<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 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 00024865
NEWGEN RESULTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0604378
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12680 HIGH BLUFF DRIVE, SUITE 300
SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices)
(619) 481-7545
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. / / Yes /X/ No
As of August 6, 1999, there were 9,998,972 shares of the Registrant's Common
Stock outstanding.
1.
<PAGE>
NEWGEN RESULTS CORPORATION
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 15
Item 2. Changes in Securities and Use of Proceeds...................................... 16
Item 6. Exhibits and Reports on Form 8-K............................................... 16
</TABLE>
2.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NEWGEN RESULTS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 26,869,695 $ 816,753
Short-term investments available for sale ........................................... 8,398,470 --
Accounts receivable, net of allowance for doubtful accounts of
$430,000 and $299,000 at June 30, 1999 and December 31,
1998, respectively .............................................................. 7,390,241 8,211,773
Prepaid expenses and other .......................................................... 841,084 376,636
------------- -----------------
Total current assets ............................................................ 43,499,490 9,405,162
PROPERTY AND EQUIPMENT, net ............................................................ 5,093,251 2,931,836
OTHER ASSETS ........................................................................... 163,399 435,337
------------- -----------------
Total assets .................................................................... $ 48,756,140 $ 12,772,335
------------- -----------------
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ..................................................................... $ 3,804,499 $ 2,787,802
Accrued and other current liabilities ................................................ 3,276,838 2,324,041
Notes payable to related parties ..................................................... -- 800,000
Current portion of capital lease obligations ......................................... 1,103,503 935,256
------------- -----------------
Total current liabilities ........................................................ 8,184,840 6,847,099
------------- -----------------
LONG TERM LIABILITIES .................................................................. 1,682,721 1,008,628
------------- -----------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, no par value, 3,500,000 shares authorized:
Series A convertible, 0 and 1,250,137 shares issued and outstanding at June
30, 1999 and December 31, 1998, respectively, (aggregate liquidation
preference of $0 at June 30, 1999 and $9,386,229 at December 31, 1998),
stated at ........................................................................ -- 5,925,054
Series B convertible, 0 and 2,158,604 shares issued and outstanding at June 30,
1999 and December 31, 1998, respectively, (aggregate liquidation preference of $0
at June 30, 1999 and $15,876,412 at December 31, 1998), stated at ................. -- 10,124,726
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 15,000,000 shares authorized;
9,997,712 and 3,767,415 shares issued and outstanding at June 30, 1999 and
December 31, 1998, respectively .................................................. 9,998 3,767
Additional paid-in capital ........................................................... 52,263,383 5,384,455
Deferred compensation ................................................................ (1,305,253) (1,393,968)
Notes receivable from stockholders ................................................... (117,846) --
Unrealized gain on marketable securities ............................................. 1,440 --
Retained deficit ..................................................................... (11,963,143) (15,127,426)
------------- -----------------
Total stockholders' equity (deficit) .............................................. 38,888,579 (11,133,172)
------------- -----------------
Total liabilities and stockholders' equity (deficit) .............................. $ 48,756,140 $ 12,772,335
------------- -----------------
------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3.
<PAGE>
NEWGEN RESULTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Database marketing services ....................... $11,963,306 $ 7,561,599 $22,534,821 $14,469,610
Consulting services ............................... 1,628,612 2,539,334 3,160,748 4,905,721
----------- ----------- ----------- -----------
Total revenues ................................. 13,591,918 10,100,933 25,695,569 19,375,331
----------- ----------- ----------- -----------
COST OF REVENUES:
Cost of database marketing services ............... 6,344,527 5,234,932 12,560,056 9,908,529
Cost of consulting services ....................... 1,373,634 1,863,044 2,713,604 3,765,154
Installation costs ................................ 385,959 352,245 749,957 774,208
----------- ----------- ----------- -----------
Total cost of revenues ......................... 8,104,120 7,450,221 16,023,617 14,447,891
----------- ----------- ----------- -----------
Gross profit ................................... 5,487,798 2,650,712 9,671,952 4,927,440
----------- ----------- ----------- -----------
OPERATING COSTS:
Selling, general and administrative expenses ...... 3,400,653 1,893,057 6,327,509 3,746,899
Technology and product development ................ 1,025,609 568,233 1,652,922 960,792
Software rewrite costs ............................ -- 826,514 -- 1,520,806
----------- ----------- ----------- -----------
Total operating costs .......................... 4,426,262 3,287,804 7,980,431 6,228,497
----------- ----------- ----------- -----------
Income (loss) from operations .................. 1,061,536 (637,092) 1,691,521 (1,301,057)
----------- ----------- ----------- -----------
INTEREST INCOME (EXPENSE), net:
Interest income .................................. 171,861 32,994 174,379 80,138
Interest expense ................................. (96,422) (42,961) (204,762) (89,443)
----------- ----------- ----------- -----------
Interest income (expense), net ................. 75,439 (9,967) (30,383) (9,305)
----------- ----------- ----------- -----------
Net income (loss) .............................. 1,136,975 (647,059) 1,661,138 (1,310,362)
Adjustment for accretion of redeemable
convertible preferred stock ................. (121,702) (340,693) (486,807) (681,386)
----------- ----------- ----------- -----------
Income (loss) applicable to common
stockholders ............................... $ 1,015,273 $ (987,752) $ 1,174,331 $(1,991,748)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic net income (loss) per share .............. $ 0.15 $ (0.26) $ 0.23 $ (0.53)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted net income (loss) per share ............ $ 0.12 $ (0.26) $ 0.19 $ (0.53)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in basic per share calculation ..... 6,568,199 3,766,915 5,199,097 3,766,915
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in diluted per share calculation ... 9,384,239 3,766,915 8,606,391 3,766,915
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4.
<PAGE>
NEWGEN RESULTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 1,661,138 $(1,310,362)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ..................................... 846,699 555,579
Deferred rent ..................................................... (17,574) (9,159)
Deferred compensation ............................................. 201,025 107,048
Changes in assets and liabilities:
Accounts receivable ............................................. 821,532 (3,047,202)
Prepaid expenses and other ...................................... (464,448) 225,224
Accounts payable ................................................ 1,016,697 448,818
Accrued and other current liabilities ........................... 952,824 775,874
----------- ------------
Net cash provided by (used in) operating activities ........... 5,017,893 (2,254,180)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ................................. (8,398,470) --
Purchases of property and equipment ................................. (1,740,037) (538,342)
Other assets ........................................................ 271,938 11,753
----------- ------------
Net cash used in investing activities ......................... (9,866,569) (526,589)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock transactions .................................... 32,109,807 --
Payments of related party loans ..................................... (800,000) --
Payments on capital lease obligations ............................... (607,832) (309,170)
Proceeds from lines of credit, net .................................. 199,643 592,434
----------- ------------
Net cash provided by financing activities ........................... 30,901,618 283,264
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 26,052,942 (2,497,505)
CASH AND CASH EQUIVALENTS, beginning of period ......................... 816,753 4,630,147
----------- ------------
CASH AND CASH EQUIVALENTS, end of period ............................... $26,869,695 $ 2,132,642
----------- ------------
----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 214,762 $ 94,443
----------- ------------
----------- ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations entered into for equipment .............. $ 1,467,746 $ 1,271,123
----------- ------------
----------- ------------
Accretion of redeemable preferred stock ........................... $ 486,807 $ 681,386
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5.
