliminarily
approving the settlement, provided that the defendants and plaintiffs agree to a
modification narrowing the scope of the bar order set forth in the original
settlement agreement.
The Company believes that the allegations against it are without merit. After
reviewing this proceeding (including the probable outcome, reasonably
anticipated costs and expenses, availability and limits of insurance coverage)
the Company believes the outcome of this proceeding will not have a material
adverse effect on our liquidity, financial condition or results of operations.
However, the results of complex legal proceedings are difficult to predict. An
unfavorable resolution of the proceeding could adversely affect the Company's
business, results of operations, liquidity or financial condition.
36
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.
10. 401(K) PLAN
The Company had a 401(k) employee retirement plan under which eligible employees
could contribute up to 20% of their annual compensation, subject to certain
limitations. Employees vested immediately in their contributions and earnings
thereon. The plan allowed for, but did not require, the Company to match
employee contributions. The Company did not make any such matching
contributions. The Company terminated this 401(k) employee retirement plan on
September 30, 2003, effective upon the distribution of all assets held by the
plan to the plan participants.
11. SEGMENT DATA
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.
Sales to customers located outside of the United States totaled 0%, 11% and 14%
of total revenues in 2004, 2003 and 2002 respectively. International sales to
customers in any one individual foreign country did not exceed 10% of total
revenues in 2004, 2003 or 2002. As of December 31, 2004, the Company had no
international assets.
12. RELATED PARTY TRANSACTIONS
We occupy space made available to us at no cost by Kanders & Company, Inc., an
entity owned and controlled by the Company's Executive Chairman, Warren B.
Kanders. This arrangement can be terminated at any time.
In December 2000, the Company entered into a full recourse secured promissory
note and security agreement with a now former officer of the Company. Under the
terms of the agreement, up to $300 could be loaned to the officer prior to April
15, 2001 solely to pay federal income tax owed by the officer in connection with
the officer's exercise in March 2000 of an option to purchase shares of the
Company's stock. Amounts outstanding under the note bear interest at 8% per
annum and are partially secured by 33,000 shares of the Company's stock held by
the officer and pledged to the Company. On April 11, 2001, $258 was loaned to a
now former officer to pay alternative minimum tax relating to the option
exercise under the terms of the note. Principal and interest owed by the officer
shall be forgiven if the officer's employment is terminated other than
voluntarily or for cause, or if there is a change in control of the Company as
defined in the agreement. Additionally, one-third of the original principal and
accrued interest will be forgiven for each year that the officer remains
continuously employed by the Company subsequent to April 2001. Otherwise,
principal and accrued interest are payable by the officer in April 2004. The
principal balance of the loan is being amortized to expense ratably over the
term of the agreement commencing in April 2001. As of December 31, 2003, the
balance of $21 is included in prepaid expenses and other current assets. As of
April 1, 2004, the note was completely forgiven in accordance with its terms.
37
13. SUBSEQUENT EVENTS
In February 2005, the Company received $228 from the settlement of the lawsuit
with i2 Technologies Inc. The Company intends to record the gain on this
settlement in the first quarter of 2005.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE 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 and
Controller, its principal executive officer and principal financial officer,
respectively of the effectiveness 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 December 31, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Administrative Officer and Controller concluded
that the Company's disclosure controls and procedures as of December 31, 2004
are effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Company's internal control over financial reporting have come
to management's attention during the fourth quarter ended December 31, 2004
evaluation that have materially affected, or are reasonably likely to materially
affect the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in our Proxy
Statement used in connection with our 2005 Annual Meeting of Stockholders, is
incorporated herein by reference.
The Company has adopted a code of ethics that applies to its Chief
Administrative Officer and Controller, its principal executive officer and
principal financial officer, and to all of its other officers, directors and
employees. The code of ethics may be accessed at www.netperceptions.com, our
Internet website, at the tab "Corporate Governance". The Company intends to
disclose future amendments to, or waivers from, certain provisions of its code
of ethics, if any, on the above website within four business days following the
date of such amendment or waiver.
Other information required by Item 10, including information regarding
directors, membership and function of the audit committee, including the
financial expertise of its members, and Section 16(a) compliance, appearing
under the captions "Election of Directors", "Information Regarding Board of
Directors and Committees" and "Other Matters" in our Proxy Statement used in
connection with our 2005 Annual Meeting of Stockholders, is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in our
Proxy Statement used in connection with our 2005 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Principal Stockholders" in our
Proxy Statement used in connection with our 2005 Annual Meeting of Stockholders,
is incorporated herein by reference.
