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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27806
----------------
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)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 31, 1996, Registrant had outstanding 17,796,672 shares of Common
Stock, $.001 par value.
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TABLE OF CONTENTS
Part I: Financial Information
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations - three
and six months ended June 30, 1996 and 1995............................................ 1
Condensed Consolidated Balance Sheets - June 30, 1996 and December 31, 1995................ 2
Condensed Consolidated Statement of Shareholders' Equity - year ended
December 31, 1995 and six months ended June 30, 1996................................... 3
Condensed Consolidated Statements of Cash Flows - six months ended
June 30, 1996 and 1995.................................................................. 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
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 Six Months Ended
June 30, June 30,
---------------------------------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
Revenues:
Software licensing fees ............................................. $ 3,793 $ 1,988 $ 7,751 $ 5,719
Services and maintenance ............................................ 13,806 10,580 26,707 19,574
-------- -------- -------- --------
Total revenues ................................................. 17,599 12,568 34,458 25,293
Cost of revenues ........................................................ 7,388 5,151 14,037 10,159
-------- -------- -------- --------
Gross margin ............................................................. 10,211 7,417 20,421 15,134
Operating expenses:
Research and development ........................................... 3,293 2,080 6,708 3,673
Sales and marketing ................................................ 1,995 1,461 3,931 2,582
General and administrative .......................................... 1,846 854 3,689 1,954
-------- -------- -------- --------
Total operating expenses ....................................... 7,134 4,395 14,328 8,209
-------- -------- -------- --------
Income from operations ................................................... 3,077 3,022 6,093 6,925
Other income, net ........................................................ 381 - 428 87
-------- -------- -------- --------
Income before income taxes ............................................... 3,458 3,022 6,521 7,012
Provision for income taxes (state and foreign only in 1995) .............. 1,407 81 2,667 212
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C-Corporation status .................................... - - 6,700 -
-------- -------- -------- --------
Net income (loss) ........................................................ $ 2,051 $ 2,941 $(2,846) $ 6,800
======== ======== ======== ========
Pro forma statement of operations:
Income before income taxes, as above ................................ $ 3,458 $ 3,022 $ 6,521 $ 7,012
Compensation charge - stock options ................................. - (1,000) - (1,000)
-------- -------- -------- --------
Income before income taxes, as adjusted ............................. 3,458 2,022 6,521 6,012
Provision for income taxes (federal, state and foreign) ............. 1,407 850 2,667 2,529
-------- -------- -------- --------
Pro forma net income ................................................ $ 2,051 $ 1,172 $ 3,854 $ 3,483
======== ======== ======== ========
Pro forma net income per share ...................................... $ 0.11 $ 0.07 $ 0.21 $ 0.20
======== ======== ======== ========
Shares used in computing pro forma net income per share ............. 19,375 17,490 18,534 17,490
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
1
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
June 30, December 31,
1996 1995
-------------- -------------
(1)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 420 $ 45
Marketable securities......................................................... 15,655 -
Billed accounts receivable, less allowance for doubtful accounts of $449
at June 30, 1996 and $652 at December 31, 1995............................ 16,162 17,661
Unbilled accounts receivable.................................................. 7,653 9,053
Other current assets.......................................................... 1,431 1,108
------------- -------------
Total current assets...................................................... 41,321 27,867
Marketable securities - noncurrent................................................. 16,139 -
Property and equipment, net........................................................ 4,198 3,128
Employee notes receivable.......................................................... 74 80
------------- -------------
$ 61,732 $ 31,075
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowing under line of credit................................................ $ - $ 8,900
Accounts payable.............................................................. 1,577 1,331
Income taxes payable.......................................................... 538 218
Deferred income taxes......................................................... 5,357 326
Other accrued liabilities..................................................... 2,741 2,027
Deferred revenue.............................................................. 8,360 7,425
-------------- -------------
Total current liabilities................................................. 18,573 20,227
Commitments
Shareholders' equity:
Preferred Stock, $.001 par value at June 30, 1996 (no par value at December
31, 1995):
Authorized shares - 5,000,000
Issued and outstanding shares - none..................................... - -
Common Stock, $.001 par value at June 30, 1996 (no par value at
December 31, 1995):
Authorized shares - 50,000,000
Issued and outstanding shares -17,794,972
(15,102,222 at December 31, 1995) ..................................... 18 609
Additional capital............................................................ 39,697 18,900
Other......................................................................... (410) (438)
Retained earnings (deficit)................................................... 3,854 (8,223)
-------------- -------------
Total shareholders' equity................................................ 43,159 10,848
-------------- -------------
$ 61,732 $ 31,075
============== =============
<FN>
(1) Derived from audited financial statements.
