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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
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INDUS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3273443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3301 WINDY RIDGE PARKWAY
ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip code)
(770) 952-8444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price $5.50 of the Common Stock on March
15, 2002, as reported on the Nasdaq National Market, was approximately
$58,894,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may by deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of the registrant's Common Stock, $.001 par
value was 35,410,015 at March 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2002 Annual Meeting of
Stockholders to be held May 9, 2002 are incorporated by reference in Part III
hereof, to the extent stated herein.
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INDUS INTERNATIONAL, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I.........................................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS..........................................................................3
ITEM 2. PROPERTIES......................................................................................23
ITEM 3. LEGAL PROCEEDINGS...............................................................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................23
PART II.......................................................................................................24
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................24
ITEM 6. SELECTED FINANCIAL DATA.........................................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........25
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.....................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............55
PART III......................................................................................................55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................................55
ITEM 11. EXECUTIVE COMPENSATION...........................................................................55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................55
PART IV.......................................................................................................56
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................56
SIGNATURES....................................................................................................59
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS DOCUMENTS INCORPORATED HEREIN BY
REFERENCE, MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE NOT BASED
ON HISTORICAL FACTS, BUT RATHER REFLECT MANAGEMENT'S CURRENT EXPECTATIONS
CONCERNING FUTURE RESULTS AND EVENTS. THESE FORWARD-LOOKING STATEMENTS GENERALLY
CAN BE IDENTIFIED BY THE USE OF PHRASES AND EXPRESSIONS SUCH AS "BELIEVE,"
"EXPECT," "ANTICIPATE," "INTEND," "PLAN," "FORESEE," "LIKELY," "WILL" OR OTHER
SIMILAR WORDS OR PHRASES. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS RELATED TO: THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS
AND INTENTIONS; THE TIMING, AVAILABILITY AND FUNCTIONALITY OF PRODUCTS UNDER
DEVELOPMENT OR RECENTLY INTRODUCED; AND MARKET AND GENERAL ECONOMIC CONDITIONS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR
IMPLIED BY THESE STATEMENTS. IMPORTANT FACTORS THAT MIGHT CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE SUGGESTED BY THE FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION OF THIS REPORT
ENTITLED "DESCRIPTION OF BUSINESS - FACTORS AFFECTING FUTURE PERFORMANCE"
BEGINNING ON PAGE 17. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S OPINIONS ONLY AS OF THE
DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE OR PUBLICLY RELEASE
THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Indus International, Inc. (the "Company" or "Indus") develops, markets,
implements and supports integrated Enterprise Asset Management ("EAM") and
supply chain software and service products for capital-intensive industries
worldwide. The Company's two principal software products are PassPort and EMPAC.
The Company recently introduced a new software product, Indus InSite. These
products are implemented by the Company's professional services organization and
supported by its worldwide customer service organization.
Indus' EAM products benefit customers by reducing maintenance and operating
costs, increasing production capacity and speeds, increasing return on assets,
and maintaining regulatory compliance. Proper maintenance of equipment and
facilities can prevent costly failures, limit disruptions, and minimize
downtime. More efficient use of personnel and better control of spare parts can
reduce costs. Properly maintained equipment can run at higher production speeds
and have a longer life cycle. Delaying new equipment purchases lowers the
capital expense budget. Proper regulatory compliance can help companies avoid
fines and forced shutdowns. Each of these benefits represent proven strategies
that enable customers to sustain long-term competitive advantage.
The Company markets its principal EAM products, known as PassPort and
EMPAC, internationally and to distinct industry segments. Overall Indus'
products and services consist of scalable, flexible business application
software; regional professional services centers positioned throughout the
Americas, Europe, the Middle East and Africa, and Asia Pacific; and service
packages, which support such functional areas as: asset and work management,
materials procurement and eProcurement, knowledge management, safety and
regulatory compliance, mobile computing, electronic document management, and
integration with financial and human resources products.
Historically, the Company has been focused on delivering PassPort and EMPAC
products to industries that have very complex assets, such as utilities
(turbines and repair trucks), oil and gas (drilling platforms and large refining
facilities), defense (airplanes, ships and tanks), pulp and paper (paper
machines), metals and mining (fabrication machinery and mines/production
plants), and process (manufacturing), as illustrated on the right side of the
graph below.
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[CHART]
The Company's multi-product strategy enables PassPort and EMPAC to support
the broadest spectrum of industry needs in these quadrants. The Company
continues to be the premier EAM supplier of complex functionality to large
market, asset intensive industries such as oil and gas, pulp and paper, and
mining and metals with its EMPAC software product, along with the utilities and
defense industries with its PassPort software product. The Company builds
long-term strategic relationships with its clients and has over 25 years of
business process experience serving the utility industry alone. By the end of
2001, the Company's PassPort and EMPAC software products were licensed for use
by over 300,000 end users representing 460 customers in 45 countries.
The recent introduction of Indus InSite, an Internet developed product
designed for the collaborative asset management market, brings Indus EAM
expertise to the mid-tier market of industries that need asset management
functionality, but with higher collaborative capabilities and much lower cost
points. These industries include facilities and property management, consumer
packaged goods, health sciences, manufacturing, and education and government.
The total asset management product is represented by the illustration below.
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[CHART]
PassPort and EMPAC are designed to interoperate with popular third-party
applications that provide best business practice functions to their customers.
Through strategic alliances, the Company works to extend the functional product
footprint to complement the Company's core competency with software providers,
such as Oracle Corporation ("Oracle"), PeopleSoft, Inc. ("PeopleSoft"), i2
Technologies, Inc. ("i2"), Lawson Software, Inc. ("Lawson"), and BEA Systems,
Inc. ("BEA"), as well as with systems integrators, such as Accenture, Deloitte
Consulting, and PricewaterhouseCoopers to create a software series that provides
seamless interoperability with corporate and financial applications, expert
systems, and certain industry specific systems that enable the Company's
customers to improve operating efficiencies, reduce costs, and comply with
governmental regulation.
The Company is committed to the collaborative workplace to ensure its
customers' competitive success and the Company has open-architected PassPort and
EMPAC for effective integration with complimentary products. The Company's
PassPort and EMPAC products are designed for large-scale projects with intensive
record keeping and high volume transactions and are specifically designed for
use with relational database management systems, relying on a mature development
methodology that is ISO 9001-certified. The `server' software is designed to
enable customers to use various operating systems, operate on multiple hardware
platforms, and interoperate with many third-party software applications and
legacy systems. Proprietary systems implementation methodology tools and web
based education tools facilitate rapid and effective deployment and utilization
of the Company's EAM applications. PassPort or EMPAC are typically licensed by
customers, but are also available as a hosted product supported through remote
data centers.
Indus InSite is the first Internet-born and architected collaborative asset
management product designed to deliver collaborative commerce to the mid-tier
market of industries with less complex assets. InSite is offered as a hosted
product. InSite was developed using a pure JAVA 2 EE design, thereby ensuring
compliance with Internet standards, and the Company has spent nearly two years
developing the product, which was formally introduced on October 23, 2001.
This design represents a major product differentiator, as most competitive
designs simply attach an Internet front-end to their current technologies, which
limits their ability to take advantage of the true power of the Internet.
The Company's EAM products include consulting services provided by subject
matter experts. This approach helps customers implement advanced EAM maintenance
principles, materials management theories, and other advanced "best practice"
strategies designed to provide a competitive advantage to the customer. The
service package content comprising this business process improvement product
leverages the knowledge gained from hundreds of customer implementations, the
extensive plant experience of the Company's employees, and the global experience
of its user community.
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Regionally located in close proximity to customer sites, the Company's
professional services organization supports the Indus sales organization. The
resulting process provides a high quality information exchange as customers
learn how the PassPort and EMPAC products address industry-specific
requirements. The Company also offers global 7 (days a week) x 24 (hours a day)
multilingual customer support. The Company believes this combination of
enterprise software, vertically oriented consulting services and worldwide
customer support enables customers to increase equipment and production
capacity, reduce operating costs, and safeguard the workforce and the
environment.
The Company was formed through the combination of The Indus Group, Inc., a
California corporation, and TSW International, Inc., a Georgia corporation, in
August 1997.
Indus, Indus Solution Series, IndusWorld, Indus InSite, PassPort Software
Solutions, ABACUS, ABACUS Toolkit, Sextant, PORTAL/G, PORTAL/95, PORTAL/97,
PORTAL/J, VIEWPORT, Prism Consulting, Enterprise MPAC, EMPAC,
IndusKnowledgeWarehouse, IndusConnect, IndusBuyDemand, IndusAnyWare, IndusASP,
Curator, AssetWare, AssetCare, myindus.com and CareNet are trademarks and
service marks of the Company. All other brand names or trademarks are the
property of their respective holders.
PRODUCTS AND SERVICES
The Company delivers world-class, business process based, EAM products,
scaled and value priced for specific industry segments. The Company targets
industries with highly complex assets through its PassPort and EMPAC software
products. The Company targets industries with less complex assets, such as
property management, consumer packaged goods, health sciences, manufacturing,
and education and government through its recently introduced Indus InSite
software product. These products are implemented by the Company's professional
services organization and supported by its worldwide customer service
organization.
PassPort and EMPAC
PassPort and EMPAC support an organization's operations and maintenance
workforce, inventory management and procurement professionals, safety and
compliance engineers, and other decision making personnel affected by asset care
decisions throughout the enterprise. This customer user group is supported by
such Indus software products as: asset and work management systems, materials
and procurement systems, eProcurement systems, and safety and compliance
systems, which seamlessly integrate to third party corporate financial systems
from Oracle, PeopleSoft, i2, Lawson, and other providers. Beyond providing
departmental information to affected workgroups throughout the customer
organization, EAM techniques employed by the Company integrate process control
systems and optimize capacity utilization through just-in-time maintenance
management practices. PassPort and EMPAC incorporate sophisticated EAM
methodologies, including reliability centered maintenance ("RCM"), total
productive maintenance ("TPM"), web-based electronic commerce, and handheld
mobile units to enable customers to apply Indus software products as a means to
achieving a strategic and competitive advantage.
EAM application business systems comprising PassPort and EMPAC are designed
to reflect the requirements of specific vertical industry functions, and the
technical architecture traditionally employed in these industries. The resultant
transaction engines are designed to support PassPort and EMPAC. Functions within
the application product lines have been tailored to encapsulate vertical
business processing requirements that are augmented by subject matter expertise
and consulting service packages, which uniquely position Indus to deliver a
total product across the enterprise.
PassPort and EMPAC Target Markets
PassPort and EMPAC, for large market, asset-intensive industries, requiring
complex functionality, provide a series of business applications and business
process improvement service packages that meet the EAM needs of businesses such
as utilities, oil and gas, pulp and paper, mining and metals, defense, and
process. PassPort is an integrated work management and supply chain software
product, originally architected for the nuclear and highly regulated process
manufacturing environment. Primary PassPort customers are very large operations
that need size scalability and product depth, such as regulatory compliance for
hazardous chemicals, radiation exposure, and fugitive emissions. EMPAC is an
integrated maintenance, inventory, and purchasing software product, originally
architected for discrete manufacturing plants, mining operations, and paper
mills. Primary EMPAC customers are medium and large operations that need
flexible product configurability to fit different plant sizes and product lines,
as well as product width, such as integration capabilities with financial and
human resources software products.
Product Architecture and Development Strategy
Both PassPort and EMPAC offer a high degree of flexibility, rapid
implementation, and scalability across multiple databases and operating systems.
These products are compatible with popular productivity software such as word
processors and spreadsheets. The Company utilizes industry-standard tools and
technologies to develop products, enabling software products comprising this
series to evolve along with rapidly emerging standards. The products are also
scalable, permitting changes in network size, server platforms, and other
architectural components with minimal disruption. The Company's products are
designed for ease of use and are largely
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platform independent, running on industry-standard UNIX and MVS servers,
including the IBM RS/6000, HP 9000, and Sun Solaris systems. The Company's
architecture utilizes the power and functionality of relational database
management systems from both Oracle and IBM with both text-based and graphical
user interfaces.
The Company provides versions of its client products on the Internet, for
both E-Commerce (extranet) and internal (intranet) applications. The Company's
clients also support a Windows Explorer navigational ability, which can be
accessed from the native client as well as the Internet. Standard Internet
protocols are used to integrate PassPort and EMPAC with popular office software
on the user's desktop. Users may also execute reports on the server and view
them through the web browser. The Company was also the first EAM vendor to
provide a suite of mobile computing modules to support critical field and
warehouse business practices.
The real-time, collaborative architecture of PassPort and EMPAC relies upon
an application server to process all application logic that is used by the web
browser to render the user interface. The database server carries out data
management functions. Integration with market-leading lightweight directory
access protocols, or LDAP, provides common user definitions and security between
various PassPort and EMPAC applications and other LDAP-compliant applications.
Additionally, the use of extensible markup language, or XML, and messaging over
hypertext transfer protocol, or HTTP, as well as open application programming
interfaces, or APIs, accessible via COM, Java, and C/C++, augment its
integration capabilities.
The PassPort and EMPAC security architecture incorporate extensive security
features designed to protect sensitive data managed by the application from
unauthorized retrieval or modification. It uses the capabilities of its own
applications, the client operating system software, some of the security
features of the relational database management system platforms, as well as
certain third-party security products, such as LDAP directory servers.
Implementation Methodology and Related Services
Indus products are implemented through the Company's proprietary ABACUS
tools and implementation methodology. ABACUS consists of software-driven
analytical tools, implementation plans and educational resources that
encapsulate the Company's extensive experience in implementing enterprise
management software products. ABACUS provides a step-by-step implementation life
cycle framework for all installation, integration, and education and business
review activities. In addition, ABACUS enhances the ongoing effectiveness of
Indus software products and assists customers in improving their business
processes.
ABACUS software tools use a time-sensitive and track-oriented approach to
help customers and the Company's business experts, technical specialists and
training professionals implement the Company's applications. In addition to
interactively identifying implementation procedures, ABACUS contains over 575
"best practice" examples of how such procedures were performed by other process
industry companies, drawn from the Company's extensive experience in
implementing EAM software products. The Company currently licenses ABACUS
software tools in conjunction with Indus software products, which includes the
use of the ABACUS ToolKit, a version of the ABACUS software that allows
customers to tailor their internal project goals and objectives with other
corporate initiatives, modify implementation plans and associated deliverables,
supporting specific project/progress reporting, etc. Versions of ABACUS products
have been created to effectively address the Company's entire product suite, as
well as implementation requirements and "best practice" selections of interest
to specific vertical industries.
A critical component of the ABACUS implementation is the partnership
between the software provider (the Company) and the customer. At the outset of
the project, the Company assigns a Project Manager or Account Executive to help
ensure a successful, on-schedule implementation. Throughout the implementation
process, the Indus team defines and then executes a customer-specific, yet
time-proven, implementation process that focuses heavily on critical Business
Process Improvement ("BPI") and Return on Investment ("ROI") processes to drive
current and future customer success. The Company has also developed alliances
with large systems integrators, as well as smaller third-party implementers and
providers. This ensures that customers with specific requirements can leverage
the value-added services of these firms when implementing PassPort or EMPAC.
PassPort/EMPAC Workbenches
A series of workbenches assist information engineers in the development of
business application systems and post-development implementation support for
large-scale projects. These workbenches include programming tools, data services
workbenches for data load and system interface exercises, and data migration
tools. These productivity tools help the Company demonstrate rapid development
of high-quality, highly functional applications on predictable schedules and
within established budgets.
The Company also licenses PassPort and EMPAC workbenches to customers
desiring the ability to modify business applications to suit internal needs and
to perform system administration and maintenance over the application life
cycle.
Hosted Products
PassPort and EMPAC are available as a hosted product fully supported
through remote data centers. The Indus hosted product provides the EAM
excellence of PassPort and EMPAC, integrated web-enabled applications, and the
Internet's e-business
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opportunities. The Company is responsible for the customer's hosted system and
is the single point of contact for any functionality issues related to PassPort
or EMPAC. PassPort or EMPAC are accessible over the Internet or a dedicated
network, via a web browser. The hosted product offers comprehensive
functionality, reduces implementation time, and service levels are guaranteed.
The Indus hosted product integrates with customer legacy systems,
delivering a true best-of-breed product. It includes many touch points with
other industry software application leaders such as Oracle and PeopleSoft. The
hosted product provides the flexibility of both packaged and tailored products.
The packaged product is a pre-configured, turnkey system that addresses the
traditional needs of organizations. The tailored product provides the proven
flexibility to ensure that unique organizational needs are completely fulfilled.
The hosted product contains robust, layered security to protect the
data. Firewall products are provided to guard entry points into the hosted
environment. Proactive monitoring provides alerts to the System Security
Operations staff. Digital certificates secure the web servers, and all
communication is via SSL, a security protocol that provides communications
privacy over the Internet. Database access is only available via the
application, which has embedded security measures. Based on an authenticated ID
and password, access is limited to a user's job functions.
The Company's hosted product infrastructure partners provide a suite of
services that expertly manage mission-critical software. With a large,
multi-specialized, technical staff of certified engineers, the infrastructure
partners provide the level of services and expertise necessary to ensure secure,
scalable, high-performance operation 24 hours a day. Their services include
installation and maintenance of hardware and software, core software expertise,
high-volume backup and recovery systems, and constant, proactive monitoring by
their server operations center.
INDUS INSITE
The Company's experience working with customers in many different markets, and
its ongoing research and development efforts highlighted an opportunity to
develop a product to meet market needs. The evolution of collaborative business
models and Internet software technologies provided an opportunity for a
different maintenance product.
What Does InSite Do?
Indus InSite addresses the need for, and the benefits associated with,
collaboration, which is typically defined as "working together towards a shared
objective." Collaboration occurs between different departments within an
organization as well as between separate divisions and even completely separate
companies. Most vertical industries are outsourcing activities that are
"non-core" to a company's business model. Breaking down barriers of geography
and language has resulted in a push to expand operations into new global
markets. Geography, time zones, monetary systems, divergent cultures, functional
and organizational differences, technology and application disparities all
create gaps between distributed teams that share a common goal of contributing
to a growing number of day-to-day and strategic business activities.
[GRAPHIC]
Many companies are looking for ways to bridge these gaps, tying into
cross-organizational business processes, sharing important operational data,
integrating with the business systems that run the enterprise, and providing a
valuable cross-enterprise platform for rich collaboration.
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Collaboration In The Maintenance World
In the realm of asset lifecycle management, collaboration can have
tangible benefits. Many companies are outsourcing certain maintenance activities
to external firms that have a certain expertise or qualification. Typically,
these organizations coordinate maintenance activities via telephone, fax, email,
or paper work transactions. The asset owner and the maintenance contractor share
a common goal - the maximum performance and optimization of that asset.
Performance may be measured by uptime, output, availability, operation within a
specified range, or some other measurement. Their working relationship may be
governed by contracts specifying the terms.
A collaborative relationship might involve both parties sharing common
performance information and key performance indicators (KPI's). They could
access the same asset monitors for real-time statistical information. They could
use a shared communication protocol for updates, alerts and reporting. Their
work management systems could intersect so that a Work Request from the asset
owning company becomes a Work Order for the maintenance company, and their
completed task process updates both companies' systems.
The benefit of this form of collaboration is faster maintenance
response time and accuracy, resulting in optimal asset productivity. It means
lower costs owing to more accurate asset management, and streamlined
communication. It improves asset management capabilities with shared, real-time
performance measures so that both companies are working from the same
intelligence.
Another example is represented between a manufacturing company and
their distributors. Many companies have a network of distributors, often in
different countries, time zones and languages. Coordinating production schedules
can be difficult with variable supply and output constraints. Communication
errors, production shortages, cost overruns, and excessive inventory can result.
In the collaborative world, all these groups work as a team, with a common goal
of optimized production and distribution. It is difficult if these groups are
divisions of the same company, and it is even more difficult for separate
companies operating in different countries, languages, currencies, time zones,
and units of measurement.
