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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 of (I.R.S. Employer
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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Indicateby check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1997, Registrant had outstanding 19,024,115 shares of Common
Stock, $.001 par value.
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<PAGE>
TABLE OF CONTENTS
Part I: Financial Information
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of
Operations - three months ended March 31, 1997
and 1996............................................... 1
Condensed Consolidated Balance Sheets -
March 31, 1997 and March 31, 1996...................... 2
Condensed Consolidated Statement of Shareholders'
Equity - year ended December 31, 1996 and
three months ended March 31, 1997...................... 3
Condensed Consolidated Statements of
Cash Flows - three months ended
March 31, 1997 and 1996................................ 4
Notes to Condensed Consolidated Financial Statements....... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 7
Part II: Other Information
Item 1. Legal Proceedings.......................................... 11
Item 2. Changes in Securities...................................... 11
Item 3. Defaults Upon Senior Securities............................ 11
Item 4. Submission of Matters to a Vote of Security Holders........ 11
Item 5. Other Information.......................................... 11
Item 6. Exhibits and Reports on Form 8-K........................... 11
Signatures................................................. 12
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Revenues:
Software licensing fees ........................ $ 3,722 $ 3,958
Services and maintenance ....................... 18,700 12,901
------- -------
Total revenues ............................ 22,422 16,859
Cost of revenues .................................... 9,518 6,649
------- -------
Gross margin ........................................ 12,904 10,210
Operating expenses:
Research and development ....................... 2,931 3,415
Sales and marketing ............................ 3,238 1,936
General and administrative ..................... 2,296 1,843
------- -------
Total operating expenses .................. 8,465 7,194
------- -------
Income from operations .............................. 4,439 3,016
Other income, net ................................... 411 47
------- -------
Income before income taxes ......................... 4,850 3,063
Provision for income taxes .......................... 2,037 1,260
Cumulative effect of deferred income taxes
provided upon January 1, 1996
conversion to C-Corporation status ............... -- 6,700
------- -------
Net income (loss) ................................... $ 2,813 $(4,897)
======= =======
Pro forma statement of operations:
Income before income taxes, as above ........... $ 4,850 $ 3,063
Provision for income taxes
(federal, state and foreign) ................... 2,037 1,260
------- -------
Pro forma net income ........................... $ 2,813 $ 1,803
======= =======
Pro forma net income per share ...................... $ 0.14 $ 0.10
======= =======
Shares used in computing pro forma net
income per share ................................. 19,609 17,686
======= =======
See accompanying notes.
1
<PAGE>
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
March 31, December 31,
1997 1996
---- ----
(1)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 5,666 $13,266
Marketable securities ............................... 27,422 26,524
Billed accounts receivable, less allowance for
doubtful accounts of $549 at March 31, 1997
and $449 at December 31, 1996 ................... 16,065 16,889
Unbilled accounts receivable ........................ 6,292 5,633
Other current assets ................................ 3,766 4,523
------- -------
Total current assets ............................ 59,211 66,835
Marketable securities - noncurrent ....................... 2,111 2,129
Property and equipment, net .............................. 7,174 6,337
Investment ............................................... 7,997 --
Employee notes receivable ................................ 210 213
------- -------
$76,703 $75,514
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 2,823 $ 2,165
Deferred income taxes ............................... 4,233 3,837
Other accrued liabilities ........................... 3,495 3,541
Deferred revenue .................................... 8,056 10,599
------- -------
Total current liabilities ....................... 18,607 20,142
Shareholders' equity:
Preferred Stock, $.001 par value at March 31, 1997
and December 31, 1996:
Authorized shares - 5,000,000
Issued and outstanding shares - none ........... -- --
Common Stock, $.001 par value at March 31, 1997
and December 31, 1996:
Authorized shares - 50,000,000
Issued and outstanding shares -18,639,011
(18,590,376 at December 31, 1996) ............ 19 19
Additional capital .................................. 46,448 46,425
Other ............................................... (412) (300)
Retained earnings ................................... 12,041 9,228
------- -------
Total shareholders' equity ...................... 58,096 55,372
------- -------
$76,703 $75,514
======= =======
(1) Derived from audited financial statements.
