-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T1dS3+iyGQstPHZtQiwRbTFP4aphsNeG12fvcGg1xceJTzLiVGyOHGDaav0qzA1u 5fnnfskLWOWyofS0rAfAiQ== 0000950005-97-000528.txt : 19970515 0000950005-97-000528.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950005-97-000528 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDUS GROUP INC CENTRAL INDEX KEY: 0001005127 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943108025 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27806 FILM NUMBER: 97603284 BUSINESS ADDRESS: STREET 1: 60 SPEAR ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4159045000 MAIL ADDRESS: STREET 2: 60 SPEAR STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 10-Q 1 QUARTERLY REPORT ================================================================================ - -------------------------------------------------------------------------------- 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 March 31, 1997 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-27806 ---------------- 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) ---------------- Indicateby check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of April 30, 1997, Registrant had outstanding 19,024,115 shares of Common Stock, $.001 par value. - -------------------------------------------------------------------------------- ================================================================================ TABLE OF CONTENTS Part I: Financial Information Page ---- Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Operations - three months ended March 31, 1997 and 1996............................................... 1 Condensed Consolidated Balance Sheets - March 31, 1997 and March 31, 1996...................... 2 Condensed Consolidated Statement of Shareholders' Equity - year ended December 31, 1996 and three months ended March 31, 1997...................... 3 Condensed Consolidated Statements of Cash Flows - three months ended March 31, 1997 and 1996................................ 4 Notes to Condensed Consolidated Financial Statements....... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7 Part II: Other Information Item 1. Legal Proceedings.......................................... 11 Item 2. Changes in Securities...................................... 11 Item 3. Defaults Upon Senior Securities............................ 11 Item 4. Submission of Matters to a Vote of Security Holders........ 11 Item 5. Other Information.......................................... 11 Item 6. Exhibits and Reports on Form 8-K........................... 11 Signatures................................................. 12 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE INDUS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended March 31, ------------------ 1997 1996 ---- ---- Revenues: Software licensing fees ........................ $ 3,722 $ 3,958 Services and maintenance ....................... 18,700 12,901 ------- ------- Total revenues ............................ 22,422 16,859 Cost of revenues .................................... 9,518 6,649 ------- ------- Gross margin ........................................ 12,904 10,210 Operating expenses: Research and development ....................... 2,931 3,415 Sales and marketing ............................ 3,238 1,936 General and administrative ..................... 2,296 1,843 ------- ------- Total operating expenses .................. 8,465 7,194 ------- ------- Income from operations .............................. 4,439 3,016 Other income, net ................................... 411 47 ------- ------- Income before income taxes ......................... 4,850 3,063 Provision for income taxes .......................... 2,037 1,260 Cumulative effect of deferred income taxes provided upon January 1, 1996 conversion to C-Corporation status ............... -- 6,700 ------- ------- Net income (loss) ................................... $ 2,813 $(4,897) ======= ======= Pro forma statement of operations: Income before income taxes, as above ........... $ 4,850 $ 3,063 Provision for income taxes (federal, state and foreign) ................... 2,037 1,260 ------- ------- Pro forma net income ........................... $ 2,813 $ 1,803 ======= ======= Pro forma net income per share ...................... $ 0.14 $ 0.10 ======= ======= Shares used in computing pro forma net income per share ................................. 19,609 17,686 ======= ======= See accompanying notes. 1 THE INDUS GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) (Unaudited) March 31, December 31, 1997 1996 ---- ---- (1) ASSETS Current assets: Cash and cash equivalents ........................... $ 5,666 $13,266 Marketable securities ............................... 27,422 26,524 Billed accounts receivable, less allowance for doubtful accounts of $549 at March 31, 1997 and $449 at December 31, 1996 ................... 16,065 16,889 Unbilled accounts receivable ........................ 6,292 5,633 Other current assets ................................ 3,766 4,523 ------- ------- Total current assets ............................ 59,211 66,835 Marketable securities - noncurrent ....................... 2,111 2,129 Property and equipment, net .............................. 7,174 6,337 Investment ............................................... 7,997 -- Employee notes receivable ................................ 