-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KqapwayQu5LbvIlpkgFiboHmuFlaI7HJjc7AjbMslDPu3Z5R+979zUBtRt4/K0SN YRFQy95PkowFXJ5PAS68Bw== 0000950005-98-000327.txt : 19980401 0000950005-98-000327.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950005-98-000327 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDUS INTERNATIONAL INC CENTRAL INDEX KEY: 0001041333 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943273443 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22993 FILM NUMBER: 98581528 BUSINESS ADDRESS: STREET 1: 60 SPEAR ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4159045000 MAIL ADDRESS: STREET 1: 60 SPEAR STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: INDUS TSW INC DATE OF NAME CHANGE: 19970619 10-K405 1 FORM 10K405 ================================================================================ - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Form 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-22993 ---------------- INDUS INTERNATIONAL, INC. (Exact name of Registrant issuer as specified in its charter) Delaware 94-3273443 (State or other jurisdiction of (I.R.S.) Employer incorporation or organization) Identification No.) 60 Spear Street, San Francisco, California 94105 (Address of principal executive offices) (Zip code) (415) 904-5000 (Registrant's telephone number, including area code) ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 11, 1998 as reported on the Nasdaq National Market, was approximately $9.13. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may by deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's Common Stock, $.001 par value was 30,244,163 at March 11, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the year ended December 31, 1997 are incorporated by reference into Parts II and IV of this Form 10-K. Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of Stockholders to be held May 5, 1998 are incorporated by reference in Part III hereof, to the extent stated herein. - -------------------------------------------------------------------------------- ================================================================================ TABLE OF CONTENTS
PART I..........................................................................................................................3 ITEM 1. DESCRIPTION OF BUSINESS.............................................................................................3 ITEM 2. PROPERTIES.........................................................................................................16 ITEM 3. LEGAL PROCEEDINGS..................................................................................................16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................................16 PART II........................................................................................................................17 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................................17 ITEM 6. SELECTED FINANCIAL INFORMATION.....................................................................................17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION...............................19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................................19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................19 PART III.......................................................................................................................19 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................................19 ITEM 11. EXECUTIVE COMPENSATION............................................................................................19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................................20 PART IV........................................................................................................................20 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................................20 SIGNATURES.....................................................................................................................24
2 PART I ITEM 1. DESCRIPTION OF BUSINESS Merger The Indus Group, Inc., a California corporation entered into an agreement and plan of merger and reorganization (the "Merger") on June 5, 1997 with TSW International, Inc., a Georgia corporation, pursuant to which The Indus Group, Inc. and TSW International, Inc. each became subsidiaries of a new Delaware corporation named Indus International, Inc. (the "Company" or the "Combined Company") which was formed for the purpose of the transactions contemplated under the Merger. The transaction was accounted for as a pooling-of-interests for financial reporting purposes and structured to qualify as a tax-free reorganization. The stockholders of each of The Indus Group, Inc. and TSW International, Inc. approved the transaction and the transaction was effective August 25, 1997. As a result of the Merger, the Company has broadened its vertical market expertise and opportunities, enhanced its international presence, broadened its product offerings and been able to more fully realize the benefits of a regional services infrastructure. In addition, the Merger provides: (i) an enhanced competitive position as a result of higher visibility of the Company; (ii) an increase in the sales and marketing capabilities; (iii) an ability to provide solutions to enterprise customers of all sizes as a result of the integration of software solutions; and (iv) cost synergies and economies of scale in operation. On December 31, 1997, the Company's subsidiaries, The Indus Group, Inc. and TSW International, Inc., each merged with and into the Company (the "Roll-up Merger"). The Company, as the surviving corporation, assumed all obligations of the two subsidiaries, in connection with the Roll-up Merger. General Indus International, Inc. develops, markets, implements and supports enterprise asset management software and service solutions for capital intense industries worldwide. Marketed internationally as the Indus Solution Series, the offering consists of business application systems and industry best practice service packages which support such functional areas as: Asset & Work Management Systems, Materials & Procurement Systems, Safety & Compliance Systems and Financial Integration products. Indus Solutions are designed to interoperate ("a single customer environment making productive use of two or more vendor's products which seamlessly integrate without requiring additional interface programming assistance") with popular third-party applications that provide best business practices function to its customers. Through strategic alliances, the Company works with Oracle Corporation ("Oracle"), PeopleSoft, Inc. ("PeopleSoft"), and other industry-specific vendors to create a software series that provides seamless interoperability with corporate and financial applications, expert systems, and other industry specific systems to provide complete enterprise-wide solutions that enable the Company's customers to improve operating efficiencies, reduce costs and comply with governmental regulation. Markets of primary focus for the Company's products include: the energy industry, continuous process industries, industrial manufacturing and the public sector. Segments within these capital intense markets include: electric and gas utilities, telecommunications providers, petrochemical refineries, mining and metals manufacturers, forest products producers, transportation authorities, educational systems, and governmental institutions. The software tools comprising the Indus Solution Series are based on an open, client/server architecture featuring a layered and object-oriented software design that enables customers to use various operating systems, operate on multiple hardware platforms and interoperate with many third-party software applications and legacy systems. Proprietary systems implementation methodology tools and best practice education tools facilitate rapid and effective deployment and utilization of its Enterprise Asset Management (EAM) applications. The Company's Enterprise Asset Management solutions include consulting services provided by subject matter experts. This unique approach helps customers implement advanced EAM maintenance principles, materials management theories, and other advanced strategies designed to provide a competitive advantage to the customer. The service package content comprising this business process improvement solution leverages the knowledge gained from hundreds of customer implementations and the extensive plant experience of the Company's employees, and the global experience of its user community. Regionally located in close proximity to customer sites, the Company's professional services organization supports the sales organization that is established along vertical business lines. The resulting process provides a high quality information exchange as customers learn how the Indus Solution Series addresses industry-specific requirements. The Company also offers a global customer support organization with 7 x 24 multi-lingual support. The Company believes this combination of enterprise software, vertically oriented consulting services and worldwide customer support allows customers to increase equipment and production capacity, reduce operating costs and safeguard the workforce and the environment. The Company is a leading provider of systems, products and services addressing the highly specialized needs of the Enterprise Asset Management market. As of December 31, 1997, the Company products were licensed for use by over 300,000 end-users representing 440 customers in 48 countries. 3 Indus, Indus Solution Series, IndusWorld, PassPort Software Solutions, ABACUS, ABACUS Toolkit, PORTAL/G, PORTAL/95, PORTAL/97, VIEWPORT, Prism Consulting, Enterprise MPAC, Curator and AssetWare, AssetCare and CareNet are trademarks and servicemarks of the Company. All other brand names or trademarks are the property of their respective holders Products and Services The Company offers software products and service packages, which incorporate sophisticated enterprise asset management methodologies, extensive subject matter expertise and advanced technology designed to interoperate seamlessly with other enterprise business information systems. Marketed as the Indus Solution Series these business tools support the needs of an organization's core decision makers in the operations and maintenance workforce, inventory management and procurement professionals, safety and compliance engineers and related disciplines affected by asset care decisions throughout the enterprise. This customer user group is supported by such Indus Software Solutions as: Asset & Work Management Systems, Materials and Procurement Systems, Safety and Compliance System, which seamlessly integrate to third party corporate financial systems from Oracle and PeopleSoft. Beyond providing departmental information to affected workgroups throughout the customer organization, Enterprise Asset Management (EAM) techniques employed by the Company integrate process control systems from vendors such as Allen-Bradley and Johnson Controls, optimizing capacity utilization through just-in-time maintenance management practices. The Indus Solution Series reflects EAM best practices, including Reliability Centered Maintenance (RCM), Total Productive Maintenance (TPM) and web-based electronic commerce, to allow customers to apply Indus Solutions as a means to achieving a strategic and competitive advantage. A proprietary implementation methodology and set of data content workbenches round out the service package offering available from the regionally positioned professional services solutions centers throughout the Americas, Europe, Middle East and Africa and Asia Pacific theaters of operation. Marketed as ABACUS tools and implementation methodology, ABACUS enables rapid implementation and configuration of Indus Software Solutions. Workbenches are a set of software tools which support application development, data migration and installation support used by the Company and its customers to develop, install and configure Indus Software Solutions. Integration products are also sold to enable Indus Software Solutions to interoperate with corporate financial, payroll, human resources and customer information applications systems available, and other industry-specific programs included in the company's Business Partner Alliance program. The Indus Software Solutions Core application business systems comprising Indus Software Solutions are commercially available in two primary product lines designed to reflect the requirements of specific vertical industry function, and the technical architecture traditionally employed in these industries. The result is two efficient transaction engines designed to support Indus Solution Series products. Functions within the application product lines have been tailored to encapsulate vertical business processing requirements which are augmented by subject matter expertise and consulting service packages which serves as another key differentiation in delivering a total solution across the enterprise. Indus Solution Series for the Energy Industry Indus Software Solutions for the Energy Industry provide a series of business applications and business process improvement service packages which meet the needs of both integrated electric and gas utilities or stand alone utility business units including: nuclear generating stations, non-nuclear steam generating facilities, a utility's energy delivery business including transmission and distribution, and systems designed to manage Department of Energy facilities. Specific packaged solutions in this series include: Indus Solutions for the Power Generation Industry Indus Solutions for the Nuclear Power