===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 0-22993
----------------
INDUS INTERNATIONAL, INC.
(Exact name of Registrant issuer as specified in its charter)
Delaware 94-3273443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 Spear Street, San Francisco, California 94105
(Address of principal executive offices) (Zip code)
(415) 904-5000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
As of October 31, 1998, Registrant had outstanding 31,277,309 shares of
Common Stock, $.001 par value.
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<PAGE>
TABLE OF CONTENTS
Part I: Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations - three and nine
months ended September 30, 1998 and 1997
Condensed Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997
Condensed Consolidated Statement of Stockholders' Equity - year ended
December 31, 1997 and nine months ended September 30, 1998
Condensed Consolidated Statements of Cash Flows - nine months ended
September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II: Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licensing fees ............ $13,042 $13,601 $38,966 $39,184
Services and maintenance ........... 37,291 29,612 101,657 91,323
--------- --------- --------- ---------
Total revenues ................. 50,333 43,213 140,623 130,507
Cost of revenues ........................ 25,994 19,157 76,997 57,286
--------- --------- --------- ---------
Gross margin ............................ 24,339 24,056 63,626 73,221
--------- --------- --------- ---------
Operating expenses:
Research and development ........... 8,171 6,993 22,266 20,375
Sales and marketing ................ 8,778 7,405 21,417 24,093
General and administrative ......... 4,379 3,173 11,175 11,507
Merger expenses .................... -- 9,977 -- 9,977
Restructuring charge ............... -- 2,106 -- 2,106
--------- --------- --------- ---------
Total operating expenses ....... 21,328 29,654 54,858 68,058
--------- --------- --------- ---------
Income (loss) from operations ........... 3,011 (5,598) 8,768 5,163
Other income (expenses), net ........... (206) (533) (627) (1,721)
--------- --------- --------- ---------
Income (loss) before income taxes ....... 2,805 (6,131) 8,141 3,442
Provision for income taxes .............. -- (2,105) (450) (6,209)
--------- --------- --------- ---------
Income (loss) before extraordinary item . 2,805 (8,236) 7,691 (2,767)
Extraordinary item ...................... -- (787) -- (787)
--------- --------- --------- ---------
Net income (loss) ........................ $2,805 ($9,023) $7,691 ($3,554)
========= ========= ========= =========
Earnings (loss) per share (basic) ....... $0.09 ($0.31) $0.25 ($0.13)
========= ========= ========= =========
Earning (loss) per share (diluted) ...... $0.08 ($0.31) $0.22 ($0.13)
========= ========= ========= =========
Shares used in computing earnings (loss)
per share (basic) ....................... 30,990 29,432 30,513 28,158
========= ========= ========= =========
Shares used in computing earnings (loss)
per share (diluted) ..................... 34,739 29,432 35,446 28,158
========= ========= ========= =========
</TABLE>
See accompanying notes
<PAGE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997*
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $20,895 $11,052
Marketable securities ............................... 8,576 11,880
Billed accounts receivable, less allowance of
$3,229 at September 30, 1998 and $1,974 at
December 31, 1997 .................................. 55,367 43,574
Unbilled accounts receivable ........................ 32,622 30,349
Other current assets ................................ 7,485 5,773
------------ -----------
Total current assets .................................. 124,945 102,628
Marketable securities - noncurrent .................... -- 4,818
Property and equipment, net ........................... 16,086 16,570
Investments ........................................... 11,727 12,119
Other assets .......................................... 994 590
------------ -----------
$153,752 $136,725
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under line of credit ...................... $26,650 $26,650
Current portion of obligations under capital leases . 835 2,404
Accounts payable .................................... 12,454 8,430
Accrued merger expenses ............................. 1,471 1,898
Other accrued liabilities ........................... 15,210 12,589
Deferred revenue .................................... 16,642 13,419
------------ -----------
Total current liabilities ............................. 73,262 65,390
------------ -----------
Obligations under capital leases and term loans........ 196 1,105
