================================================================================
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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)
-------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
----------------
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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 11,
1998 as reported on the Nasdaq National Market, was approximately $9.13. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may by deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, $.001 par
value was 30,244,163 at March 11, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated by reference into Parts II and IV of this
Form 10-K. Portions of the Proxy Statement for Registrant's 1998 Annual Meeting
of Stockholders to be held May 5, 1998 are incorporated by reference in Part III
hereof, to the extent stated herein.
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C>
PART I..........................................................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS.............................................................................................3
ITEM 2. PROPERTIES.........................................................................................................16
ITEM 3. LEGAL PROCEEDINGS..................................................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................................16
PART II........................................................................................................................17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................................17
ITEM 6. SELECTED FINANCIAL INFORMATION.....................................................................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION...............................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................19
PART III.......................................................................................................................19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................................19
ITEM 11. EXECUTIVE COMPENSATION............................................................................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................................20
PART IV........................................................................................................................20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................................20
SIGNATURES.....................................................................................................................24
</TABLE>
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Merger
The Indus Group, Inc., a California corporation entered into an
agreement and plan of merger and reorganization (the "Merger") 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") which was formed 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.
As a result of the Merger, the Company has broadened its vertical
market expertise and opportunities, enhanced its international presence,
broadened its product offerings and been able to more fully realize the benefits
of a regional services infrastructure. In addition, the Merger provides: (i) an
enhanced competitive position as a result of higher visibility of the Company;
(ii) an increase in the sales and marketing capabilities; (iii) an ability to
provide solutions to enterprise customers of all sizes as a result of the
integration of software solutions; and (iv) cost synergies and economies of
scale in operation.
On December 31, 1997, the Company's subsidiaries, The Indus Group, Inc.
and TSW International, Inc., each 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.
General
Indus International, Inc. develops, markets, implements and supports
enterprise asset management software and service solutions for capital intense
industries worldwide. Marketed internationally as the Indus Solution Series, the
offering consists of business application systems and industry best practice
service packages which support such functional areas as: Asset & Work Management
Systems, Materials & Procurement Systems, Safety & Compliance Systems and
Financial Integration products. Indus Solutions are designed to interoperate ("a
single customer environment making productive use of two or more vendor's
products which seamlessly integrate without requiring additional interface
programming assistance") with popular third-party applications that provide best
business practices function to its customers. Through strategic alliances, the
Company works with Oracle Corporation ("Oracle"), PeopleSoft, Inc.
("PeopleSoft"), and other industry-specific vendors to create a software series
that provides seamless interoperability with corporate and financial
applications, expert systems, and other industry specific systems to provide
complete enterprise-wide solutions that enable the Company's customers to
improve operating efficiencies, reduce costs and comply with governmental
regulation. Markets of primary focus for the Company's products include: the
energy industry, continuous process industries, industrial manufacturing and the
public sector. Segments within these capital intense markets include: electric
and gas utilities, telecommunications providers, petrochemical refineries,
mining and metals manufacturers, forest products producers, transportation
authorities, educational systems, and governmental institutions.
The software tools comprising the Indus Solution Series are based on an
open, client/server architecture featuring a layered and object-oriented
software design that enables customers to use various operating systems, operate
on multiple hardware platforms and interoperate with many third-party software
applications and legacy systems. Proprietary systems implementation methodology
tools and best practice education tools facilitate rapid and effective
deployment and utilization of its Enterprise Asset Management (EAM)
applications.
The Company's Enterprise Asset Management solutions include consulting
services provided by subject matter experts. This unique approach helps
customers implement advanced EAM maintenance principles, materials management
theories, and other advanced strategies designed to provide a competitive
advantage to the customer. The service package content comprising this business
process improvement solution leverages the knowledge gained from hundreds of
customer implementations and the extensive plant experience of the Company's
employees, and the global experience of its user community. Regionally located
in close proximity to customer sites, the Company's professional services
organization supports the sales organization that is established along vertical
business lines. The resulting process provides a high quality information
exchange as customers learn how the Indus Solution Series addresses
industry-specific requirements. The Company also offers a global customer
support organization with 7 x 24 multi-lingual support. The Company believes
this combination of enterprise software, vertically oriented consulting services
and worldwide customer support allows customers to increase equipment and
production capacity, reduce operating costs and safeguard the workforce and the
environment.
The Company is a leading provider of systems, products and services
addressing the highly specialized needs of the Enterprise Asset Management
market. As of December 31, 1997, the Company products were licensed for use by
over 300,000 end-users representing 440 customers in 48 countries.
3
<PAGE>
Indus, Indus Solution Series, IndusWorld, PassPort Software Solutions,
ABACUS, ABACUS Toolkit, PORTAL/G, PORTAL/95, PORTAL/97, VIEWPORT, Prism
Consulting, Enterprise MPAC, Curator and AssetWare, AssetCare and CareNet are
trademarks and servicemarks of the Company. All other brand names or trademarks
are the property of their respective holders
Products and Services
The Company offers software products and service packages, which
incorporate sophisticated enterprise asset management methodologies, extensive
subject matter expertise and advanced technology designed to interoperate
seamlessly with other enterprise business information systems. Marketed as the
Indus Solution Series these business tools support the needs of an
organization's core decision makers in the operations and maintenance workforce,
inventory management and procurement professionals, safety and compliance
engineers and related disciplines affected by asset care decisions throughout
the enterprise. This customer user group is supported by such Indus Software
Solutions as: Asset & Work Management Systems, Materials and Procurement
Systems, Safety and Compliance System, which seamlessly integrate to third party
corporate financial systems from Oracle and PeopleSoft. Beyond providing
departmental information to affected workgroups throughout the customer
organization, Enterprise Asset Management (EAM) techniques employed by the
Company integrate process control systems from vendors such as Allen-Bradley and
Johnson Controls, optimizing capacity utilization through just-in-time
maintenance management practices. The Indus Solution Series reflects EAM best
practices, including Reliability Centered Maintenance (RCM), Total Productive
Maintenance (TPM) and web-based electronic commerce, to allow customers to apply
Indus Solutions as a means to achieving a strategic and competitive advantage.
A proprietary implementation methodology and set of data content
workbenches round out the service package offering available from the regionally
positioned professional services solutions centers throughout the Americas,
Europe, Middle East and Africa and Asia Pacific theaters of operation. Marketed
as ABACUS tools and implementation methodology, ABACUS enables rapid
implementation and configuration of Indus Software Solutions. Workbenches are a
set of software tools which support application development, data migration and
installation support used by the Company and its customers to develop, install
and configure Indus Software Solutions. Integration products are also sold to
enable Indus Software Solutions to interoperate with corporate financial,
payroll, human resources and customer information applications systems
available, and other industry-specific programs included in the company's
Business Partner Alliance program.
The Indus Software Solutions
Core application business systems comprising Indus Software Solutions are
commercially available in two primary product lines designed to reflect the
requirements of specific vertical industry function, and the technical
architecture traditionally employed in these industries. The result is two
efficient transaction engines designed to support Indus Solution Series
products. Functions within the application product lines have been tailored to
encapsulate vertical business processing requirements which are augmented by
subject matter expertise and consulting service packages which serves as another
key differentiation in delivering a total solution across the enterprise.
Indus Solution Series for the Energy Industry
Indus Software Solutions for the Energy Industry provide a series of
business applications and business process improvement service packages which
meet the needs of both integrated electric and gas utilities or stand alone
utility business units including: nuclear generating stations, non-nuclear steam
generating facilities, a utility's energy delivery business including
transmission and distribution, and systems designed to manage Department of
Energy facilities.
Specific packaged solutions in this series include:
Indus Solutions for the Power Generation Industry
Indus Solutions for the Nuclear Power Industry
Indus Solutions for the Energy Delivery Industry
Indus Solutions for Managing Department of Energy Facilities
Core business systems in the Energy Series include Asset & Work Management
systems, Materials & Procurement systems, Safety & Compliance systems and
Financial Integration products. These robust applications designed especially to
meet the challenges of the energy industry in an era of deregulation, and in
certain cases non-utility customers desiring to employ traditional architecture
across large complex environments, operate on transaction engines which provide
client/server processing in MVS, UNIX and Windows NT environments on server
platforms available from IBM, HP, and Digital Equipment utilizing the Oracle and
DB2 relational database management systems. Desktop workstation products include
Windows, Windows/95-97/NT, Macintosh and 3270 non-programmable devices.
Indus Solution Series for Industry and the Public Sector
4
<PAGE>
Indus Software Solutions for Industry and the Public Sector provide a set
of business applications, which meet the needs of capital intense industrial
manufacturing businesses seeking a competitive advantage through the application
of technology. Business applications and subject matter expertise in the areas
of delivering advanced enterprise asset management strategies across the
enterprise have been packaged to meet the needs of specific vertical industries
in the series.
Specific packaged software and service package solutions in the Industry Series
include:
Indus Solutions for the Mining & Metals Industry
Indus Solutions for the Oil,Gas & Chemical Industry
Indus Solutions for the Forest Products Industry
Indus Solutions for Industrial Manufacturing
Indus Solutions for the Consumer Packaged Goods Industry
Specific packaged solutions in the Public Sector Series include:
Indus Solutions for Transportation Authorities
Indus Solutions for Educational Systems
Indus Solutions for Municipal Government Facilities
Core business systems in the Industry and Public Sector Series include:
Asset & Work Management systems, Materials & Procurement systems, Safety &
Compliance systems and Financial Integration products. These object-oriented and
Oracle-centric applications may be modularly implemented or procured on a
turnkey basis. The transaction engine supporting core processes within this
series utilizes object-oriented tools allowing each Industry and Public Sector
Solution to evolve with emerging industry standards. Largely platform
independent, the software runs on industry-standard UNIX and Windows NT servers
including the IBM RS/6000, HP 9000, Sun SPARCstation and Intel-based systems.
This Series-II architecture utilizes the native functionality of the Oracle
database with a graphical user interface developed in an object-orientated
front-end able to run in both Windows and Java client domains. Integration with
several third party applications fully extend the solution to include such
advantages as fully integrated electronic document management and workflow
capabilities, real-time data collection, and wireless support for cellular
equipped portable data terminals.
Product Architecture and Development Strategy for the Series-II Engine
Commercial Off-the-shelf Technology. Indus Series-II utilizes
industry-standard tools and technologies to develop its products, allowing Indus
Software Solutions comprising this series to evolve along with rapidly emerging
standards. Series-II is largely platform independent, running on
industry-standard UNIX and Windows NT servers including the IBM RS/6000, HP
9000, Sun SPARCstation and Intel-based systems. Series-II architecture utilizes
the native functionality of the Oracle database with a graphical user interface
developed in PowerBuilder.
Partitioned Application Architecture. The layers of the Series-II
application architecture--the user interface, business logic, data storage,
workflow and browser interface--are interoperable but not interdependent. For
example, changes to the database layer are not dependent on the user interface.
The partitioning built into Series-II components minimize the Company's
dependence on third-party vendors and efficiently utilizes desktop computers,
"thin clients," servers and networks. The Company believes this architecture
reduces its exposure to the risks of technology or market shifts that require
changes in one or more of the layers, and enables rapid exploitation of
technology advances.
Object-oriented Design and Third-party Interoperability. The Company
develops its products through an object-oriented design and development
methodology by which software "objects" (i.e., collections of properties and
methods) are used as building blocks to model real-world business processes.
Further, the Series-II architecture is designed to be an open system with an
Application Program Interface ("API") that enables easy interoperability and
extension at the application level. The API is available to third party
developers to facilitate the integration of Indus Software Solutions with other
client/server applications. The Company believes object-oriented development has
several benefits including software reusability, which results in decreased
development expense and improved software quality, and component management,
which allows customers to implement and upgrade subsets of the application.
Flexible Network Technology. Series-II applications can be installed in a
network configuration to allow customers to take full advantage of client/server
technology with low cost and low maintenance "thin clients." Network-centric
implementation is attractive to clients concerned about the acquisition and
systems management expense associated with personal computers. Series-II's
efficient network architecture is particularly important to clients with
low-bandwidth networks, prevalent in developing markets, which require the
minimization of network traffic to support advanced client/server applications.
Implementation Methodology and Related Services
Indus Software Solutions are implemented through the Company's proprietary
ABACUS tools and implementation methodology. ABACUS consists of software-driven
analytical tools, implementation plans and educational resources that
5
<PAGE>
encapsulate the Company's extensive experience in implementing enterprise
management software solutions. ABACUS provides a step-by-step implementation
life cycle framework for all installation, integration, and education and
business review activities. In addition, ABACUS enhances the ongoing
effectiveness of Indus Software Solutions and assists customers in improving
their business processes.
ABACUS software tools use a time-sensitive and track-oriented approach to
help customers and the Company's business experts, technical specialists and
training professionals implement the Company's applications. In addition to
interactively identifying implementation procedures, ABACUS contains over 575
"best practice" examples of how such procedures were performed by other process
industry companies, drawn from the Company's extensive experience in
implementing enterprise asset management software solutions. The Company
currently licenses ABACUS software tools in conjunction with Indus Software
Solutions which includes the use of the ABACUS ToolKit, a version of the ABACUS
software that allows customers to tailor their internal project goals and
objectives with other corporate initiatives, modify implementation plans and
associated deliverables, supporting specific project/progress reporting, etc.
Versions of ABACUS products have been created to effectively address the
differences in approach and complexity between Series I & Series II architecture
as well as implementation requirements and best practice selections of interest
to specific vertical industries.
Indus Solution Series Workbenches
A series of best practice workbenches assist information engineers in the
development of business application systems and post-development implementation
support. From analytical designs and programming tools to data services
workbenches for data load and system interface exercises, data migration and
archiving; these productivity tools help the Company demonstrate rapid
development of high quality, highly functional applications on predictable
schedules and within established budgets.
The Company also licenses Indus Solution Series Workbenches to customers
desiring the ability to modify business applications to suit internal needs and
to perform system administration and maintenance over the application life
cycle.
Customer Support, Software Maintenance and Training
In addition to the standardized services offered through ABACUS, the
Company offers systems integration, customer support, software maintenance and
training through its regionally positioned professional services capability. The
Company provides systems integration and customer support on a time and
materials basis. The Company provides software maintenance for a fixed fee based
on the number and types of applications licensed.
To help track and coordinate customer support and service requirements, the
Company has employed a service product marketed as CareNet. This customer care
system used throughout the global support organization provides the customer
support team with a consistent approach towards an interactive help desk,
warranty support and post-implementation services which are widely used by its
customers. Experienced product specialists who have direct access to product
development teams and technology specialists' staff the help desk. A
computerized system is used to log, track, close and analyze all customer calls.
The Indus Institute, the Company's training division, designs, manages, and
implements comprehensive education and training solutions for its user
community. The Institute's team of training and technical professionals provides
instructional design and courseware development services, training coordination
support, train-the-trainer and end-user programs, computer based training
products, as well as technical training for customer installations worldwide. In
addition, the Company has developed a comprehensive set of training courseware,
which it uses to educate and train customers and internal staff. Subjects
covered by the courseware range from application product basics to conducting
business process reviews. Open enrollment training courses are provided at the
Company's training centers in San Francisco, Atlanta, Dallas, Pittsburgh, and
internationally in London, Paris and Brisbane. In addition, training is also
provided at customer sites at the customer's option.
Customers
The Company provides enterprise management software solutions to large
process industry customers primarily in the energy industry, continuous process
industries, industrial manufacturing and the public sector. Segments within
these capital intense markets include: electric and gas utilities,
telecommunications providers, petrochemical refineries, mining and metals,
forest products producers, transportation authorities, educational systems, and
governmental institutions.
As of December 31, 1997, the Company products were licensed for use by over
300,000 end-users representing 440 customers in 48 countries. No single customer
accounted for 10% or more of the Company's total revenues in 1997.
Sales and Marketing
<TABLE>
The corporate marketing function is organized into vertical business areas,
which comprise capital intense facilities and process industries targeted by the
Company. By segmenting the market into vertical business areas, the Company can
package and
6
<PAGE>
deliver its products and service offerings effectively to the industries it
serves. The vertical business segments comprising the market include:
<CAPTION>
The Energy Series
- -----------------
<S> <C>
Indus Solutions for the Addresses electric utilities with generating capacity comprised of fossil, hydro,
Power Generation Industry wind, solar or geothermal power generation. Power Generation addresses a trend in
the industry where disparate generation groups are being aggregated into a single
business unit within the utility structure.
Indus Solutions for the Recognizes the unique requirements of nuclear generating stations in the areas
Nuclear Power Industry. of special materials, heath physics, safety and nuclear regulatory reporting and
compliance issues.
Indus Solutions for Focuses on facilities maintained by the Department of Energy and others in
Managing Department of facilites management that serve large facility complexes, maintain high rise
Energy Facilities. facilities and the distributed needs of large consumer retailers, insurance
companies and other facility-intense organizations.
Indus Solutions for the Includes the Transmission and Distribution business units of utilities, couples
Energy Delivery Industry with the revenue cycle components from Customer Information Systems for electric,
gas, water utilities.
The Industry Series
- -------------------
Indus Solutions for the Comprised of the "upstream" companies charged with prospecting and developing new
Oil, Gas & Chemical oil and gas sources (both on and offshore), as well as "downstream" operating
Industry companies charged with refining, packaging and distribution processing.
Indus Solutions for Represents steel making, pulp and paper and others whose process involves moving
Integrated-Process Industries from crude raw materials through secondary operations to finished goods. Specific
packaged solutions in this series include:
Indus Solutions for the Mining & Metals Industry
Indus Solutions for the Forest Products Industry
Indus Solutions for Industrial Manufacturing
Indus Solutions for the Developed in cooperation with Oracle Corporation's complete Consumer Packaged
Consumer Packaged Goods Goods offering, the Enterprise Asset Management components of this best-of-breed
Industry solution are provided by the Company.