Industry Indus Solutions for the Energy Delivery Industry Indus Solutions for Managing Department of Energy Facilities Core business systems in the Energy Series include Asset & Work Management systems, Materials & Procurement systems, Safety & Compliance systems and Financial Integration products. These robust applications designed especially to meet the challenges of the energy industry in an era of deregulation, and in certain cases non-utility customers desiring to employ traditional architecture across large complex environments, operate on transaction engines which provide client/server processing in MVS, UNIX and Windows NT environments on server platforms available from IBM, HP, and Digital Equipment utilizing the Oracle and DB2 relational database management systems. Desktop workstation products include Windows, Windows/95-97/NT, Macintosh and 3270 non-programmable devices. Indus Solution Series for Industry and the Public Sector 4 Indus Software Solutions for Industry and the Public Sector provide a set of business applications, which meet the needs of capital intense industrial manufacturing businesses seeking a competitive advantage through the application of technology. Business applications and subject matter expertise in the areas of delivering advanced enterprise asset management strategies across the enterprise have been packaged to meet the needs of specific vertical industries in the series. Specific packaged software and service package solutions in the Industry Series include: Indus Solutions for the Mining & Metals Industry Indus Solutions for the Oil,Gas & Chemical Industry Indus Solutions for the Forest Products Industry Indus Solutions for Industrial Manufacturing Indus Solutions for the Consumer Packaged Goods Industry Specific packaged solutions in the Public Sector Series include: Indus Solutions for Transportation Authorities Indus Solutions for Educational Systems Indus Solutions for Municipal Government Facilities Core business systems in the Industry and Public Sector Series include: Asset & Work Management systems, Materials & Procurement systems, Safety & Compliance systems and Financial Integration products. These object-oriented and Oracle-centric applications may be modularly implemented or procured on a turnkey basis. The transaction engine supporting core processes within this series utilizes object-oriented tools allowing each Industry and Public Sector Solution to evolve with emerging industry standards. Largely platform independent, the software runs on industry-standard UNIX and Windows NT servers including the IBM RS/6000, HP 9000, Sun SPARCstation and Intel-based systems. This Series-II architecture utilizes the native functionality of the Oracle database with a graphical user interface developed in an object-orientated front-end able to run in both Windows and Java client domains. Integration with several third party applications fully extend the solution to include such advantages as fully integrated electronic document management and workflow capabilities, real-time data collection, and wireless support for cellular equipped portable data terminals. Product Architecture and Development Strategy for the Series-II Engine Commercial Off-the-shelf Technology. Indus Series-II utilizes industry-standard tools and technologies to develop its products, allowing Indus Software Solutions comprising this series to evolve along with rapidly emerging standards. Series-II is largely platform independent, running on industry-standard UNIX and Windows NT servers including the IBM RS/6000, HP 9000, Sun SPARCstation and Intel-based systems. Series-II architecture utilizes the native functionality of the Oracle database with a graphical user interface developed in PowerBuilder. Partitioned Application Architecture. The layers of the Series-II application architecture--the user interface, business logic, data storage, workflow and browser interface--are interoperable but not interdependent. For example, changes to the database layer are not dependent on the user interface. The partitioning built into Series-II components minimize the Company's dependence on third-party vendors and efficiently utilizes desktop computers, "thin clients," servers and networks. The Company believes this architecture reduces its exposure to the risks of technology or market shifts that require changes in one or more of the layers, and enables rapid exploitation of technology advances. Object-oriented Design and Third-party Interoperability. The Company develops its products through an object-oriented design and development methodology by which software "objects" (i.e., collections of properties and methods) are used as building blocks to model real-world business processes. Further, the Series-II architecture is designed to be an open system with an Application Program Interface ("API") that enables easy interoperability and extension at the application level. The API is available to third party developers to facilitate the integration of Indus Software Solutions with other client/server applications. The Company believes object-oriented development has several benefits including software reusability, which results in decreased development expense and improved software quality, and component management, which allows customers to implement and upgrade subsets of the application. Flexible Network Technology. Series-II applications can be installed in a network configuration to allow customers to take full advantage of client/server technology with low cost and low maintenance "thin clients." Network-centric implementation is attractive to clients concerned about the acquisition and systems management expense associated with personal computers. Series-II's efficient network architecture is particularly important to clients with low-bandwidth networks, prevalent in developing markets, which require the minimization of network traffic to support advanced client/server applications. Implementation Methodology and Related Services Indus Software Solutions are implemented through the Company's proprietary ABACUS tools and implementation methodology. ABACUS consists of software-driven analytical tools, implementation plans and educational resources that 5 encapsulate the Company's extensive experience in implementing enterprise management software solutions. ABACUS provides a step-by-step implementation life cycle framework for all installation, integration, and education and business review activities. In addition, ABACUS enhances the ongoing effectiveness of Indus Software Solutions and assists customers in improving their business processes. ABACUS software tools use a time-sensitive and track-oriented approach to help customers and the Company's business experts, technical specialists and training professionals implement the Company's applications. In addition to interactively identifying implementation procedures, ABACUS contains over 575 "best practice" examples of how such procedures were performed by other process industry companies, drawn from the Company's extensive experience in implementing enterprise asset management software solutions. The Company currently licenses ABACUS software tools in conjunction with Indus Software Solutions which includes the use of the ABACUS ToolKit, a version of the ABACUS software that allows customers to tailor their internal project goals and objectives with other corporate initiatives, modify implementation plans and associated deliverables, supporting specific project/progress reporting, etc. Versions of ABACUS products have been created to effectively address the differences in approach and complexity between Series I & Series II architecture as well as implementation requirements and best practice selections of interest to specific vertical industries. Indus Solution Series Workbenches A series of best practice workbenches assist information engineers in the development of business application systems and post-development implementation support. From analytical designs and programming tools to data services workbenches for data load and system interface exercises, data migration and archiving; these productivity tools help the Company demonstrate rapid development of high quality, highly functional applications on predictable schedules and within established budgets. The Company also licenses Indus Solution Series Workbenches to customers desiring the ability to modify business applications to suit internal needs and to perform system administration and maintenance over the application life cycle. Customer Support, Software Maintenance and Training In addition to the standardized services offered through ABACUS, the Company offers systems integration, customer support, software maintenance and training through its regionally positioned professional services capability. The Company provides systems integration and customer support on a time and materials basis. The Company provides software maintenance for a fixed fee based on the number and types of applications licensed. To help track and coordinate customer support and service requirements, the Company has employed a service product marketed as CareNet. This customer care system used throughout the global support organization provides the customer support team with a consistent approach towards an interactive help desk, warranty support and post-implementation services which are widely used by its customers. Experienced product specialists who have direct access to product development teams and technology specialists' staff the help desk. A computerized system is used to log, track, close and analyze all customer calls. The Indus Institute, the Company's training division, designs, manages, and implements comprehensive education and training solutions for its user community. The Institute's team of training and technical professionals provides instructional design and courseware development services, training coordination support, train-the-trainer and end-user programs, computer based training products, as well as technical training for customer installations worldwide. In addition, the Company has developed a comprehensive set of training courseware, which it uses to educate and train customers and internal staff. Subjects covered by the courseware range from application product basics to conducting business process reviews. Open enrollment training courses are provided at the Company's training centers in San Francisco, Atlanta, Dallas, Pittsburgh, and internationally in London, Paris and Brisbane. In addition, training is also provided at customer sites at the customer's option. Customers The Company provides enterprise management software solutions to large process industry customers primarily in the energy industry, continuous process industries, industrial manufacturing and the public sector. Segments within these capital intense markets include: electric and gas utilities, telecommunications providers, petrochemical refineries, mining and metals, forest products producers, transportation authorities, educational systems, and governmental institutions. As of December 31, 1997, the Company products were licensed for use by over 300,000 end-users representing 440 customers in 48 countries. No single customer accounted for 10% or more of the Company's total revenues in 1997. Sales and Marketing The corporate marketing function is organized into vertical business areas, which comprise capital intense facilities and process industries targeted by the Company. By segmenting the market into vertical business areas, the Company can package and 6 deliver its products and service offerings effectively to the industries it serves. The vertical business segments comprising the market include:
The Energy Series - ----------------- Indus Solutions for the Addresses electric utilities with generating capacity comprised of fossil, hydro, Power Generation Industry wind, solar or geothermal power generation. Power Generation addresses a trend in the industry where disparate generation groups are being aggregated into a single business unit within the utility structure. Indus Solutions for the Recognizes the unique requirements of nuclear generating stations in the areas Nuclear Power Industry. of special materials, heath physics, safety and nuclear regulatory reporting and compliance issues. Indus Solutions for Focuses on facilities maintained by the Department of Energy and others in Managing Department of facilites management that serve large facility complexes, maintain high rise Energy Facilities. facilities and the distributed needs of large consumer retailers, insurance companies and other facility-intense organizations. Indus Solutions for the Includes the Transmission and Distribution business units of utilities, couples Energy Delivery Industry with the revenue cycle components from Customer Information Systems for electric, gas, water utilities. The Industry Series - ------------------- Indus Solutions for the Comprised of the "upstream" companies charged with prospecting and developing new Oil, Gas & Chemical oil and gas sources (both on and offshore), as well as "downstream" operating Industry companies charged with refining, packaging and distribution processing. Indus Solutions for Represents steel making, pulp and paper and others whose process involves moving Integrated-Process Industries from crude raw materials through secondary operations to finished goods. Specific packaged solutions in this series include: Indus Solutions for the Mining & Metals Industry Indus Solutions for the Forest Products Industry Indus Solutions for Industrial Manufacturing Indus Solutions for the Developed in cooperation with Oracle Corporation's complete Consumer Packaged Consumer Packaged Goods Goods offering, the Enterprise Asset Management components of this best-of-breed Industry solution are provided by the Company. Indus Solutions for Special offerings of products and support reflecting the needs of maintenance and the Public Sector repair operations within the Public Sector have been created. Specific packaged solutions in the Public Sector Series include: Indus Solutions for Transportation Authorities Indus Solutions for Educational Systems Indus Solutions for Municipal Government Facilities
