EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Indus Group develops, markets, implements and supports client/server
enterprise management software solutions for process industries worldwide. The
Company was founded in 1988, operated as a sole proprietorship until being
incorporated in 1990, and completed its initial publc offering on February 29,
1996. The Company derives its revenues primarily from software licenses,
implementation and training services and associated maintenance fees sold to
electric and gas utilities and other process-related industries.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations for the
periods indicated expressed as a percentage of total revenues.
Percentage of Total Revenues
Years Ended December 31,
1994 1995 1996
- - ------------------------------------------------------------------------------------------------------------------
Revenues:
Software licensing fees 25% 20% 21%
Services and maintenance 75 80 79
- - ------------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100
- - ------------------------------------------------------------------------------------------------------------------
Cost of revenues 42 42 42
- - ------------------------------------------------------------------------------------------------------------------
Gross margin 58 58 58
Operating expenses:
Research and development 23 15 16
Sales and marketing 14 11 12
General and administrative 15 9 10
Compensation charge-stock options -- 35 --
- - ------------------------------------------------------------------------------------------------------------------
Total operating expenses 52 70 38
- - ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 6 (12) 20
Other income (expense), net -- -- 1
- - ------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 6 (12) 21
Provision for income taxes -- -- 9
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C Corporation status -- -- 9
- - ------------------------------------------------------------------------------------------------------------------
Net income (loss) 6% (12)% 3%
PRO FORMA STATEMENT OF OPERATIONS DATA FOR 1995 AND 1996:
Income (loss) before income taxes, as above (12)% 21%
Add back portion of compensation charge-stock options 33 --
- - ------------------------------------------------------------------------------------------------------------------
Income before income taxes, as adjusted 21 21
Provision for income taxes 9 9
- - ------------------------------------------------------------------------------------------------------------------
Pro forma net income 12% 12%
==================================================================================================================
Revenues
The Company's revenues are derived from software licensing fees and from
services, which include implementation and training services coupled with
maintenance fees. Total revenues increased 76% from $30.6 million in 1994 to
$53.8 million in 1995, and 41% to $75.9 million in 1996. The increase in 1995
resulted from increased licensing activity in the latter half of 1994 and the
associated increase in demand for the Company's implementation and training
services. The growth in 1996 was attributable to increased licensing activity
combined with new customer licenses and subsequent implementation and training
services. The Company does not believe the revenue growth experienced in 1996
is necessarily indicative of any revenue growth that may occur in future
periods.
Cost of Revenues
Cost of revenues consists primarily of: (i) personnel and related costs for
implementation, including the costs of the Company's Account Executives, and
(ii) personnel and related costs for training and customer support services.
Substantially all of the cost of revenues is attributable to providing
services and maintenance. Costs of software license fees, which consist
primarily of packaging and production costs, are not significant and are not
segregated in the Company's accounting records. All software development costs
are expensed to research and development as incurred. Cost of revenues
increased 76% from $12.8 million in 1994 to $22.6 million in 1995 and 41% to
$31.8 million in 1996, and represented 42% of total revenues in each of those
years. The 1995 and 1996 increases resulted from the cost of increased
services associated with major new license agreements as well as the cost of
additional services associated with the expansion of existing projects.
Research and Development
Research and development expenses consist primarily of: (i) personnel and
related costs and (ii) computer timeshare costs directly attributable to the
development of new software application products, enhancements to existing
products and the costs of porting the Company's products to different
platforms. Research and development expenses increased by 17% from $7.1
million in 1994 to $8.3 million in 1995 and increased by 50% to $12.5 million
in 1996, and represented 23%, 15% and 16% respectively, of total revenues in
those years. The decline in research and development as a percentage of total
revenues in 1995 was due to the increase in total revenues. Research and
development investment increased in absolute dollars and as a percentage of
total revenues in 1996 as compared to 1995 due to the Company committing
substantial development resources towards incorporating new technologies into
PASSPORT and designing additional PASSPORT applications. The Company believes
that a significant level of research and development is essential to remain
competitive and will continue to invest development resources towards
incorporating new technologies into PASSPORT and designing additional PASSPORT
functionality. The level of these expenditures for a particular period may
vary depending on the projects in progress.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility of the software is established, after which any additional costs
are capitalized. To date, the Company has expensed all software development
costs because development costs incurred subsequent to the establishment of
technological feasibility have not been material.
Sales and Marketing
Sales and marketing expenses increased by 39% from $4.1 million in 1994 to
$5.7 million in 1995 and increased by 64% to $9.3 million in 1996, and
represented 14%, 11% and 12%, respectively, of total revenues in those years.
The 1995 and 1996 increases in absolute dollars resulted from increased
staffing levels and increased commissions expenses associated with increased
revenues. The Company believes that sales and marketing expenses as a
percentage of total revenues will increase in 1997 due to the reallocation of
certain expenditures originally intended for research and development to sales
and marketing efforts, and will increase as the Company expands its presence
in the domestic market, initiates operations in additional international
markets, develops new and existing marketing and product strategic alliances
and increases focus on vertical markets.
General and Administrative
General and administrative expenses increased by 4% from $4.7 million in 1994
to $4.9 million in 1995 and increased by 59% to $7.8 million in 1996. These
expenses represented 15%, 9% and 10%, respectively, of total revenues in those
years. The increase in 1996 primarily resulted from incremental expenditures
related to becoming a public company and expansion in staffing to support the
Company's growth.