True collaboration results when these companies share common
information and measurements of inventory levels, production schedules, and
asset performance. Benefits are achieved when their business processes work
together ensuring fast access to accurate information in a common language.
Ideally they could work in their own language and terms while still accessing a
common source of information.
Indus InSite - Facilitating Collaboration
Indus InSite delivers sustainable benefits--competitive advantages,
operational excellence, and maximum profitability-- through uncompromising
functionality, intellectual property, and scalability. Indus recognized the need
and opportunity for a new product that could facilitate collaboration and
deliver tangible benefits. InSite was developed from the ground-up to address
these challenges and deliver accelerated return on investment. InSite was built
around four key design philosophies: pure Internet, ease of use, business
intelligence and collaboration. These design philosophies ensured that InSite
would enable Indus to help its clients to architect their collaborative
enterprise. The specific features and functions result in business value in many
areas.
Accelerated ROI
Using advanced decision and data search technologies, InSite provides a
self-evident system interface allowing customers' employees to use the system
easily and effectively, to find problems within the business operation and then
to fix those problems and prevent them in the future. Comprehensive e-Learning
tools are integrated with the product so that any user can quickly learn how to
use it, and become productive within hours, versus months for a traditional EAM
product. This means system implementation and data conversions from customers
legacy systems are accomplished within 2-3 months rather than the traditional
12-18 months required by more complex enterprise asset management systems.
Operational Intelligence
InSite transforms data into information that forms the basis of
operational intelligence. Information is analyzed and "pushed" to the right user
at the right time to optimize decision-making. Key performance indicators
provide the executive management team with instantaneous access to production
alarms as well as production performance data. This business value allows them
to make just-in-time or even predictive decisions that will significantly
eliminate production downtime, stabilize equipment uptime, and ensure that a
company runs leaner as well as smoother.
Workforce Mobility
InSite allows end users to use a full suite of pagers, personal digital
assistants and cellular telephony to better inform a wealth of geographically
distributed personnel inside and outside of a customer's business. InSite
provides customers' employees and partners, no matter where they are in the
world, with information on work order status, equipment problems, labour
problems,
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production issues and even inventory issues. By having this data instantly
available, InSite empowers these people to make fast decisions that can resolve
production issues before they become major problems.
Investment Protection
For its development of InSite, the Company used current available
technology with development methodologies and techniques to create a modular
product that can grow and adapt to customers future needs. The Company decided
to use the BEA JAVA 2 EE Internet-born architecture that allowed Indus to
totally separate the platform design from the functional design. This allows the
customer's InSite software investment to evolve with numerous enhancements at
both the platform and the functional level. For example, the benefit of
component development within the Indus partner BEA framework allows the user the
ability to add, subtract, enhance or otherwise modify specific functionality of
the software with no impact on the rest of the software. The result is a product
where future software releases are backward compatible with their particular
configurations.
Lower Entry Cost
InSite is a hosted application product without any up-front license
fees. When a customer signs up for a three-year contract or longer, the Company
can show the customer how the Company will reduce the associated information
technology cost. The trend towards applications delivered as web services via
application service providers or hosted products is growing. IT departments
today are under cost and performance pressures, and the ability to eliminate new
hardware, networks, software and support allows the IT department to concentrate
more attention on supporting the information of IT, not the infrastructure.
Enabled Collaboration
InSite was developed with the capabilities to bridge the gaps between
geographies, organizations, applications, languages, and functions. Open
communication protocols, and the modular architecture promote integrated
information and business processes in multiple languages, currencies, and even
technologies.
Finally, InSite can provide standard Enterprise Application Interfaces
("EAI") using XML technology that allows the customer to easily integrate
e-Commerce, e-Procurement, e-Services and many other Internet-based capabilities
into the customers operations. Internal departments, as well as external
partners, suppliers, and contractors can share common performance data and work
processes to achieve their common objectives. This allows purchasing groups to
collaborate with their suppliers, which will lower their capital equipment costs
or even their day-to-day operational supply procurement costs. As suppliers
increasingly share asset lifecycle management responsibilities with customers,
or assume full responsibility with performance guarantees, InSite becomes a
valuable tool to enable the exchange of information about asset performance and
history between the supplier and asset owner. Even contractors can use InSite to
accelerate maintenance response time, and truly collaborate with their clients.
CUSTOMER SERVICE AND SOFTWARE MAINTENANCE
Indus World Wide Customer Service provides high-quality assistance to help
customers increase productivity and system availability. The Company combines
state-of-the-art technology and a highly skilled team of professionals to
deliver service through an international infrastructure designed to respond
promptly and effectively to customer needs.
The Company offers a variety of service options for each of its products.
Indus World Wide Customer Service Centers are strategically located in North
America, the United Kingdom, and the Asia Pacific region. Two of the Company's
service programs are `5 x 24' and `7 x 24', which provide extended telephone
service after business hours for production-down and critical issues, 24 hours a
day, 5 and 7 days a week, respectively. No matter the point-of-origin of the
call, or what time, our toll-free number automatically routes the customer's
call to a fully staffed Indus Customer Service Center. By accessing a global
customer service database, the Company's customer service professionals can
share the most up-to-date technical information and provide fast, consistent
responses to customer issues around the clock from anywhere in the world
eService is Indus' web-based mechanism for allowing our customers to access
information about our products and services, as well as log cases, suggest
product enhancements, and search for patches or resolutions to common product
issues. This service is available 24-hours-a-day, 7-days-a-week.
TRAINING
The Indus Learning Center, the Company's training division, designs,
manages, and implements comprehensive education and training products for its
user community. The Company's training professionals provide instructional
design and courseware development services, training coordination support,
train-the-trainer and end-user programs, and technical training for customer
installations worldwide. Open enrollment training courses are provided at the
Company's training centers in Atlanta, Georgia; Toronto, Canada; Woking,
England; and Brisbane, Australia. Training is also provided at customer sites at
the customer's option. The Indus Learning Center has developed a comprehensive
set of e-Learning training materials to educate and train customers and
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internal staff. The e-Learning products include web-based-training courses and
Indus e-Class, an on-line step-by-step guide for cycling through Indus product
screens.
CUSTOMERS
The Company provides enterprise management software products to large
process industry customers primarily in the energy industry, continuous process
industries, industrial manufacturing industry, and the public sector. Customer
groups within these capital-intensive markets include: electric and gas
utilities, telecommunications providers, petrochemical refineries, mining and
metals, forest products producers, consumer packaged goods manufacturers,
educational systems, and governmental and military institutions. The Company
intends to target industries with less complex assets, such as property
management, consumer packaged goods, health sciences, manufacturing, education
and government, and others through its recently introduced Indus InSite software
product.
As of December 31, 2001, the Company's products were licensed for use by
over 300,000 end-users representing 460 customers in 45 countries.
In the first quarter of 2001, the Company announced that the United
Kingdom's Ministry of Defense "MoD" had selected the Company as the application
provider for the MoD's Defense Stores Management Solution ("DSMS") for logistics
and asset management. The DSMS contract represented 23.3% of the Company's total
revenues in 2001. One other customer accounted for 12.2% and 13.2% of Company's
total revenues in 2000 and 1999.
In January 2002, the Company announced that it received notification that
the MoD suspended all current contractual work on the DSMS project, as it
reviews its priorities against long-term resource availability. The MoD has not
advised the Company when this review will be completed. The Company cannot
assure investors that the DSMS project will be resumed, or if it is resumed what
the scope of work will be involved. The Company expects to incur operating
losses in the near term as a result of the suspension of the DSMS project.
SALES AND MARKETING
The corporate marketing function is organized into vertical business areas,
which comprise capital-intensive facilities and process industries targeted by
the Company. By segmenting the market into vertical business areas, the Company
can package and deliver its products and service offerings effectively to the
industries it serves. These markets and sub sectors consist of the following:
UTILITIES, COMMUNICATIONS AND DEFENSE INDUSTRIES
Water and waste treatment
Nuclear power generation
Fossil power generation
Hydroelectric power generation
Energy transmission and substations
Energy distribution and delivery
Defense logistics Communications
ENERGY RESOURCE EXTRACTION AND PROCESS INDUSTRIES
Chemical, petrochemical, oil, and gas
Metals and mining
Pulp, paper and forest
Process manufacturing
Discrete manufacturing
Pharmaceuticals and biotech
Consumer packaged goods
Public transit
Education and government
The Company markets and sells its products and services in three primary
areas of the world:
- the Americas, with direct sales representatives in the US, Canada and
Latin America;
- Europe, the Middle East and Africa, with direct sales representatives in
the UK, France and the United Arab Emirates;
- and Asia-Pacific, with direct sales representatives in Australia and
Japan.
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In addition to these direct marketing and sales resources, the Company
utilizes business partner relationships and channel partner programs directly
and indirectly in other parts of the world. As of December 31, 2001, the
Company's Sales and Marketing organization consisted of 111 employees. The
marketing staff is based at the Company's office in Atlanta, Georgia, while the
sales organization is decentralized throughout the three operational centers.
The direct sales cycle begins with the generation of a sales lead, or the
receipt of a request for proposal from a prospect, which is followed by
qualification of the lead, an analysis of the customer's needs, response to a
request for proposal, one or more presentations to the customer utilizing the
special knowledge of the industry vertical pre-sales staff, customer internal
sign-off activities, and contract negotiation and finalization. While the sales
cycle varies depending on the customer, the sales cycle generally requires from
three to eighteen months.
In support of its sales force, the Company conducts comprehensive
industry-specific vertical marketing programs which include public relations,
trade advertising, industry seminars, trade shows and ongoing customer
communication programs through IndusWorld, the Company's international user
group. In addition, the Company's Account Manager Program provides regional
support and specialized attention for each of its customers. Account Managers
assist in implementing licensed applications over multi-year engagements,
promote licensing of additional applications, and encourage existing customers
to identify and help fund new applications and expanded core offerings.
STRATEGIC RELATIONSHIPS
INDUS STRATEGIC CLIENT PROGRAM
The Indus Strategic Client Program is designed to create a relationship in
which all participants receive benefits. The Company and its strategic clients
take mutual responsibility for the overall success of the program. The program
establishes the collaborative planning framework to recommend improvements to
the business processes of both parties, implement innovative and cost-effective
solutions to business needs, and engage each other in the Company's strategic
vision. The program improves the competitive positioning of Indus and the
strategic clients, enhances the ROI that strategic clients receive from
implementing PassPort, EMPAC or InSite, and continues the high quality and
reliability of Indus products, project support, and customer service.
The Company anticipates that the Strategic Client Program will result in
ongoing refinement and/or extension of PassPort, EMPAC, or InSite, such that
Indus will maintain its leadership position in the EAM marketplace. Additional
specific objectives include the following:
- - Work collaboratively to document return on investment by customers.
- - Identify appropriate partner applications.
- - Fully leverage Indus products to support the strategic clients' growth
strategies.
- - Identify new products and extensions to existing products that support the
Company's strategic objectives.
The Company has identified the following criteria for participation in the
Strategic Client Program:
- - Commitment to PassPort, EMPAC, or InSite and agreement to act as a
reference site.
- -- Recognized knowledge and business improvement leaders in their industry.
- -- Deployment of a collaborative strategy with strategic software partners.
- -- Willingness to commit resources to exploit opportunities and sustain their
competitive advantage.
INDUS SOFTWARE PARTNER PROGRAM
Through its Software Partner Program, the Company offers a series of
partner programs designed to increase the number of software products it can
provide to its customers, enabling Indus to continue to focus on developing and
delivering functionally advanced EAM products.
The Company believes that the need to forge strategic partnerships is
continually increasing as the needs of the Company's customers evolve and the
global marketplace expands. By combining the Company's own market-leading EAM
software with its partners' considerable strengths in products, services and
market-focused products, the Company provides its customers the leverage needed
to increase its return on assets, while providing the Company with additional
software license fees and services.
The Company partners with the "best in class" to ensure that its customers
receive leading products and services in the marketplace. These partners must
demonstrate the market leadership and vision that enables the Company to deliver
the high level of excellence that its customers have come to expect.
The Software Partner Program consists of three partner categories, three
partner levels, and distinction as to whether a partner is certified or not.
Each partnership level (Premier, Associate and Embedded) and the category of
partner certification (EAI, eBusiness
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and CSP) drive the nature of the relationship. The Company is also developing a
new partner level, for strategic partners, which would work with Indus to
aggressively extend the breadth of the Company's portfolio and market reach,
while generating incremental and new revenue. The following provides brief
descriptions for each type of existing partner level and category:
Partner Levels:
1. PREMIER: This level of partner is critical to the Company's success in
providing enhanced product functionality, competitive positioning and
product differentiation.
2. ASSOCIATE: This level of partner provides added value to the Company's
products through services and/or product functionality.
3. EMBEDDED: These partners are established market leaders that broaden and
enhance our core infrastructure thus shortening development time and
accelerating time to market. Each Embedded Partner has the opportunity to
partner at any of the three specific levels of partnership.
Partner Categories:
1. ENTERPRISE APPLICATION INTEGRATION (EAI): These are partners that provide
middleware software or applications that are used to develop a module(s) of
the Company's application suite. By definition and the nature of their
products, EAI partners are certified as Indus Solution Services Partners
through the integration of the partner offering into Indus' products. By
the nature of these partners, their partner level is considered Strategic.
2. EBUSINESS: These are partners that deliver part of the eBusiness product
suite. Business Partners may or may not be certified. This depends on the
partner and how they want to be positioned with the Company to the customer
community. The products provided by the eBusiness partner extend the value
of the Company's software through their offerings. Each eBusiness partner
has the opportunity to partner at any of the three specific levels of
partnership.
3. COMPLIMENTARY SOLUTION PROVIDERS (CSP): These are partners that provide
products that extend the value of the Company's software through their
offerings. CSP partners may or may not be certified. This depends on the
partner and how they want to be positioned with the Company to the customer
community.
INDUS SOFTWARE PARTNERS
The Company works with a variety of partners to create the widest range of
possible products for its customers. The following list highlights several of
the Company's Partners:
1. ORACLE CORPORATION -- both an Enterprise Resource Planning partner and a
B2B eComerce partner helping the Company to leverage B2B technology.
2. BEA SYSTEMS INC. -- supports the Company's customers' need to design and
automate business processes that integrate back-end applications and
e-commerce technologies.
3. PEOPLESOFT -- for corporate financial, human resources, and payroll
systems.
4. ALTAVISTA -- a complimentary product partner with its first full-text
search service.
5. I2 TECHNOLOGIES -- expands the Company's global inventory visibility and
search capabilities by enabling business-to-business end-users to find,
analyze, organize, and monitor product and supplier content (catalogs).
6. BUSINESS OBJECTS -- provides business intelligence that lets organizations
access, analyze, and share information internally with employees and
externally with customers, suppliers, and partners.
7. WIZART -- a complete internationalization workbench that allows in a very
short time the translation of information internally (messages, external
components) and externally (no recompilation).
RESEARCH AND DEVELOPMENT
The Company has a dedicated research, development, and software engineering
organization, and regularly releases new products and enhancements to existing
products. Research and development efforts are directed at increasing product
functionality, improving product performance, and extending the capabilities of
the products to interoperate with selected third-party software products
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available from alliance partners such as Oracle, PeopleSoft, BEA, AltaVista, i2,
and others. These efforts include developing new applications that address new
horizontal and vertical functions.
The Company believes that research and development is most effectively
accomplished if customers are involved in the process. Through direct customer
involvement and consensus input from user group oversight committees, product
content is improved and the customer acceptance of new software deployment is
significantly increased. In addition, the interactive development process
promotes increased customer awareness of the technological features of the
product and fosters greater product loyalty.
As of December 31, 2001, the Company had 347 employees engaged in research
and development. The Company's research and development expenses were
approximately $33.8 million, $51.6 million and $49.5 million in 1999, 2000 and
2001, respectively. Customers, as part of service contracts, fund certain
development costs. Reimbursed development costs are included as part of cost of
revenues.
COMPETITION
The EAM software products business is highly competitive, constantly
changing, and significantly affected by new product and technology innovations
brought about by industry participants. The Company believes that the principal
competitive factors in its businesses will be:
- product performance and functionality;
- adaptability to new trends driven by technology and customer
requirements;
- 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 with, and market acceptance of, new products, including
Indus InSite; and new enhancements, functionality and services.
The Company's success also depends significantly on its ability to develop
more advanced products more quickly and less expensively than its existing and
potential competitors and to educate potential customers of the benefits of
licensing the Company's products. The Company's competitors include companies in
the enterprise, departmental, and point products market segments. At the
enterprise product level, the Company's main competitors are SAP, Oracle, and
Industrial and Financial Systems ("IFS"). The Company counters these competitors
by offering product sets that provide baseline integration to Oracle's corporate
financial and human resources applications, SAP's financial applications, and
PeopleSoft's corporate financial, payroll, and human resources applications. In
the departmental or plant products market for "Tier 1", customers having annual
revenues greater than one billion Dollars, the Company competes primarily with
other EAM software vendors such as SAP, Mincom Corp., and IFS. In "Tier 2",
markets with customers having annual revenues between $250 million and one
billion Dollars, the Company competes with MRO Software, Inc. (formerly Project
Software & Development, Inc.), Marcam, Gores, Invensys, and Datastream Systems,
Inc. Point products 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 PeopleSoft and
SPL WorldGroup B.V., if these vendors elect to broaden their products 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. A host of Internet-based application
vendors, who offer state-of-the-art systems that can complement the PassPort,
EMPAC, or InSite, may become competitors in certain cases where they attempt to
extend their products to cover the entire range of Supply Chain Management or
other activities. The Company also faces competition from systems developed by
the internal MIS departments of large organizations.
The Company believes it has a number of competitive strengths that will
help it maintain its leadership within the EAM space. First is the Company's
depth and breadth of products, with some of the most comprehensive EAM products
on the market developed with over 25 years or experience, which has led Indus to
capture much of the "Tier 1" market. Second is the Company's scalability, with
products able to scale up to multiple thousands of users. Third is the Company's
substantial installed base of "Tier 1" clients, providing a source for selling
additional services and add-on modules, as well as providing client references
that can help the Company close deals with new prospects. Finally, the new Indus
InSite product will potentially enable the Company to break into the "Tier 2"
market.
PROPRIETARY RIGHTS AND LICENSING
The Company relies on a combination of the protections provided under
applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing arrangements to establish and protect
its rights in its software. Despite the Company's efforts, it may be possible
for unauthorized third parties to copy certain portions of the Company's
products or to reverse
14
engineer or obtain and use information that the Company regards as proprietary.
In addition, the laws of certain countries do not protect the Company's
proprietary rights to the same extent, as do the laws of the United States.
Furthermore, the Company has no patents, and existing copyright laws afford only
limited protection. Accordingly, there can be no assurance that the Company will
be able to protect its proprietary software against unauthorized third party
copying or use, which could adversely affect the Company's competitive position.
The Company licenses its applications to customers under license
agreements, which are generally in standard form, although each license is
individually negotiated and may contain variations. The standard form agreement
allows the customer to use the Company's products solely on the customer's
computer equipment for the customer's internal purposes, and the customer is
generally prohibited from sub-licensing or transferring the applications. The
agreements generally provide that the Company's warranty for its products is
limited to correction or replacement of the affected product, and in most cases
the Company's warranty liability may not exceed the licensing fees from the
customer. The Company's form agreement also includes a confidentiality clause
protecting proprietary information relating to the licensed applications.