The Company markets and sells its products and services in three primary areas of the world: The Americas, with direct sales representatives in the US, Canada, and Argentina; Europe, the Middle East & Africa with direct sales representatives in the UK and France, and Asia-Pacific with direct sales representatives in Australia, Hong Kong, Singapore and the Philippines. In addition to these direct marketing and sales resources, the Company utilizes business partner relationships and channel partner programs directly and indirectly in other parts of the world. As of December 31, 1997, the Company's sales and marketing organization 7 consisted of 102 employees. The marketing staff is based at the Company's corporate headquarters in San Francisco, while the sales organization is decentralized throughout the three theaters of operation. The direct sales cycle begins with the generation of a sales lead, or the receipt of a request for proposal from a prospect, which is followed by qualification of the lead, an analysis of the customer's needs, response to a request for proposal, one or more presentations to the customer utilizing the special knowledge of the industry vertical pre-sales staff, customer internal sign-off activities and contract negotiation and finalization. While the sales cycle from customer to customer varies substantially, the sales cycle generally requires three to nine months. In support of its sales force, the Company conducts comprehensive industry-specific vertical marketing programs which include public relations, trade advertising, industry seminars, trade shows and on-going customer communication programs through the IndusWorld, the Company's international user group. In addition, the Company's Account Executive Program provides regional support and specialized attention for each of its customers. Account Executives assist in implementing licensed applications over multi-year engagements, promote licensing of additional applications and encourage existing customers to identify and help fund new applications. Strategic Relationships Through its alliance and channel partner programs, the Company intends to continue to develop new products, to keep pace with the latest technological developments, and to extend its marketing, sales and support efforts by building synergy between the Company's products and services and those available from complementary third party providers. The Company has entered into strategic alliances and other formal and informal relationships with major software and hardware vendors and with consulting firms, service providers and systems integrators. Members of the Company's Alliance and Partner programs assist the Company with sales and support activities and with product localization in foreign countries. Indus Alliance Program The Indus Alliance Program is comprised of third party providers of complementary software products, which interoperate with Indus Software Solutions through integration products to provide additional license revenues and services to the Company while delivering a broad suite of enterprise-wide software capabilities. Membership in this program includes Oracle for corporate financial systems, PeopleSoft for corporate financial, human resources and payroll systems, Nuclear Fuels Services/Radiation Protection Systems for jointly developed Nuclear Health Physics Systems marketed as Total Exposure, and Identitech Corporation, maker of electronic document management and workflow software. Other third party integration alliance partners are currently under consideration by the Company. Indus Partner Program The Indus Partner Program consists of three classes of third party providers including: Indus Service Partners (foreign and domestic), Indus Solution Series Platform Partners, and partners in the Indus Extension Program. Indus Service Partners include third-party consultants and system integration firms, which help deliver the services required to implement Indus Software Solutions. These recognized firms add specialty knowledge to assist in training and reengineering services, help provide staffing levelization and supply peak load project resources to the regional operators. These resources assist in the delivery of ABACUS services on an as-needed basis. Domestically, implementation partners include: Arthur Andersen, Coopers & Lybrand, Computer Science Corporation, Deloitte & Touche Consulting Group, Solbourne Group, Cimcorp, and The Application Group. International implementation partners include: Enidata, Euriware, Gulf Data International, Innova, Maxon Engineering Services, Inc., Eagle Technologies, SGA Integrators and PosData. Indus Series Platform Partners are computer hardware providers and operating system software providers that help the Company remain technologically current and up to date with evolving releases of software and hardware upgrades. Cooperative marketing, joint trade show participation and vendor fair participation at the INDUSWORLDEXPO Annual Conference of the User Group are extended to this cooperative group of vendors. The Company participates in the Hewlett-Packard Channel Program, Digital Equipment's Business Partner Program, the IBM Business Partner Program, Sun MicroSystems Alliance Program, as well as Microsoft's Solution Provider Program and Oracle's Cooperative Applications Initiative. The Indus Extension Program is comprised of third party vendors offering products, which provide value-added product extensions or specialty services, taking Indus Solution Series data beyond the specified scope of the Company's application systems. Both specialty hardware and specialty point solution software vendors are recognized in this program which include offerings from: Harbinger Corporation (Acquion, Inc.), Commerce One, Inc., Dolphin Software, DEI Group, Future Horizons, Intermat, Meridium Corporation, Primavera, Tadcom, and Telxon Corporation. The Company's solutions for the Energy Delivery Industry, the AM/FM/GIS solutions interoperate with products from Intergraph, SHL Vision and Smallworld Corporation. 8 Research and Development The Company has a dedicated research and development and engineering organization and regularly releases new products and enhancements to existing products. Research and development efforts are directed at increasing product functionality, improving product performance and expanding the capabilities of the products to interoperate with selected third-party software products available from its alliance partners such as Oracle, PeopleSoft and others. These efforts include developing new applications that address new functions, both horizontal function as well as new targeted vertical market function, designed to enhance to the intellectual property content of the Company's offerings and ensure that the products remain best-of-class. The Company believes that research and development is most effectively accomplished if customers are involved in the process. Through direct customer involvement and consensus input from user group oversight committees, InSight and InFocus, product content is improved and the customer acceptance threshold usually associated with new software deployment significantly lowered. In addition, the interactive development process promotes increased customer awareness of the technological features of the product and fosters greater product loyalty. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that respond to technological change, changes in customer requirements, or emerging industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of such products and enhancements, or that any new products or enhancement that it may introduce will achieve market acceptance. The inability of the Company, for technological or other reasons, to develop and introduce new products or enhancements in a timely manner in response to changing customer requirements, technological change or emerging industry standards, would have a material adverse effect on the Company's business or results of operations. As of December 31, 1997, the Company had 261 employees engaged in research and development. The Company's research and development expenses were approximately $18.1 million, $23.3 million and $27.7 million in 1995, 1996 and 1997 respectively. Development costs funded by customers as part of license and service contracts are included as part of cost of revenues. Competition The enterprise asset management software solutions market is highly competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. The Company's primary competition stems from companies offering enterprise asset software solutions, vendors offering partial solutions and suppliers of departmental systems (primarily LAN-based). The Company's competitors include SAP Aktiengesellschaft ("SAP"), the Company's principal competitor, and other software vendors such as Mincom Corp., Project Software & Development, Inc., and DataStream, Inc. In the future, the Company may face competition from its Alliance Partners. In the electric utility market, the Company faces competition from suppliers of energy delivery applications, including Severn Trent Systems and Synercom. In addition, the Company faces indirect competition from suppliers of custom-developed business applications software that have focused largely on proprietary mainframe and minicomputer-based systems with highly customized software, such as the systems consulting groups of major accounting firms and systems integrators. The Company also faces indirect competition from systems developed by the internal MIS departments of large organizations. Many of the Company's competitors and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, and a larger installed base of customers than the Company. In addition, certain competitors, including SAP, have well-established relationships with customers of the Company and with accounting and consulting firms that may have an incentive to recommend such competitors over the Company. Furthermore, as the enterprise management software solutions market for process industries expands, companies with significantly greater resources than the Company could attempt to increase their presence in this market by acquiring or forming strategic alliances with competitors of the Company. The principal competitive factors affecting the market for the Company's software products are responsiveness to the needs of capital intensive industries, product functionality and ease of use, speed of implementation, product architecture, quality and reliability, vendor and product reputation, quality of customer support and price. Based on these factors, the Company believes that it has competed effectively to date. In order to be successful in the future, the Company must continue to respond promptly and effectively to the challenges of technological change and its competitors' innovations by continually enhancing its own product offerings. There can be no assurance, however, that the Company's products will continue to compete favorably or that the Company will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering this market. 9 Proprietary Rights and Licensing The Company relies on a combination of the protections provided under applicable copyright, trademark and trade secret laws, as well as on confidentiality procedures and licensing arrangements to establish and protect its rights in its software. Despite the Company's efforts, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse engineer or obtain and use information that the Company regards as proprietary. In addition, the laws of certain countries do not protect the Company's proprietary rights to the same extent, as do the laws of the United States. Furthermore, the Company has no patents, and existing copyright laws afford only limited protection. Accordingly, there can be no assurance that the Company will be able to protect its proprietary software against unauthorized third party copying or use, which could adversely affect the Company's competitive position. The Company licenses its applications to customers under license agreements, which are generally in standard form, although each license is individually negotiated and may contain variations. The standard form agreement allows the customer to use the Company's products solely on the customer's computer equipment for the customer's internal purposes, and the customer is generally prohibited from sub-licensing or transferring the applications. The agreements generally provide that the Company's warranty for its products is limited to correction or replacement of the affected product, and in most cases the Company's warranty liability may not exceed the licensing fees from the customer. The Company's form agreement also includes a confidentiality clause protecting proprietary information relating to the licensed applications. The Company's products are generally provided to customers in object code (machine-readable) format only. From time to time, in limited circumstances, the Company has licensed source code (human-readable form) subject to customary protections such as use restrictions and confidentiality agreements. In addition, customers can be beneficiaries of a master source code escrow for the applications, pursuant to which the source code will be released to end users upon the occurrence of certain events, such as the commencement of bankruptcy or insolvency proceedings by or against the Company, or certain material breaches of the agreement. The Company has the right to object to the release of the source code in such circumstances, and to submit the matter to dispute resolution procedures. In the event of any release of the source code from escrow, the customer's license is limited to use of the source code to maintain, support and configure the Company applications. The Company may from time to time receive notices from third parties claiming infringement by the Company's products of proprietary rights of others. As the number of software products in the industry increases and the functionality of these products further overlap, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims, with or without merit, can be time consuming and expensive to defend or could require the Company to enter into royalty and licensing agreements. Such agreements, if required, may not be available on terms acceptable to the Company, or at all. Employees As of December 31, 1997, the Company employed 896 people, of which 261 were primarily engaged in research and development activities, 466 in post-sales support and customer project operations, 102 in sales and marketing, and 67 in administration and finance. None of the Company's employees are represented by a labor union. The Company has experienced no work stoppages and believes that its relationship with its employees is excellent. The Company's future success depends, in large part, on the continued service of its key management, sales, product development and operational personnel and on its ability to attract and retain highly qualified employees, including management personnel. There can be no assurance that the Company will be successful in attracting, retaining and motivating key personnel. Executive Officers The executive officers of the Company as of December 31, 1997 are as follows:
