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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 September 30, 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 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 October 31, 1996, Registrant had outstanding 18,423,056 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 nine months ended
September 30, 1996 and 1995............................................................ 1
Condensed Consolidated Balance Sheets - September 30, 1996 and December 31, 1995............ 2
Condensed Consolidated Statement of Shareholders' Equity - year ended
December 31, 1995 and nine months ended September 30, 1996.............................. 3
Condensed Consolidated Statements of Cash Flows - nine months ended
September 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........................................................................... 12
Item 2. Changes in Securities....................................................................... 12
Item 3. Defaults Upon Senior Securities............................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders......................................... 12
Item 5. Other Information........................................................................... 12
Item 6. Exhibits and Reports on Form 8-K............................................................ 12
Signatures.................................................................................. 13
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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
Revenues:
Software licensing fees ........................................... $ 4,277 $ 2,585 $12,028 $ 8,304
Services and maintenance .......................................... 15,728 10,717 42,435 30,291
------- ------- ------- -------
Total ........................................................ 20,005 13,302 54,463 38,595
Cost of revenues ....................................................... 8,562 5,883 22,599 16,042
------- ------- ------- -------
Gross margin ........................................................... 11,443 7,419 31,864 22,553
Operating expenses:
Research and development ......................................... 2,905 2,311 9,614 5,984
Sales and marketing ............................................... 2,352 1,414 6,283 3,996
General and administrative ........................................ 1,979 1,116 5,668 3,070
Compensation charge - stock options ............................... -- 18,900 -- 18,900
------- ------- ------- -------
Total operating expenses ..................................... 7,236 23,741 21,565 31,950
------- ------- ------- -------
Income (loss) from operations .......................................... 4,207 (16,322) 10,299 (9,397)
Other income, net ..................................................... 384 31 813 118
------- ------- ------- -------
Income (loss) before income taxes ..................................... 4,591 (16,291) 11,112 (9,279)
Provision for income taxes (state and foreign only in 1995) ............ 1,927 31 4,594 243
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C-Corporation status .................................. -- -- 6,700 --
------- ------- ------- -------
Net income (loss) ...................................................... $ 2,664 $(16,322) $ (182) $(9,522)
======= ======= ======= =======
Pro forma statement of operations:
Income (loss) before income taxes, as above ....................... $ 4,591 $(16,291) $11,112 $(9,279)
Compensation charge - stock options ............................... -- -- -- (1,000)
Add back portion of compensation charge - stock options ........... -- 18,900 -- 18,900
------- ------- ------- -------
Income before income taxes, as adjusted ........................... 4,591 2,609 11,112 8,621
Provision for income taxes (federal, state and foreign) ........... 1,927 1,097 4,594 3,626
------- ------- ------- -------
Pro forma net income .............................................. $ 2,664 $ 1,512 $ 6,518 $ 4,995
======= ======= ======= =======
Pro forma net income per share ......................................... $ 0.14 $ 0.09 $ 0.35 $ 0.29
======= ======= ======= =======
Shares used in computing pro forma net income per share ............... 19,401 17,490 18,817 17,490
======= ======= ======= =======
<FN>
See accompanying notes.