See accompanying notes.
2
<PAGE>
<TABLE>
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)
<CAPTION>
Retained
--------
Earnings Total
-------- -----
Common Additional (Accumulated Shareholders'
------ ---------- ------------ -------------
Stock Capital Other Deficit) Equity
----- ------- ----- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .................. $ 129 $ -- $ -- $ 8,113 $ 8,242
Issuance of common stock
as deferred compensation ............... 480 -- (480) -- --
Cash distributions to shareholders ....... -- -- -- (9,516) (9,516)
Translation adjustment ................... -- -- (6) -- (6)
Stock options (2) ........................ -- 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 (1) ............. 4 35,288 -- -- 35,292
Tax benefit from exercise of stock options -- 6,669 -- -- 6,669
Purchase of Indus International, Inc. net
assets ................................. (100) (3) -- -- (103)
Unrealized loss on marketable securities . -- -- (42) -- (42)
Translation adjustment ................... -- -- 84 -- 84
Amortization of deferred compensation .... -- -- 96 -- 96
Net loss ................................. (6,700) 9,228 2,528
-------- -------- -------- -------- --------
Balance at December 31, 1996 .................. 19 46,425 (300) 9,228 55,372
Tax benefit from exercise of stock options .... -- 23 23
Translation adjustment ................... (44) (44)
Unrealized loss on marketable securities . (86) (86)
Amortization of deferred compensation .... 18 18
Net income ............................... 2,813 2,813
-------- -------- -------- -------- --------
Balance at March 31, 1997 ..................... $ 19 $ 46,448 $ (412) $ 12,041 $ 58,096
======== ======== ======== ======== ========
<FN>
(1) 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), $500 received from June 30, 1996
issuance of 39,189 common shares under the Employee Stock Purchase Plan
and $230 received from the issuance of 545,595 common shares upon
exercise of options.
(2) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature.
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
---- ----
Cash flows from operating activities
Net income (loss) .................................... $ 2,813 $ (4,897)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 496 288
Provision for doubtful accounts ................. 100 --
Amortization of deferred compensation ........... 19 48
Loss (gain) on sale of fixed assets ............. 300 --
Deferred income taxes ........................... 395 (860)
Cumulative effect of deferred income taxes
provided January 1, 1996 ...................... -- 6,700
Tax benefit from exercise of stock options ...... -- 801
Changes in operating assets and liabilities:
Billed accounts receivable ................. 724 4,048
Unbilled accounts receivable ............... (659) 1,276
Other current assets ....................... 757 (200)
Employee notes receivable .................. (69) (10)
Accounts payable ........................... 307 69
Accrued payroll and related expense ........ 216 --
Income taxes payable ....................... -- 1,274
Other accrued liabilities .................. 90 582
Deferred revenue ........................... (2,543) 1,069
Other ...................................... (61) 4
-------- --------
Net cash provided by operating activities ............ 2,885 10,192
-------- --------
Cash flows from investing activities
Purchase of marketable securities .................... (893) (31,914)
Investment ........................................... (7,997) --
Acquisition of property and equipment ................ (1,617) (521)
-------- --------
Net cash used in investing activities ................ (10,507) (32,435)
-------- --------
Cash flows from financing activities
Net repayment of credit .............................. -- (8,900)
Net proceeds from issuance of common stock ........... 22 33,927
Purchase of Indus International, Inc. net assets ..... -- (103)
-------- --------
Net cash provided by financing activities ............ 22 24,924
-------- --------
Net increase in cash and cash equivalents ............ (7,600) 2,681
Cash and cash equivalents at beginning of period ..... 13,266 45
======== ========
Cash and cash equivalents at end of period ........... $ 5,666 $ 2,726
======== ========
Supplemental disclosures of cash flow information
Interest paid ........................................ $ -- $ 76
======== ========
Income taxes paid .................................... $ 80 $ 6
======== ========
See accompanying notes.
4
<PAGE>
THE INDUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1997. For further information, refer to the
audited financial statements and footnotes thereto for the fiscal year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K filed
March 26, 1997.
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 fund 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.
