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Previous: HORIZON ORGANIC HOLDING CORP, 10-Q, 1999-08-16 |
Next: ANNAPOLIS NATIONAL BANCORP INC, 10QSB, 1999-08-16 |
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 June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number: 0-22993
INDUS INTERNATIONAL, INC. (Exact name of Registrant as specified in its charter)
Delaware 94-3273443 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
60 Spear Street, San Francisco, California 94105
(Address of principal executive offices, including 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. [X] Yes [ ] No
As of July 31, 1999, Registrant had outstanding 32,461,176 shares of Common Stock, $.001 par value.
INDUS INTERNATIONAL, INC.
FORM 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations - three and six months ended June 30, 1999 and 1998
Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows - six months ended June 30, 1999 and 1998
Notes To Condensed Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Results of Operations
Liquidity and Capital Resources
Item 3: Quantitative and Qualitative Disclosures about Market Risks
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
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Software license fees ............ $8,391 $11,564 $14,043 $25,924
Services and maintenance ......... 43,290 34,002 82,615 64,366
--------- --------- --------- ---------
Total revenues ............... 51,681 45,566 96,658 90,290
Cost of revenues ...................... 26,930 26,873 49,566 51,003
--------- --------- --------- ---------
Gross profit .......................... 24,751 18,693 47,092 39,287
--------- --------- --------- ---------
Operating expenses:
Research and development ......... 8,282 7,242 16,676 14,095
Sales and marketing .............. 7,894 7,058 14,909 12,639
General and administrative ....... 4,363 3,688 8,177 6,796
--------- --------- --------- ---------
Total operating expenses ..... 20,539 17,988 39,762 33,530
--------- --------- --------- ---------
Income from operations ................ 4,212 705 7,330 5,757
Interest and other income (expense), net. 38,915 (206) 39,173 (421)
--------- --------- --------- ---------
Income before income taxes ............ 43,127 499 46,503 5,336
Provision for income taxes ............ 16,267 -- 16,967 450
--------- --------- --------- ---------
Net income ............................ $26,860 $499 $29,536 $4,886
========= ========= ========= =========
Earnings per share (basic) ............ $0.83 $0.02 $0.92 $0.16
========= ========= ========= =========
Earnings per share (diluted) .......... $0.79 $0.01 $0.87 $0.14
========= ========= ========= =========
Shares used in computing earnings
per share (basic) ..................... 32,218 30,495 31,975 30,274
========= ========= ========= =========
Shares used in computing earnings
per share (diluted) ................... 34,139 36,010 34,099 35,798
========= ========= ========= =========
See accompanying notes.
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
June 30, December 31
1999 1998
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $22,995 $23,554
Marketable securities .............................. 67,125 15,596
Billed accounts receivable, less allowance
for doubtful accounts of $2,585 at June 30, 1999
and $3,578 at December 31, 1998..................... 42,739 56,921
Unbilled accounts receivable ....................... 23,787 21,474
Other current assets ............................... 5,728 5,517
------------ -----------
Total current assets .......................... 162,374 123,062
Property and equipment, net .......................... 15,135 15,906
Intangible assets, net................................ 2,624 11,364
Other assets ......................................... 481 453
------------ -----------
Total assets $180,614 $150,785
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under lines of credit .................... $0 $19,650
Current portion of obligations under capital leases 663 1,355
Accounts payable ................................... 8,797 9,482
Income taxes payable ............................... 16,967 57
Other accrued liabilities .......................... 14,869 16,664
Deferred revenue ................................... 21,210 17,245
------------ -----------
Total current liabilities ..................... 62,506 64,453
------------ -----------
Obligations under capital leases...................... 46 257
------------ -----------
Stockholders' equity:
Common stock ....................................... 32 32
Additional paid-in capital ......................... 105,421 102,622
Deferred compensation and other..................... (248) (740)
Retained earnings(accumulated deficit).............. 16,263 (13,273)
Accumulated other comprehensive loss................ (3,406) (2,566)
------------ -----------
Total stockholders' equity .................... 118,062 86,075
------------ -----------
Total liabilities and stockholders' equity $180,614 $150,785
============ ===========
See accompanying notes.