Name of Nominee Age Principal Occupation Robert W. Felton............................... 59 Chief Executive Officer and Chairman of the Board Christopher R. Lane............................ 42 President of Strategy and Product Development and Vice Chairman of the Board John W. Blend, III............................. 51 President of Worldwide Sales and Marketing and Director Richard W. MacAlmon............................ 48 Senior Vice President and Director Frank M. Siskowski............................. 50 Chief Financial Officer and Executive Vice President of Investor Relations
A biography, including the principal occupations for the past five years of each of the executive officers, is provided below. There is no family relationship between any executive officer of the Company. 10 Mr. Felton is a founder of The Indus Group, Inc. and has been the Chief Executive Officer and Chairman of the Board of Directors since the consummation of the Merger on August 25, 1997. From 1988 until August 25, 1997, he was the Chairman, President and Chief Executive Officer of The Indus Group, Inc. Mr. Lane has served as the President of Strategy and Product Development and Vice Chairman of the Board of Directors since the consummation of the Merger on August 25, 1997. From May 1994 to August 25, 1997, he served as President of TSW International, Inc. and was Chief Executive Officer since June 1994, and a director since 1993. From June 1994 to July 1996, he served as Chairman of the Board of TSW International, Inc. Prior to joining TSW International, Inc. in May 1994, he served as a Vice President at E.M. Warburg, Pincus & Co., Inc., a diversified financial services firm ("EMW Inc."), from 1993 to 1994. From 1987 to 1993, he held various positions at Oracle Corporation, a provider of software for information management ("Oracle"), in both the United States and Europe. Mr. Lane developed Oracle's strategic market divisions in the United Kingdom, was Vice President of its U.S. consulting business and was responsible for European product development. Mr. Blend has as served as the President of Worldwide Sales and Marketing and a director since the consummation of the Merger on August 25, 1997. From 1986 to August 25, 1997, he served as TSW International, Inc.'s Executive Vice President, Worldwide Distribution. He also served as a director of TSW International, Inc. since 1987. Prior to joining TSW International, Inc., he served as Area Vice President for the eastern field operations of HBO & Company, a provider of enterprise-wide patient care, clinical, financial and strategic management software solutions, from 1980 to 1985. Prior to his tenure at HBO & Company, he was employed in various positions by IBM Corporation; a provider of customer solutions through the use of advanced information technologies. Mr. MacAlmon is a founder of The Indus Group, Inc. and has been a Senior Vice President and director since the consummation of the Merger on August 25, 1997. Prior to August 25, 1997, he served as Vice President of Marketing and as a director of The Indus Group, Inc. since January 1990 and a Senior Vice President of The Indus Group, Inc. since June 1995. From January 1988 to December 1989, Mr. MacAlmon served as a Product Developer for The Indus Group, Inc. Mr. Siskowski has served as Chief Financial Officer and Executive Vice President of Investor Relations since the consummation of the Merger August 25, 1997. Prior to August 25, 1997, he served as Senior Vice President and Chief Financial Officer of The Indus Group, Inc. since September 1996. From July 1991 to September 1996, Mr. Siskowski served as Senior Vice President and Controller of VISA International. From January 1983 to July 1991, he served as Vice President and Controller of MCI Telecommunications and Chief Financial and Administrative Officer of the Pacific Division of MCI Communications Corporation. Risk Factors This report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements have been made pursuant to the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions, plans or strategies regarding the future. Unless required by law, the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this report. Risks Relating to the Merger Integration of Operations. The Merger of The Indus Group, Inc. and TSW International, Inc. has been consummated with the expectation that the merger will result in beneficial synergistic effects for the Combined Company. The combination of the two companies involves, among other things, integration of the companies' respective product offerings and coordination of their research and development efforts. The difficulties of integration include the necessity of coordinating geographically separated organizations and integrating personnel with disparate business backgrounds. Failure to effectively complete the integration of the two companies' operations would have a material adverse effect on the Company's business, operating results and financial condition. Volatility of Quarterly Operating Results History of TSW International, Inc. Losses. Although TSW International, Inc.'s total revenue has increased in each of the last five fiscal years, TSW International, Inc. has experienced operating and net losses for fiscal 1994 and 1995 and a net loss for fiscal 1996. Such losses resulted primarily from costs incurred in connection with the development and introduction of TSW International, Inc.'s client/server Asset Care system, Enterprise MPAC ("EMPAC"), purchasing delays by customers in anticipation of the introduction of EMPAC, and, to a lesser extent, costs associated with the expansion of TSW International, Inc.'s international operations. There can be no assurance that the Company will be able to achieve or sustain profitability in the future. 11 Fluctuating Operating Results. The Company's operating results have fluctuated in the past, and the Company's results may fluctuate significantly in the future depending on a number of factors, including (i) the relatively long sales cycles for their products, (ii) the variable size and timing of individual license transactions, (iii) changes in demand for their products and services, (iv) competitive conditions in the industry, (v) changes in customer budgets, (vi) the timing of the introduction of new products or product enhancements by each such company or its competitors, (vii) their success in and costs associated with developing and introducing new products, (viii) product life cycles, (ix) variability in new licenses obtained, (x) changes in the proportion of revenues attributable to license fees versus services, (xi) changes in the level of operating expenses, (xii) delay or deferral of customer implementations of their software, (xiii) software defects and other product quality problems, and (xiv) other economic conditions generally or in specific process industry segments. Further, the purchase of the Company's products generally involves a significant commitment of capital, with the attendant delays frequently associated with large capital expenditures and authorization procedures within large organizations. For these and other reasons, the sales cycles for the Company's products are typically lengthy and subject to a number of significant risks over which each such company has little or no control, including customers' budget constraints and internal authorization reviews. In addition, delays in the completion of a product implementation may require that the revenues associated with such implementation be recognized over a longer period than originally anticipated. Such delays in the implementation or execution of orders have caused, and may in the future cause, material fluctuations in the Company's operating results. Similarly, customers may cancel implementation projects at any time without penalty, and such cancellations could have a material adverse effect on the Company's business or results of operations. Because the Company's expenses are relatively fixed, a small variation in the timing of recognition of specific revenues can cause significant variations in operating results from quarter to quarter and may in some future quarter result in losses or have a material adverse effect on the Company's business or results of operations. Additional factors that may contribute to future fluctuations in the Company's quarterly operating results include, but are not limited to: (i) development and introduction of new operating systems that require additional development efforts; (ii) introduction or enhancement of products by the Company or its competitors; (iii) changes in pricing policies of the Company or its competitors; (iv) increased competition; (v) technological changes in computer systems and environments; (vi) the ability of the Company to timely develop, introduce and market new products; (vii) quality control of products sold; (viii) market acceptance of new products and product enhancements; (ix) the Company's success in expanding its sales and marketing programs; (x) personnel changes; (xi) foreign currency exchange rates; (xii) mix of products sold; (xiii) acquisition costs; and (xiv) general economic conditions. Management of Growth; Dependence on Key Personnel The Company's business has grown rapidly in recent periods, with total revenues increasing from $101.8 million in 1995 to $143.0 million in 1996 and $177.0 million in 1997. The growth of the Company's business and expansion of customer base has placed a strain on management and operations. The recent expansion has also resulted in substantial growth in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations, resulting in increased responsibility for management personnel. These strains on systems and resources have been exacerbated as a result of the process of integrating the constituent companies as a result of the Merger. In the future, the Company will be required to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and to expand, train and manage its employee work force. There can be no assurance that the Company will be able to effectively manage such growth. Its failure to do so would have a material adverse effect on its business, operating results and financial condition. Competition for qualified sales, technical and other personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified employees in the future. If the Company were unable to hire and retain such personnel, particularly those in key positions, its business, operating results and financial condition would be materially adversely affected. The Company's future success also depends in significant part upon the continued service of its key technical, sales and senior management personnel. The loss of the services of one or more of this key employees could have a material adverse effect on its business, operating results and financial condition. Additions of new and departures of existing personnel, particularly in key positions, can be disruptive and have a material adverse effect on the Company's business, operating results and financial condition. Intense Competition The enterprise management software solutions business is highly competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. The Company's primary competition stems from companies offering enterprise software solutions, vendors offering partial solutions and suppliers of departmental systems (primarily LAN-based). The Company's competitors include SAP, and other software vendors such as Mincom Corp. and Project Software & Development, Inc., firms that provide software products to electric utilities such as Severn Trent Systems and Synercom, and many other firms. In the future, the Company may also face competition from Oracle, PeopleSoft and SPL WorldGroup B.V., through which it has developed or is developing PassBook integration products to provide interoperability with Oracle's corporate financial applications, PeopleSoft's corporate financial, payroll and human resources applications and SPL WorldGroup's customer information applications. In addition, the Company faces competition from suppliers