Indus Solutions for Special offerings of products and support reflecting the needs of maintenance and
the Public Sector repair operations within the Public Sector have been created. Specific packaged
solutions in the Public Sector Series include:
Indus Solutions for Transportation Authorities
Indus Solutions for Educational Systems
Indus Solutions for Municipal Government Facilities
</TABLE>
The Company markets and sells its products and services in three primary
areas of the world: The Americas, with direct sales representatives in the US,
Canada, and Argentina; Europe, the Middle East & Africa with direct sales
representatives in the UK and France, and Asia-Pacific with direct sales
representatives in Australia, Hong Kong, Singapore and the Philippines. In
addition to these direct marketing and sales resources, the Company utilizes
business partner relationships and channel partner programs directly and
indirectly in other parts of the world. As of December 31, 1997, the Company's
sales and marketing organization
7
<PAGE>
consisted of 102 employees. The marketing staff is based at the Company's
corporate headquarters in San Francisco, while the sales organization is
decentralized throughout the three theaters of operation.
The direct sales cycle begins with the generation of a sales lead, or the
receipt of a request for proposal from a prospect, which is followed by
qualification of the lead, an analysis of the customer's needs, response to a
request for proposal, one or more presentations to the customer utilizing the
special knowledge of the industry vertical pre-sales staff, customer internal
sign-off activities and contract negotiation and finalization. While the sales
cycle from customer to customer varies substantially, the sales cycle generally
requires three to nine months.
In support of its sales force, the Company conducts comprehensive
industry-specific vertical marketing programs which include public relations,
trade advertising, industry seminars, trade shows and on-going customer
communication programs through the IndusWorld, the Company's international user
group. In addition, the Company's Account Executive Program provides regional
support and specialized attention for each of its customers. Account Executives
assist in implementing licensed applications over multi-year engagements,
promote licensing of additional applications and encourage existing customers to
identify and help fund new applications.
Strategic Relationships
Through its alliance and channel partner programs, the Company intends to
continue to develop new products, to keep pace with the latest technological
developments, and to extend its marketing, sales and support efforts by building
synergy between the Company's products and services and those available from
complementary third party providers. The Company has entered into strategic
alliances and other formal and informal relationships with major software and
hardware vendors and with consulting firms, service providers and systems
integrators. Members of the Company's Alliance and Partner programs assist the
Company with sales and support activities and with product localization in
foreign countries.
Indus Alliance Program
The Indus Alliance Program is comprised of third party providers of
complementary software products, which interoperate with Indus Software
Solutions through integration products to provide additional license revenues
and services to the Company while delivering a broad suite of enterprise-wide
software capabilities. Membership in this program includes Oracle for corporate
financial systems, PeopleSoft for corporate financial, human resources and
payroll systems, Nuclear Fuels Services/Radiation Protection Systems for jointly
developed Nuclear Health Physics Systems marketed as Total Exposure, and
Identitech Corporation, maker of electronic document management and workflow
software. Other third party integration alliance partners are currently under
consideration by the Company.
Indus Partner Program
The Indus Partner Program consists of three classes of third party
providers including: Indus Service Partners (foreign and domestic), Indus
Solution Series Platform Partners, and partners in the Indus Extension Program.
Indus Service Partners include third-party consultants and system
integration firms, which help deliver the services required to implement Indus
Software Solutions. These recognized firms add specialty knowledge to assist in
training and reengineering services, help provide staffing levelization and
supply peak load project resources to the regional operators. These resources
assist in the delivery of ABACUS services on an as-needed basis. Domestically,
implementation partners include: Arthur Andersen, Coopers & Lybrand, Computer
Science Corporation, Deloitte & Touche Consulting Group, Solbourne Group,
Cimcorp, and The Application Group. International implementation partners
include: Enidata, Euriware, Gulf Data International, Innova, Maxon Engineering
Services, Inc., Eagle Technologies, SGA Integrators and PosData.
Indus Series Platform Partners are computer hardware providers and
operating system software providers that help the Company remain technologically
current and up to date with evolving releases of software and hardware upgrades.
Cooperative marketing, joint trade show participation and vendor fair
participation at the INDUSWORLDEXPO Annual Conference of the User Group are
extended to this cooperative group of vendors. The Company participates in the
Hewlett-Packard Channel Program, Digital Equipment's Business Partner Program,
the IBM Business Partner Program, Sun MicroSystems Alliance Program, as well as
Microsoft's Solution Provider Program and Oracle's Cooperative Applications
Initiative.
The Indus Extension Program is comprised of third party vendors offering
products, which provide value-added product extensions or specialty services,
taking Indus Solution Series data beyond the specified scope of the Company's
application systems. Both specialty hardware and specialty point solution
software vendors are recognized in this program which include offerings from:
Harbinger Corporation (Acquion, Inc.), Commerce One, Inc., Dolphin Software, DEI
Group, Future Horizons, Intermat, Meridium Corporation, Primavera, Tadcom, and
Telxon Corporation. The Company's solutions for the Energy Delivery Industry,
the AM/FM/GIS solutions interoperate with products from Intergraph, SHL Vision
and Smallworld Corporation.
8
<PAGE>
Research and Development
The Company has a dedicated research and development and engineering
organization and regularly releases new products and enhancements to existing
products. Research and development efforts are directed at increasing product
functionality, improving product performance and expanding the capabilities of
the products to interoperate with selected third-party software products
available from its alliance partners such as Oracle, PeopleSoft and others.
These efforts include developing new applications that address new functions,
both horizontal function as well as new targeted vertical market function,
designed to enhance to the intellectual property content of the Company's
offerings and ensure that the products remain best-of-class.
The Company believes that research and development is most effectively
accomplished if customers are involved in the process. Through direct customer
involvement and consensus input from user group oversight committees, InSight
and InFocus, product content is improved and the customer acceptance threshold
usually associated with new software deployment significantly lowered. In
addition, the interactive development process promotes increased customer
awareness of the technological features of the product and fosters greater
product loyalty.
There can be no assurance that the Company will be successful in developing
and marketing product enhancements or new products that respond to technological
change, changes in customer requirements, or emerging industry standards, that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of such products and
enhancements, or that any new products or enhancement that it may introduce will
achieve market acceptance. The inability of the Company, for technological or
other reasons, to develop and introduce new products or enhancements in a timely
manner in response to changing customer requirements, technological change or
emerging industry standards, would have a material adverse effect on the
Company's business or results of operations.
As of December 31, 1997, the Company had 261 employees engaged in research
and development. The Company's research and development expenses were
approximately $18.1 million, $23.3 million and $27.7 million in 1995, 1996 and
1997 respectively. Development costs funded by customers as part of license and
service contracts are included as part of cost of revenues.
Competition
The enterprise asset management software solutions market is highly
competitive, rapidly changing and significantly affected by new product
introductions and other market activities of industry participants. The
Company's primary competition stems from companies offering enterprise asset
software solutions, vendors offering partial solutions and suppliers of
departmental systems (primarily LAN-based). The Company's competitors include
SAP Aktiengesellschaft ("SAP"), the Company's principal competitor, and other
software vendors such as Mincom Corp., Project Software & Development, Inc., and
DataStream, Inc. In the future, the Company may face competition from its
Alliance Partners. In the electric utility market, the Company faces competition
from suppliers of energy delivery applications, including Severn Trent Systems
and Synercom.
In addition, the Company faces indirect competition from suppliers of
custom-developed business applications software that have focused largely on
proprietary mainframe and minicomputer-based systems with highly customized
software, such as the systems consulting groups of major accounting firms and
systems integrators. The Company also faces indirect competition from systems
developed by the internal MIS departments of large organizations.
Many of the Company's competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition, and a larger installed base of
customers than the Company. In addition, certain competitors, including SAP,
have well-established relationships with customers of the Company and with
accounting and consulting firms that may have an incentive to recommend such
competitors over the Company. Furthermore, as the enterprise management software
solutions market for process industries expands, companies with significantly
greater resources than the Company could attempt to increase their presence in
this market by acquiring or forming strategic alliances with competitors of the
Company.
The principal competitive factors affecting the market for the Company's
software products are responsiveness to the needs of capital intensive
industries, product functionality and ease of use, speed of implementation,
product architecture, quality and reliability, vendor and product reputation,
quality of customer support and price. Based on these factors, the Company
believes that it has competed effectively to date. In order to be successful in
the future, the Company must continue to respond promptly and effectively to the
challenges of technological change and its competitors' innovations by
continually enhancing its own product offerings. There can be no assurance,
however, that the Company's products will continue to compete favorably or that
the Company will be successful in the face of increasing competition from new
products and enhancements introduced by existing competitors or new companies
entering this market.
9
<PAGE>
Proprietary Rights and Licensing
The Company relies on a combination of the protections provided under
applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing arrangements to establish and protect
its rights in its software. Despite the Company's efforts, it may be possible
for unauthorized third parties to copy certain portions of the Company's
products or to reverse engineer or obtain and use information that the Company
regards as proprietary. In addition, the laws of certain countries do not
protect the Company's proprietary rights to the same extent, as do the laws of
the United States. Furthermore, the Company has no patents, and existing
copyright laws afford only limited protection. Accordingly, there can be no
assurance that the Company will be able to protect its proprietary software
against unauthorized third party copying or use, which could adversely affect
the Company's competitive position.
The Company licenses its applications to customers under license
agreements, which are generally in standard form, although each license is
individually negotiated and may contain variations. The standard form agreement
allows the customer to use the Company's products solely on the customer's
computer equipment for the customer's internal purposes, and the customer is
generally prohibited from sub-licensing or transferring the applications. The
agreements generally provide that the Company's warranty for its products is
limited to correction or replacement of the affected product, and in most cases
the Company's warranty liability may not exceed the licensing fees from the
customer. The Company's form agreement also includes a confidentiality clause
protecting proprietary information relating to the licensed applications.
The Company's products are generally provided to customers in object code
(machine-readable) format only. From time to time, in limited circumstances, the
Company has licensed source code (human-readable form) subject to customary
protections such as use restrictions and confidentiality agreements. In
addition, customers can be beneficiaries of a master source code escrow for the
applications, pursuant to which the source code will be released to end users
upon the occurrence of certain events, such as the commencement of bankruptcy or
insolvency proceedings by or against the Company, or certain material breaches
of the agreement. The Company has the right to object to the release of the
source code in such circumstances, and to submit the matter to dispute
resolution procedures. In the event of any release of the source code from
escrow, the customer's license is limited to use of the source code to maintain,
support and configure the Company applications.
The Company may from time to time receive notices from third parties
claiming infringement by the Company's products of proprietary rights of others.
As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software developers may become increasingly subject to infringement claims. Any
such claims, with or without merit, can be time consuming and expensive to
defend or could require the Company to enter into royalty and licensing
agreements. Such agreements, if required, may not be available on terms
acceptable to the Company, or at all.
Employees
As of December 31, 1997, the Company employed 896 people, of which 261 were
primarily engaged in research and development activities, 466 in post-sales
support and customer project operations, 102 in sales and marketing, and 67 in
administration and finance. None of the Company's employees are represented by a
labor union. The Company has experienced no work stoppages and believes that its
relationship with its employees is excellent.
The Company's future success depends, in large part, on the continued
service of its key management, sales, product development and operational
personnel and on its ability to attract and retain highly qualified employees,
including management personnel. There can be no assurance that the Company will
be successful in attracting, retaining and motivating key personnel.
Executive Officers
<TABLE>
The executive officers of the Company as of December 31, 1997 are as
follows:
<CAPTION>
Name of Nominee Age Principal Occupation
<S> <C> <C>
Robert W. Felton............................... 59 Chief Executive Officer and Chairman of the Board
Christopher R. Lane............................ 42 President of Strategy and Product Development and Vice
Chairman of the Board
John W. Blend, III............................. 51 President of Worldwide Sales and Marketing and Director
Richard W. MacAlmon............................ 48 Senior Vice President and Director
Frank M. Siskowski............................. 50 Chief Financial Officer and Executive Vice President of
Investor Relations
</TABLE>
A biography, including the principal occupations for the past five years of
each of the executive officers, is provided below. There is no family
relationship between any executive officer of the Company.
10
<PAGE>
Mr. Felton is a founder of The Indus Group, Inc. and has been the Chief
Executive Officer and Chairman of the Board of Directors since the consummation
of the Merger on August 25, 1997. From 1988 until August 25, 1997, he was the
Chairman, President and Chief Executive Officer of The Indus Group, Inc.
Mr. Lane has served as the President of Strategy and Product Development
and Vice Chairman of the Board of Directors since the consummation of the Merger
on August 25, 1997. From May 1994 to August 25, 1997, he served as President of
TSW International, Inc. and was Chief Executive Officer since June 1994, and a
director since 1993. From June 1994 to July 1996, he served as Chairman of the
Board of TSW International, Inc. Prior to joining TSW International, Inc. in May
1994, he served as a Vice President at E.M. Warburg, Pincus & Co., Inc., a
diversified financial services firm ("EMW Inc."), from 1993 to 1994. From 1987
to 1993, he held various positions at Oracle Corporation, a provider of software
for information management ("Oracle"), in both the United States and Europe. Mr.
Lane developed Oracle's strategic market divisions in the United Kingdom, was
Vice President of its U.S. consulting business and was responsible for European
product development.
Mr. Blend has as served as the President of Worldwide Sales and Marketing
and a director since the consummation of the Merger on August 25, 1997. From
1986 to August 25, 1997, he served as TSW International, Inc.'s Executive Vice
President, Worldwide Distribution. He also served as a director of TSW
International, Inc. since 1987. Prior to joining TSW International, Inc., he
served as Area Vice President for the eastern field operations of HBO & Company,
a provider of enterprise-wide patient care, clinical, financial and strategic
management software solutions, from 1980 to 1985. Prior to his tenure at HBO &
Company, he was employed in various positions by IBM Corporation; a provider of
customer solutions through the use of advanced information technologies.
Mr. MacAlmon is a founder of The Indus Group, Inc. and has been a Senior
Vice President and director since the consummation of the Merger on August 25,
1997. Prior to August 25, 1997, he served as Vice President of Marketing and as
a director of The Indus Group, Inc. since January 1990 and a Senior Vice
President of The Indus Group, Inc. since June 1995. From January 1988 to
December 1989, Mr. MacAlmon served as a Product Developer for The Indus Group,
Inc.
Mr. Siskowski has served as Chief Financial Officer and Executive Vice
President of Investor Relations since the consummation of the Merger August 25,
1997. Prior to August 25, 1997, he served as Senior Vice President and Chief
Financial Officer of The Indus Group, Inc. since September 1996. From July 1991
to September 1996, Mr. Siskowski served as Senior Vice President and Controller
of VISA International. From January 1983 to July 1991, he served as Vice
President and Controller of MCI Telecommunications and Chief Financial and
Administrative Officer of the Pacific Division of MCI Communications
Corporation.
Risk Factors
This report contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements have been made pursuant to the
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934, including without limitation statements
regarding the Company's expectations, beliefs, intentions, plans or strategies
regarding the future. Unless required by law, the Company assumes no obligation
to update any such forward-looking statements. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth below and
elsewhere in this report.
Risks Relating to the Merger
Integration of Operations. The Merger of The Indus Group, Inc. and TSW
International, Inc. has been consummated with the expectation that the merger
will result in beneficial synergistic effects for the Combined Company. The
combination of the two companies involves, among other things, integration of
the companies' respective product offerings and coordination of their research
and development efforts. The difficulties of integration include the necessity
of coordinating geographically separated organizations and integrating personnel
with disparate business backgrounds. Failure to effectively complete the
integration of the two companies' operations would have a material adverse
effect on the Company's business, operating results and financial condition.
Volatility of Quarterly Operating Results
History of TSW International, Inc. Losses. Although TSW International,
Inc.'s total revenue has increased in each of the last five fiscal years, TSW
International, Inc. has experienced operating and net losses for fiscal 1994 and
1995 and a net loss for fiscal 1996. Such losses resulted primarily from costs
incurred in connection with the development and introduction of TSW
International, Inc.'s client/server Asset Care system, Enterprise MPAC
("EMPAC"), purchasing delays by customers in anticipation of the introduction of
EMPAC, and, to a lesser extent, costs associated with the expansion of TSW
International, Inc.'s international operations. There can be no assurance that
the Company will be able to achieve or sustain profitability in the future.
11
<PAGE>
Fluctuating Operating Results. The Company's operating results have
fluctuated in the past, and the Company's results may fluctuate significantly in
the future depending on a number of factors, including (i) the relatively long
sales cycles for their products, (ii) the variable size and timing of individual
license transactions, (iii) changes in demand for their 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
each such company or its competitors, (vii) their success in and costs
associated with developing and introducing new products, (viii) product life
cycles, (ix) variability in new licenses obtained, (x) changes in the proportion
of revenues attributable to license fees versus services, (xi) changes in the
level of operating expenses, (xii) delay or deferral of customer implementations
of their software, (xiii) software defects and other product quality problems,
and (xiv) other economic conditions generally or in specific process industry
segments. Further, the purchase of the Company's products generally involves a
significant commitment of capital, with the attendant delays frequently
associated with large capital expenditures and authorization procedures within
large organizations. For these and other reasons, the sales cycles for the
Company's products are typically lengthy and subject to a number of significant
risks over which each such company has little or no control, including
customers' budget constraints and internal authorization reviews. In addition,
delays in the completion of a product implementation may require that the
revenues associated with such implementation be recognized over a longer period
than originally anticipated. Such delays in the implementation or execution of
orders have caused, and may in the future cause, material fluctuations in the
Company's operating results. Similarly, customers may cancel implementation
projects at any time without penalty, and such cancellations 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.
Additional factors that may contribute to future fluctuations in the
Company's quarterly operating results include, but are not limited to: (i)
development and introduction of new operating systems that require additional
development efforts; (ii) introduction or enhancement of products by the Company
or its competitors; (iii) changes in pricing policies of the Company or its
competitors; (iv) increased competition; (v) technological changes in computer
systems and environments; (vi) the ability of the Company to timely develop,
introduce and market new products; (vii) quality control of products sold;
(viii) market acceptance of new products and product enhancements; (ix) the
Company's success in expanding its sales and marketing programs; (x) personnel
changes; (xi) foreign currency exchange rates; (xii) mix of products sold;
(xiii) acquisition costs; and (xiv) general economic conditions.
