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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 0-22993
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INDUS INTERNATIONAL, INC.
(Exact name of Registrant issuer as specified in its charter)
Delaware 94-3273443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 Spear Street, San Francisco, California 94105
(Address of principal executive offices) (Zip code)
(415) 904-5000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
As of April 30, 1999, Registrant had outstanding 32,324,345 shares of
Common Stock, $.001 par value.
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<PAGE>
TABLE OF CONTENTS
Part I: Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations - three
months ended March 31, 1999 and 1998
Condensed Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998
Condensed Consolidated Statements of Cash Flows - three months ended
March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II: Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Software licensing fees ......................... $5,652 $14,360
Services and maintenance ........................ 39,325 30,364
--------- ---------
Total revenues .............................. 44,977 44,724
Cost of revenues ..................................... 22,636 24,130
--------- ---------
Gross margin ......................................... 22,341 20,594
--------- ---------
Operating expenses:
Research and development ........................ 8,394 6,853
Sales and marketing ............................. 7,015 5,581
General and administrative ...................... 3,814 3,108
--------- ---------
Total operating expenses .................... 19,223 15,542
--------- ---------
Income from operations............ ................... 3,118 5,052
Interest and other income (expense), net.............. 258 (215)
--------- ---------
Income before income taxes ........................... 3,376 4,837
Provision for income taxes ........................... 700 450
--------- ---------
Net income............................................ 2,676 4,387
========= =========
Earnings per share (Basic) ........................... $0.08 $0.15
========= =========
Earnings per share (Diluted)...... ................... $0.08 $0.12
========= =========
Shares used in computing earnings per share (Basic)... 31,732 30,053
========= =========
Shares used in computing earnings per share (Diluted). 34,058 35,586
========= =========
</TABLE>
See accompanying notes
<PAGE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $24,653 $23,554
Marketable securities ............................... 19,475 15,596
Billed accounts receivable, less allowance for
doubtful accounts of $4,178 at March 31, 1999
and $3,578 at December 31, 1998 .................... 48,585 56,921
Unbilled accounts receivable ........................ 25,888 21,474
Other current assets ................................ 6,010 5,517
------------ -----------
Total current assets .................................. 124,611 123,062
Property and equipment, net ........................... 15,906 15,906
Investments and intangible assets, net................ 10,999 11,364
Other assets .......................................... 269 453
------------ -----------
$151,785 $150,785
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under line of credit ...................... $14,650 $19,650
Current portion of obligations under capital leases . 958 1,355
Accounts payable .................................... 9,905 9,482
Other accrued liabilities ........................... 14,077 16,721
Deferred revenue .................................... 21,218 17,245
------------ -----------
Total current liabilities ............................. 60,808 64,453
------------ -----------
Obligations under capital leases....................... 257 257
Stockholders' equity:
Common Stock ........................................ 32 32
Additional capital .................................. 104,512 102,622
Deferred Compensation and other...................... (248) (740)
Accumulated deficit ................................. (10,597) (13,273)
Accumulated other comprehensive income............... (2,979) (2,566)
------------ -----------
Total stockholders' equity ............................ 90,720 86,075
------------ -----------
$151,785 $150,785
============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $2,676 $4,387
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 1,803 2,086
Changes in operating assets and liabilities....... 5,520 (3,771)
Other............................ ................ -- 157
---------- ----------
Net cash provided by operating activities ............. 9,999 2,859
---------- ----------
Cash flows from investing activities:
Purchase of marketable securities ..................... (54,554) (83)
Sale of marketable securities ......................... 50,675 10,850
Acquisition of property and equipment ................. (1,964) (1,377)
Other ................................................. (42) (141)
---------- ----------
Net cash provided by (used in) investing activities ... (5,885) 9,249
---------- ----------
Cash flows from financing activities:
Net repayment of line of credit ....................... (5,000) --
Net repayment of capital leases........................ (397) (1,197)
Net proceeds from issuance of common stock ............ 1,890 490
Notes receivable from shareholders .................... 492 --
---------- ----------
Net cash used in financing activities ................. (3,015) (707)
---------- ----------
Net increase in cash and cash equivalents ............. 1,099 11,401
Cash and cash equivalents at beginning of period ...... 23,554 11,052
---------- ----------
Cash and cash equivalents at end of period ............ $24,653 $22,453
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
INDUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Indus International, Inc. develops, markets, and supports a
proprietary line of enterprise asset management software and
implementation services. The Company serves as an agent of change for
its customers, who seek to improve their return on investment and
efficiencies in core business functions in the utilities and energy
industry, process, discreet and consumer packaged goods companies, as
well as educational, municipal and transportation authorities worldwide.
