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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, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27806
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THE INDUS GROUP, INC.
(Exact name of Registrant issuer as specified in its charter)
California 94-3108025
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 Spear Street, San Francisco, California 94105
(Address of principal executive offices) (Zip code)
(415) 904-5000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(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 is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 11,
1997 as reported on the Nasdaq National Market, was approximately $18.75. Shares
of Common Stock held be each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock, $.001 par
value was 18,645,401 at March 11, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended December
31, 1996 are incorporated by reference into Parts II and IV. Portions of the
Proxy Statement for Registrant's 1996 Annual Meeting of Shareholders to be held
May 6, 1997 are incorporated by reference in Part III.
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TABLE OF CONTENTS
Part I
Item 1. Description of Business......................................... 3
Item 2. Description of Property.........................................15
Item 3. Legal Proceedings...............................................16
Item 4. Submission of Matters to a Vote of Security Holders.............16
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................16
Item 6. Selected Financial Data........................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation........................................18
Item 8. Financial Statements and Supplementary Data.....................18
Item 9. Changes in and Disagreements with Accounting and
Financial Disclosure............................................18
Part III
Item 10. Directors and Executive Officers of the Registrant..............19
Item 11. Executive Compensation..........................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management..19
Item 13. Certain Relationships and Related Transactions..................19
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K.....................................................19
Signatures......................................................22
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Indus Group develops, markets, implements and supports client/server
enterprise management software solutions for process industries worldwide. The
Company's PASSPORT Software Solutions consist of 17 business applications in
such functional areas as Work Management Systems, Materials & Procurement
Systems, Safety & Compliance Systems. PASSPORT Software Solutions are designed
to interoperate, through the Company's PassBook integration products, with
popular third-party applications that provide basic business functions such as
corporate finance, payroll, human resources and customer integration. The
Company has entered into strategic relationships with Oracle Corp., PeopleSoft,
Inc. and SPL WorldGroup B.V. (the "Alliance Partners"), through which it has
developed or is developing PassBook integration products to provide
interoperability with Oracle's corporate financial applications, PeopleSoft's
corporate financial, payroll and human resources applications and SPL
WorldGroup's customer information applications. The Company and its Alliance
Partners seek to provide complete enterprise-wide solutions that enable the
Company's customers to improve operating efficiencies, reduce costs and comply
with governmental regulation. The Company focuses primarily on the process
industry, including electric utility, petrochemical, chemical refining, steel
and forest products companies. The Company's PASSPORT applications are based on
an open, client/server architecture featuring a layered software design that
enables customers to use various operating systems, operate on multiple hardware
platforms and interoperate with many third-party software applications and
legacy systems. The Company's proprietary ABACUS software tools and
implementation methodology facilitate rapid and effective deployment and
utilization of its PASSPORT applications. The Company markets and sells its
products and services primarily through a direct sales force in the United
States and directly and indirectly in other parts of the world.
Products and Services
The Company's PASSPORT Software Solutions, ABACUS tools and implementation
methodology and PASSPORT Workbenches operate as a flexible, fully integrated
enterprise management software solution. PASSPORT Software Solutions consist of
17 business applications grouped into three functional areas. ABACUS tools and
implementation methodology allow for rapid implementation and configuration of
PASSPORT Software Solutions. PASSPORT Workbenches are a set of software tools
which support application development, data migration and installation support
used by the Company and its customers to develop, install and configure PASSPORT
Software Solutions. The Company's PassBook integration products are intended to
enable PASSPORT Software Solutions to interoperate with corporate financial,
payroll, human resources and customer information applications systems available
from its Alliance Partners.
PASSPORT Software Solutions
PASSPORT Software Solutions are offered in three functional areas: Work
Management Systems, Materials & Procurement Systems, and Safety & Compliance
Systems. The Company has designed its PASSPORT applications to provide
interoperability with basic business function applications developed by its
Alliance Partners. Although most customers license multiple applications in two
or more functional areas, the Company believes that the majority of its license
revenues has been derived from licenses of Work Management Systems applications.
Each PASSPORT application can operate on a stand-alone basis or interoperate
with other PASSPORT applications or with many third-party software applications
and legacy systems. PASSPORT applications incorporate adaptable workflow methods
that enable end-users to easily tailor workflow to correspond to their business
practices.
The license fees for PASSPORT applications vary depending on either the number
of users or facilities and the number and type of applications licensed. Typical
enterprise license fees have generally ranged from approximately $1 million to
approximately $5 million. Licenses generally have a perpetual term.
Software maintenance and support for the first year of the customer contract are
included in the license fee. Thereafter, maintenance and support services are
subject to an initial two-year term followed by separate renewable one-year
contracts. Software updates are included in the maintenance fee.
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The Company's PASSPORT applications consist of Work Management Systems,
Materials & Procurement Systems and Safety & Compliance Systems. Work Management
Systems communicate discrete work task requirements and priorities to all
affected departments and disciplines in the enterprise, actively informing
individuals of work progress and cost and schedule impacts of unforeseen daily
events. These applications allow managers to modify strategic management
objectives and adjust priorities, work plans, schedules and associated
documentation. Materials & Procurement Systems improve overall plant performance
by streamlining the procurement cycle and enhancing the enterprise's ability to
respond efficiently to planned supply-cycle replenishment and react quickly to
unplanned demand for spare parts, materials and contract services. Safety &
Compliance Systems interoperate with other systems to improve regulatory
compliance and reporting in order to reduce safety and environmental violations
and minimize inspections and audit interruptions by local, state and federal
regulatory agencies.
The complementary Alliance Partner Systems available via PassBook Integration
Products include Corporate Financial Systems and Customer Information Systems.
Corporate Financial Systems are on-line, activity-based decision support tools
designed to keep managers and plant personnel throughout the enterprise aware of
costs controlled by other PASSPORT applications and legacy systems so that
informed decisions may be made to improve financial results. Customer
Information Systems are on-line applications designed to provide energy delivery
companies with a link between their customers, associated revenue cycle
requirements and in-field work and materials management functions controlled
within PASSPORT applications.
The Company's PASSPORT applications are based on an open, client/server
architecture featuring a layered software design that enables customers to use
various operating systems, operate on multiple hardware platforms and
interoperate with many third-party software applications and legacy systems.
This capability permits customers to integrate their existing computing
resources with a wide variety of emerging technologies. The portability and
scalability of the Company's PASSPORT Software Solutions allows users to extend
their systems to accommodate facility expansion or acquisitions. The Company's
PORTAL/95 client workstation software provides a Windows95 "look and feel" to
its PASSPORT applications.
The Company's layered software architecture features an adapter code layer that
isolates PASSPORT applications from the systems environment, including hardware,
operating systems, databases, networks and user interfaces. This adapter code
layer permits a single repository of application code to operate across all
supported platforms in their native runtime environments and allows PASSPORT
applications to be implemented on multiple platforms with no significant loss of
efficiency. Only the adapter code layer, and not the application code, need be
reconfigured to enable PASSPORT applications to operate on additional platforms.
This layered architecture allows customers to protect their large investments in
information systems while positioning them to adapt to emerging operating
system, server and database management system technologies. The architecture
supports seamless integration of alliance partner programs via the PassBook
series of interfaces which allows PASSPORT controlled information to
interoperate with these select third party programs.
PASSPORT applications operate on UNIX servers provided by Hewlett-Packard
Company, Digital Equipment Corporation and IBM utilizing the Oracle RDBMS.
PASSPORT applications also operate on IBM mainframe or plug compatible hardware
used in conjunction with the IBM/DB2 RDBMS. The server offering supporting the
Company's products is being expanded to include NT Servers which will be made
commercially available in the third quarter of 1997. The Company believes that
PASSPORT applications offer the only enterprise client/server business solutions
currently available that are portable among these UNIX/Oracle and IBM/DB2
platforms. PASSPORT applications provide direct access to electronic mail
systems and, via object linking and embedding (OLE 2.0), to desktop word
processing and spreadsheet programs such as those included in the Microsoft
Office application suite. PASSPORT applications may be image-enabled by the
Company's VIEWPORT image processing software, allowing users to view associated
source documents and other digitized media upon demand.
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ABACUS Tools, Implementation Methodology and Related Services
The Company's PASSPORT Software Solutions are implemented through the Company's
proprietary ABACUS tools and implementation methodology. ABACUS consists of
software-driven analytical tools, implementation plans and educational tools
that encapsulate the Company's extensive experience in implementing enterprise
management software solutions. ABACUS provides a step-by-step implementation
life cycle framework for all installation, integration, education and business
review activities. In addition, ABACUS enhances the ongoing effectiveness of the
Company's PASSPORT Software Solutions and assists customers in improving their
business processes.
ABACUS software tools use a time-sensitive and track-oriented approach to help
customers and the Company's business experts, technical specialists and training
professionals implement PASSPORT applications. In addition to interactively
identifying implementation procedures, ABACUS contains over 400 "best practice"
examples of how such procedures were performed by other process industry
companies, drawn from the Company's extensive experience in implementing
enterprise management software solutions. The Company currently licenses ABACUS
software tools in conjunction with PASSPORT Software Solutions which includes
the use of the ABACUS Workbench, a version of the ABACUS software that allows
customers to tailor their internal project goals and objectives with other
corporate initiatives, modify implementation plans and associated deliverables,
supporting specific project/progress reporting, etc.
The Company offers standardized service packages that correspond to "tracks" in
the ABACUS implementation software. The Management Track defines the scope of
the solution, helps ensure that strategic goals are addressed, communicates
executive sponsorship of PASSPORT applications to the organization and provides
for budgeting and progress reporting. The Technical Track validates the overall
information strategy, defines the technology upgrade path utilizing PASSPORT and
provides for operational support. The Business Process Improvement Track engages
change management techniques to reengineer processes to embody PASSPORT best
practices in a cost-effective manner to improve overall company efficiency. The
Integration Track incorporates software tools to rapidly establish the
enterprise-wide information resource which provides interoperability between
PASSPORT and other systems. The Education Track helps ensure user acceptance of
both PASSPORT and new procedures utilizing a comprehensive education program,
computer-based training tools and courseware tailored to the organization's
training environment and specific operational needs.
PASSPORT Workbenches
PASSPORT applications are developed using PASSPORT Workbenches, a set of
integrated application development and support tools designed to make
analytical, programming, documentation, quality assurance and data loading,
migration and archiving tasks more efficient. PASSPORT Workbenches include the
following: the Analyst Workbench, which allows the developer to translate
business requirements into electronic design specifications; the Programmer
Workbench, which generates application code and guides the developer through the
calculations needed to meet the requirements of the application and the target
platform; and the Documentation Workbench, which translates the specifications
into documentation including on-line tutorials, hard copy user guides, reference
and training materials, test scripts and systems administration guides. A fourth
post-development tool, the Data Services Workbench, helps perform data load and
system interface exercises, facilitates data migration (from release to release)
and supports archiving and data warehousing facilities. PASSPORT Workbenches are
centered around a shared repository of design information known as the PASSPORT
Data Dictionary. The accumulated knowledge base stored in the Data Dictionary
promotes a high degree of design consistency, integrity and quality across the
PASSPORT product line. By using PASSPORT Workbenches to design, prototype,
build, document and maintain its application products, the Company believes it
has demonstrated that it can rapidly develop high quality, highly functional
applications on predictable schedules and within established budgets.
The Company licenses PASSPORT Workbenches to customers desiring the ability to
modify PASSPORT applications to suit internal needs and to perform system
administration and maintenance over the application life cycle.
The statements made herein regarding scheduled release dates for the Company's
products under development and proposed enhancements are forward-looking
statements, and the actual release dates for such products or enhancements could
differ materially from those projected as a result of a variety of factors,
including the ability of the Company's engineers to solve technical problems and
test products, Company priorities and the availability of development and other
resources, and other factors, including factors outside the control of the
Company. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that new products and product
enhancements will meet the requirements of the marketplace or achieve market
acceptance.
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Customer Support, Software Maintenance and Training
In addition to the standardized services offered through ABACUS, the Company
offers systems integration, customer support, software maintenance and training.
The Company provides systems integration and customer support on a time and
materials basis. The Company provides software maintenance for a fixed fee based
on the number and types of applications licensed.
The customer support team provides a help desk, warranty support and
post-implementation services which are widely used by its customers. The help
desk is staffed by experienced product specialists who have direct access to
product development teams and technology specialists. A computerized system is
used to log, track, close and analyze all customer calls.
The Indus Institute, the Company's training division, designs, manages, and
implements comprehensive education and training solutions for the PASSPORT user
community. The Institute's team of training and technical professionals provides
instructional design and courseware development services, training coordination
support, train-the-trainer and end-user programs, as well as technical training
for customer installations worldwide. In addition, the Company has developed a
comprehensive set of training courseware which it uses to educate and train
customers and internal staff. Subjects covered by the courseware range from
application product basics to conducting business process reviews. Open
enrollment training courses are provided at the Company's training centers in
San Francisco, Dallas, Pittsburgh, and internationally in London. In addition,
training is also provided at customer sites at the customer's option.
