================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27806
----------------
THE INDUS GROUP, INC.
(Exact name of Registrant issuer as specified in its charter)
California 94-3108025
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
60 Spear Street, San Francisco, California 94105
(Address of principal executive offices) (Zip code)
(415) 904-5000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 31, 1997, Registrant had outstanding 19,157,714 shares of Common
Stock, $.001 par value.
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TABLE OF CONTENTS
Part I: Financial Information Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations - three and six months ended June 30, 1997
and 1996............................................................................... 1
Condensed Consolidated Balance Sheets - June 30, 1997 and December 31, 1996................ 2
Condensed Consolidated Statement of Shareholders' Equity - year ended
December 31, 1996 and six months ended June 30, 1997................................... 3
Condensed Consolidated Statements of Cash Flows - six months ended
June 30, 1997 and 1996.................................................................. 4
Notes to Condensed Consolidated Financial Statements........................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8
Part II: Other Information
Item 1. Legal Proceedings........................................................................... 13
Item 2. Changes in Securities....................................................................... 13
Item 3. Defaults Upon Senior Securities............................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders......................................... 13
Item 5. Other Information........................................................................... 13
Item 6. Exhibits and Reports on Form 8-K............................................................ 14
Signatures.................................................................................. 15
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
Software licensing fees .................................................. $ 4,221 $ 3,793 $ 7,943 $ 7,751
Services and maintenance ................................................. 19,272 13,806 37,972 26,707
-------- -------- -------- --------
Total revenues ..................................................... 23,493 17,599 45,915 34,458
Cost of revenues ............................................................. 10,032 7,388 19,550 14,037
-------- -------- -------- --------
Gross margin .................................................................. 13,461 10,211 26,365 20,421
Operating expenses:
Research and development ................................................. 3,593 3,293 6,524 6,708
Sales and marketing ...................................................... 3,203 1,995 6,441 3,931
General and administrative .............................................. 2,177 1,846 4,473 3,689
-------- -------- -------- --------
Total operating expenses ............................................ 8,973 7,134 17,438 14,328
-------- -------- -------- --------
Income from operations ....................................................... 4,488 3,077 8,927 6,093
Other income, net ............................................................. 397 381 808 428
-------- -------- -------- --------
Income before income taxes .................................................... 4,885 3,458 9,735 6,521
Provision for income taxes .................................................... 1,954 1,407 3,991 2,667
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C-Corporation status ......................................... -- -- -- 6,700
-------- -------- -------- --------
Net income (loss) ............................................................. $ 2,931 $ 2,051 $ 5,744 $ (2,846)
======== ======== ======== ========
Pro forma statement of operations:
Income before income taxes, as above ..................................... $ 4,885 $ 3,458 $ 9,735 $ 6,521
Provision for income taxes (federal, state and foreign) .................. 1,954 1,407 3,991 2,667
-------- -------- -------- --------
Pro forma net income ..................................................... $ 2,931 $ 2,051 $ 5,744 $ 3,854
======== ======== ======== ========
Pro forma net income per share .......................................... $ 0.15 $ 0.11 $ 0.29 $ 0.21
======== ======== ======== ========
Shares used in computing pro forma net income per share .................. 19,816 19,375 19,713 18,534
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
1
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
June 30, December 31,
1997 1996
-------- --------
(1)
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 313 $ 13,266
Marketable securities ..................................................................... 25,032 26,524
Billed accounts receivable, less allowance for doubtful accounts of $549
at June 30, 1997 and $449 at December 31, 1996 ........................................ 16,275 16,889
