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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO)
INCORPORATION OR ORGANIZATION)
7901 FLYING CLOUD DRIVE, MINNEAPOLIS, 55344
MINNESOTA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(612) 903-9424
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
(TITLE OF CLASS)
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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 (sec. 229.405 of this chapter) 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. [ ]
At March 29, 2000, the aggregate market value of voting and non-voting stock
held by non-affiliates of the Registrant totaled approximately $595,109,944
based on the last sale price as reported on the Nasdaq National Market. As of
March 29, 2000 there were outstanding 26,297,863 shares of the Registrant's
common stock, par value $.0001 per share.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
Our solutions are designed to help retailers understand customers individually,
optimize product assortments, prices and inventories and offer the right product
to the right customer at the right price.
We design our solutions to benefit retailers by converting browsers into
buyers, increasing cross-sell and up-sell success rates and enhancing overall
customer satisfaction and customer loyalty. In addition, we help retailers
reduce customer acquisition and retention costs, improve advertising
effectiveness, optimize in-store and on-line retail floor space and improve
customer service. Our customers currently include major Internet and
multi-channel retailers such as Art.com, Bertelsmann, CDNow, Egghead.com,
eToys.com, Fingerhut, Hudson's Bay Company, J.C. Penney, Procter & Gamble, Tower
Records and Walgreens.
Using sophisticated, proprietary analytical techniques, our solutions
analyze and report on past and current customer behavior, including purchase
history, stated preferences and Internet browsing behavior. Our solutions also
provide analysis of item placement and item price effectiveness in
advertisements, typical item purchase combinations, segmentation of customers
based on purchasing and demographic data and customer-specific and
product-specific profitability reporting. We base our solutions on a distributed
architecture that is flexible enough to integrate with our customers' new or
existing systems, including website, call center, marketing campaign management
and point of sale software.
Net Perceptions was incorporated in Delaware in 1996. Our principal
executive offices are located at 7901 Flying Cloud Drive, Minneapolis, Minnesota
55344. Our website address is WWW.NETPERCEPTIONS.COM. The information on our
website is not incorporated by reference into this Annual Report on Form 10-K
and should not be considered as a part thereof. References in this Annual Report
on Form 10-K to "Net Perceptions", "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 herein
as "KD One").
RECENT DEVELOPMENTS
On March 29, 2000, we completed an underwritten public offering of
2,000,000 shares of our common stock, resulting in net proceeds to us of
approximately $84.8 million. If the overallotment option granted by us to the
underwriters with respect to 318,863 shares of common stock is exercised in
full, we would receive additional net proceeds of approximately $13.7 million.
We expect to use the net proceeds of the offering for general corporate
purposes, including working capital. In addition, we also may use a portion of
the net proceeds for the acquisition of complementary businesses, products or
technologies. We have no current plans, agreements or commitments and are not
currently engaged in any negotiations with respect to any such transactions. As
part of the public offering, certain of our stockholders sold 625,471 shares of
common stock and granted the underwriters an overallotment option with respect
to an additional 74,957 shares. We did not and will not receive any of the
proceeds from the sale of shares by the selling stockholders.
In February 2000, we completed our acquisition of KD One, thereby acquiring
its GreenLight family of products. KD One is a leading supplier of advanced data
analysis solutions for multi-channel retailers. We believe that our acquisition
of KD One will enable us to provide enhanced services and solutions to our
customers across all touch points, including call centers, points of sale and
websites. In this transaction we acquired all of the outstanding shares of KD
One in exchange for 1,969,630 shares of our common stock.
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In addition, options of KD One were converted into options to purchase
approximately 268,297 shares of our common stock.
INDUSTRY BACKGROUND
Internet impact on retail marketing
The Internet has had a significant effect on retail marketing. By shopping
on-line, or even just browsing websites, consumers now have more control over
where and when they shop, what products are available and at what price, and how
and when items are picked up or delivered. As a result, retailers are seeking
new and better ways to acquire, retain and satisfy customers while continuing to
pursue increased revenues and profits.
We believe that the relationship between a retailer and a customer has a
direct impact on the vitality of a business. In an on-line shopping environment,
a buyer-seller relationship must be developed without any face-to-face
interaction. We believe this relationship can be enhanced by personalization
technologies. Personalization technologies are systems and applications designed
to create an individualized shopping experience for each customer.
Personalization can occur on the Internet each time a customer interacts with a
retailer. The retailer can observe and record customer data on its website and
solicit preference information. These data can be processed using
personalization technologies to generate an understanding of the customer's
interests and recommend appropriate products, services and information.
Real time personalization
Instead of planning sales activities in aggregate across a large market
such as a geographic area or income level, many retailers now seek to
distinguish themselves by satisfying the unique needs of individual customers
through personalized marketing efforts. These personalized marketing techniques
use customer databases, computer technology and interactive communications to
help customers find the products they want to purchase, thereby increasing the
number of products sold and generating repeat sales. Personalized marketing
enables retailers to manage individual customers in addition to products, sales
channels and marketing programs.
To be effective, personalized marketing solutions must be automated and
deliver customer responses instantaneously, or in "real time," across large
customer populations. Real time personalization enables a retailer to learn a
customer's preferences during each interaction and immediately adjust the
marketing message based on the information received. We believe real time
personalization is essential in any interactive shopping context, including the
Web, call centers, in-store kiosks, point of sale terminals and wireless
devices.
Real time personalization for electronic commerce. The Internet is an
interactive communications and commerce medium through which retailers can
implement personalized marketing across large customer populations. Real time
personalization allows an on-line business to develop an individual connection
with each customer while serving thousands of customers simultaneously. With the
size and tremendous growth of electronic commerce, the opportunity for
personalized marketing on the Internet is potentially large. International Data
Corporation estimates that the amount of Internet commerce spending worldwide
will increase from $111 billion in 1999 to over $1.3 trillion in 2003.
Real time personalization across multiple touch-points. A touch-point is a
point of contact between a retailer and a customer, such as a retail store,
website, call center, in-store kiosk, wireless device or outbound marketing
campaign. Retailers that interact with customers through multiple touch-points
have the opportunity to apply information obtained from a customer interaction
at one touch-point, such as a call center purchase, to interactions at other
touch-points, such as on-line shopping.
For example, retailers can personalize customer contacts at each
touch-point by knowing a customer's purchasing history, product and style
preferences and other information solicited during
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interactions. In inbound call centers, personalization software can prompt the
sales agent to recommend additional products to the customer based on
information from other interactions. In outbound call centers, e-mail campaigns
or other outbound marketing campaigns, personalization software can recommend
specific customers that are likely to be interested in a particular product
offering based on information from other interactions.
We believe those retailers that are the most successful in learning from
all of their touch-point interactions will build the strongest relationships
with their customers. To enable this learning, retailers need an effective means
of sharing customer information across multiple touch-points.
Precision marketing
Retailers can also use customer data to more effectively advertise,
merchandise, price and market their products. Traditionally, retailers have
collected customer data through the use of various sales, support and financial
enterprise software systems. Analysis of these data could help retailers to
better understand customer purchasing patterns, thereby enabling them to market
more effectively to individual customers and customer segments. However, the
technologies historically available to analyze this tremendous volume of
information were highly complex and required very specialized skills to deploy.
As a result, retailers have experienced difficulty in managing large amounts of
customer data obtained from multiple sources and using the data effectively.
The opportunity
Traditional marketing techniques have not been able to maximize the full
potential of real time personalization and precision marketing. These techniques
have been unable to automatically learn from customers or to deliver
recommendations in real time. Traditional marketing techniques also have failed
to effectively collect, analyze and report on large amounts of customer data
collected from multiple sources. A real time personalization and precision
marketing solution must enable retailers to leverage the information received
from all customer interactions to serve each individual customer in a consistent
and improved manner regardless of the touch-points the customer chooses to
employ.
Realizing the potential of real time personalization and precision
marketing requires new solutions that:
- deliver recommendations in real time;
- span multiple customer touch-points;
- provide a measurable economic return to retailers;
- integrate easily with existing software systems; and
- satisfy the volume requirements of the largest Internet and multi-channel
retailers.
THE NET PERCEPTIONS SOLUTION
Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
We believe that retailers who implement our solutions can achieve the following
results:
- More customers. Because retailers are able to present the products that
customers are most likely to purchase, more customers may make purchases.
- More products per order. Retailers are able to increase sales per order
by offering each customer complementary products, known as cross-selling,
and higher-margin products, known as up-selling, that are attractive to
that particular customer.
- Stronger customer relationships. By creating compelling, personalized
experiences for each customer using our solutions, a retailer can make
customers feel as if they are known personally
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by the retailer. We believe that if a customer feels that he or she
receives personalized service, he or she is more likely to come back to
that retailer for future purchases.
- More effective advertising. Retailers can analyze customer preferences
and consumer buying patterns to produce the most effective layout
location and price for each item in accurate recommendations for
newspaper advertising circulars.
- Optimized physical and electronic real estate. Retailers can use our
technology to analyze data to improve website layout and product mix. Our
solutions can also predict optimum product mixes on a store-by-store
basis, maximizing shelf and floor space dedicated to items most likely to
sell while limiting store space dedicated to lower profit and lower
volume items.
Our solutions enable effective real time personalization and precision
marketing by analyzing past and current customer behavior, including purchase
history, stated preferences, demographic information and Internet browsing
behavior. Our solutions use proprietary technology to predict the merchandise or
information a customer would be most interested in purchasing or viewing.