Customers
The Company provides enterprise management software solutions to large process
industry customers primarily in the electric utility, petrochemical, chemical
refining, steel and forest products industries. As of December 31, 1996, the
Company had more than 2,000 site implementations at more than 60 companies.
Revenues from Ontario Hydro-Nuclear and PECO Energy accounted for 11% and 10%,
respectively, of the Company's total revenues in 1996. Revenues from Duke Power,
and Occidental Chemical Corporation accounted for 12% and 11% respectively, of
total revenues in 1995. No customer accounted for more than 10% of total revenue
in 1994.
Sales and Marketing
The corporate marketing function is organized into vertical business areas which
comprise the process industries targeted by the Company. By segmenting the
market into six vertical business areas, the Company can package and deliver its
products effectively to the industries it serves. The vertical business segments
comprising the market include:
Power Generation Addresses electric utilities with generating
capacity comprised of fossil, hydro, wind,
solar or geothermal power generation. Power
Generation addresses a trend in the industry
where disparate generation groups are being
aggregated into a single business unit within
the utility structure.
Nuclear Power Generation Recognizes the unique requirements of nuclear
generating stations in the areas of special
materials, heath physics, safety and nuclear
regulatory reporting and compliance issues.
Energy Delivery Includes the Transmission & Distribution
business units of utilities, coupled with the
revenue cycle components from Customer
Information Systems for electric, gas, water
utilities.
Oil, Gas, & Chemical Refining Comprised of the 'upstream' companies charged
with prospecting and developing new oil & gas
sources (both on and offshore), as well as
'downstream' operating companies charged with
refining, packaging and distribution
processing.
Integrated-Process Industries Represents steel making, pulp and paper and
others whose process involves moving from
crude raw materials through secondary
operations to finished goods.
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DOE/Facilities Management Focuses on facilities maintained by
the Department of Energy and others in
facilities management that serve large
facility complexes, maintain high rise
facilities and the distributed needs of large
consumer retailers, insurance companies and
other facility-intense organizations.
The Company markets and sells its products and services primarily through a
direct sales force in the United States and directly and indirectly in other
parts of the world. As of December 31, 1996, the Company's sales and marketing
organization consisted of 39 employees. The marketing staff is based at the
Company's corporate headquarters in San Francisco, while the sales organization
is decentralized and positioned in North America in seven regions: Northeast,
North Central, Pacific Northwest, Southwest, South Central, Southeast and
Canada. Internationally the regional model will be extended during 1997 to
recognize the special marketing needs of Europe and South America, the Middle
East and Africa, and Pacific Rim countries.
The direct sales cycle begins with the generation of a sales lead, or the
receipt of a request for proposal from a prospect, which is followed by
qualification of the lead, an analysis of the customer's needs, response to a
request for proposal, one or more presentations to the customer utilizing the
special knowledge of the industry vertical pre-sales staff, customer internal
sign-off activities and contract negotiation and finalization. While the sales
cycle from customer to customer varies substantially, the sales cycle generally
requires three to nine months.
In support of its sales force, the Company conducts comprehensive
industry-specific vertical marketing programs which include public relations,
trade advertising, industry seminars, trade shows and on-going customer
communication programs through the International Passport User Group. In
addition, the Company's Account Executive Program provides regional support and
specialized attention for each of its customers. Account Executives assist in
implementing licensed applications over multi-year engagements, promote
licensing of additional applications and encourage existing customers to
identify and help fund new applications.
Strategic Relationships
Through its PASSPORT Alliance and PASSPORT Partner programs, the Company intends
to continue to develop new products, to keep pace with the latest technological
developments, and to extend its marketing, sales and support efforts by building
synergy between the Company's products and services and those available from
complementary third party providers. The Company has entered into strategic
alliances and other formal and informal relationships with major software and
hardware vendors and with consulting firms, service providers and systems
integrators. Members of the Company's Alliance and Partner programs assist the
Company with sales and support activities and with product localization in
foreign countries.
PASSPORT Alliance Program
The PASSPORT Alliance Program is comprised of third party providers of
complementary software products which interoperate with PASSPORT Software
Solutions through PassBook integrater products to provide additional license
revenues and services to the Company while delivering a broad suite of
enterprise-wide software capabilities. Membership in this program includes
Oracle Corporation for corporate financial systems, PeopleSoft, Inc. for
corporate financial, human resources and payroll systems, SPL WorldGroup for
customer information systems and Nuclear Fuels Services/Radiation Protection
Systems for jointly developed Nuclear Health Physics Systems marketed as Total
Exposure. Other third party integration alliance partners are currently under
consideration by the Company.
PASSPORT Partner Program
The PASSPORT Partner Program consists of three classes of members including:
PASSPORT Associates (foreign and domestic), PASSPORT Platform Partners, and
partners in the PASSPORT Extension Program.
PASSPORT Associates are third party consultants and system integration firms
which help deliver the services required to implement PASSPORT Software
Solutions. These recognized firms add specialty knowledge to assist in training
and reengineering services, help provide staffing levelization and supply peak
load project resources to the regional operators. These resources assist in the
delivery of ABACUS services and those performed by the Indus Institute on an
as-needed basis. Domestically, firms providing such services for the Company
include: Duke Engineering Services, Inc., PCS, Software Consulting Group, PRC
Engineering Services, Transcend Data Systems, Dublin Group, and General Physics.
Internationally, the partners provides national language support and an ability
to deliver regional customer service to international customers without the need
for complete facility and infrastructure costs associated with local offices.
International implementation partners include: Euriware Reseau Eurisys,
supporting France and French speaking regions; EniData supporting Italy and
providing additional worldwide
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support for projects within the ENI Group of Companies and their subsidiaries;
Gulf Data International, providing Arabic language support and services in the
United Arab Emirates for customers in Abu Dhabi; ISSC/Australia and Westinghouse
Corporation with emphasis in Eastern Europe and the Spanish nuclear market.
PASSPORT Platform Partners are computer hardware providers and operating system
software providers that help the Company remain technologically current and in
step with evolving releases of software and hardware upgrades. Cooperative
marketing, joint trade show participation, vendor fair participation at the
Annual Conference of the International Passport User Group are extended to this
cooperative group of vendors. The Company participates in the Hewlett-Packard
Channel Program, Digital Equipment's Business Partner Program, the IBM Business
Partner Program as well as the Microsoft's Solution Provider Program and
Oracle's Cooperative Applications Initiative.
The PASSPORT Extension Program is comprised of third party vendors with products
which provide value-added product extensions or specialty services, taking
PASSPORT data beyond the specified scope of the Company's application systems.
Both specialty hardware and specialty point solution software vendors are
recognized in this program which include offerings from: Meridium Corporation,
Dolphin Software, Telxon, Zebra Printers, Intermat, MAC, GDS, MapFrame, Trimco
and InterGraph.
Research and Development
The Company has a dedicated research and development and engineering
organization and has regularly released new products and enhancements to
existing products. Research and development efforts are directed at increasing
product functionality, improving product performance and expanding the
capabilities of the products to interoperate with selected third-party software
products available from its alliance partners such as Oracle, PeopleSoft and SPL
WorldGroup. In particular, the Company is devoting substantial development
resources in its next Release 6.0 scheduled for the third quarter of 1997. These
efforts include developing new PASSPORT applications that address energy
delivery, a new targeted vertical market, and enhancing to the Company's nuclear
offerings. To assist international customers, all application products are
incurring significant changes to support national language support. The Company
expects that Release 6.0 will also include support for new Windows NT servers to
create pre-packaged "turn-key" product offerings, and enhanced electronic
commerce features via Internet integration.
The Company believes that research and development is most effectively
accomplished if customers are involved in the process. Though direct customer
involvement and consensus input from its International Passport User Group,
product content is improved and the customer acceptance threshold usually
associated with new software deployment significantly lowered. In addition, the
interactive development process promotes increased customer awareness of the
technological features of the product and fosters greater product loyalty.
There can be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change, changes in customer requirements, or emerging industry standards, that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of such products and
enhancements, or that any new products or enhancement that it may introduce will
achieve market acceptance. The inability of the Company, for technological or
other reasons, to develop and introduce new products or enhancements in a timely
manner in response to changing customer requirements, technological change or
emerging industry standards, would have a material adverse effect on the
Company's business or results of operations.
As of December 31, 1996, the Company had 103 employees engaged in research and
development. The Company's research and development expenses were approximately
$7.1 million, and $8.3 million and $12.5 million in 1994, 1995 and 1996
respectively. Development costs funded by customers as part of license and
service contracts is included as part of cost of revenues.
Competition
The enterprise management software solutions market is highly competitive,
rapidly changing and significantly affected by new product introductions and
other market activities of industry participants. The Company's primary
competition stems from companies offering enterprise software solutions, vendors
offering partial solutions and suppliers of departmental systems (primarily
LAN-based). The Company's competitors include SAP, the Company's principal
competitor, and other software vendors such as TSW International, Marcam Corp.,
and Project Software & Development, Inc. In the future, the Company may face
competition from its Alliance Partners. In the electric utility market, the
Company faces competition from suppliers of energy delivery applications,
including Severn Trent Systems and Synercom.
In addition, the Company faces indirect competition from suppliers of
custom-developed business applications software that have focused largely on
proprietary mainframe- and minicomputer-based systems with highly customized
software, such as the systems
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consulting groups of major accounting firms and systems integrators. The Company
also faces indirect competition from systems developed by the internal MIS
departments of large organizations.
Many of the Company's competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition, and a larger installed base of
customers than the Company. In addition, certain competitors, including SAP,
have well-established relationships with customers of the Company and with
accounting and consulting firms that may have an incentive to recommend such
competitors over the Company. Furthermore, as the enterprise management software
solutions market for process industries expands, companies with significantly
greater resources than the Company could attempt to increase their presence in
this market by acquiring or forming strategic alliances with competitors of the
Company.
The principal competitive factors affecting the market for the Company's
software products are responsiveness to process industry needs, product
functionality and ease of use, speed of implementation, product architecture,
quality and reliability, vendor and product reputation, quality of customer
support and price. Based on these factors, the Company believes that it has
competed effectively to date. In order to be successful in the future, the
Company must continue to respond promptly and effectively to the challenges of
technological change and its competitors' innovations by continually enhancing
its own product offerings. There can be no assurance, however, that the
Company's products will continue to compete favorably or that the Company will
be successful in the face of increasing competition from new products and
enhancements introduced by existing competitors or new companies entering this
market.
Proprietary Rights and Licensing
The Company relies on a combination of the protections provided under applicable
copyright, trademark and trade secret laws, as well as on confidentiality
procedures and licensing arrangement to establish and protect its rights in its
software. Despite the Company's efforts, it may be possible for unauthorized
third parties to copy certain portions of the Company's products or to reverse
engineer or obtain and use information that the Company regards as proprietary.
In addition, the laws of certain countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
Furthermore, the Company has no patents, and existing copyright laws afford only
limited protection. Accordingly, there can be no assurance that the Company will
be able to protect its proprietary software against unauthorized third party
copying or use, which could adversely affect the Company's competitive position.
The Company licenses its PASSPORT applications to customers under license
agreements which are generally in standard form, although each license is
individually negotiated and may contain variations. The standard form agreement
allows the customer to use the Company's products solely on the customer's
computer equipment for the customer's internal purposes, and the customer is
generally prohibited from sub-licensing or transferring the PASSPORT
applications. The agreements generally provide that the Company's warranty for
its products is limited to correction or replacement of the affected product,
and in most cases the Company's warranty liability may not exceed the licensing
fees from the customer. The Company's form agreement also includes a
confidentiality clause protecting proprietary information relating to the
PASSPORT applications.
The Company's products are generally provided to customers in object code
(machine-readable) format only. From time to time, in limited circumstances, the
Company has licensed source code (human-readable form) subject to customary
protections such as use restrictions and confidentiality agreements. In
addition, customers can be beneficiaries of a master source code escrow for the
PASSPORT applications, pursuant to which the source code will be released to end
users upon the occurrence of certain events, such as the commencement of
bankruptcy or insolvency proceedings by or against the Company, or certain
material breaches of the agreement. The Company has the right to object to the
release of the source code in such circumstances, and to submit the matter to
dispute resolution procedures. In the event of any release of the source code
from escrow, the customer's license is limited to use of the source code to
maintain, support and configure PASSPORT applications.
The Company may from time to time receive notices from third parties claiming
infringement by the Company's products of proprietary rights of others. As the
number of software products in the industry increases and the functionality of
these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend or could require
the Company to enter into royalty and licensing agreements. Such agreements, if
required, may not be available on terms acceptable to the Company, or at all.
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Employees
As of December 31, 1996, the Company employed 463 people, of which 103 were
primarily engaged in research and development activities, 254 in post-sale
support and customer project operations, 39 in sales and marketing, 14 in
management and 53 in administration and finance. None of the Company's employees
is represented by a labor union. The Company has experienced no work stoppages
and believes that its relationship with its employees is excellent.