<PAGE>
NEWGEN RESULTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed interim financial statements included herein have been
prepared by Newgen Results Corporation (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission for
interim financial information. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed interim financial
statements should be read in conjunction with the Company's audited
financial statements and notes thereto included in its Registration
Statement Form S-1 for the year ended December 31, 1998. In the opinion
of management, these interim condensed financial statements contain all
adjustments (consisting of normal recurring entries) which are
necessary for a fair and accurate presentation of financial position at
June 30, 1999 and the results of operations and cash flows for the
three and six month periods ended June 30, 1999 and 1998. Interim
results are not necessarily indicative of those to be expected for the
full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
2. INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES, which requires that the Company
determine the appropriate classification of investments at the time of
purchase and reevaluate such designation as of each balance sheet date.
At June 30, 1999, the Company considered all investments as available
for use in its current operations, and therefore classified them
short-term, available-for-sale investments. Available-for-sale
investments are stated at fair value, with unrealized gains and losses,
if any, net of tax, reported as a separate component of stockholders'
equity. The cost of securities sold is based on the specific
identification method. There were no realized gains or losses for the
quarter ended June 30, 1999.
At June 30, 1999, short-term investments available for sale consisted
of the following (unaudited):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate securities $ 5,935,455 $ 15 $ -- $5,935,470
Government securities 2,461,575 1,425 -- 2,463,000
------------ ---------- ---------- ----------
Total short-term investments $ 8,397,030 $ 1,440 $ -- $8,398,470
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
6.
<PAGE>
3. COMPUTATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been calculated under Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. This
statement requires companies to compute earnings per share under two
different methods (basic and diluted). Basic earnings per share are
based on the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are based on
the weighted average number of shares of common stock and potentially
dilutive securities (options and warrants) outstanding during the
period, computed using the treasury stock method.
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE - BASIC
Net income (loss) applicable to common
stockholders $ 1,015,273 $ (987,752) $ 1,174,331 $(1,991,748)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common shares 6,568,199 3,766,915 5,199,097 3,766,915
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share - basic $ 0.15 $ (0.26) $ 0.23 $ (0.53)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE - DILUTED
Net income (loss) $ 1,136,975 $ -- $ 1,661,138 $ --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders $ -- $ (987,752) $ -- $(1,991,748)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common shares 6,568,199 3,766,915 5,199,097 3,766,915
Potentially dilutive securities:
Preferred stock 1,893,745 -- 2,499,469 --
Stock options 823,348 -- 809,889 --
Warrants 98,947 -- 97,936 --
----------- ----------- ----------- -----------
Total 9,384,239 3,766,915 8,606,391 3,766,915
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share - diluted $ 0.12 $ (0.26) $ 0.19 $ (0.53)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
As a result of net operating loss carryforwards, the above net income and
earnings per share amounts do not include a tax provision.
4. STOCKHOLDERS' EQUITY
On May 21, 1999, the Company consummated its initial public offering
and issued 2,724,370 shares of common stock at a price of $13 per
share. An additional 1,000,630 shares of common stock was offered by
selling stockholders at a price of $13 per share. Concurrently with the
offering, a selling stockholder exercised a warrant to purchase 7,576
shares. The Company received proceeds of approximately $32,108,000, net
of underwriting discounts, fees and other initial public offering
costs.
Simultaneously with the closing of the offering, outstanding shares of
Series A convertible preferred stock and Series B convertible preferred
stock were converted to 1,250,137 and 2,158,604 shares of common stock,
respectively.
7.
<PAGE>
In addition, the Company granted the underwriters an option for a
period of 30 days to purchase up to 558,750 additional shares of common
stock to cover any over-allotments. The underwriters did not exercise
this option.
5. SEGMENT INFORMATION
The Company's revenues are substantially derived from two service
segments: database marketing and consulting operations. The database
marketing segment provides outsourced database management, direct
marketing and related customer retention services for the service
department of automobile dealerships and manufacturers. The consulting
segment develops and implements new techniques and programs that enable
automobile dealerships to grow their business, streamline inefficient
processes and more effectively market their services.
The following tables summarize segment information for the three and
six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
(Unaudited) (Unaudited)
DATABASE DATABASE
MARKETING CONSULTING CONSOLIDATED MARKETING CONSULTING CONSOLIDATED
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Segment revenues ................. $11,963,306 $ 1,628,612 $13,591,918 $ 7,561,599 $ 2,539,334 $10,100,933
Segment cost of revenues ......... 6,730,486 1,373,634 8,104,120 5,587,177 1,863,044 7,450,221
----------- ----------- ------------ ----------- ----------- ------------
Segment gross profit ......... $ 5,232,820 $ 254,978 $ 5,487,798 $ 1,974,422 $ 676,290 $ 2,650,712
----------- ----------- ------------ ----------- ----------- ------------
----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
(Unaudited) (Unaudited)
DATABASE DATABASE
MARKETING CONSULTING CONSOLIDATED MARKETING CONSULTING CONSOLIDATED
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Segment revenues ................. $22,534,821 $ 3,160,748 $25,695,569 $14,469,610 $ 4,905,721 $19,375,331
Segment cost of revenues ......... 13,310,013 2,713,604 16,023,617 10,682,737 3,765,154 14,447,891
----------- ----------- ------------ ----------- ----------- ------------
Segment gross profit ......... $ 9,224,808 $ 447,144 $ 9,671,952 $ 3,786,873 $ 1,140,567 $ 4,927,440
----------- ----------- ------------ ----------- ----------- ------------
----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
The following table reconciles the Company's reportable segments' gross
profit to consolidated net income for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross profit from reportable segments .......................... $5,487,798 $2,650,712 $9,671,952 $ 4,927,440
Operating costs ................................................ 4,426,262 3,287,804 7,980,431 6,228,497
------------ ------------ ----------- -----------
Income (loss) from operations ................................ 1,061,536 (637,092) 1,691,521 (1,301,057)
Interest income (expense), net ................................. 75,439 (9,967) (30,383) (9,305)
------------ ------------ ----------- -----------
Net income (loss) ............................................ $1,136,975 $ (647,059) $1,661,138 $(1,310,362)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
8.