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income............................................ $29,536 $4,885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 4,216 4,002
Changes in operating assets and liabilities...... 29,185 (2,361)
Gain on sale of investment in Tenfold Corporation.. (38,170) --
Other............................................ 372 133
---------- ----------
Net cash provided by operating activities .............. 25,139 6,659
---------- ----------
Cash flows from investing activities:
Purchase of marketable securities .................... (175,013) (8,071)
Sale of marketable securities ........................ 123,484 16,846
Acquisition of property and equipment ................ (2,670) (3,882)
Proceeds from sale of investment in Tenfold Corporation 46,178 --
Other ................................................ (44) (141)
---------- ----------
Net cash provided by (used in) investing activities .... (8,065) 4,752
---------- ----------
Cash flows from financing activities:
Net repayment of borrowings under lines of credit ..... (19,650) --
Net repayment of capital leases....................... (903) (1,771)
Net proceeds from issuance of common stock ........... 2,428 2,232
Repayment of note by stockholder ..................... 492 --
---------- ----------
Net cash provided by (used in) financing activities .... (17,633) 461
---------- ----------
Net increase in cash and cash equivalents .............. (559) 11,872
Cash and cash equivalents at beginning of period ....... 23,554 11,052
---------- ----------
Cash and cash equivalents at end of period ............. $22,995 $22,924
========== ==========
See accompanying notes.
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 June 30, 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 six months ended June 30, 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.
2.Comprehensive Income
Comprehensive income, which includes net income plus foreign currency translation effects, amounted to $28.7 million and $4.9 million, respectively, for the six months ended June 30, 1999 and 1998.
3. Earnings Per Share
Earnings per share (basic) is computed using net income and the weighted average number of common shares outstanding during each period. Earnings per share (diluted) is computed using net income and the weighted average number of common and dilutive common equivalent shares outstanding during each period. The computations of the weighted average number of shares outstanding for the three and six month periods ended June 30, 1999 and 1998 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Weighted average outstanding - used for 32,218 30,495 31,975 30,274
for basic ...........................
Options value using treasury stock 612 2,655 765 2,742
method ..............................
Dilutive effect-warrants (assumed from 1,309 2,860 1,359 2,782
former TSW International, Inc.) ...... --------- --------- --------- ---------
Weighted average outstanding and
dilutive equivalents -
used for dilutive..................... 34,139 36,010 34,099 35,798
========= ========= ========= =========
4. Litigation
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 arise from this matter has been made in the accompanying unaudited condensed consolidated financial statements.
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
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Software license fees ............ 16.2% 25.4% 14.5% 28.7%
Services and maintenance ......... 83.8% 74.6% 85.5% 71.3%
--------- --------- --------- ---------
Total revenues ............... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ...................... 52.1% 59.0% 51.3% 56.5%
--------- --------- --------- ---------
Gross margin........................... 47.9% 41.0% 48.7% 43.5%
--------- --------- --------- ---------
Operating expenses:
Research and development ......... 16.0% 15.9% 17.3% 15.6%
Sales and marketing .............. 15.3% 15.5% 15.4% 14.0%
General and administrative ....... 8.5% 8.1% 8.4% 7.5%
--------- --------- --------- ---------
Total operating expenses ..... 39.8% 39.5% 41.1% 37.1%
--------- --------- --------- ---------
Income from operations ................ 8.1% 1.5% 7.6% 6.4%
Other income, net...................... 75.3% (0.4%) 40.5% (0.5%)
--------- --------- --------- ---------
Income before income taxes ............ 83.4% 1.1% 48.1% 5.9%
Provision for income taxes ............ 31.4% 0.0% 17.5% 0.5%
--------- --------- --------- ---------
Net income ............................ 52.0% 1.1% 30.6% 5.4%
========= ========= ========= =========
Revenues. Total revenues increased 13% to $51.7 million in the quarter ended June 30, 1999 from $45.6 million in 1998. In the first six months of 1998, total revenues increased 7% to $96.7 million from $90.3 million in 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 28% to $8.4 million in the quarter ended June 30, 1999 from $11.6 million in 1998. In the first six months of 1999, license fees decreased by 46% to $14.0 million from $25.9 million in 1998. Reduced software licensing fee sales were due to the reengineering of the Company's North American sales organization, as well as a general industry slowdown in purchases of large scale enterprise applications leading up to the Year 2000.