Executive Officers
The executive officers of the Company as of December 31, 1996 are as follows:
Name of Officer Age Principal Occupation
Robert W. Felton 58 President, Chief Executive Officer and
Chairman of the Board of Directors
Richard W. Mac Almon 47 Senior Vice President, Vice President of
Marketing and Director
Michael E. Percy 50 Senior Vice President, Vice President of
Education and Methodologies and Director
Douglas R. Piper 44 Senior Vice President and Vice President
of Information Technologies
Frank M. Siskowski 49 Senior Vice President and Chief Financial
Officer
Except as set forth below, each of the officers has been engaged in his
principal occupation described above during the past five years. There is no
family relationship between any executive officer of the Company.
Robert W. Felton was a founder of the Company and has been the
Chairman, President and Chief Executive Officer of the Company since its
inception in 1988.
Richard W. Mac Almon was a founder of the Company and has been the Vice
President of Marketing and a director of the Company since January 1990 and a
Senior Vice President of the Company since June 1995. From January 1988 to
December 1989, Mr.
Mac Almon served as a Product Developer for the Company.
Michael E. Percy has served as Vice President of Education and
Methodologies of the Company since January 1995 and was Vice President of
Operations from January 1990 to December 1994. Mr. Percy has been a director of
the Company since January 1990 and a Senior Vice President since June 1995. From
July 1989 to June 1992, Mr. Percy served as a Project Manager for the Company.
Douglas R. Piper has served as Vice President of Information
Technologies of the Company since April 1991 and as Senior Vice President since
June 1995. From February 1988 to April 1991, Mr. Piper served as Chief
Technologist for the Company.
Frank M. Siskowski has served as Senior Vice President and Chief
Financial Officer of the Company since September 1996. From July 1991 to
September 1996, Mr. Siskowski served as Senior Vice President and Controller of
VISA International. From January 1983 to July 1991, he served as Vice President
and Controller of MCI Telecommunications and Chief Financial and Administrative
Officer of the Pacific Division of MCI Communications Corporation.
Risk Factors
This report contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions, plans or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in
10
<PAGE>
this report.
Variability of Quarterly Operating Results; Lengthy Sales Cycle
The Company has experienced, and may in the future experience, significant
fluctuations in quarterly revenues and operating results. The Company's revenues
and operating results in general, and in particular its revenues from new
licenses, are relatively difficult to forecast for a number of reasons,
including (i) the relatively long sales cycles for the Company's products, (ii)
the variable size and timing of individual license transactions, (iii) changes
in demand for the Company's products and services, (iv) competitive conditions
in the industry, (v) changes in customer budgets, (vi) the timing of the
introduction of new products or product enhancements by the Company or its
competitors, (vii) the Company's success in and costs associated with developing
and introducing new products, (viii) product life cycles, (ix) the timing of
revenue recognition under the percentage-of-completion method, (x) changes in
the proportion of revenues attributable to license fees versus services, (xi)
changes in the level of operating expenses, (xii) delay or deferral of customer
implementations of the Company's software, (xiii) software defects and other
product quality problems, and (xiv) other economic conditions generally or in
specific process industry segments. Further, the purchase of the Company's
products generally involves a significant commitment of capital, with the
attendant delays frequently associated with large capital expenditures and
authorization procedures within large organizations. For these and other
reasons, the sales cycles for the Company's products are typically lengthy and
subject to a number of significant risks over which the Company has little or no
control, including customers' budget constraints and internal authorization
reviews. In addition, delays in the completion of a product implementation may
require that the revenues associated with such implementation be recognized over
a longer period than originally anticipated. Such delays in the implementation
or execution of orders has caused, and may in the future cause, material
fluctuations in the Company's operating results. Similarly, customers may cancel
implementation projects at any time without penalty, and such cancellations
could have a material adverse effect on the Company's business or results of
operations. Because the Company's expenses are relatively fixed, a small
variation in the timing of recognition of specific revenues can cause
significant variations in operating results from quarter to quarter and may in
some future quarter result in losses or have a material adverse effect on the
Company's business or results of operations.
As a result, it is possible that in some future quarter the Company's
results of operations could fail to meet the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail or are perceived to prevail generally or with respect to the Company's
business, the price of the Company's Common Stock would likely be materially
adversely affected.
Lack of Firm Orders
The majority of the Company's revenues are earned from services rendered on
a time- and materials-basis under its customer contracts. Such contracts do not
obligate customers to purchase any minimum amount of services from the Company.
Customers typically engage the Company to provide services on a
project-by-project basis and such engagements are cancelable at any time without
penalty. In order to provide services to a particular customer, the Company must
have available an adequate number of trained qualified personnel. Though the
Company assists customers in creating implementation schedules and attempts to
anticipate their needs, there can be no assurance that the Company will be able
to forecast accurately customers' demand for its services. A failure by the
Company to forecast demand for its services accurately could result in either
its being unable to provide adequate service to all customers who desire service
or its having an excessive number of personnel on its payroll. The former case
could result in customer dissatisfaction and a loss of potential business. The
latter case could result in disproportionately high personnel expenses and a
related adverse effect on the Company's results of operations.
Rapid Technological Change; Need to Develop New Products
The market for the Company's software products is characterized by rapid
technological change, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The Company's future success will depend in part
upon its ability to continue to enhance and expand its PassPort applications, to
continue to provide enterprise solutions and to develop and introduce new
products that keep pace with technological developments, satisfy increasingly
sophisticated customer requirements and achieve market acceptance. In
particular, the Company must continue to anticipate and respond adequately to
advances in relational database management systems ("RDBMS") software and
desktop computer operating systems such as Microsoft Windows, Windows NT and
Windows95. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the
11
<PAGE>
successful development, introduction or marketing of new products, or that new
products and product enhancements will achieve market acceptance. If the Company
is unable to enhance existing products or develop and introduce new products in
a timely manner in response to changing market conditions or customer
requirements, the Company's business or results of operations could be
materially adversely affected.
Historically, the Company has issued new releases of its software products
approximately annually, although it has on occasion experienced delays in the
scheduled introduction of new and enhanced products. The Company currently plans
to begin shipping Release 6.0 of its PassPort applications in the third quarter
of 1997. There can be no assurance that Release 6.0, will be developed or become
commercially available on a timely basis or that any such products will achieve
market acceptance. After Release 6.0, the Company intends to increase the speed
of its development cycle to allow issuances of new releases approximately every
six months in order to meet the increasing demands of its customers for enhanced
features and performance. There can be no assurance that the Company will be
able to increase the speed of the development cycle, and failure to do so could
adversely affect the ability of the Company to satisfy its current and potential
customers, which could have a material adverse effect on the Company's business
results of operations. In addition, the Company's PassPort applications
currently operate only on the Oracle and IBM/DB2 RDBMS platforms. There can be
no assurance that the Company's current and prospective customers will not
utilize other RDBMS platforms and, if so, that the Company will be able to
successfully migrate its products to such platforms. The occurrence of any of
these problems could have a material adverse effect on the Company's business or
results of operations.
The Company uses PassPort Workbenches, a set of proprietary application
development and support tools, to develop its PassPort applications and markets
these tools to certain customers for use in implementing its PassPort
applications. In the event that PassPort Workbenches do not keep pace with the
technological changes required by its customers, the Company could be forced to
modify or abandon PassPort Workbenches in favor of third-party products, and the
Company's license revenues from PassPort Workbenches could be materially
adversely affected.
Dependence on Electric Utility Industry
The Company currently derives nearly all of its revenues from sales to
customers in process industries, and has historically derived a significant
majority of its revenues from customers in the electric utility industry. The
Company's dependence on the electric utility industry raises certain significant
risks with respect to the future success of the Company's PassPort applications.
The electric utility industry is generally characterized by long purchasing
cycles. The decision by an electric utility to deploy the Company's products
involves a significant organizational commitment by the utility. Such decisions
may be influenced by utilities' perceptions of the prevailing trends in the
industry with respect to information technology deployment. As a result, the
decision by a small number of utilities to defer or delay implementation of
enterprise software solutions may negatively affect purchasing decisions
throughout the industry, thereby reducing demand for the Company's products.
Accordingly, there can be no assurance that the Company will continue to be
successful in marketing its products to electric utilities. Because increased
penetration of the electric utility market is important to the Company's future
success, the failure of the Company to achieve such market penetration due to
these and other factors could have a material adverse effect on the Company's
business or operating results.
Dependence on PASSPORT Software Solutions
The Company currently derives substantially all of its revenues from
licenses of its PassPort Software Solutions and from services related to those
products. The Company is particularly dependent on its Work Management Systems
and Materials & Procurement Systems applications, both as a source of revenue
and as a means of establishing a presence with customers to facilitate the
licensing of additional products. Any developments that adversely affect sales
of the Company's PassPort applications generally or its Work Management Systems
and Materials & Procurement Systems applications in particular, such as the
success of competitive products, would have a material adverse effect on the
Company's business or results of operations.
Management of Changing Business
The Company's business has grown rapidly in recent periods, with total
revenues increasing from $27.5 million in 1993 to $30.6 million in 1994 and
$53.8 million in 1995. The growth of the Company's business and expansion of the
Company's customer base has placed a strain on the Company's management and
operations. The Company's recent expansion has also resulted in substantial
growth in the number of its employees, the scope of its operating and financial
systems and the geographic area of its operations, resulting in increased
responsibility for management personnel. The Company's ability to support any
future growth of its business will be substantially dependent upon having in
place highly trained employees to conduct research and development, pre-sales
activity and product implementation, assist with business process reengineering
and provide other
12
<PAGE>
customer support services. The Company's future operating results will depend on
the ability of its officers and other key employees to continue to implement its
operational, customer support and financial control systems and to expand, train
and manage its employee base. There can be no assurance that the Company will be
able to manage any future expansion successfully, and any inability to do so
would have a material adverse effect on the Company's business or results of
operations.
Dependence on Key Personnel
The Company's success depends to a significant extent upon a number of key
employees and other members of senior management of the Company, none of whom is
bound by an employment agreement. The loss of the services of one or more key
employees could have a material adverse effect on the Company's business or
results of operations. In addition, the Company believes that its future success
will also depend in large part upon its ability to attract, train and retain
highly skilled technical, management, sales and marketing personnel. Competition
for such personnel in the computer software industry is intense. The Company has
from time to time experienced difficulty in locating candidates with appropriate
qualifications. There can be no assurance that the Company will be successful in
attracting or retaining such personnel, and the failure to attract or retain
such personnel could have a material adverse effect on the Company's business or
results of operations.
Competition
The enterprise management software solutions market is highly competitive,
rapidly changing and significantly affected by new product introductions and
other market activities of industry participants. The Company's primary
competition stems from companies offering enterprise software solutions, vendors
offering partial solutions and suppliers of departmental systems (primarily
LAN-based). The Company's competitors include SAP Aktiengesellschaft ("SAP"),
the Company's principal competitor, and other software vendors such as TSW
International, Marcam Corp., and Project Software & Development, Inc. In the
future, the Company may also face competition from its Alliance Partners. In the
electric utility market, the Company faces competition from suppliers of energy
delivery applications, including Severn Trent Systems and Synercrom. In
addition, the Company faces indirect competition from suppliers of
custom-developed business application software, such as the systems consulting
groups of major accounting firms and systems integrators. The Company also faces
indirect competition from systems developed by the internal MIS departments of
large organizations.
Many of the Company's competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition, and a larger installed base of
customers than the Company. In addition, certain competitors, including SAP,
have well-established relationships with customers of the Company and with
accounting and consulting firms that may have an incentive to recommend such
competitors over the Company. Furthermore, as the enterprise management software
solutions market for process industries expands, companies with significantly
greater resources than the Company could attempt to increase their presence in
this market by acquiring or forming strategic alliances with competitors of the
Company.
In order to be successful in the future, the Company must continue to
respond promptly and effectively to the challenges of technological change and
its competitors' innovations by continually enhancing its own product offerings.
There can be no assurance, however, that the Company's products will continue to
compete favorably or that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by existing
competitors or new companies entering this market.
International Operations
International sales represented approximately 17%, 15% and 17% of the
Company's total revenues in 1994, 1995 and 1996, respectively. The Company
established a sales and support office near London, England in 1993. The Company
believes that its ability to achieve continued growth and profitability will
require further expansion of its international operations. In order to expand
international sales in subsequent periods, the Company must establish additional
foreign operations and hire additional personnel. This will require significant
management attention and financial resources and could materially adversely
affect the Company's business or results of operations. In addition, there can
be no assurance that the Company will be able to maintain or increase
international market demand for the Company's products. The Company's
international sales are currently denominated in U.S. dollars. An increase in
the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in those markets. Currently, the Company does not employ currency hedging
strategies to reduce this risk. In some markets, localization of the Company's
products is essential to achieve market penetration. Although historically the
Company's business partners have borne the costs of localizing the Company
products, the Company
13
<PAGE>
may incur substantial costs and experience delays in localizing its products in
the future, and there can be no assurance that any localized product will ever
generate significant revenues. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences including restrictions on the repatriation
of earnings and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, on the
Company's business or results of operations.