The Company derives its revenues primarily from software licenses,
implementation and training services and maintenance fees. While the
Company has derived a significant portion of its revenues from electric
utilities, it also derives revenues from customers such as oil and gas
companies, petrochemical companies, manufacturers, hospitals,
educational systems, governments, transportation authorities and steel
and forest product companies.
The accompanying unaudited condensed consolidated financial
information has been prepared by management, in accordance with
generally accepted accounting principles for interim financial
information and pursuant to instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the Securities and Exchange Commission's rules and regulations. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position at March 31, 1999 and results of operations and cash flows for
all periods presented have been made. The condensed consolidated
balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
These condensed consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial
statements as included in the Company's 1998 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission. The results of
operations for the three month ended March 31, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or
for the entire fiscal year ending December 31, 1999.
Comprehensive Income (Loss)
Comprehensive losses (primarily foreign currency translation
effects and unrealized losses on marketable securities) amounted to $3.0
million and $4.2 million, respectively, for the three months ended March
31, 1999 and 1998.
2. Earnings Per Share
Earnings per share (Basic) is computed using net income and the
weighted average number of common shares outstanding during each period.
Earnings per share (Diluted) is computed using net income and the
weighted average number of common and dilutive common equivalent shares
outstanding during each period. The computation of the weighted average
number of shares outstanding for the three month periods ended March 31,
1999 and 1998 is as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Weighted average outstanding - used
for basic .............................. 31,732 30,053
Options value using treasury stock
method ................................. 917 2,829
Dilutive effect-Warrants (assumed
from former TSW International, Inc.) ... 1,409 2,704
--------- ---------
Weighted average outstanding and dilutive
equivalents - used for dilutive ........ 34,058 35,586
========= =========
</TABLE>
3. Litigation
A customer had filed an American Arbitration Association Demand
for Arbitration that claims breach of contract related to the purchase
of the Company's software. This claim was settled on April 7, 1999.
The outcome did not have a material impact on the Company.
The Company is a party to currently pending legal proceedings in
which a former employee of the Company has filed a complaint alleging
breach of contract. The Company believes that this complaint is without
merit and is defending it vigorously. The Company anticipates a
favorable outcome, however, litigation is subject to inherent
uncertainties and, thus, there can be no assurance that this complaint
will be resolved favorably to the Company or that the outcome of this
matter will not have a material adverse affect on the Company's
financial position and results of operations. No provision for any
liability that may from this matter has been made in the accompanying
unaudited condensed consolidated financial statements.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-Q contain forward-
looking statements that involve risks and uncertainties. All forward-
looking statements included in this document are based on information
available to the Company on the date hereof, and 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 in "Factors Affecting Future Results".