</FN>
1
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
September 30, December 31,
1996 1995
-------------- -------------
(1)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 2,203 $ 45
Marketable securities ..................................................... 18,500 --
Billed accounts receivable, less allowance for doubtful accounts of $449
at September 30, 1996 and $652 at December 31, 1995 ................... 16,990 17,661
Unbilled accounts receivable .............................................. 9,796 9,053
Other current assets ...................................................... 2,948 1,108
-------- --------
Total current assets .................................................. 50,437 27,867
Marketable securities - noncurrent ............................................. 11,281 --
Property and equipment, net .................................................... 5,126 3,128
Employee notes receivable ...................................................... 70 80
-------- --------
$ 66,914 $ 31,075
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowing under line of credit ............................................ $ -- $ 8,900
Accounts payable .......................................................... 1,676 1,331
Income taxes payable ...................................................... -- 218
Deferred income taxes ..................................................... 4,211 326
Other accrued liabilities ................................................. 2,744 2,027
Deferred revenue .......................................................... 9,427 7,425
-------- --------
Total current liabilities ............................................. 18,058 20,227
Commitments
Shareholders' equity:
Preferred Stock, $.001 par value at September 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 September 30, 1996 (no par value at
December 31, 1995):
Authorized shares - 50,000,000
Issued and outstanding shares -18,187,006
(15,102,222 at December 31, 1995) .................................. 18 609
Additional capital ........................................................ 42,695 18,900
Other ..................................................................... (375) (438)
Retained earnings (deficit) ............................................... 6,518 (8,223)
-------- --------
Total shareholders' equity ............................................ 48,856 10,848
-------- --------
$ 66,914 $ 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 on
January 1, 1996 .................... -- (8,223) -- 8,223 --
Reincorporation and adoption of $.001
par value .......................... (494) 494 -- -- --
Issuance of common stock (1) ........... 3 34,591 -- -- 34,594
Tax benefit from exercise of stock
options ............................... -- 3,636 -- -- 3,636
Purchase of Indus International,
Inc. net assets ....................... (100) (3) -- -- (103)
Unrealized loss on marketable securities -- -- (51) -- (51)
Translation adjustment ................. -- -- 18 -- 18
Amortization of deferred compensation .. -- -- 96 -- 96
Net loss ............................... -- (6,700) -- 6,518 (182)
-------- -------- -------- -------- --------
Balance at September 30, 1996 ............... $ 18 $ 42,695 $ (375) $ 6,518 $ 48,856
======== ======== ======== ======== ========
<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>
3
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
--------- ---------
Cash flows from operating activities
Net income (loss) ............................................................... $ (182) $ (9,522)
Adjustments to reconcile net income to net cash provided by operating activities:
Compensation charge - stock options ........................................ -- 18,900
Depreciation and amortization .............................................. 1,008 618
Amortization of deferred compensation ...................................... 96 24
Loss (gain) on sale of fixed assets ........................................ 2 --
Deferred income taxes ...................................................... (2,815) --
Cumulative effect of deferred income taxes provided January 1, 1996 ........ 6,700 --
Tax benefit from exercise of stock options ................................. 3,636 --
Changes in operating assets and liabilities:
Billed accounts receivable ............................................ 671 (1,082)
Unbilled accounts receivable .......................................... (743) (3,080)
Other current assets .................................................. (1,840) 269
Employee notes receivable ............................................. 10 29
Accounts payable ...................................................... 345 (108)
Income taxes payable .................................................. (218) 172
Other accrued liabilities ............................................. 717 572
Deferred revenue ...................................................... 2,002 (99)
Due to shareholder .................................................... -- (53)
Other ................................................................. 18 6
-------- --------
Net cash provided by operating activities ....................................... 9,407 6,646
-------- --------
Cash flows from investing activities
Purchase of marketable securities ............................................... (39,132) --
Sale of marketable securities ................................................... 9,300 --
Acquisition of property and equipment ........................................... (3,008) (79)
-------- --------
Net cash used in investing activities ........................................... (32,840) (79)
-------- --------
Cash flows from financing activities
Net repayment of line of credit ................................................. (8,900) (2,005)
Net proceeds from issuance of common stock ...................................... 34,594 --
Distribution to shareholders .................................................... -- (4,517)
Purchase of Indus International, Inc. net assets ................................ (103) --
-------- --------
Net cash provided by (used in) financing activities ............................. 25,591 (6,522)
-------- --------
Net increase in cash and cash equivalents ....................................... 2,158 45
Cash and cash equivalents at beginning of period ................................ 45 99
-------- --------
Cash and cash equivalents at end of period ...................................... $ 2,203 $ 144
======== ========
Supplemental disclosures of cash flow information
Interest paid ................................................................... $ 105 $ 34
======== ========
Income taxes paid ............................................................... $ 5,367 $ 215
======== ========
Supplemental schedule of noncash financing activities
Issuance of common stock in exchange for notes receivable ....................... $ -- $ 480
======== ========
<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 nine month period ended
September 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.
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).
Employee Stock Purchase Plan
The Company issued 39,189 shares under the 1995 Employee Stock Purchase
Plan (Plan) on June 30, 1996, in exchange for $499,700. The Plan permits
eligible employees to purchase Company stock at 85% of the fair market value at
the beginning or end of the six month purchase period, whichever is less. The
next stock purchase date under the Plan is December 31, 1996.
Exercise of Stock Options
During the nine months ended September 30, 1996, the Company issued
545,595 shares under the 1992 Stock Option Plan. The Company received $230,235
upon the exercise of these options.
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 nine months ended
September 30, 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. 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 a contingency feature.