Compensation Charge - Stock Options
The Company amended its 1992 Stock Option Plan effective in September 1995 to
accelerate the exercisability of all outstanding stock options (covering
1,788,570 shares of Common Stock). Exercisability had previously been
contingent upon certain "liquidity events" such as an initial public offering
or an acquisition of the Company. As a result of this amendment, the Company
recognized a non-recurring compensation charge of $18.9 million in the third
quarter of 1995.
Provision for Income Taxes
Effective upon its incorporation in 1990, the Company elected to have its
United States income taxed under Subchapter S of the Code. Accordingly, income
tax provisions prior to 1996 were principally attributable to state taxes and
taxes imposed by governments on the Company's foreign operations. The
Company's S Corporation status terminated effective January 1, 1996, and the
Company was subject to federal income taxation at the corporate level
thereafter. In connection with the termination of S Corporation status as of
January 1, 1996, a one-time charge representing a cumulative net federal and
state deferred income tax liability of $6.7 million was recorded during the
first quarter of 1996.
Net Income (Loss)
The Company's net income of $2.5 million in 1996 increased from the net loss
recorded in 1995, primarily due to increased revenues. The effect of the
increased revenues was partially offset by the factors described above and by
a one-time charge representing a cumulative net federal and state deferred
income tax liability associated with the Company's conversion to C Corporation
status. The loss in 1995 was a result of the non-recurring compensation charge
upon elimination of the contingency related to stock options.
o LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company financed its operations primarily through cash
provided by operations and the proceeds of its initial public offering. In
March 1996, the Company received $33.9 million, representing the proceeds (net
of underwriting commissions and offering costs) from an initial public
offering of 2,500,000 shares of its Common Stock. Cash provided by operations
was $2.3 million, $3.1 million and $20.2 million in 1994, 1995 and 1996,
respectively. Accounts receivable increased substantially in 1995 as the
overall level of new licensing activity and associated service levels
increased. Accounts receivable decreased in 1996 in spite of increased
revenues as a result of additional focus on collections. Investing activities,
consisting primarily of the purchase of marketable securities and acquisitions
of property and equipment, used cash of approximately $861,000, $577,000 and
$33.3 million in 1994, 1995 and 1996, respectively. Financing activities in
1994 and 1995 used cash of $1.4 million and $2.6 million, respectively.
Financing activities in 1996 generated cash of $26.3 million primarily as a
result of the proceeds from the initial public offering partially offset by
repayment of the line of credit.
As of December 31, 1996, the Company's principal sources of liquidity
consisted of approximately $13.3 million in cash and cash equivalents and
$26.5 million in marketable securities. In addition, the Company has an
unsecured revolving bank line of credit agreement which permits borrowings,
including stand-by letters of credit, of up to $15 million. The facility
expires in May 1997. The Company believes it will be able to renew this
agreement or replace it on terms acceptable to the Company. No borrowings were
outstanding under this line at December 31, 1996.
The Company presently anticipates capital expenditures of approximately $6.0
million in 1997, primarily for equipment and furniture.
The Company believes that existing cash and marketable securities, anticipated
cash flow from operations and available bank borrowings will be sufficient to
meet its cash requirements during at least the next 12 months. The foregoing
statement regarding the Company's expectations for continued liquidity is a
forward-looking statement, and actual results may differ materially depending
on a variety of factors, including variable operating results.
17
18
CONTENTS OF FINANCIAL STATEMENTS
19 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
20 BALANCE SHEETS
21 STATEMENTS OF OPERATIONS
22 STATEMENT OF SHAREHOLDERS' EQUITY
23 STATEMENTS OF CASH FLOWS
24 NOTES TO FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
The Indus Group, Inc.
We have audited the accompanying consolidated balance sheet of The Indus Group,
Inc. as of December 31, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended, and
the accompanying combined balance sheet of The Indus Group, Inc. and Indus
International, Inc. (a related entity acquired by The Indus Group, Inc. in 1996)
as of December 31, 1995, and the related combined statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Indus Group,
Inc. at December 31, 1996, and the consolidated results of its operations and
its cash flows for the year then ended and the combined financial position of
The Indus Group, Inc. and Indus International, Inc. at December 31, 1995, and
the combined results of their operations and their cash flows for the two years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
January 24, 1997
19
20
COMBINED (1995); CONSOLIDATED (1996) BALANCE SHEETS
ASSETS
(In thousands, except share amounts)
December 31,
Current assets 1995 1996
- - -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 45 $ 13,266
Marketable securities -- 26,524
Billed accounts receivable, less allowance for doubtful accounts of $652 and $449
at December 31, 1995 and 1996, respectively 17,661 16,889
Unbilled accounts receivable 9,053 5,633
Other current assets 1,108 4,523
- - -------------------------------------------------------------------------------------------------------------------
Total current assets 27,867 66,835
Marketable securities - maturing beyond one year -- 2,129
Property and equipment, net 3,128 6,337
Employee notes receivable 80 140
Other assets -- 73
- - -------------------------------------------------------------------------------------------------------------------
$ 31,075 $ 75,514
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $ 8,900 $ --
Accounts payable 1,331 2,165
Accrued compensation 1,841 3,030
Income taxes payable 218 --
Deferred income taxes 326 3,837
Other accrued liabilities 186 511
Deferred revenue 7,425 10,599
- - -------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,227 20,142
Commitments -- --
Shareholders' equity:
Preferred stock -- --
Common stock 609 19
Additional capital 18,900(1) 46,425
Other (438) (300)
Retained earnings (deficit) (8,223) 9,228
- - -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,848 55,372
- - -------------------------------------------------------------------------------------------------------------------
$ 31,075 $ 75,514
===================================================================================================================
<FN>
(1) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature, which had precluded exercise of these
options. This amount was charged to operations in September 1995 and
reduced retained earnings at December 31, 1995.