Results of Operations
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain line items in the Company's statements of
operations:
Percent of Total Revenues
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Software licensing fees ......................... 12.6% 32.1%
Services and maintenance ........................ 87.4% 67.9%
--------- ---------
Total revenues .............................. 100.0% 100.0%
Cost of revenues ..................................... 50.3% 53.9%
--------- ---------
Gross margin ......................................... 49.7% 46.1%
Operating expenses:
Research and development ........................ 18.7% 15.3%
Sales and marketing ............................. 15.6% 12.5%
General and administrative ...................... 8.5% 7.0%
--------- ---------
Total operating expenses .................... 42.8% 34.8%
--------- ---------
Income from operations............ ................... 6.9% 11.3%
Other income, net..................................... 0.6% -0.5%
--------- ---------
Income before income taxes ........................... 7.5% 10.8%
Provision for income taxes ........................... 1.6% 1.0%
--------- ---------
Net income............................................ 5.9% 9.8%
========= =========
</TABLE>
Revenues. Total revenues increased 1% to $45.0 million in the three
months ended March 31, 1999 from $44.7 million in the same period of
1998. As most of the Company's contracts are denominated in U.S.
dollars, foreign currency fluctuations have not materially impacted the
results of operations.
Revenues from software licensing fees decreased by 61% to $5.7 million
in the three months ended March 31, 1999 from $14.4 million in 1998.
Reduced software licensing fee sales were a result of the reengineering
of the Company's North American sales organization, as well as an
industry-wide slowdown in enterprise application market. Software
licensing fees as a percentage of revenue were 13% and 32% for the three
months ended March 31, 1999 and 1998, respectively.
Revenues from services and maintenance increased by 30% to $39.3 million
in the three months ended March 31, 1999 from $30.4 million in 1998
resulting primarily from increases in consulting services generated by
new contracts and additional consulting projects for existing customers.
Services and maintenance as a percentage of revenue were 87% and 68% for
the three months ended March 31, 1999 and 1998, respectively.
The Company does not believe that the revenue growth in services and
maintenance experienced in the first three months of 1999 is necessarily
indicative of any revenue growth that may occur in future periods.
Cost of Revenues. Cost of revenues consists primarily of (i) personnel
and related costs for implementation (including account executive
personnel), (ii) training and customer support services and (iii)
sublicense fees to third parties upon the sale of the
Company's product containing such third-party software. Gross margin on
license fees are substantially higher than gross margin on service
revenue, reflecting the low packaging and production costs of software
products compared with the relatively high personnel costs associated
with providing implementation, maintenance, consulting and training
services
Cost of revenues decreased 6% to $22.6 million in the three months ended
March 31, 1999 from $24.1 million in 1998. The decrease in absolute
dollars in cost of revenues was due principally to the increased
utilization of personnel for services and maintenance and decrease in
third party license fees. As a percent of total revenue, cost of
revenues was 50% and 54% for the quarters ended March 31, 1999 and 1998,
respectively.
Research and Development (R&D). Research and development expenses
consist primarily of: (i) personnel and related costs, (ii) computer
timeshare costs and (iii) third party consultant fees directly
attributable to the development of new software application products and
enhancements to existing products.
Research and development expenses increased 22% to $8.4 million in the
three months ended March 31, 1999 from $6.9 million in 1998 as the
Company delivered versions 7.0 and 8.0 respectively of PASSPORT and
EMPAC during the quarter ended March 31, 1999. As a percent of total
revenue, research and development expenses were 19% and 15% for the
quarters ended March 31, 1999 and 1998, respectively. The Company
believes that a significant level of investment in R&D is essential to
remain competitive. The amount of R&D in absolute dollars for a
particular period may vary depending on the projects in progress. To
date, the Company has expensed all software development costs because
development costs incurred subsequent to the establishment of
technological feasibility have not been material.
Sales and Marketing. Sales and marketing expenses increased 26% to $7.0
million in the three months ended March 31, 1999 from $5.6 million in
1998. As a percent of total revenue, sales and marketing expenses were
16% and 13% for the three months ended March 31, 1999 and 1998,
respectively. The increase in these expenditures were primarily related
to expansion of the Company's sales and marketing staff and associated
costs and the implementation of promotional programs to improve name and
product recognition.
General and Administrative. General and administrative expenses
increased 23% to $3.8 million in the three months ended March 31, 1999
from $3.1 million in 1998. As a percent of total revenue, general and
administrative expenses were 8% and 7% for the three months ended March
31, 1999 and 1998, respectively. General and administrative expenses in
absolute dollars increased primarily due to an increase in the allowance
for doubtful accounts.