210 213 ------- ------- $76,703 $75,514 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .................................... $ 2,823 $ 2,165 Deferred income taxes ............................... 4,233 3,837 Other accrued liabilities ........................... 3,495 3,541 Deferred revenue .................................... 8,056 10,599 ------- ------- Total current liabilities ....................... 18,607 20,142 Shareholders' equity: Preferred Stock, $.001 par value at March 31, 1997 and December 31, 1996: Authorized shares - 5,000,000 Issued and outstanding shares - none ........... -- -- Common Stock, $.001 par value at March 31, 1997 and December 31, 1996: Authorized shares - 50,000,000 Issued and outstanding shares -18,639,011 (18,590,376 at December 31, 1996) ............ 19 19 Additional capital .................................. 46,448 46,425 Other ............................................... (412) (300) Retained earnings ................................... 12,041 9,228 ------- ------- Total shareholders' equity ...................... 58,096 55,372 ------- ------- $76,703 $75,514 ======= ======= (1) Derived from audited financial statements. See accompanying notes. 2 THE INDUS GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In thousands, except share amounts) (Unaudited)
Retained -------- Earnings Total -------- ----- Common Additional (Accumulated Shareholders' ------ ---------- ------------ ------------- Stock Capital Other Deficit) Equity ----- ------- ----- -------- ------ Balance at December 31, 1994 .................. $ 129 $ -- $ -- $ 8,113 $ 8,242 Issuance of common stock as deferred compensation ............... 480 -- (480) -- -- Cash distributions to shareholders ....... -- -- -- (9,516) (9,516) Translation adjustment ................... -- -- (6) -- (6) Stock options (2) ........................ -- 18,900 -- -- 18,900 Amortization of deferred compensation .... -- -- 48 -- 48 Net loss ................................. -- -- -- (6,820) (6,820) -------- -------- -------- -------- -------- Balance at December 31, 1995 .................. 609 18,900 (438) (8,223) 10,848 Conversion to C Corporation on January 1, 1996 ...................... -- (8,223) -- 8,223 -- Reincorporation and adoption of $.001 par value ............................. (494) 494 -- -- -- Issuance of common stock (1) ............. 4 35,288 -- -- 35,292 Tax benefit from exercise of stock options -- 6,669 -- -- 6,669 Purchase of Indus International, Inc. net assets ................................. (100) (3) -- -- (103) Unrealized loss on marketable securities . -- -- (42) -- (42) Translation adjustment ................... -- -- 84 -- 84 Amortization of deferred compensation .... -- -- 96 -- 96 Net loss ................................. (6,700) 9,228 2,528 -------- -------- -------- -------- -------- Balance at December 31, 1996 .................. 19 46,425 (300) 9,228 55,372 Tax benefit from exercise of stock options .... -- 23 23 Translation adjustment ................... (44) (44) Unrealized loss on marketable securities . (86) (86) Amortization of deferred compensation .... 18 18 Net income ............................... 2,813 2,813 -------- -------- -------- -------- -------- Balance at March 31, 1997 ..................... $ 19 $ 46,448 $ (412) $ 12,041 $ 58,096 ======== ======== ======== ======== ======== (1) Consists of $33,864 received from February 29, 1996 initial public offering (2,500,000 common shares offered at $15 per share less underwriting commission and expenses), $500 received from June 30, 1996 issuance of 39,189 common shares under the Employee Stock Purchase Plan and $230 received from the issuance of 545,595 common shares upon exercise of options. (2) Value of unexercised stock options of The Indus Group, Inc. upon elimination of contingency feature. See accompanying notes.
3 THE INDUS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 31, 1997 1996 ---- ---- Cash flows from operating activities Net income (loss) .................................... $ 2,813 $ (4,897) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................... 496 288 Provision for doubtful accounts ................. 100 -- Amortization of deferred compensation ........... 19 48 Loss (gain) on sale of fixed assets ............. 300 -- Deferred income taxes ........................... 395 (860) Cumulative effect of deferred income taxes provided January 1, 1996 ...................... -- 6,700 Tax benefit from exercise of stock options ...... -- 801 Changes in operating assets and liabilities: Billed accounts receivable ................. 724 4,048 Unbilled accounts receivable ............... (659) 1,276 Other current assets ....................... 757 (200) Employee notes receivable .................. (69) (10) Accounts payable ........................... 307 69 Accrued payroll and related expense ........ 216 -- Income taxes payable ....................... -- 1,274 Other accrued liabilities .................. 90 582 Deferred revenue ........................... (2,543) 1,069 Other ...................................... (61) 4 -------- -------- Net cash provided by operating activities ............ 2,885 10,192 -------- -------- Cash flows from investing activities Purchase of marketable securities .................... (893) (31,914) Investment ........................................... (7,997) -- Acquisition of property and equipment ................ (1,617) (521) -------- -------- Net cash used in investing activities ................ (10,507) (32,435) -------- -------- Cash flows from financing activities Net repayment of credit .............................. -- (8,900) Net proceeds from issuance of common stock ........... 22 33,927 Purchase of Indus International, Inc. net assets ..... -- (103) -------- -------- Net cash provided by financing activities ............ 22 24,924 -------- -------- Net increase in cash and cash equivalents ............ (7,600) 2,681 Cash and cash equivalents at beginning of period ..... 13,266 45 ======== ======== Cash and cash equivalents at end of period ........... $ 5,666 $ 2,726 ======== ======== Supplemental disclosures of cash flow information Interest paid ........................................ $ -- $ 76 ======== ======== Income taxes paid .................................... $ 80 $ 6 ======== ======== See accompanying notes. 4 THE INDUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Significant Accounting Policies Interim Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. For further information, refer to the audited financial statements and footnotes thereto for the fiscal year ended December 31, 1996 included in the Company's Annual Report on Form 10-K filed March 26, 1997. Cash Equivalents and Marketable Securities The Company considers all highly liquid, low risk debt instruments with a maturity of three months or less from the date of purchase to be cash equivalents. The Company generally invests its cash and cash equivalents in money market fund accounts. The Company presently classifies all marketable securities as available-for-sale investments and carries them at fair market value. Marketable securities represent U.S. government obligations and indirect investments in municipal obligations. Marketable securities classified as long-term mature no later than July 1998. Unrealized holding gains and losses, net of taxes, are carried as a separate component of shareholders' equity. 2. Basis of Presentation On March 1, 1996, pursuant to an Asset Purchase Agreement, the Company purchased all of the assets and assumed all of the liabilities of Indus International, Inc., an entity which was related to The Indus Group, Inc. through common shareholders. The purchase price of the net assets, which equaled the net book value, was $103,252. Concurrent with this purchase, the Company established a new wholly-owned subsidiary to which the net assets were transferred. The financial statements include the accounts of the Company and Indus International, Inc., which was included on a combined basis prior to March 1, 1996. All significant intercompany accounts and transactions have been eliminated. 3. Issuance of Common Stock Initial Public Offering On February 29, 1996, the Company completed an initial public offering (the "Offering") in which it sold 2,500,000 shares of Common Stock at $15.00 per share. The Offering raised net proceeds of $33,863,764 (exclusive of underwriting discount and $1,011,236 in related expenses). Exercise of Stock Options During the three months ended March 31, 1997, the Company received $22,026 from the issuance of 52,660 shares of common stock upon exercise of options. Subsequent Event The Company entered into an agreement after March 31, 1997 to acquire Prism Consulting, a private management consulting firm, for $4.75 million in the Company's stock at the current market value and $250,000 in cash. 5 THE INDUS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) 4. Investment The Company acquired a 10% interest in TenFold Corporation, a private software company, for approximately $8 million in cash. The Company will receive a pertpetual, unlimited license for future applications and tools developed with TenFold's technology. 5. Pro Forma Data The pro forma data reflects adjustments which would have been applicable had the Company been a C Corporation in all periods. Statements of Operations Effective upon its incorporation in 1990, the Company elected to have its United States income taxed under Subchapter S of the Code. Income tax provisions through December 31, 1995 have been principally attributable to state taxes and taxes imposed by foreign governments on the Company's foreign operations. The Company's S Corporation status terminated effective January 1, 1996, and the Company will be subject to federal income taxation at the corporate level thereafter. In connection with the termination of S Corporation status on January 1, 1996, a one-time charge representing a cumulative net federal and state deferred income tax liability of $6.7 million was recorded. For purposes of presenting comparative earnings and calculating earnings per share data, pro forma net income for the first quarter of 1996 reflects the elimination of the $6.7 million cumulative deferred income tax charge upon converting from an S Corporation to a C Corporation. Per Share Data Pro forma net income per share is computed using pro forma net income and the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of incremental common shares issuable upon the assumed exercise of stock options (using the treasury stock method). Fully diluted per share amounts are not presented, as the effect is not material. The computation of the weighted average number of shares outstanding for the three month periods ended March 31, 1997 and March 31, 1996 is as follows (in thousands): Three Months Ended March 31, ------------------- 1997 1996 ---- ---- Weighted average outstanding ...................... 