of custom-developed business application software that have focused largely on proprietary mainframe- and microcomputer-based systems 12 with highly customized software, such as the systems consulting groups of major accounting firms and systems integrators. The Company also faces competition from systems developed by the internal MIS departments of large organizations. The businesses in which the Company competes are intensely competitive and rapidly changing and, in order to compete, the Company will have to enhance current products and develop new products in a timely fashion. Management believes that the principal competitive factors in the Company's businesses will be product performance and functionality, cost of internal product development as compared with cost of purchase of products supplied by outside vendors, cost of on-going maintenance and time-to-market. Many of the Company's competitors will have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base, than the Company. The Company's success will also depend significantly on its ability to develop more advanced products more quickly and less expensively than its existing competitors and potential competitors and to educate potential customers of the benefits of licensing the Company's products rather than developing their own products. The Company's current and future competitors could introduce products with more features, greater functionality and lower prices than the Company's products. These competitors could also bundle existing or new products with other, more established products in order to compete with the Company. In addition, because there are relatively low barriers to entry for the software market, the Company expects additional competition from other established and emerging companies. Increased competition is likely to result in price reductions, reduced gross margins and loss of sales volume, any of which could materially and adversely affect the Company's business, operating results and financial condition. Any material reduction in the price of the Company's products would negatively affect its gross revenues and could have a material adverse effect on its business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, operating results and financial condition. Risk of Successfully Integrating Current and Future Products and Technologies. The Company's product strategy is initially to integrate selected products and technologies to enhance enterprise management solutions and to integrate certain products throughout its entire product line through the availability of a common set of services. Such product and technology integration activities have begun but a schedule has not been determined. The success of this strategy is dependent in significant part on the Company's ability to integrate its products as planned and the resultant products achieving market acceptance by end users. No assurance can be given that the Company will successfully integrate its products as planned. If the Company is unable to develop and introduce new integrated products and technologies, or enhancements to existing products, in a timely manner, its business, operating results and financial condition would be materially and adversely affected. Rapid Technological Change; Need to Develop New Products; Requirement for Frequent Product Transitions The industries in which the Company participates are intensely competitive and characterized by rapid technological change, evolving industry standards in computer hardware and software technology changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies, the emergence of new standards or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, the Company's success will depend in part upon its ability to continue to enhance existing products and expand its products, continue to provide enterprise solutions and develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve customer acceptance. Customer requirements include, but are not limited to, product operability and support across distributed and changing heterogeneous hardware platforms, operating systems, relational databases and networks. There can be no assurance that the Company's products will achieve customer acceptance or will adequately address the changing needs of the marketplace or that the Company will be successful in developing and marketing enhancements to its existing products or new products incorporating new technology on a timely basis. The Company has in the past experienced delays in product development, and there can be no assurance that the Company will not experience further delays in connection with its current product development or future development activities. If the Company is unable to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially and adversely affected. Because the Company has limited resources, the Company must effectively manage and properly allocate and prioritize its product development efforts and its porting efforts relating to newer products and operating systems. There can be no assurance that these efforts will be successful or, even if successful, that any resulting products or operating systems will achieve customer acceptance. International Operations International revenue (from sales outside the United States, Canada and Mexico) accounted for approximately 18%, 20% and 14% of total revenues in 1995, 1996 and 1997, respectively. The Company maintains an operational presence in the United Kingdom and France with the acquisition of SQL Systems International plc, in October 1994 and an 80% equity interest in, Socotec Maintenance Services, in July 1995. In addition, the Company has established sales and support offices in Europe, Australia and Asia; and expects international sales to continue to become a more significant component of its business. International expansion may require the Company to establish additional foreign operations and hire additional personnel. This 13 may require significant management attention and financial resources and could adversely affect the Company's operating margin. To the extent the Company is unable to effect these additions efficiently and in a timely manner, its growth, if any, in international sales will be limited, and its business, operating results and financial condition could be materially and adversely affected. There can be no assurance that the Company will be able to maintain or increase international market demand for its products. The Company's international business will also involve a number of additional risks, including lack of acceptance of localized products, cultural differences in the conduct of business, longer accounts receivable payment cycles, greater difficulty in accounts receivable collection, seasonality due to the slow-down in European business activity during the Company's third fiscal quarter, unexpected changes in regulatory requirements and royalty and withholding taxes that restrict the repatriation of earnings, tariffs and other trade barriers, and the burden of complying with a wide variety of foreign laws. The Company's international sales will be generated primarily through its international sales subsidiaries and are expected to be denominated in local currency, creating a risk of foreign currency translation gains and losses. To the extent profit is generated or losses are incurred in foreign countries, the Company's effective income tax rate may be materially and adversely affected. In some markets, localization of the Company's products will be essential to achieve market penetration. The Company may incur substantial costs and experience delays in localizing its products, and there can be no assurance that any localized product will ever generate significant revenue. There can be no assurance that any of the factors described herein will not have a material adverse effect on the Company's future international sales and operations and, consequently, its business, operating results and financial condition. Recent economic trends, particularly in the Asia-Pacific marketplace, have caused a heightened awareness of the impact this portion of the world's economy can have on the overall economy. As the Asia-Pacific market currently represents almost one-third of the worlds buying power and approximately 4% of the Company's revenues are to this region, changes in this area's economic growth rate may impact suppliers of product into that market. While the actual magnitude of the business at risk is unknown, it is likely that capital spending in this market will decrease and thus, the Company's ability to increase revenues in this region may be negatively impacted. Dependence on Proprietary Technology; Risks of Infringement The Company's success is heavily dependent upon its proprietary technology. The Company will rely on a combination of the protections provided under applicable copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements, to establish and protect its proprietary rights. As part of its confidentiality procedures, the Company will generally enter into non-disclosure agreements with its employees, distributors and corporate partners, and license agreements with respect to its software, documentation and other proprietary information. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse engineer or obtain and use information that the Company regards as proprietary the Company's products or technology without authorization, or to develop similar technology independently. Moreover, the laws of certain countries do not protect the Company's proprietary rights to the same extent, as do the laws of the United States. Furthermore, the Company has no patents, and existing copyright laws afford only limited protection. The Company will make source code available for certain of its products and the provision of such source code may increase the likelihood of misappropriation or other misuses of the Company's intellectual property. Accordingly, there can be no assurance that the Company will be able to protect its proprietary software against unauthorized third party copying or use, which could adversely affect the Company's competitive position. The Company is not aware that any of its products infringe the proprietary rights of third parties. There can be no assurance that a third party will not assert that the Company's technology violates its patents in the future. As the number of software products in the industry increases and the functionality of these products further overlap, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims, with or without merit, can be time consuming and expensive to defend or could require the Company to enter into royalty and licensing agreements. Such claims might require the Company to enter into royalty or license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. Lengthy Sales and Implementation Cycle; Large Order Size The purchase and implementation of the Company's software solutions by a customer will generally involve a significant commitment of capital over a long period of time, with the risk of delays frequently associated with large capital expenditures and implementation procedures within an organization, such as budgetary constraints and internal approval review. During the sales process, the Company may devote significant time and resources to a prospective customer, including costs associated with multiple site visits, product demonstrations and feasibility studies, and experience significant delays over which the Company will have no control. In addition, following license sales, the implementation of the Company's products will involve a lengthy process, including customer training and consultation. A successful implementation will require a close working relationship between the Company, the customer and, if applicable, third party consultants and systems integrators who assist in the process. These factors may increase the costs associated with completion of any given sale, and risks of cancellation or delay of such sales. 