See accompanying notes.
</FN>
2
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)
Retained
Earnings Total
Common Additional (Accumulated Shareholders'
Stock Capital Other Deficit) Equity
-------- -------- -------- -------- --------
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
effective January 1, 1996 .......... - (8,223) - 8,223 -
Reincorporation and adoption
of $.001 par value ................. (494) 494 - - -
Issuance of common stock (1) ........... 3 34,428 - - 34,431
Tax benefit from exercise of
stock options ....................... - 801 - - 801
Purchase of Indus International,
Inc. net assets ..................... (100) (3) - - (103)
Unrealized loss on marketable securities - - (82) - (82)
Translation adjustment ................. - - 14 - 14
Amortization of deferred compensation .. - - 96 - 96
Net loss ............................... - (6,700) - 3,854 (2,846)
-------- -------- -------- -------- --------
Balance at June 30, 1996 .................... $ 18 $ 39,697 $ (410) $ 3,854 $ 43,159
======== ======== ======== ======== ========
<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 $67 received from the issuance of 153,561 common shares upon exercise
of options.
(2) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature, which had precluded exercise of these
options.
See accompanying notes.
</FN>
3
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------------
1996 1995
--------------- --------------
Cash flows from operating activities
Net income (loss)............................................................ $ (2,846) $ 5,994
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 616 607
Amortization of deferred compensation.............................................. 96 -
Loss (gain) on sale of fixed assets................................................ 2 (12)
Deferred income taxes.............................................................. (1,669) -
Cumulative effect of deferred income taxes provided January 1, 1996................ 6,700 -
Tax benefit from exercised stock options........................................... 801 -
Changes in operating assets and liabilities:
Billed accounts receivable.................................................... 1,499 (509)
Unbilled accounts receivable.................................................. 1,400 (2,720)
Other current assets.......................................................... (323) 308
Employee notes receivable..................................................... 6 44
Accounts payable.............................................................. 246 6
Income taxes payable.......................................................... 320 -
Other accrued liabilities..................................................... 714 1,733
Deferred revenue.............................................................. 935 (402)
Other......................................................................... 14 8
--------------- --------------
Net cash provided by operating activities............................................... 8,511 5,057
--------------- --------------
Cash flows from investing activities
Purchase of marketable securities....................................................... (34,176) -
Sale of marketable securities........................................................... 2,300 -
Acquisition of property and equipment................................................... (1,688) (641)
Proceeds from sale of fixed assets...................................................... - 504
--------------- --------------
Net cash used in investing activities................................................... (33,564) (137)
--------------- --------------
Cash flows from financing activities
Net repayment of line of credit......................................................... (8,900) (985)
Net proceeds from issuance of common stock.............................................. 34,431 -
Distribution to shareholders............................................................ - (3,508)
Purchase of Indus International, Inc. net assets........................................ (103) -
--------------- --------------
Net cash provided by (used in) financing activities..................................... 25,428 (4,493)
--------------- --------------
Net increase in cash and cash equivalents............................................... 375 427
Cash and cash equivalents at beginning of period........................................ 45 99
--------------- --------------
Cash and cash equivalents at end of period.............................................. $ 420 $ 526
=============== ==============
Supplemental disclosures of cash flow information
Interest paid........................................................................... $ 105 $ 6
=============== ==============
Income taxes paid....................................................................... $ 3,176 $ 43
=============== ==============
Supplemental schedule of noncash financing activities
Issuance of common stock in exchange for notes receivable............................... $ - $ 110
=============== ==============
<FN>
See accompanying notes.