Our solutions:
- Deliver recommendations in real time. We design our solutions to meet
the real time requirements of large websites, call centers and retail
stores by delivering personalized recommendations during customer
interactions in less than a second. We believe that the response time for
producing recommendations must be virtually unnoticeable to customers for
optimal impact on customer transactions.
- Span multiple customer touch-points. We design our solutions to allow
multi-channel retailers to collect and centralize customer data on
software systems that support all their points of customer contact. This
enables retailers to identify a customer at each touch-point and deliver
a highly personalized experience. Currently, our GreenLight RDS, Net
Perceptions Recommendation Engine and Knowledge Refinery products can be
used across multiple touch-points. In addition, retailers can use our
E-commerce and Call Center solutions to share information from call
center and website interactions. We intend to release products in the
future that are readily applicable to multiple touch-points.
- Provide a measurable economic return to retailers. We design our
solutions to generate increased revenues and optimize marketing and
merchandising investments. Some of our solutions currently include
reporting capabilities that enable retailers to accurately measure the
effectiveness of our solutions.
- Integrate easily with existing software systems. We design our solutions
with a distributed architecture that is flexible enough to integrate with
new or existing industry platforms and applications as they evolve. In
addition, we have an engineering team dedicated to developing and
supporting the integration of our products with leading industry
platforms for e-commerce, call centers, campaign management systems and
retail systems.
- Satisfy the volume requirements of the largest Internet and multi-channel
retailers. Our real time personalization solutions are designed to
operate on the busiest and largest e-commerce websites and call centers.
Our precision marketing solutions are designed to process detailed
customer data from the largest retailers.
STRATEGY
Our objective is to extend our leadership position in providing real time
personalization and precision marketing solutions to Internet and multi-channel
retailers. Key elements of our strategy to achieve this objective include the
following:
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Maintain and extend our technology leadership
We intend to maintain and extend our technological leadership in real time
personalization and precision marketing through continued investment in the
development of our proprietary recommendation engine and other analytical
technologies. We believe that we are currently the technology leader in real
time personalization because of the accuracy, real time functionality,
scalability and ease of integration of our products. We intend to maintain an
open architecture so that our products will continue to integrate with major
platforms and technologies as they evolve.
Expand our application service provider offerings
In addition to licensing our software directly to end-users, we offer some
of our solutions on a hosted basis, operated on our own servers over the
Internet for a fee. We intend to increase the number of solutions offered in
this fashion and to offer these solutions through third-party Internet-based
application service providers. We believe that the application service provider
option will be attractive to some of our existing customers and to new customers
that choose not to devote resources to hosting our solutions themselves.
Broaden distribution channels
We intend to expand our indirect distribution channels by recruiting
additional resellers, systems integrators and original equipment manufacturers.
Over time, we expect that our indirect sales will increase as a percentage of
our total sales. We believe that designing our products to interface with the
products of leading vendors of website, call center, marketing campaign
management and point of sale software will make our products more attractive to
resellers, systems integrators and original equipment manufacturers.
Leverage technology investments into new applications
We have leveraged our investment in our proprietary recommendation and
analytic engines into additional industry specific software solutions. For
example, during 1999, we began shipping our knowledge management and marketing
campaign solutions, which were developed from our core real time personalization
technology, and our GreenLight Ad and GreenLight Go! products, which were
developed from our core Knowledge Refinery technology. We intend to continue to
leverage our technology into complementary and new applications.
Expand service offerings
We provide our customers with a comprehensive set of services, including
training and consulting services, software updates, documentation updates,
telephone support and Web-based support. We intend to continue to increase the
value of our solutions to customers by offering additional and improved
professional services. We believe the relationships developed with our customers
by providing services are critical to understanding customer needs and designing
our solutions to satisfy these needs.
Continue to build our international presence
We intend to expand our international presence to address the global
adoption of the Internet and international demand for real time personalization
and precision marketing software solutions. We believe that international
markets present an attractive growth opportunity and that an expanded presence
in international markets will enhance our long-term competitive position in
these regions. We intend to increase our international sales capabilities by
developing a larger direct sales and support presence in selected European and
Asian markets, adding more international distributors and developing localized
versions of certain products.
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PRODUCTS
We offer three principal product lines: commerce solutions, knowledge
management solutions, and products for original equipment manufacturers.
Commerce solutions
Our commerce solutions products are designed to solve specific business
problems for Internet and multi-channel retailers. Each of these products
incorporates our core technologies and has been designed to extract data from
other software systems. Our commerce solutions include the following products:
Net Perceptions for E-commerce. Net Perceptions for E-commerce allows
on-line retailers to create a personalized shopping experience for their
customers. Net Perceptions for E-commerce can be used to dynamically predict
which products to recommend to each customer browsing an electronic commerce
site, based on past and current customer behavior, including purchase history,
stated preferences and Internet browsing behavior.
In the fourth quarter of 1999, we began shipping Version 5.0 of Net
Perceptions for E-commerce, which includes the following enhanced features:
- Net Perceptions Personal Shopper. Net Perceptions Personal Shopper
provides a set of capabilities used to dynamically tailor recommendations
based on the shopping patterns of a customer at a given point in time.
- Net Perceptions Smart Merchant. Net Perceptions Smart Merchant allows
merchants to control the delivery of personalized recommendations to
better accomplish business objectives such as clearing overstock
situations, allocating selling opportunities to specific product
categories, or delivering unique buying opportunities to top customers.
- Net Perceptions Decision Support. Net Perceptions Decision Support is a
reporting and analysis module that allows retailers to evaluate the
effectiveness of their marketing strategies and adjust those strategies
as needed.
Net Perceptions for Call Centers. Net Perceptions for Call Centers allows
retailers that use call centers to recommend products to customers using real
time personalization. Net Perceptions for Call Centers can be used to create
product recommendations that take into account the context of the current call
while building on customers' past interactions with the call center, including
past purchases, customer inquiries and solicited preference information. We
believe that Net Perceptions for Call Centers is more powerful than a
traditional cross-sell table because the recommendations are tailored to each
individual customer in real time.
Net Perceptions for Call Centers can be integrated with other call center
systems including:
- the inventory database, so only products with sufficient inventory levels
are recommended;
- the product database, so recommendations can be delivered with additional
information about the products; and
- the pricing database, so only products with certain margins or prices are
recommended.
In the fourth quarter of 1999, we introduced Net Perceptions for Call
Centers Version 2.0, which contains the Sales Coach feature. Sales Coach is
designed to improve a customer service representative's ability to effectively
cross-sell and up-sell by presenting product recommendations in a graphical
interface, complete with an image of the item being sold and a sample selling
script.
Net Perceptions for Marketing Campaigns. Net Perceptions for Marketing
Campaigns is designed to manage and personalize outbound promotional electronic
mail campaigns. It analyzes past customer responses to direct marketing
campaigns and purchase data to select a personalized set of products to target
to each set of customers, or to select a set of customers to target for a
particular product. The set of
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products can then be recommended to the customers through promotional e-mail.
Net Perceptions for Marketing Campaigns includes a graphical user interface that
allows a marketer to construct and manage personalized e-mail campaigns. It
includes reporting features that show the effectiveness of each campaign. We
believe that the ability of the recommendation engine to better tailor message
content to the recipient on a one-to-one basis will yield higher response rates
per mailing than other methods currently employed.
GreenLight Ad. GreenLight Ad uses sophisticated analytical techniques to
help retailers maximize the return they receive from newspaper circular
advertising. Many retailers spend tens or even hundreds of millions of dollars
on this form of mass advertising. GreenLight Ad is designed to increase
advertising effectiveness by recommending which items should be advertised, how
much space should be allocated to each item, where each item should be placed
and at what price each item should be offered. By analyzing the resulting
item-level sales data across the retail chain and contrasting it to a baseline
reference point, GreenLight Ad provides retailers with the empirical data they
need to make better ad item selection decisions and substantially improve the
return on their advertising investment.
GreenLight Go! GreenLight Go! provides on-line retailers with a detailed
assessment of how customers are shopping on their websites. It identifies
different buying patterns among visitors to a site, which products influence
which buyers, which products drive the most profitable visits, which items
create the greatest change in rate of sales and which external sites refer the
most profitable customers. We offer GreenLight Go! as an application service
provider so that our customers can gain access to this information with a
minimum of effort and at a lower price than purchasing software with equivalent
capabilities.
GreenLight RDS. GreenLight Retail Discovery Suite is a strategic reporting
and analysis solution that helps retailers understand customer purchase behavior
across all customer touch-points. GreenLight RDS is based on a scalable data
collection and analysis platform that is capable of performing powerful data
analysis in a timely fashion for the largest retail operations. Retailers use
the results provided by GreenLight RDS to understand the relationship between
their products, customers and promotional tactics at a variety of levels.
Examples of such relationships include: which products are purchased most often
by the most profitable customers, which products drive the most related item
sales and which promotions yield the most long-term customers.
Knowledge management solutions
Our current knowledge management offering is Net Perceptions for Knowledge
Management, which applies our real time personalization capabilities to
corporate intranets. Net Perceptions for Knowledge Management integrates with
existing information management systems -- such as search engines, document
management systems, Lotus Notes and the Web -- to track the everyday user
interactions on these systems. Using this interaction information, Net
Perceptions for Knowledge Management can automatically locate documents
containing relevant information for each user. It also enables employees to
locate other people with knowledge and interest in areas of specific interest.