Unbilled accounts receivable .............................................................. 8,084 5,633
Other current assets ...................................................................... 8,196 4,523
-------- --------
Total current assets .................................................................. 57,900 66,835
Marketable securities - noncurrent ............................................................. 5,225 2,129
Investments .................................................................................... 12,723 --
Property and equipment, net .................................................................... 8,015 6,337
Employee notes receivable and other noncurrent assets .......................................... 612 213
-------- --------
$ 84,475 $ 75,514
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................................... $ 2,593 $ 2,165
Deferred income taxes ..................................................................... 4,293 3,837
Other accrued liabilities ................................................................. 4,009 3,541
Deferred revenue .......................................................................... 5,795 10,599
-------- --------
Total current liabilities ............................................................. 16,690 20,142
-------- --------
Shareholder's equity:
Preferred Stock, $.001 par value at June 30, 1997 and December 31, 1996:
Authorized shares - 5,000,000
Issued and outstanding shares - none ................................................. -- --
Common Stock, $.001 par value at June 30, 1997 and December 31, 1996:
Authorized shares - 50,000,000
Issued and outstanding shares -19,147,314 and
18,590,376, respectively ........................................................... 19 19
Additional capital ........................................................................ 53,059 46,425
Other ..................................................................................... (265) (300)
Retained earnings ......................................................................... 14,972 9,228
-------- --------
Total shareholders' equity ............................................................ 67,785 55,372
-------- --------
$ 84,475 $ 75,514
======== ========
<FN>
(1) The Balance Sheet at December 31, 1996 was derived from the audited financial statements as of that date but does not include
all of the information and footnotes required by Generally Accepted Accounting Principles for complete 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 (1) .................................. -- 18,900 -- -- 18,900
Amortization of deferred compensation .............. -- -- 48 -- 48
Net loss ........................................... -- -- -- (6,820) (6,820)
-------- -------- -------- -------- --------
Balance at December 31, 1995 ............................ 609 18,900 (438) (8,223) 10,848
Conversion to C Corporation effective
January 1, 1996 ................................. -- (8,223) -- 8,223 --
Reincorporation and adoption of $.001
par value ....................................... (494) 494 -- -- --
Issuance of common stock (2) ....................... 4 35,288 -- -- 35,292
Tax benefit from exercise of stock options ......... -- 6,669 -- -- 6,669
Purchase of Indus International, Inc. net
assets .......................................... (100) (3) -- -- (103)
Unrealized loss on marketable securities ........... -- -- (42) -- (42)
Translation adjustment ............................. -- -- 84 -- 84
Amortization of deferred compensation .............. -- -- 96 -- 96
Net loss ........................................... -- (6,700) -- 9,228 2,528
-------- -------- -------- -------- --------
Balance at December 31, 1996 ............................ 19 46,425 (300) 9,228 55,372
Tax benefit from exercise of stock options ......... -- 1,309 -- -- 1,309
Issuance of common stock (3) ....................... -- 575 -- -- 575
Investment in Prism ................................ -- 4,750 -- -- 4,750
Unrealized loss on marketable securities ........... -- -- (76) -- (76)
Translation adjustment ............................. -- -- 74 -- 74
Amortization of deferred compensation .............. -- -- 37 -- 37
Net income ......................................... -- -- -- 5,744 5,744
-------- -------- -------- -------- --------
Balance at June 30, 1997 ................................ $ 19 $ 53,059 $ (265) $ 14,972 $ 67,785
======== ======== ======== ======== ========
<FN>
(1) Value of unexercised stock options of The Indus Group, Inc. upon elimination of contingency feature, which had precluded
exercise of these options.
(2) 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 June 30, 1996 and December 31, 1996 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.
(3) Consists of $501 received from June 30, 1997 issuance of 29,088 common shares under the Employee Stock Purchase Plan and $74
received from the issuance of 188,565 common shares upon exercise of options.
See accompanying notes.