See accompanying notes.
</FN>
COMBINED (1994 and 1995); CONSOLIDATED (1996) STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------------
Revenues:
Software licensing fees $ 7,547 $ 10,676 $ 16,208
Services and maintenance 23,044 43,115 59,731
- - ---------------------------------------------------------------------------------------------------------------------
Total revenues 30,591 53,791 75,939
Cost of revenues (1) 12,798 22,578 31,790
- - ---------------------------------------------------------------------------------------------------------------------
Gross margin 17,793 31,213 44,149
Operating expenses:
Research and development 7,120 8,306 12,493
Sales and marketing 4,144 5,680 9,306
General and administrative 4,654 4,918 7,819
Compensation charge - stock options (2) -- 18,900 --
- - ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 15,918 37,804 29,618
- - ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,875 (6,591) 14,531
Interest and other income, net 7 167 1,356
Interest expense (108) (71) (105)
- - ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,774 (6,495) 15,782
Provision for income taxes (state and foreign only in 1994 and 1995) 69 325 6,554
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C-Corporation status (3) -- -- 6,700
- - ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,705 $ (6,820) $ 2,528
=====================================================================================================================
PRO FORMA STATEMENT OF OPERATIONS DATA:
Income (loss) before income taxes, as above $ (6,495) 15,782
Add back portion of compensation charge - stock options (4) 17,900 --
- - ---------------------------------------------------------------------------------------------------------------------
Income before income taxes, as adjusted 11,405 15,782
Provision for income taxes (federal, state and foreign) 5,083 6,554
- - ---------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 6,322 9,228
=====================================================================================================================
Pro forma net income per share $ 0.36 0.49
=====================================================================================================================
Shares used in computing pro forma net income per share 17,490 18,924
=====================================================================================================================
<FN>
(1) Includes royalties due to the Chief Executive Officer and principal
shareholder of $924 in 1994. No royalties were due after 1994.
(2) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature, which had precluded exercise of these
options.
(3) Deferred income taxes related to differences in cash basis accounting for
income tax purposes and accrual basis accounting for financial statement
purposes through December 31, 1995.
(4) To reduce compensation expense to amount related to options granted in 1995
only.
See accompanying notes.
</FN>
21
22
COMBINED (1994 and 1995); CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
Retained
Earnings Total
Common Additional (Accumulated Shareholders'
Stock Capital Other Deficit) Equity
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 (1) 131 $ -- $ (9) $ 8,001 $ 8,123
Repurchase of common stock (2) -- -- (47) (49)
Cash distributions to shareholders -- -- -- (1,546) (1,546)
Translation adjustment -- -- 9 -- 9
Net income -- -- -- 1,705 1,705
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 129 -- -- 8,113 8,242
Issuance of common stock as deferred compensation 480 -- (480) -- --
Cash distributions to shareholders (2) -- -- -- (9,516) (9,516)
Translation adjustment -- -- (6) -- (6)
Stock options (3) -- 18,900 -- -- 18,900
Amortization of deferred compensation -- -- 48 -- 48
Net loss -- -- -- (6,820) (6,820)
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 609 18,900 (438) (8,223) 10,848
Conversion to C Corporation on January 1, 1996 -- (8,223) -- 8,223 --
Reincorporation and adoption of $.001 par value (494) 494 -- -- --
Issuance of common stock (4) 4 35,288 -- -- 35,292
Tax benefit from employee stock transactions -- 6,669 -- -- 6,669
Purchase of Indus International, Inc. net assets (1) (100) (3) -- -- (103)
Unrealized loss on marketable securities -- -- (42) -- (42)
Translation adjustment -- -- 84 -- 84
Amortization of deferred compensation -- -- 96 -- 96
Net income -- (6,700) -- 9,228 2,528
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 19 $ 46,425 $ (300) $ 9,228 $ 55,372
=============================================================================================================================
<FN>
(1) Except for the $100 capitalization of Indus International, Inc., all
transactions in common stock relate to The Indus Group, Inc.
(2) Cash distributions to shareholders have been made by The Indus Group, Inc.
only. Indus International, Inc. did not make any cash distributions prior
to its acquisition by The Indus Group, Inc.
(3) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature.
(4) Consists of $33,864 received from February 29, 1996 initial public offering
(2,500,000 common shares offered at $15 per share less underwriting
commission and expenses), $1,052 received from issuance of 71,309 common
shares under the Employee Stock Purchase Plan and $376 received from the
issuance of 916,845 common shares upon exercise of options.
See accompanying notes.