Net Perceptions for Knowledge Management is designed to improve employee
productivity by reducing time spent searching for information, recreating
research already performed by others within the firm as well as creating better
cross-functional sharing of information driven by employees linking up with
others in different parts of the organization that possess relevant expertise.
Products for original equipment manufacturers
Net Perceptions Recommendation Engine. The Net Perceptions Recommendation
Engine is offered to companies interested in adding our real time
personalization capabilities to their existing applications. It offers real time
personalization capabilities similar to those that underlie our Net Perceptions
for E-commerce, Call Centers, Marketing Campaigns and Knowledge Management
offerings. We license the Net Perceptions Recommendation Engine separately to
original equipment manufacturers who may already have applications that overlap
with some of the capabilities in our
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offerings or who will apply the functionality of the recommendation engine in
markets for which we do not have specific solutions. For example, customers have
incorporated the Net Perceptions Recommendation Engine into content-based
applications, for helping customers find the news and information in which they
are most interested.
Knowledge Refinery. The Knowledge Refinery is the scalable data processing
and analysis engine that underlies our GreenLight family of products. It is
capable of collecting and transforming large amounts of information into a
format suitable for analysis. It also contains a suite of analytical modules
that create models to identify the following information:
- frequent and significant customer purchase patterns;
- print advertising return on investment;
- customer value over time; and
- customer segments with similar spending patterns, item purchase patterns
and demographic or lifestyle characteristics.
SERVICES
Our professional services organization provides consulting services,
education and training and customer support. We believe that providing a high
level of customer service and technical support is critical to the satisfaction
of our customers and our own success. As of March 15, 2000, our professional
services staff consisted of 64 employees, including employees of recently
acquired Knowledge Discovery One.
Professional services
We offer a variety of professional services that are delivered either by
our specialists or through one of our partners trained in the use and
implementation of our products. These services include project management,
in-depth application design and implementation. Fees for professional services
are typically charged separately from our software license fees. We believe
consulting services are strategically valuable to our customers because they
provide customers with a source of technical and personalization expertise to
support the timely and efficient implementation of our products.
Education and training
We offer several education and training programs to our customers. Training
classes are offered at our offices in Minneapolis, Minnesota; San Francisco,
California; New York, New York; Austin, Texas and Berkshire, United Kingdom. We
also provide training at our customers' facilities upon their request. Fees for
education and training services are typically charged separately from our
software license fees.
Customer support
We provide our customers with an array of support services, including
telephone support, Web-based support and updates to our products and
documentation. Our Web-based support is available 24 hours a day and provides
answers to frequently asked questions, technical advice and an area for
downloading product and documentation updates. We enter into maintenance and
support contracts separate from our product license agreements. Generally, fees
are approximately 15% of the license fees for the associated software product.
These contracts are renewable for an annual fee typically equivalent to 15% of
the current list price of the software licensed by the customer.
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TECHNOLOGY
Real time recommendation engine
Our real time recommendation engine is the foundation of our real time
personalization solutions. Our platform is designed to integrate easily and
effectively with external systems, such as website, call center, marketing
campaign management, retail and customer management software. Our platform is
designed to provide accurate customer recommendations and to exploit the
performance and scalability advantages of modern, multiple-processor, shared
memory computers.
The platform contains the recommendation engine, a database of customer
preferences and an application programmer's interface. The customer preference
database is a specially structured database in a commercial database management
system, such as the Microsoft SQL server, IBM DB2 or Oracle databases. Vertical
applications are built on the platform to leverage the technology investment.
The customer preference database stores customer preference data used by
the recommendation engine to produce recommendations. These data may include
customer purchasing behavior, statements of preference made by the customer and
demographic information about the customer. The preference database may also
contain information supplied by a marketer, such as groups of products the
marketer explicitly wants to be recommended together or products that are
substitutes for one another. The recommendation engine applies a series of
predictive algorithms to this data to produce recommendations in real time.
An application programmer's interface provides the link between the
recommendation engine and other applications and allows applications such as Web
servers and call center systems to "ask questions" of the recommendation engine,
which provides answers to enhance the interaction with customers.
The core predictive technology for our real time personalization is
collaborative filtering. Collaborative filtering compares selected attributes of
a customer's preferences, opinions and behavior to the attributes of large
customer populations. Groups of customers exhibiting attributes similar to the
specific customer are analyzed to determine the likely preferences of the
customer.
Collaborative filtering is driven by information about customer
preferences. This customer preference information is used to identify a group or
"neighborhood" of other customers who share preferences with the customer in
question. The collective preferences of the neighborhood are used to predict
unknown preferences of the customer in question, such as which products the
customer is most likely to purchase.
The Knowledge Refinery analytic engine
The Knowledge Refinery is an integrated application framework that provides
a foundation for advanced decision support capability for the retail
environment, and is the basis of our GreenLight family of products.
The Knowledge Refinery combines and integrates technology from the
following areas:
- machine learning and artificial intelligence;
- pattern detection and analysis;
- statistical and information theoretical analysis;
- relational on-line analytical processing;
- data modeling and simulation; and
- data warehousing.
The Knowledge Refinery is designed to be:
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- scalable -- it can be applied to a wide range of data volumes, on
hardware and database platforms with varied capacity;
- platform-neutral -- it can be deployed on a wide variety of platforms
independent of processor characteristics, database characteristics or
distribution characteristics; and
- highly flexible -- it incorporates a metadata component that contains an
extensible logical application data model, definitions of process and workflow,
business rules and application logic.
The Knowledge Refinery is based on a data-flow, pattern-oriented
architecture. The "data-flow" model allows for straightforward parallel and
distributed operation of the Knowledge Refinery. The pattern-oriented model
provides a high degree of modularity, flexibility and configurability. The
Knowledge Refinery components are based on neural networks, pattern detection
algorithms and supporting modeling techniques.
STRATEGIC ALLIANCES
We are pursuing marketing, implementation and indirect sales channel
alliances with electronic commerce software vendors, call center software
vendors, point-of-sale system software vendors, outbound e-mail service
providers, systems integrators, professional services organizations and
application service providers. These alliances are intended to increase our
geographic sales coverage worldwide and address new markets. In addition, these
alliances allow us to provide our customers with access to additional resources
to design, install and customize our solutions. As of December 31, 1999, most of
these alliances were in an early phase of development. Since inception through
December 31, 1999, sales to resellers, systems integrators and original
equipment manufacturers accounted for approximately 10% of our total revenues.
As part of our strategy, we have formed marketing and distribution
alliances with certain Internet software vendors. For example, we have entered
into an original equipment manufacturer relationship with Vignette Corporation.
Vignette is a provider of Internet relationship management software products and
services. In addition, we have entered into reseller agreements with, among
others, IBM, Broadvision and Commercialware. These relationships enable us to
broaden the distribution of our products and provide complementary functionality
to our applications. In July 1999, we entered into a joint venture with Trans
Cosmos, NTT Software and Toyo Information Systems to form Net Perceptions Japan.
Net Perceptions Japan will serve as our exclusive distribution channel for our
Japanese language product offerings in the Japanese marketplace.
We have also entered into joint marketing relationships with, among others,
Oracle, net.Genesis and Verbind. Under these joint marketing arrangements, each
party agrees to provide the other with reasonable marketing and sales
assistance. In some cases, these agreements also provide for compensation for
lead referrals. Our marketing and distribution alliances are not exclusive and
some of our partners provide similar products and services to other companies.
In addition, we have entered into interface agreements with various software
vendors in markets we currently serve and in markets where we do not have a
current application. Under these interface agreements, the parties agree to
develop and support the integration of our software offerings into our partners'
software offering.
During 1999, we also entered into an agreement with IBM to port certain of
our products to AIX and DB2 and we recently entered into an agreement with
Hewlett Packard to port the Net Perceptions Recommendation Engine to HP UX. We
also intend to expand the professional services offered to our customers by
enhancing existing, and developing new, relationships with systems integrators
and professional service organizations.
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CUSTOMERS
As of March 15, 2000, we had licensed products to more than 170 customers,
including customers of KD One. These customers are in various stages of
deployment of our products. The following is a representative list of our
customers that accounted for at least $100,000 in revenues to us during the
period from our inception to March 15, 2000.
BOOKS/MOVIES/MUSIC
BarnesandNoble.com
Bertelsmann
BMG Online
CDNOW
Christian Book Distributors
ClickRadio
DVD Express
Follett Higher Education Group
HMV Media Group
Launch Media
Musician's Friend
Tower Records
Trans World Entertainment
Virgin Online Megastore
COMPUTER/ELECTRONICS
800.com
Egghead.com
Electronic Boutique
Micron Electronics
Programmer's Paradise.com
ShopNow.com
ZoneTrader.com
GENERAL RETAIL
Eckerd
Fingerhut
Great Universal Stores
Hudson's Bay Company
imall.com
J.C. Penney
LetsBuyIt.com
Netmarket Group
Rite Aid
Skymall
Value America
Walgreens
GROCERIES/FOOD
AllRecipes.com
Dean & Deluca
HomeGrocer
Kraft Foods
Pink Dot
Wine.com
SPECIALTY RETAIL
Art.com
Ashford.com
eToys.com
Furniture.com
Garden.com
KBkids.com
Lowe's
Mattel
OurHouse
SelfCare
The Children's Place
tpuppy.com
ZoneNetwork.com
OTHER
ACS Systems
Bid.com
Carlson Companies
Libro AG
miClub.com
MPC Limited
National Computer Board
Procter & Gamble
Publisher's Clearing House
Thompson Direct
SALES AND MARKETING
We market our software and services through our direct sales organization
and through indirect distribution channels, including resellers, systems
integrators and original equipment manufacturers. We have sales offices in
Minneapolis, Minnesota; San Francisco, California; New York, New York; Austin,
Texas and Berkshire, United Kingdom.