</FN>
3
THE INDUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
------------------------
1997 1996
-------- --------
Cash flows from operating activities
Net income (loss) .................................................................................. $ 5,744 $ (2,846)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization ................................................................. 1,045 616
Amortization of deferred compensation ......................................................... 37 96
Loss on sale of fixed assets .................................................................. 315 2
Deferred income taxes ......................................................................... 455 (1,669)
Cumulative effect of deferred income taxes provided January 1, 1996 ........................... -- 6,700
Tax benefit from exercised stock options ...................................................... 1,309 801
Changes in operating assets and liabilities:
Billed accounts receivable ............................................................... 614 1,499
Unbilled accounts receivable ............................................................. (2,451) 1,400
Other current assets ..................................................................... (3,673) (323)
Employee notes receivable ................................................................ (50) 6
Accounts payable ......................................................................... 427 246
Income taxes payable ..................................................................... -- 320
Other accrued liabilities ................................................................ 469 714
Deferred revenue ......................................................................... (4,804) 935
Other .................................................................................... 53 14
-------- --------
Net cash provided by (used in) operating activities ................................................ (510) 8,511
-------- --------
Cash flows from investing activities
Purchase of marketable securities .................................................................. (1,700) (34,176)
Sale of marketable securities ...................................................................... -- 2,300
Investments ........................................................................................ (8,300) --
Acquisition of property and equipment .............................................................. (3,018) (1,688)
-------- --------
Net cash used in investing activities .............................................................. (13,018) (33,564)
-------- --------
Cash flows from financing activities
Net repayment of line of credit .................................................................... -- (8,900)
Net proceeds from issuance of common stock ......................................................... 575 34,431
Purchase of Indus International, Inc. net assets ................................................... -- (103)
-------- --------
Net cash provided by financing activities .......................................................... 575 25,428
-------- --------
Net increase (decrease) in cash and cash equivalents ............................................... (12,953) 375
Cash and cash equivalents at beginning of period ................................................... 13,266 45
-------- --------
Cash and cash equivalents at end of period ......................................................... $ 313 $ 420
======== ========
Supplemental disclosures of cash flow information
Interest paid ...................................................................................... $ -- $ 105
======== ========
Income taxes paid .................................................................................. $ 4,570 $ 3,176
======== ========
Supplemental schedule of noncash financing activities
Issuance of common stock as part consideration for purchase of Prism ............................... $ 4,750 $ --
======== ========
<FN>
See accompanying notes.
</FN>
4
THE INDUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1997. For further information, refer to the
audited financial statements and footnotes thereto for the fiscal year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K filed
March 26,1997.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid, low risk debt instruments with
a maturity of three months or less from the date of purchase to be cash
equivalents. The Company generally invests its cash and cash equivalents in
money market accounts and agency repurchase agreements which are secured by
government agency securities.
The Company presently classifies all marketable securities as
available-for-sale investments and carries them at fair market value. Marketable
securities represent U.S. government obligations and indirect investments in
municipal obligations. Marketable securities classified as long-term represent
U.S. government obligations maturing no later than May 1999. Unrealized holding
gains and losses, net of taxes, are carried as a separate component of
shareholders' equity.
2. Issuance of Common Stock
Initial Public Offering
On February 29, 1996, the Company completed an initial public offering
(the "Offering") in which it sold 2,500,000 shares of Common Stock at $15.00 per
share. The Offering raised net proceeds of $33,863,764 (exclusive of
underwriting discount and $1,011,236 in related expenses).
Employee Stock Purchase Plan
The Company received $500,663 from the issuance of 29,088 shares of
Common Stock on June 30, 1997 under the 1995 Employee Stock Purchase Plan.
Exercise of Stock Options
During the six months ended June 30, 1997, the Company received $74,269
from the issuance of 188,565 shares of common stock upon exercise of options
under the 1992 Stock Option Plan.
Acquisition of Prism Consulting
On April 1, 1997, the Company acquired Prism Consulting, Inc., a
private management consulting firm for 339,285 shares of common stock at $14.00
per share and $250,000 in cash.
5
THE INDUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
2. Issuance of Common Stock (continued)
Subsequent Event
The Company entered into an agreement and plan of merger and
reorganization on June 5, 1997 with TSW International, Inc., a Georgia
corporation. The Merger is intended to be treated as a tax-free reorganization
pursuant to the provisions of Section 368 of the Internal Revenue Code of 1986
and a pooling of interests for accounting purposes. The Company and TSW
International, Inc. will each become a subsidiary of a new Delaware corporation
named Indus International, Inc. which has been formed by the Company solely for
the purpose of the transactions contemplated under the Merger. Upon
effectiveness of the Merger, all the outstanding capital stock of the Company
and all the outstanding capital stock of TSW International, Inc. will be
converted into common stock, par value $.001 per share, of Indus International,
Inc.. Immediately following consummation of the Merger, the former shareholders
and optionholders of the Company and the former security holders of TSW
International, Inc. will collectively hold approximately 53.75% and 46.25%,
respectively, of Indus International, Inc. Common Stock on a fully diluted
basis.
3. Investment
The Company acquired a 10% interest in TenFold Corporation, a private
software company, for approximately $8 million in cash. The Company received a
perpetual, unrestricted license for applications and tools developed with
TenFold's technology.