The Company's products are generally provided to customers in object code
(machine-readable) format only. From time to time, in limited circumstances, the
Company has licensed source code (human-readable form) subject to customary
protections such as use restrictions and confidentiality agreements. In
addition, customers can be beneficiaries of a master source code escrow for the
applications, pursuant to which the source code will be released to end users
upon the occurrence of certain events, such as the commencement of bankruptcy or
insolvency proceedings by or against the Company, or certain material breaches
of the agreement. The Company has the right to object to the release of the
source code in such circumstances, and to submit the matter to dispute
resolution procedures. In the event of any release of the source code from
escrow, the customer's license is limited to use of the source code to maintain,
support and configure the Company applications.
The Company may from time to time receive notices from third parties
claiming infringement by the Company's products of proprietary rights of others.
As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software developers may become increasingly subject to infringement claims. Any
such claims, with or without merit, can be time consuming and expensive to
defend or could require the Company to enter into royalty and licensing
agreements. Such agreements, if required, may not be available on terms
acceptable to the Company, or at all.
EMPLOYEES
As of December 31, 2001, the Company employed 899 people, of which 347 were
primarily engaged in research and development activities, 374 in post-sales
support and customer project operations, 111 in sales and marketing, and 67 in
administration and finance. None of the Company's employees are represented by a
labor union. The Company has experienced no work stoppages and believes that its
relationship with its employees is excellent.
The Company's future success depends, in large part, on the continued
service of its key management, sales, product development and operational
personnel and on its ability to attract and retain highly qualified employees,
including management personnel. There can be no assurance that the Company will
be successful in attracting, retaining and motivating key personnel.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 2002 were as follows:
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION
Thomas R. Madison.............................. 56 Chairman of the Board of Directors
Kent O. Hudson................................. 48 President and Chief Executive Officer
Richard H. Beatty.............................. 55 Executive Vice President and Chief Operating Officer
J. Michael Highland............................ 41 Executive Vice President Finance and Administration and Chief
Financial Officer
Mr. Madison has served as Chairman of the Board of Directors of the Company
since December 19, 2001 and as a director of the Company since April 24, 2001.
From January 2001 until December 2001, Mr. Madison served as an independent
management consultant. From May 1999 until January 2001, he served as President
and Chief Executive Officer of Talus Solutions, implementers of products and
services that optimize pricing strategies and practices based upon customer
buying behaviors. From March 1994 until May 1999, Mr. Madison served as Group
President and Corporate Vice President of Computer Sciences Corp.
Mr. Hudson has served as President and Chief Executive Officer and a
director of the Company since January 11, 2000. During 1999, he was a consultant
to the Company. From August 1998 to January 2000, he served as the President of
Trinity Coast, Inc., a management consulting firm. From July 1997 to September
1998, he was President and Chief Executive Officer of Strategic Resource
Solutions, the non-regulated subsidiary of Carolina Power and Light. From
November 1991 to June 1997, he was founder
15
and Chief Executive Officer of Applied Computer Technologies, an EAM software
product for educational institutions, prior to its acquisition by Carolina Power
and Light.
Mr. Beatty has served as Executive Vice President and Chief Operating
Officer and a director of the Company since January 11, 2000. From 1996 to
August 1999 he was an independent consultant. From 1992 to 1996 he served as
President, Consulting Services for SHL SYSTEMHOUSE. From 1980 to 1992 he was a
Partner at Andersen Consulting.
Mr. Highland has served as Executive Vice President Finance and
Administration and Chief Financial Officer since February 1, 2001. He served as
Chief Operating Officer for Gainor Medical Management, Inc., a diabetes disease
management provider and medical device distributor from 1996 to 1999 and was
their Chief Financial Officer from 1995 to 1996. From 1994 to 1995 he was the
Chief Financial Officer of Automated Systems Design, Inc., and from 1991 to 1994
he was a manager with Arthur Andersen & Co.
EMPLOYMENT AGREEMENTS
All the executive officers of the Company have employment contracts with
the Company, except for Mr. Highland, whose employment contract expired in
January 2002.
16
FACTORS AFFECTING FUTURE PERFORMANCE
The Company's Operating Results May Fluctuate Significantly from Quarter to
Quarter.
The Company's operating results have fluctuated in the past, and the Company's
results may fluctuate significantly in the future. Prior to the third quarter of
2001, the Company had generated net operating losses for the seven prior
quarters, starting with a $6.8 million loss in the fourth quarter of 1999,
increasing to a $20.2 million loss in the second quarter of 2000, and decreasing
subsequently to a $6.7 million loss in the second quarter of 2001. Although the
Company was profitable in the third and fourth quarters of 2001, the Company
does not expect to be profitable in the near term and may not be profitable in
future quarters. Operating results of the Company may fluctuate from quarter to
quarter, depending on a number of factors, including:
- the relatively long sales cycles for its products;
- delays or deferral in the completion of product implementation;
- the variable size and timing of individual license transactions;
- changes in demand for its products and services;
- market acceptance of new products, including Indus InSite and any next
generation product offerings;
- the development and introduction of new operating systems and/or
technological changes in computer systems that require additional development
efforts;
- competitive conditions in the industry, including changes in the pricing
policies of the Company or its competitors;
- changes in customer budgets;
- the introduction of new products or product enhancements by the Company
or its competitors;
- the Company's success in, and costs associated with, developing,
introducing and marketing new products, including the necessary software and
technology for Indus InSite, its eBusiness offerings and its next generation
product initiatives;
- product life cycles;
- changes in the proportion of revenues attributable to licensing fees
versus services;
- changes in the level of operating expenses;
- delay or deferral of customer implementations of their software;
- software defects and other product quality problems;
- the successful completion of customer funded development and
implementation projects;
- the success in expanding sales and marketing programs;
- personnel changes, including changes in Company management;
- changes in the Company's sales organization;
- fluctuations in foreign currency exchange rates;
- effect of SEC requirements and AICPA Statements of Position on the
Company's revenue recognition; and
- other economic conditions, generally, or in specific vertical industry
segments.
Changes in operating expenses or variations in the timing of recognition of
specific revenues resulting from any of the these factors 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.
Market Acceptance of Indus InSite and other New Products
In October 2001, the Company announced its hosted, Internet-based EAM product,
Indus InSite. There can be no assurance that any of the Company's new products,
including Indus InSite, its e-initiatives, and web-based offerings, will be sold
successfully or that they can achieve market acceptance. The Company's future
success with Indus InSite and other next generation product offerings will
depend on its ability to accurately determine the functionality and features
required by its customers, as well as the ability to enhance its products and
deliver them in a timely manner. The Internet market is an emerging market that
may undergo rapid technological change. The Company cannot predict the present
and future size of the potential market for Indus InSite and its e-initiatives.
The Company may incur substantial costs to enhance and modify its products and
services in order to meet the demands of this potential market.
Risk Associated with the United Kingdom's Ministry of Defense ("MoD") Agreement
In the first quarter of 2001, the Company announced that the United Kingdom's
MoD had selected the Company as the application provider for the MoD's DSMS for
logistics and asset management. The DSMS contract accounted for approximately
23.3% of the Company's revenues for the year ended December 31, 2001. In January
2002, the Company announced that the MoD has suspended all current contractual
work on the DSMS project as it reviews its priorities against long-term resource
availability. The MoD has not advised the Company when this review will be
completed. The Company cannot assure investors that the DSMS project will be
resumed, or if it is resumed what the scope of work will be involved. Moreover,
the Company has demobilized resources that were working on the DSMS project and
in the event that the DSMS project is resumed, there can be no assurance that
the Company will be able to remobilize its resources in a timely and efficient
manner. The Company expects to incur operating losses in the near term as a
result of the suspension of the DSMS project.
17
The Company anticipates generating a net loss during the first quarter of
2002, due primarily to the suspension of the MoD's DSMS project and related
restructuring charges the Company anticipates taking during the first quarter of
2002. A loss during the first quarter of 2002 would trigger a default of the
profitability covenant within the bank line of credit. Such a default would
require the Company to maintain a compensating balance, equal to all outstanding
credit line and letter of credit usage, with the lender. Other than the existing
$2.25 million standby letter of credit, no other usage of the line of credit is
anticipated and the Company believes it will be able to fund the compensating
balances without negatively impacting the operations of the business. The
Company also believes that the lender would provide us with a waiver if we
maintain the required compensating balance; however, our expectations of future
operating results and continued compliance with our debt covenants cannot be
assured and the lender's actions are not controllable by the Company. If our
projections of future operating results are not achieved and our line of credit
is placed in default, we would not experience a material adverse impact on our
reported financial position and results of operations because we are not in
reliance of the line of credit, except for our $2.25 million standby letter of
credit.
Indus InSite Subscription Revenue Model
Indus InSite is a hosted product, which is being made generally available
in 2002. Initially, the Company plans to sell this product through subscription
agreements under which customers will pay a relatively low monthly or annual fee
for the right to use the InSite services. The InSite service offering is
delivered via software products that are hosted by the Company and accessed by
its customers via the Internet, leased lines, a virtual private network, or
other communications methods offered by the Company. As a result, customers will
not need to create or maintain an extensive internal information system to
support the product, and the customer's cost to discontinue their subscriptions,
not renew at the end of the term, or to switch to other products, would be lower
than purchasing a license for a fee, as under the traditional license fee-based
revenue model. Moreover, the Company does not have extensive experience in
hosting applications, and the hosting industry is relatively young. If the
Company does not accurately predict the volume of traffic, or if the Company
encounters technical difficulties with the InSite software or its third-party
hosting service providers, the Company may experience slower response times or
other problems with the service. Any delays in response times or other
performance problems could result in customers discontinuing their use of the
service or not renewing at the end of the term. If a significant number of
customers discontinue their subscriptions, or choose not to renew them, it could
have material adverse impact on the Company's future revenue, and on the
Company's overall results of operations.
Market acceptance of Indus InSite depends, in part, on the continued acceptance
of the Internet for business transactions.
The development of the Internet as a medium for business transactions, and asset
management in particular, is in a relatively formative stage. As Indus continues
to develop and market Indus InSite and other Internet-based products, the
success of those products will depend on the continued use and development of
the Internet as a tool for the transaction of business, and asset management in
particular. Indus cannot assure investors that the infrastructure or
complementary services necessary to maintain the Internet will be developed or
maintained. If the Internet fails as a medium for business transactions, and
asset management in particular, it would have a material adverse affect on the
market acceptance of Indus InSite and other Internet-based products we develop.
Security risks and concerns may deter the use of the Internet, which could
adversely affect the market acceptance of Indus InSite.
A significant barrier to the adoption and success of Internet-based products
like Indus InSite is the secure transmission of confidential information over
public networks. Advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments could result in compromises or
breaches of security systems. If any well-publicized compromises of security
were to occur, it could have the effect of substantially reducing the use of the
Internet for commerce and communications. Anyone who circumvents the security
measures for Indus InSite could misappropriate proprietary information or cause
interruptions in the services Indus provides through InSite and its other
Internet-based products. The Internet is a public network, and data is sent over
this network from many sources. In the past, computer viruses, software programs
that disable or impair computers, have been distributed and have rapidly spread
over the Internet. Computer viruses could be introduced into the Indus InSite
system or those of the Company's customers or suppliers, which could disrupt
Indus InSite or make it inaccessible to customers. Indus may be required to
expend significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that the Company's activities may involve the storage and transmission of
proprietary information, security breaches could expose the Company to a risk of
loss or litigation and possible liability. The Company's security measures may
be inadequate to prevent security breaches, and the adoption of Indus InSite and
the Company's business in general would be materially harmed if we do not
prevent them.
Changes in Management
The Company has had significant turnover at the executive management level
during 2000 and early 2001. The current executive management team has only
recently begun to work together, and they may be unable to integrate and work
effectively as a team. There can be no assurance that the Company will be able
to motivate and retain the current executive management team or that they will
be able to work together effectively. If the Company loses any members of its
executive management team or they are unable to work together effectively, the
Company's business, operations and financial results could be adversely
affected.
18
Hiring and Retaining Employees
The Company's future success depends, in significant part, upon the continued
service of its key technical, sales and senior management personnel, as well as
its ability to attract and retain new personnel. Competition for qualified
sales, technical and other personnel is intense, and there can be no assurance
that the Company will be able to attract, assimilate or retain additional highly
qualified employees in the future. If the Company were unable to hire and retain
personnel, particularly in senior management positions, its business, operating
results and financial condition would be materially adversely affected.
Additions of new personnel 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.
The Company underwent two reductions in force during the first quarter of
2002, largely in response to the suspension of the DSMS project by the MoD and
general weakness in capital expenditures in the markets that the Company serves.
The Company may not be able to rehire these people if the DSMS project is
resumed or when general economic conditions improve, which could adversely
affect the Company's future operating results.
Managing Operations
Changes to the Company's business and customer base have placed a strain on
management and operations. Previous expansion had resulted in substantial growth
in the number of Company 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 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 its operations and failure to do so would have a material adverse effect
on its business, operating results and financial condition.
Risks Related to Restructuring
During 2000 and 2001, the Company restructured some of its operations by,
among other things, relocating its corporate headquarters and administrative
functions to Atlanta, Georgia from San Francisco, California. On March 21, 2002,
the Board of Directors approved a formal restructuring plan that will
necessitate taking a restructuring charge in the first quarter of 2002, largely
in connection with the suspension of the DSMS project by the MoD. These types of
restructurings have operational risks, including reduced productivity and lack
of focus as the Company hires, terminates and assimilates a substantial number
of new employees. In addition, there can be no assurance that the Company will
achieve the anticipated cost savings from these restructurings and any failure
to achieve the anticipated cost savings could cause the Company's financial
results to fall short of expectations. Moreover, the Company has taken charges
for restructuring expenses in connection with its restructuring, including an
$8.0 million charge in the second quarter of 2001 and an anticipated $3.620
million charge in the first quarter or 2002, and there can be no assurance that
additional charges for restructuring expenses will not be taken in future
quarters. Significant future restructuring charges could cause financial results
to be unfavorable.
Intense Competition
The EAM market is intensely competitive. In order to remain competitive, the
Company must continually enhance its baseline software and integration products
and develop new products in a timely fashion. The Company believes that the
principal competitive factors in its businesses will be:
- - product performance and functionality;
- - adaptability to new trends driven by technology and customer requirements;
- - 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 with, and market acceptance of, new products, including Indus
InSite; and new enhancements, functionality and services.
The Company's success also depends significantly on its ability to develop
more advanced products more quickly and less expensively than its existing and
potential competitors and to educate potential customers of the benefits of
licensing the Company's products. Some of the Company's competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company, which may allow them to 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 effectively compete with the Company.
19
In addition, because there are relatively low barriers to entry for the
software market, the Company expects additional competition from other
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.
Possible Decrease in Market Demand
Overall demand for enterprise software may grow more slowly or actually
decrease in upcoming quarters and years because of unfavorable general economic
conditions, decreased spending by companies in the industries the Company serves
or otherwise. This may reflect a saturation of the market for enterprise
software as well as deregulation and retrenchment affecting the way companies
purchase enterprise software. To the extent that a slowdown in the market for
enterprise software market materializes, the Company's business, results of
operations and financial condition are likely to be materially adversely
affected.
Rapid Technological Change; Need to Develop New Products; Requirement for
Frequent Product Transitions
The industries in which the Company participates are 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 products 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 any future enhancements
to existing products or new products developed by the Company will achieve
customer acceptance or will adequately address the changing needs of the
marketplace. There can also be no assurance 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.
Risks Related to Delays in Product Development
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.
Risks Related to Growth of International Operations
International revenues (from sales outside the United States) accounted
for approximately 32%, 31% and 41% of total revenues in 1999, 2000 and 2001. The
Company maintains an operational presence in the United Kingdom, Canada,
Australia, France and Japan. In addition, the Company has established sales and
support offices in England, France, Canada, Australia and Japan, and expects
international sales to continue to become a more significant component of its
business. However, there can be no assurance that the Company will be able to
maintain or increase international market demand for its products. In addition,
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 expand
foreign operations 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.
Risks Related to Foreign Exchange Rate Fluctuations
At December 31, 2001, a significant portion of the Company's cash was held
in British Pounds. In the future, the Company may need to exchange some of the
cash held in British Pounds, or other foreign currencies, to U.S. Dollars. The
Company does not engage in hedging transactions, and an unfavorable foreign
exchange rate at the time of conversion to U.S. Dollars would adversely affect
the net fair value of the foreign denominated cash upon conversion.
20
Risks Related to International Operations Generally
The Company's international business also involves 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 annual 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 are generated primarily through its
international sales subsidiaries and indirect sales channel partners 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 revenues. 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.
Dependence on Proprietary Technology
The Company's success is heavily dependent upon its proprietary technology.
The Company relies 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 generally enters 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, to use the Company's products or technology without authorization,
or to develop similar technology independently. Moreover, the laws of some other
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 has made
source code available from time-to time for certain of its products and
providing 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.
Risks of Infringement
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that a third party
will not assert that the Company's technology violates its patents or other
proprietary rights 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 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 products by a
customer generally involves 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 requires 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. 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.
21
Dependence on Licensed Technology from Third Parties
Elements of the Company's products are licensed from third parties under
agreements, which may include certain warranties and representations that the
Company typically seeks to pass through to the end users through contractual
provisions. The loss of the Company's right to use and license such technology
could limit the Company's ability to successfully market certain modules or
products. While the Company believes that 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.
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 relating to its
product or third party software embedded in the Company's products could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Effect of Securities and Exchange Commission ("SEC") Requirements and American
Institute of Certified Public Accountants ("AICPA") Statements of Position on
the Company's Revenue Recognition
In October 1997, the AICPA issued Statement of Position No. 97-2 "Software
Revenue Recognition" ("SOP 97-2"), which superceded SOP No. 91-1. SOP No. 97-2
was effective for the Company's fiscal year beginning June 1, 1998, as amended
by SOP No. 98-4 and SOP No. 98-9, and provides guidance on applying generally
accepted accounting principles for software recognition transactions. In
December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101") which provides further revenue
recognition guidance. The accounting profession continues to review certain
provisions of SOP No. 97-2 and SAB 101 with the objective of providing
additional guidance on implementing consistent standards for software revenue
recognition. Depending on the outcome of these reviews and the issuance of
implementation guidelines and interpretations, the Company may be required to
change its revenue recognition policies and business practices, and such changes
could have a material adverse impact on the Company's business, results of
operations or financial position.
Pending Litigation
The Company is involved in certain pending litigation with former employees
that, if resolved unfavorably to the Company, may require the Company to pay
material cash payments in settlement. Any such payment could adversely affect
the cash position of the Company. See Part II - Item 1 - "Legal Proceedings" for
further discussion.
22
ITEM 2. PROPERTIES
Certain information concerning the Company's office space at December 31,
2001 is set forth below:
SQUARE OWNERSHIP
LOCATION PRINCIPAL USE FOOTAGE INTEREST
--------------------------------------- ------------------------------------ ------------- ----------------
DOMESTIC OFFICES:
Atlanta, GA...................... Corporate Headquarters, Research 107,200 Lease
and Development, Sales and
Marketing, Operations
San Francisco, CA................ Regional Operations, Research and 108,158 Lease
Development, Sales and Marketing,
Operations
Pittsburgh, PA................... Regional Operations 30,821 Lease
Dallas, TX....................... Regional Operations 9,042 Lease
Lake Oswego, OR.................. Regional Operations 5,057 Lease
Irvine, CA....................... Regional Operations 2,502 Lease
INTERNATIONAL OFFICES:
Woking, Surrey, United Kingdom Regional Operations 10,300 Lease
Brisbane, Australia.............. Regional Operations 6,695 Lease
Paris, France.................... Regional Operations 6,660 Lease
Toronto, Canada.................. Regional Operations 7,969 Lease
The amount noted in the above chart for the Company's San Francisco office
includes 18,313 square feet currently under sub-lease. See Note 6 to the
Consolidated Financial Statements.
Management is currently and will continue to evaluate leased facilities to
meet operational requirements for 2002. The Company owns substantially all of
the equipment used in its facilities.