Provision for Income Taxes. Income tax expense of $700,000 and $450,000
represented federal and state corporate income taxes for the three
months ended March 31, 1999 and 1998, respectively. These include a
$650,000 and $1.5 million tax benefit for these respective periods for
utilization of net operating loss carryovers and other tax credits not
previously recorded.
Liquidity and Capital Resources
The Company had total assets of $151.8 million and $150.8 million at
March 31, 1999 and December 31, 1998, respectively. Historically, the
Company has financed its operations primarily through cash provided by
operations, borrowings under its line of credit, sales of Preferred
Stock to a principal shareholder and funds borrowed from principal
shareholders. In March 1996, The Indus Group, Inc., a predecessor
corporation of the Company, received $33.9 million, representing the
proceeds (net of underwriting commissions and offering costs) from an
initial public offering of 2,500,000 shares of its Common Stock. These
proceeds were used to purchase marketable securities (comprised of
municipal and U.S. government obligations) and certain cash equivalent
instruments. TSW International, Inc., a predecessor corporation of the
Company, financed its activities largely through approximately $38.0
million provided by its principal shareholder in exchange for
subordinated notes and preferred stock.
As of March 31, 1999, the Company's principal sources of liquidity
consisted of approximately $24.7 million in cash and cash equivalents,
$19.5 million in marketable securities and an available revolving bank
line of credit of up to $35 million. The revolving credit facility
expires on July 31, 1999. Borrowings under the line of credit bear
interest at the prime rate or LIBOR rate plus 1.25% (6.18% as of March
31, 1999) and are available under the line of credit based on a
percentage of eligible accounts receivables. Borrowings of
approximately $14.7 million were outstanding as of March 31, 1999.
In the three months ended March 31, 1999, cash and cash equivalents
increased by 5% while marketable securities increased by 25%. This was
primarily due to an increase in cash of approximately $10 million
provided by operating activities. The purchase of property and
equipment used cash of approximately $2 million. Financing activities
used cash of approximately $3 million, primarily for a $5 million
paydown of the line of credit offset partially by the repayment by a
stockholder of a note receivable and proceeds from the exercise of stock
options.
In the three months ended March 31, 1998, cash and cash equivalents
increased substantially as a result of the sale of long-term marketable
securities. Operating activities provided cash of approximately $2.9
million. The purchase of property and equipment used cash of
approximately $1.4 million. Financing activities used cash of
approximately $0.7 million, primarily from the repayment of the capital
leases.
Cash requirements are expected to continue to increase in order to fund:
(i) personnel and salary costs, (ii) research and development costs,
(iii) investment in additional technical equipment, and (iv) working
capital requirements.
In addition to its line of credit, the Company's principal commitments
at March 31, 1999 consisted of obligations under operating leases for
facilities and computer equipment.
The Company believes that its existing cash and marketable securities,
together with anticipated cash flow from operations and available bank
borrowings, will be sufficient to meet its cash requirements during the
next 12 months. The foregoing statement regarding the Company's
expectations for continued liquidity is a forward-looking statement, and
actual results may differ materially depending on a variety of factors,
including variable operating results or presently unexpected uses of
cash.
Year 2000 Risk Disclosure
The Year 2000 Issue and the Nature and Effects of the Year 2000 on
Information Technology (IT) and Non-IT Systems:
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company's plan to resolve the Year 2000 Issue involves the
continuing effort in the following four phases: assessment, remediation,
testing, and implementation. To date, the Company has made progress in
identifying of all systems that could be significantly affected by the
Year 2000 and have identified areas that require Y2K testing services.
The completed assessment could indicate that most of the Company's
significant information technology systems will be affected,
particularly the general ledger, project accounting and billing systems.