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 second quarter of 1996
reflects the elimination of the $6.7 million cumulative deferred income tax
charge upon converting from an S Corporation to a C Corporation.
6
THE INDUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Per Share Data
Pro forma net income per share is computed using pro forma net income
and the weighted average number of common and dilutive common equivalent shares
outstanding during each period. Dilutive common equivalent shares consist of
incremental common shares issuable upon the assumed exercise of stock options
(using the treasury stock method). Fully diluted per share amounts are not
presented, as the effect is not material. The computation of the weighted
average number of shares outstanding for the three and six month periods ended
June 30, 1997 and 1996 is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
Weighted average outstanding ........................................ 19,038 17,752 18,834 16,868
Equivalent shares assumed to be outstanding had options granted
prior to 1995 been exercised and used to repurchase shares at their
then fair value ................................................... 778 1,623 879 1,666
------ ------ ------ ------
19,816 19,375 19,713 18,534
====== ====== ====== ======
5. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted on
December 31, 1997. At that time, the company will be required to change the
method currently used to compute earning per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the second quarter ended
June 30, 1997 and June 30, 1996 of $.006 and $.01 per share, respectively. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these quarters is not expected to be material.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements located in the Research and Development, Sales and
Marketing and Liquidity and Capital Resources sections as a result of the
factors set forth below, among others. For a more complete discussion of these
factors, refer to the Risk Factors included in the Company's Definitive Proxy
Statement for a Special Meeting of Shareholders to be held on August 25, 1997.
The Company has experienced, and may in the future experience, significant
fluctuations in quarterly revenues and operating results. The Company's revenues
and operating results in general, and in particular its revenues from new
licenses, are relatively difficult to forecast for a number of reasons,
including (i) the relatively long sales cycles for the Company's products, (ii)
the variable size and timing of individual license transactions, (iii) changes
in demand for the Company's products and services, (iv) competitive conditions
in the industry, (v) changes in customer budgets, (vi) the timing of the
introduction of new products or product enhancements by the Company or its
competitors, (vii) the Company's success in and costs associated with developing
and introducing new products, (viii) product life cycles, (ix) the timing of
revenue recognition under the percentage-of-completion method, (x) changes in
the proportion of revenues attributable to license fees versus services, (xi)
changes in the level of operating expenses, (xii) delay or deferral of customer
implementations of the Company's software, (xiii) software defects and other
product quality problems, and (xiv) other economic conditions generally or in
specific process industry segments. Further, the purchase of the Company's
products generally involves a significant commitment of capital, with the
attendant delays frequently associated with large capital expenditures and
authorization procedures within large organizations. For these and other
reasons, the sales cycles for the Company's products are typically lengthy and
subject to a number of significant risks over which the Company has little or no
control, including customers' budget constraints and internal authorization
reviews. In addition, delays in the completion of a product implementation may
require that the revenues associated with such implementation be recognized over
a longer period than originally anticipated. Such delays in the implementation
or execution of orders has caused, and may in the future cause, material
fluctuations in the Company's operating results. Similarly, customers may cancel
implementation projects at any time without penalty, and such cancellation could
have a material adverse effect on the Company's business or results of
operations. Because the Company's expenses are relatively fixed, a small
variation in the timing of recognition of specific revenues can cause
significant variations in operating results from quarter to quarter and may in
some future quarter result in losses or have a material adverse effect on the
Company's business or results of operations. For a more complete discussion of
these factors, refer to the Risk Factors included in the Company's Definitive
Proxy Statement for a Special Meeting of Shareholders to be held on August 25,
1997 filed with the Securities and Exchange Commission on August 12, 1997.
Risks relating to the proposed merger of the Company and TSW International, Inc.
include: (i) risks relating to the integration of the operations of the Company
and TSW International, Inc.; (ii) the incurrence of the Combined Company of
certain non-recurring charges in connection with the Merger; (iii) the
additional shares of Indus International, Inc. Common Stock to be issued in the
Merger as well as the number of shares of Indus International, Inc. Common Stock
to be eligible for public resale; (iv) certain differences in the rights of
holders of the Company's Common Stock and TSW International, Inc. Capital Stock
resulting from the Merger; (vi) certain affiliates of the Company and TSW
International, Inc. have certain interests that are different from or in
addition to shareholders of the Company and shareholders of TSW International,
Inc. Risks relating to the business of the proposed Combined Company include:
(i) the Combined Company's ability to manage growth; (ii) the utilization by the
Combined Company of new distribution channels; and (iii) risks relating to the
successful integration of current and future products and technologies.