ITEM 3. LEGAL PROCEEDINGS
In June 2000, the Company was served with a demand for arbitration by
William Grabske, the Company's former Chief Executive Officer. Mr. Grabske seeks
enforcement of a purported Settlement Agreement and Mutual Release. The demand
seeks severance pay and reimbursement of expenses of approximately $1.0 million
plus interest, options for approximately 20,000 shares of stock in the Company,
and fees and costs. The Company intends to vigorously contest Mr. Grabske's
demand and has asserted various counterclaims.
The Company does not believe that, individually or in aggregate, the legal
matters to which it is currently a party are likely to have a material adverse
effect on its results of operations or financial condition.
From time to time, the Company is involved in other legal proceedings
incidental to the conduct of its business. The outcome of these claims cannot be
predicted with certainty. The Company intends to defend itself vigorously in
these actions. However, any settlement or judgment may have a material adverse
effect on the Company's results of operations in the period in which such
settlement or judgment is paid or payment becomes probable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 2001.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq
National Market under the symbol "IINT". The following table sets forth the high
and low sales prices of the Company's common stock for the periods indicated.
HIGH LOW
------ -------
Year ended December 31, 2000
First Quarter $13.63 $5.94
Second Quarter 9.94 5.50
Third Quarter 9.31 3.53
Fourth Quarter 6.00 1.50
Year ended December 31, 2001
First Quarter $ 5.25 $1.63
Second Quarter 9.09 3.94
Third Quarter 8.60 4.90
Fourth Quarter 7.90 5.24
On March 7, 2002, there were 193 holders of record of our common stock.
Because many of these shares are held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
The Company has not declared or paid any cash dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company anticipates that any future earnings will be retained to finance the
continuing development of its business.
On July 15, 1999, the Company's Board of Directors approved a stock
repurchase program for up to 2,000,000 shares of the Company's outstanding
common stock. The Company is authorized to use available cash to buy back its
shares in open market transactions from time to time, subject to price and
market conditions. No purchases were made in 2000 or in 2001. As of December 31,
2001, the Company held, as treasury stock, 435,500 shares that had been
repurchased at a cost of $2.2 million under the program.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and notes thereto and other financial
information included elsewhere herein. During 1997, The Indus Group, Inc.
entered into an Agreement and Plan of Merger and Reorganization with TSW
International, Inc. The merger was consummated on August 25, 1997 and was
accounted for as a pooling of interests. All financial information was restated
to reflect the combined operations of The Indus Group, Inc. and TSW
International, Inc. The summary consolidated balance sheet data as of December
31, 2000 and 2001 and summary consolidated statements of operations data for the
years ended December 31, 1999, 2000, and 2001 are derived from and qualified by
reference to the audited consolidated financial statements of the Company, which
are included elsewhere herein. The summary consolidated balance sheet data as of
December 31, 1997, 1998 and 1999 and the summary consolidated statement of
operations for the years ended December 31, 1997 and 1998 are derived from the
audited consolidated financial statements of the Company which are not included
herein, but have been previously filed with the SEC.
24
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
REVENUES: (in thousands, except per share data)
Software licensing fees $ 55,958 $ 55,546 $ 19,071 $ 12,622 $ 21,005
Services and maintenance 119,382 138,956 158,160 131,956 154,989
Other revenue 1,694 975 1,274 1,111 20
--------- --------- --------- --------- ---------
Total revenues 177,034 195,477 178,505 145,689 176,014
Cost of revenues (1) 78,575 103,517 98,050 90,880 81,116
--------- --------- --------- --------- ---------
Gross margin 98,459 91,960 80,455 54,809 94,898
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 27,664 30,372 33,801 51,607 49,522
Sales and marketing 33,568 31,517 31,667 49,348 30,242
General and administrative 14,991 15,270 18,145 20,944 17,398
Merger and restructuring expenses 12,083 -- -- 2,063 10,188
--------- --------- --------- --------- ---------
Total operating expenses 88,306 77,159 83,613 123,962 107,350
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 10,153 14,801 (3,158) (69,153) (12,452)
Gain on sale of investment in TenFold Corporation -- -- 38,170 -- --
Other income (expense) net (1,968) (936) 3,120 3,712 2,412
--------- --------- --------- --------- ---------
Income (loss) before taxes 8,185 13,865 38,132 (65,441) (10,040)
Provision (benefit) for income taxes 6,408 450 14,295 (6,666) 36
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 1,777 13,415 23,837 (58,775) (10,076)
Extraordinary item (787) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 990 $ 13,415 $ 23,837 $ (58,775) $ (10,076)
========= ========= ========= ========= =========
Income (loss) per share (2) $ 0.03 $ 0.44 $ 0.74 $ (1.72) $ (0.29)
========= ========= ========= ========= =========
Shares used in computing per share data 28,574 30,717 32,109 34,248 34,857
========= ========= ========= ========= =========
DECEMBER 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
BALANCE SHEET DATA: (in thousands)
Working capital $ 37,238 $ 58,609 $ 95,872 $ 43,466 $ 42,193
Total assets 136,725 150,785 168,901 140,732 137,737
Short-term debt 29,054 21,005 301 71 4
Long-term debt 1,105 257 163 71 --
Total stockholders' equity 70,230 86,075 118,352 68,957 60,946
(1) Includes a $6.8 million write-down of third party software available for
sale in 2000.
(2) After $0.03 per share loss from extraordinary item in 1997. Fully diluted
per share amount in 1997, after loss from extraordinary item, does not
differ from the basic $0.03 per share amount indicated above. Fully diluted
per share amounts differ in 1998 ($0.38) and 1999 ($0.68). See Note 1 to
the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are not based on historical facts,
but rather reflect management's current expectations concerning future results
and events. These forward-looking statements generally can be identified by the
use of phrases and expressions such as "believe," "expect," "anticipate,"
"intend," "plan," "foresee," "likely," "will" or other similar words or phrases.
Forward-looking statements include, without limitation, statements related to:
the Company's plans, objectives, expectations and intentions; the timing,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. These forward-looking
statements are subject to known and unknown risks and uncertainties that could
cause actual results, performance or achievements to be different from any
future results, performance and achievements expressed or implied by these
statements. Important factors that might cause actual results to differ
materially from those suggested by the forward-looking statements include, but
are not limited to, those discussed in the section of this report entitled
"Description of Business - Factors Affecting Future Performance" beginning on
page 17. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements.
25
On January 22, 2002, the SEC issued Financial Reporting Release No. 61,
Release No. 33-8056, Commission Statement about Management's Discussion and
Analysis of Financial Condition and Results of Operations. The SEC's statement
contains suggested enhanced MD&A disclosures covering liquidity, special purpose
entities and other off-balance sheet arrangements, contractual obligations and
commercial commitments, energy and other commodity contracts, and related party
and other transactions conducted at arm's-length. The Company adopted these
suggested disclosures for reporting within this report and related financial
statements, footnotes, and MD&A. Exclusive of operating leases of the Company's
office facilities and computers and equipment necessary in the ordinary course
of the Company's business, the Company has no special purpose entities or other
off-balance sheet arrangements. The adoption of these disclosure requirements
did not have a significant impact on the Company's financial statements.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to revenue recognition,
accounts receivable and allowance for doubtful accounts, deferred tax assets,
property and equipment, investments, accrued expenses, restructuring, debt
covenants, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We have identified the policies below as critical to the Company's
business operations and the understanding of the Company's results of
operations. For a detailed discussion on the application of these and other
accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements.
Revenue Recognition:
Revenues from the Company's professional consulting and implementation
services are generally time and material based and are recognized as the work is
performed. Delays in project implementation will result in delays in revenue
recognition. Some professional consulting services involve fixed-price and/or
fixed-time arrangements and are recognized using contract accounting, which
requires the accurate estimation of the cost, scope and duration of each
engagement. Revenue and the related costs for these projects are recognized on
the percentage-of-completion method, with progress-to-completion measured by
using labor cost inputs and with revisions to estimates reflected in the period
in which changes become known. Project losses are provided for in their entirety
in the period they become known, without regard to the percentage-of-completion.
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future consulting margins on these projects may be negatively affected or losses
on existing contracts may need to be recognized.
Accounts Receivable and Allowance for Doubtful Accounts:
Billed and unbilled accounts receivable comprise trade receivables that
are credit based and do not require collateral. The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company records a
provision for uncollectible accounts on sales in the same period as the related
revenues are recorded. These estimates are based upon historical collection
patterns. If the historical data the Company uses to calculate these estimates
does not properly reflect future collections, revenue could be overstated. On an
ongoing basis, the Company also evaluates the collectibility of accounts
receivable based upon historical collections and an assessment of the
collectibility of specific accounts. The Company evaluates the collectibility of
specific accounts using a combination of factors, including the age of the
outstanding balance(s), evaluation of the account's financial condition and
credit scores, recent payment history, and discussions with the Company's
account executive for the specific customer and with the customer directly.
Based upon this evaluation of the collectibility of accounts receivable, any
increase or decrease required in the allowance for doubtful accounts is
reflected in the period in which the evaluation indicates that a change is
necessary. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The allowance amounted to $5.4 million
and $5.7 million as of December 31, 2000 and 2001, respectively.
26
The Company generates a significant portion of revenues and
corresponding accounts receivable from sales to the utility industry. As of
December 31, 2001, approximately $15 million of our accounts receivable were
attributable to software license fees and support and services sales to utility
customers. In determining the Company's allowance for doubtful accounts, we have
considered the utility industry's financial condition, as well as the financial
condition of individual utility customers. We do not foresee collectibility
issues related to the utility industry in general, except for specific customers
for which the Company has specifically reserved for potential uncollectibility.
The Company generated 23.3% of its revenues during the year ended
December 31, 2001 from a single customer, for the MoD's DSMS project in the
United Kingdom. As of December 31, 2001, approximately $7.9 million of the
Company's accounts receivable were attributable to this customer. As announced
by the Company on January 24, 2002, the MoD has suspended all current
contractual work on the DSMS project as it reviews its priorities against
long-term resource availability. The Company does not anticipate accounts
receivable collectibility issues related to the project's suspension.
The Company generates a significant portion of its revenues and
corresponding accounts receivable through sales denominated in currencies other
than the U.S. Dollar. As of December 31, 2001, approximately $17 million of the
Company's gross billed accounts receivable were denominated in foreign
currencies, of which approximately $12 million were denominated in British
Pounds. Historically, the foreign currency gains and losses on these receivables
have not been significant, and the Company has determined that foreign currency
derivative products are not required to hedge the Company's exposure. If there
were a significant decline in the British Pound exchange rate, the U.S. Dollar
equivalents received from our customers could be significantly less than the
reported amount. A decline in the exchange rate of the British Pound to the U.S.
Dollar of 10% from the rate as of December 31, 2001 would result in an exchange
loss of approximately $1.2 million.
Deferred Tax Assets:
As of December 31, 2001, the Company had approximately $31.8 million of
deferred tax assets, including net operating loss carryforwards, which, subject
to certain limitations, may be used to offset for income tax purposes against
future income through 2020. The Company records a valuation allowance to reduce
its deferred tax assets to the amount that is more likely than not to be
realized. The Company considers future taxable income expectations in assessing
the need for the valuation allowance. In the event the Company were to determine
that it would be able to realize its deferred tax assets in the future in excess
of its net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such a determination was made. Likewise, should
the Company determine that it would not be able to realize all or part of its
net deferred tax asset in the future, an adjustment to the deferred tax asset
would be charged to income in the period such a determination was made.
Management evaluates the realizability of the deferred tax assets and the need
for valuation allowances on a regular basis.
Property and Equipment:
Property, equipment and software purchased for internal use is
capitalized and depreciated/amortized over estimated useful lives. Reviews are
performed, evaluating impairment and technological obsolescence, and any
decision to reduce a capital asset's carrying value would be recorded during the
period such a determination was made. No material capital asset write-downs have
occurred during the prior two fiscal years and none are currently anticipated
for the capital assets currently existing on the consolidated balance sheet. The
Company expenses, as incurred, the cost for development of new software products
and substantial enhancements to existing software products. Following SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, costs incurred subsequent to the establishment of
technological feasibility have not been estimated as significant and all
software development costs have been charged to research and development in the
consolidated statement of operations. The Company has incurred significant
research and development costs during the past three years, $135 million or 27%
of total revenues, and anticipates continuing to fund research and development
activities as necessary in the future. If the Company does not accurately
estimate the software development costs incurred or correctly evaluate
establishment of technological feasibility, then a material amount of costs
currently recorded as research and development expense could be capitalized on
the balance sheet and amortized over future periods to match against anticipated
revenue recognition.
Investments:
The Company attempts to maximize total investment returns while
maintaining a conservative investment policy that emphasizes preservation of
principal through high credit quality requirements (A1/P1, MIG 1 A or better, AA
or better) and maintenance of liquidity with maximum effective maturity of any
single issue not to exceed two years. The Company currently classifies all
marketable securities as available-for-sale investments and carries them at fair
market value. At December 31, 2000 and 2001, the gross amortized cost of the
Company's investments approximated the estimated fair value. Given that the
Company's investment policy and guidelines restrict investments to non-volatile
government, agency, and select money market instruments, the Company deems it a
very low probability that there will be potential impairment on the current
existing investments.
27
Accrued Liabilities:
The Company records accrued liabilities based upon valid, measurable,
approved purchases, commitments and obligations, with definitive receipt of
goods or services and known timing. Most of the liabilities accrued are
supported by specific invoices or contracts. For internal commission and bonus
amounts, these are payable in the quarter subsequent to when they are earned,
necessitating the use of management estimates to record quarter-end and year-end
accrual amounts. The total accrued balance for internal commissions and bonuses
was $5.0 million and $3.9 million for the periods ending December 31, 2000 and
2001, respectively. If the Company does not accurately estimate these commission
and bonus amounts or if there is a change in the commission or bonus plans, the
resultant adjustment could impact the Company's reported gross profit and
operating margins.
Restructuring:
At December 31, 2001, the Company had a balance in accrued liabilities
of approximately $7.5 million related to restructuring charges, with
approximately $7.3 million representing the estimated excess lease costs
associated with subleasing redundant San Francisco office space, due to the
relocation of the Company's headquarters and certain administrative functions to
Atlanta, Georgia, in 2000 and 2001. The Company could incur future charges or
credits, in the event that the underlying assumptions used to develop the
Company's estimates of excess lease costs, such as the timing and the amount of
any sublease income, change.
Currently, the Company has sublease arrangements for two of the five
redundant San Francisco office floors. The Company estimates that two more
floors will come under sublease arrangements in 2002 and the final floor will
come under sublease arrangement in 2003. The two floors currently under
subleases are projected to generate approximately $3.2 million in sublease
income from 2002 through 2008. The Company estimates that sublease arrangements
for all five floors could generate approximately $9.7 million of sublease income
from 2002 through 2008. If the Company is unable to sublease the additional
three floors, the shortfall of $6.5 million of estimated sublease income will
generate charges against the Company's income from 2002 through 2008, with the
2002 charge being approximately $500,000. Conversely, the Company could generate
higher than estimated sublease income from 2002 through 2008, from faster
signing of arrangements on those floors currently not under sublease and/or from
higher than estimated sublease rental rates.
Debt Covenants:
The Company has an unsecured revolving bank line of credit in the
amount of $15.0 million, which expires on May 31, 2003. As of December 31, 2001,
the only use of this line of credit was a $2.25 million standby letter of
credit. The line of credit contains certain affirmative and negative covenants
(see 10-K exhibit index, items 10.15 and 10.16 for location of copies of the
recent bank line of credit amendments). The Company was either in compliance
with, or had received waivers for, each of the financial covenants at December
31, 1999, 2000 and 2001.
The Company anticipates generating a net loss during the first quarter
of 2002, due primarily to the suspension of the MoD's DSMS project and related
restructuring charges the Company anticipates taking during the first quarter of
2002. A loss during the first quarter of 2002 would trigger a default of the
profitability covenant within the bank line of credit. Such a default would
require the Company to maintain a compensating balance, equal to all outstanding
credit line and letter of credit usage, with the lender. Other than the existing
$2.25 million standby letter of credit, no other usage of the line of credit is
anticipated and the Company will be able to fund the compensating balances
without negatively impacting the operations of the business.
The Company also believes that the lender would provide a waiver if the
required compensating balance was maintained; however, our expectations of
future operating results and continued compliance with our debt covenants cannot
be assured and the lender's actions are not controllable by the Company. If our
projections of future operating results are not achieved and our line of credit
is placed in default, we would not experience a material adverse impact on our
reported financial position and results of operations because we are not in
reliance of the line of credit, except for our $2.25 million standby letter of
credit.
Litigation and Contingencies:
The Company has been notified that it is a defendant in a number of
legal proceedings associated with employment and other matters. The Company does
not believe that it is a party to any legal proceedings that will have a
material adverse effect on our consolidated financial position. It is possible;
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in our assumptions related
to these proceedings.
The Company at times faces challenges from domestic and foreign tax
authorities regarding the amount of taxes due. These challenges include
questions regarding the timing and amount of deductions and the allocation of
income among various tax jurisdictions. In evaluating the exposure associated
with the Company's various filing positions, the Company records reserves for
probable exposures. Based upon the Company's evaluation of its tax positions,
the Company believes it has appropriately accrued for probable exposures. To the
extent the Company was to prevail in matters for which accruals have been
established or be required to pay in excess of reserves, the Company's effective
tax rate in any given financial statement period may be materially impacted.
28
RESULTS OF OPERATIONS
OPERATING RESULTS
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:
PERCENTAGE OF TOTAL REVENUES
YEARS ENDED DECEMBER 31,
-------------------------------------
Statement of Operations Data: 1999 2000 2001
----- ----- -----
Revenues:
Software licensing fees 10.7% 8.7% 11.9%
Services, and maintenance and other 89.3% 91.3% 88.1%
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
Cost of revenues (including $6,838 writedown of
third party software in 2000) 54.9% 62.4% 46.1%
----- ----- -----
Gross margin 45.1% 37.6% 53.9%
----- ----- -----
Operating expenses:
Research and development 18.9% 35.4% 28.1%
Sales and marketing 17.7% 33.9% 17.2%
General and administrative 10.2% 14.4% 9.9%
Restructuring expenses -- 1.4% 5.8%
----- -----
Total operating expenses 46.8% 85.1% 61.0%
----- ----- -----
Income (loss) from operations (1.7%) (47.5%) (7.1%)
Gain on sale of investment in TenFold
Corporation 21.4% -- --
Other income (expense) net 1.7% 2.5% 1.4%
----- ----- -----
Income (loss) before income taxes 21.4% (45.0%) (5.7%)
Provision (benefit) for income taxes 8.0% (4.6%) --
----- -----
Net income (loss) 13.4% (40.4%) (5.7%)
===== ===== =====
Revenues. The Company's revenues are derived from software licensing fees and
from professional services, which include implementation and training services,
customer funded development, and support fees. Total revenues decreased 18.4%
from $178.5 million in 1999 to $145.7 million in 2000, before increasing 20.8%
to $176.0 million in 2001. The decrease in total revenue from 1999 to 2000 was
primarily attributable to a decrease in the revenues from software license fees
and professional services. The increase in total revenue from 2000 to 2001 was
mainly due to an increase in revenues from both software license fees and
professional services in the Utility market, as well as growth in the MoD DSMS
project.
Revenues from software licensing fees were 10.7%, 8.7% and 11.9% of total
revenues for 1999, 2000 and 2001, respectively. Revenues from software license
fees decreased 33.8% from $19.1 million in 1999 to $12.6 million in 2000. This
decrease in 2000 software license fees was attributable to a change in the
nature (e.g., increase in elements that are to be delivered in the future) of
licensing agreements executed in 2000, which resulted in an increase in deferred
revenue. Revenues from software license fees increased 66.4% from $12.6 million
in 2000 to $21.0 million in 2001. Despite overall weakness in the U.S. economy
in 2001, the Utility vertical continued to be a strong buyer of the Company's
EAM product. The increase in software license fees in 2001 is also attributable
to recognition of deferred elements and revenue from 2000 contracts. During
1999, 2000 and 2001, the Company signed new licensing contracts valued at $19.1
million, $28.0 million and $27.0 million, respectively.