<PAGE>
6. COMPREHENSIVE INCOME
Other comprehensive income for the three and six months ended June 30,
1999 were immaterial and there was no other comprehensive income for the
three and six months ended June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Newgen Results Corporation (the "Company") should be read in
conjunction with the condensed consolidated unaudited financial statements
and the related notes thereto included elsewhere in this Form 10-Q and the
audited consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the year ended December 31, 1998 included in the Company's Registration
Statement on Form S-1, as amended (file No. 333-62703).
Certain statements set forth below constitute "forward-looking
statements". Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors including, but not limited to, those
discussed herein and in the Registration Statement on Form S-1, as amended
(file No. 333-62703), that may cause the actual results, performance or
achievements of the Company, or industry results to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Given these uncertainties, investors and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update
information contained in any forward-looking statement.
OVERVIEW
The Company provides customized, outsourced database management,
direct marketing and related services for service departments of automobile
dealerships and automobile manufacturers. The Company has expertise both in
database marketing and customer retention services, as well as an in-depth
knowledge of automobile service department operations. Database marketing
revenues consist of revenues from the RESULTS program as well as ancillary
products and services.
Revenues for the RESULTS Program are based on the number of active
names in a dealership's database, typically a fixed number determined by the
dealership. The Company generally invoices each of the dealers on a monthly
basis in advance. Revenues for the Company's consulting services are based
principally on a per diem rate for the services it provides. The Company is
also reimbursed for travel expenses and associated costs it incurs in
providing consulting services, which are included as revenues. The Company
recognizes all of its revenues in the month during which it performs the
related database marketing or consulting services.
The Company derives a significant portion of its revenues from Ford
and Ford dealerships. Although each Ford dealership utilizing the Company's
database marketing services enters into a separate contract with the Company,
collection of receivables from Ford dealerships is centralized through Ford's
accounting department. The Company's current consulting engagement with Ford
relating to implementation of the Around the Wheel Program is expected to be
completed in October 1999. The Company currently does not have a commitment
from
9.
<PAGE>
Ford for a new consulting engagement beyond that approximate date. A majority
of the Company's database marketing services are attributable to Ford
dealerships. During the six months ended June 30, 1999 and 1998, sales of
RESULTS Program and other database marketing services to Ford dealerships
represented 57% and 55% of revenues, respectively. Although the percentage of
new sales to Ford dealerships decreased, the Company provided increased data
mining services to Ford Motor Company. One hundred percent of consulting
services were provided to Ford during such periods.
Cost of revenues consists of database marketing services costs,
consulting costs and installation costs. Costs of database marketing services
include the printing and mailing of letters, as well as the costs of the
teleservice contacts of dealership customers. The costs of database marketing
services also include all costs of managing and purifying the dealership
databases, as well as the costs of customer service and customer satisfaction
departments. The costs of additional services, such as Welcome Home and
Around the Wheel, include only the direct costs of those services because no
additional costs associated with database management or customer service are
incurred. Costs of consulting include the direct costs of consulting
personnel, as well as the cost of any independent consultants subcontracted
by the Company. Costs of consulting also include costs of travel and
associated costs incurred by the Company's Consulting Division. Installation
costs include the direct costs (excluding sales commissions) of implementing
the Company's program at dealerships and the costs of the initial download,
setup and purification of the dealership's customer database. These costs are
expensed as incurred and represent a one-time charge for each new dealership
added to the Company's customer base. As a result, these costs are expected
to decrease as a percentage of total revenues as database marketing services
revenues increase. Installation costs are presented as a separate line item
to illustrate investment in implementing new dealerships. For the purposes of
calculating the gross profit associated with database marketing services in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, installation costs are added to cost of database marketing
services.
Operating expenses consist of fixed costs, such as selling, general
and administrative expenses, technology and product development costs, and
the cost of the software rewrite of the core data management and customer
retention software system. The Company anticipates that operating expenses
will increase as it develops and introduces new services and increases its
customer base. Historically, the Company has been able to leverage operating
expenses over a growing revenue base, and to the extent that the business
continues to grow, the Company expects that operating expenses as a
percentage of total revenues will continue to decline even though they are
expected to increase in absolute dollars. However, because the Company is
generally unable to significantly reduce expenses in the short term to
compensate for any unexpected revenue shortfall, any such shortfall would
have an immediate adverse effect on the business, results of operations and
financial condition. Selling costs include costs of internal sales
department, as well as commissions earned by sales representatives. General
and administrative costs include accounting, payroll and human resources
functions. General and administrative costs also include other non-allocated
costs, such as professional fees and general corporate services. Technology
and product development costs include the cost of programming personnel who
enhance current services and develop new services. The cost of the software
rewrite to the core database management system includes all costs associated
with the implementation of the enterprise-wide software application by a
third-party developer. The costs of the software rewrite were expensed as
they were incurred in 1998. Because of new accounting standards, any software
rewrite costs incurred during 1999 may be capitalized and amortized over an
appropriate useful life.
10.
<PAGE>
As of December 31, 1998, the Company had net operating loss
carryforwards for federal income purposes of approximately $6.5 million.
These net operating loss carryforwards expire in various years beginning in
2009. The net deferred asset is fully reserved because of uncertainty
regarding its realizability. Utilization of the Company's net operating loss
carryforwards may be limited as a result of certain changes in the Company's
ownership.
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
TOTAL REVENUES. Revenues from database marketing services increased
by $4.4 million, or 58%, to $12 million in the quarter ended June 30, 1999
from $7.6 million in the quarter ended June 30, 1998. The increase in
database marketing revenues was due primarily to the addition by the Company
of almost 200 dealerships, as well as an increase in the provision of
ancillary services. Revenues from consulting services decreased by $911,000,
or 36%, to $1.6 million in the quarter ended June 30, 1999 from $2.5 million
in the quarter ended June 30, 1998. The decrease in consulting services
revenues was due primarily to the fact that the Company has completed its
implementation of the Around the Wheel consulting project in almost all of
its target dealerships.
GROSS PROFIT. Gross profit from database marketing services
increased by $3.3 million, or 165%, to $5.2 million in the quarter ended June
30, 1999 from $2.0 million in the quarter ended June 30, 1998. As a
percentage of database marketing revenues, database marketing gross profit
increased to 44% in the quarter ended June 30, 1999 from 26% in the quarter
ended June 30, 1998. This increase was due primarily to increased
efficiencies associated with the implementation of the Company's new
telephone system. To a lesser extent, the Company also became more efficient
in the labor cost per letter, which increased margins, and it obtained
leverage by spreading the Company's fixed installation costs over a larger
revenue base. Gross profit from consulting services decreased by $421,000, or
62%, to $255,000 in the quarter ended June 30, 1999 from $676,000 in the
quarter ended June 30, 1998. As a percentage of consulting services revenues,
consulting services gross profit decreased to 16% in the quarter ended June
30, 1999 from 27% in the quarter ended June 30, 1998. This decrease was due
primarily to the fact that the Around the Wheel project was in its concluding
stages, resulting in less than full utilization of the Company's consultants.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.5 million, or 80%, to $3.4 million in
the quarter ended June 30, 1999 from $1.9 million in the quarter ended June
30, 1998. The increase was due primarily to increased commissions associated
with the selling of longer term contracts for new dealerships. To a lesser
extent, the increase was also caused by increased expenditures associated
with the Company's marketing department and increased administrative costs
associated with the Company's continued growth. As a percentage of total
revenues, selling, general and administrative expenses increased to 25% in
the quarter ended June 30, 1999 from 19% in the quarter ended June 30, 1998.