The Company has in the past and may in the future acquire complementary products
or businesses. Risks associated with such transactions include difficulty in
retaining ad assimilating the personnel of the combined companies, difficulty in
integrating the operations of the combined companies, disruption of the
Company's ongoing business, expenses associated with completing the transaction
and amortizing acquired intangible assets, and dilution of existing equity
holders. There can be no assurance that such transactions will not materially
adversely affect the Company's business, financial condition or operating
results.
8
Results of Operations
Overview. The Indus Group, Inc. develops, markets, and supports a proprietary
line of enterprise management software and implementation services for process
industry customers worldwide. Taking advantage of the client/server model of
networked computing, PASSPORT Software Solutions contain "best business
practices" which serve as the catalyst for improving core business functions for
electric utilities, oil and gas, chemical refining, forest products, and steel
producing industries. ABACUS, The Indus Group's proprietary methodology,
accelerates the realization of benefits by delivering a reliable cost and
time-efficient approach to implementation across the enterprise.
The Company derives its revenues primarily from software licenses,
implementation and training services and maintenance fees. While the Company has
derived the majority of its revenues from electric utilities, it also derives
revenues from customers in other process industries, such as the oil and gas,
petrochemical, steel and forest product industries.
The Company provides its software to customers under contracts which provide for
software license fees, system implementation services and the first year of
software maintenance. Revenues from software license fees, which typically have
ranged from approximately $1 million to $5 million per enterprise license, are
recognized as earned revenue over the estimated time period to complete the
implementation of the software, which generally is twelve to fourteen months.
Revenues from system implementation services, which typically are time- and
material-based, are recognized as direct contract costs are incurred and
typically range from one to three times the license fees.
Accordingly, revenues for each quarter depend in part on revenues from the
closing of new contracts during the quarter as well as revenue from contracts
under implementation that were executed in prior quarters. A portion of license
fees is deferred initially and subsequently recognized over the one-year period
during which continuing maintenance and support services are provided to
customers under the contracts. After an initial contract period, additional
maintenance and support services, for which the Company typically charges 15-18%
of the original license fee per year, are subject to separate contracts whereby
revenue is recognized ratably over the contract period.
In March 1997, the Company acquired a 10% interest in TenFold Corporation, a
private software company for approximately $8 million in cash. The Company will
receive a perpetual, unrestricted license for future applications and tools
developed with TenFold's technology. In April 1997, the Company acquired Prism
Consulting, a private management consulting firm, for $4.75 million in the
Company's stock at the then current market value and $250,000 in cash. The
Company has not and does not anticipate any material consequences on its results
of operations for the calendar year 1997 as a result of these acquisitions.
In June 1997, the Company entered into an agreement and plan of merger and
reorganization with TSW International, Inc., a Georgia corporation. The Merger
is intended to be treated as a tax-free reorganization pursuant to the
provisions of Section 368 of the Internal Revenue Code of 1986 and a pooling of
interests for accounting purposes. The Company and TSW International, Inc. will
each become a subsidiary of a new Delaware corporation named Indus
International, Inc. which has been formed by the Company solely for the purpose
of the transactions contemplated under the Merger. Upon effectiveness of the
Merger, all the outstanding capital stock of the Company and all the outstanding
capital stock of TSW International, Inc. will be converted into common stock,
par value $.001 per share, of Indus International, Inc. Immediately following
consummation of the Merger, the former shareholders and optionholders of the
Company and the former security holders of TSW International, Inc. will
collectively hold approximately 53.75% and 46.25%, respectively, of Indus
International, Inc. Common Stock on a fully diluted basis.