In addition, the Company is in the process of gathering information
about the Year 2000 compliance status of its significant suppliers and
subcontractors and will continue to monitor their compliance.
Status of Progress in Becoming Year 2000 Compatible: The Company has a
formal Year 2000 Program focusing on four key areas: 1) Information
Technology, addressing internal software and business systems; 2) the
Company's Products; 3) Third Party, addressing the preparedness of non-
IT suppliers; 4) the Company's Facilities. For each readiness area,
based on a phased approach, the Company is performing a worldwide risk
assessment, remediating and conducting testing, implementing solutions,
and communicating with employees, suppliers and customers to raise
awareness of the Year 2000 problem. The Year 2000 Program is managed by
full time Y2K project personnel. The Company has inventoried over 400
key suppliers of goods and services to the Company and has either mailed
surveys or captured their Y2K Disclosure information off the web. It is
the process of evaluating responses and following-up. It is our goal to
have this phase completed by June 30, 1999. Presently we have received
responses from approximately 20% of the suppliers surveyed. The Company
intends to disqualify potentially non-compliant sources and re-qualify
alternative sources to help mitigate potential business disruptions.
Information Technology Program: The Company is continuing its assessment
of internal applications and computer hardware. The program is
addressing not only the supplier's year 2000 product integrity but also
assesses the supplier's ability to provide product and services.
Hardware assessment includes workstations, servers, telecommunication
equipment and other items. The assessment of major applications, servers
and networks is complete. Presently, 94% of the major applications have
been verified compatible. Furthermore 85% of the servers and networks
that required action have been addressed and 46% of the operating
systems have been evaluated. Completion of the testing phase for all
significant systems is expected by June 30, 1999, with all remediated
systems expected to be fully tested and implemented by September 30,
1999.
Product Readiness Program: This program focuses on identifying and
resolving the Year 2000 issues existing in the Company's currently
supported products. It encompasses a number of activities including
product testing, evaluation, product engineering and quality assurance.
The program began in 1998 and work will continue through 1999.
Third Party Program: The Company has completed the survey of its
significant 3rd party service suppliers. The key vendors included the
Company's banking, insurance and investment partners. The Company has
received and reviewed all of their Y2K disclosure information and
confirmed they are Year 2000 compatible. To date, the Company is not
aware of any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. There may be certain third parties, such
as utilities, telecommunication companies or material vendors, where
alternate arrangements or sources are limited or unavailable. The
inability of external agents to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company. The
effect of non-compliance by external agents is not determinable.
Indus Facilities Program: The Company is conducting an assessment of all
the Indus facilities and facility suppliers worldwide. The facilities
assessment was completed by the end of March 1999 and a spreadsheet
detailing areas of responsibilities was developed and sent out to the
landlords in mid April. The spreadsheet which will identify areas
requiring action is due to be returned to Indus by May 31, 1999.
Currently, a plan is due to rectify affected systems. Remediation is
approximately 25% complete as of April 1999. Testing and implementation
of affected equipment is expected to be 90% complete by July 1999.
Contingency Plans: The Company currently has no contingency plans in
place in the event it does not complete all phases of the Year 2000
program. The Company is currently evaluating the status of completion to
determine whether such a plan is necessary. There can be no assurance
that the Company will be able to develop a contingency plan that will
adequately address issues that may arise in the year 2000. Failure by
the Company to develop and implement, if necessary, an appropriate
contingency plan could have a material impact on the operations of the
Company.
Costs: The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating
equipment for Year 2000 modifications. The total cost of the Year 2000
project is currently estimated at an amount up to $3.0 million and will
be funded through operating cash flows. To date, the Company has
incurred approximately $1.25 million, related to all phases of the Year
2000 project. The majority of the total costs will be incurred during
the next three quarters. The Company is continuing its assessment and
refining its cost estimates. There can be no assurance, however that
there will not be a delay in, or increased costs associated with the
programs described in this section.