This increase was due primarily to increased commissions associated with the
installation of a greater number of names pursuant to longer term contracts.
TECHNOLOGY AND PRODUCT DEVELOPMENT COSTS. Technology and product
development costs increased by $457,000, or 80%, to $1.0 million in the
quarter ended June 30, 1999 from $568,000 in the quarter ended June 30, 1998.
As a percentage of total revenues, technology and product development
expenses increased to 8% in the quarter ended June 30, 1999 from 6% in the
quarter ended June 30, 1998. The increase was due primarily to the Company's
decision to invest heavily in new service development, and the difficulty of
attracting qualified full time employees. As a result, the Company was
required to pay higher salaries and utilize higher cost
11.
<PAGE>
contractors.
SOFTWARE REWRITE COSTS. Software rewrite costs decreased by $827,000
to $0 in the quarter ended June 30, 1999 from $827,000 in the quarter ended
June 30, 1998. This decrease was due primarily to the fact that the software
rewrite activities undertaken in the quarter were related to the resolution
of issues associated with components which were previously delivered and
expensed.
INTEREST INCOME (EXPENSE), NET. Net interest income increased by
$85,000 to $75,000 in the quarter ended June 30, 1999 from net interest
expense of $10,000 in the quarter ended June 30, 1998. This increase was due
primarily to the increase in cash and investments as a result of the initial
public offering.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
TOTAL REVENUES. Revenues from database marketing services increased
by $8.1 million, or 56%, to $22.5 million in the six months ended June 30,
1999 from $14.5 million in the six months ended June 30, 1998. The increase
in database marketing revenues was due primarily to the addition by the
Company of almost 400 dealerships, and to a lesser extent, an increase in
provisions of ancillary services. Revenues from consulting services decreased
by $1.7 million, or 36%, to $3.2 million in the six months ended June 30,
1999 from $4.9 million in the six months ended June 30, 1998. The decrease in
consulting services revenues was due primarily to the fact that the Company
has completed its implementation of the Around the Wheel consulting project
in almost all of the Company's target dealerships.
GROSS PROFIT. Gross profit from database marketing services
increased by $5.4 million, or 144%, to $9.2 million in the six months ended
June 30, 1999 from $3.8 million in the six months ended June 30, 1998. As a
percentage of database marketing revenues, database marketing gross profit
increased to 41% in the six months ended June 30, 1999 from 26% for the six
months ended June 30, 1998. This increase was due primarily to increased
efficiencies associated with the implementation of the Company's new
telephone system. To a lesser extent, the Company also became more efficient
in the labor cost per letter, which increased margins, and it obtained
leverage by spreading the Company's installation costs over a larger revenue
base. Gross profit from consulting services decreased by $693,000, or 61%, to
$447,000 in the six months ended June 30, 1999 from $1.1 million in the six
months ended June 30, 1998. As a percentage of consulting services revenues,
consulting services gross profit decreased to 14% in the six months ended
June 30, 1999 from 23% in the six months ended June 30, 1998. This decrease
was due primarily to the fact that the Around the Wheel project was in its
concluding stages, resulting in less than full utilization of the Company's
consultants.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.6 million, or 69%, to $6.3 million
for the six months ended June 30, 1999 from $3.7 million in the six months
ended June 30, 1998. As a percentage of total revenues, selling, general and
administrative expenses increased to 25% for the six months ended June 30,
1999 from 19% for the six months ended June 30, 1998. The increase was due
primarily to increased commissions associated with the selling of longer term
contracts for new dealerships. To a lesser extent, the increase was also
caused by increased expenditures associated with the Company's marketing
department and administrative costs associated with the Company's continued
growth.
TECHNOLOGY AND PRODUCT DEVELOPMENT COSTS. Technology and product
development costs increased by $692,000, or 72%, to $1.7 million in the six
months ended June 30, 1999 from
12.
<PAGE>
$961,000 in the six months ended June 30, 1998. As a percentage of total
revenues, technology and product development costs increased to 6% for the
six months ended June 30, 1999 from 5% for the six months ended June 30,
1998. The increase was due primarily to the Company's decision to invest
heavily in new service development and the difficulty of attracting qualified
full time employees. As a result, the Company was required to pay higher
salaries and utilize higher cost contractors.
SOFTWARE REWRITE COSTS. Software rewrite costs decreased by $1.5
million to $0 in the six months ended June 30, 1999 from $1.5 million in the
six months ended June 30, 1998. This decrease was due primarily to the fact
that the software rewrite activities undertaken in the quarter were related
to the resolution of issues associated with components which were previously
delivered and expensed.
INTEREST INCOME (EXPENSE), NET. Net interest expense increased by
$21,000, or 227%, to $30,000 in the six months ended June 30, 1999 from
$9,000 for the six months ended June 30, 1998. This increase was due
primarily to increased borrowings from banks and new capital lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception, the Company has financed its
operations primarily through the sale of equity securities and through
borrowings under the credit facility with Silicon Valley Bank ("SVB").
Through 1998, the Company raised approximately $14.5 million, net of fees and
expenses, through the sale of preferred stock.
Cash provided by (used in) operating activities was $5.0 million
and $(2.3) million in the six months ended June 30, 1999 and 1998,
respectively. The increase in cash provided by operating activities was
primarily due to the net income and collections of accounts receivable in the
six months ended June 30, 1999, compared to the net loss in the same period
in 1998.
Cash used in investing activities was $9.9 million and $527,000 in
the six months ended June 30, 1999 and 1998, respectively. The increase in
cash used in investing activities was primarily due to the purchases of
short-term investments and property and equipment in connection with the
expansion of the business.
Cash provided by financing activities was $30.9 million and $283,000
in the six months ended June 30, 1999 and 1998, respectively. The increase in
cash provided by financing activities was primarily due to the proceeds from
the Company's initial public offering.
Subsequent to June 30, 1999, the Company renewed its working capital
line of credit with SVB that is secured by substantially all of its assets.
The total available amount of the line is $5.0 million, with advances limited
to 80% of qualified accounts receivable, including a $1.0 million sub-limit
for securing letters of credit. Borrowings under this credit facility bear
interest at SVB prime rate (7.75% at June 30, 1999) with maturity date of May
9, 2000. The Company also has a $2.0 million Equipment Line of Credit with
SVB that bears an interest rate of SVB prime rate plus .5% with the draw
period up to December 31, 1999. The credit facilities contain certain
covenants and restrictions, including a limitation on indebtedness requiring
the Company, as of the last day of each month, to maintain a ratio of quick
assets to current liabilities of at least 2.50 to 1.0. At June 30, 1999, no
borrowings were outstanding.