Management of Growth; Dependence on Key Personnel
The Company's business has grown rapidly in recent periods, with total
revenues increasing from $101.8 million in 1995 to $143.0 million in 1996 and
$177.0 million in 1997. The growth of the Company's business and expansion of
customer base has placed a strain on management and operations. The recent
expansion has also resulted in substantial growth in the number of its
employees, the scope of its operating and financial systems and the geographic
area of its operations, resulting in increased responsibility for management
personnel. These strains on systems and resources have been exacerbated as a
result of the process of integrating the constituent companies as a result of
the Merger.
In the future, the Company will be required to continue to improve its
financial and management controls, reporting systems and procedures on a timely
basis and to expand, train and manage its employee work force. There can be no
assurance that the Company will be able to effectively manage such growth. Its
failure to do so would have a material adverse effect on its business, operating
results and financial condition. Competition for qualified sales, technical and
other personnel is intense, and there can be no assurance that the Company will
be able to attract, assimilate or retain additional highly qualified employees
in the future. If the Company were unable to hire and retain such personnel,
particularly those in key positions, its business, operating results and
financial condition would be materially adversely affected. The Company's future
success also depends in significant part upon the continued service of its key
technical, sales and senior management personnel. The loss of the services of
one or more of this key employees could have a material adverse effect on its
business, operating results and financial condition. Additions of new and
departures of existing personnel, particularly in key positions, can be
disruptive and have a material adverse effect on the Company's business,
operating results and financial condition.
Intense Competition
The enterprise management software solutions business is highly
competitive, rapidly changing and significantly affected by new product
introductions and other market activities of industry participants. The
Company's primary competition stems from companies offering enterprise software
solutions, vendors offering partial solutions and suppliers of departmental
systems (primarily LAN-based). The Company's competitors include SAP, and other
software vendors such as Mincom Corp. and Project Software & Development, Inc.,
firms that provide software products to electric utilities such as Severn Trent
Systems and Synercom, and many other firms. In the future, the Company may also
face competition from Oracle, PeopleSoft and SPL WorldGroup B.V., through which
it has developed or is developing PassBook integration products to provide
interoperability with Oracle's corporate financial applications, PeopleSoft's
corporate financial, payroll and human resources applications and SPL
WorldGroup's customer information applications. In addition, the Company faces
competition from suppliers of custom-developed business application software
that have focused largely on proprietary mainframe- and microcomputer-based
systems
12
<PAGE>
with highly customized software, such as the systems consulting groups of major
accounting firms and systems integrators. The Company also faces competition
from systems developed by the internal MIS departments of large organizations.
The businesses in which the Company competes are intensely competitive and
rapidly changing and, in order to compete, the Company will have to enhance
current products and develop new products in a timely fashion. Management
believes that the principal competitive factors in the Company's businesses will
be product performance and functionality, cost of internal product development
as compared with cost of purchase of products supplied by outside vendors, cost
of on-going maintenance and time-to-market. Many of the Company's competitors
will have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company. The Company's success will also depend significantly on its ability
to develop more advanced products more quickly and less expensively than its
existing competitors and potential competitors and to educate potential
customers of the benefits of licensing the Company's products rather than
developing their own products. The Company's current and future competitors
could introduce products with more features, greater functionality and lower
prices than the Company's products. These competitors could also bundle existing
or new products with other, more established products in order to compete with
the Company. In addition, because there are relatively low barriers to entry for
the software market, the Company expects additional competition from other
established and emerging companies. Increased competition is likely to result in
price reductions, reduced gross margins and loss of sales volume, any of which
could materially and adversely affect the Company's business, operating results
and financial condition. Any material reduction in the price of the Company's
products would negatively affect its gross revenues and could have a material
adverse effect on its business, operating results and financial condition. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors, and the failure to do so would have a
material adverse effect upon the Company's business, operating results and
financial condition.
Risk of Successfully Integrating Current and Future Products and Technologies.
The Company's product strategy is initially to integrate selected products
and technologies to enhance enterprise management solutions and to integrate
certain products throughout its entire product line through the availability of
a common set of services. Such product and technology integration activities
have begun but a schedule has not been determined. The success of this strategy
is dependent in significant part on the Company's ability to integrate its
products as planned and the resultant products achieving market acceptance by
end users. No assurance can be given that the Company will successfully
integrate its products as planned. If the Company is unable to develop and
introduce new integrated products and technologies, or enhancements to existing
products, in a timely manner, its business, operating results and financial
condition would be materially and adversely affected.
Rapid Technological Change; Need to Develop New Products; Requirement for
Frequent Product Transitions
The industries in which the Company participates are intensely competitive
and characterized by rapid technological change, evolving industry standards in
computer hardware and software technology changes in customer requirements and
frequent new product introductions and enhancements. The introduction of
products embodying new technologies, the emergence of new standards or changes
in customer requirements could render the Company's existing products obsolete
and unmarketable. As a result, the Company's success will depend in part upon
its ability to continue to enhance existing products and expand its products,
continue to provide enterprise solutions and develop and introduce new products
that keep pace with technological developments, satisfy increasingly
sophisticated customer requirements and achieve customer acceptance. Customer
requirements include, but are not limited to, product operability and support
across distributed and changing heterogeneous hardware platforms, operating
systems, relational databases and networks. There can be no assurance that the
Company's products will achieve customer acceptance or will adequately address
the changing needs of the marketplace or that the Company will be successful in
developing and marketing enhancements to its existing products or new products
incorporating new technology on a timely basis. The Company has in the past
experienced delays in product development, and there can be no assurance that
the Company will not experience further delays in connection with its current
product development or future development activities. If the Company is unable
to develop and introduce new products, or enhancements to existing products, in
a timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially and adversely affected. Because the Company has limited
resources, the Company must effectively manage and properly allocate and
prioritize its product development efforts and its porting efforts relating to
newer products and operating systems. There can be no assurance that these
efforts will be successful or, even if successful, that any resulting products
or operating systems will achieve customer acceptance.
International Operations
International revenue (from sales outside the United States, Canada and
Mexico) accounted for approximately 18%, 20% and 14% of total revenues in 1995,
1996 and 1997, respectively. The Company maintains an operational presence in
the United Kingdom and France with the acquisition of SQL Systems International
plc, in October 1994 and an 80% equity interest in, Socotec Maintenance
Services, in July 1995. In addition, the Company has established sales and
support offices in Europe, Australia and Asia; and expects international sales
to continue to become a more significant component of its business.
International expansion may require the Company to establish additional foreign
operations and hire additional personnel. This
13
<PAGE>
may require significant management attention and financial resources and could
adversely affect the Company's operating margin. To the extent the Company is
unable to effect these additions efficiently and in a timely manner, its growth,
if any, in international sales will be limited, and its business, operating
results and financial condition could be materially and adversely affected.
There can be no assurance that the Company will be able to maintain or increase
international market demand for its products.
The Company's international business will also involve a number of
additional risks, including lack of acceptance of localized products, cultural
differences in the conduct of business, longer accounts receivable payment
cycles, greater difficulty in accounts receivable collection, seasonality due to
the slow-down in European business activity during the Company's third fiscal
quarter, unexpected changes in regulatory requirements and royalty and
withholding taxes that restrict the repatriation of earnings, tariffs and other
trade barriers, and the burden of complying with a wide variety of foreign laws.
The Company's international sales will be generated primarily through its
international sales subsidiaries and are expected to be denominated in local
currency, creating a risk of foreign currency translation gains and losses. To
the extent profit is generated or losses are incurred in foreign countries, the
Company's effective income tax rate may be materially and adversely affected. In
some markets, localization of the Company's products will be essential to
achieve market penetration. The Company may incur substantial costs and
experience delays in localizing its products, and there can be no assurance that
any localized product will ever generate significant revenue. There can be no
assurance that any of the factors described herein will not have a material
adverse effect on the Company's future international sales and operations and,
consequently, its business, operating results and financial condition.
Recent economic trends, particularly in the Asia-Pacific marketplace, have
caused a heightened awareness of the impact this portion of the world's economy
can have on the overall economy. As the Asia-Pacific market currently represents
almost one-third of the worlds buying power and approximately 4% of the
Company's revenues are to this region, changes in this area's economic growth
rate may impact suppliers of product into that market. While the actual
magnitude of the business at risk is unknown, it is likely that capital spending
in this market will decrease and thus, the Company's ability to increase
revenues in this region may be negatively impacted.
Dependence on Proprietary Technology; Risks of Infringement
The Company's success is heavily dependent upon its proprietary technology.
The Company will rely on a combination of the protections provided under
applicable copyright, trademark and trade secret laws, confidentiality
procedures and licensing arrangements, to establish and protect its proprietary
rights. As part of its confidentiality procedures, the Company will generally
enter into non-disclosure agreements with its employees, distributors and
corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for unauthorized third parties to copy certain portions of the
Company's products or to reverse engineer or obtain and use information that the
Company regards as proprietary the Company's products or technology without
authorization, or to develop similar technology independently. Moreover, the
laws of certain countries do not protect the Company's proprietary rights to the
same extent, as do the laws of the United States. Furthermore, the Company has
no patents, and existing copyright laws afford only limited protection. The
Company will make source code available for certain of its products and the
provision of such source code may increase the likelihood of misappropriation or
other misuses of the Company's intellectual property. Accordingly, there can be
no assurance that the Company will be able to protect its proprietary software
against unauthorized third party copying or use, which could adversely affect
the Company's competitive position.
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance that a third party will not
assert that the Company's technology violates its patents in the future. As the
number of software products in the industry increases and the functionality of
these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend or could require
the Company to enter into royalty and licensing agreements. Such claims might
require the Company to enter into royalty or license agreements. Such royalty or
license agreements, if required, may not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
Lengthy Sales and Implementation Cycle; Large Order Size
The purchase and implementation of the Company's software solutions by a
customer will generally involve a significant commitment of capital over a long
period of time, with the risk of delays frequently associated with large capital
expenditures and implementation procedures within an organization, such as
budgetary constraints and internal approval review. During the sales process,
the Company may devote significant time and resources to a prospective customer,
including costs associated with multiple site visits, product demonstrations and
feasibility studies, and experience significant delays over which the Company
will have no control. In addition, following license sales, the implementation
of the Company's products will involve a lengthy process, including customer
training and consultation. A successful implementation will require a close
working relationship between the Company, the customer and, if applicable, third
party consultants and systems integrators who assist in the process. These
factors may increase the costs associated with completion of any given sale, and
risks of cancellation or delay of such sales.
14
<PAGE>
Dependence on Licensed Technology
Elements of the Company's products, particularly in its EMPAC workflow
engine, are licensed from third parties under license agreements. The loss of
the Company's right to use and license such technology could limit the Company's
ability to successfully market certain modules of EMPAC. While the Company
believes that the it would be able to either license or develop alternatives to
such component technologies, there can be no assurance that the Company would be
able to do so, or that such alternatives would achieve market acceptance or be
available on a timely basis. Failure to obtain the necessary licenses or to
develop needed technologies could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on Third Parties
Implementation and development of EMPAC software depends on proprietary
technology licensed from third parties. Implementation of EMPAC requires the use
of the Windows environment licensed from Microsoft Corporation. The introduction
and increased market acceptance of operating systems that are incompatible with
the Company's products, or the failure of Microsoft's operating systems to
achieve continued market acceptance, could adversely affect the market for the
Company's products. EMPAC also relies on certain proprietary features of the
database management system developed by Oracle. The introduction and increased
market acceptance of database management systems that are incompatible with the
Company's products, or the failure of Oracle products to achieve continued
market acceptance, could adversely affect the market for the Company's products.
In addition, certain elements of EMPAC have been developed in PowerBuilder, a
client/server development product that has been traditionally database
independent. Sybase, Inc. acquired Powersoft Corporation, which licenses
PowerBuilder, in 1994. If PowerBuilder does not continue to be database
independent, future development of the Company's Windows-based components which
operate in conjunction with the Oracle database management system may be
adversely affected. Although the Company's strategy has been to develop software
products that are minimally dependent on any particular element of the
underlying platform, there can be no assurance that the Company will be able to
avoid the obsolescence of its products due to rapid technological change and
evolving industry standards.
Risk of Software Defects; Product Liability
The sale and support of the Company's products may entail the risk of
product liability claims. The license agreements of the Company typically
contain provisions designed to limit exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in such license agreements may not be effective as a result of
federal, state or local laws or ordinances or unfavorable judicial decisions. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Past and Future Acquisitions.
The Company, as well as its predecessor corporations, The Indus Group, Inc.
and TSW International, Inc. have made acquisitions in the past. Acquisitions of
companies, divisions of companies or products entail numerous risks, including
difficulty in successfully assimilating acquired operations, diversion of
management's attention and loss of key employees of acquired companies. In 1997,
The Indus Group, Inc. has completed two acquisitions. In 1994 and 1995, TSW
International, Inc. concluded a total of three acquisitions of companies,
divisions of companies or products. The Company may make additional acquisitions
in the future. Products acquired by The Indus Group, Inc. and TSW International,
Inc. in the past required significant additional development before they could
be marketed and some failed to generate any revenue for The Indus Group, Inc. or
TSW International, Inc. Any problems related to acquisitions could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, future acquisitions by the Company may result
in dilutive issuance of equity securities, incurring additional debt, large
one-time write-offs and the creation of goodwill or other intangible assets that
could result in amortization expense. These factors could have a material
adverse effect on the Company's business, operating results and financial
condition.
15
<PAGE>
ITEM 2. PROPERTIES
<TABLE>
Certain information concerning the Company's office space at December 31,
1997 is set forth below:
<CAPTION>
Location Principal use Footage Ownership
------------------------------------- ------------------------------------ -------------- ----------------
<S> <C> <C> <C>
Domestic Offices:
Atlanta, GA...................... Regional Headquarters, Research 107,650 Lease
and Development, Sales and
Marketing, Operations
San Francisco, CA................ Corporate Headquarters, Research 66,678 Lease
and Development, Sales and
Marketing, Operations
Pittsburgh, PA................... Regional Operations 28,261 Lease
Dallas, TX....................... Regional Operations 9,041 Lease
Lake Oswego, OR.................. Regional Operations 5,507 Lease
Malvern, PA...................... Regional Operations 4,075 Lease
Other executive offices.......... Sales 3,455 Lease
International Offices:
Woking, Surrey, United Kingdom... Regional Operations 9,300 Lease
Richmond, United Kingdom......... Regional Operations 7,779 Lease
Brisbane......................... Regional Operations 6,695 Lease
Chertsey, Surrey, United Kingdom. Regional Operations 5,500 Lease
Singapore........................ Regional Operations 807 Lease
Executive offices in Asia Pacific Sales 1,840 Lease
</TABLE>
In the first quarter of 1998, the Company entered into additional lease
agreements for additional office space, in Singapore, France and Canada of
3,305, 6,660 and 1,600 square feet, respectively. Management is currently and
will continue to evaluate additional leased facilities to accommodate the
anticipated growth in operations for 1998. The company owns substantially all of
the equipment used in its facilities.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings incidental
to the conduct of its business. While the outcome of these claims cannot be
predicted with certainty, the Company does not believe that the litigation,
individually or in the aggregate, to which it is currently a party is likely to
have a material adverse effect on the results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq
National Market under the symbol "IINT". The table sets forth the high and low
closing prices of the Company's common stock for the periods indicated.
Information included in the table for the periods prior to the consummation of
the Merger on August 25, 1997 reflect the stock prices of the common stock of
The Indus Group, Inc., the Company's predecessor issuer, which was traded on the
Nasdaq National Market under the symbol "IGRP" commencing on February 29, 1996,
the date of its initial public offering.
High Low
---- ---
Fiscal 1996
First Quarter........................... $ 22-3/4 $ 18
Second Quarter.......................... 21-1/2 17
Third Quarter........................... 21-1/4 15-3/4
Fourth Quarter.......................... 25-3/4 18-7/8
Fiscal 1997
First Quarter........................... 25-3/4 14
Second Quarter.......................... 20-1/4 13-1/2
Third Quarter........................... 19-3/4 15-3/8
Fourth Quarter.......................... 17-3/4 6-1/2
The Company anticipates that any future earnings will be retained to
finance the continuing development of its business. The Company has not declared
or paid any cash dividends on its Common Stock and does not anticipate paying
cash dividends in the foreseeable future.
The number of stockholders of record for the Company's common stock as of
March 11, 1998 was 288.
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial information of the Company is qualified by
reference to and should be read in conjunction with the financial statements and
notes thereto and other financial information included elsewhere herein. During
1997, The Indus Group, Inc. entered into an agreement and plan of merger and
reorganization with TSW International, Inc. The Merger was consummated on August
25, 1997 and has been accounted for as a pooling-of-interests. All financial
information has been restated to reflect the combined operations of The Indus
Group, Inc. and TSW International, Inc. The consolidated statements of
operations data for the years ended December 31, 1995, 1996, and 1997 and
consolidated balance sheet data as of December 31, 1996 and 1997 are derived
from and qualified by reference to the audited financial statements of the
Company and are included elsewhere herein. The consolidated balance sheet data
as of December 31, 1993, 1994 and 1995 and the consolidated statement of
operations for the years ended December 31, 1993 and 1994 are derived from the
audited financial statements of the Company which are not included herein.