Revenues from professional services were 89.3%, 91.3% and 88.1% of total
revenues for 1999, 2000 and 2001, respectively. Revenues from professional
services decreased 16.5% from $159.4 million in 1999 to $133.1 million in 2000.
This decrease in service and support revenue in 2000 was due to the majority of
new license agreements being executed in the last six months of the year.
Revenues from professional services increased 16.5% from $133.1 million in 2000
to $155.0 million in 2001. The increase in professional services revenue in 2001
is primarily attributable to customer funded development and services provided
under the United Kingdom's MoD DSMS project, as well as implementation and
consulting services generated from the new software licensing contracts sold
from mid-2000 through mid-2001.
29
From a geographic perspective, revenue from international customers (from sales
outside the United States) accounted for 32%, 31% and 41% of revenues for 1999,
2000 and 2001, respectively. The majority of the 2001-over-2000 growth in
revenue from international customers was attributable to the MoD DSMS project.
In the aggregate, the regions identified as EMEA (Europe, Middle East and
Africa), Canada, and APAC (Australia, Asia and the Pacific Rim) represented the
following percentages of total revenues:
1999 2000 2001
---- ---- ----
EMEA (Europe, Middle East & Africa) 22% 23% 35%
Canada 6% 4% 3%
APAC (Australia, Asia & Pacific Rim) 4% 4% 3%
Total International (sales outside US) 32% 31% 41%
As most of the Company's existing contracts are denominated in U.S. Dollars,
foreign currency fluctuations have not significantly impacted the results of
operations. Historically, foreign currency gains and losses have not been
significant, and the Company has determined that foreign currency derivative
products are not required to hedge the Company's exposure.
The United Kingdom's MoD DSMS project represented 23.3% of total revenues for
2001. Another customer accounted for 12.2% and 13.2% of the Company's total
revenues in 2000 and 1999.
Looking forward into 2002, we continue to see softening in key vertical markets
as well as lost revenue due to the suspension of the MoD's DSMS project,
partially offset by revenues from the new InSite product, resulting in a
decrease in overall revenues in 2002 over 2001.
Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and
related costs for implementation and consulting services, (ii) training and
customer support services, and (iii) license fees to third parties upon the sale
of the Company's products containing third-party software. Gross profits on
license fees are substantially higher than gross profits on services revenues,
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 7.3% from $98.1 million in 1999 to $90.9 million in
2000 and decreased 10.7% to $81.1 million in 2001. As a percentage of total
revenue, cost of revenues was 54.9%, 62.4% and 46.1% for 1999, 2000 and 2001,
respectively. The 2000 decrease in absolute Dollars in cost of revenues was due
principally to the decrease in year-over-year revenues, partially offset by a
$6.8 million write-down of third party software available for sale and higher
cost of services margins due to fixed and variable cost reductions not matching
the service revenue reductions. The increase in cost of revenues in 2000, as a
percentage of revenues, was primarily attributable to the $6.8 million writedown
of third-party software, as well as the higher cost of services margins. The
2001 decrease in absolute Dollars in cost of revenues was due to 2000 being
higher due to the $6.8 million third-party software writedown and lower cost of
revenue margins for software licensing fees and services, partially offset by
the increase in year-over-year revenues. The decrease in cost of revenues in
2001, as a percentage of revenues, was due to the aforementioned $6.8 million
writedown in 2000, a higher proportion of license fees (which have higher gross
profit margins than services revenues), and increased gross profit margins in
2001 versus 2000 for both license fees and services.
The cost of software licensing fees was $5.1 million, $9.6 million and $1.4
million for 1999, 2000 and 2001, respectively. Gross profit margins on software
licensing fees were 73.2%, 24.2% and 93.3% respectively for 1999, 2000 and 2001.
The 2000 margin is lower, due to the previously noted $6.8 million third-party
software writedown. Excluding this writedown the 2000 margin would have been
approximately 78%. The improved margin for 2001 over 2000 is the result of the
product mix, where license fees recognized in 2001 were less dependent on
third-party products than in 2000.
The cost of services revenue was $93.0 million, $81.3 million and $79.7 million
for 1999, 2000 and 2001, respectively. Gross profit margins on services revenues
were 41.7%, 38.9% and 48.6% respectively for 1999, 2000 and 2001. The decrease
in margin in 2000 was due to the Company's inability to reduce fixed and
variable services costs rapidly enough to match the services revenue reduction
and maintain margin. The increase in margin in 2001 was a result of improved
utilization rates for services personnel and higher realized billable rates per
hour.
Research and Development (R&D). Research and development expenses consist
primarily of: (i) personnel and related costs and, (ii) computer processing
costs, and (iii) third party consultant fees directly attributable to the
development of new software application products, enhancements to existing
products (including language translations), and the integration/porting of
Indus' products to different systems/platforms.
Research and development expenses increased 52.7% from $33.8 million in 1999 to
$51.6 million in 2000, before decreasing 4.0% to $49.5 million in 2001, and
represented 18.9%, 35.4% and 28.1%, respectively, of total revenues in those
years. The Company's higher research and development expense levels in 2000 and
2001 reflect the Company's investment in the recently introduced Indus InSite
Internet-born product for the mid-tier, collaborative asset management market;
as well as ongoing development of Indus new vision products, such as
IndusBuyDemand and IndusKnowledgeWarehouse; development and implementation of
Indus hosted products and eLearning applications; and full language conversion,
such as the EMPAC translation for the Japanese utility market. The Company
believes that a significant level of investment in R&D is essential to remain
competitive.
30
To date, the Company has expensed all software development costs as incurred.
Sales and Marketing. Sales and marketing expenses include personnel costs, sales
commissions, and the costs of advertising, public relations and participation in
industry conferences and trade shows. Sales and marketing expenses increased
55.8% from $31.7 million in 1999 to $49.3 million in 2000, before decreasing
38.7% to $30.2 million in 2001. As a percent of total revenues, sales and
marketing expenses were 17.7%, 33.9% and 17.2% for 1999, 2000 and 2001,
respectively.
The increase in sales and marketing expense for 2000 over 1999 related primarily
to the rebuilding of the sales and marketing staff, and expanded advertising and
promotional costs, to address the 66% and 34% declines in license fee revenues
in 1999 and 2000, respectively. The decrease in sales and marketing expenses
from 2000 to 2001 related to a continuing review and rationalization of ongoing
sales and marketing investments in the Company's vertical and geographic
markets. This resulted in lower salaries and benefit costs due to reductions in
headcount and a more focused advertising and promotion program resulting in
lower marketing expenses.
General and Administrative. General and administrative expenses include the
costs of finance, human resources and administrative operations. General and
administrative expenses increased 15.4% from $18.1 million in 1999 to $20.9
million in 2000, before decreasing 16.9% to $17.4 million in 2001. These
expenses represented 10.2%, 14.4% and 9.9% of total revenues in those years,
respectively.
General and administrative expenses increased on an absolute basis and as a
percentage of total revenues from 1999 to 2000 due to the decrease in revenue,
the relatively fixed nature of some portions of general and administrative
expenses, expenses related to changes in management personnel, and the writedown
of $0.6 million related to an impaired acquired intangible asset. The reduction
in general and administrative expenses in 2001, both on an absolute basis and as
a percentage of total revenues, is a result of lower salaries and benefits from
reduced headcount and lower lease costs due to the elimination of redundant
space in the Company's San Francisco office (see Restructuring Expenses below).
Restructuring Expenses. The Company recorded $2.1 million and $10.2 million in
2000 and 2001, respectively, in restructuring costs in connection with the
ongoing relocation of the Company's headquarters and certain administrative
functions to Atlanta, Georgia, severance payments related to the elimination of
56 global positions, and charges representing the estimated excess lease costs
associated with subleasing redundant San Francisco office space.
This relocation was approved by the Board of Directors in July 2000 and includes
costs of approximately $2.8 million for severance pay for employees affected,
and approximately $9.5 million for lease termination costs associated with
reducing leased space in San Francisco. Due to the excess capacity of available
lease space in the San Francisco market, lease rates have declined from
approximately $60 per square foot at the beginning of 2001 to the $28-$30 per
square foot range, which is below the Company's actual lease cost of $45 per
square foot. The San Francisco office leases expire May 31, 2008.
As of December 31, 2001, approximately $4.4 million of these costs were paid.
$1.6 million was included in other current liabilities and $5.9 in other
non-current liabilities at December 31, 2001. In addition, approximately $0.3
million of other costs related to the restructuring were recorded directly to
restructuring expense during 2001.
No restructuring expenses were incurred in the third or fourth quarters ending
September 30, 2001 and December 31, 2001, respectively, and the Company does not
anticipate taking any significant further restructuring charges related to the
relocation of administrative functions to Atlanta. The Company could incur
future charges or credits, in the event that the underlying assumptions used to
develop the Company's estimates of excess lease costs, such as the timing and
the amount of any sublease income, change.
On January 2, 2002, the Company announced that unanticipated MoD budget
constraints would reduce near-term revenues from the DSMS project. On January
24, 2002, the Company announced that it has received notification that the MoD
has suspended all current contractual work on this project, as it reviews its
priorities against long-term resource availability. The MoD has not advised the
Company when this review will be completed. The first quarter of 2002 will be a
major transition quarter for Indus, as the Company demobilizes on the MoD
project. The Company anticipates taking a restructuring charge in the first
quarter of 2002 to address the impact of the project's suspension. See Footnote
15, Subsequent Events, for discussion of 2002 Restructuring charge.
Gain on Sale of Investment in TenFold Corporation. In March 1997, Indus Group,
Inc. acquired a 10% interest in TenFold Corporation, a private software company
for approximately $8 million in cash. In May 1999, the Company sold its interest
in TenFold Corporation, which resulted in a $38.2 million gain.
31
Interest and Other Income and Interest Expense. Interest and other income are
primarily generated from the Company's investments in marketable securities and
interest-bearing cash and cash equivalents. Interest and other income increased
19% from $3.1 million in 1999 to $3.7 million in 2000, before decreasing 35% to
$2.4 million in 2001. The increase in net interest income in 2000 is a result of
a higher interest rate environment in 2000 and reductions in interest expenses
from 1999. The decrease in net interest income in 2001 is a result of a lower
interest rate environment in 2001 and a decrease in the average monthly balances
for cash, cash equivalents and marketable securities for 2001 as compared to
2000.
Provision for Income Taxes. The provision for income taxes of $14.3 million in
1999 and $36 thousand in 2001 include federal, state and foreign income taxes.
The income tax benefit of $6.7 million in 2000 relates principally to
refundable federal income taxes previously paid as a result of net operating
loss carrybacks. As of December 31, 2001, the Company has net operating loss
carryforwards, for tax purposes, of approximately $20.2 million, which, subject
to certain limitations, may be used to offset against future income through
2020. As of December 31, 2001, the Company had a net operating loss
carryforward of approximately $5.8 million related to stock option deductions.
The tax benefit for this carryforward will be recorded as additional
paid-in-capital as realized.
The Company estimates that it can recognize between $20 to $40 million of book
income in future periods before the Company returns to a regular tax paying
position in the U.S., and up to $100 million of book income can be recognized in
future periods before the Company will need to recognize a U.S. tax provision.
The Company will potentially be in an alternative minimum tax ("AMT") position
in future periods as it utilizes its NOL carryforwards.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of the assets is more likely
than not. Based upon the weight of available evidence, which includes historical
supporting performance and the reported cumulative net losses for the most
recent three years, the Company has provided a full valuation allowance against
its net deferred tax asset at December 31, 2001.
Net Income (Loss). The Company reported net income of $23.8 million in 1999, and
net losses of $58.8 million in 2000, and $10.1 million in 2001. The net loss in
2000, as compared to net income in 1999, is due to the $38.2 million gain on
sale of its investment in TenFold Corporation in May 1999, reduced revenues in
2000, and an increase in operating expenses of $40.0 million. The $48.7 million
reduction in net loss from 2000 to 2001 is primarily attributable to a $40.1
million increase in gross margin in 2001, due to a $30.3 million increase in
revenues and to an increase in gross profit margin percentage of total revenues
from 37.6% in 2000 to 53.9% in 2001. In addition, operating expenses (including
restructuring expenses) were reduced 13.4% or $16.6 million from 2000 to 2001,
partially offset by $1.3 million of lower interest income in 2001 and the
aforementioned $6.7 million income tax credit in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) operations was $18.1 million, ($22.3) million and
$13.9 million in 1999, 2000 and 2001, respectively. In 1999, cash generated from
positive operating income and positive working capital changes offset the impact
of recording the gain on the sale of the investment in TenFold. In 2000, cash
generated from an increase in deferred revenue and the receipt of $9.1 million
in U.S. federal income tax refunds partially reduced the cash used to finance
the Company's net loss for the period. In 2001, cash generated from improved
working capital management and the receipt of $7.7 million in U.S. federal
income tax refunds were more than sufficient to offset the cash used to finance
the Company's net loss for the period. The effect of exchange rate differences
on cash was $737,000, ($34,000) and ($251,000) in 1999, 2000 and 2001,
respectively.
Investing activities, consisting primarily of the purchase and sale of
marketable securities, the acquisition of investments and intangible assets,
proceeds from sale of investment in TenFold in 1999, and the acquisition of
property and equipment, used cash of $9.1 million and provided cash of $34.5
million and $6.7 million, in 1999, 2000 and 2001, respectively. In 2001, the
Company generated net cash of $14.2 million for the sales/purchases of
marketable securities. Capital expenditures were $7.5 million for 2001 and were
made primarily to support the Company's internal information systems.
Financing activities in 1999 used $16.7 million primarily due to purchase of
treasury stock, and repayment of the Company's line of credit, partially offset
by proceeds from exercises of stock options. Financing activities provided $9.0
million in 2000 and $2.1 million in 2001, primarily due to the exercise of stock
options and the sale of common stock under the employee stock purchase plan.
As of December 31, 2001, the Company's principal sources of liquidity consisted
of approximately $61.7 million in cash, cash equivalents and marketable
securities, and an unsecured revolving bank line of credit of $15.0 million. The
revolving credit facility was renewed on December 10, 2001 and expires on May
31, 2003. Borrowings under the line of credit bear interest at the LIBOR rate
plus 1.75% to 2.00%. At December 31, 2001, $2.25 million in standby letters of
credit were outstanding under the bank line of credit.
The Company anticipates generating a net loss during the first quarter of 2002,
exclusive of a restructuring charge, due primarily to the cancellation of the
MoD's DSMS project. A loss during the first quarter of 2002 would trigger a
default of a profitability covenant within our revolving bank line of credit.
Such a default would require the Company to maintain a compensating balance,
equal to all outstanding credit line and letter of credit usage, with the
lender, California Bank & Trust. Other than the existing $2.25 million standby
letter of credit, held by our San Francisco office landlord, no other usage of
the line of credit is anticipated and the Company will be able to fund the
compensating balance without negatively impacting the operations of the
business.
32
As of December 31, 2001, the Company's primary commitments are its leased office
space in Atlanta, Georgia; San Francisco, California; and Woking, England. The
Company leases its office space under non-cancelable lease agreements that
expire at various times through 2011.
The Company has no guarantees of debt or similar commitments to third parties.
The Company has no written options on non-financial assets. Other than
operating/capital leases and the previously mentioned $15 million line of
credit, including the $2.25 million standby letter of credit, the Company has no
other credit or debt guarantees, standby repurchase agreements, or other
commercial commitments.
Within some software licensing contracts, the Company does provide guarantees
that provide for return of specific amounts of license fee payments in the event
of product non-performance and/or failure to meet specific product delivery
and/or implementation schedules.
The Company believes that its existing cash, cash equivalents and marketable
securities, together with anticipated cash flows from operations, will be
sufficient to meet its cash requirements during the next 12 months. The
foregoing statement regarding the Company's expectations for continued liquidity
is a forward-looking statement, and actual results may differ materially
depending on a variety of factors, including variable operating results or
presently unexpected uses of cash, such as for acquisitions, or to fund losses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's cash flow can be exposed to market risks primarily in the form of
changes in interest rates in its short-term borrowings available under its
revolving bank line of credit as well as its investments in certain
available-for-sale securities. The Company's cash management and investment
policies restrict investments to highly liquid, low risk debt instruments. The
Company currently does not use interest rate derivative instruments to manage
exposure to interest rate changes. A hypothetical 100 basis point adverse move
(decrease in) interest rates along the entire interest rate yield curve would
adversely affect the net fair value of all interest sensitive financial
instruments by approximately $0.6 million at December 31, 2001.
We provide our services to customers primarily in the United States and, to some
extent, in Europe, Asia Pacific and elsewhere throughout the world. As a result,
our financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. Sales
are primarily made in U.S. Dollars; however, as we continue to expand our
operations, more of our contracts may be denominated in Australian Dollars,
British Pounds, Euros and Japanese Yen. A strengthening of the U.S. Dollar could
make our products less competitive in foreign markets. A hypothetical 5%
unfavorable foreign currency exchange move versus the U.S. Dollar, across all
foreign currencies, would adversely affect the net fair value of foreign
denominated cash, cash equivalent and investment financial instruments by
approximately $2.1 million at December 31, 2001.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDUS INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS................................................................35
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2000 AND 2001........................................................36
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001..........37
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001.........38
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001..........39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................................40
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)......................................................................54
34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Indus International, Inc.
We have audited the accompanying consolidated balance sheets of Indus
International, Inc. as of December 31, 2000 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Indus International, Inc. as of December 31, 2000 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 4, 2002
35
INDUS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS DECEMBER 31,
----------------------------
Current assets 2000 2001
--------- ---------
Cash and cash equivalents 37,535 59,901
Marketable securities 17,572 1,757
Billed accounts receivable, net of allowance for
doubtful accounts of $5,379 and $5,713 at
December 21, 2000 and 2001, respectively 33,835 31,337
Unbilled accounts receivable 13,039 14,666
Income tax receivable, net 5,983 --
Other current assets 7,206 5,445
--------- ---------
Total current assets 115,170 113,106
Property and equipment, net 22,233 21,877
Investments and intangible assets, net 386 2,025
Other assets 2,943 729
--------- ---------
Total assets $ 140,732 $ 137,737
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 5,867 6,190
Other accrued liabilities 27,177 24,749
Current portion of obligations under capital leases 71 4
Deferred revenue 38,589 39,970
--------- ---------
Total current liabilities 71,704 70,913
Obligations under capital leases and other liabilities 71 5,878
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value -- --
Shares authorized: 10 million; shares issued: none
Common stock, $.001 par value 35 35
Shares authorized: 100 million
Shares issued: December 31, 2000 - 34,695,394
Shares issued: December 31, 2001 - 35,210,251
Additional paid-in capital 121,313 123,671
Treasury stock (2,181) (2,181)
Shares: December 31, 2000 - 435,500
Shares: December 31, 2001 - 435,500
Note receivable from stockholder (24) (55)
Deferred compensation (104) (157)
Accumulated deficit (48,211) (58,287)
Accumulated other comprehensive loss (1,871) (2,080)
--------- ---------
Total stockholders' equity 68,957 60,946
--------- ---------
Total liabilities and stockholders' equity $ 140,732 $ 137,737
========= =========
See accompanying notes.