</FN>
COMBINED (1994 and 1995); CONSOLIDATED (1995) STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1994 1995 1996
- - --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,705 $ (6,820) $ 2,528
Adjustments to reconcile net income to net cash provided by operating activities:
Compensation charge - stock options -- 18,900 --
Depreciation and amortization 1,105 901 1,360
Provision for doubtful accounts 436 325 (203)
Amortization of deferred compensation -- 48 96
Cumulative effect of deferred income taxes provided on conversion to
C-corporation status -- -- 6,700
Changes in operating assets and liabilities:
Billed accounts receivable (4,782) (8,910) 975
Unbilled accounts receivable (984) (4,502) 3,420
Receivable from shareholder 306 -- --
Other current assets (387) (316) (3,415)
Employee notes receivable 157 13 (61)
Accounts payable 191 223 834
Accrued payroll and related expense 348 824 1,189
Income taxes payable 7 (75) 6,451
Deferred income taxes 14 384 (3,189)
Other accrued liabilities 299 (387) 106
Deferred revenue 3,780 2,596 3,174
Other 62 (59) 231
- - --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,257 3,145 20,196
- - --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities -- -- (39,010)
Sales and maturities of marketable securities -- -- 10,314
Acquisition of property and equipment (861) (577) (4,568)
- - --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (861) (577) (33,264)
- - --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayment) of line of credit 172 6,895 (8,900)
Net proceeds from issuance of common stock -- -- 35,292
Repurchase of common stock (49) -- --
Distributions to shareholders (1,546) (9,517) --
Purchase of Indus International, Inc. net assets -- -- (103)
- - --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,423) (2,622) 26,289
- - --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (27) (54) 13,221
Cash and cash equivalents at beginning of period 126 99 45
- - --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 99 $ 45 $ 13,266
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 108 $ 72 $ 105
==========================================================================================================================
Income taxes paid $ -- $ 236 $ 5,417
==========================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Issuance of common stock in exchange for notes receivable $ -- $ 480 $ --
==========================================================================================================================
<FN>
See accompanying notes.
</FN>
23
24
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 1....NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
o ORGANIZATION AND BUSINESS
The Indus Group, Inc. was incorporated under the laws of the state of
California in 1990. On March 1, 1996, pursuant to an Asset Purchase Agreement,
The Indus Group, Inc. purchased all of the assets and assumed all of the
liabilities of Indus International, Inc., an entity which was incorporated in
1993 to operate in the United Kingdom and which was related to The Indus
Group, Inc. through control by common shareholders. The purchase price of the
net assets, which equaled the net book value, was $103,252. Concurrent with
this purchase, The Indus Group, Inc. established a new wholly-owned subsidiary
also named Indus International, Inc. to which the net assets were transferred.
On January 1, 1996, The Indus Group, Inc. established a foreign sales
corporation, Indus Foreign Sales Corporation. Collectively, the entities are
referred to as the Company.
The Company develops, markets, implements and supports client/server
enterprise management software solutions. The Company focuses primarily on
process industry companies, including electric utility, nuclear, oil and gas,
chemical refining, steel and forest products companies.
o BASIS OF PRESENTATION
The Company's combined financial statements for 1994 and 1995 include the
accounts of The Indus Group, Inc. and Indus International, Inc. The Company's
consolidated financial statements for 1996 include the accounts of The Indus
Group, Inc., Indus International, Inc. and Indus Foreign Sales Corporation.
All significant intercompany accounts and transactions have been eliminated.
o SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company provides its software to customers under contracts which provide
for both software license fees and system implementation services. Revenues
from system implementation services, which generally are time- and
material-based, are recognized as direct contract costs are incurred. Revenues
from application software licenses are recognized as earned revenue over the
estimated time period to complete implementation of the software, which period
generally is twelve to fourteen months. Revenues from client workstation
software are recognized as billed.
A portion of license fees is deferred initially and subsequently recognized
over the one-year period during which continuing maintenance and support
services are provided to customers under the contracts. After that initial
contract period, additional maintenance and support services are subject to
separate contracts for which revenue is recognized ratably over the contract
period.
Unbilled accounts receivable represent amounts related to revenue which has
been recorded either as deferred revenue or earned revenue but which has not
been billed. Generally, unbilled amounts are billed within 90 days.
Deferred revenue represents primarily unearned license fees and unearned
maintenance and support fees.
Concentration of Credit Risk
The Company's customers are generally large companies in the electrical
utility, nuclear, oil and gas, chemical refining, steel and forest products
industries. The Company performs ongoing credit evaluations of its customers
and does not require collateral. The Company maintains allowances for
potential credit losses and such losses have been within management's
expectations. Two customers accounted for 12% and 11% of revenues in 1995 and
11% and 10% of revenues in 1996. No individual customer represented greater
than 10% of sales in 1994.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The Company generally invests its cash and cash equivalents in
money market accounts.
The Company presently classifies all marketable securities as
available-for-sale investments and carries them at fair market value.
Marketable securities represent U.S. government obligations and indirect
investments in municipal obligations. Marketable securities classified as
long-term mature no later than July 1998. Unrealized holding gains and losses,
net of taxes, are carried as a separate component of shareholders' equity.
Depreciation and Amortization
Depreciation on office and computer equipment and furniture is computed using
the straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the related lease term or their estimated useful lives.
The Company's policy is to capitalize software development costs after
technological feasibility has been established. To date, software development
costs incurred subsequent to the establishment of technological feasibility
have not been material and have not been capitalized.
Income Taxes
Effective January 1, 1996, the Company elected C Corporation status for income
tax purposes. Prior to 1996, the Company was an S Corporation and, as a
result, income determined on the cash basis for income tax purposes was
taxable to the shareholders, and not the Company, for federal and certain
state income tax purposes. In connection with the termination of S Corporation
status on January 1, 1996, a $6.7 million cumulative effect charge was
recorded. The majority of the cumulative effect charge is due to changing from
the cash basis of accounting as an S Corporation to the accrual basis of
accounting as a C Corporation. The related deferred tax liability is payable
over four years.
The provision for income taxes included in the accompanying financial
statements represents federal, state and foreign income taxes in 1996 and
state income taxes in certain states for the Company and foreign income taxes
relating to Indus International, Inc. in 1995 and 1994.