As of March 15, 2000, our direct sales organization, including KD One
employees, had 63 sales representatives, managers, pre-sales engineers,
telemarketing and support personnel. We intend to increase our North American
sales force as demand requires by opening additional field sales offices. We
recently established a sales force dedicated to the development of the indirect
sales channel for our products. As of March 15, 2000, our indirect sales
organization consisted of 10 employees. Additionally, we intend to expand our
presence in international markets by continuing to build our international sales
force. We believe that this will be necessary in order to grow our revenues. We
have started to localize some of our products for sale into the Japanese market
and we may need to localize our products in other markets. However, we have
limited experience in developing localized versions of our products and
marketing and distributing our products internationally. We may not be
successful in international markets.
Our sales organization is complemented by distribution partners, including
resellers, systems integrators and original equipment manufacturers. These
partners license our products at a discount for
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re-licensing and may provide training, support and customer service to
end-users. In 1999, our distribution partners were responsible for 12% of our
product revenues. We anticipate that the percentage of our total revenues
derived from indirect sales will increase in the future. We expect that a
significant increase in our indirect sales as a percentage of revenues will
adversely affect our average selling prices and gross margins due to the lower
unit prices that we receive when selling through indirect channels. In addition,
we expect that indirect sales will generate less services revenues than direct
sales because our partners generally provide support services to their
customers.
As of March 15, 2000, our marketing organization consisted of 20 employees,
including KD One employees, primarily engaged in marketing research, producing
marketing materials, product planning and management, managing press coverage
and other public relations, identifying potential customers, attending and
exhibiting at trade shows, seminars and conferences, creating presentations and
sales tools, establishing and maintaining close relationships with industry
analysts and maintaining our website. In addition, we rely on various outside
consultants to supplement our marketing organization for various public
relations and market research requirements.
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for product
architecture, core technology, product testing and quality assurance, writing
product documentation and expanding the ability of our products to operate with
the leading hardware platforms, operating systems, database management systems
and industry platforms. In addition, this organization supports some pre-sale
and customer support activities. Our research and development organization is
divided into teams consisting of development engineers, quality assurance
engineers and technical writers.
As of March 15, 2000, our research and development staff consisted of 87
employees, including KD One employees. Our total expenses for research and
development, not including those of KD One, were $1.4 million in 1997, $2.3
million in 1998 and $8.2 million in 1999. We believe that research and
development expenses will continue to increase in the future. To date, our
development efforts have not resulted in any capitalized software development
costs.
We believe that our future performance will depend in large part on our
ability to maintain and enhance our current product line; develop new products
that achieve market acceptance; maintain technological competitiveness; and meet
an expanding range of customer requirements.
COMPETITION
The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of commerce solutions, we
primarily encounter competition from Accrue Software, Andromedia (a division of
Macromedia), Broadbase, DataSage (recently acquired by Vignette), the EHNC
division of HNC Software, E.piphany and Personify. Microsoft has acquired
FireFly Network, a company with collaborative filtering technology and, as a
result, we expect that we may encounter competition from Microsoft in the
future.
In the marketing of Net Perceptions for Marketing Campaigns, we primarily
encounter competition from Exchange Applications, Annuncio Software, Prime
Response and Rubric, which was recently acquired by Broadbase. We expect that if
we are successful in our strategy to leverage our technology into new vertical
markets, we will encounter many additional, market-specific competitors. For
example, RightPoint Software, recently acquired by E.piphany, is an established
firm serving call centers that we expect to increasingly encounter in the
marketing of Net Perceptions for Call Centers. In addition, because there are
relatively low barriers to entry in the software market, we expect additional
competition from other established and emerging companies as the Internet
software market continues to develop and expand. We also expect increasing
competition from network-based providers of personalization technology such as
TriVida, which was recently acquired by Be Free, and Cogit.
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In the marketing of our GreenLight RDS product, we primarily encounter
competition from Brio, Seagate, Comshare, IBM and SAS.
In the marketing of our Knowledge Management product, we primarily
encounter competition from Orbital Software and Tacit Knowledge Systems.
We believe that the principal competitive factors affecting our market
include core technology, product features, product quality and performance,
customer service and price. Although we believe that our products currently
compete favorably with respect to such factors, our market is relatively new and
is rapidly evolving. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of software industry consolidations. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share. We
may not be able to compete successfully against current and future competitors.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We are a technology company. Our success depends in large part on
protecting our intellectual property, which is our most important asset. We rely
on a combination of trademark, copyright, patent and trade secret laws to
protect our rights in our technology. We license our software and require our
customers to enter into license agreements, which impose restrictions on our
customers' ability to utilize the software. In addition, we seek to avoid
disclosure of our trade secrets, including but not limited to requiring those
persons with access to our proprietary information to execute confidentiality
agreements with us and restricting access to the source code for our software.
As of March 15, 2000, we had 13 pending United States patent applications.
We also have license rights to two issued United States patents and one allowed
United States patent application from the University of Minnesota. We have four
pending foreign patent applications, but we have no issued foreign patents. It
is possible that no patents will issue from the currently pending patent
applications. It is also possible that our current patents or potential future
patents may be found invalid or unenforceable, or otherwise be successfully
challenged. It is also possible that any patent issued to us may not provide us
with any competitive advantages. Moreover, we may not develop future proprietary
products or technologies that are patentable, and the patents of others may
seriously limit our ability to conduct our business. In this regard, we have not
performed any comprehensive analysis of patents of others that may limit our
ability to conduct our business.
Our efforts to protect our proprietary rights may not succeed. Copyright
and trade secret laws afford only limited protection for our proprietary rights
in our software, documentation and other written materials. Unauthorized parties
may be able to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our
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proprietary rights may not be adequate and our competitors may independently
develop similar technology, duplicate our products or design around patents
issued to us or our other intellectual property. We may not be able to detect
infringement and, as a result, our competitive position in the market may
suffer.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. We have, from time to time, received
claims that we are infringing third parties' intellectual property rights. It is
possible that in the future third parties may claim that our current or
potential future products infringe their intellectual property rights. We expect
that software companies such as Net Perceptions will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays, or require us to
enter into royalty or licensing agreements in order to secure continued access
to required technology. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us, or at all. Claims of intellectual property
infringement also may require us to pay significant damages or subject us to an
injunction against the use of our products. Any successful claim of intellectual
property infringement against us could have an immediate and significant impact
on our ability to carry on our business and market our products.
CERTAIN LEGAL AND REGULATORY MATTERS
Typically, our products capture user preference and profile information
each time a user interacts with the application utilizing our products or
volunteers information in response to survey questions. Privacy concerns may
cause users to resist providing the personal data necessary to support this
profiling capacity. Our customers generally have implemented security measures
to protect customers' data from unauthorized disclosure or interception by third
parties. However, the security measures may not be effective against all
potential security threats. If a beach of customer data security were to be
publicized, our products may be perceived as less desirable, and our future
sales negatively impacted. More importantly, even the perception of privacy and
security concerns, whether or not valid, may indirectly inhibit market
acceptance of our products. In addition, legislative or regulatory requirements
may heighten such concerns if users must be notified that the data captured
after these interactions may be sued by marketing entities to direct product
promotion and advertising to that user. We are not aware of any such legislation
or regulatory requirements currently in effect in the United States. However,
various other countries and political entities, such as the European Economic
Community, have adopted these types of legislation or regulatory requirements.
The federal and state governments may adopt similar legislation or regulatory
requirements. If user privacy concerns are not adequately addressed or if
restrictive legislation is adopted in the United States, our business could be
seriously harmed and we could experience increased operating losses.
Our products can use data captured with "cookies" to track demographic
information and user preferences. A "cookie" is a bit of information keyed to a
specific server, file pathway or director location that is stored on a computer
user's hard drive, possibly without the user's knowledge. Some countries have
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If laws of this
type are passed, our business could be adversely impaired and we could suffer
increased operating losses. In addition, Internet users can, if they choose,
configure their Web browsers to limit the collection of user data. Should many
Internet users choose to limit the collection of user data in this matter, or if
major countries or regions adopt legislation or other restrictions on the use of
customer data, our software would be less useful to our customers and market
acceptance of our products could be adversely impacted.
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EMPLOYEES
As of March 15, 2000, including KD One employees, we had a total of 328
employees, including 99 in sales and marketing, 116 in research and development,
64 in customer support and 49 in administration. All of these employees were
located in North America, with the exception of 12 employees, 11 of whom were
located in Europe and one of whom was located in Asia. None of our employees is
represented by a collective bargaining agreement, nor have we experienced any
work stoppage. We consider our relations with our employees to be good.
ITEM 2. PROPERTIES
The following table sets forth certain information about our principal
executive offices, as well as our other facilities. We lease all of our existing
facilities. We believe that our existing facilities are adequate for our current
needs and that suitable additional or alternative space will be available in the
future on commercially reasonable terms. We are in the process of negotiating a
new lease for 110,000 square feet to replace our existing facilities in
Minneapolis, which we currently expect to begin in July 2000.