</FN>
4
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 and six month periods ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1996. For further information, refer to the
audited financial statements and footnotes thereto for the fiscal year ended
December 31, 1995 included in the Company's Registration Statement on Form S-1
(No. 33-80573) for its initial public offering of common shares on February 29,
1996.
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 and agency repurchase agreements which are secured by
government agency securities.
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 represent
U.S. government obligations maturing no later than November 1997. 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).
Employee Stock Purchase Plan
The Company received $499,700 from the issuance of 39,189 shares of
Common Stock on June 30, 1996 under the 1995 Employee Stock Purchase Plan.
Exercise of Stock Options
During the six months ended June 30, 1996, the Company received $66,675
from the issuance of 153,561 shares of common stock upon exercise of options
under the 1992 Stock Option Plan.
5
THE INDUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
4. 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.
Pro forma net income in 1995 reflects provisions for taxes assuming the
Company was taxed as a C Corporation. In addition, pro forma net income data
includes a $1 million nonrecurring compensation charge representing the fair
value of the options granted in 1995.
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 and six month periods ended
June 30, 1996 and 1995 is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1996 1995 1996 1995
----------- ---------- ---------- -----------
Weighted average outstanding........................................... 17,752 15,021 16,868 15,021
Equivalent shares assumed to be outstanding had options granted
prior to 1995 been exercised and used to repurchase shares at their then
fair value........................................................... 1,623 1,315 1,666 1,315
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 - 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 y SEC Staff Accounting Bulletins Topic 1B).............. - 635 - 635
----------- ---------- ---------- -----------
19,375 17,490 18,534 17,490
=========== ========== ========== ===========
6
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 (paragraph
four), Sales and Marketing and Liquidity and Capital Resources (paragraphs four
and six) 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 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 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.
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 business functions for
electric utilities, oil and gas, chemical refining, forest products, 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, such as the oil and gas,
petrochemical, steel and forest product industries. Subsequent to June 30, 1996,
the Company announced it was awarded a software and services contract to provide
facility management at one of the nation's largest consumer insurance companies.
There can be no assurance that this contract will lead to other significant
revenue opportunities.
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 software license fees, 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 system implementation services, which typically are time- and
material-based, are recognized as direct contract costs are incurred and
typically range from one to three times the license fees. 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 contracts whereby revenue is recognized ratably
over the contract period.
7
Results of Operations (continued)
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 Six Months Ended
June 30, June 30,
-------------------- ----------------
1996 1995 1996 1995
--------- --------- ------- -------
Revenues:
Software licensing fees ............................... 21.6% 15.8% 22.5% 22.6%
Services and maintenance .............................. 78.4 84.2 77.5 77.4
--------- --------- ------- -------
Total revenues ................................... 100.0 100.0 100.0 100.0
Cost of revenues ........................................... 42.0 41.0 40.7 40.2
--------- --------- ------- -------
Gross margin ............................................... 58.0 59.0 59.3 59.8
Operating expenses:
Research and development .............................. 18.7 16.6 19.5 14.5
Sales and marketing ................................... 11.3 11.6 11.4 10.2
General and administrative ............................ 10.5 6.8 10.7 7.7
--------- --------- ------- -------
Total operating expenses ......................... 40.5 35.0 41.6 32.4
--------- --------- ------- -------
Income from operations ..................................... 17.5 24.0 17.7 27.4
Other income, net .......................................... 2.2 - 1.2 .3
--------- --------- ------- -------
Income before income taxes ................................. 19.7 24.0 18.9 27.7
Provision for income taxes (state and foreign only in 1995) 8.0 0.6 7.7 0.8
Cumulative effect of deferred income taxes provided upon
January 1, 1996 conversion to C-Corporation status ...... - - 19.4 -
--------- --------- ------- -------
Net income (loss) ......................................... 11.7% 23.4% (8.2)% 26.9%
========= ========= ======= =======
Pro forma statement of operations:
Income before income taxes, as above .................. 19.7% 24.0% 18.9% 27.7%
Compensation charge - stock options ................... - (7.9) - (3.9)
--------- --------- ------- -------
Income before taxes, as adjusted ...................... 19.7 16.1 18.9 23.8
Provision for income taxes (federal, state and foreign) 8.0 6.8 7.7 10.0
--------- --------- ------- -------
Pro forma net income per share ........................ 11.7% 9.3% 11.2% 13.8%
========= ========= ======= =======
Revenues. Total revenues increased 40% to $17.6 million in the quarter ended
June 30, 1996 from $12.6 million in 1995. In the first six months of 1996, total
revenues increased by 36% to $34.5 million from $25.3 million in 1995. Revenue
from international customers (excluding Canada and Mexico) accounted for 20% of
revenues for both the quarter and six months ended June 30, 1996 and 6% and 10%
for the quarter and six months ended June 30, 1995, respectively. 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 50% of revenues for all periods
presented. The composition of the top five customers has changed from year to
year, with the exception of one customer which generated revenues ranging from
9% of revenue for the quarter ended June 30, 1996 to 11% of revenue for the
quarter ended June 30, 1995.