9
Results of Operations (continued)
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain line items in the Company's statements of
operations:
Percent of Total Revenues
Three Months Ended Six Months Ended
June 30, June 30,
-------------- --------------
1997 1996 1997 1996
----- ----- ----- -----
Revenues:
Software licensing fees ........................................... 18.0% 21.6% 17.3% 22.5%
Services maintenance .............................................. 82.0 78.4 82.7 77.5
----- ----- ----- -----
Total revenues ............................................... 100.0 100.0 100.0 100.0
Cost of revenues ....................................................... 42.7 42.0 42.6 40.7
----- ----- ----- -----
Gross margin ........................................................... 57.3 58.0 57.4 59.3
Operating expenses:
Research and development .......................................... 15.3 18.7 14.2 19.5
Sales and marketing ............................................... 13.6 11.3 14.0 11.4
General and administrative ........................................ 9.3 10.5 9.8 10.7
----- ----- ----- -----
Total operating expenses ..................................... 38.2 40.5 38.0 41.6
----- ----- ----- -----
Income from operations ................................................. 19.1 17.5 19.4 17.7
Other income, net ...................................................... 1.7 2.2 1.8 1.2
----- ----- ----- -----
Income before income taxes ............................................. 20.8 19.7 21.2 18.9
Provision for income taxes (state and foreign only in 1995) ............ 8.3 8.0 8.7 7.7
Cumulative effect of deferred income taxes provided upon January 1, 1996
conversion to C-Corporation status .................................. -- -- -- 19.4
----- ----- ----- -----
Net income (loss) ...................................................... 12.5% 11.7% 12.5% (8.2)%
===== ===== ===== =====
Pro forma statement of operations:
Income before income taxes, as above .............................. 20.8% 19.7% 21.2% 18.9%
Provision for income taxes (federal, state and foreign) ........... 8.3 8.0 8.7 7.7
----- ----- ----- -----
Pro forma net income per share .................................... 12.5% 11.7% 12.5% 11.2%
===== ===== ===== =====
Revenues. Total revenues increased 34% to $23.5 million in the quarter ended
June 30, 1997 from $17.6 million in 1996. In the first six months of 1997, total
revenues increased by 33% to $45.9 million from $34.5 million in 1996. Revenue
from international customers (excluding Canada and Mexico) accounted for 6.5%
and 8.6% of revenues for the quarter and six months ended June 30, 1997,
respectively, and 20% for both the quarter and six months ended June 30, 1996.
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 34% and 35% of
revenues for the quarter and six months ended June 30, 1997, respectively, and
50% of revenues for both the quarter and six months ended June 30, 1996. The
composition of the top five customers has changed from year to year, with the
exception of one customer which generated revenues ranging from 9.5% of revenue
for the quarter ended June 30, 1997 to 10.5% of revenue for the quarter ended
June 30, 1996.
Revenues from licensing fees increased by 11% to $4.2 million in the quarter
ended June 30, 1997 from $3.8 million in 1996. In the first six months of 1997,
licensing fees increased 2.5% to $7.9 million from $7.8 million in 1996. The
license fee growth from 1996 to 1997 resulted primarily from closing of a number
of license fee agreements with both new and existing customers. License fees as
a percentage of revenue were 18.0% and 21.6% for the three months ended June 30,
1997 and 1996, and 17.3% and 22.5% for the six months ended June 30, 1997 and
1996.
10
Results of Operations (continued)
Revenues from services and maintenance increased by 40% to $19.3 million in the
quarter ended June 30, 1997 from $13.8 million in 1996. In the first six months
of 1997, services and maintenance revenue increased 42% to $38.0 million from
$26.7 million in 1996. The service and maintenance growth from 1996 to 1997
resulted primarily from implementation services generated by several new
domestic contracts and additional implementation projects with existing
customers.
The Company does not believe that the revenue growth experienced in the first
six months of 1997 is necessarily indicative of any revenue growth that may
occur in future periods.
Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and
related costs for implementation (including account executive personnel), and
(ii) training and customer support services. Substantially all of the cost of
revenues is attributable to providing services and maintenance; costs of
software license fees, which consist primarily of packaging and production
costs, are not significant and are not segregated in the Company's accounting
records. All software development costs are expensed to research and development
as incurred.
Cost of revenues increased 36% to $10.0 million in the quarter ended June 30,
1997 from $7.4 million in 1996. In the first six months of 1997, cost of
revenues increased by 39% to $19.6 million from $14.0 million in 1996. The 1997
increase in absolute dollars in cost of revenues was due principally to the need
for additional personnel to service the Company's customers. As a percent of
total revenue, cost of revenues was 43% and 42% for the quarters ended June 30,
1997 and 1996, respectively. For the first six months of 1997 and 1996, the cost
of revenues as a percent of total revenue was at 42.6% and 40.7%, respectively.