18,629 15,984 Equivalent shares assumed to be outstanding had options granted prior to 1995 been exercised and used to repurchase shares at their then fair value ...... 980 1,702 ------ ------ 19,609 17,686 ====== ====== 6 Earning Per Share In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earning per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the first quarter ended March 31, 1997 and March 31, 1996 of $.01 per share. The impact of Statement 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements located in the Research and Development, Sales and Marketing and Liquidity and Capital Resources sections as a result of the factors set forth below, among others. The Company has experienced, and may in the future experience, significant fluctuations in quarterly revenues and operating results. The Company's revenues and operating results in general, and in particular its revenues from new licenses, are relatively difficult to forecast for a number of reasons, including (i) the relatively long sales cycles for the Company's products, (ii) the variable size and timing of individual license transactions, (iii) changes in demand for the Company's products and services, (iv) competitive conditions in the industry, (v) changes in customer budgets, (vi) the timing of new products or product enhancements by the Company or its competitors, (vii) the Company's success in and costs associated with developing and introducing new products, (viii) product life cycles, (ix) the timing of revenue recognition, (x) changes in the proportion of revenues attributable to license fees versus services, (xi) changes in the level of operating expenses, (xii) delay or deferral of customer implementations of the Company's software, (xiii) software defects and other product quality problems, and (xiv) other economic conditions generally or in specific process industry segments. Further, the purchase of the Company's products generally involves a significant commitment of capital, with the attendant delays frequently associated with large capital expenditures and authorization procedures within large organizations. For these and other reasons, the sales cycles for the Company's products are typically lengthy and subject to a number of significant risks over which the Company has little or no control, including customers' budget constraints and internal authorization reviews. In addition, delays in the completion of a product implementation may require that the revenues associated with such implementation be recognized over a longer period than originally anticipated. Such delays in the implementation or execution of orders have caused, and may in the future cause, material fluctuations in the Company's operating results. Similarly, customers may cancel implementation projects at any time, and such cancellation could have a material adverse effect on the Company's business or results of operations. Because the Company's expenses are relatively fixed, a small variation in the timing of recognition of specific revenues can cause significant variations in operating results from quarter to quarter and may in some future quarter result in losses or have a material adverse effect on the Company's business or results of operations. The Company has in the past and may in the future acquire complementary products or businesses. Risks associated with such transactions include difficulty in retaining and assimilating the personnel of the combined companies, difficulty in integrating the operations of the combined companies, disruption of the Company's ongoing business, expenses associated with completing the transaction and amortizing acquired intangible assets, and dilution of existing equity holders. There can be no assurance that such transactions will not materially adversely affect the Company's business, financial condition or operating results. Results of Operations Overview. The Indus Group, Inc. develops, markets, and supports a proprietary line of enterprise management software and implementation services for process industry customers worldwide. Taking advantage of the client/server model of networked computing, PassPort Software Solutions contain "best business practices" which serve as the catalyst for improving core operational business functions for electric utilities, oil and gas, chemical refining, forest products, nuclear and steel producing industries. ABACUS, The Indus Group's proprietary methodology, accelerates the realization of benefits by delivering a reliable cost and time-efficient approach to implementation across the enterprise. The Company derives its revenues primarily from software licenses, implementation and training services and maintenance fees. While the Company has derived the majority of its revenues from electric utilities, it also derives revenues from customers in other process industries, including oil and gas, chemical refining, nuclear, steel and forest product industries. The Company provides its software to customers under contracts which provide for software license fees, system implementation services and the first year of software maintenance. Revenues from application software licenses, which typically have ranged from approximately $1 million to $5 million per enterprise license, are recognized as earned revenue over the estimated time period to complete the implementation of the software, which generally is twelve to fourteen months. Revenues from client workstation software are recognized as