17
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
Statement of operations data: 1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licensing fees (1) (2) ...................... $ 14,961 $ 15,380 $ 32,816 $ 43,060 $ 55,958
Services and maintenance ............................. 34,751 41,901 67,824 97,515 119,382
Other revenue ........................................ 2,729 824 1,184 2,463 1,694
--------- --------- --------- --------- ---------
Total revenues ..................................... $ 52,441 $ 58,105 $ 101,824 $ 143,038 $ 177,034
Cost of revenues ........................................ 23,458 27,664 47,872 63,738 78,575
--------- --------- --------- --------- ---------
Gross margin ............................................ $ 28,983 $ 30,441 $ 53,952 $ 79,300 $ 98,459
--------- --------- --------- --------- ---------
Operating expenses:
Research and development ............................ 11,263 19,063 18,151 23,265 27,664
Sales and marketing .................................. 8,412 13,084 19,915 26,523 33,568
General and administrative ........................... 5,959 10,352 12,996 14,951 14,991
Compensation charge-stock options (3) ................ -- -- 18,900 -- --
Merger and restructuring expenses(4) ................. -- -- -- -- 12,083
--------- --------- --------- --------- ---------
Total operating expenses ........................... $ 25,634 $ 42,499 $ 69,962 $ 64,739 $ 88,306
--------- --------- --------- --------- ---------
Income (loss) from operations ........................... $ 3,349 $ (12,058) $ (16,010) $ 14,561 $ 10,153
Other income (expense) net .............................. 80 (783) (2,112) (1,887) (1,968)
--------- --------- --------- --------- ---------
Income (loss) before taxes .............................. $ 3,429 $ (12,841) $ (18,122) $ 12,674 $ 8,185
Provision (benefit) for income taxes .................... 187 (1,195) 423 6,849 6,408
Cumulative effect of deferred income taxes
provided upon conversion by Indus to C
Corporation(5) .......................................... -- -- -- 6,700 --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ................. 3,242 (11,646) (18,545) (875) 1,777
Extraordinary item ...................................... -- -- -- -- (787)
--------- --------- --------- --------- ---------
Net Income (loss) ....................................... $ 3,242 $ (11,646) $ (18,545) $ (875) $ 990
========= ========= ========= ========= =========
Pro forma statement of operations as adjusted:
Income (loss) before income taxes .................... $ (18,122) $ 12,674
Add back portion of compensation charge-stock
options (3) .......................................... 17,900 --
--------- ---------
Income (loss) before income taxes, as adjusted ...... $ (222) $ 12,674
Provision for income taxes (federal, state
and foreign) (5) ..................................... 5,181 6,849
--------- ---------
Pro forma net income (loss) .......................... $ (5,403) $ 5,825
========= =========
Income (loss) per share (computed on pro forma
net income (loss) in 1995 and 1996) ..................... $ (0.25) $ 0.22 $ 0.03
========= ========= =========
Shares used in computing per share data ................. 22,027 25,976 28,574
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
Balance sheet data: 1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital .................................. $ 9,235 $ 226 $ (291) $ 43,064 $ 37,238
Total assets ..................................... 25,984 39,857 57,734 117,855 136,725
Short-term debt .................................. 2,331 4,496 16,481 16,951 29,054
Long-term debt ................................... 249 665 1,222 2,126 1,105
Subordinated long-term notes ..................... -- 9,650 16,251 18,065 --
TSW redeemable preferred stock ................... 8,100 11,100 13,100 18,100 --
Total stockholder's equity ....................... 6,972 (11,846) (20,473) 20,666 70,230
<FN>
(1) Effective in the third quarter of 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,
continued to recognize the applicable portion of license fees as earned
upon shipment of standard software products to customers.
(2) TSW International, Inc. began recognizing license fee revenue from EMPAC in
the quarter ended December 31, 1995, when EMPAC first became operational at
a customer site.
18
<PAGE>
(3) Reflects nonrecurring expense incurred in the third quarter of 1995 in
connection with an amendment to The Indus Group's 1992 Stock Option Plan to
accelerate the exercisability of outstanding stock options, which had
previously been contingent upon the occurrence of certain events. The pro
forma adjustment of $17,900,000 is to reduce 1995 compensation expense to
the amount related to options granted in 1995 only. See Note 1 and Note 9
of the Notes to the Consolidated Financial Statements.
(4) See Note 1 of the Notes to the Consolidated Financial Statements for an
explanation of the merger and restructuring expenses.
(5) Prior to January 1, 1996, The Indus Group, Inc. was not subject to federal
corporate income taxation because of its election to be taxed under the
provisions of Subchapter S of the Code. Pro forma net income for 1995 has
been determined by assuming that the Company had been taxed as a C
Corporation for 1995. Pro forma net income for 1996 reflects the
elimination of a nonrecurring charge for the cumulative effect of deferred
income taxes incurred in the first quarter of 1996 in connection with the
termination of The Indus Group's S Corporation status. See Note 1 to the
Consolidated Financial Statements.
(6) There were no material transactions between The Indus Group, Inc. and TSW
International, Inc. prior to the consummation of the merger on August 25,
1997.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's 1997 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
section entitled "Consolidated Financial Statements" in the Company's 1997
Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14(a) (the "Proxy Statement") not later that 120 days after the end
of the fiscal year covered by this Report and certain information included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement that specifically address the items set forth herein are incorporated
by reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's Directors required by this Item is
incorporated by reference to the information contained under the captions
"Election of Directors-Nominees" and "Section 16(a) Beneficial Ownership
Compliance" in the Proxy Statement. The information concerning the Company's
officers required by this Item is included in the Section in Part I hereof
entitled "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the Company's Executive Officers required by
this Item is incorporated by reference to the information contained under the
captions "Proposal One - Election of Directors - Director Compensation and
Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership required by this Item is
incorporated by reference to the information contained under the caption
"Security Ownership of Management; Principal Stockholders" in the Proxy
Statement.
19
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained under the caption "Certain Transactions with Management"
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. The following documents are filed as a part of this Report:
1. Financial Statements: The following Consolidated Financial Statements
of Indus International, Inc. and Report of Ernst & Young LLP,
Independent Auditors, are incorporated by reference to the section
entitled "Consolidated Financial Statements" of the Registrant's 1997
Annual Report to Stockholders
Consolidated Balance Sheets - Years Ended December 31, 1996 and
1997
Consolidated Statements of Operations - Years Ended December 31,
1995, 1996, and 1997
Consolidated Statement of Stockholders' Equity - Three-Year Period
Ended December 31, 1997
Consolidated Statements of Cash Flows - Years Ended December 31,
1995, 1996, and 1997
Notes to Financial Statements
2. Financial Statement Schedule: The following financial statement
schedule of Indus International, Inc. for the years ended December 31,
1997, 1996 and 1995 is filed as part of this Report and should be read
in conjunction with the Consolidated Financial Statements of Indus
International, Inc.
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
3. Exhibits: The exhibits listed on the Exhibit Index at page 25 of this Form
10-K are filed as a part hereof or incorporated by reference into this Form
10-K.
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger and Reorganization dated as of June
5, 1997 ("Agreement of Merger"), by and among the Registrant, The
Indus Group, Inc. ("Indus") and TSW International, Inc. ("TSW")
(incorporated by reference to Appendix A-1 to the Joint Proxy
Statement/Prospectus filed as part of the Registration Statement
on Form S-4 (Reg. No. 333-33113) filed with the Securities and
Exchange Commission on August 7, 1997 (the "Proxy Statement"))
2.2 First Amendment to Agreement of Merger dated as of July 21, 1997
by and among the Registrant, Indus and TSW (incorporated by
reference to Exhibit 2.2 to the Proxy Statement)
2.3 Form of Agreement of Merger to be entered into by and among the
Registrant, Indus Sub, Inc. and Indus (incorporated by reference
to Appendix A-2 to the Proxy Statement)
2.4 Form of Agreement of Merger to be entered into by and among the
Registrant, TSW Sub, Inc. and TSW (incorporated by reference to
Appendix A-3 to the Proxy Statement)
3.1 Registrant's Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the Proxy Statement)
3.2 Registrant's Bylaws (incorporated by reference to Exhibit 3.2 to
the Proxy Statement)
20
<PAGE>
4.1 Form of Registration Rights Agreement entered into among the
Registrant, Warburg, Pincus Investors, LP ("Warburg"), Robert W.
Felton, Richard W. MacAlmon, John W. Blend, III and John R.
Oltman (incorporated by reference to Exhibit 4.1 to the Proxy
Statement)
4.2 Form of Indus Affiliate Agreement dated as of June 5, 1997
entered into by the Registrant, Indus, TSW and each of Robert W.
Felton, Richard W. MacAlmon, Michael E. Percy, Alan G. Merten,
Donald F. Robertson, Douglas R. Piper, Frank M. Siskowski and
Edward R. Koepfler (incorporated by reference to Exhibit 4.2 to
the Proxy Statement)
4.3 Form of TSW Affiliate Agreement dated as of June 5, 1997 entered
into by the Registrant, Indus, TSW and each of Warburg,
Christopher R. Lane, John F. Bartels, John W. Blend, III, Kenneth
C. Colby, Jr., David J. Loesch, Allen D. Vaughn, John R. Oltman,
George D. Busbee, William H. Janeway and Joseph P. Landy
(incorporated by reference to Exhibit 4.3 to the Proxy Statement)
4.4 Felton Affiliate Agreement dated as of June 5, 1997 entered into
among the Registrant, Indus, TSW and Robert W. Felton
(incorporated by reference to Exhibit 4.4 to the Proxy Statement)
4.5 Warburg Affiliate Agreement dated as of June 5, 1997 entered into
among the Registrant, Indus, TSW and Warburg (incorporated by
reference to Exhibit 4.5 to the Proxy Statement)
4.6 Nomination Agreement entered into among the Registrant, Warburg
and Robert W. Felton (incorporated by reference to Exhibit 4.6 to
the Proxy Statement)
4.7 Specimen certificate for Registrant's Common Stock (incorporated
by reference to Exhibit 4.7 to the Proxy Statement)
9.1 Indus Voting Agreement dated as of June 5, 1997 entered into
among TSW, Robert W. Felton, Richard W. MacAlmon, Michael E.
Percy and Douglas R. Piper (incorporated by reference to Exhibit
9.1 to the Proxy Statement)
9.2 TSW Voting Agreement dated as of June 5, 1997 entered into among
the Registrant, Indus, Warburg, John W. Blend, III and John R.
Oltman (incorporated by reference to Exhibit 9.2 to the Proxy
Statement)
10.1* Indus International, Inc. 1997 Stock Plan (incorporated by
reference to Exhibit 10.1 to the Proxy Statement)
10.2* Indus International, Inc. 1997 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.2 to the Proxy
Statement)
10.3* Indus International, Inc. 1997 Director Option Plan (incorporated
by reference to Exhibit 10.3 to the Proxy Statement)
10.4 Form of Tax Indemnification Agreement of Indus (incorporated by
reference to Exhibit 10.6 to Indus' Registration Statement on
Form S-1 (File No. 33-80573) declared effective on February 26,
1996, as amended (the "Indus Form S-1"))
10.5 Software Master License Agreement between Indus and Felton
Enterprises, dated January 2, 1990, as amended to date
(incorporated herein by reference to Exhibit 10.7 to the Indus
Form S-1)
10.6 Conditional Assignment of Software Master License Agreement and
Underlying Software between Indus and Felton Enterprises dated
February 24, 1996 (incorporated herein by reference to Exhibit
10.8 to the Indus Form S-1)
10.7 Amended and Restated Commercial Loan Agreement dated June 30,
1995 between Indus and Sumitomo Bank of California, as amended
through December 19, 1995 (incorporated herein by reference to
Exhibit 10.9 to the Indus Form S-1)
21
<PAGE>
10.8 Third Amendment to Commercial Loan Agreement dated May 29, 1996
between Indus and Sumitomo Bank of California (incorporated
herein by reference to Exhibit 10.1 to the Indus Quarterly Report
on Form 10-Q (File No. 0-27806) filed with the Securities and
Exchange Commission on August 13, 1996)
10.9 Fourth Amendment to Commercial Loan Agreement dated September 6,
1996 between Indus and Sumitomo Bank of California (incorporated
herein by reference to Exhibit 10.1 to the Indus Quarterly Report
on Form 10-Q (File No. 0-27806) filed with the Securities and
Exchange Commission on November 13, 1996)
10.10 Asset Acquisition Agreement between Indus and Indus
International, Inc. (incorporated herein by reference to Exhibit
10.10 to Amendment No. 3 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-80573) filed with the Securities and
Exchange Commission on February 28, 1996)
10.11 Lease for Indus' San Francisco, CA headquarters dated January 24,
1990, as amended (incorporated herein by reference to Exhibit
10.11 to the Indus Form S-1)
10.12 Lease for Indus' Pittsburgh, PA sales office (incorporated herein
by reference to Exhibit 10.12 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-80574) filed with
the Securities and Exchange Commission on January 31, 1996)
10.13 Loan and Security Agreement dated November 17, 1995 between TSW
and Greyrock Business Credit, a division of Greyrock Capital
Group Inc. ("Greyrock") (incorporated by reference to Exhibit
10.13 to the Proxy Statement)
10.14 Patent and Trademark Security Agreement dated November 17, 1995
between TSW and Greyrock (incorporated by reference to Exhibit
10.14 to the Proxy Statement)
10.15 Security Agreement in Copyrighted Works dated February 28, 1996
between TSW and Greyrock (incorporated by reference to Exhibit
10.15 to the Proxy Statement)
10.16 Amendment to Loan Documents, dated August 1, 1996, between TSW
and Greyrock (incorporated by reference to Exhibit 10.16 to the
Proxy Statement)
10.17 Secured Promissory Note dated August 1, 1996 between TSW and
Greyrock (incorporated by reference to Exhibit 10.17 to the Proxy
Statement)
10.18 Guarantee dated November 6, 1996 between TSW International
Limited and Greyrock (incorporated by reference to Exhibit 10.18
to the Proxy Statement)
10.19 Deed of Guarantee and Indemnity dated November 14, 1996 between
TSW and International Pty Ltd. and Greyrock (incorporated by
reference to Exhibit 10.19 to the Proxy Statement)
10.20 Second Amendment to Loan Documents dated April 3, 1997 between
TSW and Greyrock (incorporated by reference to Exhibit 10.20 to
the Proxy Statement)
10.21 Securities Purchase Agreement dated as of June 20, 1994, between
TSW and Warburg, Pincus Investors, LP ("Warburg") (incorporated
by reference to Exhibit 10.21 to the Proxy Statement)
10.22 Amended and Restated Stockholders Agreement dated June 20, 1994
between TSW, Warburg, John W. Blend, III ("Blend") and David P.
Welden (incorporated by reference to Exhibit 10.22 to the Proxy
Statement)
10.23 Stockholder's Rights Agreement dated as of August 30, 1994
between TSW, Warburg and Alan Johnston (incorporated by reference
to Exhibit 10.23 to the Proxy Statement)
10.24 Form of Stock Purchase Warrant between TSW and Warburg and
schedule of substantially similar Agreements (incorporated by
reference to Exhibit 10.24 to the Proxy Statement)
10.25 Form of Subordinated Floating Rate Note payable by TSW to Warburg
and schedule of substantially similar agreements (incorporated by
reference to Exhibit 10.25 to the Proxy Statement)
22
<PAGE>
10.26* Employment Agreement dated July 19, 1994 between TSW and
Christopher R. Lane ("Lane") (incorporated by reference to
Exhibit 10.26 to the Proxy Statement)
10.27 Loan Agreement dated December 22, 1996 between TSW and Lane
(incorporated by reference to Exhibit 10.27 to the Proxy
Statement)
10.28 Supplemental Severance Agreement dated December 15, 1994 between
TSW and Lane (incorporated by reference to Exhibit 10.28 to the
Proxy Statement)
10.29 Promissory Note dated December 22, 1996 between TSW and Lane
(incorporated by reference to Exhibit 10.29 to the Proxy
Statement)
10.30 Collateral Assignment Agreement dated December 22, 1996 between
TSW and Lane (incorporated by reference to Exhibit 10.30 to the
Proxy Statement)
10.31 Nonrecourse Loan Agreement dated September 16, 1992 between TSW
and Blend (incorporated by reference to Exhibit 10.31 to the
Proxy Statement)
10.32 Stock Pledge Agreement dated September 16, 1992 between TSW and
Blend (incorporated by reference to Exhibit 10.32 to the Proxy
Statement)
10.33 Collateral Assignment and Agreement dated September 16, 1992
between TSW and Blend (incorporated by reference to Exhibit 10.33
to the Proxy Statement)
10.34 Nonrecourse Promissory Note dated September 16, 1992 between TSW
and Blend (incorporated by reference to Exhibit 10.34 to the
Proxy Statement)
10.35 Lease Agreement dated June 8, 1993 between TSW and Cousins
Properties Incorporated, as amended (incorporated by reference to
Exhibit 10.35 to the Proxy Statement)
10.36 Credit Agreement dated September 2, 1997 (as amended through
First Amendment dated September 16, 1997) with Sumitomo Bank of
California and Union Bank of California, N.A. (incorporated by
reference to Exhibit 10.01 to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-22993) filed with the Securities and
Exchange Commission on November 14, 1997)
13.1 Portions of the Registrant's Annual Report
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney, filed on page 24 of this report.
27.1 Financial Data Schedule
- -----------
* Designates management contract or compensatory plan or arrangement.
(b) Reports on Forms 8-K.
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 1997.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Indus International, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INDUS INTERNATIONAL, INC.
/s/ Robert W. Felton
--------------------
Robert W. Felton
Chief Executive Officer and
Chairman of the Board of Directors
Date: March 31, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Robert W. Felton and Frank M. Siskowski, jointly
and severally, his/her attorneys-in-fact, each with the power of substitution,
for him/her in any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his/her
substitute or substitutes may do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert W. Felton Chief Executive Officer March 31, 1998
- ---------------------------------- and Chairman of the Board of Directors
(Robert W. Felton)
/s/ Frank M. Siskowski Chief Financial Officer and Executive March 31, 1998
- ---------------------------------- Vice President of Investor Relations
(Frank M. Siskowski)
/s/ Richard W. MacAlmon Senior Vice President and Director March 31, 1998
- ----------------------------------
(Richard W. MacAlmon)
/s/ Christopher R. Lane President of Strategy and Product March 31, 1998
- ---------------------------------- Development and Vice Chairman of the
(Christopher R. Lane) Board of Directors
/s/ John W. Blend, III President of Worldwide Sales and March 31, 1998
- ---------------------------------- Marketing and Director
(John W. Blend, III)
/s/ Alan G. Merten Director March 31, 1998
- ----------------------------------
(Alan G. Merten)
/s/ William H. Janeway Director March 31, 1998
- ----------------------------------
(William H. Janeway)
/s/ Joseph P. Landy Director March 31, 1998
- ----------------------------------
(Joseph P. Landy)
</TABLE>
24
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger and Reorganization dated as of June
5, 1997 ("Agreement of Merger"), by and among the Registrant, The
Indus Group, Inc. ("Indus") and TSW International, Inc. ("TSW")
(incorporated by reference to Appendix A-1 to the Joint Proxy
Statement/Prospectus filed as part of the Registration Statement
on Form S-4 (Reg. No. 333-33113) filed with the Securities and
Exchange Commission on August 7, 1997 (the "Proxy Statement"))
2.2 First Amendment to Agreement of Merger dated as of July 21, 1997
by and among the Registrant, Indus and TSW (incorporated by
reference to Exhibit 2.2 to the Proxy Statement)
2.3 Form of Agreement of Merger to be entered into by and among the
Registrant, Indus Sub, Inc. and Indus (incorporated by reference
to Appendix A-2 to the Proxy Statement)
2.4 Form of Agreement of Merger to be entered into by and among the
Registrant, TSW Sub, Inc. and TSW (incorporated by reference to
Appendix A-3 to the Proxy Statement)
3.1 Registrant's Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the Proxy Statement)
3.2 Registrant's Bylaws (incorporated by reference to Exhibit 3.2 to
the Proxy Statement)
4.1 Form of Registration Rights Agreement entered into among the
Registrant, Warburg, Pincus Investors, LP ("Warburg"), Robert W.