Stockholders' equity:
Common Stock ........................................ 30 29
Additional capital .................................. 101,487 98,608
Other ............................................... (2,226) (1,719)
Accumulated deficit ................................. (18,997) (26,688)
------------ -----------
Total stockholders' equity ............................ 80,294 70,230
------------ -----------
$153,752 $136,725
============ ===========
<FN>
* The balance sheet at December 31, 1997 has been derived from the audited
financial statements at 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>
</TABLE>
<PAGE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Total
Common Additional Accumulated Stockholders'
Stock Capital Other Deficit Equity
--------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996................. $22 $48,649 ($603) ($27,402) $20,666
Issuance of common stock (1)................ -- 6,725 -- -- 6,725
Tax benefit from exercise of stock options.. -- 3,479 -- -- 3,479
Capital contribution by a TSW
shareholder................................. -- 1,717 -- -- 1,717
Reincorporation............................. (4) 4 -
Redemption of TSW subordinated notes (2) 8 19,937 19,945
Exchange of common stock for TSW
Redeemable preferred stock (3).............. 3 18,097 -- -- 18,100
Other....................................... -- -- (1,116) -- (1,116)
Net income.................................. -- -- -- 990 990
Adjustment for TSW's
March 1997 quarter profit (4).......... -- -- -- (276) (276)
--------- ----------- --------- ----------- ------------
Balance at December 31, 1997 29 98,608 (1,719) (26,688) 70,230
Issuance of common stock (5)................ 1 2,585 -- -- 2,586
Tax benefit from exercise of stock
options............................... -- 294 -- -- 294
Other....................................... -- -- (507) -- (507)
Net income.................................. -- -- -- 7,691 7,691
--------- ----------- --------- ----------- ------------
Balance at September 30, 1998 $30 $101,487 ($2,226) ($18,997) $80,294
========= =========== ========= =========== ============
<FN>
(1) Includes $4,750 (339,285 shares of common stock at $14.00 per
share, issued with $250 in cash to acquire a management consulting firm.
(2) Redemption of TSW subordinated notes and accumulated interest in
exchange for 1,235,879 common shares of Indus International, Inc.
(3) Exchange of 8,049,025 common shares of Indus International, Inc.
for redeemable preferred stock of TSW International, Inc. and
53,937 common shares for accumulated dividends.
(4) Net income of TSW International, Inc. for the three months ended
March 31, 1997 ($276) included in both 1996 and 1997 combined
operating results, as a result of change in TSW International,
Inc.'s fiscal year end.
(5) Amount consists of $2,076 received from the issuance of 805,930
common shares upon exercise of options and $510 received from
April 30, 1998 issuance of 73,164 common shares under the
Employee Stock Purchase Plan.
See accompanying notes
</FN>
</TABLE>
<PAGE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $7,691 ($3,554)
Elimination of TSW's net income for the three
months ended March 31, 1997 ............................ -- (276)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 5,992 3,775
Allowance against billed receivables ................ 1,255 784
Amortization of deferred compensation ............... 14 56
Loss (gain) on sale of fixed assets ................. (24) 315
Deferred income taxes ............................... (419) (3,437)
Tax benefit from exercise of stock options .......... 294 1,721
Merger expense resulting from equity transaction..... -- 2,009
Extraordinary charge to net loss from debt
extinguishment .................................... -- 787
Changes in operating assets and liabilities:
Billed accounts receivable ..................... (13,048) (7,400)
Unbilled accounts receivable ................... (2,273) (6,002)
Other current assets ........................... (1,712) 1,995
Employee notes receivable ...................... (446) 157
Other assets ................................... (47) 231
Accounts payable ............................... 4,024 4,117
Accrued merger expense ......................... (427) 7,482
Other accrued liabilities ...................... 3,040 (2,939)
Deferred revenue ............................... 3,223 (8,203)
Other .......................................... (893) (96)
---------- ----------
Net cash provided by (used in) operating activities ...... 6,244 (8,478)
---------- ----------
Cash flows from investing activities:
Purchase of marketable securities ........................ (8,630) (3,284)