The Company also has two lease lines of credit of $2.0 million each
for equipment acquisitions. One of these lines of credit expired in July 1999
and is currently under negotiation
13.
<PAGE>
for an extension. As of June 30, 1999, $760,000 is available under that line
of credit. The second line of credit expires in December 1999 and as of June
30, 1999, $730,000 is available under that line of credit.
As of June 30, 1999, the Company has approximately $35.3 million of
cash, cash equivalents, and short-term investments. The Company expects to
finance short-term obligations through lease financing, reduction of
receivables and use of cash on hand. The Company may utilize the credit
facility with SVB to meet short term needs. The Company believes that its
existing capital resources together with cash generated from operations and
amounts available under the line of credit will be sufficient to meet capital
requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
The use of computer systems and software products that rely on
two-digit date programs to perform computations and decision-making functions
may cause computer systems to malfunction in the Year 2000 and lead to
significant business delays and disruptions. The Company uses a significant
number of computer software programs and operating systems in its operations
and is therefore particularly sensitive to the problems which may be caused
by the Year 2000 problem. The Company anticipates that a significant element
of exposure to malfunction created by noncompliance is in its information
technology systems. These systems include data retrieval, purification,
distribution, financial, administrative and communication operations.
The Company has commissioned a substantial rewrite of its
enterprise-wide database management software. The rewritten enterprise-wide
database management software is designed to be Year 2000 compliant. The
Company expects the software rewrite to be completed in the fourth quarter of
1999. Because the Company expects to implement the rewritten enterprise-wide
database management software prior to the end of 1999, it has not undertaken
a comprehensive review of the existing enterprise-wide database management
software to date. The Company has developed a program to determine its
exposure to other potential Year 2000 problems and to develop plans to reduce
or eliminate its exposure. The Company expects that all phases of this
program will be successfully completed by the end of 1999. In the first phase
of this program, the Company is making a detailed assessment of its computer
systems, other than the enterprise-wide database management software, to
identify those systems which may have Year 2000 problems. The Company is
currently developing plans to correct systems critical to its business.
Critical systems will then be replaced or modified according to plan to
eliminate the Year 2000 problems which were discovered. Finally, in the later
part of 1999, the Company will conduct a test of internal systems to insure
that they are ready for the year 2000.
The Company has not spent a material amount to date in addressing
Year 2000 problems. The funds used to address the Year 2000 problem to date
have come from working capital. Additionally, the Company does not expect to
spend material amounts during 1999 to complete its assessment of its Year
2000 readiness. Unanticipated costs associated with any Year 2000 compliance
may exceed present expectations and harm the business. The Company is also
assessing the Year 2000 readiness of its customers and suppliers. Any failure
of third party networks, systems or services upon which the business depends
could have a material adverse impact on the business. The Company also relies
on other systems and services that third parties provide to its customers. As
a result, the success of the plan to address Year 2000 issues depends in part
on parallel efforts being undertaken by other third parties. The Company has
begun to identify and initiate communications with third parties whose
networks, systems or services are
14.
<PAGE>
critical to the business to determine the status of their Year 2000
compliance. To date, the Company has contacted and received responses from
approximately two-thirds of its third party suppliers concerning their Year
2000 compliance. The Company cannot assure that all such parties have
provided, or in the future will provide, accurate and complete information,
or that all their networks, systems or services will achieve full Year 2000
compliance in a timely fashion. The most reasonably likely worst-case
scenario resulting from Year 2000 issues is that third-party noncompliance
would disrupt, reduce or eliminate for a period of time the Company's ability
to service existing customers or to solicit new customers. If such
occurrences are widespread, frequent or long in duration, they could harm the
Company's business.
Once the Company completes the first phase of the Year 2000 program,
and is aware of the nature of the potential exposure to Year 2000 related
issues, the Company will develop a contingency plan describing how it will
handle Year 2000 problems which would occur if preparatory efforts are not
successful. Despite its Year 2000 program or other efforts, the Company
cannot assure that all problems have been or will be foreseen and corrected
or that no material disruption of the business will occur. For instance, in
the event that the software rewrite of enterprise-wide database management
software is not completed on time or the software does not perform according
to design, it could result in significant Year 2000 non-compliance issues for
the Company's operations, some of which may be unforeseen at this time.
Potential systems interruptions and expenditures of significant financial or
management resources to solve any Year 2000 issues may have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, the failure of customers and suppliers to achieve
Year 2000 compliance could result in a reallocation of the Company's
financial resources to deal with the issue and reduce customers' ability to
utilize services, which could have a material adverse effect on the Company's
business, financial condition and results of operation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company invests its excess cash in interest-bearing investment-grade
securities that are held for the duration of the term of the respective
instrument. The Company does not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, management
believes that, while the investment-grade securities the Company holds are
subject to changes in the financial standing of the issuer of such
securities, it is not subject to any material risks arising from changes in
interest rates, foreign currency exchange rates, commodity prices, equity
prices or other market changes that affect market risk sensitive instruments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings
that individually, or in the aggregate, are material. During the quarter
ended June 30, 1999, the lawsuit filed against the Company in January 1999 by
Jeff Davis, the Company's former Vice President of Sales, was settled.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities:
15.
<PAGE>
During the three month period ended June 30, 1999, the Company
issued and sold unregistered securities as follows:
In May 1999, the Company granted stock options to purchase an
aggregate of 3,100 shares of common stock to employees with an exercise price
of $10.38 per share pursuant to the 1998 Equity Incentive Plan. In
conjunction with the Company's initial public offering, the Company granted
stock options to purchase an aggregate of 56,000 shares of common stock to
non-employee directors with an exercise price of $13.00 per share pursuant to
the Non-Employee Directors' Stock Option Plan. Concurrently with the initial
public offering, a selling stockholder exercised a warrant to purchase 7,576
shares.
No underwriters were used in connection with these sales and
issuances. The sales and issuances of these securities were exempt from
registration under the Securities Act pursuant to (1) Rule 701 promulgated
thereunder on the basis that these options were offered and sole either
pursuant to a written compensatory benefit plan or pursuant to written
contracts relating to consideration, as provided by Rule 701
[or (2) Section 4(2) thereof, on the basis that the transactions did not involve
a public offering.]
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are included as part of this Report:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
10.24 BHI Amendment
27.1 Financial Data Schedule for the six months ended June 30, 1999
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by Newgen Results
Corporation during the quarter ended June 30, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWGEN RESULTS CORPORATION
(Registrant)
Date: August 10, 1999 /s/Gerald L. Benowitz
----------------------------------------
Gerald L. Benowitz
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 1999 /s/ Samuel Simkin
----------------------------------------
Samuel Simkin
Chief Financial Officer
(Principal Financial Officer)
16.