Revenues from licensing fees increased by 91% to $3.8 million in the quarter
ended June 30, 1996 from $2.0 million in 1995. In the first six months of 1996,
licensing fees increased by 36% to $7.8 million from $5.7 million in 1995. The
license fee growth from 1995 to 1996 resulted primarily from new international
contracts and several new significant domestic contracts. License fees as a
percentage of revenue were 21.6% and 15.8% for the three months ended June 30,
1996 and 1995, and 22.5% and 22.6% for the six months ended June 30, 1996 and
1995. Since license fees are recognized over the term of initial expected
implementation, the date on which a contract is signed and the number of
contracts signed within the same quarter can have an impact on the amount of
revenue recognized in a particular quarter.
8
Results of Operations (continued)
Revenues from services and maintenance increased by 30% to $13.8 million in the
quarter ended June 30, 1996 from $10.6 million in 1995. In the first six months
of 1996, services and maintenance revenue increased 36% to $26.7 million from
$19.6 million in 1995. The service and maintenance growth from 1995 to 1996
resulted primarily from implementation services generated by new international
customers, 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
six months of 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 account executive personnel), and
(ii) 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 $7.4 million in the quarter ended June 30,
1996 from $5.1 million in 1995. In the first six months of 1996, cost of
revenues increased by 38% to $14.0 million from $10.2 million in 1995. The 1996
increase in absolute dollars in cost of revenues was due principally to the need
for additional personnel to service the Company's customers. As a percent of
total revenue, cost of revenues was 42% and 41% for the quarters ended June 30,
1996 and 1995, respectively. The slight increase in the percentage was due to
growth in 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 reduce the overall gross
margin as a percent of revenues. For the first six months of 1996 and 1995, the
cost of revenues as a percent of total revenue remained fairly consistent at
40.7% and 40.2%, respectively.
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 increased 58% to $3.3 million in the quarter
ended June 30, 1996 from $2.1 million in 1995. In the first six months of 1996,
research and development expenses increased by 83% to $6.7 million from $3.7
million in 1995. As a percent of total revenue, research and development
expenses were 18.7% and 16.6% for the quarters ended June 30, 1996 and 1995,
respectively. For the first six months of 1996 and 1995, research and
development expenses as a percent of total revenue were 19.5% and 14.5%,
respectively.
R&D investment growth in 1996 as compared to 1995 relates to the Company
devoting substantial development resources towards incorporating new
technologies into PASSPORT and designing additional PASSPORT applications. For
example, work continues to define specific industry views such as a project to
develop a work management and materials "view" specific to the Utility
Transmission and Distribution (T & D) business. In addition, the Company is
continually improving the capability to support additional platforms, databases,
graphical user interfaces, toolsets and emerging technologies. Furthermore, the
Company continues to enhance and develop corporate financial systems
applications, as well as enhance versions of its PORTAL client workstation
software to provide a "look and feel" based on the Windows95/NT operating system
to all of its PASSPORT applications (PORTAL95). Moreover, the R&D growth in the
first quarter of 1996 as compared to 1995 was partially due to the timing of
PASSPORT Release 4.0. Unlike PASSPORT Release 5.0 which was completed in the
first quarter of 1996, PASSPORT Release 4.0 was completed in the last quarter of
1994, resulting in a minimal R&D cost impact in the first quarter of 1995. The
Company believes that a significant level of investment in R&D is essential to
remain competitive. The amount of R&D in absolute dollars for a particular
period may vary depending on the projects in progress.