Pro Forma Data
For purposes of presenting comparative earnings and calculating earnings per
share data, pro forma net income for 1996 reflects the elimination of the $6.7
million cumulative deferred income tax charge.
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
Pro forma net income in 1995 reflects provisions for taxes assuming the
Company was taxed as a C Corporation. Furthermore, pro forma net income data
in 1995 includes a $1 million nonrecurring compensation charge representing
the fair value of the options granted in 1995 and excludes a $18.9 million
nonrecurring compensation charge representing the value of unexercised
non-qualified stock options upon elimination of the contingency feature. The
contingency feature was intended to preserve the Company's S Corporation
qualification by limiting the number of shareholders. If the Company had not
been an S Corporation, no contingency feature would have been necessary.
Per Share Data
Pro forma net income per share is computed using pro forma net income and the
weighted average number of common and dilutive common equivalent shares
outstanding during each period. Dilutive common equivalent shares consist of
incremental common shares issuable upon the assumed exercise of stock options
(using the treasury stock method). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and Staff policy, the number of shares
in 1995 also includes: (i) all common shares issued (and shares subject to
stock options granted) within 12 months of the initial public offering date,
as if they were outstanding for all periods presented; and (ii) 634,444
additional shares (equivalent to dividends paid in 1995 divided by the
expected offering price per share).
Foreign Currency Translation
Gains and losses from the translation of Indus International, Inc.'s financial
statements are included in shareholders' equity. Net gains and losses
resulting from foreign exchange transactions were immaterial in all periods
presented.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
NOTE 2....MARKETABLE SECURITIES
The Company held no marketable securities prior to the initial public offering
of common stock in February 1996. The following is a summary of marketable
securities, all of which are available for sale at December 31, 1996 (in
thousands):
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- - --------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 16,067 $ 0 $(65) $ 16,002
Municipal obligations 13,628 23 0 13,651
- - --------------------------------------------------------------------------------
$ 29,695 $23 $(65) $ 29,653
================================================================================
Included in:
Cash and cash equivalents $ 1,000 $ 0 $ 0 $ 1,000
Short term investments 26,579 10 (65) 26,524
Long term investments 2,116 13 0 2,129
- - --------------------------------------------------------------------------------
$ 29,695 $23 $(65) $ 29,653
================================================================================
There were no realized gains or losses on sales of marketable securities. The
net adjustment to unrealized holding losses on marketable securities included
as a component of shareholder's equity totaled $41,986 in 1996.
25
26
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 3....PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following (in
thousands):
December 31,
1995 1996
- - --------------------------------------------------------------------------------
Office and computer equipment $ 4,233 $ 6,886
Furniture 2,153 2,973
Leasehold improvements 434 1,337
Purchased software 272 465
- - --------------------------------------------------------------------------------
7,092 11,661
Less accumulated depreciation and amortization 3,964 5,324
- - --------------------------------------------------------------------------------
$ 3,128 $ 6,337
================================================================================
NOTE 4....LINE OF CREDIT
The Company has an unsecured revolving bank line of credit agreement,
renewable annually in May, which permits borrowings, including stand-by
letters of credit, of up to $15 million. No direct borrowings were outstanding
under this agreement at December 31, 1996. Interest would have been payable at
the bank's prime rate of 8.25% at December 31, 1996. Borrowings outstanding
under this agreement at December 31, 1995 were $8.9 million, with interest at
the bank's prime rate of 8.50%. Stand-by letters of credit outstanding were
$232,641 and $602,641 at December 31, 1995 and 1996, respectively. The credit
agreement contains certain affirmative and negative covenants. The Company was
in compliance with these covenants at December 31, 1996.
NOTE 5....RELATED PARTY TRANSACTIONS
The Company had a software license and royalty agreement with its Chief
Executive Officer and principal shareholder through 1995. In 1995, accrual and
payment under this agreement was waived. The related royalty expense, which
was included in the cost of revenues, was $924,956 for 1994 (none in 1995).
There were no royalties payable at December 31, 1996.
The Company held employee notes receivable totaling $79,827 and $140,763 at
December 31, 1995 and 1996, respectively, from officers and employees of the
Company.
NOTE 6....COMMITMENTS
The Company leases its office facilities under various operating lease
agreements. The leases require monthly rental payments in varying amounts
through 2001. These leases also require the Company to pay all property taxes,
normal maintenance, and insurance on the leased facilities.
Total rental expense under these leases was approximately $1,450,000, $2,378,000
and $3,888,000 for 1994, 1995 and 1996, respectively. Future minimum lease
payments under all non-cancelable operating leases are as follows (in
thousands):
December 31, 1996
1997 $ 3,529
1998 3,019
1999 2,717
2000 2,313
2001 589
- - -------------------------------------
$ 12,167
=====================================
A stand-by letter of credit ($202,674 at December 31, 1996), which is required
in the lease for the Company's office, has been issued under The Indus Group,
Inc.'s bank line of credit. This letter of credit requirement will terminate
in May 1997.
In 1995, the bank issued four irrevocable stand-by letters of credit totaling
$29,967. In 1996, the bank issued two additional irrevocable stand-by letters
of credit totaling $370,000. These letters are a requirement of two of the
Company's licensing agreements. These letter of credit requirements will
terminate in 1998.
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 7....SHAREHOLDERS' EQUITY
On December 27, 1995, the articles of incorporation of The Indus Group, Inc.
were amended to: (i) increase the authorized number of common shares to
50,000,000, all of which are voting shares; (ii) effect a 17-for-one split of
the outstanding common shares (and shares under option), and (iii) authorize
5,000,000 shares of preferred stock, issuable in series, with the rights and
preferences to be established for each series. All share and per share data in
the accompanying financial statements have been adjusted retroactively to give
effect to the stock split. No series of preferred stock has been designated.