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 nine month periods ended
September 30, 1996 and 1995 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
--------- ---------- --------- --------
Weighted average outstanding .............................................. 17,864 15,021 17,200 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 ......................................................... 1,537 1,315 1,617 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 by SEC Staff Accounting Bulletins Topic 1B) ................ -- 635 -- 635
------ ------ ------ ------
19,401 17,490 18,817 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 two,
four and five) 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.
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. Furthermore,
the Company continues to expand into other facility-driven industries. For
example, during the third quarter of 1996, the Company announced it was awarded
software and services contracts to provide facility management at one of the
nation's largest consumer insurance companies and at a Department of Energy
(DOE) facility, Los Alamos National Laboratory. There can be no assurance that
these type of contracts will lead to other similar 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 agreements whereby revenue is recognized ratably
over the agreement 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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
----- ----- ----- -----
Revenues:
Software licensing fees .......................................... 21.4% 19.4% 22.1% 21.5%
Services and maintenance .......................................... 78.6 80.6 77.9 78.5
----- ----- ----- -----
Total revenues ............................................... 100.0 100.0 100.0 100.0
Cost of revenues ...................................................... 42.8 44.2 41.5 41.6
----- ----- ----- -----
Gross margin ........................................................... 57.2 55.8 58.5 58.4
Operating expenses:
Research and development ......................................... 14.5 17.4 17.7 15.5
Sales and marketing .............................................. 11.8 10.6 11.5 10.4
General and administrative ........................................ 9.9 8.4 10.4 7.9
Compensation charge - stock options ............................... -- 142.1 -- 49.0
----- ----- ----- -----
Total operating expenses .................................... 36.2 178.5 39.6 82.8
----- ----- ----- -----
Income (loss) from operations .......................................... 21.0 (122.7) 18.9 (24.4)
Other income, net ...................................................... 1.9 0.2 1.5 .3
----- ----- ----- -----
Income (loss) before income taxes ...................................... 22.9 (122.5) 20.4 (24.1)
Provision for income taxes (state and foreign only in 1995) ............ 9.6 0.2 8.4 0.6
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C-Corporation status ................................. -- -- 12.3 --
----- ----- ----- -----
Net income (loss) ..................................................... 13.3% (122.7%) (.3%) (24.7%)
===== ===== ===== =====
Pro forma statement of operations:
Income (loss) before income taxes, as above ....................... 22.9% (122.5%) 20.4% (24.1%)
Compensation charge - stock options ............................... -- -- -- (2.6)
Add back portion of compensation charge - stock options ........... -- 142.1 -- 49.0
----- ----- ----- -----
Income before income taxes, as adjusted .......................... 22.9 19.6 20.4 22.3
Provision for income taxes (federal, state and foreign) ........... 9.6 8.2 8.4 9.4
----- ----- ----- -----
Pro forma net income per share ................................... 13.3% 11.4% 12.0% 12.9%
===== ===== ===== =====
Revenues. Total revenues increased 50% to $20.0 million in the quarter ended
September 30, 1996 from $13.3 million in 1995. In the first nine months of 1996,
total revenues increased by 41% to $54.5 million from $38.6 million in 1995.
Revenue from international customers (excluding Canada and Mexico) accounted for
13% and 17% of revenues for the quarter and nine months ended September 30,
1996, respectively, and 4% and 8% for the quarter and nine months ended
September 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 45-50% 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 accounted for 8% of total revenue for the quarter ended September
30, 1996 and 11% of total revenue for the quarter ended September 30, 1995.
8
Results of Operations (continued)
Revenues from licensing fees increased by 65% to $4.3 million in the quarter
ended September 30, 1996 from $2.6 million in 1995. In the first nine months of
1996, licensing fees increased by 45% to $12.0 million from $8.3 million in
1995. License fees as a percentage of revenue were 21.4% and 19.4% for the three
months ended September 30, 1996 and 1995, and 22.1% and 21.5% for the nine
months ended September 30, 1996 and 1995. The license fee growth from 1995 to
1996 resulted primarily from new international contracts and several new
significant domestic contracts.