2. Basis of Presentation
On March 1, 1996, pursuant to an Asset Purchase Agreement, the Company
purchased all of the assets and assumed all of the liabilities of Indus
International, Inc., an entity which was related to The Indus Group, Inc.
through common shareholders. The purchase price of the net assets, which equaled
the net book value, was $103,252. Concurrent with this purchase, the Company
established a new wholly-owned subsidiary to which the net assets were
transferred. The financial statements include the accounts of the Company and
Indus International, Inc., which was included on a combined basis prior to March
1, 1996. All significant intercompany accounts and transactions have been
eliminated.
3. Issuance of Common Stock
Initial Public Offering
On February 29, 1996, the Company completed an initial public offering
(the "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 (exclusive of
underwriting discount and $1,011,236 in related expenses).
Exercise of Stock Options
During the three months ended March 31, 1997, the Company received
$22,026 from the issuance of 52,660 shares of common stock upon exercise of
options.
Subsequent Event
The Company entered into an agreement after March 31, 1997 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.
5
<PAGE>
THE INDUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
4. Investment
The Company acquired a 10% interest in TenFold Corporation, a private
software company, for approximately $8 million in cash. The Company will receive
a pertpetual, unlimited license for future applications and tools developed with
TenFold's technology.
5. Pro Forma Data
The pro forma data reflects adjustments which would have been
applicable had the Company been a C Corporation in all periods.
Statements of Operations
Effective upon its incorporation in 1990, the Company elected to have
its United States income taxed under Subchapter S of the Code. Income tax
provisions through December 31, 1995 have been principally attributable to state
taxes and taxes imposed by foreign governments on the Company's foreign
operations. The Company's S Corporation status terminated effective January 1,
1996, and the Company will be subject to federal income taxation at the
corporate level thereafter. In connection with the termination of S Corporation
status on January 1, 1996, a one-time charge representing a cumulative net
federal and state deferred income tax liability of $6.7 million was recorded.
For purposes of presenting comparative earnings and calculating
earnings per share data, pro forma net income for the first quarter of 1996
reflects the elimination of the $6.7 million cumulative deferred income tax
charge upon converting from an S Corporation to a C Corporation.
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). Fully diluted per share amounts are not
presented, as the effect is not material. The computation of the weighted
average number of shares outstanding for the three month periods ended March 31,
1997 and March 31, 1996 is as follows (in thousands):
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
Weighted average outstanding ...................... 18,629 15,984
Equivalent shares assumed to be
outstanding had options granted
prior to 1995 been exercised and used to
repurchase shares at their then fair value ...... 980 1,702
------ ------
19,609 17,686
====== ======
6 Earning Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earning per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the first quarter ended
March 31, 1997 and March 31, 1996 of $.01 per share. The impact of Statement 128
on the calculation of fully diluted earnings per share for these quarters is not
expected to be material.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains 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. Actual results could differ materially from those projected in the
forward-looking statements located in the Research and Development, Sales and
Marketing and Liquidity and Capital Resources sections as a result of the
factors set forth below, among others.
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 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,
(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 have caused, and may in the future cause, material
fluctuations in the Company's operating results. Similarly, customers may cancel
implementation projects at any time, and such cancellation 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.
The Company has in the past and may in the future acquire complementary products
or businesses. Risks associated with such transactions include difficulty in
retaining and assimilating the personnel of the combined companies, difficulty
in integrating the operations of the combined companies, disruption of the
Company's ongoing business, expenses associated with completing the transaction
and amortizing acquired intangible assets, and dilution of existing equity
holders. There can be no assurance that such transactions will not materially
adversely affect the Company's business, financial condition or operating
results.
Results of Operations
Overview. The Indus Group, Inc. develops, markets, and supports a proprietary
line of enterprise management software and implementation services for process
industry customers worldwide. Taking advantage of the client/server model of
networked computing, PassPort Software Solutions contain "best business
practices" which serve as the catalyst for improving core operational business
functions for electric utilities, oil and gas, chemical refining, forest
products, nuclear and steel producing industries. ABACUS, The Indus Group's
proprietary methodology, accelerates the realization of benefits by delivering a
reliable cost and time-efficient approach to implementation across the
enterprise.