Felton, Richard W. MacAlmon, John W. Blend, III and John R.
Oltman (incorporated by reference to Exhibit 4.1 to the Proxy
Statement)
4.2 Form of Indus Affiliate Agreement dated as of June 5, 1997
entered into by the Registrant, Indus, TSW and each of Robert W.
Felton, Richard W. MacAlmon, Michael E. Percy, Alan G. Merten,
Donald F. Robertson, Douglas R. Piper, Frank M. Siskowski and
Edward R. Koepfler (incorporated by reference to Exhibit 4.2 to
the Proxy Statement)
4.3 Form of TSW Affiliate Agreement dated as of June 5, 1997 entered
into by the Registrant, Indus, TSW and each of Warburg,
Christopher R. Lane, John F. Bartels, John W. Blend, III, Kenneth
C. Colby, Jr., David J. Loesch, Allen D. Vaughn, John R. Oltman,
George D. Busbee, William H. Janeway and Joseph P. Landy
(incorporated by reference to Exhibit 4.3 to the Proxy Statement)
4.4 Felton Affiliate Agreement dated as of June 5, 1997 entered into
among the Registrant, Indus, TSW and Robert W. Felton
(incorporated by reference to Exhibit 4.4 to the Proxy Statement)
4.5 Warburg Affiliate Agreement dated as of June 5, 1997 entered into
among the Registrant, Indus, TSW and Warburg (incorporated by
reference to Exhibit 4.5 to the Proxy Statement)
4.6 Nomination Agreement entered into among the Registrant, Warburg
and Robert W. Felton (incorporated by reference to Exhibit 4.6 to
the Proxy Statement)
4.7 Specimen certificate for Registrant's Common Stock (incorporated
by reference to Exhibit 4.7 to the Proxy Statement)
9.1 Indus Voting Agreement dated as of June 5, 1997 entered into
among TSW, Robert W. Felton, Richard W. MacAlmon, Michael E.
Percy and Douglas R. Piper (incorporated by reference to Exhibit
9.1 to the Proxy Statement)
9.2 TSW Voting Agreement dated as of June 5, 1997 entered into among
the Registrant, Indus, Warburg, John W. Blend, III and John R.
Oltman (incorporated by reference to Exhibit 9.2 to the Proxy
Statement)
10.1* Indus International, Inc. 1997 Stock Plan (incorporated by
reference to Exhibit 10.1 to the Proxy Statement)
10.2* Indus International, Inc. 1997 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.2 to the Proxy
Statement)
25
<PAGE>
10.3* Indus International, Inc. 1997 Director Option Plan (incorporated
by reference to Exhibit 10.3 to the Proxy Statement)
10.4 Form of Tax Indemnification Agreement of Indus (incorporated by
reference to Exhibit 10.6 to Indus' Registration Statement on
Form S-1 (File No. 33-80573) declared effective on February 26,
1996, as amended (the "Indus Form S-1"))
10.5 Software Master License Agreement between Indus and Felton
Enterprises, dated January 2, 1990, as amended to date
(incorporated herein by reference to Exhibit 10.7 to the Indus
Form S-1)
10.6 Conditional Assignment of Software Master License Agreement and
Underlying Software between Indus and Felton Enterprises dated
February 24, 1996 (incorporated herein by reference to Exhibit
10.8 to the Indus Form S-1)
10.7 Amended and Restated Commercial Loan Agreement dated June 30,
1995 between Indus and Sumitomo Bank of California, as amended
through December 19, 1995 (incorporated herein by reference to
Exhibit 10.9 to the Indus Form S-1)
10.8 Third Amendment to Commercial Loan Agreement dated May 29, 1996
between Indus and Sumitomo Bank of California (incorporated
herein by reference to Exhibit 10.1 to the Indus Quarterly Report
on Form 10-Q (File No. 0-27806) filed with the Securities and
Exchange Commission on August 13, 1996)
10.9 Fourth Amendment to Commercial Loan Agreement dated September 6,
1996 between Indus and Sumitomo Bank of California (incorporated
herein by reference to Exhibit 10.1 to the Indus Quarterly Report
on Form 10-Q (File No. 0-27806) filed with the Securities and
Exchange Commission on November 13, 1996)
10.10 Asset Acquisition Agreement between Indus and Indus
International, Inc. (incorporated herein by reference to Exhibit
10.10 to Amendment No. 3 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-80573) filed with the Securities and
Exchange Commission on February 28, 1996)
10.11 Lease for Indus' San Francisco, CA headquarters dated January 24,
1990, as amended (incorporated herein by reference to Exhibit
10.11 to the Indus Form S-1)
10.12 Lease for Indus' Pittsburgh, PA sales office (incorporated herein
by reference to Exhibit 10.12 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-80574) filed with
the Securities and Exchange Commission on January 31, 1996)
10.13 Loan and Security Agreement dated November 17, 1995 between TSW
and Greyrock Business Credit, a division of Greyrock Capital
Group Inc. ("Greyrock") (incorporated by reference to Exhibit
10.13 to the Proxy Statement)
10.14 Patent and Trademark Security Agreement dated November 17, 1995
between TSW and Greyrock (incorporated by reference to Exhibit
10.14 to the Proxy Statement)
10.15 Security Agreement in Copyrighted Works dated February 28, 1996
between TSW and Greyrock (incorporated by reference to Exhibit
10.15 to the Proxy Statement)
10.16 Amendment to Loan Documents, dated August 1, 1996, between TSW
and Greyrock (incorporated by reference to Exhibit 10.16 to the
Proxy Statement)
10.17 Secured Promissory Note dated August 1, 1996 between TSW and
Greyrock (incorporated by reference to Exhibit 10.17 to the Proxy
Statement)
10.18 Guarantee dated November 6, 1996 between TSW International
Limited and Greyrock (incorporated by reference to Exhibit 10.18
to the Proxy Statement)
10.19 Deed of Guarantee and Indemnity dated November 14, 1996 between
TSW and International Pty Ltd. and Greyrock (incorporated by
reference to Exhibit 10.19 to the Proxy Statement)
26
<PAGE>
10.20 Second Amendment to Loan Documents dated April 3, 1997 between
TSW and Greyrock (incorporated by reference to Exhibit 10.20 to
the Proxy Statement)
10.21 Securities Purchase Agreement dated as of June 20, 1994, between
TSW and Warburg, Pincus Investors, LP ("Warburg") (incorporated
by reference to Exhibit 10.21 to the Proxy Statement)
10.22 Amended and Restated Stockholders Agreement dated June 20, 1994
between TSW, Warburg, John W. Blend, III ("Blend") and David P.
Welden (incorporated by reference to Exhibit 10.22 to the Proxy
Statement)
10.23 Stockholder's Rights Agreement dated as of August 30, 1994
between TSW, Warburg and Alan Johnston (incorporated by reference
to Exhibit 10.23 to the Proxy Statement)
10.24 Form of Stock Purchase Warrant between TSW and Warburg and
schedule of substantially similar Agreements (incorporated by
reference to Exhibit 10.24 to the Proxy Statement)
10.25 Form of Subordinated Floating Rate Note payable by TSW to Warburg
and schedule of substantially similar agreements (incorporated by
reference to Exhibit 10.25 to the Proxy Statement)
10.26* Employment Agreement dated July 19, 1994 between TSW and
Christopher R. Lane ("Lane") (incorporated by reference to
Exhibit 10.26 to the Proxy Statement)
10.27 Loan Agreement dated December 22, 1996 between TSW and Lane
(incorporated by reference to Exhibit 10.27 to the Proxy
Statement)
10.28 Supplemental Severance Agreement dated December 15, 1994 between
TSW and Lane (incorporated by reference to Exhibit 10.28 to the
Proxy Statement)
10.29 Promissory Note dated December 22, 1996 between TSW and Lane
(incorporated by reference to Exhibit 10.29 to the Proxy
Statement)
10.30 Collateral Assignment Agreement dated December 22, 1996 between
TSW and Lane (incorporated by reference to Exhibit 10.30 to the
Proxy Statement)
10.31 Nonrecourse Loan Agreement dated September 16, 1992 between TSW
and Blend (incorporated by reference to Exhibit 10.31 to the
Proxy Statement)
10.32 Stock Pledge Agreement dated September 16, 1992 between TSW and
Blend (incorporated by reference to Exhibit 10.32 to the Proxy
Statement)
10.33 Collateral Assignment and Agreement dated September 16, 1992
between TSW and Blend (incorporated by reference to Exhibit 10.33
to the Proxy Statement)
10.34 Nonrecourse Promissory Note dated September 16, 1992 between TSW
and Blend (incorporated by reference to Exhibit 10.34 to the
Proxy Statement)
10.35 Lease Agreement dated June 8, 1993 between TSW and Cousins
Properties Incorporated, as amended (incorporated by reference to
Exhibit 10.35 to the Proxy Statement)
10.36 Credit Agreement dated September 2, 1997 (as amended through
First Amendment dated September 16, 1997) with Sumitomo Bank of
California and Union Bank of California, N.A. (incorporated by
reference to Exhibit 10.01 to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-22993) filed with the Securities and
Exchange Commission on November 14, 1997)
13.1 Portions of the Registrant's Annual Report
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney, filed on page 24 of this report
27.1 Financial Data Schedule
- ---------------
*Designates management contract or compensatory plan or arrangement.
27
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Business. Indus International, Inc. (the "Company" or "Indus") 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.
Merger. The Indus Group, Inc. entered into an agreement and plan of merger and
reorganization on June 5, 1997 with TSW International, Inc., a Georgia
corporation (the "Merger"), 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
formed for the purpose of the transactions contemplated under the Merger. On
December 31, 1997, the Company's subsidiaries, The Indus Group, Inc. and TSW
International, Inc., each 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. The Merger was
consummated on August 25, 1997, as a tax-free reorganization pursuant to the
provisions of Section 368 of the Internal Revenue Code of 1986, and has been
accounted for as a pooling-of-interests. In connection with the Merger, (a) each
share of outstanding common stock of The Indus Group, Inc. was converted into
one share of Common Stock of the Company ("Common Stock") and (b) each
outstanding share of common stock of TSW International, Inc. ("TSW
International, Inc. Common Stock"), and each outstanding share of preferred
stock of TSW International, Inc. ("TSW International, Inc. Preferred Stock"),
was converted into approximately 2.73 shares of the Company's Common Stock; (c)
the outstanding subordinated floating rate notes of TSW International, Inc.
(including accrued interest thereon) were exchanged for an aggregate of
1,235,879 shares of the Company's Common Stock; (d) all rights to receive any
unpaid dividends on TSW International, Inc. Preferred Stock were converted into
an aggregate of 53,937 shares of the Company's Common Stock and (e) each
outstanding option or warrant to purchase TSW International, Inc. Common Stock
was converted into an option or warrant, respectively, to purchase that number
of shares of the Company's Common Stock determined by multiplying the number of
shares of TSW International, Inc. Common Stock subject to such option or warrant
by approximately 2.73, at an exercise price per share of the Company's Common
Stock equal to the exercise price per share of TSW International, Inc. Common
Stock pursuant to such option or warrant divided by approximately 2.73. Based on
the capitalization of TSW International, Inc. as of August 25, 1997,
approximately 10.2 million shares of the Company's Common Stock were issued in
the transaction and the Company has reserved approximately 7.9 million shares of
its Common Stock for issuance pursuant to the assumption of outstanding options
and warrants to purchase TSW International, Inc. Common Stock.
Risks relating to the 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 development of current and future
products and technologies.
The Company has experienced, and may in the future experience, significant
fluctuations in 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) changes in the level of
operating expenses, (xi) delay or deferral of customer implementations of the
Company's software, (xii) software defects and other product quality problems,
and (xiii) other economic conditions generally or in specific industry segments.
Further, the purchase of the Company's products generally involves a significant
commitment of capital, with the attendant delays frequently associated with
large capital expenditures and authorization procedures within large
organizations. For these and other reasons, the sales cycles for the Company's
products are typically lengthy and subject to a number of significant risks over
which the Company has little or no control, including customers' budget
constraints and internal authorization reviews. In addition, delays in the
completion of a product implementation may require that the revenues associated
with such implementation be recognized over a longer period than originally
anticipated. Such delays in the implementation or execution of orders have
caused, and may in the future cause, material fluctuations in the Company's
operating results. Similarly, customers may cancel implementation projects at
any time 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 and may
in some future period result in losses or have a material adverse effect on the
Company's business or results of operations.
1
<PAGE>
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 to date,
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. Effective in the
three months ended September 30, 1997, The Indus Group, Inc., Inc. began to
report applicable new license fees, which typically have ranged from
approximately $100,000 to $5 million, 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. has always recognized license
fees upon shipment of product. 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.
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 warranty period. After an initial contract period, additional
maintenance and support services, for which the Company typically charges 15-18%
of the original license fee per year, are subject to separate contracts whereby
revenue is recognized ratably over the contract period.
In March 1997, The Indus Group, Inc. acquired a 10% interest in TenFold
Corporation, a private software company for approximately $8 million in cash.
The Indus Group, Inc. received a perpetual, unrestricted license for future
applications and tools developed with TenFold's technology. In April 1997, The
Indus Group, Inc. acquired Prism Consulting, Inc. a private
management-consulting firm, for $4.75 million of The Indus Group, Inc.'s stock
at the then current market value and $250,000 in cash. Substantially all of the
purchased cost was allocated to intangible assets and is included in investments
and intangible assets.
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 Indus'
ongoing business, expenses associated with completing the transaction and
amortizing acquired intangible assets, and dilution of existing equity holders.
There can be no assurance that such transactions will not materially adversely
affect Indus' business, financial condition or operating results.
2
<PAGE>
Operating Results
<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>
Percentages of Total Revenues
Years Ended December 31,
-----------------------------------------
Statement of Operations Data: 1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software licensing fees ................................................... 32.2 % 30.1 % 31.6 %
Services, maintenance and other ........................................... 67.8 69.9 68.4
----- ----- -----
Total revenues .......................................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues ............................................................. 47.0 44.6 44.4
----- ----- -----
Gross margin ................................................................. 53.0 55.4 55.6
----- ----- -----
Operating expenses:
Research and development .................................................. 17.8 16.3 15.6
Sales and marketing ....................................................... 19.6 18.5 19.0
General and administrative ................................................ 12.8 10.5 8.5
Compensation charge - stock options ....................................... 18.6 -- --
Merger expenses ........................................................... -- -- 6.8
----- ----- -----
Total operating expenses ................................................ 68.7 45.3 49.9
----- ----- -----
Income (loss) from operations ................................................ (15.7) 10.2 5.7
Other income (expense) net ................................................... (2.1) (1.3) (1.1)
----- ----- -----
Income (loss) before income taxes ............................................ (17.8) 8.9 4.6
Provision (benefit) for income taxes ......................................... 0.4 4.8 3.6
Cumulative effect of deferred income taxes provided upon
conversion by The Indus Group, Inc. to a C Corporation ....................... -- 4.7 --
----- ----- -----
Income (loss) before extraordinary item ...................................... (18.2) (0.6) 1.0
Extraordinary item ........................................................... -- -- (0.4)
===== ===== =====
Net income (loss) ............................................................ (18.2) (0.6) 0.6
===== ===== =====
Pro forma statement of operations as adjusted:
Income (loss) before income taxes....................... (17.8) 8.9
Add back portion of compensation charge-stock
options................................................. 17.6 --
----- -----
Income (loss) before income taxes, as adjusted.......... (0.2) 8.9
Provision for income taxes (federal, state and foreign). 5.1 4.8
----- -----
Pro forma net income (loss)............................. (5.3) 4.1
===== =====
</TABLE>
Revenues. The Company's revenues are derived from software licensing fees and
from services, which include implementation and training services coupled with
maintenance fees. Total revenues increased 40.5% from $101.8 million in 1995 to
$143.0 million in 1996, and 23.8% to $177.0 million in 1997. The year over year
increase in license fees is due to additional contracts with new and existing
customers and to the change in revenue recognition policy by The Indus Group,
Inc in 1997. The overall annual growth in services and maintenance revenue
results from the high level of services required to fulfill the implementation
needs of the customers. Revenue from international customers (from sales outside
the United States, Canada and Mexico) accounted for 18%, 20% and 14% of revenues
for the years ending December 31, 1995, 1996, and 1997, respectively. As most of
the Company's contracts are denominated in U.S. dollars, foreign currency
fluctuations have not impacted the results of operations.
Effective in the three months ended 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, continued to recognize the
applicable portion of license fees as earned upon shipment of standard software
products to customers.
The Company does not believe that the revenue growth experienced in 1997 is
necessarily indicative of any revenue growth that may occur in future periods.
Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and
related costs for implementation (including account executive personnel), (ii)
training and customer support services and (iii) sublicense fees to third
parties upon the sale of the
3
<PAGE>
Company's product containing such third-party software. Gross margin on license
fees is substantially higher than gross margin on service revenue, reflecting
the low packaging and production costs of software products and third party
software costs compared with the relatively high personnel costs associated with
providing implementation, maintenance, consulting and training services.