billed. Revenues from system implementation services, which generally are time- and material-based, are recognized as direct contract costs are incurred and typically range from one to three times the license fees. 7 Results of Operations (continued) Accordingly, revenues for each quarter depend in part on revenues from the closing of new contracts during the quarter as well as revenue from contracts under implementation that were executed in prior quarters. A portion of license fees is deferred initially and subsequently recognized over the one-year period during which continuing maintenance and support services are provided to customers under the contracts. After an initial contract period, additional maintenance and support services, for which the Company typically charges 15-18% of the original license fee per year, are subject to separate agreements whereby revenue is recognized ratably over the agreement period. In March, 1997, the Company acquired a 10% interest in TenFold Corporation, a private software company for approximately $8 million in cash. The Company will receive a perpetual, unlimited license for future applications and tools developed with TenFold's technology. Subsequent to March 31, 1997, the Company acquired Prism Consulting, a private management consulting firm, for $4.75 million in the Company's stock at the current market value and $250,000 in cash. The Company has not and does not anticipate any material consequences on its results of operations for the calendar year 1997 as a result of these acquisitions. The following table sets forth for the periods indicated the percentage of total revenues represented by certain line items in the Company's statements of operations: Percent of Total Revenues Three Months Ended March 31, ------------------- 1997 1996 ------------------- Revenues: Software licensing fees .......................... 16.6% 23.5% Services and maintenance ......................... 83.4 76.5 ----- ----- Total revenues .............................. 100.0 100.0 Cost of revenues ...................................... 42.4 39.4 ----- ----- Gross margin ......................................... 57.6 60.6 Operating expenses: Research and development ......................... 13.1 20.2 Sales and marketing .............................. 14.4 11.5 General and administrative ....................... 10.2 10.9 ----- ----- Total operating expenses .................... 37.8 42.6 ----- ----- Income (loss) from operations ......................... 19.8 18.0 Other income, net .................................... 1.8 0.3 ----- ----- Income (loss) before income taxes ..................... 21.6 18.3 Provision for income taxes (state and foreign only in 1995) ..................................... 9.1 7.5 Cumulative effect of deferred income taxes provided upon January 1, 1996 conversion to C-Corporation status ................. -- 40.0 ----- ----- Net income (loss) ..................................... 12.5% (29.2%) ===== ===== Pro forma statement of operations: Income (loss) before income taxes, as above ...... 21.6% 18.3% Provision for income taxes (federal, state and foreign only in 1995) ....................... 9.1 7.5 ----- ----- Pro forma net income ............................. 12.5% 10.8% ----- ----- 8 Results of Operations (continued) Revenues. Total revenues increased 33% to $22.4 million in the first quarter in 1997 from $16.9 million in the first quarter of 1996. The increase was due to a significant growth in service revenues. Revenue from international customers (excluding Canada and Mexico) accounted for 11% and 20% of revenues for the first quarter of 1997 and 1996, respectively. The decrease in the percentage of international revenue was due to the lack of new international customers. As most of the Company's contracts are denominated in U.S. dollars, foreign currency fluctuations have not impacted the results of operations. The top five customers of the Company have accounted for approximately 40-45% of revenues for the periods presented. The composition of the top five customers has changed from year to year, with the exception of two of the customers whose combined revenues accounted for 12% of total revenue for the first quarter of 1997 and 19% of total revenue for the first quarter of 1996. Revenues from licensing fees decreased by 6% to $3.7 million in the first quarter in 1997 from $4 million in the first quarter of 1996 due to delays in the closing of new contracts. A number of factors have contributed to these delays including reorganizations within potential customers and delays in the decision process by potential customers. Revenues from services and maintenance increased by 45% to $18.7 million in the first quarter in 1997 from $12.9 million in 1996. The service and maintenance revenue growth from 1996 to 1997 resulted primarily from implementation services generated by several new significant domestic contracts, and additional implementation projects with existing customers. The Company does not believe that the revenue growth experienced in the first quarter of 1997 is necessarily indicative of any revenue growth that may occur in future periods. The Company's domestic and foreign markets have not been affected by inflation or fluctuations in interest rates and costs. The Company has not experienced any material seasonality in its operating results. Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and related costs for implementation (including account executive personnel), and (ii) personnel and related costs for training and customer support services. Substantially all of the cost of revenues is attributable to providing services and maintenance. Costs of software license fees, which consist primarily of packaging and production costs, are not significant and are not segregated in the Company's accounting records. All software development costs are expensed to research and development as incurred. Cost of revenues increased 43% to $9.5 million in the first quarter in 1997 from $6.6 million in 1996 and was due principally to the need for additional personnel to service the Company's customers. As a percent of total revenue, cost of revenues increased to 42.4% for the first quarter in 1997 from 39.4% in 1996. The increase in the cost of sales percentage is partially due to the increase in the level of low-margin reimbursable expenses. The Company's accounting policy is to record direct reimbursable costs as revenue when billed to the customer, which is then offset by the related cost of revenues. Since the direct reimbursable costs have little or no margin, they have the effect of decreasing the Company's gross margin Research and Development (R&D). Research and development expenses consist primarily of: (i) personnel and related costs and (ii) computer timeshare costs directly attributable to the development of new software application products, enhancements to existing products and the costs of porting the Company's products to different platforms. Research and development expenses decreased 14% to $2.9 million in the first quarter in 1997 from $3.4 million in 1996. The Company continues to invest research and development efforts for modifications of existing applications and development of new technologies, including the capability to support additional platforms, databases, graphical user interfaces, toolsets and emerging technologies. The Company believes that a significant level of R&D is essential to remain competitive and will continue to invest development resources towards incorporating new technologies into PassPort and designing additional PassPort functionality. The amount for a particular period may vary depending on the projects in progress. INDUS has historically developed its own applications. During 1996, the Company devoted R&D resources to the development of General Ledger, Asset Management and Financial Planning applications. In response to time-to-market demands, the Company recently formalized strategic product relationships with third party vendors, including PeopleSoft, Oracle and SPL World Group, who will blend their financial and customer information/order entry applications with PassPort. As a result, the Company has halted the development of the General Ledger, Asset Management and Financial Planning applications. A portion of the R&D expenditures intended for the financial application project were reallocated to (i) the software integration development necessary to provide seamless integration with the Company's strategic partners' offerings and (ii) sales and marketing efforts. In 1997, the Company expects to shift, as a percentage of total revenues, at least 3% from R&D expenditures to sales and marketing expenditures. 9 Results of Operations (continued) In accordance with Statement of Financial Accounting Standards No. 86, software development costs are expensed as incurred until technological feasibility of the software is established, after which any additional costs are capitalized. To date, the Company has expensed all software development costs because development costs incurred subsequent to the establishment of technological feasibility have not been material. Sales and Marketing. Sales and marketing expenses increased 67% to $3.2 million in the first quarter in 1997 from $1.9 million in 1996. As a percent of total revenue, sales and marketing expenses increased to 14.4% the first quarter ended in 1997 from 11.5% in 1996. The growth in sales and marketing expenses is primarily due to: (i) the addition of personnel, (ii) expansion into new international sectors, (iii) changes in the mix of the revenue base on which commission expense is generated and (iv) the new vertical business programs. The Company believes that sales and marketing expenses as a percentage of total revenues may increase as it (i) expands its presence in the marketplace, (ii) initiates operations in additional international markets, (iii) develops new and existing marketing and product strategic alliances and (iv) increases focus on specific vertical markets, such as Transmission and Distribution. General and Administrative. General and administrative expenses increased 25% to $2.3 million in the first quarter in 1997 from $1.8 million in 1996. The growth in general and administrative expenses is primarily a result of: (i) incremental expenditures related to being a public company and (ii) an expansion in staffing to support the Company's growth. Provision for Income Taxes. Effective upon its incorporation in 1990, the Company elected to have its United States income taxed under Subchapter S of the Code. Accordingly, income tax provisions prior to 1996 were principally attributable to state taxes and taxes imposed by foreign governments on the Company's foreign operations. The Company's S Corporation status terminated effective January 1, 1996, and the Company will be subject to federal income taxation at the corporate