<PAGE>
AMENDMENT TO GENERAL SERVICES AGREEMENT
This Amendment is entered into on July 15 1999, by and between Newgen
Results Corporation, a Delaware corporation ("Customer") and Information +
Graphics Systems, Inc. ("Company").
RECITALS
A. On or about December 25, 1997, Newgen Results Corporation, a
California corporation ("Newgen-Cal") and Bolder Heuristics, Inc. ("BHI")
entered into a General Services Agreement ("Agreement") for certain services
relating to the development and implementation of software referred to as the
NewZen Customer Retention System ("Software").
B. Customer is the successor in interest to Newgen-Cal. Company
is the successor in interest to BHI.
C. Delays and disputes between the parties previously arose
regarding the Company's development and delivery of the Software to
Customer. As a result of various meetings and discussions between the
parties, Customer and Company have agreed to modify certain provisions of the
Agreement pursuant to this Amendment in order to complete and deliver the
Software to Customer.
NOW, THEREFORE, in consideration of the mutual provisions contained
herein, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. GENERAL SERVICES. The following sentences are hereby added to
Section 1.2 of the Agreement:
All Services occurring after March 1, 1999 shall be performed pursuant
to the new Statement of Work attached hereto as Exhibit A and fully
incorporated herein ("SOW"). This SOW supersedes all prior SOW's, including
the original Statement of Work attached to the Agreement.
2. MODIFICATIONS. Section 2.1 of the Agreement is replaced as
follows:
2.1 If Customer wishes to modify the Services specified in the
attached SOW, any Assignment or PO, or wishes to obtain additional Services
not covered by this Agreement, the Customer shall so advise the Company, in
writing, and the Company will respond in writing with its understanding of
the additional services or modifications requested and its acceptance or
rejection thereof. Company shall continue to perform the Services under the
SOW, Assignment or PO and not delay such activities pending determination of
whether the parties can mutually agree on such modifications.
3. RESOURCES. Section 3.6 of the Agreement is hereby replaced as
follows:
3.6 Neither party, on behalf of itself or on behalf of any other
person or entity, shall solicit nor offer employment to or retain in any
capacity the services of any of the other party's employees or any person
engaged by such party on a full-time basis and paid pursuant to IRS Form
1099, during the term of this Agreement and for a period of twelve (12)
months following termination or expiration of this Agreement, unless mutually
agreed to in advance by the Company and Customer in writing.
4. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY. Sections
5.1 and 5.2 are replaced, Section 5.3 is deleted and Sections 5.7 and 5.8 are
added, as follows:
5.1: Company agrees it shall use reasonable care to protect the
confidentiality of, data or information (including copies or modifications to
such) that relate to Customer's business and which are clearly designated in
writing as confidential by Customer, or which would be reasonably considered
confidential to Customer.
5.2. Upon Customer's payment of all amounts due and payable to
Company as of the date of this Amendment, Customer shall be deemed to own all
materials that Company has delivered to Customer prior to the execution of
this
1
<PAGE>
Amendment. All materials that Company delivers to Customer thereafter shall
become the property of Customer upon Customer's payment of all amounts due
with respect to the delivery of such materials. Upon request, Company will
cooperate with Customer at Customer's expense in securing any copyright
protection for such materials.
5.7 Company agrees that to the extent practicable Company will
provide Customer with a written list of "generic tools" as described in
Section 5.4 of this Agreement. To the extent incorporated into Company's
deliverables to Customer, Company grants to Customer a non-exclusive,
non-transferable, worldwide, license to use and copy such generic tools
solely for Company's internal use of the NewZen system. Upon Customer's full
payment to Company of all amounts due under this Agreement such license shall
be deemed perpetual. Notwithstanding anything to the contrary, Company will
have residual rights, without any obligation of accounting, to reuse, and
redistribute generic routines, objects, techniques, methods, processes,
know-how, and algorithms developed or discovered in the course of projects
under this Agreement, which do not contain confidential business data of
Customer.
5.8 For purposes of this Agreement, "intellectual property" shall
mean rights under copyright, patent, trade secret, trademark, moral rights
and similar laws relating to the software and other materials described in
this Section 5.
5. WARRANTY. Section 6.2(c) is replaced, and Sections 6.4, 6.5,
6.6, 6.7, and 6.8 are hereby added, as follows:
6.2(c) that all deliverables provided by BHI to Customer will conform
in all materials respects to the Functional Specification and Specification
Resolution Document that are incorporated by reference into the Amended
Statement of Work executed on the same date as this Amendment.
6.4 Each party warrants to the other: (i) that it has all right
and authority to execute and perform its obligations hereunder; (ii) that the
performance of its obligations hereunder will not conflict with or constitute
a breach or default of any oral or written contract or other understanding to
which it is a party or by which it is bound; and (iii) it is not aware of any
agreements or other facts which could prevent its proper performance
hereunder.
6.5 Each party warrants to the other that, to its knowledge: (i)
there is no claim, lien, suit, arbitration or other proceeding pending or
threatened which in any way relates to the Software, Materials, the Company's
development of the same and/or Customer's use thereof, and (ii) there does
not exist any reasonable basis for any such claim, suit, arbitration or other
proceeding.
6.6 The Company warrants to Customer that the Software, when
operated in accordance with the documentation supplied by Company, is Year
2000 Compliant (as defined below). Customer acknowledges that the capability
of the Software to manage and manipulate date-related information
appropriately depends in part on the quality of information imported or input
into the Software, including the presence of adequate indicators of century
in such information. Company disclaims any warranty relating to the quality of
any such imported or input information. "Year 2000 Compliant" means that the
Software shall (i) manage and manipulate data (including storage, retrieval
and calculation) involving dates, including single century formulas and
multi-century formulas and, subject to the quality of input information as
described above, shall not cause an abnormally ending scenario within the
Software caused by the advent of the Year 2000; and (ii) provide that all
date related functions and data fields include the capability to input the
indication of century.
6.7 All of Company's deliverables to Customer shall be subject to
an acceptance period of seven (7) days following delivery by Company
("Acceptance Period"). The Company's warranties under this Agreement shall
apply only to final production deliverables and shall remain in effect solely
during the Acceptance Period and for thirty (30) days thereafter ("Warranty
Period"). Such warranty will terminate upon modification of any source code
of the Software by Customer or any third party. Unless acceptance has already
occurred, Customer shall be deemed to have accepted the final production
Software upon its use in commercial production for a period of thirty (30)
days.
6.8 Customer acknowledges that, as with any complex custom
software development, Customer's
2
<PAGE>
acceptance testing (no matter how thoroughly nor expertly performed by
Customer) is not likely to detect every latent bug in the Software.
Accordingly, the Software will require ongoing maintenance following delivery
and acceptance, and Customer assumes the obligation to perform such
maintenance either itself, through use of a third party, or pursuant to an
SOW with Company containing specific commitments by Company to provide
maintenance.