Summary: Management of the Company believes it has an effective program
in place to resolve the Year 2000 issue in a timely manner. As noted
above, the Company has not yet completed all necessary phases of the
Year 2000 program. In the event that the Company does not complete any
additional phases, the Company may have difficulty in processing
customer invoices or payments. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation
for computer systems product failure, for example, equipment shutdown or
failure to properly date business records. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Factors Affecting Future Results
Volatility of Operating Results
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 its 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 $143.0 million in 1996 to $177.0 million
in 1997 and $195.5 million in 1998. 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.
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. Our 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. The Company is currently in the
process of recruiting a Senior Vice-President of Global Sales. 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 asset 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 competitors include companies in the
enterprise, departmental, and point solutions market segments. At the
enterprise solution level, the Company's main competitor is SAP. The
Company counters SAP by offering best-of-breed solution sets that
include application integration to provide interoperability with
Oracle's corporate financial applications and PeopleSoft's corporate
financial, payroll, and human resources applications. In the
departmental or plant solutions market for Tier 1 customers, the Company
competes primarily with other EAM software vendors such as Mincom Corp.,
Project Software & Development, Inc. (PSDI), Marcam, Walker, and
DataStream, Inc. Point solutions vendors such as Severn Trent Systems,
Synercom, and others provide competing software products to industry
sub-sectors such as transmission and distribution of electric power for
utilities. In the future, the Company may also face competition from
Oracle, PeopleSoft and SPL WorldGroup B.V. if they elect to broaden
their solutions to include some components of EAM functionality. 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 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.
Changes in Market Demand
Overall demand for enterprise software may grow more slowly or
actually decrease in upcoming quarters and years. In 1999, a number of
major providers of enterprise software have reported revenue growth
substantially slower growth than in previous periods. The Company
believes this trend may be a result of organizations devoting
information technology resources and budgets towards resolving Year 2000
issues; however it may also reflect a saturation of the market for
enterprise software. The Company has reported a decrease in software
licensing fees by 65% in Q1 1999 as compared to Q1 1998. To the extent
that the overall slowdown in the market for enterprise software market
continues or worsens, the Company's business, results of operations and
financial condition are likely to be 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 20%, 14% and 13% of total
revenues in 1996, 1997 and 1998, respectively. The Company maintains an
international operational presence in the United Kingdom, Australia and
France. In addition, the Company has established international sales
and support offices in Europe and Australia; and expects international
sales 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 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 indirect sales channel partners 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 world's
buying power and approximately 3% 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 continue to 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.
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. has 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since
December 31, 1998.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to currently pending legal proceedings in which a
former employee of the Company has filed a complaint alleging breach of
contract. The Company believes that this complaint is without merit and
is defending it vigorously. The Company anticipates a favorable outcome,
however, litigation is subject to inherent uncertainties and, thus,
there can be no assurance that this complaint will be resolved favorably
to the Company or that the outcome of this matter will not have a
material adverse affect on the Company's financial position and results
of operations. No provision for any liability that may from this matter
has been made in the unaudited condensed consolidated financial
statements included elsewhere herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Report of Use of Proceeds from Initial Public Offering dated
February 29, 1996 (Form SR)
Aggregate offering price $37,500,000
Expenses incurred in connection with offering 3,636,236
Net offering proceeds to issuer $33,863,764
Purchase of equipment 2,714,000
Income taxes 3,841,421
Working capital 27,308,343
Proceeds remaining $ 0
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.01 Financial Data Schedule
(b) Reports on Forms 8-K.
The following report on Form 8K was filed during the first quarter
ended March 31, 1999.
Form 8K reporting Item 5 (dated March 23, 1999) was filed
April 13, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INDUS INTERNATIONAL, INC.
(Registrant)
Date: May 17, 1999
/s/ Albert J. Wood
Albert J. Wood
Vice President of
Finance and Treasurer
Principal Financial and
Accounting Officer
<PAGE>
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 19,475
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<ALLOWANCES> 4,178
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<OTHER-EXPENSES> 19,223
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