Risk of Product Defects
As a result of the complexities inherent in RDBMS and client/server
technologies and the broad product functionality and performance demanded by the
Company's customers, major new product enhancements and new products can require
long development and testing periods to achieve market acceptance. In addition,
software as complex as that offered by the Company may contain undetected errors
or "bugs" when first introduced or as new versions are released that, despite
testing by the Company, are discovered only after a product has been installed
and used by customers. To date, the Company's business has not been materially
adversely affected by the release of products containing errors. However, the
Company is currently attempting to accelerate the development and introduction
cycle for new products and product enhancements and this could increase the
potential for errors. There can be no assurance that errors will not be found in
future releases of the Company's software, or that any such errors will not
impair the market acceptance of these products and adversely affect operating
results. Difficulties encountered by customers installing and implementing new
releases or problems with the performance of the Company's products could have a
material adverse effect on the Company's business or results of operations.
Dependence on Proprietary Technology
The Company's success is heavily dependent on its proprietary software. The
Company relies on a combination of the protections provided under applicable
copyright, trademark and trade secret laws, as well as on confidentiality
procedures and licensing arrangements, to establish and protect its rights in
its software. Despite the Company's efforts, it may be possible for unauthorized
third parties to copy certain portions of the Company's products or to reverse
engineer or obtain and use information that the Company regards as proprietary.
Moreover, the laws of certain countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States. Furthermore, the
Company has no patents, and existing copyright laws afford only limited
protection. Accordingly, there can be no assurance that the Company will be able
to protect its proprietary software against unauthorized third-party copying or
use, which could adversely affect the Company's competitive position.
There can be no assurance that a third party will not assert that the
Company's technology violates its patents in the future. As the number of
software products in the industry increases and the functionality of these
products further overlap, the Company believes that software developers may
become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend or could require
the Company to enter into royalty and licensing agreements. Such agreements, if
required, may not be available on terms acceptable to the Company, or at all.
Product Liability
The sale and support of PassPort applications by the Company may entail the
risk of product liability claims. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective as a result of federal, state or local laws or ordinances
or unfavorable judicial decisions. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business or results of operations.
Anti-takeover Effect of Certain Charter Provisions
The Company's Board of Directors has authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights of such shares, without any
further vote or action by the Company's shareholders. The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult
14
<PAGE>
for a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, as well as other events or factors. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations which
have particularly affected the market prices of the stocks of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock.
ITEM 2. PROPERTIES
The Company currently maintains offices comprising 115,000 square feet of which
its headquarters facility in San Francisco, California occupies 67,000 square
feet, under a lease which expires in May, 2001. The Company conducts its product
development, customer project operations, customer training and all financial
services at its corporate headquarters location. Customer project operations and
training are also conducted at regional facilities located in Pittsburgh,
Philadelphia, Portland, Dallas and London. Management believes that its
facilities are adequate to meet the needs through 1997 and that if required,
suitable additional space will be available to accommodate expansion of the
Company's operations on commercially reasonable terms. The Company owns
substantially all equipment used in its facilities.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or of which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Indus Group, Inc.'s Common Stock, $.001 par value, is traded on the Nasdaq
National Market. The tables present its high and low market prices, and dividend
information. Quarterly common stock price ranges are not available for the
Company prior to its initial public offering date of February 29, 1996 since
there was no public market for the Common Stock of the Company.
Quarterly Common Stock Prices Ranges
1996
- - ---------------------------------------------
Quarter High Low Dividend
- - ------- ---- --- --------
1st 22-3/4 18 none
2nd 21-1/2 17 none
3rd 21-1/4 15-3/4 none
4th 25-3/4 18-7/8 none
Prior to its initial public offering in February, 1996, the Company was an S
Corporation and from time to time made substantial cash distributions to its
shareholders. The Company anticipates that any future earnings will be retained
to finance the continuing development of its business. The Company has not
declared or paid any cash dividends on its Common Stock since the termination of
its S Corporation status and does not anticipate paying cash dividends in the
foreseeable future.
The number of shareholders of record for the Company's common stock as of March
11, 1997 was 226.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial information of the Company is qualified by
reference to and should be read in conjunction with the financial statements and
notes thereto and other financial information included elsewhere herein. The
combined statements of operations data for the years ended December 31, 1994 and
1995 and combined balance sheet data as of December 31, 1995 of The Indus Group,
Inc. and Indus International, Inc. and the consolidated statements of operations
data for the year ended December 31, 1996 and consolidated balance sheet data as
of December 31, 1996 are derived from and qualified by reference to financial
statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere herein. The combined balance
sheet data as of December 31, 1992 and 1993 and the combined statements of
operations data for the years ended December 31, 1992 and 1993 are derived from
the financial statements of the Company that have been audited by Ernst & Young
LLP that are not included herein.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Software licensing fees .................................... $ 6,112 $ 6,514 $ 7,547 $ 10,676 $ 16,208
Services and maintenance ................................... 16,681 20,978 23,044 43,115 59,731
-------- -------- -------- -------- --------
Total revenues ............................................. 22,793 27,492 30,591 53,791 75,939
Cost of revenues ........................................... 9,127 10,395 12,798 22,578 31,790
-------- -------- -------- -------- --------
Gross margin ............................................... 13,666 17,097 17,792 31,213 44,149
-------- -------- -------- -------- --------
Operating expenses:
Research and development ................................... 4,295 6,910 7,120 8,306 12,493
Sales and marketing ........................................ 1,856 3,533 4,144 5,680 9,306
General and administrative ................................. 3,988 3,595 4,654 4,918 7,819
Compensation charge--stock options(1) ...................... -- -- -- 18,900 --
-------- -------- -------- -------- --------
Total operating expenses ................................... 10,139 14,038 15,918 37,804 29,618
-------- -------- -------- -------- --------
Income (loss) from operations .............................. 3,527 3,059 1,874 (6,591) 14,531
Other income (expense), net ................................ 83 83 (100) 96 1,251
-------- -------- -------- -------- --------
Income (loss) before income taxes .......................... 3,610 3,142 1,774 (6,495) 15,782
Provision for income taxes (state and foreign only) ........ 90 55 69 325 6,554
Cumulative effect of deferred income taxes
provided upon January 1, 1996 conversion to
C Corporation status(2) ............................. -- -- -- -- 6,700
-------- -------- -------- -------- --------
Net income (loss) ..................................... $ 3,520 $ 3,087 $ 1,705 $ (6,820) $ 2,528
Pro Forma Statement of Operations Data for 1995 and 1996:
Income (loss) before income taxes, as above................. $ (6,495) $ 15,782
Add back portion of compensation charge--stock options(1)... 17,900 --
-------- --------
Income before income taxes, as adjusted..................... 11,405 15,782
Provision for income taxes (federal, state and foreign)(2).. 5,083 6,554
-------- --------
Pro forma net income........................................ $ 6,322 $ 9,228
======== ========
Pro forma net income per share(3)........................... $ 0.36 $ 0.49
======== ========
Shares used in computing pro forma net income per share(3).. 17,490 18,924
======== ========
December 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital ............................................ $ 6,789 $ 4,179 $ 4,698 $ 7,640 $46,693
Total assets ............................................... 14,914 13,080 18,063 31,075 75,514
Short-term debt ............................................ 1,700 1,833 2,005 8,900 --
Long-term debt ............................................. -- -- -- -- --
Total shareholders' equity ................................. 9,641 8,123 8,243 10,848 55,372
</TABLE>
17
<PAGE>
(1) Reflects nonrecurring expense incurred in the third quarter of 1995 in
connection with an amendment to the Company's 1992 Stock Option Plan to
accelerate the exercisability of outstanding stock options, which had
previously been contingent upon the occurrence of certain events. The pro
forma adjustment of $17,900,000 is to reduce 1995 compensation expense to
the amount related to options granted in 1995 only. See Note 1 of the
Notes to the Combined Financial Statements.
(2) Prior to January 1, 1996, the Company was not subject to federal corporate
income taxation because of its election to be taxed under the provisions
of Subchapter S of the Code. Pro forma net income for 1995 has been
determined by assuming that the Company had been taxed as a C Corporation
for 1995. Pro forma net income for 1996 reflects the elimination of a
nonrecurring charge for the cumulative effect of deferred income taxes
incurred in the first quarter of 1996 in connection with the termination
of the Company's S Corporation status. See Notes 1 and 6 of Notes to the
Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for a more
complete explanation of the determination of the number of shares used in
computing pro forma net income per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required by this Item is incorporated by reference to pages 15
through 17 of the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages 19
through 31 of the Company's 1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later that 120 days after the end of the fiscal year
covered by this Report and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated by reference.
Such incorporation does not include the Compensation Committee Report or the
Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's Directors required by this Item is
incorporated by reference to the information contained under the captions
"Election of Director-Nominees" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement. The information
concerning the Company's officers required by this Item is included in the
Section in Part I hereof entitled "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the Company's Executive Officers required by this
Item is incorporated by reference to the information contained under the caption
"Executive Compensation and Other Matters" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership required by this Item is
incorporated by reference to the information contained under the caption
"Security Ownership of Management; Principal Shareholders" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. The following documents are filed as a part of this Report:
1. Financial Statements: The following Combined and Consolidated
Financial Statements of The Indus Group, Inc. and Report of Ernst &
Young LLP, Independent Auditors, are incorporated by reference to
pages 19 through 31 of the Registrant's 1996 Annual Report to
Shareholders.
Report of Ernst & Young LLP, Independent Auditors
Combined Balance Sheet - December 31, 1995
Consolidated Balance Sheet - December 31, 1996
Combined Statement of Operations - Years Ended December 31, 1994 and
1995
Consolidated Statements of Operations - Year Ended December 31, 1996
Combined and Consolidated Statement of Shareholders' Equity -
Three Year Period Ended December 31, 1996
Combined and Consolidated Statements of Cash Flows - Fiscal Years
Ended December 31, 1994, 1995 and 1996
Notes to Financial Statements
19
<PAGE>
2. Financial Statement Schedule: The following financial statement
schedule of The Indus Group, Inc. for the years ended December 31,
1994, 1995 and 1996 is filed as part of this Report and should be read
in conjunction with the Consolidated Financial Statements of The Indus
Group, Inc.
Schedule II Valuation and Qualifying Accounts............S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
3. Exhibits: The Exhibits listed on the accompanying index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by references into, this Report.
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement of Form S-1 (Reg.
No. 33-80573) filed with the Securities and Exchange
Commission on December 19, 1995.
3.2 Bylaws of Registrant, as amended, incorporated herein by
reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-80573) filed with the
Securities and Exchange Commission on December 19, 1995.
10.1 Form of Indemnification Agreement with Directors and
Officers, incorporated herein by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1 (Reg.
No. 33-80573) filed with the Securities and Exchange
Commission on December 19, 1995.
10.2* 1995 Stock Plan, incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-80573) filed with the Securities and
Exchange Commission on December 19, 1995.
10.3* 1995 Director Option Plan, incorporated herein by reference
to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-80573) filed with the Securities and
Exchange Commission on December 19, 1995.
10.4* Employee Stock Purchase Plan, incorporated herein by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-80573) filed with the
Securities and Exchange Commission on December 19, 1995.
10.5* 1992 Stock Option Plan, as amended, incorporated herein by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-80573) filed with the
Securities and Exchange Commission on December 19, 1995.
10.6* Amendments to Registrant's 1992 Stock Option Plan,
incorporated herein by reference to Exhibit 10.02 to the
Company's Quarterly Report on Form 10-Q (File No. 0-27806)
filed with the Securities and Exchange Commission on
November 13, 1996.
10.7 Form of Tax Indemnification Agreement, incorporated herein
by reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-80573) filed with the
Securities and Exchange Commission on December 19, 1995.
10.8 Software Master License Agreement between the Company and
Felton Enterprises, dated January 2, 1990, as amended to
date, incorporated herein by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1 (Reg. No.
33-80573) filed with the Securities and Exchange Commission
on December 19, 1995.
10.9 Conditional Assignment of Software Master License Agreement
and Underlying Software between the Company and Felton
Enterprises dated February 24, 1996 incorporated herein by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-80573) filed with the
Securities and Exchange Commission on December 19, 1995.
10.10 Amended and Restated Commercial Loan Agreement dated June
30, 1995 with Sumitomo Bank of California, as amended
through December 19, 1995, incorporated herein by reference
to Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-80573) filed with the Securities and
Exchange Commission on December 19, 1995.
20
<PAGE>
10.11 Third Amendment to Commercial Loan Agreement dated May 29,
1996 with Sumitomo Bank of California, incorporated herein
by reference to Exhibit 10.01 to the Company's Quarterly
Report on Form 10-Q (File No. 0-27806) filed with the
Securities and Exchange Commission on August 13, 1996.