Revenues from services and maintenance increased by 27% to $43.3 million in the quarter ended June 30, 1999 from $34.0 million in 1998. In the first six months of 1999, services and maintenance revenues increased 28% to $82.6 million from $64.4 million in 1998. The services and maintenance growth resulted primarily from new consulting and implementation projects for existing customers. Services and maintenance as a percentage of revenue were 84% and 75% for the quarters ended June 30, 1999 and 1998, respectively, and 86% and 71% for the six months ended June 30, 1999 and 1998, respectively.
The Company does not believe that the revenue growth in services and maintenance experienced in the first six 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 and consulting services (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 remained relatively flat at $26.9 million in each of the quarters ended June 30, 1999 and 1998. In the first six months of 1999, cost of revenues decreased 3% to $49.6 million from $51.0 million in 1998. This resulted in the gross margin increasing to 48% for the quarter ended June 30, 1999 from 41% for the same period in 1998, and 49% for the six months ended June 30, 1999 from 44% for the same period in 1998. The gross margin improvement was due principally to the increased utilization of personnel for services and maintenance.
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 15% to $8.3 million in the quarter ended June 30, 1999 from $7.2 million in 1998, and $16.7 million in the six months ended June 30, 1999 from $14.1 million for the same period in 1998 as the Company continued to develop integration products and increase functionality to its products. As a percent of total revenue, research and development expenses were 16% for each of the quarters ended June 30, 1999 and 1998, and 17% and 16% for the six months ended June 30, 1999 and 1998, respectively. The Company believes that a significant level of investment in research and development is essential to remain competitive. The amount of research and development 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 11% to $7.9 million in the quarter ended June 30, 1999 from $7.1 million in 1998. In the first six months of 1999, sales and marketing expenses increased 18% to $14.9 million from $12.6 million in 1998. As a percent of total revenue, sales and marketing expenses were 15% and 16% for the quarter ended June 30, 1999 and 1998, respectively, and 15% and 14% for the six months ended June 30, 1999 and 1998, respectively. The increase in sales and marketing expenses were primarily related to advertising and promotional costs for strategic alliance programs and telemarketing expenses.
General and Administrative. General and administrative expenses increased 22% to $4.4 million in the three months ended June 30, 1999 from $3.7 million in 1998 and increased 21% to $8.2 million in the six months ended June 30, 1999 from $6.8 million in 1998. As a percent of total revenue, general and administrative expenses were 8% for the quarter ended June 30, 1999 and 1998, and 9% and 8% for the six months ended June 30, 1999 and 1998, respectively. The increase in general and administrative expenses resulted from a change in management personnel and additional accruals for lease costs in the UK.
Interest and Other Income (Expense). Interest and other income (expense) increased to $38.9 million in the three months ended June 30, 1999 from ($.2) million in 1998 and increased to $39.2 million in the six months ended June 30, 1999 from ($.4) million in 1998 primarily due to the $38.2 million gain on sale of the Company's investment in Tenfold Corporation in May 1999.
Provision for Income Taxes. Income tax expense of $16.3 million represented an estimate for federal, state and foreign taxes for the quarter ended June 30, 1999. The Company's effective tax rate is 36% for the six months ended June 30, 1999 and differs from the statutory rate primarily due to utilization of net operating loss carryovers, research and engineering credits and foreign tax credits.
Liquidity and Capital Resources
As of June 30, 1999, the Company's principal sources of liquidity consisted of approximately $23.0 million in cash and cash equivalents, $67.1 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, 2000. Borrowings under the line of credit bear interest at the prime rate or LIBOR rate plus 1.25% and are available under the line of credit based on a percentage of eligible accounts receivables. No borrowings were outstanding under the line of credit as of June 30, 1999.
In the six months ended June 30, 1999, cash, cash equivalents and marketable securities increased 130% to $90.1 million from $39.2 million at December 31, 1998. This was primarily due to an increase in cash of approximately $46.2 million provided by the sale of the Company's investment in Tenfold Corporation. The purchase of property and equipment used cash of approximately $2.7 million. Financing activities used cash of approximately $19.7 million to pay down the balance of the borrowing under the Company's line of credit.
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 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 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.
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, all of the major applications have been verified compatible. Furthermore, most of the servers and networks that required action have been addressed and most of the operating systems have been certified. All remediated systems are expected to be fully tested and implemented before the end of the year.
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. Presently, we have confirmed most of the suppliers are Y2K compatible. The Company intends to disqualify potentially non-compliant sources and re-qualify alternative sources to help mitigate potential business disruptions.