6. INDEMNITY. Article 6.3 is hereby replaced as follows:
6.3 In the event of any claims, suits, actions or proceedings
brought against Customer and/or Company by any third party alleging that the
Software, any information, data, processes, methods, specifications, code, or
other matter supplied by Customer, or Customer's or Company's use thereof,
infringes any patent, copyright, trademark, statutory database right or other
intellectual property right of a third party, then either Company or Customer
(as the case may be) shall defend and indemnify the other from and against
such claims, suits, actions or proceedings to the extent based upon
allegations that material supplied by the indemnifying party gives rise to
the alleged infringement. In the event Company and Customer are both required
to indemnify the other under this Section 6.3 with the respect to the same or
substantially related claims, suits, actions or proceedings, then Company and
Customer shall enter into a joint defense agreement (whether either or both
are named in the suit or proceeding) and: (a) cooperate in the defense of
such claim, suit, action or proceeding, (b) provide each other with
information and assistance from its personnel with relevant knowledge or
documents to the extent reasonably necessary for the defense of such claim or
suit, and (c) shall use good faith efforts to agree upon a sharing of the
joint defense costs and attorneys' fees taking into account whether the
claims are based upon development work by Company or any information, data,
processes, methods, specifications, code, or other matter supplied by
Customer. In the event Company and Customer are unable to reach agreement as
to any matter relating to indemnification or joint defense under this Section
6.3, they shall refrain from raising any disputes between them in any
litigation or other proceeding involving a third party and shall submit their
disputes under this Section 6.3 to private settlement via binding arbitration
pursuant to the Commercial Rules of the American Arbitration Association.
Notwithstanding the foregoing, Company shall not indemnify Customer for any
claims based on (i) any Customer or third party intellectual property or
software incorporated in or combined with the Software where in the absence
of such incorporated item, the Software would not have been infringing, (ii)
Software that have been altered or modified by Customer or any third party
where in the absence of such alteration or modification the Software would
not be infringing; (iii) any use of an outmoded version of the Software (or
portions thereof) for which Company has made available an updated, revised or
repaired version which is not infringing; and (iv) relating to the
development, implementation, configuration, or use of the Software. Upon
notice of any claim of infringement or upon reasonable belief of the
likelihood of such a claim, Company shall have the right, at its option, (i)
to obtain the rights to continued use of the Software, (ii) substitute other
suitable, functionally-equivalent, non-infringing software, (iii) replace or
modify the Software or its design so that it is no longer infringing, or, in
the event that Company, using commercially reasonable efforts, is unable to
cure the infringement, refund to Customer the allocable portion of
development fees already paid for the Software, depreciated on a five-year
straight-line basis (or such other actual basis reported by Customer to the
IRS).
6. EFFECT. Except as amended or added hereby, all of the other
provisions of the Agreement including any attachments thereto shall remain
unchanged and continue to be in full force and effect. Each party represents
to each other that it has the authority from its respective governing body to
enter into this Amendment and to bind its respective company to all of the
provisions of this Amendment.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment effective
as of the date first written above.
NEWGEN RESULTS CORPORATION,
a Delaware corporation
By: /s/ Sam Simkin
-------------------------------
Sam Simkin, Vice President and
Chief Financial Officer
INFORMATION + GRAPHICS SYSTEMS, INC.,
a Delaware corporation
By: /s/ Steven M. Bruny
-------------------------------
Steven M. Bruny,
Chief Financial Officer
4
<PAGE>
LIST OF "GENERIC" OR THIRD PARTY TOOLS
Following is the list of third party tools used for development on the NewZen
project:
Oracle (client tools and server)
PVCS Tracker
Microsoft Data Access Components (MDAC)
Microsoft Access 97
Microsoft Word 97
Microsoft Excel
Microsoft Visual Source Safe
Microsoft Visual Basic 5
UNIX shell scripts
Perl
C
Protoview Active X Components
Crystal Reports
FarPoint Technologies Suite (Spread)
pcAnywhere
FaxRight (used only by Newgen staff)
ERWin
VideoSoft VS Spell
DynaZip Data Compression Toolkit
Computer Simple DBDate
5
<PAGE>
STATEMENT OF WORK
FOR NEWGEN RESULTS CORPORATION
This Statement of Work, ("SOW"), for the completion of the development of the
NewZen Customer Retention System ("the System"), is an attachment to the
General Services Agreement (the "Agreement"), dated December 25, 1997, as
amended, between Bolder Heuristics, Inc. ("BHI") and Newgen Results
Corporation ("Newgen", and collectively with BHI, the "Parties"). The terms
and conditions of this SOW, combined with the terms of the Agreement, as
amended, supercede any prior SOW.
The Parties recognize that the development and implementation of the System
requires effort and responsiveness by each Party. This SOW sets forth a
process for completion of BHI's development and delivery of the System under
the Agreement.
1. TASKS, MILESTONES AND SCHEDULE
1.1 The Parties desire to set forth the following phases ("Phases") which
shall constitute milestone objectives in this SOW:
<TABLE>
<CAPTION>
Phase Name Estimated Start Date Finish Date Milestone
Hours Payment
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Phase 1 790.5 2/1/99 3/24/99 $30,000.00
- ----------------------------------------------------------------------------------------------------
Phase 2 457.6 2/1/99 4/27/99 $30,000.00
- ----------------------------------------------------------------------------------------------------
Phase 3 670.0 2/1/99 4/2/99 $30,000.00
- ----------------------------------------------------------------------------------------------------
Phase 4: Prepare and Deliver Alpha 48.0 4/27/99 5/19/99 $30,000.00
- ----------------------------------------------------------------------------------------------------
Phase 5: Alpha release 270.6 5/19/99 6/28/99 $30,000.00
- ----------------------------------------------------------------------------------------------------
Phase 6: Beta release 412.0 6/28/99 7/27/99 $30,000.00
- ----------------------------------------------------------------------------------------------------
Phase 7: Final Production System TBD 7/27/99 8/3/99 $53,252.87
Release
- ----------------------------------------------------------------------------------------------------
Phase 8: Technology Transfer TBD 7/27/99 7/28/99 $45,396
(includes
payment for
agreed ECOs
- ----------------------------------------------------------------------------------------------------
Expiration of Warranty Period N/A 8/3/99 9/2/99 $108,800
- ----------------------------------------------------------------------------------------------------
Additional ECOs N/A N/A 9/2/99 or as TBD
agreed
- ----------------------------------------------------------------------------------------------------
</TABLE>
1.2 The Parties acknowledge that the above-referenced "Finish Date" for each
Phase is dependent on the cooperation and input of each Party. Any delay in
the milestones caused, in
1.
<PAGE>
whole or in part, by Newgen shall extend the remaining schedules for an
equitable period of time at least equal to the delay caused by Newgen. The
parties further acknowledge that any target completion dates, except for the
Phases listed above, reflect only the mutual goals of the Parties.