14 Dependence on Licensed Technology Elements of the Company's products, particularly in its EMPAC workflow engine, are licensed from third parties under license agreements. The loss of the Company's right to use and license such technology could limit the Company's ability to successfully market certain modules of EMPAC. While the Company believes that the it would be able to either license or develop alternatives to such component technologies, there can be no assurance that the Company would be able to do so, or that such alternatives would achieve market acceptance or be available on a timely basis. Failure to obtain the necessary licenses or to develop needed technologies could have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Third Parties Implementation and development of EMPAC software depends on proprietary technology licensed from third parties. Implementation of EMPAC requires the use of the Windows environment licensed from Microsoft Corporation. The introduction and increased market acceptance of operating systems that are incompatible with the Company's products, or the failure of Microsoft's operating systems to achieve continued market acceptance, could adversely affect the market for the Company's products. EMPAC also relies on certain proprietary features of the database management system developed by Oracle. The introduction and increased market acceptance of database management systems that are incompatible with the Company's products, or the failure of Oracle products to achieve continued market acceptance, could adversely affect the market for the Company's products. In addition, certain elements of EMPAC have been developed in PowerBuilder, a client/server development product that has been traditionally database independent. Sybase, Inc. acquired Powersoft Corporation, which licenses PowerBuilder, in 1994. If PowerBuilder does not continue to be database independent, future development of the Company's Windows-based components which operate in conjunction with the Oracle database management system may be adversely affected. Although the Company's strategy has been to develop software products that are minimally dependent on any particular element of the underlying platform, there can be no assurance that the Company will be able to avoid the obsolescence of its products due to rapid technological change and evolving industry standards. Risk of Software Defects; Product Liability The sale and support of the Company's products may entail the risk of product liability claims. The license agreements of the Company typically contain provisions designed to limit exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Past and Future Acquisitions. The Company, as well as its predecessor corporations, The Indus Group, Inc. and TSW International, Inc. have made acquisitions in the past. Acquisitions of companies, divisions of companies or products entail numerous risks, including difficulty in successfully assimilating acquired operations, diversion of management's attention and loss of key employees of acquired companies. In 1997, The Indus Group, Inc. has completed two acquisitions. In 1994 and 1995, TSW International, Inc. concluded a total of three acquisitions of companies, divisions of companies or products. The Company may make additional acquisitions in the future. Products acquired by The Indus Group, Inc. and TSW International, Inc. in the past required significant additional development before they could be marketed and some failed to generate any revenue for The Indus Group, Inc. or TSW International, Inc. Any problems related to acquisitions could have a material adverse effect on the Company's business, operating results and financial condition. In addition, future acquisitions by the Company may result in dilutive issuance of equity securities, incurring additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense. These factors could have a material adverse effect on the Company's business, operating results and financial condition. 15 ITEM 2. PROPERTIES Certain information concerning the Company's office space at December 31, 1997 is set forth below:
Location Principal use Footage Ownership ------------------------------------- ------------------------------------ -------------- ---------------- Domestic Offices: Atlanta, GA...................... Regional Headquarters, Research 107,650 Lease and Development, Sales and Marketing, Operations San Francisco, CA................ Corporate Headquarters, Research 66,678 Lease and Development, Sales and Marketing, Operations Pittsburgh, PA................... Regional Operations 28,261 Lease Dallas, TX....................... Regional Operations 9,041 Lease Lake Oswego, OR.................. Regional Operations 5,507 Lease Malvern, PA...................... Regional Operations 4,075 Lease Other executive offices.......... Sales 3,455 Lease International Offices: Woking, Surrey, United Kingdom... Regional Operations 9,300 Lease Richmond, United Kingdom......... Regional Operations 7,779 Lease Brisbane......................... Regional Operations 6,695 Lease Chertsey, Surrey, United Kingdom. Regional Operations 5,500 Lease Singapore........................ Regional Operations 807 Lease Executive offices in Asia Pacific Sales 1,840 Lease
In the first quarter of 1998, the Company entered into additional lease agreements for additional office space, in Singapore, France and Canada of 3,305, 6,660 and 1,600 square feet, respectively. Management is currently and will continue to evaluate additional leased facilities to accommodate the anticipated growth in operations for 1998. The company owns substantially all of the equipment used in its facilities. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in legal proceedings incidental to the conduct of its business. While the outcome of these claims cannot be predicted with certainty, the Company does not believe that the litigation, individually or in the aggregate, to which it is currently a party is likely to have a material adverse effect on the results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1997. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, $.001 par value, is traded on the Nasdaq National Market under the symbol "IINT". The table sets forth the high and low closing prices of the Company's common stock for the periods indicated. Information included in the table for the periods prior to the consummation of the Merger on August 25, 1997 reflect the stock prices of the common stock of The Indus Group, Inc., the Company's predecessor issuer, which was traded on the Nasdaq National Market under the symbol "IGRP" commencing on February 29, 1996, the date of its initial public offering. High Low ---- --- Fiscal 1996 First Quarter........................... $ 22-3/4 $ 18 Second Quarter.......................... 21-1/2 17 Third Quarter........................... 21-1/4 15-3/4 Fourth Quarter.......................... 25-3/4 18-7/8 Fiscal 1997 First Quarter........................... 25-3/4 14 Second Quarter.......................... 20-1/4 13-1/2 Third Quarter........................... 19-3/4 15-3/8 Fourth Quarter.......................... 17-3/4 6-1/2 The Company anticipates that any future earnings will be retained to finance the continuing development of its business. The Company has not declared or paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. The number of stockholders of record for the Company's common stock as of March 11, 1998 was 288. ITEM 6. SELECTED FINANCIAL INFORMATION The following selected financial information of the Company is qualified by reference to and should be read in conjunction with the financial statements and notes thereto and other financial information included elsewhere herein. During 1997, The Indus Group, Inc. entered into an agreement and plan of merger and reorganization with TSW International, Inc. The Merger was consummated on August 25, 1997 and has been accounted for as a pooling-of-interests. All financial information has been restated to reflect the combined operations of The Indus Group, Inc. and TSW International, Inc. The consolidated statements of operations data for the years ended December 31, 1995, 1996, and 1997 and consolidated balance sheet data as of December 31, 1996 and 1997 are derived from and qualified by reference to the audited financial statements of the Company and are included elsewhere herein. The consolidated balance sheet data as of December 31, 1993, 1994 and 1995 and the consolidated statement of operations for the years ended December 31, 1993 and 1994 are derived from the audited financial statements of the Company which are not included herein. 17 INDUS INTERNATIONAL, INC. SUMMARY CONSOLIDATED FINANCIAL DATA
Years Ended December 31, --------------------------------------------------------------------- Statement of operations data: 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- Revenues: Software licensing fees (1) (2) ...................... $ 14,961 $ 15,380 $ 32,816 $ 43,060 $ 55,958 Services and maintenance ............................. 34,751 41,901 67,824 97,515 119,382 Other revenue ........................................ 2,729 824 1,184 2,463 1,694 --------- --------- --------- --------- --------- Total revenues ..................................... $ 52,441 $ 58,105 $ 101,824 $ 143,038 $ 177,034 Cost of revenues ........................................ 23,458 27,664 47,872 63,738 78,575 --------- --------- --------- --------- --------- Gross margin ............................................ $ 28,983 $ 30,441 $ 53,952 $ 79,300 $ 98,459 --------- --------- --------- --------- --------- Operating expenses: Research and development ............................ 11,263 19,063 18,151 23,265 27,664 Sales and marketing .................................. 8,412 13,084 19,915 26,523 33,568 General and administrative ........................... 5,959 10,352 12,996 14,951 14,991 Compensation charge-stock options (3) ................ -- -- 18,900 -- -- Merger and restructuring expenses(4) ................. -- -- -- -- 12,083 --------- --------- --------- --------- --------- Total operating expenses ........................... $ 25,634 $ 42,499 $ 69,962 $ 64,739 $ 88,306 --------- --------- --------- --------- --------- Income (loss) from operations ........................... $ 3,349 $ (12,058) $ (16,010) $ 14,561 $ 10,153 Other income (expense) net .............................. 80 (783) (2,112) (1,887) (1,968) --------- --------- --------- --------- --------- Income (loss) before taxes .............................. $ 3,429 $ (12,841) $ (18,122) $ 12,674 $ 8,185 Provision (benefit) for income taxes .................... 187 (1,195) 423 6,849 6,408 Cumulative effect of deferred income taxes provided upon conversion by Indus to C Corporation(5) .......................................... -- -- -- 6,700 -- --------- --------- --------- --------- --------- Income (loss) before extraordinary item ................. 3,242 (11,646) (18,545) (875) 1,777 Extraordinary item ...................................... -- -- -- -- (787) --------- --------- --------- --------- --------- Net Income (loss) ....................................... $ 3,242 $ (11,646) $ (18,545) $ (875) $ 990 ========= ========= ========= ========= ========= Pro forma statement of operations as adjusted: Income (loss) before income taxes .................... $ (18,122) $ 12,674 Add back portion of compensation charge-stock options (3) .......................................... 17,900 -- --------- --------- Income (loss) before income taxes, as adjusted ...... $ (222) $ 12,674 Provision for income taxes (federal, state and foreign) (5) ..................................... 5,181 6,849 --------- --------- Pro forma net income (loss) .......................... $ (5,403) $ 5,825 ========= ========= Income (loss) per share (computed on pro forma net income (loss) in 1995 and 1996) ..................... $ (0.25) $ 0.22 $ 0.03 ========= ========= ========= Shares used in computing per share data ................. 22,027 25,976 28,574 ========= ========= =========
Years Ended December 31, -------------------------------------------------------------------------- Balance sheet data: 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Working capital .................................. $ 9,235 $ 226 $ (291) $ 43,064 $ 37,238 Total assets ..................................... 25,984 39,857 57,734 117,855 136,725 Short-term debt .................................. 2,331 4,496 16,481 16,951 29,054 Long-term debt ................................... 249 665 1,222 2,126 1,105 Subordinated long-term notes ..................... -- 9,650 16,251 18,065 -- TSW redeemable preferred stock ................... 8,100 11,100 13,100 18,100 -- Total stockholder's equity ....................... 6,972 (11,846) (20,473) 20,666 70,230 (1) Effective in the third quarter of 1997, The Indus Group, Inc. began to report applicable new license fees on standard software products not requiring substantial modification or customization as earned revenue upon shipment to customers. Previously, because substantial modification and customization of software products was expected by customers, The Indus Group, Inc. had deferred the applicable license fees initially and recognized those fees as earned over the period of modification, customization and other installation services. TSW International, Inc., which had not been required to perform substantial customization services, continued to recognize the applicable portion of license fees as earned upon shipment of standard software products to customers. (2) TSW International, Inc. began recognizing license fee revenue from EMPAC in the quarter ended December 31, 1995, when EMPAC first became operational at a customer site. 18 (3) Reflects nonrecurring expense incurred in the third quarter of 1995 in connection with an amendment to The Indus Group's 1992 Stock Option Plan to accelerate the exercisability of outstanding stock options, which had previously been contingent upon the occurrence of certain events. The pro forma adjustment of $17,900,000 is to reduce 1995 compensation expense to the amount related to options granted in 1995 only. See Note 1 and Note 9 of the Notes to the Consolidated Financial Statements. (4) See Note 1 of the Notes to the Consolidated Financial Statements for an explanation of the merger and restructuring expenses. (5) Prior to January 1, 1996, The Indus Group, Inc. was not subject to federal corporate income taxation because of its election to be taxed under the provisions of Subchapter S of the Code. Pro forma net income for 1995 has been determined by assuming that the Company had been taxed as a C Corporation for 1995. Pro forma net income for 1996 reflects the elimination of a nonrecurring charge for the cumulative effect of deferred income taxes incurred in the first quarter of 1996 in connection with the termination of The Indus Group's S Corporation status. See Note 1 to the Consolidated Financial Statements. (6) There were no material transactions between The Indus Group, Inc. and TSW International, Inc. prior to the consummation of the merger on August 25, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this Item is incorporated by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference to the section entitled "Consolidated Financial Statements" in the Company's 1997 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14(a) (the "Proxy Statement") not later that 120 days after the end of the fiscal year covered by this Report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's Directors required by this Item is incorporated by reference to the information contained under the captions "Election of Directors-Nominees" and "Section 16(a) Beneficial Ownership Compliance" in the Proxy Statement. The information concerning the Company's officers required by this Item is included in the Section in Part I hereof entitled "Executive Officers". ITEM 11. EXECUTIVE COMPENSATION The information concerning the Company's Executive Officers required by this Item is incorporated by reference to the information contained under the captions "Proposal One - Election of Directors - Director Compensation and Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning security ownership required by this Item is incorporated by reference to the information contained under the caption "Security Ownership of Management; Principal Stockholders" in the Proxy Statement. 