Sale of marketable securities ............................ 16,846 6,200
Investments .............................................. (578) (8,289)
Other .................................................... 18 --
Acquisition of property and equipment .................... (4,163) (5,072)
---------- ----------
Net cash provided by (used in) investing activities ...... 3,493 (10,445)
---------- ----------
Cash flows from financing activities:
Net drawdown/(repayment) of line of credit ............... -- 10,659
Net drawdown/(repayment) of capital leases/notes payable . (2,478) (1,866)
Net proceeds from issuance of common stock ............... 2,585 850
---------- ----------
Net cash provided by financing activities ................ 107 9,643
---------- ----------
Net increase/(decrease) in cash and cash equivalents ..... 9,844 (9,280)
Cash and cash equivalents at beginning of period ......... 11,052 13,815
---------- ----------
Cash and cash equivalents at end of period ............... $20,896 $4,535
========== ==========
Supplemental disclosures of cash flow information:
Interest paid ............................................ $818 $2,004
========== ==========
Income taxes paid ........................................ $689 $4,755
========== ==========
Supplemental schedule of noncash financing activities:
Issuance of common stock in exchange for TSW
subordinated notes and redeemable preferred stock...... -- $38,034
========== ==========
Issuance of common stock as part consideration
for purchase of Prism .................................. -- $4,750
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For further
information, refer to the Company's 1997 Annual Report on Form 10K
filed March 31, 1998.
Merger of The Indus Group, Inc. and TSW International, Inc.
The Indus Group, Inc., a California corporation entered into an
agreement and plan of merger and reorganization on June 5, 1997 with
TSW International, Inc., a Georgia corporation, pursuant to which
The Indus Group, Inc. and TSW International, Inc. each became
subsidiaries of a new Delaware corporation named Indus International,
Inc. (the "Company" or the "Combined Company"). The transaction was
accounted for as a pooling-of-interests for financial reporting purposes
and structured to qualify as a tax-free reorganization . The
stockholders of each of The Indus Group, Inc. and TSW International, Inc
approved the transaction, and the merger was effective August 25, 1997.
On December 31, 1997, the Company's subsidiaries, The Indus
Group, Inc. and TSW International, Inc., each were merged with and into
the Company (the "Roll-up Merger"). The Company, as the surviving
corporation, assumed all obligations of the two subsidiaries, in
connection with the Roll-up Merger.
Reporting Periods
The 1997 period included the combined results of The Indus Group,
Inc. and TSW International, Inc. on a pooling of interest basis, as a
result of a merger effective August 25, 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.
The Company presently classifies all marketable securities as
available-for-sale investments and carries them at fair market value.
Marketable securities represent certificates of deposit and commercial
paper. Marketable securities classified as short-term represent
certificates of deposit and corporate notes maturing no later than March 1999.
<PAGE>
Unrealized holding gains and losses, net of taxes, are carried as a
component of shareholders' equity.
Revenue Recognition
Effective in the quarter ended September 30, 1997, Indus
International, Inc. has reported applicable new license fees on standard
software products not requiring substantial modification or
customization as earned revenue upon shipment to customers. Previously,
because substantial modification and customization of software products
was expected by customers, The Indus Group, Inc. had deferred the
applicable license fees initially and recognized those fees as earned
over the period of modification, customization and other installation
services. TSW International, Inc. which had not been required to
perform substantial customization services, consistently recognized the
applicable portion of license fees as earned upon shipment of standard
software products to customers.
2. Issuance of Common Stock
Employee Stock Purchase Plan
The Company received $509,953 from the issuance of 73,164 shares
of Common Stock on April 30, 1998 under the 1995 Employee Stock Purchase
Plan.
Exercise of Stock Options
During the nine months ended September 30, 1998, Indus
International, Inc. received $2,076,431 from the issuance of 1,116,827
shares of common stock upon exercise of options under its various stock
option plans.
3. Earnings/(loss) Per Share
Earnings/(loss) per share (Basic) is computed using net income/(loss)
and the weighted average number of common shares outstanding during each
period. Earnings per share (Diluted) is computed using net income and the
weighted average number of common and diluted common equivalent shares
outstanding during each period in which there is net income. The computation
of number of shares used in these computations for the three month and nine
month periods ended September 30, 1998 and 1997 is as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average outstanding - used
for basic .............................. 30,990 29,432 30,513 28,158
Options value using treasury stock
method ................................. 1,703 -- 2,396 --
Dilutive effect-Warrants (assumed
from former TSW International, Inc.) ... 2,046 -- 2,537 --
--------- --------- --------- ---------
Weighted average outstanding and dilutive
equivalents - used for dilutive ........ 34,739 29,432 35,446 28,158
========= ========= ========= =========
</TABLE>
4. Income Taxes
As a result of the merger of TSW International, Inc.,
Indus International, Inc. inherited net operating loss carryovers of
approximately $18.7 million, or approximately $7.5 million in potential tax
benefits. Benefits of 1.3 million were recognized through December 31, 1997.
In the nine months ended September 30, 1998, benefits of approximately $2.8
million were recognized, reducing the provision for federal and state income
taxes in that period.
5. Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standard No. 130
(Statement 130), "Reporting Comprehensive Income." Statement 130
establishes new rules for the reporting and display of comprehensive income
and its components. Statement 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
In the first nine months of 1998 and 1997, total comprehensive
income /(loss) amounted to $7.2 million and $3.7 million,
respectively.
Effective January 1, 1998, the Company adopted Financial
Accounting Standards Board's Statement of Financial Accounting Standard
No. 131 (Statement 131), "Disclosures about Segments of an Enterprise
and Related Information." Statement 131 superseded Statement 14,
Financial Reporting for Segments of a Business enterprise. Statement
131 establishes standards for the way that public business enterprises
report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and major
<PAGE>
customers. The adoption of Statement 131 had no impact on the Company's
results of operations, financial position or disclosure of segment
information at September 30, 1998.
AICPA Accounting Standards Executive Committee Statement of
Position 97-2, Software Revenue Recognition, (SOP 97-2), which contains
new rules for timing of recognition of software company revenues,
particularly as to license fee revenues where there are multiple
elements to be delivered under a contract or arrangement with a
customer, became effective for transactions beginning in 1998.
Management believes the Company's current policy and its practices
conform to the rules in this new accounting pronouncement. Under the
Company's current policy, license fees on standard software products not
requiring substantial modification and customization are recognized as
revenue upon shipment to customers. Management also believes that
industry practice among software companies generally in applying the new
rules is evolving and that both the rules and their application to specific
situations may change in the future.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Financial Instruments and for Hedging Activities" ("SFAS
133") which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. SFAS
133 is effective for years beginning after June 15, 1999 and is not
anticipated to have a significant impact on the Company's results of
operations or financial condition when adopted.
<PAGE>
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 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) changes in the proportion of revenues attributable to
license fees versus services, (x) the percentage of license fees
attributable to third party software; (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, (xiv) effect of AICPA Statement of Position 97-2 on
Company's revenue recognition and (xv) 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 1997 Annual Report on Form
10K.
Other risks relating to the Company's business as a result of the Merger
include: (i) the Combined Company's ability to manage growth; (ii) the
<PAGE>
utilization by the 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 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 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. Indus International, Inc. develops, markets, and supports
proprietary lines of enterprise asset management software and
implementation services. The Company serves as an agent of change for
its customers, who seek to improve their return on investment and
efficiencies in core business functions in the utilities and energy
industry, process, discreet and consumer packaged goods companies, as
well as educational, municipal and transportation authorities worldwide.
The Company derives its revenues primarily from software licenses,
implementation and training services and maintenance fees. While the
Company has derived a significant portion of its revenues from electric
utilities, it also derives revenues from customers such as the oil and
gas companies, petrochemical companies, manufacturers, hospitals,
educational systems, governments, transportation authorities and steel
and forest product companies.
The Company provides its software to customers under contracts, which
provide for software license fees and system implementation services.
Revenues from software license fees, which typically have ranged from
approximately $100,000 to $5 million for initial software license fees,
are now recognized as earned revenue upon shipment to customers if the
Company is not subject to any significant remaining obligations and
collection of the resulting receivable is deemed probable. Effective
September 30, 1997, The Indus Group, Inc. began to report applicable new
license fees on standard software products not requiring substantial
modification or customization as earned revenue upon shipment to
customers. Previously, because substantial modification and
customization of software products was expected by customers, The Indus
Group, Inc. had deferred the applicable license fees initially and
recognized those fees as earned over the period of modification,
customization and other installation services. TSW International, Inc.,
which had not been required to perform substantial customization
services, recognized the applicable portion of license fees as earned
upon shipment of standard software products to customers. 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. Additional maintenance
and support services are typically provided for under a separate
<PAGE>
contract where the Company charges 9-18% of the original license fee per
year in the first year beginning shortly after the software contract is
signed and 15-18% of the original license fee per year in the following
years. For those contracts with a one-year warranty clause, 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, Indus International, Inc. acquired a 10% interest in
TenFold Corporation, a private software company for approximately $8.0
million in cash. Indus International, Inc. will receive a perpetual,
unrestricted license for future applications and tools developed with
TenFold's technology. In April 1997, Indus International, Inc. 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
1998 as a result of these acquisitions.
<PAGE>
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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licensing fees ............ 25.9% 31.5% 27.7% 30.0%
Services and maintenance ........... 74.1% 68.5% 72.3% 70.0%
--------- --------- --------- ---------
Total revenues ................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................ 51.6% 44.3% 54.8% 43.9%
--------- --------- --------- ---------
Gross margin ............................ 48.4% 55.7% 45.2% 56.1%
Operating expenses:
Research and development ........... 16.2% 16.2% 15.8% 15.6%
Sales and marketing ................ 17.4% 17.1% 15.2% 18.5%
General and administrative ......... 8.8% 7.4% 8.0% 8.8%
Merger expenses .................... -- 23.1% -- 7.6%
Restructuring charge ............... -- 4.9% -- 1.6%
--------- --------- --------- ---------
Total operating expenses ....... 42.4% 68.7% 39.0% 52.1%
--------- --------- --------- ---------
Income (loss) from operations ........... 6.0% -13.0% 6.2% 4.0%
Other income (expenses), net ........... 0.4% 1.2% 0.4% 1.4%
--------- --------- --------- ---------
Income (loss) before income taxes ....... 5.6% -14.2% 5.8% 2.6%
Provision for income taxes .............. 0.0% 4.9% 0.3% 4.7%
--------- --------- --------- ---------
Income (loss) before extraordinary item . 5.6% -19.1% 5.5% -2.1%
Extraordinary item ...................... -- -1.8% -- -0.6%
--------- --------- --------- ---------
Net income (loss) ........................ 5.6% -20.9% 5.5% -2.7%
========= ========= ========= =========
</TABLE>
Revenues. Total revenues increased 16% to $50.3 million in the quarter
ended September 1998 from $43.2 million in 1997. In the first nine
months of 1998, total revenues increased by 8% to $140.6 million from
$130.5 in 1997. Revenue from international customers (excluding Canada
and Mexico) accounted for 10% and 14% of revenues for the quarter and
nine months ended September 30, 1998, respectively, and 11% and 13% for
the quarter and nine months ended September 30, 1997. As most of the
Company's contracts are denominated in U.S. dollars, foreign currency
fluctuations have not significantly impacted the results of operations.
In addition, effective September 30, 1997, The Indus Group, Inc. began
to report applicable new license fees on standard software products not
requiring substantial modification or customization as earned revenue
upon shipment to customers. Previously, because substantial
modification and customization of software products was expected by
<PAGE>
customers, The Indus Group, Inc. had deferred the applicable license
fees initially and recognized those fees as earned over the period of
modification, customization and other installation services. TSW
International, Inc., which had not been required to perform substantial
customization services, continued to recognize the applicable portion of license
fees as earned upon shipment of standard software products to customers.
Revenues from licensing fees decreased 4% to $13.0 million in the
quarter ended September 30 1998 from $13.6 million in 1997. This
decrease in license fees was due to lower than anticipated licensing
agreements from new and existing customers. In the first nine months of
1998, license fees decreased by 0.5% to $39.0 million from $39.2
million in 1997.
Revenues from services and maintenance increased by 26% to $37.3 million
in the quarter ended September 30, 1998 from $29.6 million in 1997. In
the first nine months of 1998, services and maintenance revenues
increased 11% to $101.7 million from $91.3 million in 1997. The
services and maintenance growth resulted primarily from increases in
consulting services generated by new contracts and additional
consulting projects of existing customers. Services and maintenance
revenue as a percentage of total revenue were 74% and 69% for the three months
ended September 30, 1998 and 1997, and 72% and 70% for the nine months ended
September 30, 1998 and 1997.
The Company does not believe that the revenue growth experienced in the
first nine months of 1998 is necessarily indicative of 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), (ii) training and customer support services and (iii)
sublicense fees to third parties upon the sale of the Company's product
containing such third-party software. Gross margin on license fees are
substantially higher than gross margin on service revenue, reflecting
the low packaging and production costs of software products compared
with the relatively high personnel costs associated with providing
implementation, maintenance, consulting and training services.
Cost of revenues increased 35% to $26.0 million in the quarter ended
September 30, 1998 from $19.2 million in 1997. In the first nine months
of 1998, cost of revenues increased by 34% to $77.0 million from $57.3
million in 1997. The 1998 increase in absolute dollars in cost of
revenues reflected the additional personnel costs necessary to provide
the additional service revenues for the quarter. As a percent of total
revenue, cost of revenues was 52% and 44% for the quarters ended
September 30, 1998 and 1997, respectively. For the first nine months of
1998 and 1997, the cost of revenues as a percent of total revenue was at
55% and 44%, respectively.
Research and Development (R&D). Research and development expenses
consist primarily of: (i) personnel and related costs,
(ii) third party consultant fees directly attributable to the development
of new software application products and enhancements to existing products.
Research and development expenses increased 17% to $8.2 million in the
quarter ended September 30, 1998 from $7.0 million in 1997. As a
<PAGE>
percent of total revenues, research and development expenses was 16% in
the quarters ended September 30, 1998 and 1997. In the nine months
ending September 30, 1998, research and development expenses increased
9% to $22.3 million from $20.4 million in 1997. 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 19% to $8.8
million in the quarter ended September 30, 1998 from $7.4 million in
1997. In the first nine months of 1998, sales and marketing expenses
decreased by 11% to $21.4 million from $24.1 million in 1997. As a
percentage of total revenue sales and marketing expenses were at 17.4%
and 17.1% for the quarters ended September 30, 1998 and 1997 and 15.2%
and 18.5% for the first nine months of 1998 and 1997, respectively.
The increase in sales and marketing expenses in absolute dollars is
primarily due to the increased commission expense in the quarter ended
September 30, 1998 and the company-funded expenses for the 1998 user
group conference (EXPO 98).
General and Administrative. General and administrative expenses
increased 38% to $4.4 million in the quarter ended September 30, 1998
from $3.2 million in 1997. In the first nine months of 1998, general
and administrative expenses decreased by 3% to $11.2 million from $11.5
million in 1997. As a percent of total revenue, general and
administrative expenses were 8.0 % and 7.4% for the quarters ended
September 30, 1998 and 1997, respectively. For the first nine months of
1998 and 1997, general and administrative expenses as a percentage
of total revenue were 8.0% and 8.8%, respectively. General and
administrative expenses in absolute dollars increased due to the
addition of key management personnel and an increase in the allowance
for bad debts.
Provision for Income Taxes. Income tax expense of $450,000 for the nine
months ended September 30, 1998. Reflects a $2.8 million tax benefit for
utilization of a net operating loss carryovers and other tax credits.
As a result of the merger from the prior year, Indus International, Inc.
has domestic net operating loss carryforwards in excess of $18.7 million
which will expire in years 2010 through 2012; domestic research and
experimental tax credits of approximately $724,000 which expire in years
2010 to 2012; foreign tax credits of approximately $841,000 which expire
in years 1998 - 2002, and foreign net operating loss carryforwards of
approximately $2.9 million which can be carried forward indefinitely.
Net Income. The increase in the Company's net income to $7.7 million for the
nine months ended September 30, 1998 as compared to a net loss of $3.6
million recorded in 1997 resulted primarily from the one time
restructuring and merger expense.
<PAGE>
Liquidity and Capital Resources
The Company had total assets of $153.8 million and $136.7 million at
September 30, 1998 and December 31, 1997, respectively. Historically,
the Company has financed its operations primarily through cash provided
by operations, borrowings under its line of credit, sales of preferred
Stock to a principal shareholder and funds borrowed from principal
shareholders. In March 1996, The Indus Group, Inc. 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 and certain cash equivalent instruments. TSW International,
Inc. financed its activities prior to the Merger largely through
approximately $38.0 million provided by its principal shareholder in
exchange for subordinated notes and preferred stock.
As of September 30, 1998, the Company's principal sources of liquidity
consisted of approximately $20.9 million in cash and cash equivalents and
$8.6 million in marketable securities. The Company has borrowed against
a revolving bank line of credit in the amount of $26.7 million, which is
secured by all of the Company's accounts receivables. The revolving
credit facility expires in July 31, 1999. The revolving credit facility
bears an interest rate of the one month LIBOR rate plus 1.50% (6.78% as
of September 30, 1998). This facility replaced and eliminated The Indus
Group, Inc. and TSW International, Inc. revolving lines of credit, which
bore higher interest rates.
In the nine months ended September 30, 1998, cash and cash equivalents
increased substantially by $9.8 million. Operating activities provided
cash of approximately $6.2 million. Financing activities provided cash of
approximately $107,000.
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) reductions
in outstanding borrowings, and (v) working capital requirements.
The Company presently anticipates additional capital expenditures
for the remainder of 1998 of approximately $2.0 million, primarily for
equipment and furniture.
In addition to its line of credit, the Company's principal commitments
at September 30, 1998 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 uses of
cash, and the ability to negotiate additional credit facilities beyond
July 1999.
The Year 2000 Issue and the Nature and Effects of the Year
2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
<PAGE>
applicable year. Any of the Company's computer programs or
hardware that have date-sensitive software or embedded chips
may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations,
including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar
normal business activities.
The Company's plan to resolve the Year 2000 Issue involves
the following four phases: assessment, remediation, testing,
and implementation. To date, the Company has not yet fully
completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed
assessment could indicate that most of the Company's
significant information technology systems will be affected,
particularly the general ledger, project accounting and
billing systems. In addition, the Company is in the
process of gathering information about the Year 2000
compliance status of its significant suppliers and
subcontractors and will continue to monitor their
compliance.
Status of Progress in Becoming Year 2000 Compatible
The Company has a formal Year 2000 Program focusing on four
key areas: 1) Information Technology, addressing internal
software and business systems; 2) the Company's Products; 3)
Third Party, addressing the preparedness of non-IT
suppliers; 4) the Company's Facilities.
For each readiness area, based on a phased approach, the Company
is performing a worldwide risk assessment, remediating and
conducting testing, implementing solutions, and
communicating with employees, suppliers and customers to
raise awareness of the Year 2000 problem.
Information Technology Program: The Company is conducting an
assessment of internal applications and computer hardware.
The program addresses not only the supplier's year 2000
product integrity but also assesses the supplier's ability
to provide product and services.
Hardware assessment includes workstations, servers,
telecommunication equipment and other items. The assessment
is 50% complete and is due for completion at the end of
March 1999. For its information technology exposures, to
date the Company is 15% complete on the remediation phase
for systems and products with significant Year 2000 risk
and expects to complete reprogramming and replacement by
June 31, 1999. These phases run concurrently for different
systems. To date, the Company has completed approximately 15% of its
testing and has implemented approximately 15% of its remediated systems.