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. This process will continue through 1999 and into the Year 2000 as needed.
Third Party Program: The Company has completed the survey of its significant 3rd party service providers. 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. Currently, a plan is in place to obtain the required information by the end of 1999.
Contingency Plans: The Company currently has a contingency plan in place for product support. We are in the process of evaluating the requirements for contingency plans in other areas. 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 $1.7 million, related to all phases of the Year 2000 project. The remaining costs are expected to be incurred during the next two 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 demand for the Company's products and services, (iv) economic conditions in process industry segments, (v) changes in pricing policies of the Company or its competitors; (vi) increased competition; (vii) technological changes in computer systems and environments; (viii) the ability of the Company to timely develop, introduce and market new products; (ix) quality control of products sold; (x) changes in demand for the Company's products and services, (xi) market acceptance of new products and product enhancements; (xii) the Company's successful completion of customer funded development and implementation projects, (xiii) the Company's success in expanding its sales and marketing programs; (xiv) personnel changes including changes in Company management; (xv) changes in the Company's sales organization, (xvi) foreign currency exchange rates; (xvii) mix of products sold; (xviii) acquisition costs; and (xix) 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. 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 (EAM) software solutions business is highly competitive, constantly changing, and significantly affected by new product and technology innovations brought about by 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 provide baseline, seamless integration to 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 these vendors 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 Company competes with businesses that are intensely competitive and adaptable to rapidly evolving markets. In order to remain competitive, the Company must continually enhance its baseline software and integration 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 ongoing 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 may 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 as the enterprise asset management market continues to expand. 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 46% in the first six months of 1999 as compared to the same period in 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.
British Energy Funded Development and Implementation
The Company signed a co-development and implementation agreement valued at more that $60 million in May, 1999 and will provide products and services over a three year period. Due to the size of this project, the successful and timely completion of the British Energy funded development and implementation may have a material effect on the future financial results of the Company.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of stockholders on May 4, 1999.
(b) Pursuant to the election of the five directors listed under Item 1, Robert W. Felton, William J. Grabske, William H. Janeway, Joseph P. Landy and Jeanne D. Wohlers were each elected for a one-year term. Robert W. Felton, William H. Janeway and Joseph P. Landy still continue as directors and were elected at prior annual meeting for a term of one year. William J. Grabske still continues as director and was elected by the Board in December 1998. Jeanne Wohlers still continues as director and was elected by the Board in January 1999.
(c) The Company's stockholders voted the following matters:
(i) Election of five directors. All directors proposed by management were selected.
Name of Number of Number of
Nominee Votes For Votes Withheld
Robert W. Felton 29,454,912 389,945
William J. Grabske 29,730,752 114,105
William H. Janeway 29,471,297 373,560
Joseph P. Landy 29,752,873 91,984
Jeanne D. Wohlers 29,730,501 114,356
(ii) Approval of an amendment to the 1997 Stock Plan to increase the number of shares reserved for issuance thereunder by 2,500,000. 16,965,342 votes were cast in favor of the amendment, 3,195,619 were cast against, zero votes were withheld. There were 7,650 abstentions and 9,676,246 broker non-votes.
(iii) Approval of an amendment to the 1997 Directors Option Plan to increase the number of shares of Common Stock granted as a First Option from 10,000 to 50,000 shares and the shares granted as a Subsequent Option from 5,000 to 10,000 shares. 27,510,216 votes were cast in favor of the amendment, 2,326,391 were cast against, zero votes were withheld. There were 8,250 abstentions and zero broker non-votes.
(iv) Ratification and approval of the appointment of Ernst & Young as independent public accountants of the Company for the year ending December 31, 1999. 29,798,561 votes were cast in favor of the appointment, 25,357 votes were cast against, zero were withheld. There were 20,939 abstentions and zero broker non- votes.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.01 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1999.
INDUS INTERNATIONAL, INC.
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) |
Dated: August 16, 1999
| By: | /s/ Joan P. Platt |
|
| |
| Joan P. Platt | |
|
Senior Vice President and Chief Financial Officer | |
| (Principal Financial Officer) |
Dated: August 16, 1999
| By: | /s/ Anna Ng-Borden |
|
| |
| Anna Ng-Borden | |
|
Vice President, Finance | |
| (Principal Accounting Officer) |
|
|