10.12 Fourth Amendment to Commercial Loan Agreement dated
September 6, 1996 with Sumitomo Bank of California
incorporated herein by reference to Exhibit 10.01 to the
Company's Quarterly Report on Form 10-Q (File No. 0-27806)
filed with the Securities and Exchange Commission on
November 13, 1996.
10.13 Asset Acquisition Agreement with Indus International, Inc.,
incorporated herein by reference to Exhibit 10.10 to
Amendment No 3 to the Company's Registration Statement on
Form S-1 (Reg. No. 33- 80573) filed with the Securities and
Exchange Commission on February 28, 1996.
10.14 Lease for the Company's San Francisco, CA headquarters
dated January 24, 1990, as amended, incorporated herein by
reference to Exhibit 10.11 to the Company's Registration
Statement on form S-1 (Reg. No. 33-80573) filed with the
Securities and Exchange Commission on December 19, 1995.
10.15 Lease for the Company's Pittsburgh, PA sales office,
incorporated herein by reference to Exhibit 10.12 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-80573) filed with the Securities and
Exchange Commission on January 31, 1996.
11.1 Statement of Computation of Pro Forma Net Income Per Share
13.1 Annual Report to Shareholders for the year ended December
31, 1996 (to be deemed filed only to the extent required by
the instructions to exhibits for reports on Form 10-K).
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (included on page 22 of this Report).
27.1 Financial Data Schedule.
- - -----------
*Designates management contracts or compensatory plan arrangements required to
be filed as an exhibit pursuant to item 14(C) of this report on Form 10-K.
(b) Reports on Forms 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, The Indus Group, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
THE INDUS GROUP, INC.
(Registrant)
/s/ Robert W. Felton
Robert W. Felton
President, Chief Executive Officer and
Director
Date: March 26, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Robert W. Felton and Frank M. Siskowski, jointly
and severally, his/her attorneys-in-fact, each with the power of substitution,
for him/her in any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his/her
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert W. Felton President, Chief Executive Officer March 26, 1997
- - ------------------------- and Chairman of the Board of Directors
(Robert W. Felton) (Principal Executive Officer)
/s/ Frank M.Siskowski Senior Vice President of Finance March 26, 1997
- - ------------------------- and Chief Financial Officer
(Frank M. Siskowski) (Principal Financial and Accounting
Officer)
/s/ Richard W. MacAlmon Senior Vice President of Marketing March 26, 1997
- - ------------------------- and Director
(Richard W. MacAlmon)
/s/ Michael E. Percy Senior Vice President of Education March 26, 1997
- - ------------------------- and Director
(Michael E. Percy)
/s/ Katherine C. Holland Director March 26, 1997
- - -------------------------
(Katherine C. Holland)
/s/ Alan G. Merten Director March 26, 1997
- - -------------------------
(Alan G. Merten)
/s/ Donald F. Robertson Director March 26, 1997
- - -------------------------
(Donald F. Robertson)
22
<PAGE>
THE INDUS GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
Charged
Balance at Charged to to Other Changes-Add Balance
Beginning Costs and Account- (Deduct)- at End
Year Description of Year Expenses Describe Describe of Year
- - ---- ----------- ------- -------- -------- -------- -------
1996 Allowance for
doubtful amounts $652 $203(1) $449
---- ---- ----
1995 Allowance for
doubtful amounts $586 $66 $652
---- --- ----
1994 Allowance for
doubtful amounts $150 $436 $586
---- ---- ----
(1) Bad debts written off.
23
<PAGE>
Index to Exhibits
Number Description
------ -----------
3.1* Amended and Restated Articles of Incorporation of
Registrant.
3.2* Bylaws of Registrant, as amended.
10.1* Form of Indemnification Agreement with Directors and
Officers.
10.2* 1995 Stock Plan.
10.3* 1995 Director Option Plan.
10.4* Employee Stock Purchase Plan.
10.5* 1992 Stock Option Plan, as amended.
10.6* Amendments to Registrant's 1992 Stock Option Plan.
10.7* Form of Tax Indemnification Agreement.
10.8* Software Master License Agreement between the Company and
Felton Enterprises, dated January 2, 1990, as amended to
date.
10.9* Conditional Assignment of Software Master License Agreement
and Underlying Software between the Company and Felton
Enterprises dated February 24, 1996.
10.10* Amended and Restated Commercial Loan Agreement dated June
30, 1995 with Sumitomo Bank of California, as amended
through December 19, 1995.
10.11* Third Amendment to Commercial Loan Agreement dated May 29,
1996 with Sumitomo Bank of California.
10.12* Fourth Amendment to Commercial Loan Agreement dated
September 6, 1996 with Sumitomo Bank of California.
10.13* Asset Acquisition Agreement with Indus International, Inc.
10.14* Lease for the Company's San Francisco, CA headquarters
dated January 24, 1990, as amended.
10.15* Lease for the Company's Pittsburgh, PA sales office.
11.1 Statement of Computation of Pro Forma Net Income Per Share
13.1 Annual Report to Shareholders for the year ended December
31, 1996 (to be deemed filed only to the extent required by
the instructions to exhibits for reports on Form 10-K).
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (Included on page 22 of this report).
27.1 Financial Data Schedule.
- - -----------
* Previously filed.
24
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Indus Group develops, markets, implements and supports client/server
enterprise management software solutions for process industries worldwide. The
Company was founded in 1988, operated as a sole proprietorship until being
incorporated in 1990, and completed its initial publc offering on February 29,
1996. The Company derives its revenues primarily from software licenses,
implementation and training services and associated maintenance fees sold to
electric and gas utilities and other process-related industries.
<PAGE>
16
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations for the
periods indicated expressed as a percentage of total revenues.
<CAPTION>
Percentage of Total Revenues
Years Ended December 31,
1994 1995 1996
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software licensing fees 25% 20% 21%
Services and maintenance 75 80 79
- - ------------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100
- - ------------------------------------------------------------------------------------------------------------------
Cost of revenues 42 42 42
- - ------------------------------------------------------------------------------------------------------------------
Gross margin 58 58 58
Operating expenses:
Research and development 23 15 16
Sales and marketing 14 11 12
General and administrative 15 9 10
Compensation charge-stock options -- 35 --
- - ------------------------------------------------------------------------------------------------------------------
Total operating expenses 52 70 38
- - ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 6 (12) 20
Other income (expense), net -- -- 1
- - ------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 6 (12) 21
Provision for income taxes -- -- 9
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C Corporation status -- -- 9
- - ------------------------------------------------------------------------------------------------------------------
Net income (loss) 6% (12)% 3%
PRO FORMA STATEMENT OF OPERATIONS DATA FOR 1995 AND 1996:
Income (loss) before income taxes, as above (12)% 21%
Add back portion of compensation charge-stock options 33 --
- - ------------------------------------------------------------------------------------------------------------------
Income before income taxes, as adjusted 21 21
Provision for income taxes 9 9
- - ------------------------------------------------------------------------------------------------------------------
Pro forma net income 12% 12%
==================================================================================================================
</TABLE>
Revenues
The Company's revenues are derived from software licensing fees and from
services, which include implementation and training services coupled with
maintenance fees. Total revenues increased 76% from $30.6 million in 1994 to
$53.8 million in 1995, and 41% to $75.9 million in 1996. The increase in 1995
resulted from increased licensing activity in the latter half of 1994 and the
associated increase in demand for the Company's implementation and training
services. The growth in 1996 was attributable to increased licensing activity
combined with new customer licenses and subsequent implementation and training
services. The Company does not believe the revenue growth experienced in 1996
is necessarily indicative of any revenue growth that may occur in future
periods.
Cost of Revenues
Cost of revenues consists primarily of: (i) personnel and related costs for
implementation, including the costs of the Company's Account Executives, and
(ii) personnel and related costs for training and customer support services.
Substantially all of the cost of revenues is attributable to providing
services and maintenance. Costs of software license fees, which consist
primarily of packaging and production costs, are not significant and are not
segregated in the Company's accounting records. All software development costs
are expensed to research and development as incurred. Cost of revenues
increased 76% from $12.8 million in 1994 to $22.6 million in 1995 and 41% to
$31.8 million in 1996, and represented 42% of total revenues in each of those
years. The 1995 and 1996 increases resulted from the cost of increased
services associated with major new license agreements as well as the cost of
additional services associated with the expansion of existing projects.
Research and Development
Research and development expenses consist primarily of: (i) personnel and
related costs and (ii) computer timeshare costs directly attributable to the
development of new software application products, enhancements to existing
products and the costs of porting the Company's products to different
platforms. Research and development expenses increased by 17% from $7.1
million in 1994 to $8.3 million in 1995 and increased by 50% to $12.5 million
in 1996, and represented 23%, 15% and 16% respectively, of total revenues in
those years. The decline in research and development as a percentage of total
revenues in 1995 was due to the increase in total revenues. Research and
development investment increased in absolute dollars and as a percentage of
total revenues in 1996 as compared to 1995 due to the Company committing
substantial development resources towards incorporating new technologies into
PASSPORT and designing additional PASSPORT applications. The Company believes
that a significant level of research and development is essential to remain
competitive and will continue to invest development resources towards
incorporating new technologies into PASSPORT and designing additional PASSPORT
functionality. The level of these expenditures for a particular period may
vary depending on the projects in progress.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility of the software is established, after which any additional costs
are capitalized. To date, the Company has expensed all software development
costs because development costs incurred subsequent to the establishment of
technological feasibility have not been material.
Sales and Marketing
Sales and marketing expenses increased by 39% from $4.1 million in 1994 to
$5.7 million in 1995 and increased by 64% to $9.3 million in 1996, and
represented 14%, 11% and 12%, respectively, of total revenues in those years.
The 1995 and 1996 increases in absolute dollars resulted from increased
staffing levels and increased commissions expenses associated with increased
revenues. The Company believes that sales and marketing expenses as a
percentage of total revenues will increase in 1997 due to the reallocation of
certain expenditures originally intended for research and development to sales
and marketing efforts, and will increase as the Company expands its presence
in the domestic market, initiates operations in additional international
markets, develops new and existing marketing and product strategic alliances
and increases focus on vertical markets.
General and Administrative
General and administrative expenses increased by 4% from $4.7 million in 1994
to $4.9 million in 1995 and increased by 59% to $7.8 million in 1996. These
expenses represented 15%, 9% and 10%, respectively, of total revenues in those
years. The increase in 1996 primarily resulted from incremental expenditures
related to becoming a public company and expansion in staffing to support the
Company's growth.
Compensation Charge - Stock Options
The Company amended its 1992 Stock Option Plan effective in September 1995 to
accelerate the exercisability of all outstanding stock options (covering
1,788,570 shares of Common Stock). Exercisability had previously been
contingent upon certain "liquidity events" such as an initial public offering
or an acquisition of the Company. As a result of this amendment, the Company
recognized a non-recurring compensation charge of $18.9 million in the third
quarter of 1995.
Provision for Income Taxes
Effective upon its incorporation in 1990, the Company elected to have its
United States income taxed under Subchapter S of the Code. Accordingly, income
tax provisions prior to 1996 were principally attributable to state taxes and
taxes imposed by governments on the Company's foreign operations. The
Company's S Corporation status terminated effective January 1, 1996, and the
Company was subject to federal income taxation at the corporate level
thereafter. In connection with the termination of S Corporation status as of
January 1, 1996, a one-time charge representing a cumulative net federal and
state deferred income tax liability of $6.7 million was recorded during the
first quarter of 1996.
Net Income (Loss)
The Company's net income of $2.5 million in 1996 increased from the net loss
recorded in 1995, primarily due to increased revenues. The effect of the
increased revenues was partially offset by the factors described above and by
a one-time charge representing a cumulative net federal and state deferred
income tax liability associated with the Company's conversion to C Corporation
status. The loss in 1995 was a result of the non-recurring compensation charge
upon elimination of the contingency related to stock options.
o LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company financed its operations primarily through cash
provided by operations and the proceeds of its initial public offering. In
March 1996, the Company received $33.9 million, representing the proceeds (net
of underwriting commissions and offering costs) from an initial public
offering of 2,500,000 shares of its Common Stock. Cash provided by operations
was $2.3 million, $3.1 million and $20.2 million in 1994, 1995 and 1996,
respectively. Accounts receivable increased substantially in 1995 as the
overall level of new licensing activity and associated service levels
increased. Accounts receivable decreased in 1996 in spite of increased
revenues as a result of additional focus on collections. Investing activities,
consisting primarily of the purchase of marketable securities and acquisitions
of property and equipment, used cash of approximately $861,000, $577,000 and
$33.3 million in 1994, 1995 and 1996, respectively. Financing activities in
1994 and 1995 used cash of $1.4 million and $2.6 million, respectively.
Financing activities in 1996 generated cash of $26.3 million primarily as a
result of the proceeds from the initial public offering partially offset by
repayment of the line of credit.