Cost of revenues increased 33.1% from $47.9 million in 1995 to $63.7 million in
1996 and 23.3% to $78.6 million in 1997. The 1995 and 1996 increases resulted
from the cost of increased services associated with major new license agreements
as well as the cost of additional services associated with the expansion of
existing projects. The 1997 increase in absolute dollars in cost of revenues was
due principally to the need for additional personnel to service the Company's
customers. As a percent of total revenue, cost of revenues was 47.0%, 44.6% and
44.4% for the years ended 1995, 1996, and 1997, respectively. Cost of revenues
remained relatively flat as a percentage of revenue between 1996 and 1997.
Gross Margin. Gross margin improved from 53% in 1995 to 55.4% and 55.6% in 1996
and 1997, 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,
enhancements to existing products and the porting of Indus' products to
different platforms and (iii) computer timeshare costs.
Research and development expenses increased 28.2% from $18.2 million in 1995 to
$23.3 million in 1996 and 18.9% to $27.7 million in 1997, and represented 17.8%,
16.3%, and 15.6%, respectively, of total revenues in those years. While R&D
expenses continue to increase year over year in absolute dollars, they declined
as a percentage of total revenue due to the overall increase in revenues. During
1997, the Company invested resources in developing PASSPORT Release 6.0 which
was completed by July 1997 and EMPAC Release 7.5 which was completed by August
1997. The Company believes that a significant level of investment in R&D is
essential to remain competitive. Research and development in absolute dollars
for a particular period may vary depending on the projects in progress.
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 include personnel costs, which
include sales commissions involved in the sales and marketing of the Company's
products and services and the costs of advertising, public relations and
participation in industry conferences and trade shows. Sales and marketing
expenses increased 33.2% from $19.9 million in 1995 to $26.5 million in 1996 and
26.6% to $33.6 million in 1997. As a percent of total revenue, sales and
marketing expenses were 19.6%, 18.5%, and 19.0% for 1995, 1996, and 1997,
respectively. The growth in sales and marketing expenses in absolute dollars is
primarily due to: (i) the addition of personnel, (ii) expansion of strategic
alliance program and (iii) changes in the mix of the revenue base on which
commission expense is generated. The Company believes that sales and marketing
expenses as a percentage of total revenues may continue to increase for the same
reasons.
General and Administrative. General and administrative expenses include the
costs of finance, human resources and administrative operations. General and
administrative expenses increased 15.0% from $13.0 million in 1995 to $15.0
million in 1996 and 1997. These expenses represented 12.8%, 10.5%, and 8.5% of
total revenues in those years. General and administrative expenses in absolute
dollars declined as a percentage of total revenues due to the growth in revenue
and the relatively fixed nature of some portions of general and administrative
expenses. General and administrative expenses are expected to increase in
absolute dollars in future years.
Compensation Charge - Stock Options. The Indus Group, Inc. amended its 1992
Stock Option Plan effective September 1995 to accelerate the exercisability of
all outstanding stock options. Exercisability had previously been contingent
upon certain "liquidity events" such as an initial public offering or an
acquisition of The Indus Group, Inc. As a result of this amendment, The Indus
Group, Inc. recognized a non-recurring compensation charge of $18.9 million in
the third quarter of 1995.
Merger and Restructuring. The Company recorded $9.98 million in merger related
costs in 1997. This included approximately $6.7 million for transaction fees and
professional services, $1.7 million for consulting services incurred by a
significant shareholder and $1.6 million for other costs incident to the merger.
In addition to the merger-related costs, the Company provided for costs and
losses as a result of the restructuring of the Company totaling $ 2.1 million
during 1997. Of the total cost, $0.9 million results from excess facilities and
$1.2 million from termination costs of excess or redundant employees.
Provision for Income Taxes. Income tax expense of $6.4 million represented $6.1
million of federal and state corporate income taxes for The Indus Group, Inc.
for the year ended December 31, 1997 and $0.3 of foreign withholding taxes for
TSW International, Inc. As of March 31, 1997, TSW 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 $0.78 million which expire in years 2010 to 2012;
domestic and foreign tax credits of approximately $0.506 million which can be
carried
4
<PAGE>
forward indefinitely; and foreign net operating loss carryforwards of
approximately $2.9 million which can be carried forward indefinitely. Those loss
carryforwards were subject to a separate taxpayer limitation through December
31, 1997 because TSW International, Inc. remained a separate corporation until
that date. No benefit has been accorded those carryovers in the accompanying
financial statements.
Effective upon its incorporation in 1990, The Indus Group, Inc. elected to have
its United States income taxed under Subchapter S of the Code. Accordingly,
income tax provisions prior to 1996 were principally attributable to state taxes
and taxes imposed by foreign governments on The Indus Group, Inc.'s foreign
operations. The Indus Group, Inc.'s S Corporation status terminated effective
January 1, 1996, and The Indus Group, Inc. was subject to federal income
taxation at the corporate level thereafter. In relation to the termination of S
Corporation status as of January 1, 1996, a one-time charge representing a
cumulative net federal and state deferred income tax liability of $6.7 million
was recorded.
Net Income (Loss) The Company's net income was $0.99 million in 1997 compared
with a net loss of $0.875 million recorded in 1996, due primarily to increased
revenues in the current year. The effect of the increase in revenues is offset
by the factors described above and by the net of merger and restructuring
charges recorded in 1997 and by the one-time income tax charge associated with
the company's conversion to C Corporation status recorded in 1996. The loss in
1995 was in a large part a result of the non-recurring compensation charge upon
elimination of the contingency related to stock options.
Pro Forma Net Income (Loss). For purposes of presenting comparative earnings and
calculating per share data, pro forma net income for the year ended December 31,
1996 reflects the elimination of the $6.7 million nonrecurring cumulative
deferred income tax charge upon converting from an S Corporation to a C
Corporation. For 1995 pro forma net income reflects the add-back of $17.9
million non-recurring compensation charge incurred upon the elimination of the
contingency related to stock options.
Liquidity and Capital Resources
Historically, The Indus Group, Inc. has financed its activities primarily
through cash provided by operations and borrowings under its line of credit. 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.
Cash provided (used) by operations was ($7.7) million, $8.3 million and ($10.6)
million in 1995, 1996 and 1997, respectively. Unbilled accounts receivable
increased substantially due to the change in revenue recognition policy by The
Indus Group, Inc. in 1997. Investing activities, consisting primarily of the
purchase and sale of marketable securities, the acquisitions of investments and
intangible assets, and the acquisition of property and equipment, used cash of
$3.4 million, $35.7 million, and $5.2 million, in 1995, 1996 and 1997,
respectively. Financing activities provided cash of $10.7 million and $13.1
million, in 1995 and 1997 primarily from the drawdown from the Company's lines
of credit. Financing activities in 1996 generated cash of $40.9 million
primarily from the issuance of redeemable preferred and common stock.
As of December 31, 1997, the Company's principal sources of liquidity consisted
of approximately $11.1 million in cash and cash equivalents, $16.7 million in
marketable securities and a revolving bank line of credit of $35.0 million,
which is secured by all of the Company's accounts receivables. The revolving
credit facility expires July 31, 1999. The revolving credit facility bears an
interest rate of the one month LIBOR rate plus 1.50% (7.19% as of December 31,
1997). This facility replaced and eliminated the prior revolving lines of credit
of The Indus Group, Inc. and TSW International, Inc., which bore higher interest
rates. Approximately $26.7 million had been drawn down under this line of credit
at December 31, 1997.
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
of approximately $16 million in 1998, primarily for equipment and furniture.
In addition to its line of credit, the Company's principal commitments at
December 31, 1997 consisted of obligations under operating and capital 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, such as for acquisitions.
5
<PAGE>
Effects of Recent Accounting Pronouncements
A new pronouncement containing rules for timing of recognition of software
company revenues, particularly license fee revenues where there are multiple
elements to be delivered under a contract or arrangement with a customer, will
be effective for transactions beginning in 1998. 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. The Company has not yet assessed what the impact of these rules will
be on its recognition of revenues in its 1998 financial statements.
Other recent pronouncements relate primarily to disclosure matters and not to
timing of recognition of income. One pronouncement will require disclosure of
"comprehensive income", including items such as unrealized gains and losses on
foreign currency translation and marketable securities, in addition to income
determined under customary accounting rules. Another pronouncement will require
additional or different "segment" footnote data. The Company has not yet
assessed what the impact of these rules will be in terms of additional or
changed disclosures to be included in its 1998 financial statements.
Year 2000 Risk Disclosure
Like most other companies, the year 2000 computer issue creates risk for the
Company. If internal systems do not correctly recognize date information when
the year changes to 2000, there could be an adverse impact on the Company's
operations. The Company has initiated a comprehensive project to prepare its
computer systems for the year 2000 and plans to have changes to critical systems
completed by the first quarter of 1999 to allow time for testing. The Company is
also assessing the capability of its products sold to customers over a period of
years to handle the year 2000, but does not currently believe there are product
issues. Management believes that the likelihood of a material adverse impact due
to problems with internal systems or products sold to customers is remote and
expects that the cost of these projects over the next two years will not have a
material effect on the Company's financial position or overall trends in results
of operations. The Company is also developing a plan to contact critical
suppliers of products and services to determine that the suppliers' operations
and the products and services they provide are year 2000 capable or to monitor
their progress toward year 2000 capability. There can be no assurance that
another company's failure to ensure year 2000 capability will not have an
adverse effect on the Company.
The Company's operating results are subject to general economic conditions and a
variety of risks characteristic of the software industry or specific to the
Company, any of which could cause the Company's operating results to differ
materially from past results.
6
<PAGE>
INDUS INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS........................... 2
CONSOLIDATED BALANCE SHEETS................................................. 3
CONSOLIDATED STATEMENTS OF OPERATIONS....................................... 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY.............................. 5
CONSOLIDATED STATEMENTS OF CASH FLOWS....................................... 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................. 8
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Boards of Directors and Stockholders
Indus International, Inc.
We have audited the accompanying consolidated balance sheets of Indus
International, Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Indus
International, Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 27, 1998
2
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 31,
------------------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 13,815 $ 11,052
Marketable securities ................................................................. 26,524 11,880
Billed accounts receivable, less allowance for doubtful accounts of
$1,247 and $1,974 on December 31, 1996 and 1997, respectively ......................... 35,861 43,574
Unbilled accounts receivable .......................................................... 19,397 30,349
Other current assets .................................................................. 6,365 5,773
--------- ---------
Total current assets ................................................................ 101,962 102,628
Marketable securities - noncurrent ....................................................... 2,129 4,818
Property and equipment, net .............................................................. 12,270 16,570
Investments and intangible assets, net ................................................... -- 12,119
Employee notes receivable ................................................................ 537 416
Other assets ............................................................................. 957 174
--------- ---------
$ 117,855 $ 136,725
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under lines of credit ....................................................... $ 15,991 $ 26,650
Current portion of obligations under capital leases ................................... 960 2,404
Accounts payable ...................................................................... 7,006 8,430
Deferred income taxes ................................................................. 3,837 419
Other accrued liabilities ............................................................. 9,732 14,068
Deferred revenue ...................................................................... 21,372 13,419
--------- ---------
Total current liabilities ........................................................... 58,898 65,390
--------- ---------
Obligations under capital leases and term loans .......................................... 2,126 1,105
Subordinated long-term notes ............................................................. 18,065 --
Redeemable preferred stock of TSW International, Inc. .................................... 18,100 --
Stockholders' equity:
Preferred stock ....................................................................... -- --
Common stock .......................................................................... 22 29
Additional paid-in capital ............................................................ 48,649 98,608
Other ................................................................................. (603) (1,719)
Accumulated deficit ................................................................... (27,402) (26,688)
--------- ---------
Total stockholders' equity .......................................................... 20,666 70,230
--------- ---------
$ 117,855 $ 136,725
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Years Ended December 31
---------------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Software licensing fees .......................................... $ 32,816 $ 43,060 $ 55,958
Services and maintenance ......................................... 67,824 97,515 119,382
Other revenue .................................................... 1,184 2,463 1,694
--------- --------- ---------
Total revenues ................................................. 101,824 143,038 177,034
Cost of revenues .................................................... 47,872 63,738 78,575
--------- --------- ---------
Gross margin ........................................................ 53,952 79,300 98,459
--------- --------- ---------
Operating expenses:
Research and development ......................................... 18,151 23,265 27,664
Sales and marketing .............................................. 19,915 26,523 33,568
General and administrative ....................................... 12,996 14,951 14,991
Compensation charge-stock options ................................ 18,900 -- --
Merger and restructuring expenses ................................ -- -- 12,083
--------- --------- ---------
Total operating expenses ....................................... 69,962 64,739 88,306
--------- --------- ---------
Income (loss) from operations ....................................... (16,010) 14,561 10,153
Interest and other income ........................................... 213 1,391 1,590
Interest expense .................................................... (2,325) (3,278) (3,558)
--------- --------- ---------
Income (loss) before income taxes ................................... (18,122) 12,674 8,185
Provision for income taxes .......................................... 423 6,849 6,408
Cumulative effect of deferred income taxes
provided upon conversion by The Indus Group,
Inc. to a C Corporation ............................................. -- 6,700 --
--------- --------- ---------
Income (loss) before extraordinary item ............................. (18,545) (875) 1,777
Extraordinary item .................................................. -- -- (787)
--------- --------- ---------
Net income (loss) ................................................... $ (18,545) $ (875) $ 990
========= ========= =========
Pro forma statement of operations as adjusted:
Income (loss) before income taxes ................................ $ (18,122) $ 12,674
Add back portion of compensation
charge-stock options ............................................. 17,900 --
--------- ---------
Income (loss) before income taxes, as ............................ (222) 12,674
adjusted
Provision for income taxes (federal, state
and foreign) ..................................................... 5,181 6,849
--------- ---------
Pro forma net income (loss) ...................................... $ (5,403) $ 5,825
========= =========
Income (loss) per share (computed on pro forma
net income (loss) in 1995 and 1996):
Basic
Income (loss) before extraordinary item .......................... $ (0.25) $ 0.22 $ 0.06
Extraordinary item ............................................... -- -- (0.03)
--------- --------- ---------
Net income (loss) ................................................ $ (0.25) $ 0.22 $ 0.03
========= ========= =========
Diluted
Income (loss) before extraordinary item .......................... $ (0.25) $ 0.20 $ 0.05
Extraordinary item ............................................... -- -- 0.02
--------- --------- ---------
Net income (loss) ................................................ $ (0.25) $ 0.20 $ 0.03
========= ========= =========
Shares used in computing per share data
Basic ............................................................ 22,027 25,976 28,574
Diluted .......................................................... 22,027 28,821 33,448
<FN>
See accompanying notes.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Total
Common Additional Accumulated Stockholders'
Stock Capital Other Deficit Equity
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ........................... $ 131 $ 1,399 $ 13 $(13,389) $(11,846)
Issuance of common stock ............................. 481 266 (480) -- 267
Stock options (1) .................................... -- 18,900 -- -- 18,900
Repurchase and retirement of stock ................... -- (122) -- -- (122)
Issuance of warrants to common stock ................. -- 570 -- -- 570
Cash distributions to stockholders ................... -- -- -- (9,516) (9,516)
Other ................................................ -- -- (181) -- (181)
Net loss ............................................. -- -- -- (18,545) (18,545)
-------- -------- -------- -------- --------
Balance at December 31, 1995 ........................... 612 21,013 (648) (41,450) (20,473)
Conversion of The Indus Group, Inc. to
a C Corporation effective January 1, 1996 ............ -- (8,223) -- 8,223 --
Reincorporation ...................................... (494) 494 -- -- --
Issuance of common stock (2) ......................... 4 35,399 -- -- 35,403
Tax benefit from exercise of stock options ........... -- 6,669 -- -- 6,669
Purchase of Indus International, Inc. net
assets ............................................ (100) (3) -- -- (103)
Other ................................................ -- -- 45 -- 45
Net loss ............................................. -- (6,700) -- 5,825 (875)
-------- -------- -------- -------- --------
Balance at December 31, 1996 ........................... 22 48,649 (603) (27,402) 20,666
Issuance of common stock (3) ......................... -- 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 (4) ............. 8 19,937 -- -- 19,945
Exchange of common stock for TSW
redeemable preferred stock (5) .................... 3 18,097 -- -- 18,100
Other ................................................ -- -- (1,116) -- (1,116)
Net income ........................................... -- -- -- 990 990
Elimination of TSW's net income for the
three months ended March 31, 1997 (6) ............. -- -- -- (276) (276)
-------- -------- -------- -------- --------
Balance at December 31, 1997 ........................... $ 29 $ 98,608 $ (1,719) $(26,688) $ 70,230
======== ======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
INDUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
(1) Value of unexercised stock options of The Indus Group, Inc. upon
elimination of contingency feature, which had precluded exercise of these
options.
(2) Includes $33,864 received from February 29, 1996 initial public offering of
The Indus Group, Inc. (2,500,000 common shares offered at $15.00 per share
less underwriting commission and expenses).
(3) 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.
(4) Redemption of TSW International, Inc. subordinated notes and accumulated
interest in exchange for 1,235,879 common shares of Indus International,
Inc.
(5) 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.
(6) 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.
See accompanying notes.