19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information contained under the caption "Certain Transactions with Management" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. The following documents are filed as a part of this Report: 1. Financial Statements: The following Consolidated Financial Statements of Indus International, Inc. and Report of Ernst & Young LLP, Independent Auditors, are incorporated by reference to the section entitled "Consolidated Financial Statements" of the Registrant's 1997 Annual Report to Stockholders Consolidated Balance Sheets - Years Ended December 31, 1996 and 1997 Consolidated Statements of Operations - Years Ended December 31, 1995, 1996, and 1997 Consolidated Statement of Stockholders' Equity - Three-Year Period Ended December 31, 1997 Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1996, and 1997 Notes to Financial Statements 2. Financial Statement Schedule: The following financial statement schedule of Indus International, Inc. for the years ended December 31, 1997, 1996 and 1995 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Indus International, Inc. Schedule II Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits: The exhibits listed on the Exhibit Index at page 25 of this Form 10-K are filed as a part hereof or incorporated by reference into this Form 10-K. Exhibit Number Description ------ ----------- 2.1 Agreement and Plan of Merger and Reorganization dated as of June 5, 1997 ("Agreement of Merger"), by and among the Registrant, The Indus Group, Inc. ("Indus") and TSW International, Inc. ("TSW") (incorporated by reference to Appendix A-1 to the Joint Proxy Statement/Prospectus filed as part of the Registration Statement on Form S-4 (Reg. No. 333-33113) filed with the Securities and Exchange Commission on August 7, 1997 (the "Proxy Statement")) 2.2 First Amendment to Agreement of Merger dated as of July 21, 1997 by and among the Registrant, Indus and TSW (incorporated by reference to Exhibit 2.2 to the Proxy Statement) 2.3 Form of Agreement of Merger to be entered into by and among the Registrant, Indus Sub, Inc. and Indus (incorporated by reference to Appendix A-2 to the Proxy Statement) 2.4 Form of Agreement of Merger to be entered into by and among the Registrant, TSW Sub, Inc. and TSW (incorporated by reference to Appendix A-3 to the Proxy Statement) 3.1 Registrant's Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Proxy Statement) 3.2 Registrant's Bylaws (incorporated by reference to Exhibit 3.2 to the Proxy Statement) 20 4.1 Form of Registration Rights Agreement entered into among the Registrant, Warburg, Pincus Investors, LP ("Warburg"), Robert W. Felton, Richard W. MacAlmon, John W. Blend, III and John R. Oltman (incorporated by reference to Exhibit 4.1 to the Proxy Statement) 4.2 Form of Indus Affiliate Agreement dated as of June 5, 1997 entered into by the Registrant, Indus, TSW and each of Robert W. Felton, Richard W. MacAlmon, Michael E. Percy, Alan G. Merten, Donald F. Robertson, Douglas R. Piper, Frank M. Siskowski and Edward R. Koepfler (incorporated by reference to Exhibit 4.2 to the Proxy Statement) 4.3 Form of TSW Affiliate Agreement dated as of June 5, 1997 entered into by the Registrant, Indus, TSW and each of Warburg, Christopher R. Lane, John F. Bartels, John W. Blend, III, Kenneth C. Colby, Jr., David J. Loesch, Allen D. Vaughn, John R. Oltman, George D. Busbee, William H. Janeway and Joseph P. Landy (incorporated by reference to Exhibit 4.3 to the Proxy Statement) 4.4 Felton Affiliate Agreement dated as of June 5, 1997 entered into among the Registrant, Indus, TSW and Robert W. Felton (incorporated by reference to Exhibit 4.4 to the Proxy Statement) 4.5 Warburg Affiliate Agreement dated as of June 5, 1997 entered into among the Registrant, Indus, TSW and Warburg (incorporated by reference to Exhibit 4.5 to the Proxy Statement) 4.6 Nomination Agreement entered into among the Registrant, Warburg and Robert W. Felton (incorporated by reference to Exhibit 4.6 to the Proxy Statement) 4.7 Specimen certificate for Registrant's Common Stock (incorporated by reference to Exhibit 4.7 to the Proxy Statement) 9.1 Indus Voting Agreement dated as of June 5, 1997 entered into among TSW, Robert W. Felton, Richard W. MacAlmon, Michael E. Percy and Douglas R. Piper (incorporated by reference to Exhibit 9.1 to the Proxy Statement) 9.2 TSW Voting Agreement dated as of June 5, 1997 entered into among the Registrant, Indus, Warburg, John W. Blend, III and John R. Oltman (incorporated by reference to Exhibit 9.2 to the Proxy Statement) 10.1* Indus International, Inc. 1997 Stock Plan (incorporated by reference to Exhibit 10.1 to the Proxy Statement) 10.2* Indus International, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Proxy Statement) 10.3* Indus International, Inc. 1997 Director Option Plan (incorporated by reference to Exhibit 10.3 to the Proxy Statement) 10.4 Form of Tax Indemnification Agreement of Indus (incorporated by reference to Exhibit 10.6 to Indus' Registration Statement on Form S-1 (File No. 33-80573) declared effective on February 26, 1996, as amended (the "Indus Form S-1")) 10.5 Software Master License Agreement between Indus and Felton Enterprises, dated January 2, 1990, as amended to date (incorporated herein by reference to Exhibit 10.7 to the Indus Form S-1) 10.6 Conditional Assignment of Software Master License Agreement and Underlying Software between Indus and Felton Enterprises dated February 24, 1996 (incorporated herein by reference to Exhibit 10.8 to the Indus Form S-1) 10.7 Amended and Restated Commercial Loan Agreement dated June 30, 1995 between Indus and Sumitomo Bank of California, as amended through December 19, 1995 (incorporated herein by reference to Exhibit 10.9 to the Indus Form S-1) 21 10.8 Third Amendment to Commercial Loan Agreement dated May 29, 1996 between Indus and Sumitomo Bank of California (incorporated herein by reference to Exhibit 10.1 to the Indus Quarterly Report on Form 10-Q (File No. 0-27806) filed with the Securities and Exchange Commission on August 13, 1996) 10.9 Fourth Amendment to Commercial Loan Agreement dated September 6, 1996 between Indus and Sumitomo Bank of California (incorporated herein by reference to Exhibit 10.1 to the Indus Quarterly Report on Form 10-Q (File No. 0-27806) filed with the Securities and Exchange Commission on November 13, 1996) 10.10 Asset Acquisition Agreement between Indus and Indus International, Inc. (incorporated herein by reference to Exhibit 10.10 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (Reg. No. 33-80573) filed with the Securities and Exchange Commission on February 28, 1996) 10.11 Lease for Indus' San Francisco, CA headquarters dated January 24, 1990, as amended (incorporated herein by reference to Exhibit 10.11 to the Indus Form S-1) 10.12 Lease for Indus' Pittsburgh, PA sales office (incorporated herein by reference to Exhibit 10.12 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No. 33-80574) filed with the Securities and Exchange Commission on January 31, 1996) 10.13 Loan and Security Agreement dated November 17, 1995 between TSW and Greyrock Business Credit, a division of Greyrock Capital Group Inc. ("Greyrock") (incorporated by reference to Exhibit 10.13 to the Proxy Statement) 10.14 Patent and Trademark Security Agreement dated November 17, 1995 between TSW and Greyrock (incorporated by reference to Exhibit 10.14 to the Proxy Statement) 10.15 Security Agreement in Copyrighted Works dated February 28, 1996 between TSW and Greyrock (incorporated by reference to Exhibit 10.15 to the Proxy Statement) 10.16 Amendment to Loan Documents, dated August 1, 1996, between TSW and Greyrock (incorporated by reference to Exhibit 10.16 to the Proxy Statement) 10.17 Secured Promissory Note dated August 1, 1996 between TSW and Greyrock (incorporated by reference to Exhibit 10.17 to the Proxy Statement) 10.18 Guarantee dated November 6, 1996 between TSW International Limited and Greyrock (incorporated by reference to Exhibit 10.18 to the Proxy Statement) 10.19 Deed of Guarantee and Indemnity dated November 14, 1996 between TSW and International Pty Ltd. and Greyrock (incorporated by reference to Exhibit 10.19 to the Proxy Statement) 10.20 Second Amendment to Loan Documents dated April 3, 1997 between TSW and Greyrock (incorporated by reference to Exhibit 10.20 to the Proxy Statement) 10.21 Securities Purchase Agreement dated as of June 20, 1994, between TSW and Warburg, Pincus Investors, LP ("Warburg") (incorporated by reference to Exhibit 10.21 to the Proxy Statement) 10.22 Amended and Restated Stockholders Agreement dated June 20, 1994 between TSW, Warburg, John W. Blend, III ("Blend") and David P. Welden (incorporated by reference to Exhibit 10.22 to the Proxy Statement) 10.23 Stockholder's Rights Agreement dated as of August 30, 1994 between TSW, Warburg and Alan Johnston (incorporated by reference to Exhibit 10.23 to the Proxy Statement) 10.24 Form of Stock Purchase Warrant between TSW and Warburg and schedule of substantially similar Agreements (incorporated by reference to Exhibit 10.24 to the Proxy Statement) 10.25 Form of Subordinated Floating Rate Note payable by TSW to Warburg and schedule of substantially similar agreements (incorporated by reference to Exhibit 10.25 to the Proxy Statement) 22 10.26* Employment Agreement dated July 19, 1994 between TSW and Christopher R. Lane ("Lane") (incorporated by reference to Exhibit 10.26 to the Proxy Statement) 10.27 Loan Agreement dated December 22, 1996 between TSW and Lane (incorporated by reference to Exhibit 10.27 to the Proxy Statement) 10.28 Supplemental Severance Agreement dated December 15, 1994 between TSW and Lane (incorporated by reference to Exhibit 10.28 to the Proxy Statement) 10.29 Promissory Note dated December 22, 1996 between TSW and Lane (incorporated by reference to Exhibit 10.29 to the Proxy Statement) 10.30 Collateral Assignment Agreement dated December 22, 1996 between TSW and Lane (incorporated by reference to Exhibit 10.30 to the Proxy Statement) 10.31 Nonrecourse Loan Agreement dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.31 to the Proxy Statement) 10.32 Stock Pledge Agreement dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.32 to the Proxy Statement) 10.33 Collateral Assignment and Agreement dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.33 to the Proxy Statement) 10.34 Nonrecourse Promissory Note dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.34 to the Proxy Statement) 10.35 Lease Agreement dated June 8, 1993 between TSW and Cousins Properties Incorporated, as amended (incorporated by reference to Exhibit 10.35 to the Proxy Statement) 10.36 Credit Agreement dated September 2, 1997 (as amended through First Amendment dated September 16, 1997) with Sumitomo Bank of California and Union Bank of California, N.A. (incorporated by reference to Exhibit 10.01 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-22993) filed with the Securities and Exchange Commission on November 14, 1997) 13.1 Portions of the Registrant's Annual Report 21.1 Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney, filed on page 24 of this report. 27.1 Financial Data Schedule - ----------- * Designates management contract or compensatory plan or arrangement. (b) Reports on Forms 8-K. No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1997. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Indus International, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDUS INTERNATIONAL, INC. /s/ Robert W. Felton -------------------- Robert W. Felton Chief Executive Officer and Chairman of the Board of Directors Date: March 31, 1998 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Robert W. Felton and Frank M. Siskowski, jointly and severally, his/her attorneys-in-fact, each with the power of substitution, for him/her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his/her substitute or substitutes may do or cause to be done by virtue hereof. 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 --------- ----- ---- /s/ Robert W. Felton Chief Executive Officer March 31, 1998 - ---------------------------------- and Chairman of the Board of Directors (Robert W. Felton) /s/ Frank M. Siskowski Chief Financial Officer and Executive March 31, 1998 - ---------------------------------- Vice President of Investor Relations (Frank M. Siskowski) /s/ Richard W. MacAlmon Senior Vice President and Director March 31, 1998 - ---------------------------------- (Richard W. MacAlmon) /s/ Christopher R. Lane President of Strategy and Product March 31, 1998 - ---------------------------------- Development and Vice Chairman of the (Christopher R. Lane) Board of Directors /s/ John W. Blend, III President of Worldwide Sales and March 31, 1998 - ---------------------------------- Marketing and Director (John W. Blend, III) /s/ Alan G. Merten Director March 31, 1998 - ---------------------------------- (Alan G. Merten) /s/ William H. Janeway Director March 31, 1998 - ---------------------------------- (William H. Janeway) /s/ Joseph P. Landy Director March 31, 1998 - ---------------------------------- (Joseph P. Landy)