As of December 31, 1996, the Company's principal sources of liquidity
consisted of approximately $13.3 million in cash and cash equivalents and
$26.5 million in marketable securities. In addition, the Company has an
unsecured revolving bank line of credit agreement which permits borrowings,
including stand-by letters of credit, of up to $15 million. The facility
expires in May 1997. The Company believes it will be able to renew this
agreement or replace it on terms acceptable to the Company. No borrowings were
outstanding under this line at December 31, 1996.
The Company presently anticipates capital expenditures of approximately $6.0
million in 1997, primarily for equipment and furniture.
The Company believes that existing cash and marketable securities, anticipated
cash flow from operations and available bank borrowings will be sufficient to
meet its cash requirements during at least the next 12 months. The foregoing
statement regarding the Company's expectations for continued liquidity is a
forward-looking statement, and actual results may differ materially depending
on a variety of factors, including variable operating results.
17
<PAGE>
18
CONTENTS OF FINANCIAL STATEMENTS
19 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
20 BALANCE SHEETS
21 STATEMENTS OF OPERATIONS
22 STATEMENT OF SHAREHOLDERS' EQUITY
23 STATEMENTS OF CASH FLOWS
24 NOTES TO FINANCIAL STATEMENTS
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
The Indus Group, Inc.
We have audited the accompanying consolidated balance sheet of The Indus Group,
Inc. as of December 31, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended, and
the accompanying combined balance sheet of The Indus Group, Inc. and Indus
International, Inc. (a related entity acquired by The Indus Group, Inc. in 1996)
as of December 31, 1995, and the related combined statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Indus Group,
Inc. at December 31, 1996, and the consolidated results of its operations and
its cash flows for the year then ended and the combined financial position of
The Indus Group, Inc. and Indus International, Inc. at December 31, 1995, and
the combined results of their operations and their cash flows for the two years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
January 24, 1997
19
<PAGE>
20
<TABLE>
COMBINED (1995); CONSOLIDATED (1996) BALANCE SHEETS
ASSETS
<CAPTION>
(In thousands, except share amounts)
December 31,
Current assets 1995 1996
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 45 $ 13,266
Marketable securities -- 26,524
Billed accounts receivable, less allowance for doubtful accounts of $652 and $449
at December 31, 1995 and 1996, respectively 17,661 16,889
Unbilled accounts receivable 9,053 5,633
Other current assets 1,108 4,523
- - -------------------------------------------------------------------------------------------------------------------
Total current assets 27,867 66,835
Marketable securities - maturing beyond one year -- 2,129
Property and equipment, net 3,128 6,337
Employee notes receivable 80 140
Other assets -- 73
- - -------------------------------------------------------------------------------------------------------------------
$ 31,075 $ 75,514
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $ 8,900 $ --
Accounts payable 1,331 2,165
Accrued compensation 1,841 3,030
Income taxes payable 218 --
Deferred income taxes 326 3,837
Other accrued liabilities 186 511
Deferred revenue 7,425 10,599
- - -------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,227 20,142
Commitments -- --
Shareholders' equity:
Preferred stock -- --
Common stock 609 19
Additional capital 18,900(1) 46,425
Other (438) (300)
Retained earnings (deficit) (8,223) 9,228
- - -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,848 55,372
- - -------------------------------------------------------------------------------------------------------------------
$ 31,075 $ 75,514
===================================================================================================================
<FN>
(1) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature, which had precluded exercise of these
options. This amount was charged to operations in September 1995 and
reduced retained earnings at December 31, 1995.
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
COMBINED (1994 and 1995); CONSOLIDATED (1996) STATEMENTS OF OPERATIONS
<CAPTION>
(In thousands, except per share amounts)
Years Ended December 31,
1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software licensing fees $ 7,547 $ 10,676 $ 16,208
Services and maintenance 23,044 43,115 59,731
- - ---------------------------------------------------------------------------------------------------------------------
Total revenues 30,591 53,791 75,939
Cost of revenues (1) 12,798 22,578 31,790
- - ---------------------------------------------------------------------------------------------------------------------
Gross margin 17,793 31,213 44,149
Operating expenses:
Research and development 7,120 8,306 12,493
Sales and marketing 4,144 5,680 9,306
General and administrative 4,654 4,918 7,819
Compensation charge - stock options (2) -- 18,900 --
- - ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 15,918 37,804 29,618
- - ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,875 (6,591) 14,531
Interest and other income, net 7 167 1,356
Interest expense (108) (71) (105)
- - ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,774 (6,495) 15,782
Provision for income taxes (state and foreign only in 1994 and 1995) 69 325 6,554
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C-Corporation status (3) -- -- 6,700
- - ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,705 $ (6,820) $ 2,528
=====================================================================================================================
PRO FORMA STATEMENT OF OPERATIONS DATA:
Income (loss) before income taxes, as above $ (6,495) 15,782
Add back portion of compensation charge - stock options (4) 17,900 --
- - ---------------------------------------------------------------------------------------------------------------------
Income before income taxes, as adjusted 11,405 15,782
Provision for income taxes (federal, state and foreign) 5,083 6,554
- - ---------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 6,322 9,228
=====================================================================================================================
Pro forma net income per share $ 0.36 0.49
=====================================================================================================================
Shares used in computing pro forma net income per share 17,490 18,924
=====================================================================================================================
<FN>
(1) Includes royalties due to the Chief Executive Officer and principal
shareholder of $924 in 1994. No royalties were due after 1994.
(2) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature, which had precluded exercise of these
options.
(3) Deferred income taxes related to differences in cash basis accounting for
income tax purposes and accrual basis accounting for financial statement
purposes through December 31, 1995.
(4) To reduce compensation expense to amount related to options granted in 1995
only.
See accompanying notes.
</FN>
</TABLE>
21
<PAGE>
22
<TABLE>
COMBINED (1994 and 1995); CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
(In thousands, except share amounts)
Retained
Earnings Total
Common Additional (Accumulated Shareholders'
Stock Capital Other Deficit) Equity
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 (1) 131 $ -- $ (9) $ 8,001 $ 8,123
Repurchase of common stock (2) -- -- (47) (49)
Cash distributions to shareholders -- -- -- (1,546) (1,546)
Translation adjustment -- -- 9 -- 9
Net income -- -- -- 1,705 1,705
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 129 -- -- 8,113 8,242
Issuance of common stock as deferred compensation 480 -- (480) -- --
Cash distributions to shareholders (2) -- -- -- (9,516) (9,516)
Translation adjustment -- -- (6) -- (6)
Stock options (3) -- 18,900 -- -- 18,900
Amortization of deferred compensation -- -- 48 -- 48
Net loss -- -- -- (6,820) (6,820)
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 609 18,900 (438) (8,223) 10,848
Conversion to C Corporation on January 1, 1996 -- (8,223) -- 8,223 --
Reincorporation and adoption of $.001 par value (494) 494 -- -- --
Issuance of common stock (4) 4 35,288 -- -- 35,292
Tax benefit from employee stock transactions -- 6,669 -- -- 6,669
Purchase of Indus International, Inc. net assets (1) (100) (3) -- -- (103)
Unrealized loss on marketable securities -- -- (42) -- (42)
Translation adjustment -- -- 84 -- 84
Amortization of deferred compensation -- -- 96 -- 96
Net income -- (6,700) -- 9,228 2,528
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 19 $ 46,425 $ (300) $ 9,228 $ 55,372
=============================================================================================================================
<FN>
(1) Except for the $100 capitalization of Indus International, Inc., all
transactions in common stock relate to The Indus Group, Inc.
(2) Cash distributions to shareholders have been made by The Indus Group, Inc.
only. Indus International, Inc. did not make any cash distributions prior
to its acquisition by The Indus Group, Inc.
(3) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature.
(4) Consists of $33,864 received from February 29, 1996 initial public offering
(2,500,000 common shares offered at $15 per share less underwriting
commission and expenses), $1,052 received from issuance of 71,309 common
shares under the Employee Stock Purchase Plan and $376 received from the
issuance of 916,845 common shares upon exercise of options.
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
COMBINED (1994 and 1995); CONSOLIDATED (1995) STATEMENTS OF CASH FLOWS
<CAPTION>
(In thousands)
Years Ended December 31,
1994 1995 1996
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,705 $ (6,820) $ 2,528
Adjustments to reconcile net income to net cash provided by operating activities:
Compensation charge - stock options -- 18,900 --
Depreciation and amortization 1,105 901 1,360
Provision for doubtful accounts 436 325 (203)
Amortization of deferred compensation -- 48 96
Cumulative effect of deferred income taxes provided on conversion to
C-corporation status -- -- 6,700
Changes in operating assets and liabilities:
Billed accounts receivable (4,782) (8,910) 975
Unbilled accounts receivable (984) (4,502) 3,420
Receivable from shareholder 306 -- --
Other current assets (387) (316) (3,415)
Employee notes receivable 157 13 (61)
Accounts payable 191 223 834
Accrued payroll and related expense 348 824 1,189
Income taxes payable 7 (75) 6,451
Deferred income taxes 14 384 (3,189)
Other accrued liabilities 299 (387) 106
Deferred revenue 3,780 2,596 3,174
Other 62 (59) 231
- - --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,257 3,145 20,196
- - --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities -- -- (39,010)
Sales and maturities of marketable securities -- -- 10,314
Acquisition of property and equipment (861) (577) (4,568)
- - --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (861) (577) (33,264)
- - --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayment) of line of credit 172 6,895 (8,900)
Net proceeds from issuance of common stock -- -- 35,292
Repurchase of common stock (49) -- --
Distributions to shareholders (1,546) (9,517) --
Purchase of Indus International, Inc. net assets -- -- (103)
- - --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,423) (2,622) 26,289
- - --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (27) (54) 13,221
Cash and cash equivalents at beginning of period 126 99 45
- - --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 99 $ 45 $ 13,266
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 108 $ 72 $ 105
==========================================================================================================================
Income taxes paid $ -- $ 236 $ 5,417
==========================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Issuance of common stock in exchange for notes receivable $ -- $ 480 $ --
==========================================================================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
23
<PAGE>
24
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 1....NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
o ORGANIZATION AND BUSINESS
The Indus Group, Inc. was incorporated under the laws of the state of
California in 1990. On March 1, 1996, pursuant to an Asset Purchase Agreement,
The Indus Group, Inc. purchased all of the assets and assumed all of the
liabilities of Indus International, Inc., an entity which was incorporated in
1993 to operate in the United Kingdom and which was related to The Indus
Group, Inc. through control by common shareholders. The purchase price of the
net assets, which equaled the net book value, was $103,252. Concurrent with
this purchase, The Indus Group, Inc. established a new wholly-owned subsidiary
also named Indus International, Inc. to which the net assets were transferred.
On January 1, 1996, The Indus Group, Inc. established a foreign sales
corporation, Indus Foreign Sales Corporation. Collectively, the entities are
referred to as the Company.
The Company develops, markets, implements and supports client/server
enterprise management software solutions. The Company focuses primarily on
process industry companies, including electric utility, nuclear, oil and gas,
chemical refining, steel and forest products companies.
o BASIS OF PRESENTATION
The Company's combined financial statements for 1994 and 1995 include the
accounts of The Indus Group, Inc. and Indus International, Inc. The Company's
consolidated financial statements for 1996 include the accounts of The Indus
Group, Inc., Indus International, Inc. and Indus Foreign Sales Corporation.
All significant intercompany accounts and transactions have been eliminated.
o SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company provides its software to customers under contracts which provide
for both software license fees and system implementation services. Revenues
from system implementation services, which generally are time- and
material-based, are recognized as direct contract costs are incurred. Revenues
from application software licenses are recognized as earned revenue over the
estimated time period to complete implementation of the software, which period
generally is twelve to fourteen months. Revenues from client workstation
software are recognized as billed.
A portion of license fees is deferred initially and subsequently recognized
over the one-year period during which continuing maintenance and support
services are provided to customers under the contracts. After that initial
contract period, additional maintenance and support services are subject to
separate contracts for which revenue is recognized ratably over the contract
period.
Unbilled accounts receivable represent amounts related to revenue which has
been recorded either as deferred revenue or earned revenue but which has not
been billed. Generally, unbilled amounts are billed within 90 days.
Deferred revenue represents primarily unearned license fees and unearned
maintenance and support fees.
Concentration of Credit Risk
The Company's customers are generally large companies in the electrical
utility, nuclear, oil and gas, chemical refining, steel and forest products
industries. The Company performs ongoing credit evaluations of its customers
and does not require collateral. The Company maintains allowances for
potential credit losses and such losses have been within management's
expectations. Two customers accounted for 12% and 11% of revenues in 1995 and
11% and 10% of revenues in 1996. No individual customer represented greater
than 10% of sales in 1994.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The Company generally invests its cash and cash equivalents in
money market accounts.
The Company presently classifies all marketable securities as
available-for-sale investments and carries them at fair market value.
Marketable securities represent U.S. government obligations and indirect
investments in municipal obligations. Marketable securities classified as
long-term mature no later than July 1998. Unrealized holding gains and losses,
net of taxes, are carried as a separate component of shareholders' equity.