LOCATION SQUARE FOOTAGE LEASE EXPIRATION DATE
- -------- -------------- ---------------------
Minneapolis, Minnesota
Principal office.................................... 28,000 December 2003
Administrative facility............................. 9,000 September 2001
Austin, Texas......................................... 14,000 January 2004
Richardson, Texas..................................... 2,000 February 2001
New York, New York.................................... 6,500 September 2006
San Francisco, California............................. 5,000 August 2004
Berkshire, United Kingdom............................. 8,000 March 2010
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "NETP" since April 23, 1999. The following table sets forth, for the
periods indicated, the high and low sale prices per share of our common stock as
reported on the Nasdaq National Market.
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------ ------
1999
Second Quarter (from April 23, 1999)........................ $35.00 $15.00
Third Quarter............................................... $23.50 $ 9.75
Fourth Quarter.............................................. $43.13 $14.75
2000
First Quarter (through March 23, 2000)...................... $66.50 $35.94
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On March 23, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $45.38 per share. As of March 15, 2000, there were
318 stockholders of record registered with our transfer agent, Norwest Bank
Minnesota, N.A.
We have not declared or paid any cash dividends on our capital stock since
our inception and do not intend to pay any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any, based upon our financial condition, results of
operations, capital requirements, general business condition and other factors
that the board deems relevant. Therefore, you will not receive any funds without
selling your shares.
On August 17, 1999, we issued, in reliance on Section 4(2) of the
Securities Act of 1933 as a transaction by an issuer not involving any public
offering, 10,565 shares of common stock to Silicon Valley Bank pursuant to the
net exercise of an outstanding warrant.
ITEM 6. SELECTED FINANCIAL DATA
In the tables below we provide you with selected historical financial data
of Net Perceptions, 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 three years in the period ended December 31, 1999, and the balance sheet
data at December 31, 1998 and 1999, 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 period from July 3, 1996
(inception) to December 31, 1996, and the balance sheet data at December 31,
1996 and 1997 are derived from audited financial statements not included in this
report.
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PERIOD FROM
JULY 3, 1996
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------
1996 1997 1998 1999
-------------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product................................. $ -- $ 284 $ 3,955 $ 11,408
Service and maintenance................. 4 33 522 3,721
------- ------- ------- --------
Total revenues....................... 4 317 4,477 15,129
------- ------- ------- --------
Cost of revenues:
Product................................. -- 14 52 286
Service and maintenance................. 2 30 373 2,735
------- ------- ------- --------
Total cost of revenues............... 2 44 425 3,021
------- ------- ------- --------
Gross margin.............................. 2 273 4,052 12,108
------- ------- ------- --------
Operating expenses:
Sales and marketing..................... 454 3,063 4,980 12,099
Research and development................ 378 1,372 2,314 8,194
General and administrative.............. 210 585 1,424 3,725
Stock compensation expense.............. -- -- 366 1,495
Amortization of intangibles............. -- -- -- --
------- ------- ------- --------
Total operating expenses............. 1,042 5,020 9,084 25,513
------- ------- ------- --------
Loss from operations...................... (1,040) (4,747) (5,032) (13,405)
Other income, net......................... 13 25 64 1,366
------- ------- ------- --------
Net loss.................................. $(1,027) $(4,722) $(4,968) $(12,039)
======= ======= ======= ========
Basic and diluted net loss per common
share................................... $ (3.40) $ (3.01) $ (1.40) $ (0.78)
======= ======= ======= ========
Shares used in computing basic and diluted
net loss per share(1)................... 302 1,569 3,546 15,402
======= ======= ======= ========
Pro forma basic and diluted net loss per
share................................... $ (0.64)
========
Shares used in computing pro forma basic
and diluted net loss per share(1)....... 18,851
========
DECEMBER 31,
-------------------------------------
1996 1997 1998 1999
------ ------ ------ -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $3,821 $4,846 $ 972 $36,854
Working capital................................. 3,554 4,442 468 37,372
Total assets.................................... 4,099 5,575 5,637 58,748
Long-term liabilities, net of current portion... 87 345 538 707
Total stockholders' equity...................... 2,950 3,879 421 48,388
- -------------------------
(1) See Note 2 of the notes to Net Perceptions' financial statements for an
explanation of the methods used to determine the number of shares used in
computing net loss per share data.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and notes thereto appearing elsewhere in this
report. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results may differ
substantially from those anticipated in these forward-looking statements.
OVERVIEW
Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
Our solutions are designed to help retailers understand customers individually,
optimize product assortments, prices and inventories and offer the right product
to the right customer at the right price.
Through December 31, 1999, we focused on providing solutions to electronic
commerce retailers, and most of our product revenues through December 31, 1999
were attributable to our Net Perceptions for E-commerce product. In 1999, we
expanded our product suite by introducing new applications for Internet sales
channels and other markets, including Net Perceptions for Marketing Campaigns,
Net Perceptions for Call Centers and Net Perceptions for Knowledge Management.
In addition, in 1999, we introduced the Net Perceptions Recommendation Engine,
which is a product designed for original equipment manufacturers.
We incorporated in Delaware in July 1996 and shipped our initial product in
January 1997. In the period from our inception through 1999, we expanded our
organization by hiring personnel in key areas, particularly marketing, sales and
research and development. We grew from 34 employees at December 31, 1997, to 70
employees at December 31, 1998 and to 213 employees at December 31, 1999.
Prior to the third quarter of 1999, substantially all of our product
revenues were attributable to Net Perceptions for E-commerce and the Net
Perceptions Recommendation Engine and their predecessor products. In the third
quarter of 1999, we recognized initial product revenues from our Net Perceptions
for Call Centers and Net Perceptions for Knowledge Management products. In 2000,
we expect to recognize initial product revenues from Net Perceptions for
Marketing Campaigns, although we anticipate Net Perceptions for E-commerce to
continue to account for a substantial portion of our revenues in this period.
We sell our products and services worldwide through a direct sales force,
original equipment manufacturers and resellers. Sales derived through indirect
channels accounted for approximately 12% of our total revenues in 1999 and 8% in
1998. We are seeking to increase sales derived through indirect channels as a
percentage of total revenues. Sales through indirect channels have lower average
selling prices and gross margins than direct sales. As a result, we expect that
our gross margins on product sales will decline if sales through indirect
channels increase.
We license our products under various pricing plans, such as per stored
profile, per user, per e-mail, per CPU, per site and per enterprise. We grant
licenses on both a term and perpetual basis. License fees for our products range
from $50,000 to several hundred thousand dollars. The price of our annual
maintenance contracts is based on a percentage of the related product license
price and is generally paid in advance. Professional service fees for
implementation and training are generally priced on a per hour or per class
basis.
We recognize revenues in accordance with the Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-4,
"Deferral of the Effective Date of a Provision of Statement of Position 97-2."
We derive revenues from software licenses, software maintenance and professional
services. Maintenance includes telephone and Web-based technical support, bug
fixes and
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rights to unspecified upgrades on a when-and-if available basis. Professional
services include implementation, training and consulting. In software
arrangements that include rights to multiple software products, specified
upgrades, maintenance or services, we allocate the total arrangement fee among
each deliverable based on the relative fair value of each of the deliverables
determined based on vendor-specific objective evidence. In software arrangements
in which we do not have vendor-specific objective evidence, we defer revenue
until the earlier of when vendor-specific objective evidence is determined for
all elements or when all elements have been delivered. We recognize revenues
from license fees when persuasive evidence of an agreement exists, delivery of
the product has occurred, no significant company obligations with regard to
implementation remain, the fee is fixed or determinable and collection is
probable. If the fee due from the customer is not fixed or determinable, we
recognize revenues as payments become due from the customer. If we do not
consider collection to be probable, then we recognize revenues when the fee is
collected. We recognize revenues allocable to maintenance on a straight-line
basis over the periods in which it is provided. We evaluate arrangements that
include professional services to determine whether those services are essential
to the functionality of other elements of the arrangement. When professional
services are considered essential, we recognize revenues from the arrangement
using contract accounting, generally on a percentage of completion basis. When
we do not consider the professional services to be essential, we recognize the
revenues allocable to the services as they are performed.
We have sustained losses on a quarterly and an annual basis since
inception. As of December 31, 1999, we had an accumulated deficit of $22.8
million. Our net loss was $12.0 million in 1999, $5.0 million in 1998 and $4.7
million in 1997. These losses resulted from significant costs incurred in the
development and sale of our products and services. We expect to experience
significant increases in our operating expenses for the foreseeable future,
particularly research and development and sales and marketing expenses.
Accordingly, we anticipate that our operating expenses, as well as planned
capital expenditures, will constitute a material use of our cash resources. We
also expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and these losses may increase
significantly from current levels. We do not expect to achieve profitability in
2000 or 2001.
Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future performance.
Our prospects must be considered in light of the risks, expenses and
difficulties encountered by companies at an early stage of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties. We have experienced
significant percentage growth in revenues in recent periods; however, we do not
believe that prior growth rates are sustainable or indicative of future growth
rates.
THE KD ONE ACQUISITION
We acquired Knowledge Discovery One, Inc. in February 2000, as a result of
which KD One is now our wholly-owned subsidiary. In connection with the
transaction, we acquired all of the outstanding shares of KD One in exchange for
1,969,630 shares of our common stock. In addition, options of KD One were
converted into options to purchase approximately 268,297 shares of our common
stock.
KD One was incorporated in Delaware in December 1996 and was in development
stage from inception through December 1997. KD One shipped its first products in
May 1998. KD One had total revenues of $3.5 million in 1999 and $3.2 million in
1998. KD One's cost of revenues increased to $2.8 million in 1999 from $2.0
million in 1998, and its operating expenses increased to $8.8 million in 1999
from $5.7 million in 1998. As of December 31, 1999, KD One had accumulated net
losses, excluding accretion on redeemable convertible preferred stock, of $16.2
million since inception. KD One grew to 51 employees as of December 31, 1999
from 38 employees as of December 31, 1998.