36
INDUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
Revenues: 1999 2000 2001
--------- --------- ---------
Software licensing fees $ 19,071 $ 12,622 $ 21,005
Services and maintenance 158,160 131,956 154,989
Other revenue 1,274 1,111 20
--------- --------- ---------
Total revenues 178,505 145,689 176,014
Cost of revenues (including $6,838 writedown of
third party software in 2000) 98,050 90,880 81,116
--------- --------- ---------
Gross Margin 80,455 54,809 94,898
--------- --------- ---------
OPERATING EXPENSES:
Research and development 33,801 51,607 49,522
Sales and marketing 31,667 49,348 30,242
General and administrative 18,145 20,944 17,398
Restructuring expenses -- 2,063 10,188
--------- --------- ---------
Total operating expenses 83,613 123,962 107,350
--------- --------- ---------
Loss from operations (3,158) (69,153) (12,452)
Gain on sale of investment in TenFold
Corporation 38,170 -- --
Interest and other income 3,523 3,784 2,454
Interest expense (403) (72) (42)
--------- --------- ---------
Income (loss) before income taxes 38,132 (65,441) (10,040)
Provision (benefit) for income taxes 14,295 (6,666) 36
--------- --------- ---------
Net income (loss) $ 23,837 $ (58,775) $ (10,076)
========= ========= =========
NET INCOME (LOSS) PER SHARE:
Basic $ 0.74 $ (1.72) $ (0.29)
========= ========= =========
Diluted $ 0.68 $ (1.72) $ (0.29)
========= ========= =========
Shares used in computing per share data
Basic 32,109 34,248 34,857
========= ========= =========
Diluted 35,274 34,248 34,857
========= ========= =========
See accompanying notes.
37
INDUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
ACCUMU-
DEFERRED RETAINED LATED
COMPEN- EARNINGS OTHER TOTAL
ADD'L TREA- SATION (ACCUMU- COMPRE- STOCK-
COMMON STOCK PAID-IN SURY & LATED HENSIVE HOLDERS'
SHARES $ AMT CAPITAL STOCK OTHER DEFICIT) LOSS EQUITY
------ ----- -------- ------- -------- -------- ------- ---------
BALANCE AT DECEMBER 31, 1998 31,617 $ 32 $102,622 $ -- $(740) $(13,273) $(2,566) $ 86,075
Exercise of stock options 1,619 1 5,658 -- -- -- -- 5,659
Tax benefit from exercise of stock options -- -- 3,471 -- -- -- -- 3,471
Sale of common stock under ESPP 191 -- 722 -- -- -- -- 722
Note receivable from stockholder -- -- -- -- (56) -- -- (56)
Purchase of treasury stock (435) -- -- (2,181) -- -- -- (2,181)
Amortization of deferred compensation -- -- -- -- 96 -- -- 96
Comprehensive income:
Net income -- -- -- -- -- 23,837 -- 23,837
Unrealized loss on marketable securities -- -- -- -- -- -- (8) (8)
Foreign currency translation -- -- -- -- -- -- 737 737
---------
Total comprehensive income 24,566
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 32,992 33 112,473 (2,181) (700) 10,564 (1,837) 118,352
Exercise of stock options 1,485 2 7,899 -- -- -- -- 7,901
Sale of common stock under ESPP 218 -- 941 -- -- -- -- 941
Notes receivable from stockholder -- -- -- -- 524 -- -- 524
Amortization of deferred compensation -- -- -- -- 48 -- -- 48
Comprehensive loss:
Net loss -- -- -- -- -- (58,775) -- (58,775)
Foreign currency translation -- -- -- -- -- -- (34) (34)
---------
Total comprehensive loss (58,809)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 34,695 35 121,313 (2,181) (128) (48,211) (1,871) 68,957
Exercise of stock options 276 -- 1,330 -- -- -- -- 1,330
Sale of common stock under ESPP 240 -- 894 -- -- -- -- 894
Notes receivable from stockholder -- -- -- -- (31) -- -- (31)
Deferred stock compensation -- -- 134 -- (134) -- -- --
Amortization of deferred compensation -- -- -- -- 81 -- -- 81
Comprehensive loss:
Net loss -- -- -- -- * (10,076) -- (10,076)
Unrealized gain on marketable securities -- -- -- -- -- -- 42 42
Foreign currency translation -- -- -- -- -- -- (251) (251)
---------
Total comprehensive loss (10,285)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 35,211 $ 35 $123,671 $(2,181) $(212) $(58,287) $(2,080) $ 60,946
=================================================================================
See accompanying notes.
38
INDUS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------------
Cash flows from operating activities: 1999 2000 2001
--------- --------- --------
Net income (loss) $ 23,837 $ (58,775) $(10,076)
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 7,677 8,472 8,067
Provision for doubtful accounts 413 1,388 333
Amortization of deferred compensation 96 48 81
Loss on sale of fixed assets -- -- 95
Tax benefit from exercise of stock options 3,471 -- --
Gain on sale of investment in TenFold Corporation (38,170) -- --
Changes in operating assets and liabilities:
Billed accounts receivable 21,076 209 2,165
Unbilled accounts receivable 7,739 696 (1,627)
Income tax receivable, net 2,361 (5,983) 5,983
Other current assets (4,576) (399) 1,491
Other assets (591) 1,597 2,427
Accounts payable (3,950) 335 323
Deferred income taxes (9,513) 9,512 --
Other accrued liabilities 1,108 4,391 3,450
Deferred revenue 7,118 16,822 1,381
Other (8) (642) (214)
--------- --------- --------
Net cash provided by (used in) operating activities 18,088 (22,329) 13,879
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (471,555) (361,567) (52,041)
Sale of marketable securities 422,724 408,422 66,192
Proceeds from sale of investment in TenFold 46,178 -- --
Acquisition of property and equipment (6,402) (12,346) (7,467)
--------- --------- --------
Net cash provided by (used in) investing activities (9,055) 34,509 6,684
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of line of credit (19,650) -- --
Net repayment of capital leases/notes payable (1,148) (322) (139)
Net proceeds from issuance of common stock 6,381 8,842 2,224
Net receivable from stockholder (56) 524 (31)
Purchase of treasury stock (2,181) -- --
--------- --------- --------
Net cash provided by (used in) financing activities (16,654) 9,044 2,054
--------- --------- --------
Effect of exchange rate differences on cash 737 (34) (251)
Net increase/(decrease) in cash and cash equivalents (6,884) 21,190 22,366
Cash and cash equivalents at beginning of period 23,229 16,345 37,535
--------- --------- --------
Cash and cash equivalents at end of period $ 16,345 $ 37,535 $ 59,901
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 403 $ 72 $ 42
========= ========= ========
Income taxes paid $ 15,812 $ 729 $ 1,631
========= ========= ========
Income tax refunds $ 339 $ 9,262 $ 8,021
========= ========= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH, INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in exchange for stockholder note receivable $ 548 -- --
========= ========= ========
See accompanying notes
39
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Business
Indus International, Inc. (the "Company") is a multi-product company
that develops, markets, implements and supports integrated Enterprise Asset
Management ("EAM") and Supply Chain software and service products for
capital-intensive industries worldwide. The Company's software and service
products help customers maximize return on assets and improve efficiencies in
core business functions in the utilities, oil and gas, defense, pulp and paper,
metals and mining and process industries worldwide.
Significant Customers
In the first quarter of 2001, the Company announced that the United
Kingdom's MoD had selected the Company as the application provider for the MoD's
DSMS for logistics and asset management. The DSMS project represented 23.3% of
total revenues for 2001. One customer accounted for 12.2% and 13.2% of the
Company's total revenues in 2000 and 1999 respectively.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Indus
International, Inc. and its subsidiaries (collectively, the Company). All
significant intercompany balances and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current
presentation.
Revenue Recognition
The Company provides its software to customers under contracts, which
provide for both software license fees and system implementation services. The
revenues from software license fees are recognized in accordance with AICPA
Statements of Position 97-2, 98-4, and 98-9, and SEC Staff Accounting Bulletin
No. 101. Revenue for software is recognized when persuasive evidence of
arrangement exists, delivery has occurred, the license fee is fixed or
determinable, and collection is probable. Revenues from system implementation
services, which generally are time and material based, are recognized as the
work is performed. When software is licensed through indirect sales channels,
licensing fees are recognized as revenue when the reseller sells the software to
an end user customer and the criteria described above have been met. For
arrangements that include rights to multiple software products and/or services,
the total arrangement fee is allocated to each of the elements using the
residual method, under which revenue applicable to the undelivered elements is
deferred based on vendor specific objective evidence of fair value, where it
exists, and the residual amount of revenue is allocated to the delivered
elements.
Revenue is recognized using contract accounting for arrangements involving
customization or modification of the software or where software services are
considered essential to the functionality of the software. Revenue from these
software arrangements is recognized using the percentage-of-completion method
with progress-to-completion measured using labor cost inputs.
Revenue applicable to maintenance and support services is recognized
ratably over the support period.
Revenue applicable to web hosting (also referred to as "ASP" or application
service provider) is recognized based upon contractually agreed upon rates per
user or service, over a contractually defined time period.
Unbilled accounts receivable represent amounts related to revenue under
existing contracts that has been recorded either, as deferred revenue or earned
revenue but which has not been billed. Generally, unbilled amounts are billed
within one year of the sale of product or performance of services. The amounts
of unbilled receivables included in deferred revenue were $1,481,000 and
$3,526,000 at December 31, 2000 and 2001, respectively.
Deferred revenue represents primarily unearned maintenance and support fees
and unearned license fees for which future performance obligations remain.
40
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. The financial statements of foreign subsidiaries
have been translated into U.S. Dollars. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date. The
gains and losses resulting from the translation of the accounts of the Company's
foreign subsidiaries have been reported in other comprehensive income (loss)
within stockholders equity. Statement of operations amounts have been translated
during the year using the average exchange rate for each week. Gains and losses
resulting from foreign currency transactions are included in determination of
net income. Historically, the foreign currency gains and losses have not been
significant, and the Company has determined that foreign currency derivative
products are not required to hedge the Company's exposure.
Concentration of Credit Risk
Financial instruments that the Company is subject to concentrations of
credit risk consist principally of cash and cash equivalents, short-term
investments and trade accounts receivable. The Company invests excess cash
primarily in money market funds and commercial paper, which are highly liquid
securities that bear minimal risk. In addition, the Company has investment
policies and procedures that are reviewed periodically to minimize credit risk.
The Company's customers are generally large companies in the utilities, oil and
gas, defense, pulp and paper, metals and mining and process industries. The
Company performs ongoing credit evaluations and generally does not require
collateral. In addition, the Company routinely assesses the financial strength
of its customers and, as a consequence, believes that its accounts receivable
credit risk exposure is limited.
The Company added approximately $2.5 million in 1999, $3.1 million in 2000
and $3.4 million in 2001 to its allowance for doubtful accounts through charges
to operations. Total write-offs of uncollectible amounts were $2.1 million in
1999, $1.7 million in 2000 and $3.1 million in 2001.
One customer (MoD) represented 23.3% of total revenues for 2001 and 17.2%
of total billed and unbilled accounts receivable at December 31, 2001. Another
customer accounted for 12.2% and 13.2% of the Company's total revenues in 2000
and 1999 respectively.
Cash Equivalents and Marketable Securities
The Company considers all non-auctionable, highly liquid, low risk debt
instruments with maturity of three months or less from the date of purchase to
be cash equivalents. The Company generally invests its cash and cash equivalents
in money market funds, and commercial paper and corporate notes.
The Company presently classifies all marketable securities as
available-for-sale investments and carries them at fair market value. Unrealized
holding gains and losses, net of taxes, are included in accumulated other
comprehensive income (loss) within stockholders' equity.
Restricted Cash
Restricted cash of approximately $325,000, included in other current
assets, primarily consists of a certificate of deposit, which has a maturity
date of less than 12 months. This certificate of deposit is used as security for
a letter of credit.
The Company anticipates generating a net loss during the first quarter of
2002, due primarily to the cancellation of the MoD's DSMS project. A loss during
the first quarter of 2002 would trigger a default of a profitability covenant
within our revolving bank line of credit. Such a default would require the
Company to maintain a compensating balance, equal to all outstanding credit line
and letter of credit usage, with the lender, California Bank & Trust. Other than
the existing $2.25 million standby letter of credit, held by our San Francisco
office landlord, no other usage of the line of credit is anticipated and the
Company will be able to fund the compensating balance without negatively
impacting the operations of the business.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
stated at lower of fair market value or the present value of the minimum lease
payments at the inception of the lease.
Depreciation on office and computer equipment and furniture is computed
using the straight-line method over estimated useful lives of four to seven
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the related lease term or their estimated useful lives. Software
purchased for internal use is amortized using the straight-line method over
estimated useful lives of four to five years.
41
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Software Development Costs
The Company accounts for software development costs in accordance with SFAS
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, whereby costs for the development of new software products
and substantial enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which time any
additional costs are capitalized. Technological feasibility is established upon
completion of a working model. Through December 31, 2001, software development
costs incurred subsequent to the establishment of technological feasibility have
not been significant, and all software development costs have been charged to
research and development expense in the accompanying consolidated statements of
operations.
Internal-Use Software
SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use requires that entities capitalize certain costs
related to internal use software once certain criteria have been met.
Capitalized internal-use software development costs associated with the
Company's information systems are included in property and equipment and are
amortized on a straight-line basis over three year periods. Amortization expense
recorded in 1999, 2000 and 2001 was approximately $595,000, $1,111,000 and
$1,830,000, respectively. Only a small amount of internal personnel costs
related to the implementation of one internal use software program have been
capitalized, the majority of the costs that have been capitalized and are being
amortized have been external purchases and implementation services obtained for
internal use.
Investments and Intangible Assets
In 1997, the Company acquired a convertible preferred stock interest in
TenFold Corporation, a privately held software company in the development stage,
for approximately $8 million in cash. This investment was sold for cash in May
1999 with a net gain of $38.2 million. Also in 1997, the Company acquired a
management-consulting firm for $4.75 million in common stock and $250,000 in
cash. The $5 million acquisition cost has been fully amortized over a four-year
period, consistent with the related employment, confidentiality and
non-competition agreements. In 1998, the Company purchased the rights; title and
interest to the intellectual property related to radiological recording and
tracking software called Total Exposure for $469,000, which has been fully
amortized over a two and one-half year period.
Included in investments and intangible assets is a marketable security with
a maturity date greater than one year at December 31, 2001, valued at $1,862,000
(see Note 2 to the Consolidated Financial statements for more information).
Advertising Costs
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense was approximately $659,000, $919,600 and $213,600
in 1999, 2000 and 2001, respectively.
Income Taxes
Income taxes are computed in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"), which
requires the use of the liability method in accounting for income taxes. Under
FAS 109, deferred tax assets and liabilities are measured based on differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
Per Share Data
Basic earnings per share is calculated using the weighted average common
shares outstanding during the periods. Common equivalent shares from stock
options and warrants, using the treasury stock method, are also included in the
diluted per share calculations unless their effect of inclusion would be
antidilutive.
42
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of basic and diluted earnings per share were as follows (in
thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 2000 2001
---------------- ------------ ------------
Net income (loss) ........................................................... $23,837 $ (58,775) $(10,076)
======= ========= ========
Weighted average shares of common stock
outstanding ............................................................ 32,109 34,248 34,857
======= ========= ========
Basic net income (loss) per share ........................................... $ 0.74 $ (1.72) $ (0.29)
======= ========= ========
Calculation of shares outstanding for computing diluted net (loss) income per
share:
Shares used in computing basic net income (loss)
per share .............................................................. 32,109 34,248 34,857
Shares to reflect the effect of the assumed
exercise of:
Employee stock options ................................................. 1,345 -- --
Warrants ............................................................... 1,820 -- --
------- --------- --------
Shares used in computing diluted net
income (loss) per share ..................................................... 35,274 34,248 34,857
======= ========= ========
Diluted net income (loss) per share ......................................... $ 0.68 $ (1.72) $ (0.29)
======= ========= ========
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation", the Company accounts for
stock based compensation in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and accordingly recognizes
no compensation expense for the stock option grants as long as the exercise
price is equal to or more than the fair value of the shares at the date of
grant. See Note 9 for pro forma information related to net income (loss) and
earnings (loss) per share calculations in accordance with SFAS 123.
Compensation costs for stock options granted to employees is measured by
the excess, if any, of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock. Note 9
to the Consolidated Financial Statements contains a summary of the pro forma
effects to reported net earnings (loss) and per share data for 1999, 2000 and
2001 as if the Company had elected to recognize compensation cost based upon
fair value of options granted at grant date.
For employee stock options granted with exercise prices at or above the
existing market price and without any contingent feature as to the optionee's
ability to exercise (other than the passage of time as a continuing employee),
the Company records no compensation expense.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 eliminates the use of the pooling of interests method
for all business combinations initiated after June 30, 2001. SFAS No. 141 also
provides new criteria to determine whether an acquired intangible asset should
be recognized separately from goodwill, and requires expanded disclosure
requirements. The Company adopted SFAS No. 141 in the third quarter of 2001. The
adoption of SFAS 141 did not have a significant impact on the Company's
financial statements.
43
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is no longer subject to amortization;
instead it will be subject to new impairment testing criteria. Other intangible
assets will continue to be amortized over their estimated useful lives, although
those with indefinite lives are not to be amortized but will be tested at least
annually for impairment, using a lower of cost or fair value approach. The
Company will adopt SFAS No. 142 in accordance with the provisions of the
statement, and anticipates that SFAS No. 142 will not have a significant impact
on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a
segment of a business. FAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company will adopt
FAS 144 in accordance with the provisions of the statement and it does not
expect that the adoption of the Statement will have a significant impact on the
Company's financial position and results of operations.
2. MARKETABLE SECURITIES
The Company attempts to maximize total investment returns while maintaining
a conservative investment policy that emphasizes preservation of principal
through high credit quality requirements (A1/P1, MIG 1 A or better, AA or
better) and maintenance of liquidity with maximum effective maturity of any
single issue not to exceed two years. The Company currently classifies all
marketable securities as available-for-sale investments and carries them at fair
market value. At December 31, 2000 and 2001, the gross amortized cost of the
Company's investments approximated the estimated fair value.
The following is a summary of marketable securities, all of which are
available for sale (in thousands):
DECEMBER 31, 2000
Money market funds .......................... $17,672
Commercial paper and corporate notes ........ 8,953
Auction rate notes .......................... 12,970
-------
$39,595
=======
Included in:
Cash and cash equivalents ................... $21,825
Marketable securities ....................... 17,572
Investments and intangible assets ........... 198
-------
$39,595
=======
DECEMBER 31, 2001
Money market funds .......................... $ 131
Government agency notes ..................... 1,601
Commercial paper and corporate notes ........ 2,109
Auction rate notes .......................... 1,175
-------
$ 5,016
=======
Included in:
Cash and cash equivalents ................... $ 1,397
Marketable securities ....................... 1,757
Investments and intangible assets ........... 1,862
-------
$ 5,016
=======
At December 31, 2000 and 2001, the gross amortized cost of marketable
securities approximates the estimated fair value. Included in investments and
intangible assets is a marketable security with a maturity date greater than one
year at December 31, 2001.
There have been no significant realized gains or losses on sales of
marketable securities.
44
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following
(in thousands):
DECEMBER 31,
----------------------
2000 2001
------- -------
Furniture and fixtures ....................... $ 6,389 $ 6,465
Office equipment ............................. 37,342 38,993
Leasehold improvements ....................... 3,677 3,847
Internally used capitalized software ......... 8,849 12,408
------- -------
56,257 61,713
Less accumulated depreciation and amortization 34,024 39,836
------- -------
$22,233 $21,877
======= =======
Depreciation expense totaled $8.0 million, $7.0 million and $6.2 million
for the years ended December 31, 2001, 2000 and 1999, respectively.