The Company derives its revenues primarily from software licenses,
implementation and training services and maintenance fees. While the Company has
derived the majority of its revenues from electric utilities, it also derives
revenues from customers in other process industries, including oil and gas,
chemical refining, nuclear, steel and forest product industries.
The Company provides its software to customers under contracts which provide for
software license fees, system implementation services and the first year of
software maintenance. Revenues from application software licenses, which
typically have ranged from approximately $1 million to $5 million per enterprise
license, are recognized as earned revenue over the estimated time period to
complete the implementation of the software, which generally is twelve to
fourteen months. Revenues from client workstation software are recognized as
billed. Revenues from system implementation services, which generally are time-
and material-based, are recognized as direct contract costs are incurred and
typically range from one to three times the license fees.
7
<PAGE>
Results of Operations (continued)
Accordingly, revenues for each quarter depend in part on revenues from the
closing of new contracts during the quarter as well as revenue from contracts
under implementation that were executed in prior quarters. 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 an initial contract period, additional
maintenance and support services, for which the Company typically charges 15-18%
of the original license fee per year, are subject to separate agreements whereby
revenue is recognized ratably over the agreement period.
In March, 1997, the Company acquired a 10% interest in TenFold Corporation, a
private software company for approximately $8 million in cash. The Company will
receive a perpetual, unlimited license for future applications and tools
developed with TenFold's technology. Subsequent to March 31, 1997, the Company
acquired 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 Company has not and does not anticipate any material consequences on its
results of operations for the calendar year 1997 as a result of these
acquisitions.
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain line items in the Company's statements of
operations:
Percent of Total Revenues
Three Months Ended
March 31,
-------------------
1997 1996
-------------------
Revenues:
Software licensing fees .......................... 16.6% 23.5%
Services and maintenance ......................... 83.4 76.5
----- -----
Total revenues .............................. 100.0 100.0
Cost of revenues ...................................... 42.4 39.4
----- -----
Gross margin ......................................... 57.6 60.6
Operating expenses:
Research and development ......................... 13.1 20.2
Sales and marketing .............................. 14.4 11.5
General and administrative ....................... 10.2 10.9
----- -----
Total operating expenses .................... 37.8 42.6
----- -----
Income (loss) from operations ......................... 19.8 18.0
Other income, net .................................... 1.8 0.3
----- -----
Income (loss) before income taxes ..................... 21.6 18.3
Provision for income taxes (state and foreign
only in 1995) ..................................... 9.1 7.5
Cumulative effect of deferred income taxes
provided upon January 1, 1996
conversion to C-Corporation status ................. -- 40.0
----- -----
Net income (loss) ..................................... 12.5% (29.2%)
===== =====
Pro forma statement of operations:
Income (loss) before income taxes, as above ...... 21.6% 18.3%
Provision for income taxes (federal, state and
foreign only in 1995) ....................... 9.1 7.5
----- -----
Pro forma net income ............................. 12.5% 10.8%
----- -----
8
<PAGE>
Results of Operations (continued)
Revenues. Total revenues increased 33% to $22.4 million in the first quarter in
1997 from $16.9 million in the first quarter of 1996. The increase was due to a
significant growth in service revenues. Revenue from international customers
(excluding Canada and Mexico) accounted for 11% and 20% of revenues for the
first quarter of 1997 and 1996, respectively. The decrease in the percentage of
international revenue was due to the lack of new international customers. As
most of the Company's contracts are denominated in U.S. dollars, foreign
currency fluctuations have not impacted the results of operations. The top five
customers of the Company have accounted for approximately 40-45% of revenues for
the periods presented. The composition of the top five customers has changed
from year to year, with the exception of two of the customers whose combined
revenues accounted for 12% of total revenue for the first quarter of 1997 and
19% of total revenue for the first quarter of 1996.