We expect to incur additional expenses across all departments to build and
integrate our direct sales force and our professional service organization,
increase our indirect sales activities, increase our investment in the
development of technology and expand general and administrative infrastructure.
We
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expect that these investments will cause all operating expense categories to
increase in absolute dollars and could result in an increase in expense
categories as a percentage of revenues. In addition, this expansion will place
significant demands on our management and operational resources.
We will account for the KD One acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of KD One will be
allocated to the assets and liabilities that we acquired from KD One. As a
result, we will record non-cash charges against our future operating results,
which will adversely affect our reported financial results. If we had completed
the acquisition on December 31, 1999, we would have recorded approximately
$117.4 million in goodwill and other intangible assets in connection with the
acquisition. We would have recorded an amortization expense of $26.2 million in
2000, $30.0 million in 2001, $30.0 million in 2002, $30.0 million in 2003 and
$1.2 million in the first quarter of 2004. The actual amount of goodwill and
other intangible assets will be higher due to KD One's net losses between
December 31, 1999 and the closing of the acquisition on February 14, 2000.
RESULTS OF OPERATIONS
The following table sets forth certain items in our statement of operations
expressed as a percentage of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ---- ----
Revenues:
Product.............................................. 90% 88% 75%
Service and maintenance.............................. 10 12 25
------ ---- ----
Total revenues.................................... 100 100 100
Cost of revenues:
Product.............................................. 4 1 2
Service and maintenance.............................. 10 8 18
------ ---- ----
Total cost of revenues............................ 14 9 20
------ ---- ----
Gross margin........................................... 86 91 80
Operating expenses:
Sales and marketing.................................. 966 111 80
Research and development............................. 433 52 54
General and administrative........................... 185 32 25
Stock compensation expense........................... - 8 10
------ ---- ----
Total operating expenses.......................... 1,584 203 169
------ ---- ----
Loss from operations................................... (1,498) (112) (89)
Other income, net...................................... 8 1 9
------ ---- ----
Net loss............................................... (1,490)% (111)% (80)%
------ ---- ----
------ ---- ----
RESULTS OF OPERATIONS FOR 1999, 1998 AND 1997
REVENUES
Our revenues increased 238% to $15.1 million in 1999, from $4.5 million in
1998. During 1997, our software products were in the early stages of development
and total revenues were $317,000, consisting principally of product revenues.
The increase in total revenues is primarily the result of increased sales of our
cornerstone product, Net Perceptions for E-commerce. Revenues from our Net
Perceptions Recommendation Engine and the introduction in 1999 of two new
products, Net Perceptions for Call Centers and Net Perceptions for Knowledge
Management, also contributed to the increase in total revenues.
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Revenues from United States sales were $12.7 million in 1999, $3.9 million
in 1998 and $232,000 in 1997, or 84% of total revenues in 1999, 87% in 1998 and
73% in 1997. Revenues from international sales were $2.4 million in 1999,
$600,000 in 1998 and $85,000 in 1997, representing 16% of total revenues in
1999, 13% in 1998 and 27% in 1997. The majority of international sales to date
were made in Europe and Asia by our direct sales force located in the United
States and the United Kingdom. International sales are generally denominated in
United States dollars. Purchases by one customer represented 11% of our revenues
in 1999. During 1998, no single customer accounted for 10% or more of total
revenues. During 1997, two customers accounted for approximately 22% and 19% of
total revenues. We do not expect any single customer to account for 10% or more
of total revenues in 2000.
Product revenues. Product revenues increased 188% to $11.4 million in 1999
from $4.0 million in 1998. We currently derive the majority of our product
revenues from our Net Perceptions for E-commerce product. The growth of revenues
in absolute dollars is attributable to an increase in the average size of
license transactions recognized during the year, increased sales and marketing
efforts, specifically the expansion of our direct sales force, and increased
sales of our products. Product revenues from United States sales increased 178%
to $9.6 million in 1999 from $3.4 million in 1998, representing 84% of total
product revenues in 1999 and 87% in 1998. Product revenues from international
sales increased to $1.8 million in 1999, from $507,000 in 1998, or 16% of total
product revenues in 1999 and 13% in 1998. We anticipate that revenues from
product licenses will continue to represent a majority of our revenues in the
foreseeable future. In addition, we expect that prior percentage growth rates of
our product revenues will not be sustainable in the future.
Service and maintenance revenues. Service and maintenance revenues consist
primarily of professional and maintenance services. Our professional service
revenues include business consulting, implementation support and educational
services and are generally offered on a time and material basis. Maintenance
revenues are generally derived from annual service agreements and are recognized
ratably over the period of the agreement. Total service and maintenance revenues
increased 613% to $3.7 million in 1999 from $522,000 in 1998. Service and
maintenance revenues were 25% of total revenues in 1999 and 12% in 1998. During
1997, our company was in the early stages of development and our service and
maintenance revenues were $33,000.
Professional service revenues increased 750% to $2.3 million in 1999 from
$274,000 in 1998. Professional service revenues were nominal in 1997.
Professional service revenues were 63% of total service and maintenance revenues
in 1999, 52% in 1998 and 27% in 1997. The increase in professional service
revenues in 1999 is a result of higher business volumes and additional personnel
in our professional services group. Our professional service revenues as a
percentage of total revenues may decline to the extent our strategy of
developing alliances with systems integrators continues to expand.
Maintenance revenues increased 461% to $1.4 million in 1999 from $248,000
in 1998. Maintenance revenues were nominal in 1997. Maintenance revenues were
37% of total service and maintenance revenues in 1999, 48% in 1998 and 73% in
1997. The increase in maintenance revenues is a result of expanded software
sales and corresponding maintenance fees relating to a larger installed base of
software licenses. We expect our maintenance revenues to increase as a
percentage of total revenues in 1999 to the extent our installed license base
grows. Our maintenance revenues as a percentage of total revenues may continue
to increase as the installed license base increases.
COST OF REVENUES
Cost of product revenues. Cost of product revenues consists primarily of
the cost of royalties paid to third-party vendors, product media and
duplication, manuals, packaging materials and shipping expenses. Cost of product
revenues increased 450% to $286,000 in 1999 from $52,000 for 1998, representing
3% and 1% of the related product revenues. Cost of product revenues was $14,000
in 1997. The increase in cost of product revenues as a percentage of total
product revenues from 1998 to 1999 is attributable to increased royalties
payable to vendors. The increase in the absolute dollar amount of cost of
product revenues was due to higher volumes of product shipped. Because all
development costs
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incurred in the research and development of new software products and
enhancements to existing software products have been expended as incurred, cost
of product revenues includes no amortization of capitalized software development
costs. We believe that the cost of product revenues will increase in dollar
amounts and as a percentage of product revenues in the future.
Cost of service and maintenance revenues. Cost of service and maintenance
revenues consists primarily of personnel-related costs incurred in providing
telephone and Web-based support, professional and educational services to
customers. Cost of service and maintenance revenues increased 633% to $2.7
million in 1999, from $373,000 in 1998, representing 74% and 71% of the related
services and maintenance revenues. Cost of service and maintenance revenues was
$30,000 in 1997. The increase in cost of services and maintenance revenues in
absolute dollars and as a percentage of revenues is due primarily to recruiting
and training costs associated with increased personnel in our service
organization, as well as to increased costs for third-party contractors used to
staff consulting engagements. We believe that the cost of service and
maintenance revenues will increase in dollar amounts in the future as we expand
our service capacity to meet anticipated demand. In addition, cost of service
and maintenance revenues may vary significantly from quarter to quarter
depending upon the mix of services that we provide and the utilization rate of
our service personnel.
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, other employee related costs, commissions and other incentive
compensation, travel and entertainment and expenditures for marketing programs
such as collateral materials, trade shows, public relations and creative
services. Sales and marketing expenses were $12.1 million in 1999, $5.0 million
in 1998 and $3.1 million in 1997. Sales and marketing expenses increased 143%
from 1998 to 1999, and 63% from 1997 to 1998. Sales and marketing expenses were
80% of total revenues in 1999, 111% in 1998 and 966% in 1997. The overall
increase in sales and marketing expenses in absolute dollar amounts reflects the
cost of hiring additional sales and marketing personnel, developing and
expanding our sales and distribution channels, deploying new products and
expanding promotional activities. We believe that sales and marketing expenses
will continue to increase in absolute dollar amounts in the future as we
continue to expand our direct sales and marketing efforts for all of our product
lines.
Research and development. Research and development expenses consist
primarily of salaries, other employee related costs and consulting fees relating
to the development of our products. Research and development expenses were $8.2
million in 1999, $2.3 million in 1998 and $1.4 million in 1997. Research and
development expenses increased 254% from 1998 to 1999 and 69% from 1997 to 1998.
Research and development expenses were 54% of total revenues in 1999, 52% in
1998 and 433% in 1997. The increase in research and development expenses in
absolute dollars is primarily due to the cost of hiring additional research and
development personnel for the enhancement of existing products and the
development of new products. We believe that continued investment in research
and development is critical to attaining our strategic objectives and, as a
result, expect research and development expenses to increase in absolute dollars
in future periods.