Preferred and Common Stock
On February 29, 1996, the Company completed an initial public offering in
which it sold 2,500,000 shares of common stock at $15.00 per share. The
offering raised net proceeds of $33,863,764 after underwriting discount and
$1,011,236 in related expenses.
Common Stock
The following is a summary of the authorized and issued common stock of The
Indus Group, Inc. and in 1995 only for Indus International, Inc.:
December 31,
1995 1996
- - --------------------------------------------------------------------------------
The Indus Group, Inc.:
Authorized shares, no par value in 1995,
$.001 par value in 1996 50,000,000 50,000,000
Issued and outstanding 15,102,222 18,590,376
Amount $ 509,061 $ 18,590
- - --------------------------------------------------------------------------------
Indus International, Inc.:
Authorized shares, no par value 200,000 (not applicable)
Amount $ 100,000 (not applicable)
- - --------------------------------------------------------------------------------
Total Amount for The Company $ 609,061 $ 18,590
================================================================================
NOTE 8....INCENTIVE COMMON STOCK PLANS ISSUED AS DEFERRED COMPENSATION
Common Stock
In June 1995, the Company issued 162,622 shares of common stock to several
employees in exchange for notes aggregating $109,626. The notes will be
forgiven over a five-year period provided the note holders continue their
employment with the Company. Additional deferred compensation of $370,000 has
been recorded for the difference between the notes and the deemed fair value
of the shares at the date of issuance. The $479,626 total deferred
compensation is being amortized over the five-year period.
1992 Stock Option Plan
In 1992, the Company adopted a stock option plan under which options for a
total of 1,805,400 shares of common stock may be granted to employees. The
exercise price of each common share under option was the book value per share
on the grant date. No further options will be granted under the 1992 Stock
Option Plan. Under the plan, options granted would not be exercisable until a
"liquidity event" had occurred. A liquidity event was defined as the sale of
more than 20% of the voting stock interest to an independent party or parties
or an acquisition of the Company which would result in termination of the
plan. Options granted would expire on the earlier of termination of employment
or ten years. Upon expiration of an option, the Company was obligated to pay
the optionee the increase in book value over the term of the option ("the book
value appreciation feature"). If any options were exercised, the Company would
retain the right to repurchase the issued shares at their then book value upon
termination of employment.
As of September 29, 1995, the board of directors eliminated the liquidity
event contingency, thereby causing the options then outstanding as to
1,791,970 common shares to be exercisable in their entirety. As a result,
these options were valued as of September 30, 1995 for financial statement
purposes and a one-time charge of $18,900,000 was recorded in the combined
statement of operations. The book value appreciation feature, in the event of
expiration of an option, also was eliminated at that time.
A summary of activity under the option plan is as follows:
Options Outstanding
--------------------------
Shares Available Number Price Per
for Grant of Share Share
- - --------------------------------------------------------------------------------
Balances at December 31, 1993 99,790 1,705,610 $0.28-$0.35
Options canceled 298,860 (298,860) $0.28-$0.35
- - --------------------------------------------------------------------------------
Balances at December 31, 1994 398,650 1,406,750 $0.28-$0.35
Options granted (438,260) 438,260 $0.69
Options canceled 56,440 (56,440) $0.28
- - --------------------------------------------------------------------------------
Balances at December 31, 1995 16,830 1,788,570 $0.28-$0.69
Options exercised -- (916,845) $0.28-$0.69
Options canceled 1,700 (1,700) $0.28
- - --------------------------------------------------------------------------------
Balances at December 31, 1996 18,500 870,025 $0.28-$0.69
================================================================================
27
28
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
1995 Stock Plan
The 1995 Stock Plan provides for the grant of incentive stock options to
employees of the Company and nonstatutory stock options to employees,
directors and consultants of the Company. A total of 1,500,000 shares of
common stock have been reserved for issuance under the plan. The incentive
stock options will be granted at not less than the fair market value of the
stock on the date of grant; nonqualified stock options will be granted at not
less than 85% of the fair market value of the stock on the date of grant. The
options will generally vest over a one to four year period and have a maximum
term of ten years.
A summary of activity under the option plan is as follows:
Options Outstanding
----------------------------
Shares Available Number of Price Per
for Grant Share Share
- - --------------------------------------------------------------------------------
Balances at December 31, 1995 1,500,000 --
Options granted (807,350) 807,350 $16.50-$22.75
Options canceled 2,250 (2,250) $16.50
- - --------------------------------------------------------------------------------
Balances at December 31, 1996 694,900 805,100 $16.50-$22.75
================================================================================
1995 Director Option Plan
The 1995 Director Option Plan provides for the issuance of nonstatutory stock
options to nonemployee directors of the Company. A total of 100,000 shares of
common stock have been reserved for issuance. Under the plan, nonemployee
directors were each granted an option to purchase 10,000 shares of common
stock upon the completion of the initial public offering in February 1996. The
options were granted at an exercise price of $15.00 per share and vest
quarterly over a four year period. On each date of the Company's Annual
Meeting of Shareholders, each nonemployee director will be granted an option
to purchase an additional 2,500 shares, provided the director has served on
the board for at least six months. Future options will be granted at the fair
market value of the stock on the date of grant and will vest quarterly over a
four year period.