Revenues from services and maintenance increased by 47% to $15.7 million in the
quarter ended September 30, 1996 from $10.7 million in 1995. In the first nine
months of 1996, services and maintenance revenue increased 40% to $42.4 million
from $30.3 million in 1995. The service and maintenance revenue 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
nine 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) 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 46% to $8.6 million in the quarter ended September
30, 1996 from $5.9 million in 1995. In the first nine months of 1996, cost of
revenues increased by 41% to $22.6 million from $16.0 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 decreased to 42.8% for the quarter ended
September 30, 1996 from 44.2% in 1995. For the first nine months of 1996 and
1995, the cost of revenues as a percent of total revenue remained fairly steady
at 41.5% and 41.6%, respectively. Variations in the cost of sales percentage is
partially due to changes 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 increased 26% to $2.9 million in the quarter
ended September 30, 1996 from $2.3 million in 1995. In the first nine months of
1996, research and development expenses increased by 61% to $9.6 million from
$6.0 million in 1995. Research and development expenses as a percent of total
revenue decreased to 14.5% for the quarter ended September 30, 1996 from 17.4%
in 1995 due to the increase in revenues for the comparable periods. For the
first nine months of 1996 and 1995, research and development expenses as a
percent of total revenue were 17.7% and 15.5%, respectively.
R&D investment increased in absolute dollars in 1996 as compared to 1995 due to
the Company devoting substantial development resources towards incorporating new
technologies into PASSPORT and designing additional PASSPORT applications. 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 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 allocated to the financial application project
will be realigned to (i) the software integration development necessary to
provide seamless integration with our strategic partners' offerings and (ii)
sales and marketing efforts.
9
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 66% to $2.4 million
in the quarter ended September 30, 1996 from $1.4 million in 1995. In the first
nine months of 1996, sales and marketing expenses increased by 57% to $6.3
million from $4.0 million in 1995. As a percent of total revenue, sales and
marketing expenses increased to 11.8% in the quarter ended September 30, 1996
from 10.6% in 1995 and to 11.5% in the nine months ended September 30, 1996 from
10.4% in 1995. 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) additional costs related to the annual International PASSPORT
Users Group conference. 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 markets, such as Transmission and Distribution.
General and Administrative. General and administrative expenses increased 77% to
$2.0 million in the quarter ended September 30, 1996 from $1.1 million in 1995.
In the first nine months of 1996, general and administrative expenses increased
by 85% to $5.7 million from $3.1 million in 1995. As a percent of total revenue,
general and administrative expenses were 9.9% and 8.4% for the quarters ended
September 30, 1996 and 1995, respectively. For the first nine months of 1996 and
1995, the general and administrative expenses as a percent of total revenue was
10.4% and 7.9%, respectively. 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 nine months ended September 30, 1996 was
the result of the $6.7 million cumulative deferred income tax liability charge
upon elimination of the S Corporation status. The net loss for the three and
nine months ended September 30, 1995 was the result of a $18.9 million
nonrecurring compensation charge representing the value of unexercised
non-qualified stock options upon elimination of a contingency feature.
Pro Forma Net Income. For purposes of presenting comparative earnings and
calculating earnings per share data, pro forma net income for the nine months
ended September 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 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 a contingency
feature.
10
Liquidity and Capital Resources
The Company had total assets of $66.9 million and $31.1 million at September 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 September 30, 1996, the Company's principal sources of liquidity consisted
of approximately $2.2 million in cash and cash equivalents and $29.7 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
September 30, 1996.
In the nine months ended September 30, 1996, cash, cash equivalents and
marketable securities increased substantially as a result of cash generated from
operations ($9.3 million) and cash proceeds from the issuance of shares through
an initial public offering and employee stock purchase and option programs
($34.6 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 $4.8 million of initial public offering proceeds to pay for
offering costs and estimated income taxes. Cash paid for income taxes for the
nine months ended September 30, 1996 and 1995 was $5.4 million and $215,000,
respectively.
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 1996 of approximately $1.0
million. The Company's principal commitments at September 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 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.
11
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
In September 1996 Mr. Frank Siskowski was hired as Senior Vice
President of Finance and Chief Financial Officer. In August 1996
Mr. Charles Rosselle resigned as Senior Vice President and Vice
President of Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.01 Fourth Amendment to Commercial Loan Agreement dated
September 6, 1996 with Sumitomo Bank of California.
10.02 Amendments to The Indus Group, Inc. 1992 Stock Option Plan.
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.
12
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: November 13, 1996
/s/ Robert W. Felton
----------------------------------------
Robert W. Felton
President and Chief Executive Officer
Date: November 13, 1996
/s/ Frank W. Siskowski
----------------------------------------
Frank W. Siskowski
Senior Vice President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
13
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Description Page
- - ------- ----------- ----
10.01 Fourth Amendment to Commercial Loan Agreement dated
September 6, 1996 with Sumitomo Bank of California.
10.02 Amendments to The Indus Group, Inc. 1992 Stock Option Plan.
11.01 Statement of Computation of Pro Forma Net Income Per Share.
27.01 Financial Data Schedule.