General and administrative. General and administrative expenses consist
primarily of salaries, other employee related costs and professional service
fees. General and administrative expenses were $3.7 million in 1999, $1.4
million in 1998 and $585,000 in 1997. General and administrative expenses
increased 162% from 1998 to 1999, and 143% from 1997 to 1998. General and
administrative expenses were 25% of total revenues in 1999, 32% in 1998 and 185%
in 1997. The overall increase in general and administrative expenses in absolute
dollar amounts reflects the cost of hiring additional general and administrative
personnel, increased professional fees, additional provision for doubtful
accounts and additional infrastructure to support our expanded operations. We
expect to continue to add administrative staff to support broadened operations.
As a result, general and administrative expenses will increase in absolute
dollar amounts in the future.
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Stock compensation. Compensation charges related to granted stock options
were $1.5 million in 1999 and $366,000 in 1998. There were no compensation
charges related to stock options granted in 1997. These amounts represent the
difference between the exercise price of certain stock option grants and the
deemed fair value of the common stock at the time of the grants. Stock
compensation expense is recognized over the vesting period of the options, which
is generally four years. As a result, the recognition of stock compensation will
impact our reported results of operations through early 2003.
Other income, net. Other income, net consists of interest income, interest
expense, equity losses of a joint venture and other expense and was $1.4 million
in 1999, $64,000 in 1998 and $25,000 in 1997. Other income, net increased
substantially in 1999 due to interest income on the proceeds from our initial
public offering in April 1999.
PROVISION FOR INCOME TAXES
As of December 31, 1999, we had net operating loss carryforwards of
approximately $18.1 million available to reduce future taxable income expiring
at various dates beginning in 2011. In addition, as of December 31, 1999, we had
$140,000 of tax credit carryforwards expiring at various dates beginning in
2011. Under the provisions of the Internal Revenue Code, certain substantial
changes in our ownership may limit in the future the amount of net operating
loss and tax credit carryforwards that could be utilized annually to offset
future taxable income.
We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the realization of the future tax benefit is presently
not likely.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the sale
of equity securities, and to a lesser extent, loans and capital equipment
leases. At December 31, 1999, we had $36.9 million of cash, cash equivalents and
short-term investments, compared to $972,000 at December 31, 1998. Cash used in
operations was $10.2 million in 1999, $4.4 million in 1998 and $4.6 million in
1997. Cash used in operations resulted primarily from net losses and increases
in our accounts receivable, offset in part by the growth in accrued liabilities,
deferred revenues and non-cash expenses, including depreciation and stock
compensation.
We used $30.8 million net cash in investing activities in 1999 and $1.7
million in 1997. In 1998, net cash provided by investing activities was $3.0
million. Our investing activities consisted primarily of purchases and sales of
marketable securities and property and equipment. To date, we have not invested
in financial instruments that involve a high level of complexity or risk. We
expect that, in the future, cash in excess of current requirements will be
invested in investment grade, interest bearing securities.
Net cash provided by financing activities was $57.5 million in 1999, $1.0
million in 1998 and $5.6 million in 1997. Financing activities consisted
primarily of the sale of our common and preferred stock. On April 28, 1999, we
completed an initial public offering, selling 3,650,000 shares of common stock
at a price of $14 per share, raising a total of $46.1 million in net proceeds
after payment of underwriting discounts and commissions and offering expenses.
In May 1999, the underwriters of our initial public offering exercised their
right to purchase additional shares of common stock to cover over-allotments.
Accordingly, we sold 547,500 additional shares of common stock, generating an
additional $7.1 million in net proceeds after payment of underwriting discounts
and commissions and estimated offering expenses. Including the over-allotment
shares, we sold a total of 4,197,500 shares of common stock in our initial
public offering, raising a total of $53.2 million net of underwriting discounts
and commissions and estimated offering expenses.
Capital expenditures were $4.6 million in 1999, $914,000 in 1998 and
$414,000 in 1997. Our capital expenditures consisted of leasehold improvements
and purchases of property and equipment, primarily computer equipment and
software, for our growing employee base. From inception through 1998, we
generally funded the purchase of property and equipment with capital leases.
During 1999, we purchased
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property and equipment with cash balances. We expect that the rate of purchases
of property and equipment will continue to increase in the future as our
employee base grows.
We have also used loans and leases to partially finance our operations. At
December 31, 1999, we had $853,000 in current and noncurrent loans, including
current and noncurrent lease obligations. Included in the amounts above are
installment loans with a third-party financing source that are secured by the
equipment financed by the third party. The loans bear interest at rates between
15.9% and 16.8% and mature between November 2000 and July 2002. The total amount
outstanding under these loans as of December 31, 1999 was approximately
$534,000. At December 31, 1999, we also had noncancellable operating leases for
office space of approximately $5.8 million which are payable through 2010.
Although we have no material long-term commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We intend to fund the intended increase in
expenses and capital expenditures through the proceeds of our recent public
offering (see Item 1. "Business-Recent Developments"), together with existing
cash, cash equivalents and short-term investments, and believe that these funds
will be sufficient to meet our working capital needs for at least the next 12
months. However, we may need to raise additional funds in order to support more
rapid expansion of our sales force, develop new or enhanced products or
services, respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. If we seek to raise
additional funds, we may not be able to obtain funds on terms which are
favorable or otherwise acceptable to us. If we raise additional funds through
the issuance of equity securities, the percentage ownership of our stockholders
would be reduced.
YEAR 2000 ISSUES
"Year 2000 issues" refer generally to the problems that some software and
hardware may have in determining the correct century for the year. For example,
software with the date-sensitive functions that is not year 2000 compliant may
not be able to distinguish whether "00" means 1900 or 2000 or recognize the year
2000 as a leap year, which may result in failures or the creation of erroneous
results.
We designed our current products to be year 2000 compliant when configured
and used in accordance with the related documentation, provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are year 2000 compliant. We have sought
assurances from our vendors that the hardware and software we have obtained from
third parties is year 2000 compliant. In addition, we have assessed our material
internal information technology systems and non-information technology systems
for year 2000 compliance. Based upon these assurance and assessments, we do not
expect to incur material costs related to year 2000-related issues. To date, we
have not experienced any problems or failures with our products or internal
systems associated with year 2000-related issues. However, we may experience
significant unanticipated problems and costs caused by undetected year 2000
problems, or problems with KD One's products or internal systems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Financial Accounting Standards Statement No. 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. We will be required to adopt Financial Accounting
Standards Statement No. 133 for our year ending December 31, 2001. However,
because we do not utilize derivative financial instruments, we do not believe
the impact of Financial Accounting Standards Statement No. 133 will be material
to our consolidated financial position or results of operations.
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In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of Statement of Position 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." Statement
of Position 98-9 requires use of the residual method for recognition of revenue
when vendor-specific objective evidence exists for undelivered elements but does
not exist for delivered elements of a software arrangement. We will be required
to comply with the provisions of Statement of Position 98-9 for transactions
entered into beginning January 1, 2000. The adoption of Statement of Position
98-9 is not expected to have a material impact on our financial position or
operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Through December 31, 1999, substantially all of our recognized revenues
were denominated in United States dollars and primarily from customers in the
United States, and our exposure to foreign currency exchange rate changes has
been immaterial. We expect, however, that future product license and service
revenues may also be derived from international markets and may be denominated
in the currency of the applicable market. As a result, our operating results may
become subject to significant fluctuations based upon changes in the exchange
rates of certain currencies in relation to the United States dollar.
Furthermore, to the extent that we engage in international sales denominated in
United States dollars, an increase in the value of the United States dollar
relative to foreign currencies could make our products less competitive in
international markets. Although we will continue to monitor our exposure to
currency fluctuations, and, when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, exchange
rate fluctuations may adversely affect our financial results in the future.
Our exposure to market risk is otherwise limited to interest income
sensitivity, which is affected by changes in the general level of United States
interest rates, particularly because the majority of our investments are in
short-term debt securities issued by corporations. We place our investments with
high-quality issuers and limit the amount of credit exposure to any one issuer.
Due to the nature of our short-term investments, we believe that we are not
subject to any material market risk exposure. We do not have any derivative
financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required by this item are included
herein as exhibits and listed under Item 14.(a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth our executive officers and directors, and
their ages as of March 15, 2000.
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NAME AGE POSITION
---- --- --------
Steven J. Snyder..................... 45 President, Chief Executive Officer and Director
Nanci Anderson....................... 43 Vice President of Customer Solutions
Paul Bieganski....................... 36 Chief Technical Officer
Thomas M. Donnelly................... 36 Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary
P. Stephen Larsen.................... 49 Senior Vice President of Marketing and Business
Development
Bradley N. Miller.................... 35 Vice President of Product Development
George E. Moser...................... 44 Senior Vice President of Worldwide Sales
John T. Riedl........................ 38 Director and Chief Scientist
Douglas J. Burgum.................... 43 Director
Ann L. Winblad....................... 49 Director
William Lansing...................... 41 Director
Steven J. Snyder co-founded Net Perceptions in July 1996 and since that
time has served as our President and Chief Executive Officer and as a director.
From January 1996 to July 1996, Dr. Snyder served as an independent consultant.
From July 1993 to December 1995, Dr. Snyder served as Vice President of Software
Development at Personnel Decisions International, Inc., a human resources
consulting firm. Dr. Snyder pursued his doctorate in psychology from 1988 to
1994. From 1983 to 1988, Dr. Snyder was employed by Microsoft Corporation, a
software company, where he held several posts including IBM Account Manager and
General Manager of the Language Business Unit. Dr. Snyder holds a B.S. in
mathematics from Drexel University, an M.B.A. from Harvard University and an
M.A. and a Ph.D. in psychology from the University of Minnesota.