1995 Employee Stock Purchase Plan
The Company has an employee stock purchase plan under which 500,000 shares of
common stock have been reserved for issuance. The plan allows for eligible
employees to purchase stock at 85% of the lower of the fair market value of
the Company's common stock as of the first day of each six-month offering
period or the fair market value of the stock at the end of the offering
period. The offering period will commence on January 1 and July 1 of each
year, with the first offering period beginning on such date following the
closing of the initial public offering in February 1996. Purchases will be
limited to 10% of each employee's compensation. The Company issued 71,309
shares under the plan in 1996 at prices ranging from $12.75 to $17.21 per
share.
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
NOTE 9....ALTERNATIVE METHOD OF VALUING STOCK OPTIONS
The Company has elected to follow Accounting Principal Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation," (Statement 123) requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized in the Company's financial statements.
The Company's 1995 Stock Option Plan has authorized the grant of options to
employees for up to 1,500,000 shares of the Company's common stock. All
options granted typically have 10 year terms and vest and become fully
exercisable at the end of 4 years of continued employment.
Pro forma information regarding net income and earnings per share is required
by Statement 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the minimum value
method for 1995 and the Black-Scholes option pricing model for 1996 with the
following weighted-average assumptions for 1995 and 1996, respectively:
risk-free interest rates of 6.0% and 5.75%; dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of 0.75 and
0.0; and a weighted-average expected life of the option of 1 and 4 years.
The option valuation models were developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information net income including compensation expense, net of tax of
$1,074,000 and $878,000 for the year ended December 31, 1995 and 1996,
respectively, is as follows (in thousands except for earnings per share
information):
1995 1996
- - ---------------------------------------------
Pro forma
net income $ 5,248 $ 8,350
Pro forma
earnings per share: $ 0.29 $ 0.44
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity, and related information for
the years ended December 31, follows:
1995 1996
----------------------------- -----------------------------
Weighted- Weighted-
Average Average
Options Exercise Options Exercise
(in thousands) Price (in thousands) Price
- - ------------------------------------------------------------------------------------------------
Outstanding-beginning of year 1,407 $0.32 1,789 $ 0.41
Granted 438 0.69 827 16.50
Exercised -- -- (917) 0.41
Forfeited (56) 0.28 (4) 5.25
- - ------------------------------------------------------------------------------------------------
Outstanding-end of year 1,789 $0.41 1,695 $ 8.38
====== ======
Exercisable at end of year 1,789 $0.41 874 $ 8.38
Weighted-average fair value of
options granted during the year $ 5.16 $16.71
29
30
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options outstanding
as of December 31, 1996.
Options Outstanding Options Exercisable
- - ----------------------------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Exercise Outstanding As Contractual Exercise Exercisable as Exercise
Prices of 12/31/96 Life Price of 12/31/96 Price
- - --------------------------------------------------------------------------------------
$0.28-$0.69 870,025 6.53 $ 0.41 870,025 $ 0.41
$15.00-$22.75 825,100 9.28 $ 16.79 3,750 $15.00
- - --------------------------------------------------------------------------------------
Total 1,695,125 7.87 $ 8.38 873,775 $ 0.47
======================================================================================
NOTE 10....EMPLOYEE BENEFIT AND PROFIT-SHARING PLANS
The Company has a defined contribution 401(K) plan. All employees over the age
of 21 who have completed at least one-half year of service are eligible to
participate. Each participant may elect to have amounts deducted from his or
her compensation and contributed to the plan up to 15% of his or her base
salary. All contributions are fully vested at the time the employee becomes an
active participant.
The Company also has a profit sharing plan. All employees over the age of 21
who have completed at least one-half year of service are eligible to
participate. Contributions to the plan are at the discretion of the board of
directors and are made to eligible employees' individual accounts in
proportion to their base salary. Contribution expense related to the profit
sharing plan for 1994, 1995 and 1996 was approximately $100,000, $238,000 and
$250,000, respectively.
NOTE 11....EXPORT SALES
Export sales were as follows (in thousands):
1994 1995 1996
- - --------------------------------------------------------------------------------
Europe $ 1,457 $ 2,017 $ 7,337
Pacific 2,237 1,766 2,326
Other 753 2,118 3,005
- - --------------------------------------------------------------------------------
$ 4,447 $ 5,901 $12,668
================================================================================
NOTE 12....INCOME TAXES
The provision for income taxes (state and foreign only in 1994 and 1995)
consists of the following (in thousands):
1994 1995 1996
- - --------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ 7,639
State and foreign 55 95 2,202
- - --------------------------------------------------------------------------------
Deferred: 55 95 9,841
- - --------------------------------------------------------------------------------
Federal -- -- (2,522)
State and foreign 14 230 (765)
- - --------------------------------------------------------------------------------
14 230 (3,287)
- - --------------------------------------------------------------------------------
$ 69 $ 325 $ 6,554
================================================================================
NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS
The provision for income taxes reconciles to the amount computed by applying the
federal statutory rate to income before provision for income taxes as follows
(in thousands):
1996
Amount Percent
- - --------------------------------------------------------------------------------
Federal statutory rate $ 5,524 35.0%
State taxes, net of federal benefit 934 5.9
FSC benefit (294) (1.8)
Other 390 2.4
- - --------------------------------------------------------------------------------
$ 6,554 41.5%
================================================================================
No state income tax benefit has been recorded in connection with the $18.9
million compensation charge recorded in 1995. The 1996 current federal and
state tax provisions do not reflect the tax savings of $6,669,000 resulting
from deductions associated with the exercise of stock options by employees in
1996. This tax benefit has been included in additional capital in 1996.
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the net
deferred tax liability are as follows (in thousands):
December 31,
1995 1996
- - --------------------------------------------------------------------------------
Accounts receivable allowances $ -- $ (197)
Tax over book depreciation and amortization -- 363
Nondeductible accruals -- (782)
Deferred licensing fees -- (3,820)
State income taxes -- (339)
Conversion from cash to accrual basis of accounting -- 8,612
Cash basis of accounting for income taxes 312 --
Other, net 14 --
- - --------------------------------------------------------------------------------
Net deferred tax liability $ 326 $ 3,837
================================================================================
The additional taxable income resulting from the change from the cash to
accrual basis of accounting for income taxes in 1996 will be reportable in
taxable income over the year 1996 through 1999.