6
<PAGE>
<TABLE>
INDUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ..................................................................... $(18,545) $ (875) $ 990
Elimination of TSW's net income for the three months ended March 31, 1997 ............. -- -- (276)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Compensation charge - stock options ................................................ 18,900 -- --
Depreciation and amortization ...................................................... 2,789 3,440 5,969
Provision for doubtful accounts .................................................... 747 370 891
Amortization of deferred compensation .............................................. 48 555 74
Loss on sale of fixed assets ....................................................... 89 -- 332
Write-off goodwill ................................................................. -- 688 --
Cumulative effect of deferred income taxes provided January 1, 1996 ................ -- 6,700 --
Tax benefit from exercise of stock options ......................................... -- -- 3,479
Merger expense resulting from equity transaction ................................... -- -- 2,009
Extraordinary charge to net income from debt extinguishment ........................ -- -- 787
Changes in operating assets and liabilities:
Billed accounts receivable ....................................................... (9,455) (6,536) (8,604)
Unbilled accounts receivable ..................................................... (9,909) (3,946) (10,952)
Other current assets ............................................................. (316) (1,403) 592
Other assets ..................................................................... (22) (3,415) 798
Employee notes receivable ........................................................ 13 (61) 121
Accounts payable ................................................................. 355 (328) 1,424
Deferred income taxes ............................................................ 384 (3,189) (3,418)
Income taxes payable ............................................................. 1,906 6,451 --
Other accrued liabilities ........................................................ 2,243 5,889 4,336
Deferred revenue ................................................................. 2,857 3,444 (7,953)
Cumulative currency translation .................................................. (229) (9) (1,246)
Other ............................................................................ 427 481 20
-------- -------- --------
Net cash (used)/provided by in operating activities .............................. (7,718) 8,256 (10,627)
-------- -------- --------
Cash flows from investing activities
Purchase of marketable securities ..................................................... -- (39,010) (3,104)
Sale of marketable securities ......................................................... -- 10,314 15,100
Investments and intangible assets ..................................................... (642) -- (8,288)
Acquisition of property and equipment ................................................. (2,767) (6,982) (8,901)
-------- -------- --------
Net cash used in investing activities ................................................. (3,409) (35,678) (5,193)
-------- -------- --------
Cash flows from financing activities
Net drawdown/(repayment) of line of credit ............................................ 12,471 (81) 10,659
Net drawdown of capital leases/notes payable .......................................... 5,574 725 423
Net proceeds from issuance of redeemable preferred stock .............................. 2,000 5,000 --
Net proceeds from issuance of common stock ............................................ 145 35,399 1,975
Distributions to shareholders ......................................................... (9,517) -- --
Purchase of Indus International, Inc. net assets ...................................... -- (103) --
-------- -------- --------
Net cash provided by financing activities ............................................. 10,673 40,940 13,057
-------- -------- --------
Net increase/(decrease) in cash and cash equivalents .................................. (454) 13,518 (2,763)
Cash and cash equivalents at beginning of period ...................................... 751 297 13,815
-------- -------- --------
Cash and cash equivalents at end of period ............................................ $ 297 $ 13,815 $ 11,052
======== ======== ========
Supplemental disclosures of cash flow information
Interest paid ......................................................................... $ 598 $ 1,464 $ 2,004
======== ======== ========
Income taxes paid ..................................................................... $ 523 $ 5,712 $ 4,775
======== ======== ========
Supplemental schedule of noncash, investing and financing activities
Issuance of common stock in exchange for notes receivable ............................. $ 480 $ -- $ --
Issuance of common stock in exchange for TSW subordinated notes and
redeemable preferred stock ............................................................ -- -- 38,045
======== ======== ========
Issuance of common stock in exchange for investment ................................... $ -- $ -- $ 4,750
======== ======== ========
<FN>
See accompanying notes
</FN>
</TABLE>
7
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Organization and Business
Business
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.
Merger
The Indus Group, Inc. entered into an agreement and plan of merger and
reorganization on June 5, 1997 with TSW International, Inc., a Georgia
corporation (the "Merger"), 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") which was formed for the purpose of
the transactions contemplated under the Merger. On December 31, 1997, the
Company's subsidiaries, The Indus Group, Inc. and TSW International, Inc., each
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. The Merger was consummated on August 25,
1997, as a tax-free reorganization pursuant to the provisions of Section 368 of
the Internal Revenue Code of 1986, and has been accounted for as a pooling of
interests. In connection with the Merger, (a) each share of outstanding common
stock of The Indus Group, Inc. was converted into one share of Common Stock of
the Company ("Common Stock") and (b) each outstanding share of common stock of
TSW ("TSW Common Stock"), and each outstanding share of preferred stock of TSW
("TSW Preferred Stock"), was converted into approximately 2.73 shares of the
Company's Common Stock; (c) the outstanding subordinated floating rate notes of
TSW (including accrued interest thereon) were exchanged for an aggregate of
1,235,879 shares of the Company's Common Stock; (d) all rights to receive any
unpaid dividends on TSW Preferred Stock were converted into an aggregate of
53,937 shares of the Company's Common Stock and (e) each outstanding option or
warrant to purchase TSW Common Stock was converted into an option or warrant,
respectively, to purchase that number of shares of the Company's Common Stock
determined by multiplying the number of shares of TSW Common Stock subject to
such option or warrant by approximately 2.73, at an exercise price per share of
the Company's Common Stock equal to the exercise price per share of TSW Common
Stock pursuant to such option or warrant divided by approximately 2.73. Based on
the capitalization of TSW International, Inc. as of August 25, 1997,
approximately 10.2 million shares of the Company's Common Stock were issued in
the transaction and the Company has reserved approximately 7.9 million shares of
its Common Stock for issuance pursuant to the assumption of outstanding options
and warrants to purchase TSW Common Stock.
As a result of the transaction, the Company incurred charges to
operations of $9.98 million of Merger related costs during fiscal 1997 that
primarily related to approximately $6.7 million for transaction fees and
professional services, $1.7 million for consulting services incurred by a
significant stockholder and $1.6 million for other costs incident to the Merger.
Of the total charge, cash outflow to date is $7.6 million and $700,000 are
future outflows as of December 31, 1997. The future outflows will primarily be
paid during the next 9 months. In addition to the Merger related costs, the
Company accrued costs and losses for the restructuring of the Company totaling
$2.1 million. Of the total cost, $916,000 results from excess facilities that
will be vacated and $1.2 million from termination costs of excess or redundant
employees. Of the total charge, cash outflow to date is $404,000.
Prior to the Merger, TSW International, Inc. used a fiscal year ending
on March 31. Accordingly, the restated financial statements combine the March
31, 1996 and March 31, 1997 financial statements of TSW International, Inc. with
the December 31, 1995 and 1996 financial statements of The Indus Group, Inc.,
respectively. Revenues and the net income of TSW International, Inc. for the
three-month period ended March 31, 1997 were $21.4 million and $0.3 million
respectively, with the net income reflected as an adjustment to retained
earnings effective January 1, 1997.
8
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
Separate results of the combined entities for the years 1995 and 1996
and for the period ending August 25, 1997 (date of Merger) are as follows (in
thousands):
<CAPTION>
The Indus Group TSW Combined
--------------- --------- ---------
<S> <C> <C> <C>
Eight months ended August 25, 1997 (Unaudited)
Revenue .......................................................... $ 57,862 $ 28,034 $ 85,896
--------- --------- ---------
Net Income (loss) ................................................ 5,680 (2,887) 2,793
========= ========= =========
1996
Revenue .......................................................... 75,939 67,099 143,038
--------- --------- ---------
Net Income (loss) ................................................ 2,528 (3,403) (875)
========= ========= =========
1995
Revenue .......................................................... 53,791 48,033 101,824
--------- --------- ---------
Net Loss ......................................................... $ (6,820) $ (11,725) $ (18,545)
========= ========= =========
</TABLE>
Significant Accounting Policies
Basis of Presentation
All periods include the combined results of The Indus Group, Inc. and
TSW International, Inc. on a pooling-of-interests basis, as a result of the
Merger effective August 25, 1997.
The consolidated financial statements include the accounts of Indus
International, Inc. and its subsidiaries (collectively, the Company). All
significant intercompany balances and transactions have been eliminated. The
functional currencies of the Company's foreign subsidiaries are their respective
local currencies. Accordingly, gains and losses from the translation of the
financial statements of the foreign subsidiaries are included in stockholder's
equity.
Revenue Recognition
The Company provides its software to customers under contracts which
provide for both software license fees and system implementation services.
Revenues from system implementation services, which generally are time- and
material-based, are recognized as direct contract costs are incurred. Effective
in the quarter ended 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, continued to recognize the applicable portion of license
fees as earned upon shipment of standard software products to customers.
A portion of license fees is deferred initially and subsequently
recognized over the one-year period during which continuing maintenance and
support services are provided to customers under the contracts. After that
initial contract period, additional maintenance and support services are subject
to separate contracts for which revenue is recognized ratably over the contract
period.
Unbilled accounts receivable represent amounts related to revenue which
has been recorded either as deferred revenue or earned revenue but which has not
been billed. Generally, unbilled amounts are billed within 90 days.
Deferred revenue represents primarily unearned license fees and
unearned maintenance and support fees.
9
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
The Company's customers are generally large companies in the utilities
and energy industry, process, discreet and consumer packaged goods companies, as
well as educational, municipal and transportation authorities. The Company
performs ongoing credit evaluations of its customers and does not require
collateral. The Company maintains allowances for potential credit losses and
such losses have been within management's expectations. No individual customers
represented greater than 10% of sales in 1995, 1996 and 1997.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid, low risk debt instruments with
a maturity of three months or less from the date of purchase to be cash
equivalents. The Company generally invests its cash and cash equivalents in
money market accounts and agency repurchase agreements, which are secured by
government agency securities.
The Company presently classifies all marketable securities as
available-for-sale investments and carries them at fair market value. Marketable
securities represent U.S. government obligations and indirect investments in
municipal obligations. Marketable securities classified as long-term mature no
later than July 1, 1999. Unrealized holding gains and losses, net of taxes, are
included in stockholders' equity.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital
leases is stated at lower of fair market value or the present value of the
minimum lease payments at the inception of the lease.
Depreciation on office and computer equipment and furniture is computed
using the straight-line method over estimated useful lives of four to seven
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the related lease term or their estimated useful lives.
Capitalized Software
No amounts related to internally developed software have been
capitalized. Purchased software costs included in other assets resulted
principally from the acquisition by TSW International, Inc. of SQL Systems
International plc. These costs are amortized over three years, the estimated
life of the related product. Amortization expense recorded in 1995, 1996, and
1997 was approximately $356,000, $459,000, and $294,000 respectively.
Investments and Intangibles, net
In 1997, The Indus Group, Inc. acquired convertible preferred stock in
Tenfold Corporation, a privately held software company in the development stage,
for approximately $8 million in cash. This investment, which if converted would
result in a 10% interest, is carried at cost. Also in 1997, The Indus Group,
Inc. acquired a management consulting firm for $4.75 million in common stock
(339,285 shares of The Indus Group, Inc. valued at $14 per share) and $250,000
in cash. The $5 million acquisition cost is being amortized over a four year
period, which is consistent with the related employment, confidentiality and
non-competition agreements.
Advertising Costs
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense was approximately $370,000, $486,000 and $472,000
in 1995, 1996, and 1997, respectively.
10
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
Effective January 1, 1996, The Indus Group, Inc. elected C Corporation
status for income tax purposes. Prior to 1996, The Indus Group, Inc. was an S
Corporation and, as a result, income determined on the cash basis for income tax
purposes was taxable to the shareholders, and not The Indus Group, Inc., for
federal and certain state income tax purposes. In connection with the
termination of S Corporation status on January 1, 1996, a $6.7 million
cumulative effect charge was recorded. The majority of the cumulative effect
charge is due to changing from the cash basis of accounting as an S Corporation
to the accrual basis of accounting as a C Corporation. The related deferred tax
liability is payable over four years.
TSW International, Inc. had accumulated operating loss carryovers of
approximately $10.3 million through its fiscal year end March 31, 1997 (included
with the December 31, 1996 year end of The Indus Group, Inc.). Those loss
carryovers were subject to a separate taxpayer limitation through December 31,
1997 because TSW International, Inc. remained as a separate corporation until
that date. No benefit has been accorded those carryovers in the accompanying
financial statements.
The provision for income taxes included in the accompanying financial
statements represents state and foreign taxes in all years and federal income
taxes of The Indus Group, Inc. and Indus International, Inc. for 1996 and 1997,
without any benefit for the operating losses or operating loss carryovers of TSW
International, Inc.
Pro Forma Statement of Operations Data
Pro forma net income data in 1995 includes a $1 million nonrecurring
compensation charge representing the fair value of the options granted in 1995
and excludes an $18.9 million nonrecurring compensation charge representing the
value of unexercised non-qualified stock options upon elimination of the
contingency feature. The contingency feature was intended to preserve The Indus
Group, Inc.'s S Corporation qualification by limiting the number of
shareholders. If The Indus Group, Inc. had not been an S Corporation, no
liquidity event contingency feature would have been necessary and the value of
all stock options would have been measured at their grant dates. Pro forma net
income in 1995 and 1996 reflects provisions for income taxes assuming The Indus
Group, Inc. was taxed as a C Corporation in both years.
Per Share Data
The average outstanding share numbers used in computing basic earnings
per share data in 1997 and pro forma basic earnings (loss) per share data in
1995 and 1996 reflect the average outstanding shares of each of the merged
companies, as adjusted for the effective exchange rates, and also the equivalent
common shares required for the redemption of the preferred stock of TSW
International, Inc. As a result of new accounting pronouncements, certain
additional equivalent shares are no longer included in the computation.
Additional equivalent shares related to options and warrants are included in the
diluted computations only.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements
A new pronouncement containing rules for timing of recognition of
software company revenues, particularly license fee revenues where there are
multiple elements to be delivered under a contract or arrangement with a
customer, will be effective for transactions beginning in 1998. 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. The Company has not yet assessed what the impact of
these rules will be on its recognition of revenues in its 1998 financial
statements.
Other recent pronouncements relate primarily to disclosure matters and
not to timing of recognition of income. One pronouncement will require
disclosure of "comprehensive income", including items such as unrealized gains
and losses on foreign currency translation and marketable securities, in
addition to income in determined under customary accounting rules. Another
pronouncement will require additional or different "segment" footnote data. The
Company has not yet assessed what the impact of these rules will be in terms of
additional or changed disclosures to be included in its 1998 financial
statements.
11
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Marketable Securities
<TABLE>
The following is a summary of marketable securities, all of which are
available for sale (in thousands):
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------- ------- -------- -------
<S> <C> <C> <C> <C>
1996
U.S. Treasury securities and obligations
of U.S. government agencies .................................. $16,067 $ -- $ (65) $16,002
Municipal obligations ........................................ 13,628 23 -- 13,651
------- ------- -------- -------
$29,695 $ 23 $ (65) $29,653
======= ======= ======== =======
Included in:
Cash and cash equivalents .................................... $ 1,000 $ -- $ -- $ 1,000
Short term investments ....................................... 26,579 10 (65) 26,524
Long term investments ........................................ 2,116 13 -- 2,129
------- ------- -------- -------
$29,695 $ 23 $ (65) $29,653
======= ======= ======== =======
1997
U.S. Treasury securities and obligations
of U.S. government agencies .................................. $ -- $ -- $ -- $ --
Municipal obligations ........................................ 23,649 24 -- 23,673
------- ------- -------- -------
$23,649 $ 24 $ -- $23,673
======= ======= ======== =======
Included in:
Cash and cash equivalents .................................... $ 6,975 $ -- $ -- $ 6,975
Marketable securities-current ................................ 11,874 6 -- 11,880
Marketable securities-non current ............................ 4,800 18 -- 4,818
------- ------- -------- -------
$23,649 $ 24 $ -- $23,673
======= ======= ======== =======
</TABLE>
There have been no significant realized gains or losses on sales of
marketable securities.
3. Property and Equipment
Property and equipment is recorded at cost and consists of the
following (in thousands):
1996 1997
------- -------
Furniture & fixtures ................................... $ 3,984 $ 4,615
Office equipment ....................................... 16,383 19,089
Leasehold improvements ................................. 2,391 2,617
Capitalized software ................................... 1,899 2,763
Capital lease .......................................... -- 4,104
------- -------
$24,657 $33,188
Less accumulated depreciation and amortization ......... 12,387 16,618
------- -------
$12,270 $16,570
======= =======
12
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Other Accrued Liabilities
Other accrued liabilities consists of the following (in thousands):
December 31
----------------------
1996 1997
------- -------
Merger and restructuring ......................... $ -- $ 1,898
Accrued commissions .............................. 2,257 3,089
Accrued payroll and related expenses ............. 2,093 2,674
Other accrued liabilities ........................ 5,382 6,407
------- -------
$ 9,732 $14,068
======= =======
5. Lines of Credit
The Company has a revolving bank line of credit of $35.0 million, which is
secured by all of the Company's accounts receivables. The revolving credit
facility expires on July 31, 1999 and bears an interest rate of the one month
LIBOR rate plus 1.5% (7.19% as of December 31, 1997). This facility replaced and
eliminated The Indus Group, Inc. and TSW International, Inc., revolving lines of
credit, which bore higher interest rates. Borrowings outstanding under this line
of credit were $26.7 million at December 31, 1997. Stand-by letters of credit
outstanding on this line of credit were $0.6 million at both December 31, 1996
and 1997, respectively. The line of credit agreement contains certain
affirmative and negative covenants. The Company was in compliance with these
covenants at December 31, 1997.
6. Related Party Transactions
Immediately prior to the Merger, TSW International, Inc. had subordinated
long-term notes of $15,706,000 and accrued interest of $4,075,000 that were
payable to its principal stockholder. The notes bore an interest rate of prime
plus 1.5% with varying maturity dates from July 31, 1999 to October 13, 2000.
Pursuant to the Merger, the outstanding subordinated floating rate notes of TSW
International, Inc. and accrued interest were exchanged for an aggregate of
1,235,879 common shares of the Company. Deferred issuance costs in connection
with the notes were written off as an extraordinary item in 1997.
In 1997, TSW International, Inc. forgave two notes receivable from
officers and stockholders totaling $457,000. TSW International, Inc. lent an
additional $161,850 to the individuals for payment of taxes in conjunction with
the note forgiveness.
The Company held employee notes receivable totaling $537,000 and
$416,000 at December 31, 1996 and 1997, respectively, from officers and
employees of the Company.
In 1995, TSW International, Inc. purchased approximately $557,000 of specified
research and development services from a company in which its principal
shareholder had an ownership interest for a portion of the year.
Through 1995, The Indus Group, Inc had a software license and royalty
agreement with its Chief Executive Officer and principal shareholder. In 1995,
accrual and payment under this agreement was waived.
13
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Commitments
The Company leases its office facilities under various operating lease
agreements. The leases require monthly rental payments in varying amounts
through 2005. These leases also require the Company to pay all property taxes,
normal maintenance, and insurance on the leased facilities.