Nanci Anderson joined Net Perceptions in September 1998 as our General
Manager of Customer Solutions, and in March 1999 was promoted to Vice President
of Customer Solutions. From February 1998 to September 1998, Ms. Anderson was
Technology Services Practice Director for Oracle Corporation, a software
company. From December 1996 to February 1998, Ms. Anderson was Chief Operating
Officer for KeyTech, LLC, a software development firm specializing in
object-oriented and Internet application development services. From April 1995
to December 1996, Ms. Anderson was Area Services Director for Lawson Software
Corporation, a software company.
Paul Bieganski joined Net Perceptions in August 1997 as our Director of
Algorithm Development, and in November 1998 became our Chief Technical Officer.
From September 1995 to August 1997, Dr. Bieganski was the Vice President of
Research and Development at Signum Systems, a manufacturer of embedded systems
software and hardware development tools. Dr. Bieganski holds a B.S., an M.S. and
a Ph.D. in computer science from the University of Minnesota.
Thomas M. Donnelly joined Net Perceptions in March 1997 as our Corporate
Controller, and in March 1998 became our Chief Financial Officer. In February
1999, Mr. Donnelly was appointed Secretary. In July 1999, Mr. Donnelly also
became Senior Vice President of Finance and Administration. From March 1995 to
March 1997, Mr. Donnelly served as a financial and management consultant in the
capacity of chief financial officer or corporate controller for various public
and private companies and partnerships, including Net Perceptions from September
1996 to March 1997. Mr. Donnelly holds a B.A. in economics from St. Olaf
College.
P. Stephen Larsen joined Net Perceptions in June 1997 as our Vice President
of Marketing and Business Development. In July 1999, Mr. Larsen became Senior
Vice President of Marketing. From August 1996 to June 1997, Mr. Larsen served as
Vice President of Business Development for CitySearch, Inc., a community-based
information service. From July 1995 to August 1996, Mr. Larsen was President and
Managing Partner of Digital Dynamics, a consulting company. Mr. Larsen holds an
A.A. from Rochester State College.
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Bradley N. Miller co-founded Net Perceptions in July 1996 and since that
time has served as our Vice President of Product Development. From September
1992 to July 1996, Mr. Miller was a Ph.D. candidate in Computer Science at the
University of Minnesota. Mr. Miller holds a B.A. in physics and computer science
from Luther College and an M.S. in computer science from the University of
Minnesota.
George E. Moser joined Net Perceptions in January 1997 as our Regional
Director of Sales, East Region. In September 1997, Mr. Moser was appointed Vice
President of Worldwide Sales and in July 1999, Mr. Moser became Senior Vice
President of Worldwide Sales. From March 1993 to December 1996, Mr. Moser was
the Director, East Region for Autodesk, Inc., a software company. Mr. Moser
holds a B.S. in management and an M.B.A. from the University of Hartford.
John T. Riedl co-founded Net Perceptions in July 1996 and since such time
has served as a director. In November 1998, Dr. Riedl became our Chief
Scientist. Since September 1998, Dr. Riedl has worked with us on a part-time
basis. From July 1996 until November 1998, Dr. Riedl served as our Chief
Technical Officer. Dr. Riedl has been a professor in the computer science
department at the University of Minnesota since March 1990. Dr. Riedl holds a
B.S. in mathematics from the University of Notre Dame and an M.S. and a Ph.D. in
computer science from Purdue University.
Douglas J. Burgum became a director of Net Perceptions in January 1999. Mr.
Burgum has served as President of Great Plains Software, Inc., a software
company, since March 1984, Chief Executive Officer since September 1991 and
Chairman of the Board since January 1996. Mr. Burgum holds a B.U.S. from North
Dakota State University and an M.B.A. from Stanford University.
Ann L. Winblad became a director of Net Perceptions in August 1996. Ms.
Winblad has been a General Partner of Hummer Winblad Venture Partners, a venture
capital investment firm, since 1989. Ms. Winblad is also a director of The Knot,
Inc. and Liquid Audio, Inc. Ms. Winblad holds a B.A. in mathematics and business
administration from the College of Saint Catherine and an M.A. in education with
an economics focus from the University of St. Thomas.
William Lansing became a director of Net Perceptions in May 1999. Mr.
Lansing was hired as President of Fingerhut Companies, Inc. in May 1998 and
became Chief Executive Officer in May 1999. From November 1996 to May 1998, Mr.
Lansing served as a Vice President for Business Development of General Electric
Corp. From January 1996 to October 1996, he served as Chief Operating Officer of
Prodigy. Mr. Lansing also serves as a director of Digital River, Inc., Select
Comfort Corp., FreeShop.com, Inc. and BigStar Entertainment, Inc. Mr. Lansing
holds a B.A. in English from Wesleyan University and a J.D. from Georgetown
University. Mr. Lansing has announced that he will resign from Fingerhut
effective April 1, 2000.
We currently have five directors. Each director holds office until the next
annual meeting of stockholders or until a successor is duly elected and
qualified. The officers serve at the discretion of the board of directors. There
are no family relationships among our directors and officers.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act, as amended, requires the
Company's directors, officers and stockholders who own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Based
solely upon review of Forms 3, 4 and 5 (and amendments thereto) furnished to the
Company during or in respect of the fiscal year ended December 31, 1999, we are
not aware of any director or executive officer who has not timely filed reports
required by Section 16(a) of the Exchange Act during or in respect of such
fiscal year, except Messrs. Bieganski and Moser, who each filed one late Form 4
covering one transaction, and Mr. Miller, who filed one late Form 4 covering two
transactions.
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ITEM 11. EXECUTIVE COMPENSATION
Summary compensation table
The following table sets forth information with respect to compensation we
paid in 1998 and 1999 for services to us by our chief executive officer and our
four other highest-paid executive officers whose total salary and bonus for 1999
exceeded $100,000. We refer to these officers as our named executive officers in
other parts of this report.
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
SHARES OF
ANNUAL COMPENSATION COMMON STOCK
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
--------------------------- ---- --------- --------- ------------ ---------------
Steven J. Snyder............. 1999 150,000 40,000 -- --
President and Chief 1998 130,000 10,000 -- --
Executive Officer
P. Stephen Larsen............ 1999 175,000 25,000 -- --
Senior Vice President of 1998 175,000 23,500 140,000 --
Marketing
Nanci Andersen............... 1999 130,000 21,850 30,000 --
Vice President of Customer 1998 36,500 -- 40,000 --
Solutions
Thomas M. Donnelly........... 1999 125,000 40,000 40,000 --
Senior Vice President of 1998 94,833 10,000 96,000 --
Finance and Administration
and Chief Financial Officer
George E. Moser.............. 1999 125,000 133,600(1) 10,000 --
Senior Vice President of 1998 122,500 82,500(2) 140,000 50,000(3)
Worldwide Sales
- -------------------------
(1) Includes commissions of $113,600.
(2) Includes commissions of $72,500.
(3) Represents relocation expenses.
Option grants in last year
The following table sets forth each grant of stock options in 1999 to each
of the named executive officers. We did not grant any stock appreciation rights
during 1999. The exercise price of each option is equal to the fair market value
of our common stock on the date that the grant was approved by the compensation
committee of our board of directors.
The potential realizable values are net of the exercise prices and before
taxes associated with the exercise, and are based on the assumption that our
common stock appreciates at the annual rate shown from the date of the grant
until the expiration of the ten-year option term. These numbers are calculated
based on the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices. The amounts
reflected in the table may not necessarily be achieved. The actual amount the
executive officer may realize will depend upon the extent to which the stock
price exceeds the exercise price of the options on the date the option is
exercised.
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INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED(#/SH)(1) 1999(%)(2) SHARE($) DATE 5%($) 10%($)
---- ---------------- ------------ --------- ---------- ---------- ----------
Steven J. Snyder...... -- -- -- -- -- --
P. Stephen Larsen..... -- -- -- -- -- --
Nanci Andersen........ 10,000 0.66 5.50 1/26/09 34,589 87,656
20,000 1.33 14.00 4/21/09 176,091 446,248
Thomas M. Donnelly.... 20,000 1.33 5.50 1/26/09 69,178 175,312
16,306 1.08 15.94 7/30/09 163,435 414,177
3,694 0.25 15.94 7/30/09 37,025 93,829
George E. Moser....... 10,000 0.66 15.94 7/30/09 100,230 254,003
- -------------------------
(1) Options granted under our 1996 Stock Plan are immediately exercisable for
all the option shares, but any shares purchased under those options will be
subject to repurchase by us at the original exercise price paid per share,
upon the optionee's cessation of service, prior to the vesting in those
shares. Options granted under our 1999 Equity Incentive Plan may be
exercised only when, and to the extent, vested. Each of the options has a 10
year term, subject to earlier termination in the event of the optionee's
cessation of service.
(2) Based on an aggregate of 897,936 options granted to our employees under the
1996 Stock Plan and 607,050 options granted to our employees under the 1999
Equity Incentive Plan during the year ended December 31, 1999.
Fiscal year-end option values
The following table provides information concerning the number and value of
the shares of common stock underlying unexercised options held by each of the
named executive officers as of December 31, 1999. None of the named executive
officers exercised any options in 1999.
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999(#)(1) DECEMBER 31, 1999($)(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Steven J. Snyder........................ -- -- --