1.3 In the event that Newgen requests any additional tasks outside of the
scope of the Functional Specification, or requests any modifications thereto,
then if BHI agrees to perform such additional or changed tasks, the costs for
such tasks shall be governed by Section 2.0 below, and the Finish Date of any
affected Phase shall be equitably adjusted accordingly or by mutual agreement
of the Parties.
1.4 Newgen acknowledges that BHI has delivered and Newgen has accepted Phases
1 through 5 in accordance with the delivery plan ("Delivery Plan") mutually
agreed to by the Parties. The parties agree that there will not be a
contractual Delivery Plan for Phases 4 through 8, and therefore, the relevant
acceptance criteria for Phases 4 through 8 shall be that BHI's deliverables
conform in all material respects with the applicable terms contained within
the Functional Specification dated October 21, 1997, as amended by the
Specification Resolution Document attached hereto in Exhibit A. Acceptance of
any deliverable shall not be contingent upon any particular testing plan
unless such test plan has been agreed, in advance, by both parties.
1.5 The following terms shall control delivery and acceptance:
(a) Pre Alpha release: Phases 1 through 3 testing shall be solely for
the purposes of determining that BHI has reasonably addressed, in all
substantial respects, the issues identified in the Issue/Resolution List
attached hereto as Exhibit A. In no event shall the acceptance criteria
for any of Phases 1 through 3 exceed the requirements documented in the
Functional Specification as amended by Exhibit A hereto. Software bugs
not previously identified in Exhibit A shall not constitute grounds for
rejection.
(b) Alpha release: The software shall contain substantially all
functionality associated with the Functional Specification, provided
however that bugs may still exist. The alpha release shall be deemed
acceptable notwithstanding bugs if it reasonably permits BHI to proceed
with beta development.
(c) Beta release: The beta release shall demonstrate increased stability
compared to the alpha release and all pre-identified severity 1 and
severity 2 bugs shall have been corrected. The beta release shall be
deemed acceptable notwithstanding the identification of a reasonable
number of bugs provided that the beta release is stable enough to permit
BHI to proceed with development of the final release of the System.
1.6 In the event BHI fails to achieve the milestone delivery of a Phase by a
delay of greater than forty-five (45) days (subject to extension for delays
not caused by BHI), then Newgen may notify BHI of its intention to terminate
the Agreement.
2.0 PRICE
The Phases covered under this SOW shall be completed on a fixed price basis
to the extent that they are within the scope of the Functional Specification
dated October 21, 1997, as amended. Any tasks performed that are outside of
the fixed-price scope of this Agreement shall be pre-approved by both Parties
through a written engineering change order ("ECO"). The rate for work under
an ECO shall be $117.00 per hour.
2.
<PAGE>
The Parties agree that the following activities are outside the scope of the
fixed price portion of the contract:
1. Any technology transfer activities beyond those specified in the
Implementation Plan, Version V1.10, dated 12/23/97; additional one day
Technology Transfer meetings shall be charged to Newgen on a fixed price
basis of $3,250.00 per meeting and shall be mutually pre-approved
through a written ECO. Attached to this SOW as Exhibit B are agreed upon
documentation prototypes for the type and level of Technology Transfer
materials that BHI will deliver within the scope of this SOW.
2. Software maintenance and modification not specifically agreed to in
the Functional Specification and/or Specification Resolution Document.
3. Preparation, training and readiness assessments of Newgen personnel,
hardware, business processes, and operations; data validation and
conversion (except as specifically agreed in writing); any other task
not specifically agreed in writing.
4. All tasks, services and functions not specifically agreed in writing
to be BHI's responsibility shall be retained by Newgen.
5. Newgen shall be responsible for all delays, extra costs, and
non-conformities caused by Newgen's failure to fulfill its performance
obligations under this SOW.
3.0 PAYMENT SCHEDULE
A lump sum payment of $65,554.50, plus payments for any unpaid amounts for
Phases 1 through 5, shall be paid by Newgen to BHI upon execution of this
SOW.
Progress payments under the fixed-price portion of this Agreement shall be
payable in installments as specified in Section 1.1 upon the completion of
each of the listed milestones.
4.0 LIMITATION OF LIABILITY
Under no circumstances, and notwithstanding any indications to the contrary,
shall BHI be held liable for any incidental or consequential damages
(including any and all loss contingencies disclosed in Newgen's S-1/A public
filing with the Securities and Exchange Commission dated March 19, 1999), nor
lost profits or loss of business as a result of any delay, breach, or failure
to perform under this Agreement.
5.0 LIMITED SUPPORT AGREEMENT
Following BHI's delivery to Newgen of Phase 7, BHI agrees to make available
support services for a period of six (6) months, and Newgen shall pay to BHI
a minimum, monthly fee of $17,500.00 ("Minimum Support Fee"). The Minimum
Support Fee shall cover the hourly-based services of BHI up to hours equal to
one full time equivalent ("FTE"), provided that BHI shall have discretion to
deploy staffing of one or more persons to perform services equal to one FTE
during any month, and the Minimum Support Fee shall be payable regardless of
any lesser amount of hours that may be required. The support services tasks
shall, in general, constitute efforts to correct any failures of BHI's
deliverables to conform to BHI's warranties and/or
3.
<PAGE>
perform in accordance with the acceptance criteria for such deliverables, or
any other related tasks reasonably requested by Newgen. Newgen shall pay the
Minimum Support Fee monthly in advance, and shall pay all reasonable BHI
travel and incidental expenses related to the support services. Should the
parties mutually agree to extend support services for a level of effort in
excess of one FTE or for a term in excess of six months, they shall execute
an ECO documenting such agreement. BHI shall not be required to perform any
additional support services except pursuant to an executed ECO.
Signed this 15th day of July, 1999.
/s/ Steven Bruny /s/ Sam Simkin
- ---------------------------------- ------------------------------------
Boulder Heuristics, Inc. Newgen Results Corporation
STEVEN BRUNY SAM SIMKIN
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
4.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 26,869,695
<SECURITIES> 8,398,470
<RECEIVABLES> 7,390,241
<ALLOWANCES> 430,000
<INVENTORY> 0
<CURRENT-ASSETS> 43,499,490
<PP&E> 8,741,340
<DEPRECIATION> (3,648,089)
<TOTAL-ASSETS> 48,756,140
<CURRENT-LIABILITIES> 8,184,840
<BONDS> 0
0
0
<COMMON> 52,273,381
<OTHER-SE> (13,384,802)
<TOTAL-LIABILITY-AND-EQUITY> 48,756,140
<SALES> 25,695,569
<TOTAL-REVENUES> 25,695,569
<CGS> 16,023,617
<TOTAL-COSTS> 24,004,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 240,979
<INTEREST-EXPENSE> 204,762
<INCOME-PRETAX> 1,661,138
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,661,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,661,138
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.19
</TABLE>