Total rental expense under these leases (in thousands) was
approximately $4,508, $6,683 and $5,215 for 1995, 1996 and 1997, respectively.
Future minimum lease payments under all non-cancelable operating leases are as
follows (in thousands):
Operating Capital
Years Ending December 31 Leases Leases
- ------------------------ ------ ------
1998 .......................................... $ 4,347 $ 2,404
1999 .......................................... 4,441 1,053
2000 .......................................... 3,919 197
2001 .......................................... 2,419 19
2002 .......................................... 1,899 4
Thereafter .................................... 4,057 --
------- -------
Total minimum payments required .................... $21,082 $ 3,677
=======
Less amounts representing interest ................. 168
-------
Present value of future lease payments ............. $ 3,509
Less current portion ............................... 2,404
-------
Long term portion .................................. $ 1,105
=======
In 1995, Sumitomo Bank issued four irrevocable stand-by letters of
credit totaling $29,967. In 1996, Sumitomo Bank issued two additional
irrevocable stand-by letters of credit totaling $370,000. These letters are a
requirement of two of the Company's licensing agreements. This letter of credit
requirement will terminate in January 1998.
In 1996, Nations Bank issued an irrevocable standby letter of credit
for $200,000, as a requirement for a licensing agreement. In 1997, this letter
of credit was increased to $325,000. This letter of credit will expire March
1998.
8. Stockholders' Equity
On June 4, 1997, the articles of incorporation for Indus International,
Inc. were filed.
The following is a summary of the authorized and issued Preferred and Common
Stock of Indus International, Inc:
December 31
1997
------------
Preferred Stock
Authorized shares, $.001 par value per share ............... 10,000,000
Issued and outstanding ..................................... --
Amount ..................................................... $ --
Common Stock
Authorized shares, $.001 par value per share ............... 100,000,000
Issued and outstanding ..................................... 29,935,980
Amount (in thousands) ...................................... $ 29,936
14
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Stockholders' Equity - (Continued)
The Board of Directors is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of shares of Preferred
Stock in one or more series, to establish from time to time the number of shares
to be included in each such series, to fix the powers, preferences and rights of
the shares of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the stockholders. The Board
of Directors may authorize the issuance of Preferred Stock with voting or
conversion rights that could adversely affect the voting power of other rights
of the holders of Common Stock. Thus, the issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plan to issue any shares of Preferred Stock.
In June 1995, The Indus Group, Inc. issued 162,622 shares of common stock to
several employees in exchange for notes aggregating $109,626. The notes will be
forgiven over a five-year period provided the note holders continue their
employment with the Company. Additional deferred compensation of $370,000 was
recorded for the difference between the notes and the deemed fair value of the
shares at the date of issuance. The $479,626 total deferred compensation is
being amortized over the five-year period.
9. Stock Plans
Stock Option and Benefit Plans
Upon consummation of the Merger, The Indus Group, Inc. and TSW
International, Inc. stock option plans terminated and each outstanding option
under the plans as well as any individual non-plan options of TSW International,
Inc. were assumed and converted into options to purchase Indus International,
Inc. Common Stock, at the respective exchange rates in the Merger.
The Company has two stock option plans under which employees, directors
and consultants may be granted rights to purchase Common Stock.
1997 Stock Option Plan
The 1997 Stock Option Plan (the "Stock Plan") provides for the grant of
incentive stock options to employees, including officers and directors, and
consultants of the Company or any subsidiary of the Company. A total of
5,000,000 shares has been reserved for issuance under the Stock Plan. The
incentive stock options will be granted at not less than fair market value of
the stock on the date of grant. The options will generally vest over one to four
years and have a maximum term of ten years.
1997 Director Stock Option Plan
Each director who is not an employee of the Company is automatically
granted a nonstatutory stock option to purchase 10,000 shares of Common Stock of
the Company (the "First Option") on the date such person becomes a director or,
if later, on the effective date of the 1997 Director Stock Option Plan (the
"Director Option Plan"). Thereafter, each such person will automatically be
granted an option to acquire 2,500 shares of the Company's Common Stock (the
"Subsequent Option") upon such outside director's re-election at each Annual
Meeting of Stockholders, provided that on such date such person has served on
the Board of Directors for at least six months. A total of 200,000 shares have
been reserved for issuance under the Director Option Plan. Each option granted
under the Director Option Plan will become exercisable as to 25% of the Shares
subject to such option on each anniversary of its date of grant.
15
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Stock Plans - (Continued)
<TABLE>
The activity under the option plans, combined, was as follows:
<CAPTION>
Options Outstanding
--------------------------
Shares Available Number of Price
for Grant Shares Per Share
---------------- --------- ---------
<S> <C> <C> <C>
Balances at December 31, 1994 7,040,963 2,748,197 $ 0.28 - $ 1.65
Shares reserved .......... -- --
Options granted .......... (627,847) 627,847 $ 0.35 - $ 4.20
Options canceled ......... 56,440 (56,440) $ 0.28
Options exercised ........ -- --
---------- ----------
Balances at December 31, 1995 6,469,556 3,319,604 $ 0.28 - $ 4.20
Shares reserved .......... 1,600,000 --
Options granted .......... (2,925,942) 2,925,942 $ 3.38 - $22.75
Options canceled ......... 7,350 (7,350) $ 0.28 - $16.50
Options exercised ........ -- (916,845) $ 0.28 - $ 0.69
---------- ----------
Balances at December 31, 1996 5,150,964 5,321,351 $ 0.28 - $22.75
Shares reserved .......... 8,400,000 --
Options granted .......... (4,396,604) 4,396,604 $ 3.94 - $25.75
Options canceled ......... 577,466 (577,466) $ 0.28 - $25.00
Options exercised ........ -- (784,481) $ 0.28 - $15.00
Plan shares expired ...... (8,027,326) --
========== ==========
Balances at December 31, 1997 1,704,500 8,356,008 $ 0.28 - $25.75
========== ==========
</TABLE>
1992 Stock Option Plan (former Indus Group, Inc.)
Under a stock option plan of The Indus Group, Inc. effective prior to
its becoming a C Corporation, options granted would not be exercisable until a
"liquidity event" had occurred. A liquidity event was defined as the sale of
more than 20% of the voting stock interest to an independent party or parties or
an acquisition of the Company, which would result in termination of the plan.
Options granted would expire on the earlier of termination of employment or ten
years. Upon expiration of an option, the Company was obligated to pay the
optionee the increase in book value over the term of the option ("the book value
appreciation feature"). If any options were exercised, the Company would retain
the right to repurchase the issued shares at their then book value upon
termination of employment. As of September 29, 1995, the Board of Directors
eliminated the liquidity event contingency, thereby causing the options then
outstanding as to 1,791,970 common shares to be exercisable in their entirety.
As a result, these options were valued as of September 30, 1995 for financial
statement purposes and a one-time charge of $18,900,000 was recorded in the
statement of operations. The book value appreciation feature, in the event of
expiration of an option, also was eliminated at that time.
1997 Employee Stock Purchase Plan
Indus International, Inc. has an employee stock purchase plan under
which 1,000,000 shares of Common Stock have been reserved for issuance. The plan
allows for eligible employees to purchase stock at 85% of the lower of the fair
market value of the Company's Common Stock as of the first day of each six-month
offering period or the fair market value of the stock at the end of the offering
period. The initial offering period began November 1997. Purchases will be
limited to 10% of each employee's compensation. The Company has not issued any
stock under the plan.
Under a prior employee stock purchase plan of The Indus Group, Inc.
71,309 and 39,101 shares were issued in 1996 and 1997, respectively, at prices
ranging from $12.75 to $17.21 per share.
16
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Alternative Method of Valuing Stock Options
For employee stock options granted with exercise prices at or above the
existing market price and without any contingent feature as to the optionee's
ability to exercise (other than the passage of time as a continuing employee),
the Company records no compensation expense.
The following pro forma data is based on an alternative in which employee
stock options granted after 1994 are valued at grant date based on the
Black-Scholes option pricing model, a model that was developed to value options
subject to an active trading market. Although employee stock options are not
subject to a trading market, active or inactive, the pro forma disclosures that
follow are required by applicable accounting pronouncements.
The Indus Group, Inc. estimated the fair value for these options at the
date of grant using the minimum value method for 1995 and the Black-Scholes
option pricing model for 1996 and 1997, with the following weighted-average
assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of
6.0%, 5.75% and 6.43%, dividend yields of 0%; volatility factors of the expected
market price of the company's stock of 0.0, 0.75 and 0.60; and an expected life
of the options of one, four and six years. TSW International, Inc. estimated the
fair value for these options at the date of grant using the minimum value option
pricing model for 1995 and 1996 and the Black-Scholes option pricing model for
1997, with the following weighted-average assumptions for 1995, 1996 and 1997,
respectively: risk-free interest rates of 5.86%, 6.15% and 6.43%, dividend
yields of 0%; volatility factors of the expected market price of the company's
stock of 0.0, 0.0 and 0.60, and an expected life of the options of five years
for 1995, 1996 and 1997. Indus International, Inc. has estimated the fair value
for the options at the date of grant using the Black-Scholes option pricing
model, with the following weighted-average assumptions for 1997: risk-free
interest rate of 6.43%, dividend yield of 0%, volatility factor of the expected
market price of the company's stock of 0.60, and an expected life of the options
of six years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information net income (loss) including pro forma compensation
expense, net of tax for the years ended December 31, 1995, 1996 and 1997,
respectively, is as follows (in thousands except for earnings per share
information):
1995 1996 1997
-------- -------- --------
Pro forma net income (loss)........... $(20,207) $ 5,740 $ (1,546)
Pro forma net income (loss) per share. $ (0.92) $ 0.22 $ (0.05)
17
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Alternative Method of Valuing Stock Options - (Continued)
<TABLE>
The following table summarizes information about stock options
outstanding as of December 31, 1997.
<CAPTION>
Options
Options Outstanding Exercisable
-------------------------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Remaining Exercise Number of Exercise
Range of Exercise Prices Shares Contractual Life Price Shares Price
------------------------ ----------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$ 0.28 - $ 1.65 1,752,531 4.56 $ 1.06 1,573,470 $ 0.99
$ 2.20 - $ 2.20 8,354 7.24 2.20 8,354 2.20
$ 3.38 - $ 3.38 1,894,485 8.70 3.38 927,132 3.38
$ 3.94 - $13.50 486,212 9.27 5.47 103,657 5.02
$13.75 - $13.75 3,290,750 9.85 13.75 - -
$14.13 - $25.75 923,676 8.58 16.62 179,256 16.67
--------- ---- ------- --------- -------
Total 8,356,008 8.30 $ 8.56 2,791,869 $ 2.95
========= ==== ======= ========= =======
</TABLE>
The weighted average fair value of options granted in 1995, 1996 and
1997 is $3.91, $8.57 and $8.20, respectively, using these alternative methods of
valuation.
11. Employee Benefit and Profit-Sharing Plans
The Company has a defined contribution 401(K) plan. All employees over
the age of 21 who have completed at least one-half year of service are eligible
to participate. Each participant may elect to have amounts deducted from his or
her compensation and contributed to the plan up to 15% of his or her base
salary. All contributions are fully vested at the time the employee becomes an
active participant.
The Company also has a profit sharing plan. All employees over the age of 21
who have completed at least one-half year of service are eligible to
participate. Contributions to the plan are at the discretion of the board of
directors and are made to eligible employees' individual accounts in proportion
to their base salary. Contribution expense related to the profit sharing plan
for 1995, 1996 and 1997 was approximately $238,000, $250,000 and $250,000,
respectively.
18
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. Geographic Information
<TABLE>
Geographic information is as follows (in thousands):
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales (based on destination)
United States .......................................................... $ 79,287 $ 101,691 $ 135,763
International (including United States exports shown
below):
Europe ............................................................... 9,259 16,891 14,668
Asia ................................................................. 5,060 7,987 7,070
Canada ............................................................... 1,772 12,252 15,422
Other ................................................................ 6,446 4,217 4,111
--------- --------- ---------
Total International ....................................................... 22,537 41,347 41,271
--------- --------- ---------
Total consolidated net sales ........................................... $ 101,824 $ 143,038 $ 177,034
========= ========= =========
Income from operations
United States .......................................................... $ 42,011 $ 56,377 $ 75,506
International:
Europe ............................................................... 4,906 9,364 8,158
Asia ................................................................. 2,681 4,428 3,932
Canada ............................................................... 939 6,792 8,577
Other ................................................................ 3,416 2,338 2,286
Corporate administrative and other expenses ............................... (69,962) (64,738) (88,306)
Interest and other expenses, net .......................................... (2,113) (1,887) (1,968)
========= ========= =========
Total consolidated income (loss) before income taxes ...................... $ (18,122) $ 12,674 $ 8,185
========= ========= =========
Identifiable assets
United States .......................................................... $ 41,536 $ 100,105 $ 118,918
International:
Europe ............................................................... 8,025 8,834 5,490
Asia ................................................................. 2,163 3,951 3,225
Canada ............................................................... 3,114 3,228 5,895
Other ................................................................ 2,896 1,737 3,197
========= ========= =========
Total consolidated identifiable assets .................................... $ 57,734 $ 117,855 $ 136,725
========= ========= =========
United States export sales (reported in international sales
above)
Europe ............................................................... $ 2,017 $ 7,337 $ 3,201
Asia ................................................................. 1,766 2,326 871
Canada ............................................................... 1,772 12,252 15,422
Other ................................................................ 6,446 4,217 4,069
========= ========= =========
Total consolidated export sales ........................................... $ 12,001 $ 26,132 $ 23,563
========= ========= =========
</TABLE>
19
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
13. Income Taxes
The provision for income taxes (state and foreign only in 1995)
consists of the following (in thousands):
1995 1996 1997
-------- -------- --------
Current:
Federal ..................... $ -- $ 7,639 $ 7,993
State and foreign ........... 193 2,497 1,823
-------- -------- --------
Deferred: ...................... 193 10,136 9,816
-------- -------- --------
Federal ..................... -- (2,522) (3,057)
State and foreign ........... 230 (765) (351)
-------- -------- --------
230 (3,287) (3,408)
-------- -------- --------
$ 423 $ 6,849 $ 6,408
======== ======== ========
The effective rate of the provision for income taxes reconciles to the
amount computed by applying the federal statutory rate to income before
provision for income taxes as follows:
Percentage
--------------
1996 1997
---- ----
Federal statutory rate ................... 35.0 % 35.0 %
Merger expenses .......................... -- 41.1
State taxes, net of federal benefit ...... 6.5 9.3
Foreign Taxes ............................ 2.3 3.7
FSC benefit .............................. (2.3) (1.5)
R&D credit ............................... (1.1) (4.8)
TSW NOL tax benefit, net ................. 8.6 (10.3)
Other .................................... 5.0 5.8
---- ----
54.0 % 78.3 %
==== ====
The 1996 and 1997 current federal and state tax provisions do not
reflect the tax savings of $6,669,000 and $3,479,000, respectively resulting
from deductions associated with the exercise of stock options by employees in
1996. This tax benefit has been included in additional capital.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred tax liability are as follows (in thousands):
December 31,
--------------------
1996 1997
-------- --------
Accounts receivable allowances ......................... $ (444) $ (804)
Tax over book depreciation and amortization ............ 703 782
Nondeductible accruals ................................. (1,287) (2,100)
Deferred licensing fee revenue ......................... (7,027) (4,641)
State income taxes ..................................... (339) (672)
Conversion from cash to accrual basis of accounting .... 8,612 5,542
Net operating loss and tax credit carryforwards ........ (6,445) (6,826)
Other, net ............................................. -- (2)
-------- --------
Subtotal ............................................ (6,227) (8,721)
Less valuation allowance ............................... 10,064 9,140
-------- --------
Net deferred tax liability ............................. $ 3,837 $ 419
======== ========
The additional taxable income resulting from the change by The Indus
Group, Inc. from the cash to accrual basis of accounting for income taxes in
1996 will be reportable in taxable income over the years 1996 through 1999. The
valuation allowance is attributable to TSW International, Inc.'s net operating
loss and tax credit carryforwards and other temporary differences on the date of
the Merger.
20
EXHIBIT 21.1
INDUS INTERNATIONAL, INC.
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY (AND DOING BUSINESS AS) STATE OF INCORPORATION
------------------------------------------ ----------------------
Indus Group North America, Inc. California
Indus Foreign Sales Corporation U.S. Virgin Islands
TSW International, Ltd. United Kingdom
TSW International, S.A. France
TSW International Pty Ltd. Australia
TSW International Software Pte. Ltd. Singapore
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Indus International, Inc. of our report dated January 27, 1998,
included in the 1997 Annual Report to the Stockholders of Indus International,
Inc.
Our audits also included the financial statement schedule of Indus
International, Inc. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-36995) pertaining to the 1997 Stock Plan, 1997
Director Option Plan and 1997 Employee Stock Purchase Plan of Indus
International, Inc. of our report dated January 27, 1998, with respect to the
consolidated financial statements of Indus International, Inc. incorporated by
reference in this Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/ Ernst & Young LLP
Palo Alto, California
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Indus
International, Inc.'s, Annual Report on Form 10-K for the year ended December
31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001041333
<NAME> INDUS INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,052
<SECURITIES> 11,880
<RECEIVABLES> 45,548
<ALLOWANCES> (1,974)
<INVENTORY> 0
<CURRENT-ASSETS> 102,628
<PP&E> 33,188
<DEPRECIATION> (16,618)
<TOTAL-ASSETS> 136,725
<CURRENT-LIABILITIES> 65,390
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 70,201
<TOTAL-LIABILITY-AND-EQUITY> 136,725
<SALES> 0
<TOTAL-REVENUES> 177,034
<CGS> 0
<TOTAL-COSTS> 78,575
<OTHER-EXPENSES> 88,306
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,558
<INCOME-PRETAX> 8,185
<INCOME-TAX> 6,408
<INCOME-CONTINUING> 1,777
<DISCONTINUED> 0
<EXTRAORDINARY> (787)
<CHANGES> 0
<NET-INCOME> 990
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