level thereafter. In relation to the termination of S Corporation status as of January 1, 1996, a one-time charge representing a cumulative net federal and state deferred income tax liability of $6.7 million was recorded. Net Income (Loss). The net loss for the three months ended March 31, 1996 was the result of the $6.7 million cumulative deferred income tax liability charge upon elimination of the S Corporation status. Pro Forma Net Income. For purposes of presenting comparative earnings and calculating earnings per share data, pro forma net income for the three months ended March 31, 1996 reflects the elimination of the $6.7 million nonrecurring cumulative deferred income tax charge upon converting from an S Corporation to a C Corporation. Liquidity and Capital Resources The Company had total assets of $76.7 million and $75.5 million at March 31, 1997 and December 31, 1996, respectively. Historically, the Company has financed its operations primarily through cash provided by operations, borrowings under its line of credit and, to lesser extent, through borrowings from its Chief Executive Officer and principal shareholder. In March 1996, the Company received $33.9 million (net of underwriting commissions and offering costs) from an initial public offering of 2,500,000 shares of its Common Stock. These proceeds were used to purchase marketable securities (comprised of municipal and U.S. government obligations) and certain cash equivalent instruments. As of March 31, 1997, the Company's principal sources of liquidity consisted of approximately $5.7 million in cash and cash equivalents and $27.4 million in marketable securities. In addition, the Company has an unsecured revolving bank line of credit agreement which permits borrowings, including stand-by letters of credit, of up to $15 million. The facility expires in May 1997, however, the Company believes it will be able to renew this agreement or replace it on terms acceptable to the Company. No borrowings were outstanding under this line at March 31, 1997. In the three months ended March 31, 1997, cash, cash equivalents and marketable securities decreased as a result of the cash investment in a 10% interest in TenFold Corporation ($8 million), the purchase of property and equipment ($1.6 million) and the purchase of marketable securities ($0.9 million) offset by cash generated from operations ($2.9 million). Cash requirements are expected to continue to increase in order to fund: (i) personnel and salary costs, (ii) investment in additional technical equipment, and (iii) working capital requirements. The Company presently anticipates additional capital expenditures for the remainder of 1997 of approximately $3.0 million. The Company's principal commitments at March 31, 1997, consisted of obligations under operating leases for facilities and computer equipment. 10 Liquidity and Capital Resources (continued) The Company believes that its existing cash and marketable securities, together with anticipated cash flow from operations and available bank borrowings, will be sufficient to meet its cash requirements during the next 12 months. The foregoing statement regarding the Company's expectations for continued liquidity is a forward-looking statement, and actual results may differ materially depending on a variety of factors, including variable operating results or presently unexpected usage's of cash, such as acquisitions. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no pending legal proceedings to which the Company is a party or of which any of its property is subject. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 11.01 Statement of Computation of Pro Forma Net Income Per Share. 27.01 Financial Data Schedule. (b) Reports on Forms 8-K. No reports on Form 8-K were filed during the Quarter covered by this report. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE INDUS GROUP, INC. (Registrant) Date: May 14, 1997 /s/ Robert W. Felton --------------------------------------- Robert W. Felton President and Chief Executive Officer Date: May 14, 1997 /s/ Frank W. Siskowski --------------------------------------- Frank W. Siskowski Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 12 INDEX TO EXHIBITS Sequentially ------------ Numbered -------- Exhibit Description Page ------- ----------- ---- 11.01 Statement of Computation of Pro Forma Net Income Per Share 27.01 Financial Data Schedule EX-11.01 2 STATEMENT OF COMPUTATION OF PRO FORMA NET INCOME EXHIBIT 11.01 THE INDUS GROUP, INC. STATEMENT OF COMPUTATION OF PRO FORMA NET INCOME PER SHARE (In thousands, except share amounts) (Unaudited) Three Months Ended March 31, --------------------- 1997 1996 ------- ------- Pro forma net income ............................... $ 2,813 $ 1,803 ======= ======= Shares used in per share computation: Weighted average outstanding .................. 18,629 15,984 Equivalent shares assumed to be outstanding had options granted prior to 1995 been exercised and used to repurchase shares at their then fair value ................... 980 1,702 ------- ------- 19,609 17,686 ======= ======= Pro forma net income per share ..................... $ 0.14 $ 0.10 ======= ======= EX-27 3 FINANCIAL DATA SCHEDULE
5 CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 5,666 29,533 22,906 549 0 59,211 12,961 5,787 76,703 18,607 0 19 0 0 58,077 76,703 0 22,422 0 9,518 8,465 0 0 4,850 2,037 2,813 0 0 0 2,813 0.14 0.14
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