The slight increase in the percentage was due to growth in low-margin
reimbursable expenses. The Company's accounting policy is to record direct
reimbursable costs as revenue when billed to the customer, which is then offset
by the related cost of revenues. Since the direct reimbursable costs have little
or no margin, they reduce the overall gross margin as a percent of revenues.
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 9% to $3.6 million in the quarter
ended June 30, 1997 from $3.3 million in 1996. In the first six months of 1997,
research and development expenses decreased by 3% to $6.5 million from $6.7
million in 1996. As a percent of total revenue, research and development
expenses were 15.3% and 18.7% for the quarters ended June 30, 1997 and 1996,
respectively. For the first six months of 1997 and 1996, research and
development expenses as a percent of total revenue were 14.2% and 19.5%,
respectively.
R&D investment increased in the second quarter in 1997 compared to 1996 due to
the timing of PASSPORT Release 6.0 which was completed by July 1997. PASSPORT
Release 5.0 was completed in the first quarter of 1996 resulting in a minimal
R&D cost impact in the second quarter of 1996. The Company believes that a
significant level of investment in R&D is essential to remain competitive. The
amount of R&D in absolute dollars for a particular period may vary depending on
the projects in progress.
In accordance with Statement of Financial Accounting Standards No. 86, software
development costs are expensed as incurred until technological feasibility of
the software is established, after which any additional costs are capitalized.
To date, the Company has expensed all software development costs because
development costs incurred subsequent to the establishment of technological
feasibility have not been material.
Sales and Marketing. Sales and marketing expenses increased 61% to $3.2 million
in the quarter ended June 30, 1997 from $2.0 million in 1996. In the first six
months of 1997, sales and marketing expenses increased by 64% to $6.4 million
from $3.9 million 1996. As a percent of total revenue, sales and marketing
expenses were at 13.6%, 11.3%, 14.0% and 11.4% for the quarters ended June 30,
1997 and 1996 and for the first six months of 1997 and 1996, respectively. The
growth in sales and marketing expenses in absolute dollars is primarily due to:
(i) the addition of personnel, (ii) expansion into new vertical markets, (iii)
expansion of strategic alliance program, (iv) changes in the mix of the revenue
base on which commission expense is generated. The Company believes that sales
and marketing expenses as a percentage of total revenues may continue to
increase for the same reasons.
11
Results of Operations (continued)
General and Administrative. General and administrative expenses increased 18% to
$2.2 million in the quarter ended June 30, 1997 from $1.8 million in 1996. In
the first six months of 1997, general and administrative expenses increased by
21% to $4.5 million from $3.7 million in 1996. As a percent of total revenue,
general and administrative expenses were 9.3% and 10.5% for the quarters ended
June 30, 1997 and 1996, respectively. For the first six months of 1997 and 1996,
the general and administrative expenses as a percent of total revenue was 9.8%
and 10.7%, respectively. The growth in general and administrative expenses in
absolute dollars is primarily a result of: an expansion in staffing and increase
in other costs necessary 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 six months ended June 30, 1996 was the
result of the $6.7 million cumulative deferred income tax liability charge upon
elimination of the S Corporation status.
Pro Forma Net Income. For purposes of presenting comparative earnings and
calculating earnings per share data, pro forma net income for the six months
ended June 30, 1996 reflects the elimination of the $6.7 million nonrecurring
cumulative deferred income tax charge upon converting from an S Corporation to a
C Corporation.
Liquidity and Capital Resources
The Company had total assets of $84.5 million and $75.5 million at June 30, 1997
and December 31, 1996, respectively. Historically, the Company has financed its
operations primarily through cash provided by operations, borrowings under its
line of credit and, to a lesser extent, through borrowings from its Chief
Executive Officer and principal shareholder. In March 1996, the Company received
$33.9 million, representing the proceeds (net of underwriting commissions and
offering costs) from an initial public offering of 2,500,000 shares of its
Common Stock. These proceeds were used to purchase marketable securities
(comprised of municipal and U.S. government obligations) and certain cash
equivalent instruments.
