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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From _____ to _____.

Commission File Number: 000-25781

NET PERCEPTIONS, INC.

7700 France Avenue South
Edina, Minnesota 55435
(Address of principal executive offices, Zip Code)

(952) 842-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes        No  

The number of shares of the registrant’s common stock outstanding as of July 31, 2002 was 27,299,333.

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NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2002

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Special Note Regarding Forward-Looking Statements

         This Quarterly Report on Form 10-Q (including exhibits and information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions or strategies for the future. All forward-looking statements included in this Quarterly Report on Form 10-Q (including exhibits and information incorporated by reference herein) are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those described in our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Risks That May Affect Future Results” and those described in our previous filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they were made. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

         References in this Quarterly Report on Form 10-Q to “Net Perceptions,” the “Company,” “we,” “our” and “us” refer to Net Perceptions, Inc. and, if so indicated or the context so requires, includes our wholly owned subsidiary Knowledge Discovery One, Inc. (which we refer to in this report as “KD1”).

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NET PERCEPTIONS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

Note 1. Basis of Presentation

         In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to fairly present the Company’s financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

         Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto for the year ended December 31, 2001, which are contained in the Company’s Annual Report on Form 10-K (File No. 000-25781). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

         The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

         Accumulated other comprehensive income (loss) consists entirely of unrealized gain (loss) on available-for-sale investments. Changes in unrealized gain (loss) on available-for-sale investments were $(389) and $134 for the second quarter 2002 and 2001 and $314 and $141 for the six months ended June 30, 2002 and 2001, respectively. Comprehensive loss was $4,727 and $5,700 for the three months ended June 30, 2002 and 2001, respectively, and $7,496 and $114,487 for the six months ended June 30, 2002 and 2001, respectively.

Note 2. Recently Issued Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board (“FASB”) approved Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets.” The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and certain intangible assets not be amortized. Instead, the statements provide that these assets should be tested, at least annually, for impairment with any related losses recognized as incurred. SFAS No. 141 is generally effective for business combinations completed after June 30, 2001. SFAS No. 142 was effective for the Company beginning January 1, 2002 for existing goodwill and intangible assets. See Note 5 to the Consolidated Financial Statements for additional discussion on the impact of SFAS No. 141 and No. 142.

         In October 2001, FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121 and APB Opinion No. 30. SFAS No. 144 was effective for the Company beginning January 1, 2002. The adoption of SFAS No.144 had no impact on the Company’s financial position or results of operations.

         In accordance with Emerging Issue Task Force Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” the Company began to account for such items as revenue and cost of revenue effective January 1, 2002. Service revenues and cost of service revenues include $60 and $109 of such amounts for the second quarter of 2002 and the six months ended June 30, 2002, respectively. Additionally, service revenues and cost of service revenues of $85 and $179 for the second quarter of 2001 and the six months ended June 30, 2001, respectively, have been reclassified to conform to current period presentation.

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Note 3. Net Loss Per Share

         Net loss per share is computed under SFAS No. 128, “Earnings Per Share.” Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding, excluding shares of common stock subject to repurchase. Such shares of common stock subject to repurchase aggregated 2 and 24 at June 30, 2002 and 2001, respectively. Diluted net loss per share does not differ from basic net loss per share since potential shares of common stock from conversion of stock options and outstanding shares of common stock subject to repurchase are anti-dilutive for all periods presented. Options to purchase 3,073 and 3,711 shares of the Company’s common stock were outstanding as of June 30, 2002 and 2001, respectively, and could potentially dilute earnings per share in future periods.

Note 4. Impairment of Goodwill and Other Intangibles

         In February 2000, the Company acquired Knowledge Discovery One, Inc. (“KD1”), a developer and marketer of advanced data analysis solutions for retailers. Intangible assets recorded in conjunction with the acquisition consisted of acquired technology, customer list, workforce and goodwill of $4,000, $3,000, $1,000 and $110,755, respectively. At March 31, 2001, the Company performed an impairment assessment of the KD1 goodwill and intangible assets. As a result of its review, the Company recorded a $75,298 impairment charge to reduce goodwill and other intangible assets to their estimated fair values.

Note 5. Goodwill and Other Intangible Assets – Adoption of SFAS No. 141 and No. 142

         Effective January 1, 2002, in accordance with SFAS No. 141 and No. 142, the Company ceased amortizing goodwill and certain other identified intangible assets that had a net book value of approximately $6,500 as of January 1, 2002, which is expected to reduce 2002 annual amortization expense by approximately $3,100. Instead these assets will be reviewed for impairment at least annually. A transitional impairment review was performed during the quarter ended June 30, 2002 and the Company did not record any impairment charge as a result of this review.

         The adoption of these statements resulted in the Company not recognizing $771 and $1,541 of amortization expense for the second quarter of 2002 and the six months ended June 30, 2002, respectively, that would have been recognized had the old standards been in effect. The Company’s net loss for the second quarter of 2001 and the six months ended June 30, 2001 included $771 and $7,776, respectively, in amortization expense relating to goodwill and certain other identified intangible assets that are no longer being amortized.

         The following table presents the impact of these statements on net loss and net loss per share, as if they had been in effect for the three and six months ended June 30, 2001.

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         Intangible assets subject to amortization were as follows:

         Amortization expense related to other intangible assets was $63 and $128 for the second quarter of 2002 and the six months ended June 30, 2002, respectively, and is expected to be $257 and $32 for the full fiscal year ending December 31, 2002 and three months ending March 31, 2003, respectively.

Note 6. Restructuring Related Charges

         The Company recorded restructuring related charges of $401 in the second quarter of 2002. $139 related to employee termination costs due to a reduction in workforce by 18 or 21%, $291 represents the write- down of certain fixed assets and $(29) represents a reversal of previously recorded restructuring related charges resulting from revised estimates of other costs. In 2001, the Company instituted two separate restructuring plans to better align its cost structure with its business outlook and general economic conditions. Under the restructuring plans, the Company recorded restructuring related charges totaling $15,551 in 2001, of which $13,920 was recorded as of June 30, 2001.

         A total of $1,076 was charged against the restructuring reserve during the second quarter of 2002, bringing the total charges against the restructuring reserve to $2,667 for the six months ended June 30, 2002, lowering the accrued restructuring liability to $5,534. Charges against the reserve during the three months ended June 30, 2002 included $355 of non-cash fixed assets write-offs, $191 in employee severance payments, $807 in rent payments and $213 in costs relating to subletting facilities. These charges were partially offset by $393 of sublease income and $97 in proceeds from the sale of fixed assets. For the six months ended June 30, 2002 the charges included $642 of non-cash fixed assets write-offs, $500 in employee severance payments, $1,444 in rent payments and $845 in costs relating to subletting facilities. These charges were partially offset by $708 of sublease income and $56 in proceeds from the sale of fixed assets. In conjunction with the restructuring related charges recorded, the Company made certain estimates regarding future sublease income that have a significant impact on its anticipated cash obligations and related restructuring reserves. Although the Company believes that the lease commitment estimates are appropriate in the current circumstances, future changes in real estate markets could impact the ultimate amount of cash paid to resolve these obligations. The Company is actively seeking to sublease its remaining excess facilities. Specifically, the Company is currently seeking to sublease an additional portion of its Edina, Minnesota office space, its entire Roseland, New Jersey office space and a portion of its office space in Austin, Texas. However, there is a risk that the Company may not be able to sublease these facilities under favorable terms, if at all, which could negatively impact the Company’s cash flow and future operating results.

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         The following table presents a summary of the restructuring related activities and accrued restructuring charges as of June 30, 2002: