================================================================================
- --------------------------------------------------------------------------------
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, 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 April 30, 1998, Registrant had outstanding 30,349,692 shares of Common
Stock, $.001 par value.
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
Part I: Financial Information
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations - three months
ended March 31, 1998 and 1997.............................. 1
Condensed Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997.......................................... 2
Condensed Consolidated Statement of Stockholders' Equity -
year ended December 31, 1997 and three months ended
March 31, 1998............................................. 3
Condensed Consolidated Statements of Cash Flows - three months
ended March 31, 1998 and 1997.............................. 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 and Use of Proceeds...................... 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
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
----------- ------------
<S> <C> <C>
Revenues:
Software licensing........................................................ $ 14,360 $ 12,806
Services and maintenance................................................. 30,364 31,102
------------- --------------
Total revenues....................................................... 44,724 43,908
Cost of revenues............................................................... 24,130 19,316
------------- --------------
Gross margin................................................................... 20,594 24,592
Operating expenses:
Research and development.................................................. 6,853 6,102
Sales and marketing....................................................... 5,581 8,665
General and administrative................................................ 3,108 4,066
------------- --------------
Total operating expenses............................................. 15,542 18,833
------------- --------------
Income from operations......................................................... 5,052 5,759
Other income, net.............................................................. (215) (532)
------------- --------------
Income before income taxes..................................................... 4,837 5,227
Provision for income taxes..................................................... 450 2,138
------------- --------------
Net income..................................................................... $ 4,387 $ 3,089
============= ==============
Earnings per share (Basic)..................................................... $ 0.15 $ 0.11
============= ==============
Earnings per share (Diluted)................................................... $ 0.12 $ 0.10
============= ==============
Shares used in computing Earnings per share (Basic)............................ 30,053 27,436
============= ==============
Shares used in computing Earnings per share (Diluted).......................... 35,586 30,121
============= ==============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31, December 31,
1998 1997*
----------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current
assets:
Cash and cash equivalents..................................................... $ 22,453 $ 11,052
Marketable securities......................................................... 6,010 11,880
Billed accounts receivable, less allowance for doubtful accounts of $2,380
at March 31, 1998 and $1,974 at December 31, 1997......................... 41,404 43,574
Unbilled accounts receivable.................................................. 40,304 30,349
Other current assets.......................................................... 6,069 5,773
----------------- -----------------
Total current assets...................................................... 116,240 102,628
Marketable securities - noncurrent................................................. - 4,818
Property and equipment, net........................................................ 15,694 16,589
Investments and intangible assets, net............................................. 11,947 12,100
Employee notes receivable.......................................................... 424 416
Other assets....................................................................... 124 174
================= =================
$ 144,429 $ 136,725
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under line of credit................................................ $ 26,650 $ 26,650
Current portion of obligations under capital leases........................... 2,002 2,012
Accounts payable.............................................................. 12,126 8,430
Deferred income taxes......................................................... - 419
Accrued merger expenses....................................................... - 1,898
Other accrued liabilities..................................................... 12,491 12,170
Deferred revenue.............................................................. 15,361 13,419
----------------- -----------------
Total current liabilities................................................. 68,630 64,998
----------------- -----------------
Obligations under capital leases and term loans 310 1,497
Stockholders' equity:
Common Stock 29 29
Additional capital............................................................ 99,660 98,608
Other......................................................................... (1,899) (1,719)
Accumulated deficit........................................................... (22,301) (26,688)
----------------- -----------------
Total stockholders' equity................................................ 75,489 70,230
----------------- -----------------
$ 144,429 $ 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>
2
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
<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 as Indus International, Inc.. (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 to net loss 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)................. - 490 - - 490
Tax benefit from exercise of stock
options................................... - 562 - - 562
Other ....................................... - - (180) - (180)
Net income................................... - - - 4,387 4,387
------------ ------------ ------------ ------------- -------------
Balance at March 31, 1998 $ 29 $ 99,660 $ (1,899) $ (22,301) $ 75,489
============ ============ ============ ============= =============
<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 $490 received from the issuance of 325,620 common shares
upon exercise of options.
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income.............................................................................. $ 4,387 $ 3,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 2,086 890
Provision for doubtful accounts.................................................... 406 173
Amortization of deferred compensation.............................................. 14 19
Loss on sale of fixed assets....................................................... - 300
Deferred income taxes.............................................................. (419) 395
Tax benefit from exercise of stock options......................................... 562 -
Changes in operating assets and liabilities:
Billed accounts receivable.................................................... 1,763 (2,068)
Unbilled accounts receivable.................................................. (9,955) (5,814)
Other current assets.......................................................... (295) 663
Employee notes receivable..................................................... (8) (69)
Other assets.................................................................. (38) (502)
Accounts payable.............................................................. 3,697 522
Accrued merger expense........................................................ (140) -
Other accrued liabilities..................................................... (1,438) 1,097
Deferred revenue.............................................................. 1,943 (565)
Other......................................................................... 294 416
--------------- --------------
Net cash provided by (used in) operating activities..................................... 2,859 (1,454)
--------------- --------------
Cash flows from investing activities
Purchase of marketable securities....................................................... (83) (893)
Sale of marketable securities........................................................... 10,850 -
Investments and intangible assets....................................................... (159) (7,997)
Other................................................................................... 18 -
Acquisition of property and equipment................................................... (1,377) (1,960)
--------------- --------------
Net cash provided by (used in) investing activities..................................... 9,249 (10,850)
--------------- --------------
Cash flows from financing activities
Net drawdown of line of credit.......................................................... - 3,074
Net drawdown/(repayment) of capital leases/notes payable................................ (1,197) 258
Net drawdown of subordinated debt....................................................... - 454
Net proceeds from issuance of common stock.............................................. 490 59
--------------- --------------
Net cash provided by (used in) financing activities..................................... (707) 3,845
--------------- --------------
Net increase in cash and cash equivalents............................................... 11,401 (8,459)
Cash and cash equivalents at beginning of period........................................ 11,052 14,674
--------------- --------------
Cash and cash equivalents at end of period.............................................. $ 22,453 $ 6,215
=============== ==============
Supplemental disclosures of cash flow information
Interest paid........................................................................... $ 397 $ 467
=============== ==============
Income taxes paid....................................................................... $ 137 $ 182
=============== ==============
<FN>
See accompanying notes.
</FN>
</TABLE>
4
<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 month periods ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. For further information, refer to the
Company's Annual Report on Form 10-K 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 (the "Merger") on June 5,
1997with 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"), which was combined for the purpose of the transactions
contemplated under the Merger. 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 transaction 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, which are secured by
government agency securities.
The Company presently classifies all marketable securities as
available-for-sale investments and carries them at fair market value. Marketable
securities represent U.S. government obligations and indirect investments in
municipal obligations. Marketable securities classified as short-term represent
U.S. government obligations maturing no later than February, 1999. Unrealized
holding gains and losses, net of taxes, are carried as a component of
stockholders' 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, continues to recognize the
applicable portion of license fees as earned upon shipment of standard software
products to customers.
5
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
2. Issuance of Common Stock
Exercise of Stock Options
During the three months ended March 31, 1998, Indus International, Inc.
received $490,624 from the issuance of 325,620 shares of common stock upon
exercise of options under its various stock option plans.
3. Earnings Per Share
Earnings per share (Basic) is computed using net income and the
weighted average number of common shares outstanding during each period.
Earnings per share (Dilutive) is computed using net income and the weighted
average number of common and dilutive common equivalent shares outstanding
during each period. The computation of the weighted average number of shares
outstanding for the three month periods ended March 31, 1998 and 1997 is as
follows (in thousands):
Three Months Ended
March 31,
---------------
1998 1997
------ ------
Weighted average outstanding -- used for basic... 30,053 27,436
Options value using treasury stock method ....... 2,829 2,685
Dilutive effect-Warrants (assumed from former TSW
International, Inc.) ....................... 2,704 --
------ ------
Weighted average outstanding and dilutive
equivalents -- used for dilutive 35,586 30,121
====== ======
4. As a result of the merger with TSW International, Inc. and the
subsequent liquidation of that company into Indus International, Inc., Indus
International, Inc. inherited net operating loss carryovers of approximately $10
million, none of which benefit had been recognized in its financial statements
through December 31, 1997. In the three months ended March 31, 1998, benefits of
approximately $1.5 million were recognized, reducing the current 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; however,
the adoption of this Statement had no impact on the Company's net income or
shareholders, equity. 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 shareholders,
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130.
During the first quarter of 1998 and 1997, total comprehensive income
amounted to $4.2 million and $3.4 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 customers.
The adoption of Statement 131 had no impact on the Company's results of
operations, financial position or disclosure of segment information at March 31,
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 in specific situations may change in the future.
6
<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 10-K.
Risks relating to the August 25, 1997 merger of The Indus Group, Inc. and TSW
International, Inc. include: (i) risks relating to the integration of the
operations of The Indus Group, Inc. and TSW International, Inc.; and, (ii)
certain affiliates of The Indus Group, Inc. and TSW International, Inc. have
certain interests that are different from or in addition to shareholders of The
Indus Group, Inc. and shareholders of TSW International, Inc. Risks relating to
the business of the Combined Company include: (i) the Combined Company's ability
to manage growth; (ii) the utilization by the Combined Company of new
distribution channels; and (iii) risks relating to the successful integration of
current and future products and technologies.
The Company has in the past acquired 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 a
proprietary line 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 oil and gas companies, petrochemical
companies, manufacturers, hospitals, educational systems, governments,
transportation authorities and steel and forest product companies.
7
<PAGE>
Results of Operations (continued)
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. For 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 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.
<TABLE>
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:
<CAPTION>
Percent of Total Revenues
Three Months Ended
March 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Revenues:
Software licensing fees.................................................... 29.2% 32.1%
Services and maintenance................................................... 70.8 67.9
-------------------------
Total revenues........................................................ 100.0 100.0
Cost of revenues................................................................ 44.0 53.9
-------------------------
Gross margin.................................................................... 46.1 56.0
Operating expenses:
Research and development................................................... 13.9 15.3
Sales and marketing........................................................ 12.5 19.7
General and administrative................................................. 7.0 9.3
-------------------------
Total operating expenses.............................................. 34.8 42.9
-------------------------
Income from operations.......................................................... 11.3 13.1
Other income, net............................................................... (0.5) (1.2)
-------------------------
Income before income taxes...................................................... 10.8 11.9
Provision for income taxes ..................................................... 1.0 4.9
=========================
Net income...................................................................... 9.8% 7.0%
=========================
</TABLE>
8
<PAGE>
Results of Operations (continued)
Revenues. Total revenues increased 2% to $44.7 million in the three months ended
March 31, 1998 from $43.9 million in the same period of 1997. Revenue from
international customers (excluding Canada and Mexico) accounted for 13% and 16%
of revenues for the three months ended March 31, 1998 and 1997. As most of the
Company's contracts are denominated in U.S. dollars, foreign currency
fluctuations have not 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 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 licensing fees increased by 12% to $14.4 million in the three
months ended March 31, 1998 from $12.8 million in 1997. License fees as a
percentage of revenue were 32% and 29% for the three months ended March 31, 1998
and 1997, respectively.
Revenues from services and maintenance remained relatively flat in the three
months ended March 31, 1998 and 1997 due to the delay in the startup of
implementation service contracts related to license fee contracts closed in the
quarter ended December 31, 1997.
The Company does not believe that the revenue growth experienced in the first
three months of 1998 is necessarily indicative of any revenue growth that may
occur in future periods.
Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and
related costs for implementation (including account executive personnel), (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 25% to $24.1 million in the three months ended March
31, 1998 from $19.3 million in 1997. The 1998 increase in absolute dollars in
cost of revenues was due principally to the increased third party license fees
costs. As a percent of total revenue, cost of revenues was 54% and 44% for the
quarters ended March 31, 1998 and 1997, respectively.
Research and Development (R&D). Research and development expenses consist
primarily of: (i) personnel and related costs, (ii) computer timeshare costs and
(iii) third party consultant fees directly attributable to the development of
new software application products and enhancements to existing products.
Research and development expenses increased 13% to $6.9 million in the three
months ended March 31, 1998 from $6.1 million in 1996. As a percent of total
revenue, research and development expenses remained relatively flat at 15% and
14% for the quarters ended March 31, 1998 and 1997, respectively. 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 decreased 36% to $5.6 million
in the three months ended March 31, 1998 from $8.7 million in 1997. As a percent
of total revenue, sales and marketing expenses were 13% and 20% for the three
months ended March 31, 1998 and 1997, respectively. The decrease in sales and
marketing expenses in absolute dollars is primarily due to the decreased
commission expense in the quarter ended March 31, 1998
General and Administrative. General and administrative expenses decreased 24% to
$3.1 million in the three months ended March 31, 1998 from $4.1 million in 1997.
As a percent of total revenue, general and administrative expenses were 7% and
9% for the three months ended March 31, 1998 and 1997, respectively. General and
administrative expenses in absolute dollars decreased due to the centralization
and consolidation of certain administrative functions, as a result of the
Merger.
9
<PAGE>
Results of Operations (continued)
Provision for Income Taxes. Income tax expense of $450,000 represented federal
and state corporate income taxes for the three months ended March 31, 1998. This
includes a $1.5 million tax benefit for utilization of 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 $10.0 million which will expire in years 2010 through 2012; domestic
research and experimental tax credits of approximately $776,000 which expire in
years 2010 to 2012; domestic and foreign tax credits of approximately $506,000
which can be carried forward indefinitely; and foreign net operating loss
carryforwards of approximately $2.9 million which can be carried forward
indefinitely.
Net Income. The Company's net income of $4.4 million for the three months ended
March 31, 1998 as compared to a net income of $3.1 million recorded in 1997
resulted primarily from a decrease in operating expenses and a $1.5 million tax
benefit for utilizing a net operating loss carryover, offset partially by a
decrease in the gross margin achieved during the three months ended March 31,
1998.
Liquidity and Capital Resources
The Company had total assets of $144.4 million and $136.7 million at March 31,
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 (comprised of municipal and U.S. government obligations) 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 March 31, 1998, the Company's principal sources of liquidity consisted of
approximately $22.5 million in cash and cash equivalents, $6.0 million in
marketable securities and a revolving bank line of credit of $35 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 1.25% (6.94% as of March 31,
1998). This facility replaced and eliminated The Indus Group, Inc. and TSW
International, Inc. revolving lines of credit, which bore higher interest rates.
Approximately $26.7 million had been drawn down under this line of credit at
March 31, 1998.
In the three months ended March 31, 1998, cash and cash equivalents increased
substantially as a result of the sale of long-term marketable securities.
Operating activities provided cash of approximately $2.9 million. The purchase
of property and equipment used cash of approximately $1.4 million. Financing
activities used cash of approximately $0.7 million, primarily from the repayment
of the capital leases.
Cash requirements are expected to continue to increase in order to fund: (i)
personnel and salary costs, (ii) research and development costs, (iii)
investment in additional technical equipment, and (iv) working capital
requirements. The Company presently anticipates additional capital expenditures
for the remainder of 1998 of approximately $13 million, primarily for equipment
and furniture.
In addition to its line of credit, the Company's principal commitments at March
31, 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.
10
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
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.
No reports on Form 8-K were filed during the Quarter covered by this report
11
<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: May 15, 1998
/s/ Robert W. Felton
----------------------------------------
Robert W. Felton
President and Chief Executive Officer
Date: May 15, 1998
/s/ Frank M. Siskowski
---------------------------------------
Frank M. Siskowski
Senior Vice President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
------- -----------
27.01 Financial Data Schedule
13
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<PP&E> 28,060
<DEPRECIATION> 13,818
<TOTAL-ASSETS> 129,520
<CURRENT-LIABILITIES> 58,315
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18,100
<COMMON> 23
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<TOTAL-REVENUES> 43,386
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<TOTAL-COSTS> 18,813
<OTHER-EXPENSES> 19,571
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,053
<INCOME-PRETAX> 4,346
<INCOME-TAX> 1,965
<INCOME-CONTINUING> 2,381
<DISCONTINUED> 0
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<NET-INCOME> 2,381
<EPS-PRIMARY> .09
<EPS-DILUTED> .07
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<PP&E> 21,973
<DEPRECIATION> 10,598
<TOTAL-ASSETS> 99,870
<CURRENT-LIABILITIES> 47,004
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