As of June 30, 1997, the Company's principal sources of liquidity consisted of
approximately $313,000 in cash and cash equivalents and $25.0 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 1999. No borrowings
were outstanding under this line at June 30, 1997.
In the six months ended June 30, 1997, cash, cash equivalents and marketable
securities decreased substantially as a result of cash investment in a 10%
interest in TenFold Corporation ($8 million), the purchase of property and
equipment ($3.0 million), the purchase of marketable securities ($1.7 million),
and cash used by operations ($510,000). Cash paid for income taxes for the six
months ended June 30, 1997 and 1996 was $4.6 million and $3.2 million,
respectively.
Cash requirements are expected to continue to increase in order to fund: (i)
personnel and salary costs, (ii) research and development costs, (iii)
investment in additional technical equipment, and (iv) working capital
requirements. The Company presently anticipates additional capital expenditures
for the remainder of 1997 of approximately $2 million, primarily for equipment
and furniture.
The Company's principal commitments at June 30, 1997, 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 usages of cash, such as the merger with TSW International,
Inc. and acquisitions.
12
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
(a) The Company held its annual meeting of stockholders on May 6,
1997.
(b) Pursuant to the election of the five directors listed under
Item 1, Robert W. Felton, Richard W. MacAlmon, Michael E.
Percy, Alan G. Merten, and Donald F. Robertson were each
elected for a one year term. Robert W. Felton, Richard W.
MacAlmon, Michael E. Percy and Donald F. Robertson still
continue as directors and were elected at prior annual meeting
for a term of one year. Alan G. Merten still continues as
director and was elected by the Board in December 1995.
(C) The Company's stockholders voted the following matters:
(i) Election of five directors. All directors proposed by
management were selected.
Name of Number of Number of
Nominee Votes For Votes Withheld
------- --------- --------------
Robert W. Felton 16,600,010 3,971
Richard W. MacAlmon 16,600,018 3,963
Alan G. Merten 16,600,018 3,963
Michael E. Percy 16,600,018 3,963
Donald F. Robertson 16,599,968 4,013
(ii) Approval of an amendment to the 1995 Stock Plan to
increase the number of shares reserved for issuance
thereunder by 2,500,000. 13,921,430 votes were cast in
favor of the amendment, 2,659,733 were cast against,
zero votes were withheld, there were 2,360 abstentions
and 20,458 broker non-votes.
(iii) Ratification and approval of the appointment of Ernst
& Young as independent public accountants of the
Company for the year ending December 31, 1997.
16,602,111 votes were cast in favor of the
appointment, 950 votes were cast against, zero were
withheld, there were 920 abstentions and zero broker
non-votes.
ITEM 5. OTHER INFORMATION
None.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Merger and Reorganization dated as of
June 5, 1997 ("Agreement of Merger"), by and among The Indus
Group, Inc., Indus International, Inc. and TSW International,
Inc. (Incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-4 filed by Indus
International, Inc. with the Securities and Exchange
Commission on August 7, 1997; Registration No. 333-33113)
2.2 First Amendment to Agreement of Merger dated as of July 21,
1997 by and among The Indus Group, Inc., Indus International,
Inc. and TSW International, Inc. (Incorporated by reference to
Exhibit 2.2 to the Registration Statement on Form S-4 filed by
Indus International, Inc. with the Securities and Exchange
Commission on August 7, 1997; Registration No. 333-33113)
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.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE INDUS GROUP, INC.
(Registrant)
Date: August 14, 1997
/s/ Robert W. Felton
-----------------------------------
Robert W. Felton
President and Chief Executive
Officer
Date: August 14, 1997
/s/ Frank W. Siskowski
-----------------------------------
Frank Siskowski
Senior Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Description Page
------- ----------- ----
2.1* Agreement and Plan of Merger and Reorganization dated as of June 5,
1997 by and among The Indus Group Inc., Indus International, Inc.,
and TSW International, Inc.,
2.2* First amendment to Agreement of Merger dated as of July 21, 1997 by
and among The Indus Group, Inc., Indus International, Inc. and TSW
International, Inc.
11.01 Statement of Computation of Pro Forma Net Income Per Share
27.01 Financial Data Schedule