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement used in connection with our 2005 Annual
Meeting of Stockholders, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Principal Accountant Fees and
Services" in our Proxy Statement used in connection with our 2005 Annual Meeting
of Stockholders, is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements filed as part of this report are listed on
the Index to Consolidated Financial Statements on page 21.
2. All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required. The information required to be set forth therein is not applicable or
is shown in the Consolidated Financial Statements or notes thereto included in
this report.
3. The following Exhibits are hereby filed as part of this Annual Report on Form
10-K:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Patent Purchase Agreement, dated December 30, 2003, between Thalveg
Data Flow LLC and Net Perceptions, Inc., as amended on March 31,
2004 (1)
3.1(a) Amended and Restated Certificate of Incorporation (2).
3.1(b) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation (3).
3.2 Amended and Restated Bylaws as amended through August 5, 2003 (4).
4.1 Amended and Restated Investor's Rights Agreement, dated December 18,
1997, among Net Perceptions, Inc. and the investors and founders
named therein, as amended (2).
4.2 Specimen common stock certificate (2).
4.3 Specimen common stock certificate (including Rights Agreement
Legend) (5).
4.4 Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank
Minnesota, as Rights Agent (6).
4.5 Amendment No. 1 to Rights Agreement dated as of December 22, 2003
(7).
4.6 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock (attached as Exhibit A to the Rights Agreement filed
as Exhibit 4.4 hereto) (6).
4.7 Form of Rights Certificate (attached as Exhibit B to the Rights
Agreement filed as Exhibit 4.4 hereto) (6).
10.1* Form of Indemnification Agreement entered into between Net
Perceptions, Inc. and its directors and officers (2).
10.2* 1996 Stock Plan (2).
10.3* 1999 Equity Incentive Plan (2).
10.4* Amended and Restated 1999 Non-Employee Director Option Plan, as
amended through April 2, 2001 (8).
10.5* Employee Stock Purchase Plan (2).
10.8* 2000 Stock Plan (9).
10.9* Change in Control Severance Plan and Summary Plan Description (2).
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent registered public
accounting firm.
31.1 Certification of principal executive officer pursuant to Exchange
Act Rules Rule 13(a)-14(a) and15(a)-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of principal financial officer pursuant to Exchange
Act Rules Rule 13(a)-14(a) and15(a)-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
39
- ------------
* Represents a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Net Perceptions' Current Report on Form 8-K
filed April 1, 2004.
(2) Incorporated by reference to Net Perceptions' Registration Statement on
Form S-1 (Registration No. 333-71919).
(3) Incorporated by reference to Net Perceptions' Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 2002.
(4) Incorporated by reference to Net Perceptions' Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2003.
(5) Incorporated by reference to Net Perceptions' Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2001.
(6) Incorporated by reference to Net Perceptions' Registration Statement on
Form 8-A filed June 6, 2001.
(7) Incorporated by reference to Net Perceptions' Current Report on Form 8-K
filed December 23, 2003.
(8) Incorporated by reference to Net Perceptions' Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 2001.
(9) Incorporated by reference to Net Perceptions' Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2000.
(b) The exhibits are listed in Item 15. (a)(3) above.
(c) None.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NET PERCEPTIONS, INC.
By: /s/ NIGEL P. EKERN
------------------------
Nigel P. Ekern
Chief Administrative
Officer
Date: March 31, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant in the capacities indicated on March 31, 2005.
SIGNATURE TITLE
- ----------------------------- ----------------------------------------------
/s/ NIGEL P. EKERN Chief Administrative Officer (Principal
- ----------------------------- Executive Officer)
Nigel P. Ekern
/s/ SUSAN LUCKFIELD Controller (Principal Financial Officer)
- -----------------------------
Susan Luckfield
/s/ WARREN B. KANDERS Executive Chairman of the Board of Directors
- -----------------------------
Warren B. Kanders
/s/ GIANMARIA C. DELZANNO Director
- -----------------------------
Gianmaria C. Delzanno
/s/ DAVID A. JONES Director
- -----------------------------
David A. Jones
/s/ NICHOLAS SOKOLOW Director
- -----------------------------
Nicholas Sokolow
41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------------
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent
registered public accounting firm.
31.1 Certification of principal executive officer pursuant to
Exchange Act Rules Rule 13(a)-14(a) and15(a)-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of principal financial officer pursuant to
Exchange Act Rules Rule 13(a)-14(a) and15(a)-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of principal executive officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of principal financial officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
42