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.
9
Results of Operations (continued)
Sales and Marketing. Sales and marketing expenses increased 36% to $2.0 million
in the quarter ended June 30, 1996 from $1.5 million in 1995. In the first six
months of 1996, sales and marketing expenses increased by 52% to $3.9 million
from $2.6 million in 1995. As a percent of total revenue, sales and marketing
expenses remained fairly consistent at 11.3%, 11.6%, 11.4% and 10.2% for the
quarters ended June 30, 1996 and 1995 and for the first six months of 1996 and
1995, respectively. The growth in sales and marketing expenses in absolute
dollars is primarily due to: (i) the addition of personnel, (ii) expansion into
new international sectors and (iii) changes in the mix of the revenue base on
which commission expense is generated. The Company believes that sales and
marketing expenses as a percentage of total revenues may increase as (i) a
larger portion of sales become fully commissioned, (ii) the Company initiates
operations in additional international markets and (iii) new marketing and
product strategic alliances are developed.
General and Administrative. General and administrative expenses increased 116%
to $1.8 million in the quarter ended June 30, 1996 from $.9 million in 1995. In
the first six months of 1996, general and administrative expenses increased by
89% to $3.7 million from $1.9 million in 1995. As a percent of total revenue,
general and administrative expenses were 10.5% and 6.8% for the quarters ended
June 30, 1996 and 1995, respectively. For the first six months of 1996 and 1995,
the general and administrative expenses as a percent of total revenue was 10.7%
and 7.7%, respectively. The growth in general and administrative expenses is
primarily a result of: (i) an expansion in staffing to support the Company's
growth, and (ii) additional expenditures related to being a public company.
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 six months ended June 30, 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 six months
ended June 30, 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. Pro forma net income in 1995 also reflects provisions for taxes
assuming the Company was taxed as a C Corporation. In addition, pro forma net
income data for 1995 includes a $1 million nonrecurring compensation charge
representing the fair value of the options granted in 1995.
Liquidity and Capital Resources
The Company had total assets of $61.7 million and $31.1 million at June 30, 1996
and December 31, 1995, 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, representing the proceeds (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 June 30, 1996, the Company's principal sources of liquidity consisted of
approximately $420,000 in cash and cash equivalents and $31.8 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
June 30, 1996.
In the six months ended June 30, 1996, cash, cash equivalents and marketable
securities increased substantially as a result of cash generated from operations
($8.5 million) and cash proceeds from the issuance of shares through an initial
public offering and employee stock purchase and option programs ($34.4 million).
The principal uses of operating cash were the purchase of property and equipment
and the repayment of the line of credit. The reduction in the line of credit was
fully funded by operations. The Company utilized approximately $2.3 million of
initial public offering proceeds to pay for offering costs and estimated income
taxes. Cash paid for income taxes for the six months ended June 30, 1996 and
1995 was $3.2 million and $43,000, respectively.
10
Liquidity and Capital Resources (continued)
Cash requirements are expected to continue to increase in order to fund: (i)
personnel and salary costs, (ii) research and development costs, (iii)
investment in additional technical equipment, and (iv) working capital
requirements. The Company presently anticipates additional capital expenditures
for the remainder of 1996 of approximately $1.3 million, primarily for equipment
and furniture.
The Company's principal commitments at June 30, 1996, consisted of obligations
under operating leases for facilities and computer equipment.
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 24 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 usages 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.
10.01 Third Amendment to Commercial Loan Agreement dated May 29,
1996 with Sumitomo Bank of California.
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
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: August 13, 1996
/s/ Robert W. Felton
----------------------------------------
Robert W. Felton
President and Chief Executive Officer
Date: August 13, 1996
/s/ Anna Ng-Borden
---------------------------------------
Anna Ng-Borden
Vice President of Finance
(Principal Financial and Accounting Officer)
12
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Description Page
------- ----------- -------------
10.01 Third Amendment to Commercial Loan Agreement dated May 29, 1996
with Sumitomo Bank of California
11.01 Statement of Computation of Pro Forma Net Income Per Share
27.01 Financial Data Schedule