Completion of the testing phase for all significant systems
is expected by June 30, 1999, with all remediated systems
fully tested and implemented by September 30, 1999.
<PAGE>
Product Readiness Program: This program focuses on
identifying and resolving the Year 2000 issues existing in
the Company's currently supported products. It encompasses a
number of activities including product testing, evaluation,
product engineering and quality assurance. The program
began in 1998 and work will continue through 1999.
Third Party Program: The Company is querying its significant
suppliers and subcontractors that do not share information
systems with the Company (external agents Testing and
implementation are scheduled for June 1999 completion. To
date, the Company is not aware of any external agent with a
Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external
agents will be Year 2000 ready. There may be certain third parties,
such as utilities, telecommunication companies or material vendors
where alternate arrangements or sources are limited or unavailable.
The inability of external agents to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company. The
effect of non-compliance by external agents is not determinable
Indus Facilities Program: The Company is conducting an
assessment of all the Indus Facilities and facility
suppliers worldwide. The assessment is approximately 15% complete. The
expected completion date for surveying the facilities and
facility suppliers is January 1999. Remediation is approximately 10%
complete. Testing and implementation of affected equipment
is expected to be 90% complete by July 1999.
Contingency Plans
The Company currently has no contingency plans in place in
the event it does not complete all phases of the Year 2000
program. The Company plans to evaluate the status of
completion in January 1999 and determine whether such a plan
is necessary. There can be no assurance that the company will be
able to develop a contingency plan that will adequately address issues
that may arise in the year 2000. Failure by the company to develop
and implement, if necessary, an appropriate contingency plan could have
a material impact on the operations of the company.
Costs
The Company will utilize both internal and external
resources to reprogram, or replace, test, and implement the
software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is currently
estimated at $1.0 to $3.0 million and will be funded through
operating cash flows. To date, the Company has incurred
approximately $0.75 million, related to all phases of the
Year 2000 project. The majority of the total costs will
be incurred during the next four quarters. The Company is
continuing its assessment and refining its cost estimates.
There can be no assurance, however that there will not be a
delay in, or increased costs associated with the programs
described in this section.
<PAGE>
Summary
Management of the Company believes it has an effective
program in place to resolve the Year 2000 issue in a timely
manner. As noted above, the Company has not yet completed
all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases,
the Company may have difficulty in processing customer invoices
or payments. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject
to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date
business records. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
<PAGE>
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 AND USE OF PROCEEDS
None
Report of Sales of Securities and Use of Proceeds Therefrom
(Form SR)
Aggregate offering price $37,500,000
Expenses incurred in connection with offering 3,636,236
Net offering proceeds to issuer $33,863,764
Purchase of equipment 750,000
Income taxes 3,841,421
Working capital 3,300,000
Temporary investment $25,972,343
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.
27.01 Financial Data Schedule
(b) Reports on Forms 8-K.
Form 8K reporting Item 5 (dated August 31, 1998) was filed
September 15, 1998
<PAGE>
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.
INDUS INTERNATIONAL, INC.
(Registrant)
Date: November 12, 1998
/s/ Robert W. Felton
Robert W. Felton
Chief Executive Officer
Date: November 12, 1998
/s/ Albert J. Wood
Albert J. Wood
Vice President of Finance
and Treasurer
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 20,895
<SECURITIES> 8,576
<RECEIVABLES> 59,596
<ALLOWANCES> 4,229
<INVENTORY> 0
<CURRENT-ASSETS> 124,945
<PP&E> 16,086
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,752
<CURRENT-LIABILITIES> 73,262
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0
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<COMMON> 30
<OTHER-SE> 80,264
<TOTAL-LIABILITY-AND-EQUITY> 153,752
<SALES> 50,333
<TOTAL-REVENUES> 50,333
<CGS> 25,994
<TOTAL-COSTS> 25,994
<OTHER-EXPENSES> 21,328
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