Depreciation and Amortization
Depreciation on office and computer equipment and furniture is computed using
the straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the related lease term or their estimated useful lives.
The Company's policy is to capitalize software development costs after
technological feasibility has been established. To date, software development
costs incurred subsequent to the establishment of technological feasibility
have not been material and have not been capitalized.
Income Taxes
Effective January 1, 1996, the Company elected C Corporation status for income
tax purposes. Prior to 1996, the Company was an S Corporation and, as a
result, income determined on the cash basis for income tax purposes was
taxable to the shareholders, and not the Company, for federal and certain
state income tax purposes. In connection with the termination of S Corporation
status on January 1, 1996, a $6.7 million cumulative effect charge was
recorded. The majority of the cumulative effect charge is due to changing from
the cash basis of accounting as an S Corporation to the accrual basis of
accounting as a C Corporation. The related deferred tax liability is payable
over four years.
The provision for income taxes included in the accompanying financial
statements represents federal, state and foreign income taxes in 1996 and
state income taxes in certain states for the Company and foreign income taxes
relating to Indus International, Inc. in 1995 and 1994.
Pro Forma Data
For purposes of presenting comparative earnings and calculating earnings per
share data, pro forma net income for 1996 reflects the elimination of the $6.7
million cumulative deferred income tax charge.
<PAGE>
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
Pro forma net income in 1995 reflects provisions for taxes assuming the
Company was taxed as a C Corporation. Furthermore, pro forma net income data
in 1995 includes a $1 million nonrecurring compensation charge representing
the fair value of the options granted in 1995 and excludes a $18.9 million
nonrecurring compensation charge representing the value of unexercised
non-qualified stock options upon elimination of the contingency feature. The
contingency feature was intended to preserve the Company's S Corporation
qualification by limiting the number of shareholders. If the Company had not
been an S Corporation, no contingency feature would have been necessary.
Per Share Data
Pro forma net income per share is computed using pro forma net income and the
weighted average number of common and dilutive common equivalent shares
outstanding during each period. Dilutive common equivalent shares consist of
incremental common shares issuable upon the assumed exercise of stock options
(using the treasury stock method). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and Staff policy, the number of shares
in 1995 also includes: (i) all common shares issued (and shares subject to
stock options granted) within 12 months of the initial public offering date,
as if they were outstanding for all periods presented; and (ii) 634,444
additional shares (equivalent to dividends paid in 1995 divided by the
expected offering price per share).
Foreign Currency Translation
Gains and losses from the translation of Indus International, Inc.'s financial
statements are included in shareholders' equity. Net gains and losses
resulting from foreign exchange transactions were immaterial in all periods
presented.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
NOTE 2....MARKETABLE SECURITIES
The Company held no marketable securities prior to the initial public offering
of common stock in February 1996. The following is a summary of marketable
securities, all of which are available for sale at December 31, 1996 (in
thousands):
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- - --------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 16,067 $ 0 $(65) $ 16,002
Municipal obligations 13,628 23 0 13,651
- - --------------------------------------------------------------------------------
$ 29,695 $23 $(65) $ 29,653
================================================================================
Included in:
Cash and cash equivalents $ 1,000 $ 0 $ 0 $ 1,000
Short term investments 26,579 10 (65) 26,524
Long term investments 2,116 13 0 2,129
- - --------------------------------------------------------------------------------
$ 29,695 $23 $(65) $ 29,653
================================================================================
There were no realized gains or losses on sales of marketable securities. The
net adjustment to unrealized holding losses on marketable securities included
as a component of shareholder's equity totaled $41,986 in 1996.
25
<PAGE>
26
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 3....PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following (in
thousands):
December 31,
1995 1996
- - --------------------------------------------------------------------------------
Office and computer equipment $ 4,233 $ 6,886
Furniture 2,153 2,973
Leasehold improvements 434 1,337
Purchased software 272 465
- - --------------------------------------------------------------------------------
7,092 11,661
Less accumulated depreciation and amortization 3,964 5,324
- - --------------------------------------------------------------------------------
$ 3,128 $ 6,337
================================================================================
NOTE 4....LINE OF CREDIT
The Company has an unsecured revolving bank line of credit agreement,
renewable annually in May, which permits borrowings, including stand-by
letters of credit, of up to $15 million. No direct borrowings were outstanding
under this agreement at December 31, 1996. Interest would have been payable at
the bank's prime rate of 8.25% at December 31, 1996. Borrowings outstanding
under this agreement at December 31, 1995 were $8.9 million, with interest at
the bank's prime rate of 8.50%. Stand-by letters of credit outstanding were
$232,641 and $602,641 at December 31, 1995 and 1996, respectively. The credit
agreement contains certain affirmative and negative covenants. The Company was
in compliance with these covenants at December 31, 1996.
NOTE 5....RELATED PARTY TRANSACTIONS
The Company had a software license and royalty agreement with its Chief
Executive Officer and principal shareholder through 1995. In 1995, accrual and
payment under this agreement was waived. The related royalty expense, which
was included in the cost of revenues, was $924,956 for 1994 (none in 1995).
There were no royalties payable at December 31, 1996.
The Company held employee notes receivable totaling $79,827 and $140,763 at
December 31, 1995 and 1996, respectively, from officers and employees of the
Company.
NOTE 6....COMMITMENTS
The Company leases its office facilities under various operating lease
agreements. The leases require monthly rental payments in varying amounts
through 2001. These leases also require the Company to pay all property taxes,
normal maintenance, and insurance on the leased facilities.
Total rental expense under these leases was approximately $1,450,000, $2,378,000
and $3,888,000 for 1994, 1995 and 1996, respectively. Future minimum lease
payments under all non-cancelable operating leases are as follows (in
thousands):
December 31, 1996
1997 $ 3,529
1998 3,019
1999 2,717
2000 2,313
2001 589
- - -------------------------------------
$ 12,167
=====================================
A stand-by letter of credit ($202,674 at December 31, 1996), which is required
in the lease for the Company's office, has been issued under The Indus Group,
Inc.'s bank line of credit. This letter of credit requirement will terminate
in May 1997.
In 1995, the bank issued four irrevocable stand-by letters of credit totaling
$29,967. In 1996, the bank issued two additional irrevocable stand-by letters
of credit totaling $370,000. These letters are a requirement of two of the
Company's licensing agreements. These letter of credit requirements will
terminate in 1998.
<PAGE>
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 7....SHAREHOLDERS' EQUITY
On December 27, 1995, the articles of incorporation of The Indus Group, Inc.
were amended to: (i) increase the authorized number of common shares to
50,000,000, all of which are voting shares; (ii) effect a 17-for-one split of
the outstanding common shares (and shares under option), and (iii) authorize
5,000,000 shares of preferred stock, issuable in series, with the rights and
preferences to be established for each series. All share and per share data in
the accompanying financial statements have been adjusted retroactively to give
effect to the stock split. No series of preferred stock has been designated.
Preferred and Common Stock
On February 29, 1996, the Company completed an initial public offering in
which it sold 2,500,000 shares of common stock at $15.00 per share. The
offering raised net proceeds of $33,863,764 after underwriting discount and
$1,011,236 in related expenses.
Common Stock
The following is a summary of the authorized and issued common stock of The
Indus Group, Inc. and in 1995 only for Indus International, Inc.:
December 31,
1995 1996
- - --------------------------------------------------------------------------------
The Indus Group, Inc.:
Authorized shares, no par value in 1995,
$.001 par value in 1996 50,000,000 50,000,000
Issued and outstanding 15,102,222 18,590,376
Amount $ 509,061 $ 18,590
- - --------------------------------------------------------------------------------
Indus International, Inc.:
Authorized shares, no par value 200,000 (not applicable)
Amount $ 100,000 (not applicable)
- - --------------------------------------------------------------------------------
Total Amount for The Company $ 609,061 $ 18,590
================================================================================
NOTE 8....INCENTIVE COMMON STOCK PLANS ISSUED AS DEFERRED COMPENSATION
Common Stock
In June 1995, the Company issued 162,622 shares of common stock to several
employees in exchange for notes aggregating $109,626. The notes will be
forgiven over a five-year period provided the note holders continue their
employment with the Company. Additional deferred compensation of $370,000 has
been recorded for the difference between the notes and the deemed fair value
of the shares at the date of issuance. The $479,626 total deferred
compensation is being amortized over the five-year period.
1992 Stock Option Plan
In 1992, the Company adopted a stock option plan under which options for a
total of 1,805,400 shares of common stock may be granted to employees. The
exercise price of each common share under option was the book value per share
on the grant date. No further options will be granted under the 1992 Stock
Option Plan. Under the plan, options granted would not be exercisable until a
"liquidity event" had occurred. A liquidity event was defined as the sale of
more than 20% of the voting stock interest to an independent party or parties
or an acquisition of the Company which would result in termination of the
plan. Options granted would expire on the earlier of termination of employment
or ten years. Upon expiration of an option, the Company was obligated to pay
the optionee the increase in book value over the term of the option ("the book
value appreciation feature"). If any options were exercised, the Company would
retain the right to repurchase the issued shares at their then book value upon
termination of employment.
As of September 29, 1995, the board of directors eliminated the liquidity
event contingency, thereby causing the options then outstanding as to
1,791,970 common shares to be exercisable in their entirety. As a result,
these options were valued as of September 30, 1995 for financial statement
purposes and a one-time charge of $18,900,000 was recorded in the combined
statement of operations. The book value appreciation feature, in the event of
expiration of an option, also was eliminated at that time.
A summary of activity under the option plan is as follows:
Options Outstanding
--------------------------
Shares Available Number Price Per
for Grant of Share Share
- - --------------------------------------------------------------------------------
Balances at December 31, 1993 99,790 1,705,610 $0.28-$0.35
Options canceled 298,860 (298,860) $0.28-$0.35
- - --------------------------------------------------------------------------------
Balances at December 31, 1994 398,650 1,406,750 $0.28-$0.35
Options granted (438,260) 438,260 $0.69
Options canceled 56,440 (56,440) $0.28
- - --------------------------------------------------------------------------------
Balances at December 31, 1995 16,830 1,788,570 $0.28-$0.69
Options exercised -- (916,845) $0.28-$0.69
Options canceled 1,700 (1,700) $0.28
- - --------------------------------------------------------------------------------
Balances at December 31, 1996 18,500 870,025 $0.28-$0.69
================================================================================
27
<PAGE>
28
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
1995 Stock Plan
The 1995 Stock Plan provides for the grant of incentive stock options to
employees of the Company and nonstatutory stock options to employees,
directors and consultants of the Company. A total of 1,500,000 shares of
common stock have been reserved for issuance under the plan. The incentive
stock options will be granted at not less than the fair market value of the
stock on the date of grant; nonqualified stock options will be granted at not
less than 85% of the fair market value of the stock on the date of grant. The
options will generally vest over a one to four year period and have a maximum
term of ten years.
A summary of activity under the option plan is as follows:
Options Outstanding
----------------------------
Shares Available Number of Price Per
for Grant Share Share
- - --------------------------------------------------------------------------------
Balances at December 31, 1995 1,500,000 --
Options granted (807,350) 807,350 $16.50-$22.75
Options canceled 2,250 (2,250) $16.50
- - --------------------------------------------------------------------------------
Balances at December 31, 1996 694,900 805,100 $16.50-$22.75
================================================================================
1995 Director Option Plan
The 1995 Director Option Plan provides for the issuance of nonstatutory stock
options to nonemployee directors of the Company. A total of 100,000 shares of
common stock have been reserved for issuance. Under the plan, nonemployee
directors were each granted an option to purchase 10,000 shares of common
stock upon the completion of the initial public offering in February 1996. The
options were granted at an exercise price of $15.00 per share and vest
quarterly over a four year period. On each date of the Company's Annual
Meeting of Shareholders, each nonemployee director will be granted an option
to purchase an additional 2,500 shares, provided the director has served on
the board for at least six months. Future options will be granted at the fair
market value of the stock on the date of grant and will vest quarterly over a
four year period.
1995 Employee Stock Purchase Plan
The Company has an employee stock purchase plan under which 500,000 shares of
common stock have been reserved for issuance. The plan allows for eligible
employees to purchase stock at 85% of the lower of the fair market value of
the Company's common stock as of the first day of each six-month offering
period or the fair market value of the stock at the end of the offering
period. The offering period will commence on January 1 and July 1 of each
year, with the first offering period beginning on such date following the
closing of the initial public offering in February 1996. Purchases will be
limited to 10% of each employee's compensation. The Company issued 71,309
shares under the plan in 1996 at prices ranging from $12.75 to $17.21 per
share.
<PAGE>
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 9....ALTERNATIVE METHOD OF VALUING STOCK OPTIONS
The Company has elected to follow Accounting Principal Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation," (Statement 123) requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized in the Company's financial statements.
The Company's 1995 Stock Option Plan has authorized the grant of options to
employees for up to 1,500,000 shares of the Company's common stock. All
options granted typically have 10 year terms and vest and become fully
exercisable at the end of 4 years of continued employment.