Revenues from licensing fees decreased by 6% to $3.7 million in the first
quarter in 1997 from $4 million in the first quarter of 1996 due to delays in
the closing of new contracts. A number of factors have contributed to these
delays including reorganizations within potential customers and delays in the
decision process by potential customers. Revenues from services and maintenance
increased by 45% to $18.7 million in the first quarter in 1997 from $12.9
million in 1996. The service and maintenance revenue growth from 1996 to 1997
resulted primarily from implementation services generated by several new
significant domestic contracts, and additional implementation projects with
existing customers. The Company does not believe that the revenue growth
experienced in the first quarter of 1997 is necessarily indicative of any
revenue growth that may occur in future periods.
The Company's domestic and foreign markets have not been affected by inflation
or fluctuations in interest rates and costs. The Company has not experienced any
material seasonality in its operating results.
Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and
related costs for implementation (including account executive personnel), 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 43% to $9.5 million in the first quarter in 1997 from
$6.6 million in 1996 and was due principally to the need for additional
personnel to service the Company's customers. As a percent of total revenue,
cost of revenues increased to 42.4% for the first quarter in 1997 from 39.4% in
1996. The increase in the cost of sales percentage is partially due to the
increase in the level of low-margin reimbursable expenses. The Company's
accounting policy is to record direct reimbursable costs as revenue when billed
to the customer, which is then offset by the related cost of revenues. Since the
direct reimbursable costs have little or no margin, they have the effect of
decreasing the Company's gross margin
Research and Development (R&D). 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 decreased 14% to $2.9 million in the first
quarter in 1997 from $3.4 million in 1996. The Company continues to invest
research and development efforts for modifications of existing applications and
development of new technologies, including the capability to support additional
platforms, databases, graphical user interfaces, toolsets and emerging
technologies. The Company believes that a significant level of R&D is essential
to remain competitive and will continue to invest development resources towards
incorporating new technologies into PassPort and designing additional PassPort
functionality. The amount for a particular period may vary depending on the
projects in progress.
INDUS has historically developed its own applications. During 1996, the Company
devoted R&D resources to the development of General Ledger, Asset Management and
Financial Planning applications. In response to time-to-market demands, the
Company recently formalized strategic product relationships with third party
vendors, including PeopleSoft, Oracle and SPL World Group, who will blend their
financial and customer information/order entry applications with PassPort. As a
result, the Company has halted the development of the General Ledger, Asset
Management and Financial Planning applications. A portion of the R&D
expenditures intended for the financial application project were reallocated to
(i) the software integration development necessary to provide seamless
integration with the Company's strategic partners' offerings and (ii) sales and
marketing efforts. In 1997, the Company expects to shift, as a percentage of
total revenues, at least 3% from R&D expenditures to sales and marketing
expenditures.
9
<PAGE>
Results of Operations (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 67% to $3.2 million
in the first quarter in 1997 from $1.9 million in 1996. As a percent of total
revenue, sales and marketing expenses increased to 14.4% the first quarter ended
in 1997 from 11.5% in 1996. The growth in sales and marketing expenses is
primarily due to: (i) the addition of personnel, (ii) expansion into new
international sectors, (iii) changes in the mix of the revenue base on which
commission expense is generated and (iv) the new vertical business programs. The
Company believes that sales and marketing expenses as a percentage of total
revenues may increase as it (i) expands its presence in the marketplace, (ii)
initiates operations in additional international markets, (iii) develops new and
existing marketing and product strategic alliances and (iv) increases focus on
specific vertical markets, such as Transmission and Distribution.
General and Administrative. General and administrative expenses increased 25% to
$2.3 million in the first quarter in 1997 from $1.8 million in 1996. The growth
in general and administrative expenses is primarily a result of: (i) incremental
expenditures related to being a public company and (ii) an expansion in staffing
to support the Company's growth.
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 foreign governments on the
Company's foreign operations. The Company's S Corporation status terminated
effective January 1, 1996, and the Company will be subject to federal income
taxation at the corporate level thereafter. In relation to 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.
Net Income (Loss). The net loss for the three months ended March 31, 1996 was
the result of the $6.7 million cumulative deferred income tax liability charge
upon elimination of the S Corporation status.
Pro Forma Net Income. For purposes of presenting comparative earnings and
calculating earnings per share data, pro forma net income for the three months
ended March 31, 1996 reflects the elimination of the $6.7 million nonrecurring
cumulative deferred income tax charge upon converting from an S Corporation to a
C Corporation.