Equipment leased under capital leases is included in property and
equipment. At December 31, 2000 and 2001, equipment under capital leases was
approximately $4.3 million and $4.1 million, respectively, with accumulated
depreciation of $4.1 million and $4.1 million, respectively.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of the following (in thousands):
DECEMBER 31,
----------------------
2000 2001
------- -------
Accrued commissions .............................. $ 2,166 $ 1,242
Accrued payroll and related expenses ............. 7,778 6,426
Accrued taxes payable ............................ 2,846 5,350
Accrued restructuring expenses ................... 1,597 1,628
Accrued project reserves ......................... 2,596 2,644
Accrued legal and accounting expenses ............ 588 1,674
Other ............................................ 9,606 5,785
------- -------
$27,177 $24,749
======= =======
5. LINES OF CREDIT
The Company has an unsecured revolving bank line of credit in the
amount of $15.0 million. The revolving credit facility expires on May 31, 2003.
Borrowings bear interest at the LIBOR rate plus 1.75% to 2.00%. There were no
borrowings outstanding under this line of credit at December 31, 1999, 2000 or
2001. There was $0.2 million outstanding on this line of credit at December 31,
1999 and $2.25 million in standby letters of credit outstanding on this line of
at December 31, 2000 and 2001, respectively. The line of credit agreement
contains certain affirmative and negative covenants. The Company was either in
compliance with or had received waivers for each of the financial covenants at
December 31, 1999, 2000 and 2001.
The Company anticipates generating a net loss during the first quarter
of 2002, due primarily to the cancellation of the MoD's DSMS project. A loss
during the first quarter of 2002 would trigger a default of a profitability
covenant within our revolving bank line of credit. Such a default would require
the Company to maintain a compensating balance, equal to all outstanding credit
line and letter of credit usage, with the lender, California Bank & Trust. Other
than the existing $2.25 million standby letter of credit, held by our San
Francisco office landlord, no other usage of the line of credit is anticipated
and the Company will be able to fund the compensating balance without negatively
impacting the operations of the business.
45
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS
The Company leases its office facilities under various operating lease
agreements. The leases require monthly rental payments in varying amounts
through 2012. These leases also require the Company to pay all property taxes,
normal maintenance and insurance on the leased facilities.
Total rental expense under these leases (in thousands) was approximately
$7,364, $8,104 and $9,196 for 1999, 2000 and 2001, respectively. In 2001, the
$9,196 of gross rental expense was reduced by $2,191 related to the release of
restructuring accruals for the lease costs associated with redundant San
Francisco office space. Future minimum lease payments under all non-cancelable
operating leases are as follows (in thousands):
OPERATING
YEARS ENDING DECEMBER 31, LEASES
- -------------------------------------------------- --------
2002 ............................................. $12,269
2003 ............................................. 10,823
2004 ............................................. 9,558
2005 ............................................. 8,563
2006 ............................................. 7,000
Thereafter ....................................... 17,786
-------
Total minimum payments required .................. $65,999
=======
As of December 31, 2001 there was $4,000 of remaining capital leases, to be
paid off in 2002.
As of December 31, 2001, the Company has sub-leased 18,313 square feet
related to excess office space in its San Francisco location. Future reduction
in rent anticipated from these sub-leases is shown in the below chart (in
thousands):
SUB-LEASE
YEARS ENDING DECEMBER 31, INCOME
- ----------------------------------------------------------------- ---------
2002 ............................................................ $ 501
2003 ............................................................ 501
2004 ............................................................ 501
2005 ............................................................ 501
2006 ............................................................ 501
Thereafter ...................................................... 708
------
Total sub-lease income under current contracts .................. $3,213
======
7. STOCKHOLDERS' EQUITY
The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, to provide for the issuance of shares of preferred stock in one
or more series, to establish from time to time the number of shares to be
included in each such series, to fix the powers, preferences and rights of the
shares of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the stockholders. The Board
of Directors may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power of other rights
of the holders of common stock. Thus, the issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plan to issue any shares of preferred stock.
In July 1999, the Company's Board of Directors approved a stock repurchase
program for up to 2,000,000 shares of the Company's outstanding common stock.
The Company is authorized to use available cash to buy back its shares in open
market transactions from time to time, subject to price and market conditions.
As of December 31, 2001, the Company held, as treasury stock, 435,500 shares
that had been repurchased at a cost of approximately $2.2 million under the
program.
46
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK PLANS
Stock Option and Benefit Plans
The Company has three stock option plans under which employees, directors
and consultants may be granted rights to purchase common stock.
1997 Stock Plan
The 1997 Stock Plan provides for the grant of incentive or nonstatutory
stock options to employees, including officers and directors, and nonstatutory
options only to consultants of the Company. A total of 12,500,000 shares have
been reserved for issuance under the Stock Plan. The incentive stock options
will be granted at not less than fair market value of the stock on the date of
grant. The options will generally vest over one to four years and have a maximum
term of ten years.
1997 Director's Option Plan
Each director who is not an employee of the Company is automatically
granted a nonstatutory stock option to purchase 50,000 shares of common stock of
the Company (the "First Option") on the date such person becomes a director or,
if later, on the effective date of the 1997 Director's Option Plan (the
"Director Option Plan"). Thereafter, each such person will automatically be
granted an option to acquire 10,000 shares of the Company's Common Stock (the
"Subsequent Option") upon such outside director's re-election at each Annual
Meeting of Stockholders, provided that on such date such person has served on
the Board of Directors for at least six months. A total of 700,000 shares have
been reserved for issuance under the Director Option Plan. Each option granted
under the Director Option Plan will become exercisable as to 25% of the shares
subject on each anniversary date of the option grant.
1998 Indus International, Inc. Company Share Option Plan
The 1998 Indus International, Inc. Company Share Option Plan (the "UK Stock
Plan") provides for the grant of stock options to employees of Indus
International, Ltd. (a UK foreign subsidiary of the Company). A total of 500,000
shares of the Company's common stock have been reserved for issuance under the
Stock Plan. Options were granted in the amounts of 10,000 in 1999, 135,235 in
2000 and 69,250 in 2001. Options of 131,125 in 1999, 37,625 in 2000 and 50,050
in 2001 were cancelled or expired. 28,475 options have been exercised to date.
The stock options will be granted at not less than fair market value of the
stock on the date of grant. The options generally vest over one to three years
and have a maximum term of three years.
47
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The activity under all of the Company's stock option plans, combined, was as
follows:
Options Outstanding
Shares -------------------------------
Available Number
for of
Grant Shares Price Per Share
---------- ---------- ----------------
Balances at December 31, 1998 ................................... 1,423,189 9,067,471 $0.283 - $18.15
Shares authorized ........................................... 2,500,000 -- --
Options granted ............................................. (3,153,000) 3,153,000 $4.13 - $6.63
Options forfeited ........................................... 3,247,490 (3,247,490) $0.283 - $16.50
Options exercised ........................................... -- (1,617,776) $0.283 - $4.56
Plan shares expired ......................................... (294,485) -- --
---------- ---------- ----------------
BALANCES AT DECEMBER 31, 1999 ................................... 3,723,194 7,355,205 0.283 - $18.15
Shares authorized ........................................... 500,000 -- --
Options granted ............................................. (5,643,578) 5,643,578 $1.75 - $8.06
Options forfeited ........................................... 2,227,709 (2,227,709) $3.38 - $16.50
Options exercised ........................................... -- (1,477,633) $0.283 - $8.50
Plan shares expired ......................................... (128,390) -- --
---------- ---------- ----------------
BALANCES AT DECEMBER 31, 2000 ................................... 678,935 9,293,441 $0.283 - $18.15
Shares authorized ........................................... 2,500,000 -- --
Options granted ............................................. (1,673,100) 1,673,100 $1.70 - $8.60
Options forfeited ........................................... 1,624,024 (1,624,024) $1.75 - $18.15
Options exercised ........................................... -- (275,691) $0.283 - $6.13
Plan shares expired ......................................... (92,332) -- --
---------- ---------- ----------------
BALANCES AT DECEMBER 31, 2001 ................................... 3,037,527 9,066,826 $0.283 - $15.375
========== ========== ================
The following table summarizes information about stock options outstanding
as of December 31, 2001.
OPTIONS OUTSTANDING
---------------------------------------------------- OPTIONS VESTED AND
WEIGHTED- EXERCISABLE
---------------------------------
Average Weighted- Weighted-
Remaining Average Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices in shares Life Price in shares Price
- ------------------------- ----------------- ---------------- --------------- ---------------- ---------------
$0.2830 - $2.8750 925,796 7.94 $ 1.88 359,080 $ 1.60
$3.3800 - $3.8750 383,476 5.32 $ 3.45 337,929 $ 3.40
$3.9375 - $3.9375 1,298,828 8.80 $ 3.94 322,392 $ 3.94
$3.9400 - $4.5000 619,407 7.76 $ 4.44 402,124 $ 4.48
$4.5620 - $4.5620 1,517,944 5.89 $ 4.56 1,453,273 $ 4.56
$4.5900 - $5.9600 1,230,100 8.94 $ 5.71 233,759 $ 5.48
$6.0000 - $7.6000 669,688 9.02 $ 6.64 94,001 $ 6.49
$7.6250 - $7.6250 1,200,000 8.08 $ 7.63 625,000 $ 7.63
$7.6800 - $8.0625 1,071,587 8.38 $ 8.01 513,243 $ 8.04
$13.7500 - $15.3750 150,000 5.82 $ 13.97 150,000 $ 13.97
----------------- ----------------
Totals 9,066,826 7.85 $ 5.42 4,490,801 $ 5.41
================= ================
48
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 Employee Stock Purchase Plan
The Company has an employee stock purchase plan under which 1,000,000
shares of common stock have been reserved for issuance. The plan allows for
eligible employees to purchase stock at 85% of the lower of the fair market
value of the Company's common stock as of the first day of each six-month
offering period or the fair market value of the stock at the end of the offering
period. Purchases are limited to 10% of each employee's compensation and a
maximum of 4,000 shares. Under the plan the Company issued 191,019, 218,151 and
239,601 shares in 1999, 2000 and 2001, respectively, at prices ranging from
$3.61 to $3.85 per share.
Under a prior employee stock purchase plan of The Indus Group, Inc., 39,101
shares were issued in 1997 at prices ranging from $6.50 to $25.75 per share.
9. ALTERNATIVE METHOD OF VALUING STOCK OPTIONS
For employee stock options granted with exercise prices at or above the
existing market price and without any contingent feature as to the optionee's
ability to exercise (other than the passage of time as a continuing employee),
the Company records no compensation expense.
Pro forma information regarding net income and earnings per share is
required by Statement 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 2000 and 2001, respectively: risk free interest rate of
5.32%, 6.12% and 5.06%; dividend yields of 0%; volatility factor of the expected
market price of the Company's common stock of 0.65, 1.39 and 0.89; and a
weighted-average expected life of the option of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information net income (loss) including pro forma compensation
expense, net of tax for the years ended December 31, 1999, 2000 and 2001,
respectively (for the years 2000 and 2001 the Company was not in a taxable
position), is as follows (in thousands except for earnings per share
information):
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 2000 2001
------------ ------------ -----------
Pro forma net income (loss) ..................................... $ 19,502 $ (71,258) $ (18,819)
Pro forma basic net income (loss) per share ..................... $ 0.64 $ (2.08) $ (0.54)
Pro forma diluted net income (loss) per share ................... $ 0.63 $ (2.08) $ (0.54)
The weighted average fair value of options granted under all plans was
$3.84, $4.34 and $3.91 in 1999, 2000 and 2001, respectively.
10. EMPLOYEE BENEFIT AND PROFIT-SHARING PLANS
The Company has a defined contribution 401(K) plan. All employees over the
age of 18 who have completed at least three months of service are eligible to
participate. Each participant may elect to have amounts deducted from his or her
compensation and contribute to the plan up to 15% of his or her base salary. All
employee contributions are fully vested at the time the employee becomes an
active participant. The Company's matching contributions were approximately
$797,000, $984,000 and $1,389,000 in 1999, 2000 and 2001, respectively.
49
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. GEOGRAPHIC INFORMATION
Geographic information is as follows (in thousands):
YEAR ENDED DECEMBER 31,
Net revenues (based on destination) 1999 2000 2001
--------- --------- ---------
United States .............................................. $ 121,449 $ 101,256 $ 104,442
International:
Europe, Middle East & Africa .......................... 40,130 33,291 62,269
Asia .................................................. 818 1,387 2,407
Canada ................................................ 10,390 5,854 4,719
Australia ............................................. 5,718 3,901 2,177
--------- --------- ---------
Total International ........................................ 57,056 44,433 71,572
--------- --------- ---------
Total consolidated net revenues ....................... $ 178,505 $ 145,689 $ 176,014
========= ========= =========
Income (loss) from operations
United States .............................................. $ 66,153 $ 43,545 $ 57,302
International:
Europe, Middle East & Africa .......................... 8,742 10,811 35,174
Asia .................................................. (135) 272 1,061
Canada ................................................ 4,086 (756) 519
Australia ............................................. 1,608 937 841
Corporate administrative and other expenses ..................... (83,612) (123,962) (107,349)
--------- --------- ---------
Total consolidated loss from operations ......................... $ (3,158) $ (69,153) $ (12,452)
========= ========= =========
Identifiable assets:
United States .............................................. $ 144,276 $ 110,072 $ 68,232
International:
Europe, Middle East & Africa .......................... 16,023 22,861 59,085
Asia .................................................. 60 1,428 567
Canada ................................................ 4,100 3,433 6,031
Australia ............................................. 4,442 2,938 3,822
--------- --------- ---------
Total consolidated identifiable assets .......................... $ 168,901 $ 140,732 $ 137,737
========= ========= =========
Net assets:
United States .............................................. $ 103,363 $ 51,951 $ 3,105
International:
Europe, Middle East & Africa .......................... 10,558 13,085 51,394
Asia .................................................. 45 989 464
Canada ................................................ 1,652 1,735 3,957
Australia ............................................. 2,734 1,197 2,026
--------- --------- ---------
Total consolidated net assets ................................... $ 118,352 $ 68,957 $ 60,946
========= ========= =========
12. RESTRUCTURING EXPENSES
The Company recorded $2.1 million and $10.2 million in 2000 and 2001
respectively, in restructuring costs in connection with the ongoing relocation
of the Company's headquarters and certain administrative functions to Atlanta,
Georgia, severance payments related to the elimination of 56 global positions,
and charges representing the estimated excess lease costs associated with
subleasing redundant San Francisco office space.
50
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
This relocation was approved by the Board of Directors in July 2000 and
includes costs of approximately $2.8 million for severance pay for employees
affected, and approximately $9.5 million for lease termination costs associated
with reducing leased space in San Francisco. Due to the excess capacity of
available lease space in the San Francisco market, lease rates have declined
from approximately $60 per square foot at the beginning of 2001 to the $28-$30
per square foot range, which is below the Company's actual lease cost of $45 per
square foot. The San Francisco office leases expire May 31, 2008.
(In thousand Severance and
Related Costs Facilities Total
---------------- ------------ -------
Balance at 12/31/00 $ 337 $ 1,260 $ 1,597
Payments in Q1 (621) (406) (1,027)
Net accruals in Q1 1,089 874 1,963
------- ------- -------
Balance at 3/31/01 805 1,728 2,533
------- ------- -------
Payments in Q2 (638) (494) (1,132)
Net accruals in Q2 464 7,387 7,851
------- ------- -------
Balance at 6/30/01 631 8,621 9,252
------- ------- -------
Payments in Q3 (324) (644) (968)
------- ------- -------
Balance at 9/30/01 307 7,977 8,284
------- ------- -------
Payments in Q4 (133) (645) (778)
Net accruals in Q4 -- -- --
------- ------- -------
Balance at 12/31/01 $ 174 $ 7,332 $ 7,506
======= ======= =======
The $7.506 million remaining accrual at December 31, 2001 is split
between current and long-term classification on the Company's consolidated
balance sheet, with $1.628 million included as current (less than one year)
within other accrued liabilities and $5.878 million included as long-term
(greater than one year) within obligations under capital lease and other
liabilities. In addition, approximately $0.3 million of other costs related to
the restructuring were recorded directly to restructuring expense during 2001.
The Company does not anticipate taking any significant further
restructuring charges related to the relocation of administrative functions to
Atlanta. The Company could incur future charges or credits, in the event that
the underlying assumptions used to develop the Company's estimates of excess
lease costs, such as the timing and the amount of any sublease income, change.
See Footnote 15, Subsequent Events, for discussion of 2002
Restructuring charge.
13. INCOME TAXES
The provision for income taxes (credits) consists of the following (in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 2000 2001
-------- -------- ---------
Current:
Federal ................................. $ 19,301 $(14,794) $--
State and foreign ....................... 4,506 (1,384) 36
-------- -------- ---
23,807 (16,178) 36
-------- -------- ---
Deferred:
Federal ................................. (8,384) 8,384 --
State and foreign ....................... (1,128) 1,128 --
-------- -------- ---
(9,512) 9,512 --
-------- -------- ---
$ 14,295 $ (6,666) $36
======== ======== ===
51
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax benefit in 2001 is due primarily to Canadian net operating loss
carrybacks.
Pre-tax income (loss) attributable to foreign and domestic operations is
summarized below:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 2000 2001
--------- -------- --------
Income (loss) before income taxes
United States................................ $ 42,023 $ (59,420) $ (13,168)
International:
Europe, Middle East & Africa........ (3,474) (1,504) 4,723
Asia................................ (509) 185 (41)
Canada.............................. 1,222 (2,237) (1,080)
Australia........................... (1,130) (2,465) (474)
--------- --------- ---------
Total consolidated income (loss) before income taxes.. $ 38,132 $ (65,441) $ (10,040)
========= ========= =========
The effective rate of the provision for income taxes reconciles to the
amount computed by applying the federal statutory rate to income before
provision for income taxes as follows:
PERCENTAGE
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 2000 2001
--------- -------- --------
Federal statutory rate ............................ 35.0% 35.0% 35.0%
State taxes, net of federal benefit ............... 3.0 1.4 --
Foreign taxes ..................................... 7.3 (5.4) (0.3)
FSC benefit ....................................... (0.9) -- --
Research and development credit ................... (3.7) -- --
Utilization of TSW net operating loss carryforwards (5.0) -- --
Reported losses and tax credits not benefited ..... -- (19.3) (33.9)
Other ............................................. 1.8 (1.2) (1.2)
---- ---- ----
37.5% 10.5% -0.4%
==== ==== ====
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred tax assets are as follows (in thousands):
DECEMBER 31,
--------------------------------
2000 2001
-------- --------
Accounts receivable allowances ................... $ 2,297 $ 1,831
Tax over book depreciation ....................... 603 176
Other (prepaid license writedown) ................ -- 2,598
Nondeductible accruals ........................... 6,542 3,130
Deferred licensing fee revenue ................... 2,843 3,678
Net operating loss carryforwards ................. 2,792 7,943
Research and other credit carryforwards .......... 3,638 4,066
Foreign tax credits and losses ................... 8,735 8,326
-------- --------
27,450 31,748
Valuation allowance .............................. (27,450) (31,748)
-------- --------
$ -- $ --
======== ========
The net valuation allowance increased by approximately $5.2 million, $22.3
million and $4.3 million during 1999, 2000 and 2001, respectively. Approximately
$2.1 million of the valuation allowance for the deferred tax asset at December
31, 2001 relates to benefits of stock option deductions which, when recognized,
will be directly allocated to contributed capital.
As of December 31, 2001 the Company had federal net operating loss
carryforwards of approximately $20.2 million. The Company also had federal
research tax credit carryforwards of approximately $2.0 million and federal
alternative minimum tax credits of $1.0 million. The federal net operating loss
and credit carryforwards will expire beginning in the year 2020, if not
utilized. The Company also has foreign net operating loss carryforwards of
approximately $18.4 million, which can be carried forward indefinitely. The
Company also has foreign tax credits of approximately $0.9 million, which will
expire in the years 2002 through 2004 if not utilized.
The utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitations may result in the expiration of net operating losses and credits
before utilization.