Pro forma information regarding net income and earnings per share is required
by Statement 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the minimum value
method for 1995 and the Black-Scholes option pricing model for 1996 with the
following weighted-average assumptions for 1995 and 1996, respectively:
risk-free interest rates of 6.0% and 5.75%; dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of 0.75 and
0.0; and a weighted-average expected life of the option of 1 and 4 years.
The option valuation models were developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information net income including compensation expense, net of tax of
$1,074,000 and $878,000 for the year ended December 31, 1995 and 1996,
respectively, is as follows (in thousands except for earnings per share
information):
1995 1996
- - ---------------------------------------------
Pro forma
net income $ 5,248 $ 8,350
Pro forma
earnings per share: $ 0.29 $ 0.44
<TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity, and related information for
the years ended December 31, follows:
<CAPTION>
1995 1996
----------------------------- -----------------------------
Weighted- Weighted-
Average Average
Options Exercise Options Exercise
(in thousands) Price (in thousands) Price
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 1,407 $0.32 1,789 $ 0.41
Granted 438 0.69 827 16.50
Exercised -- -- (917) 0.41
Forfeited (56) 0.28 (4) 5.25
- - ------------------------------------------------------------------------------------------------
Outstanding-end of year 1,789 $0.41 1,695 $ 8.38
====== ======
Exercisable at end of year 1,789 $0.41 874 $ 8.38
Weighted-average fair value of
options granted during the year $ 5.16 $16.71
</TABLE>
29
<PAGE>
30
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
<TABLE>
The following table summarizes information about fixed stock options outstanding
as of December 31, 1996.
<CAPTION>
Options Outstanding Options Exercisable
- - ----------------------------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Exercise Outstanding As Contractual Exercise Exercisable as Exercise
Prices of 12/31/96 Life Price of 12/31/96 Price
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.28-$0.69 870,025 6.53 $ 0.41 870,025 $ 0.41
$15.00-$22.75 825,100 9.28 $ 16.79 3,750 $15.00
- - --------------------------------------------------------------------------------------
Total 1,695,125 7.87 $ 8.38 873,775 $ 0.47
======================================================================================
</TABLE>
NOTE 10....EMPLOYEE BENEFIT AND PROFIT-SHARING PLANS
The Company has a defined contribution 401(K) plan. All employees over the age
of 21 who have completed at least one-half year of service are eligible to
participate. Each participant may elect to have amounts deducted from his or
her compensation and contributed to the plan up to 15% of his or her base
salary. All contributions are fully vested at the time the employee becomes an
active participant.
The Company also has a profit sharing plan. All employees over the age of 21
who have completed at least one-half year of service are eligible to
participate. Contributions to the plan are at the discretion of the board of
directors and are made to eligible employees' individual accounts in
proportion to their base salary. Contribution expense related to the profit
sharing plan for 1994, 1995 and 1996 was approximately $100,000, $238,000 and
$250,000, respectively.
NOTE 11....EXPORT SALES
Export sales were as follows (in thousands):
1994 1995 1996
- - --------------------------------------------------------------------------------
Europe $ 1,457 $ 2,017 $ 7,337
Pacific 2,237 1,766 2,326
Other 753 2,118 3,005
- - --------------------------------------------------------------------------------
$ 4,447 $ 5,901 $12,668
================================================================================
NOTE 12....INCOME TAXES
The provision for income taxes (state and foreign only in 1994 and 1995)
consists of the following (in thousands):
1994 1995 1996
- - --------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ 7,639
State and foreign 55 95 2,202
- - --------------------------------------------------------------------------------
Deferred: 55 95 9,841
- - --------------------------------------------------------------------------------
Federal -- -- (2,522)
State and foreign 14 230 (765)
- - --------------------------------------------------------------------------------
14 230 (3,287)
- - --------------------------------------------------------------------------------
$ 69 $ 325 $ 6,554
================================================================================
<PAGE>
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
The provision for income taxes reconciles to the amount computed by applying the
federal statutory rate to income before provision for income taxes as follows
(in thousands):
1996
Amount Percent
- - --------------------------------------------------------------------------------
Federal statutory rate $ 5,524 35.0%
State taxes, net of federal benefit 934 5.9
FSC benefit (294) (1.8)
Other 390 2.4
- - --------------------------------------------------------------------------------
$ 6,554 41.5%
================================================================================
No state income tax benefit has been recorded in connection with the $18.9
million compensation charge recorded in 1995. The 1996 current federal and
state tax provisions do not reflect the tax savings of $6,669,000 resulting
from deductions associated with the exercise of stock options by employees in
1996. This tax benefit has been included in additional capital in 1996.
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the net
deferred tax liability are as follows (in thousands):
December 31,
1995 1996
- - --------------------------------------------------------------------------------
Accounts receivable allowances $ -- $ (197)
Tax over book depreciation and amortization -- 363
Nondeductible accruals -- (782)
Deferred licensing fees -- (3,820)
State income taxes -- (339)
Conversion from cash to accrual basis of accounting -- 8,612
Cash basis of accounting for income taxes 312 --
Other, net 14 --
- - --------------------------------------------------------------------------------
Net deferred tax liability $ 326 $ 3,837
================================================================================
The additional taxable income resulting from the change from the cash to
accrual basis of accounting for income taxes in 1996 will be reportable in
taxable income over the year 1996 through 1999.
NOTE 13....SUBSEQUENT EVENTS
The Company entered into an agreement to acquire a 10% interest in TenFold
Corporation, a private software company, for $8 million in cash. The Company
will receive a perpetual, unlimited license for future applications and tools
developed with TenFold's technology.
The Company entered into an agreement to acquire Prism Consulting, a private
management consulting firm, for $4.75 million in the Company's stock at the
current market value and $250,000 in cash. The principals of Prism Consulting
will become employees of the Company and be subject to non-compete agreements.
31
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
The following selected financial information of the Company is qualified by
reference to and should be read in conjunction with the financial statements
and notes thereto and other financial information included elsewhere herein.
The combined statements of operations data for the years ended December 31,
1994 and 1995 and combined balance sheet data as of December 31, 1995 of The
Indus Group, Inc. and Indus International, Inc. and the consolidated statement
of operations data for the year ended December 31, 1996 and consolidated
balance sheet data as of December 31, 1996 are derived from and qualified by
reference to financial statements of the Company that have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere herein.
The combined balance sheet data as of December 31, 1992 and 1993 and the
combined statement of operations data for the years ended December 31, 1992
and 1993 are derived from the financial statements of the Company that have
been audited by Ernst & Young LLP that are not included herein.
<CAPTION>
Years Ended December 31,
1992 1993 1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licensing fees $ 6,112 $ 6,514 $ 7,547 $ 10,676 $ 16,208
Services and maintenance 16,681 20,978 23,044 43,115 59,731
- - ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 22,793 27,492 30,591 53,791 75,939
- - ---------------------------------------------------------------------------------------------------------------------------------
Cost of revenues 9,127 10,395 12,798 22,578 31,790
- - ---------------------------------------------------------------------------------------------------------------------------------
Gross margin 13,666 17,097 17,793 31,213 44,149
Operating expenses:
Research and development 4,295 6,910 7,120 8,306 12,493
Sales and marketing 1,856 3,533 4,144 5,680 9,306
General and administrative 3,988 3,595 4,654 4,918 7,819
Compensation charge - stock options(1) -- -- -- 18,900 --
- - ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 10,139 14,038 15,918 37,804 29,618
- - ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 3,527 3,059 1,875 (6,591) 14,531
Other income (expense), net 83 83 (101) 96 1,251
- - ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 3,610 3,142 1,774 (6,495) 15,782
Provision for income taxes (state and foreign only
prior to 1996) 90 55 69 325 6,554
Cumulative effect of deferred income taxes provided upon
January 1, 1996 conversion to C Corporation status(2) -- -- -- -- 6,700
- - ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,520 $ 3,087 $ 1,705 $ (6,820) $ 2,528
PRO FORMA STATEMENT OF OPERATIONS DATA FOR 1995 AND 1996:
Income (loss) before income taxes, as above $ (6,495) $ 15,782
Add back portion of compensation charge - stock options(1) 17,900 --
- - ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, as adjusted 11,405 15,782
Provision for income taxes (federal, state and foreign)(2) 5,083 6,554
=================================================================================================================================
Pro forma net income $ 6,322 $ 9,228
=================================================================================================================================
Pro forma net income per share(3) $ 0.36 $ 0.49
=================================================================================================================================
Shares used in computing pro forma net income per share(3) 17,490 18,924
=================================================================================================================================
December 31,
1992 1993 1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
Working capital $ 6,789 $ 4,179 $ 4,698 $ 7,640 $46,693
Total assets 14,914 13,080 18,063 31,075 75,514
Short-term debt 1,700 1,833 2,005 8,900 --
Long-term debt -- -- -- -- --
Total shareholders' equity 9,641 8,123 8,243 10,848 55,372
<FN>
(1) Reflects nonrecurring expense incurred in the third quarter of 1995 in
connection with an amendment to the Company's 1992 Stock Option Plan to
accelerate the exercisability of outstanding stock options, which had
previously been contingent upon the occurrence of certain events. The pro
forma adjustment of $17,900 is to reduce 1995 compensation expense to the
amount related to options granted in 1995 only. See Note 1 of the Notes to
the Combined Financial Statements.
(2) Prior to January 1, 1996, the Company was not subject to federal corporate
income taxation because of its election to be taxed under the provisions of
Subchapter S of the Code. Pro forma net income for 1995 has been determined
by assuming that the Company had been taxed as a C Corporation for 1995.
Pro forma net income for 1996 reflects the elimination of a nonrecurring
charge for the cumulative effect of deferred income taxes incurred in the
first quarter of 1996 in connection with the termination of the Company's S
Corporation status. See Notes 1 and 12 of Notes to the Consolidated
Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for a more
complete explanation of the determination of the number of shares used in
computing pro forma net income per share.
</FN>
</TABLE>
32
EXHIBIT 11.01
THE INDUS GROUP, INC.
<TABLE>
STATEMENT OF COMPUTATION OF PRO FORMA
NET INCOME PER SHARE
(In thousands, except share amounts)
(Unaudited)
<CAPTION>
Year Ended December 31,
------------------------
1995 1996
------- --------
<S> <C> <C>
Pro forma net income................................................. $ 6,322 $ 9,228
======= ========
Shares used in per share computation:
Weighted average outstanding......................................... 15,021 17,423
Equivalent shares assumed to be outstanding had options granted
prior to 1995 been exercised and used to repurchase shares at
their then fair value................................................ 1,315 1,500
Shares issued or shares reserved for options granted in 1995,
which shares are assumed to be outstanding for all prior periods
(as required by SEC Staff Accounting Bulletins Topic 4 D) ........... 519 -
Shares assumed to be outstanding equivalent to dividends paid in
1995 ($9,516,659) divided by expected offering price ($15 per
share) (as required by SEC Staff Accounting Bulletins Topic
1B).................................................................. 635 -
======= ========
17,490 18,923
======= ========
Pro forma net income per share....................................... $ 0.36 $ 0.49
======= ========
</TABLE>
19
EXHIBIT 21.01
THE INDUS GROUP, INC.
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY (AND DOING BUSINESS AS) STATE OF INCORPORATION
Indus International, Inc. California
Indus Foreign Sales Corporation U.S. Virgin Islands
Indus North America, Inc. California
20
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of The Indus Group, Inc. of our report dated January 24, 1997,
included in the 1996 Annual Report to the Shareholders of The Indus Group, Inc.
Our audits also included the financial statement schedule of The Indus
Group, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-04654) pertaining to the 1995 Stock Plan, 1995
Director Option Plan and Employee Stock Plan of The Indus Group, Inc. of our
report dated January 24, 1997, with respect to the consolidated financial
statements of The Indus Group, Inc. incorporated by reference in this Annual
Report (Form 10K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Palo Alto, California
March 24, 1997
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Condensed consolidated balance sheet and the condensed consolidated
statement of operations.
</LEGEND>
<CIK> 0001005127
<NAME> THE INDUS GROUP, INC.
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 13,266
<SECURITIES> 28,653
<RECEIVABLES> 22,971
<ALLOWANCES> 449
<INVENTORY> 0
<CURRENT-ASSETS> 27,867
<PP&E> 11,661
<DEPRECIATION> 5,324
<TOTAL-ASSETS> 75,514
<CURRENT-LIABILITIES> 20,142
<BONDS> 0
<COMMON> 19
0
0
<OTHER-SE> 55,372
<TOTAL-LIABILITY-AND-EQUITY> 75,514
<SALES> 0
<TOTAL-REVENUES> 75,939
<CGS> 0
<TOTAL-COSTS> 31,790
<OTHER-EXPENSES> 29,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,782
<INCOME-TAX> 6,554
<INCOME-CONTINUING> 9,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 6,700
<NET-INCOME> 2,528
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