Liquidity and Capital Resources
The Company had total assets of $76.7 million and $75.5 million at March 31,
1997 and December 31, 1996, respectively. Historically, the Company has financed
its operations primarily through cash provided by operations, borrowings under
its line of credit and, to lesser extent, through borrowings from its Chief
Executive Officer and principal shareholder. In March 1996, the Company received
$33.9 million (net of underwriting commissions and offering costs) from an
initial public offering of 2,500,000 shares of its Common Stock. These proceeds
were used to purchase marketable securities (comprised of municipal and U.S.
government obligations) and certain cash equivalent instruments.
As of March 31, 1997, the Company's principal sources of liquidity consisted of
approximately $5.7 million in cash and cash equivalents and $27.4 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, however, 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
March 31, 1997.
In the three months ended March 31, 1997, cash, cash equivalents and marketable
securities decreased as a result of the cash investment in a 10% interest in
TenFold Corporation ($8 million), the purchase of property and equipment ($1.6
million) and the purchase of marketable securities ($0.9 million) offset by cash
generated from operations ($2.9 million).
Cash requirements are expected to continue to increase in order to fund: (i)
personnel and salary costs, (ii) investment in additional technical equipment,
and (iii) working capital requirements. The Company presently anticipates
additional capital expenditures for the remainder of 1997 of approximately $3.0
million. The Company's principal commitments at March 31, 1997, consisted of
obligations under operating leases for facilities and computer equipment.
10
<PAGE>
Liquidity and Capital Resources (continued)
The Company believes that its existing cash and marketable securities, together
with anticipated cash flow from operations and available bank borrowings, will
be sufficient to meet its cash requirements during 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 or
presently unexpected usage's of cash, such as acquisitions.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a
party or of which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.01 Statement of Computation of Pro Forma Net Income Per Share.
27.01 Financial Data Schedule.
(b) Reports on Forms 8-K.
No reports on Form 8-K were filed during the Quarter covered by
this report.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE INDUS GROUP, INC.
(Registrant)
Date: May 14, 1997
/s/ Robert W. Felton
---------------------------------------
Robert W. Felton
President and Chief Executive Officer
Date: May 14, 1997
/s/ Frank W. Siskowski
---------------------------------------
Frank W. Siskowski
Senior Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
<PAGE>
INDEX TO EXHIBITS
Sequentially
------------
Numbered
--------
Exhibit Description Page
------- ----------- ----
11.01 Statement of Computation of Pro Forma Net Income Per Share
27.01 Financial Data Schedule
EXHIBIT 11.01
THE INDUS GROUP, INC.
STATEMENT OF COMPUTATION OF PRO FORMA
NET INCOME PER SHARE
(In thousands, except share amounts)
(Unaudited)
Three Months Ended
March 31,
---------------------
1997 1996
------- -------
Pro forma net income ............................... $ 2,813 $ 1,803
======= =======
Shares used in per share computation:
Weighted average outstanding .................. 18,629 15,984
Equivalent shares assumed to be
outstanding had options granted
prior to 1995 been exercised and
used to repurchase shares
at their then fair value ................... 980 1,702
------- -------
19,609 17,686
======= =======
Pro forma net income per share ..................... $ 0.14 $ 0.10
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CONDENSED CONSOLIDATED BALANCE SHEET AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,666
<SECURITIES> 29,533
<RECEIVABLES> 22,906
<ALLOWANCES> 549
<INVENTORY> 0
<CURRENT-ASSETS> 59,211
<PP&E> 12,961
<DEPRECIATION> 5,787
<TOTAL-ASSETS> 76,703
<CURRENT-LIABILITIES> 18,607
<BONDS> 0
<COMMON> 19
0
0
<OTHER-SE> 58,077
<TOTAL-LIABILITY-AND-EQUITY> 76,703
<SALES> 0
<TOTAL-REVENUES> 22,422
<CGS> 0
<TOTAL-COSTS> 9,518
<OTHER-EXPENSES> 8,465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,850
<INCOME-TAX> 2,037
<INCOME-CONTINUING> 2,813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,813
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