NOTE 13....SUBSEQUENT EVENTS
The Company entered into an agreement to acquire a 10% interest in TenFold
Corporation, a private software company, for $8 million in cash. The Company
will receive a perpetual, unlimited license for future applications and tools
developed with TenFold's technology.
The Company entered into an agreement to acquire Prism Consulting, a private
management consulting firm, for $4.75 million in the Company's stock at the
current market value and $250,000 in cash. The principals of Prism Consulting
will become employees of the Company and be subject to non-compete agreements.
31
SELECTED FINANCIAL INFORMATION
The following selected financial information of the Company is qualified by
reference to and should be read in conjunction with the financial statements
and notes thereto and other financial information included elsewhere herein.
The combined statements of operations data for the years ended December 31,
1994 and 1995 and combined balance sheet data as of December 31, 1995 of The
Indus Group, Inc. and Indus International, Inc. and the consolidated statement
of operations data for the year ended December 31, 1996 and consolidated
balance sheet data as of December 31, 1996 are derived from and qualified by
reference to financial statements of the Company that have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere herein.
The combined balance sheet data as of December 31, 1992 and 1993 and the
combined statement of operations data for the years ended December 31, 1992
and 1993 are derived from the financial statements of the Company that have
been audited by Ernst & Young LLP that are not included herein.
Years Ended December 31,
1992 1993 1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licensing fees $ 6,112 $ 6,514 $ 7,547 $ 10,676 $ 16,208
Services and maintenance 16,681 20,978 23,044 43,115 59,731
- - ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 22,793 27,492 30,591 53,791 75,939
- - ---------------------------------------------------------------------------------------------------------------------------------
Cost of revenues 9,127 10,395 12,798 22,578 31,790
- - ---------------------------------------------------------------------------------------------------------------------------------
Gross margin 13,666 17,097 17,793 31,213 44,149
Operating expenses:
Research and development 4,295 6,910 7,120 8,306 12,493
Sales and marketing 1,856 3,533 4,144 5,680 9,306
General and administrative 3,988 3,595 4,654 4,918 7,819
Compensation charge - stock options(1) -- -- -- 18,900 --
- - ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 10,139 14,038 15,918 37,804 29,618
- - ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 3,527 3,059 1,875 (6,591) 14,531
Other income (expense), net 83 83 (101) 96 1,251
- - ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 3,610 3,142 1,774 (6,495) 15,782
Provision for income taxes (state and foreign only
prior to 1996) 90 55 69 325 6,554
Cumulative effect of deferred income taxes provided upon
January 1, 1996 conversion to C Corporation status(2) -- -- -- -- 6,700
- - ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,520 $ 3,087 $ 1,705 $ (6,820) $ 2,528
PRO FORMA STATEMENT OF OPERATIONS DATA FOR 1995 AND 1996:
Income (loss) before income taxes, as above $ (6,495) $ 15,782
Add back portion of compensation charge - stock options(1) 17,900 --
- - ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, as adjusted 11,405 15,782
Provision for income taxes (federal, state and foreign)(2) 5,083 6,554
=================================================================================================================================
Pro forma net income $ 6,322 $ 9,228
=================================================================================================================================
Pro forma net income per share(3) $ 0.36 $ 0.49
=================================================================================================================================
Shares used in computing pro forma net income per share(3) 17,490 18,924
=================================================================================================================================
December 31,
1992 1993 1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
Working capital $ 6,789 $ 4,179 $ 4,698 $ 7,640 $46,693
Total assets 14,914 13,080 18,063 31,075 75,514
Short-term debt 1,700 1,833 2,005 8,900 --
Long-term debt -- -- -- -- --
Total shareholders' equity 9,641 8,123 8,243 10,848 55,372
<FN>
(1) Reflects nonrecurring expense incurred in the third quarter of 1995 in
connection with an amendment to the Company's 1992 Stock Option Plan to
accelerate the exercisability of outstanding stock options, which had
previously been contingent upon the occurrence of certain events. The pro
forma adjustment of $17,900 is to reduce 1995 compensation expense to the
amount related to options granted in 1995 only. See Note 1 of the Notes to
the Combined Financial Statements.
(2) Prior to January 1, 1996, the Company was not subject to federal corporate
income taxation because of its election to be taxed under the provisions of
Subchapter S of the Code. Pro forma net income for 1995 has been determined
by assuming that the Company had been taxed as a C Corporation for 1995.
Pro forma net income for 1996 reflects the elimination of a nonrecurring
charge for the cumulative effect of deferred income taxes incurred in the
first quarter of 1996 in connection with the termination of the Company's S
Corporation status. See Notes 1 and 12 of Notes to the Consolidated
Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for a more
complete explanation of the determination of the number of shares used in
computing pro forma net income per share.
</FN>
32