52
INDUS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. LITIGATION
In June 2000, the Company was served with a demand for arbitration by
William Grabske, the Company's former Chief Executive Officer. Mr. Grabske seeks
enforcement of a purported Settlement Agreement and Mutual Release. The demand
seeks severance pay and reimbursement of expenses of approximately $1.0 million
plus interest, options for approximately 20,000 shares of stock in the Company,
and fees and costs. The Company intends to vigorously contest Mr. Grabske's
demand and has asserted various counterclaims.
In April 2001, Robert Pocsik, the Company's former Chief Administrative
Officer, filed a lawsuit against the Company. Mr. Pocsik subsequently amended
the complaint to add one current and one former executive officer of the Company
as co-defendants. Mr. Pocsik alleged breach of implied employment contract,
breach of the covenant of good faith and fair dealing, defamation with respect
to termination of his employment, and misrepresentation with his offer of
employment and terms of employment. In October 2001, Mr. Pocsik dismissed this
lawsuit with prejudice as to all defendants.
The Company does not believe that, individually or in aggregate, the legal
matters to which it is currently a party are likely to have a material adverse
effect on its results of operations or financial condition.
From time to time, the Company is involved in other legal proceedings
incidental to the conduct of its business. The outcome of these claims cannot be
predicted with certainty. The Company intends to defend itself vigorously in
these actions. However, any settlement or judgment may have a material adverse
effect on the Company's results of operations in the period in which such
settlement or judgment is paid or payment becomes probable.
15. SUBSEQUENT EVENTS (UNAUDITED)
On January 2, 2002, the Company announced that the MoD had reduced the
scope of its DSMS project due to budget constraints in its current fiscal year,
which ends March 31, 2002. This project, which utilizes the Company's PassPort
application as the central software platform, represented 23.3% of the Company's
total revenues for the year ended December 31, 2001. On January 24, 2002, the
Company announced that it has received notification that the MoD has suspended
all current contractual work on this project, as it reviews its priorities
against long-term resource availability. The MoD has not advised the Company
when this review will be completed. The first quarter of 2002 will be a major
transition quarter for Indus, as the Company demobilizes on the MoD project and
reduces operating costs in anticipation of continued weakness in key vertical
markets.
On March 21, 2002, the Board of Directors approved a formal restructuring
plan that will necessitate taking an approximate $3.620 million restructuring
charge in the first quarter of 2002 in connection with computer lease
termination costs related to the suspension of the MoD DSMS project, severance
payments related to the elimination of 81 global positions, and charges
representing the estimated excess lease costs associated with subleasing
redundant office space in our Dallas and Pittsburgh locations.
The restructuring plan includes costs of approximately $947,000 for
computer lease termination costs to reduce excess CPU capacity due to the
suspension of the MoD DSMS project, approximately $946,000 of severance payments
related to the elimination of 81 global positions, and approximately $1.727
million for lease termination costs associated with closing the Company's Dallas
office and reducing leased space in the Company's Pittsburgh office. Due to the
excess capacity of available lease space in both the Dallas and Pittsburgh
markets, current lease rates for both markets in the $15-$17 per square foot
range are below the Company's actual lease costs of $25-$26 per square foot. The
Pittsburgh lease expires September 30, 2005 and the Dallas lease expires
December 31, 2005.
The Company does not anticipate taking any significant further
restructuring charges relating to the suspension of the MoD DSMS project. The
Company could incur future charges or credits, in the event that the underlying
assumptions used to develop the Company's estimates of excess lease costs, such
as the timing and the amount of any sublease income, change.
The Company also anticipates generating a net loss during the first quarter
of 2002, exclusive of the aforementioned restructuring charge, due primarily to
the cancellation of the MoD's DSMS project. A loss during the first quarter of
2002 would trigger a default of a profitability covenant within our revolving
bank line of credit. Such a default would require the Company to maintain a
compensating balance, equal to all outstanding credit line and letter of credit
usage, with the lender, California Bank & Trust. Other than the existing $2.25
million standby letter of credit, held by our San Francisco office landlord, no
other usage of the line of credit is anticipated and the Company will be able to
fund the compensating balance without negatively impacting the operations of the
business.
53
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000 (in thousands):
REPORTED REPORTED REPORTED REPORTED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------- -------- ------------ --------
2001
Total revenues $ 42,377 $ 43,135 $ 44,207 $ 46,295
Cost of revenues 21,032 20,424 19,757 19,903
-------- -------- -------- --------
Gross margin 21,345 22,711 24,450 26,392
Net income (loss) (6,409) (6,696) 383 2,646
Net income (loss) per share
-Basic (0.18) (0.19) 0.01 0.08
-Diluted (0.18) (0.19) 0.01 0.07
2000
Total revenues $ 31,743 $ 32,597 $ 36,527 $ 44,822
Cost of revenues (including
$6,200 writedown of third
party software held for sale
in the fourth quarter 18,311 21,718 22,096 28,755
-------- -------- -------- --------
Gross Margin 13,432 10,879 14,431 16,067
Net income (loss) (8,622) (20,154) (16,362) (13,637)
Net income (loss) per share
-Basic (0.26) (0.59) (0.47) (0.39)
-Diluted (0.26) (0.59) (0.47) (0.39)
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14(a) (the "Proxy Statement") not later that 120 days after the end
of the fiscal year covered by this Report and certain information included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement that specifically address the items set forth herein are incorporated
by reference. Such incorporation does not include the Compensation Committee
Report, the Audit Committee Report, or the Performance Graph included in the
Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's Directors required by this Item is
incorporated by reference to the information contained under the captions
"Election of Director-Nominees" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement. The information
concerning the Company's officers required by this Item is included in the
Section in Part I hereof entitled "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the Company's Executive Officers required by
this Item is incorporated by reference to the information contained under the
captions "Proposal One - Election of Directors - Director Compensation and
Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership required by this Item is
incorporated by reference to the information contained under the caption
"Security Ownership of Management; Principal Stockholders" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Financial Statements required by this item, together with the
report of independent auditors, are filed as part of this Form 10-K.
See Index to Consolidated Financial Statements under Item 8.
(2) Financial Statement Schedule
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits
The following exhibits are filed herewith or incorporated by reference.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger and Reorganization dated as of June 5, 1997 ("Agreement of
Merger"), by and among the Registrant, The Indus Group, Inc. ("Indus") and TSW
International, Inc. ("TSW") (incorporated by reference to Appendix A-1 to the Joint Proxy
Statement/Prospectus filed as part of the Registration Statement on Form S-4 (Reg. No.
333-33113) filed with the Securities and Exchange Commission ("Commission") on August 7,
1997 (the "1997 Proxy Statement"))
2.2 First Amendment to Agreement of Merger dated as of July 21, 1997 by
and among the Registrant, Indus and TSW (incorporated by reference
to Exhibit 2.2 to the 1997 Proxy Statement)
2.3 Form of Agreement of Merger of the Registrant, Indus Sub, Inc. and Indus (incorporated by
reference to Appendix A-2 to the 1997 Proxy Statement)
2.4 Form of Agreement and Plan of Merger entered into by and among the Registrant, TSW Merger
Sub, Inc. and TSW (incorporated by reference to Appendix A-3 to the 1997 Proxy Statement)
3.1 Registrant's Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
1997 Proxy Statement)
3.2 Registrant's Amended and Restated Bylaws (incorporated by reference
to Exhibit 4.2 to the Registration Statement on Form S-8 filed with
the Commission on July 5, 2001)
4.1 Registration Rights Agreement entered into among the Registrant, Warburg, Pincus Investors,
L.P. ("Warburg"), Robert W. Felton, Richard W. MacAlmon, John W. Blend, III and John R.
Oltman (incorporated by reference to Exhibit 4.1 to the 1997 Proxy Statement)
4.2 Nomination Agreement entered into among the Registrant, Warburg and Robert W.
Felton (incorporated by reference to Exhibit 4.6 to the 1997 Proxy Statement)
10.1* Indus International, Inc. 1997 Stock Plan (incorporated by reference to Exhibit 10.1 to the
1997 Proxy Statement)
56
10.2* Amendment No. 1 to the Indus International, Inc. 1997 Stock Plan (incorporated by reference
to Exhibit 99.1 to the Registration Statement on Form S-8 filed with the Commission on July
5, 2001)
10.3* Amendment No. 2 to the Indus International, Inc. 1997 Stock Plan (incorporated by reference
to Exhibit 99.2 to the Registration Statement on Form S-8 filed with the Commission on July
5, 2001)
10.4* Amendment No. 3 to the Indus International, Inc. 1997 Stock Plan (incorporated by reference
to Exhibit 99.3 to the Registration Statement on Form S-8 filed with the Commission on July
5, 2001)
10.5* Indus International, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.2 to the 1997 Proxy Statement)
10.6* Indus International, Inc. 1997 Director Option Plan (incorporated by reference to Exhibit
10.3 to the 1997 Proxy Statement)
10.7* Rules of the Indus International, Inc. Company Share Option Plan (the "UK Option Plan)
10.8 Stock Purchase Warrant dated August 25, 1997 between Indus International, Inc. and Warburg
Pincus Investors, L.P., as amended by that certain Amendment to Stock Purchase Warrant dated
October 23, 2001
10.9 Stock Purchase Agreement dated January 13, 1999 between Robert W. Felton, Warburg Pincus
Investors, L.P. and Indus International, Inc. (incorporated by reference to Exhibit 10.37 to
the Registrant's Annual Report on Form 10-K (File No. 0-22993) filed with the Commission on
March 29, 1999)
10.10 [Intentionally Omitted]
10.11 Amended and Restated Credit Agreement dated June 10, 1998 by and
among Indus International, Inc., Sumitomo Bank of California, as
agent, and the financial institutions named therein.
10.12 First Amendment to Amended and Restated Credit Agreement dated as of
June 30, 1998 by and among Indus International, Inc., Sumitomo Bank
of California, as agent, and the financial institutions named
therein.
10.13 Second Amendment to Amended and Restated Credit Agreement dated as
of August 1, 1998 by and among Indus International, Inc., Sumitomo
Bank of California, as agent, and the financial institutions named
therein.
10.14 Third Amendment to Amended and Restated Credit Agreement dated as of
September 20, 1999, by and among Indus International, Inc.,
California Bank & Trust, as successor by merger to Sumitomo Bank of
California, as agent, and the financial institutions named therein.
10.15 Fourth Amendment to Amended and Restated Credit Agreement dated as
of December 10, 2001, by and among Indus International, Inc.,
California Bank & Trust, as successor by merger to Sumitomo Bank of
California, as agent, and the financial institutions named therein.
10.16 Fifth Amendment to Amended and Restated Credit Agreement dated as of
March 29, 2002, by and among Indus International, Inc., California
Bank & Trust, as successor by merger to Sumitomo Bank of California,
as agent, and the financial institutions named therein.
10.17 Amended and Restated Lease Agreement for the Registrant's Atlanta,
Georgia corporate headquarters by and between Cousins Properties
Incorporated and Indus International, Inc. dated August 1, 2000
(incorporated by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K filed with the Commission on March 16,
2001)
57
10.18 Office Lease Agreement for the Registrant's San Francisco, California regional office
between EOP - 60 Spear, L.L.C. and Indus International, Inc. dated March 3, 2000, as amended
(incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K
filed with the Commission on March 16, 2001)
10.19 Lease for Indus' Pittsburgh, Pennsylvania regional office (incorporated herein by reference
to Exhibit 10.12 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1
(Reg. No. 33-80574) filed with the Commission on January 31, 1996)
10.20* Employment Agreement dated December 19, 2001 by and between Indus International, Inc. and
Thomas R. Madison
10.21* Employment Agreement dated October 1, 2001 between Indus International, Inc. and Kent O.
Hudson.
10.22* Employment Agreement dated October 1, 2001 between Indus International, Inc. and Richard H.
Beatty.
10.23* Employment Agreement dated January 1, 2001 between Indus International, Inc. and J. Michael
Highland (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on
Form 10-K filed with the Commission on March 16, 2001)
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney, filed on page 59 of this report
- -----------
*Designates management contract or compensatory plan or arrangement
58
(b) REPORTS ON FORMS 8-K.
NO REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER OF THE
FISCAL YEAR ENDED DECEMBER 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Indus International, Inc. has duly caused this report to be signed
on our behalf by the undersigned, thereunto duly authorized.
INDUS INTERNATIONAL, INC.
/s/ Kent O. Hudson
--------------------------------------
Kent O. Hudson
President and Chief Executive Officer
Date: March 29, 2002
6 POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Kent O. Hudson and Thomas R. Madison, jointly and
severally, his/her attorneys-in-fact, each with the power of substitution, for
him/her in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his/her
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
President and Chief Executive Officer March 29, 2002
Principal Executive Officer
/s/ Kent O. Hudson Director
- ---------------------------------------------
(Kent O. Hudson)
Executive Vice President Finance and March 29, 2002
Administration and Chief Financial Officer
/s/ J. Michael Highland Principal Financial & Accounting Officer
- ---------------------------------------------
(J. Michael Highland)
Executive Vice President and Chief March 29, 2002
Operating Officer
/s/ Richard H. Beatty Director
- ---------------------------------------------
(Richard H. Beatty)
/s/ Gayle A. Crowell Director March 29, 2002
- ---------------------------------------------
(Gayle A. Crowell)
/s/ Robert W. Felton Director March 29, 2002
- ---------------------------------------------
(Robert W. Felton)
/s/ Edward Grzedzinski Director March 29, 2002
- ---------------------------------------------
(Edward Grzedzinski)
/s/ William H. Janeway Director March 29, 2002
- ---------------------------------------------
(William H. Janeway)
/s/ Joseph P. Landy Director March 29, 2002
- ---------------------------------------------
(Joseph P. Landy)
/s/ Thomas R. Madison Chairman of the Board of Directors March 29, 2002
- ---------------------------------------------
(Thomas R. Madison)
/s/ Jeanne D. Wohlers Director March 29, 2002
- ---------------------------------------------
(Jeanne D. Wohlers)
59
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger and Reorganization dated as of June 5, 1997 ("Agreement of
Merger"), by and among the Registrant, The Indus Group, Inc. ("Indus") and TSW
International, Inc. ("TSW") (incorporated by reference to Appendix A-1 to the Joint Proxy
Statement/Prospectus filed as part of the Registration Statement on Form S-4 (Reg. No.
333-33113) filed with the Securities and Exchange Commission ("Commission") on August 7,
1997 (the "1997 Proxy Statement"))
2.2 First Amendment to Agreement of Merger dated as of July 21, 1997 by
and among the Registrant, Indus and TSW (incorporated by reference
to Exhibit 2.2 to the 1997 Proxy Statement)
2.3 Form of Agreement of Merger of the Registrant, Indus Sub, Inc. and Indus (incorporated by
reference to Appendix A-2 to the 1997 Proxy Statement)
2.4 Form of Agreement and Plan of Merger entered into by and among the Registrant, TSW Merger
Sub, Inc. and TSW (incorporated by reference to Appendix A-3 to the 1997 Proxy Statement)
3.1 Registrant's Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the
1997 Proxy Statement)
3.2 Registrant's Amended and Restated Bylaws (incorporated by reference
to Exhibit 4.2 to the Registration Statement on Form S-8 filed with
the Commission on July 5, 2001)
4.1 Registration Rights Agreement entered into among the Registrant, Warburg, Pincus Investors,
L.P. ("Warburg"), Robert W. Felton, Richard W. MacAlmon, John W. Blend, III and John R.
Oltman (incorporated by reference to Exhibit 4.1 to the 1997 Proxy Statement)
4.2 Nomination Agreement entered into among the Registrant, Warburg and Robert W.
Felton (incorporated by reference to Exhibit 4.6 to the 1997 Proxy Statement)
10.1* Indus International, Inc. 1997 Stock Plan (incorporated by reference to Exhibit 10.1 to the
1997 Proxy Statement)
10.2* Amendment No. 1 to the Indus International, Inc. 1997 Stock Plan (incorporated by reference
to Exhibit 99.1 to the Registration Statement on Form S-8 filed with the Commission on July
5, 2001)
10.3* Amendment No. 2 to the Indus International, Inc. 1997 Stock Plan (incorporated by reference
to Exhibit 99.2 to the Registration Statement on Form S-8 filed with the Commission on July
5, 2001)
10.4* Amendment No. 3 to the Indus International, Inc. 1997 Stock Plan (incorporated by reference
to Exhibit 99.3 to the Registration Statement on Form S-8 filed with the Commission on July
5, 2001)
10.5* Indus International, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.2 to the 1997 Proxy Statement)
10.6* Indus International, Inc. 1997 Director Option Plan (incorporated by reference to Exhibit
10.3 to the 1997 Proxy Statement)
10.7* Rules of the Indus International, Inc. Company Share Option Plan (the "UK Option Plan)
60
10.8 Stock Purchase Warrant dated August 25, 1997 between Indus International, Inc. and Warburg
Pincus Investors, L.P., as amended by that certain Amendment to Stock Purchase Warrant dated
October 23, 2001
10.9 Stock Purchase Agreement dated January 13, 1999 between Robert W. Felton, Warburg Pincus
Investors, L.P. and Indus International, Inc. (incorporated by reference to Exhibit 10.37 to
the Registrant's Annual Report on Form 10-K (File No. 0-22993) filed with the Commission on
March 29, 1999)
10.10 [Intentionally Omitted]
10.11 Amended and Restated Credit Agreement dated June 10, 1998 by and
among Indus International, Inc., Sumitomo Bank of California, as
agent, and the financial institutions named therein.
10.12 First Amendment to Amended and Restated Credit Agreement dated as of
June 30, 1998 by and among Indus International, Inc., Sumitomo Bank
of California, as agent, and the financial institutions named
therein.
10.13 Second Amendment to Amended and Restated Credit Agreement dated as
of August 1, 1998 by and among Indus International, Inc., Sumitomo
Bank of California, as agent, and the financial institutions named
therein.
10.14 Third Amendment to Amended and Restated Credit Agreement dated as of
September 20, 1999, by and among Indus International, Inc.,
California Bank & Trust, as successor by merger to Sumitomo Bank of
California, as agent, and the financial institutions named therein.
10.15 Fourth Amendment to Amended and Restated Credit Agreement dated as
of December 10, 2001, by and among Indus International, Inc.,
California Bank & Trust, as successor by merger to Sumitomo Bank of
California, as agent, and the financial institutions named therein.
10.16 Fifth Amendment to Amended and Restated Credit Agreement dated as of
March 29, 2002, by and among Indus International, Inc., California
Bank & Trust, as successor by merger to Sumitomo Bank of California,
as agent, and the financial institutions named therein.
10.17 Amended and Restated Lease Agreement for the Registrant's Atlanta,
Georgia corporate headquarters by and between Cousins Properties
Incorporated and Indus International, Inc. dated August 1, 2000
(incorporated by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K filed with the Commission on March 16,
2001)
10.18 Office Lease Agreement for the Registrant's San Francisco, California regional office
between EOP - 60 Spear, L.L.C. and Indus International, Inc. dated March 3, 2000, as amended
(incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K
filed with the Commission on March 16, 2001)
10.19 Lease for Indus' Pittsburgh, Pennsylvania regional office (incorporated herein by reference
to Exhibit 10.12 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1
(Reg. No. 33-80574) filed with the Commission on January 31, 1996)
10.20* Employment Agreement dated December 19, 2001 by and between Indus International, Inc. and
Thomas R. Madison
10.21* Employment Agreement dated October 1, 2001 between Indus International, Inc. and Kent O.
Hudson.
10.22* Employment Agreement dated October 1, 2001 between Indus International, Inc. and Richard H.
Beatty.
10.23* Employment Agreement dated January 1, 2001 between Indus International, Inc. and J. Michael
Highland (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on
Form 10-K filed with the Commission on March 16, 2001)
21.1 Subsidiaries of Registrant
61
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney, filed on page 59 of this report
- -----------
*Designates management contract or compensatory plan or arrangement.
62