24 EXHIBIT INDEX Exhibit Number Description ------ ----------- 2.1 Agreement and Plan of Merger and Reorganization dated as of June 5, 1997 ("Agreement of Merger"), by and among the Registrant, The Indus Group, Inc. ("Indus") and TSW International, Inc. ("TSW") (incorporated by reference to Appendix A-1 to the Joint Proxy Statement/Prospectus filed as part of the Registration Statement on Form S-4 (Reg. No. 333-33113) filed with the Securities and Exchange Commission on August 7, 1997 (the "Proxy Statement")) 2.2 First Amendment to Agreement of Merger dated as of July 21, 1997 by and among the Registrant, Indus and TSW (incorporated by reference to Exhibit 2.2 to the Proxy Statement) 2.3 Form of Agreement of Merger to be entered into by and among the Registrant, Indus Sub, Inc. and Indus (incorporated by reference to Appendix A-2 to the Proxy Statement) 2.4 Form of Agreement of Merger to be entered into by and among the Registrant, TSW Sub, Inc. and TSW (incorporated by reference to Appendix A-3 to the Proxy Statement) 3.1 Registrant's Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Proxy Statement) 3.2 Registrant's Bylaws (incorporated by reference to Exhibit 3.2 to the Proxy Statement) 4.1 Form of Registration Rights Agreement entered into among the Registrant, Warburg, Pincus Investors, LP ("Warburg"), Robert W. Felton, Richard W. MacAlmon, John W. Blend, III and John R. Oltman (incorporated by reference to Exhibit 4.1 to the Proxy Statement) 4.2 Form of Indus Affiliate Agreement dated as of June 5, 1997 entered into by the Registrant, Indus, TSW and each of Robert W. Felton, Richard W. MacAlmon, Michael E. Percy, Alan G. Merten, Donald F. Robertson, Douglas R. Piper, Frank M. Siskowski and Edward R. Koepfler (incorporated by reference to Exhibit 4.2 to the Proxy Statement) 4.3 Form of TSW Affiliate Agreement dated as of June 5, 1997 entered into by the Registrant, Indus, TSW and each of Warburg, Christopher R. Lane, John F. Bartels, John W. Blend, III, Kenneth C. Colby, Jr., David J. Loesch, Allen D. Vaughn, John R. Oltman, George D. Busbee, William H. Janeway and Joseph P. Landy (incorporated by reference to Exhibit 4.3 to the Proxy Statement) 4.4 Felton Affiliate Agreement dated as of June 5, 1997 entered into among the Registrant, Indus, TSW and Robert W. Felton (incorporated by reference to Exhibit 4.4 to the Proxy Statement) 4.5 Warburg Affiliate Agreement dated as of June 5, 1997 entered into among the Registrant, Indus, TSW and Warburg (incorporated by reference to Exhibit 4.5 to the Proxy Statement) 4.6 Nomination Agreement entered into among the Registrant, Warburg and Robert W. Felton (incorporated by reference to Exhibit 4.6 to the Proxy Statement) 4.7 Specimen certificate for Registrant's Common Stock (incorporated by reference to Exhibit 4.7 to the Proxy Statement) 9.1 Indus Voting Agreement dated as of June 5, 1997 entered into among TSW, Robert W. Felton, Richard W. MacAlmon, Michael E. Percy and Douglas R. Piper (incorporated by reference to Exhibit 9.1 to the Proxy Statement) 9.2 TSW Voting Agreement dated as of June 5, 1997 entered into among the Registrant, Indus, Warburg, John W. Blend, III and John R. Oltman (incorporated by reference to Exhibit 9.2 to the Proxy Statement) 10.1* Indus International, Inc. 1997 Stock Plan (incorporated by reference to Exhibit 10.1 to the Proxy Statement) 10.2* Indus International, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Proxy Statement) 25 10.3* Indus International, Inc. 1997 Director Option Plan (incorporated by reference to Exhibit 10.3 to the Proxy Statement) 10.4 Form of Tax Indemnification Agreement of Indus (incorporated by reference to Exhibit 10.6 to Indus' Registration Statement on Form S-1 (File No. 33-80573) declared effective on February 26, 1996, as amended (the "Indus Form S-1")) 10.5 Software Master License Agreement between Indus and Felton Enterprises, dated January 2, 1990, as amended to date (incorporated herein by reference to Exhibit 10.7 to the Indus Form S-1) 10.6 Conditional Assignment of Software Master License Agreement and Underlying Software between Indus and Felton Enterprises dated February 24, 1996 (incorporated herein by reference to Exhibit 10.8 to the Indus Form S-1) 10.7 Amended and Restated Commercial Loan Agreement dated June 30, 1995 between Indus and Sumitomo Bank of California, as amended through December 19, 1995 (incorporated herein by reference to Exhibit 10.9 to the Indus Form S-1) 10.8 Third Amendment to Commercial Loan Agreement dated May 29, 1996 between Indus and Sumitomo Bank of California (incorporated herein by reference to Exhibit 10.1 to the Indus Quarterly Report on Form 10-Q (File No. 0-27806) filed with the Securities and Exchange Commission on August 13, 1996) 10.9 Fourth Amendment to Commercial Loan Agreement dated September 6, 1996 between Indus and Sumitomo Bank of California (incorporated herein by reference to Exhibit 10.1 to the Indus Quarterly Report on Form 10-Q (File No. 0-27806) filed with the Securities and Exchange Commission on November 13, 1996) 10.10 Asset Acquisition Agreement between Indus and Indus International, Inc. (incorporated herein by reference to Exhibit 10.10 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (Reg. No. 33-80573) filed with the Securities and Exchange Commission on February 28, 1996) 10.11 Lease for Indus' San Francisco, CA headquarters dated January 24, 1990, as amended (incorporated herein by reference to Exhibit 10.11 to the Indus Form S-1) 10.12 Lease for Indus' Pittsburgh, PA sales office (incorporated herein by reference to Exhibit 10.12 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No. 33-80574) filed with the Securities and Exchange Commission on January 31, 1996) 10.13 Loan and Security Agreement dated November 17, 1995 between TSW and Greyrock Business Credit, a division of Greyrock Capital Group Inc. ("Greyrock") (incorporated by reference to Exhibit 10.13 to the Proxy Statement) 10.14 Patent and Trademark Security Agreement dated November 17, 1995 between TSW and Greyrock (incorporated by reference to Exhibit 10.14 to the Proxy Statement) 10.15 Security Agreement in Copyrighted Works dated February 28, 1996 between TSW and Greyrock (incorporated by reference to Exhibit 10.15 to the Proxy Statement) 10.16 Amendment to Loan Documents, dated August 1, 1996, between TSW and Greyrock (incorporated by reference to Exhibit 10.16 to the Proxy Statement) 10.17 Secured Promissory Note dated August 1, 1996 between TSW and Greyrock (incorporated by reference to Exhibit 10.17 to the Proxy Statement) 10.18 Guarantee dated November 6, 1996 between TSW International Limited and Greyrock (incorporated by reference to Exhibit 10.18 to the Proxy Statement) 10.19 Deed of Guarantee and Indemnity dated November 14, 1996 between TSW and International Pty Ltd. and Greyrock (incorporated by reference to Exhibit 10.19 to the Proxy Statement) 26 10.20 Second Amendment to Loan Documents dated April 3, 1997 between TSW and Greyrock (incorporated by reference to Exhibit 10.20 to the Proxy Statement) 10.21 Securities Purchase Agreement dated as of June 20, 1994, between TSW and Warburg, Pincus Investors, LP ("Warburg") (incorporated by reference to Exhibit 10.21 to the Proxy Statement) 10.22 Amended and Restated Stockholders Agreement dated June 20, 1994 between TSW, Warburg, John W. Blend, III ("Blend") and David P. Welden (incorporated by reference to Exhibit 10.22 to the Proxy Statement) 10.23 Stockholder's Rights Agreement dated as of August 30, 1994 between TSW, Warburg and Alan Johnston (incorporated by reference to Exhibit 10.23 to the Proxy Statement) 10.24 Form of Stock Purchase Warrant between TSW and Warburg and schedule of substantially similar Agreements (incorporated by reference to Exhibit 10.24 to the Proxy Statement) 10.25 Form of Subordinated Floating Rate Note payable by TSW to Warburg and schedule of substantially similar agreements (incorporated by reference to Exhibit 10.25 to the Proxy Statement) 10.26* Employment Agreement dated July 19, 1994 between TSW and Christopher R. Lane ("Lane") (incorporated by reference to Exhibit 10.26 to the Proxy Statement) 10.27 Loan Agreement dated December 22, 1996 between TSW and Lane (incorporated by reference to Exhibit 10.27 to the Proxy Statement) 10.28 Supplemental Severance Agreement dated December 15, 1994 between TSW and Lane (incorporated by reference to Exhibit 10.28 to the Proxy Statement) 10.29 Promissory Note dated December 22, 1996 between TSW and Lane (incorporated by reference to Exhibit 10.29 to the Proxy Statement) 10.30 Collateral Assignment Agreement dated December 22, 1996 between TSW and Lane (incorporated by reference to Exhibit 10.30 to the Proxy Statement) 10.31 Nonrecourse Loan Agreement dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.31 to the Proxy Statement) 10.32 Stock Pledge Agreement dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.32 to the Proxy Statement) 10.33 Collateral Assignment and Agreement dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.33 to the Proxy Statement) 10.34 Nonrecourse Promissory Note dated September 16, 1992 between TSW and Blend (incorporated by reference to Exhibit 10.34 to the Proxy Statement) 10.35 Lease Agreement dated June 8, 1993 between TSW and Cousins Properties Incorporated, as amended (incorporated by reference to Exhibit 10.35 to the Proxy Statement) 10.36 Credit Agreement dated September 2, 1997 (as amended through First Amendment dated September 16, 1997) with Sumitomo Bank of California and Union Bank of California, N.A. (incorporated by reference to Exhibit 10.01 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-22993) filed with the Securities and Exchange Commission on November 14, 1997) 13.1 Portions of the Registrant's Annual Report 21.1 Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney, filed on page 24 of this report 27.1 Financial Data Schedule - --------------- *Designates management contract or compensatory plan or arrangement. 27 EX-13.1 2 PORTIONS OF THE REGISTRANT'S ANNUAL REPORT EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Business. Indus International, Inc. (the "Company" or "Indus") develops, markets, and supports a proprietary line of enterprise asset management software and implementation services. The Company serves as an agent of change for its customers, who seek to improve their return on investment and efficiencies in core business functions in the utilities and energy industry, process, discreet and consumer packaged goods companies, as well as educational, municipal and transportation authorities worldwide. Merger. The Indus Group, Inc. entered into an agreement and plan of merger and reorganization on June 5, 1997 with TSW International, Inc., a Georgia corporation (the "Merger"), pursuant to which The Indus Group, Inc. and TSW International, Inc. each became subsidiaries of a new Delaware corporation named Indus International, Inc. (the "Company" or the "Combined Company") which was formed for the purpose of the transactions contemplated under the Merger. On December 31, 1997, the Company's subsidiaries, The Indus Group, Inc. and TSW International, Inc., each merged with and into the Company (the "Roll-up Merger"). The Company, as the surviving corporation, assumed all obligations of the two subsidiaries, in connection with the Roll-up Merger. The Merger was consummated on August 25, 1997, as a tax-free reorganization pursuant to the provisions of Section 368 of the Internal Revenue Code of 1986, and has been accounted for as a pooling-of-interests. In connection with the Merger, (a) each share of outstanding common stock of The Indus Group, Inc. was converted into one share of Common Stock of the Company ("Common Stock") and (b) each outstanding share of common stock of TSW International, Inc. ("TSW International, Inc. Common Stock"), and each outstanding share of preferred stock of TSW International, Inc. ("TSW International, Inc. Preferred Stock"), was converted into approximately 2.73 shares of the Company's Common Stock; (c) the outstanding subordinated floating rate notes of TSW International, Inc. (including accrued interest thereon) were exchanged for an aggregate of 1,235,879 shares of the Company's Common Stock; (d) all rights to receive any unpaid dividends on TSW International, Inc. Preferred Stock were converted into an aggregate of 53,937 shares of the Company's Common Stock and (e) each outstanding option or warrant to purchase TSW International, Inc. Common Stock was converted into an option or warrant, respectively, to purchase that number of shares of the Company's Common Stock determined by multiplying the number of shares of TSW International, Inc. Common Stock subject to such option or warrant by approximately 2.73, at an exercise price per share of the Company's Common Stock equal to the exercise price per share of TSW International, Inc. Common Stock pursuant to such option or warrant divided by approximately 2.73. Based on the capitalization of TSW International, Inc. as of August 25, 1997, approximately 10.2 million shares of the Company's Common Stock were issued in the transaction and the Company has reserved approximately 7.9 million shares of its Common Stock for issuance pursuant to the assumption of outstanding options and warrants to purchase TSW International, Inc. Common Stock. Risks relating to the merger of The Indus Group, Inc. and TSW International, Inc. include: (i) risks relating to the integration of the operations of The Indus Group, Inc. and TSW International, Inc.; and (ii) certain affiliates of The Indus Group, Inc. and TSW International, Inc. have certain interests that are different from or in addition to shareholders of The Indus Group, Inc. and shareholders of TSW International, Inc. Risks relating to the business of the Combined Company include: (i) the Combined Company's ability to manage growth; (ii) the utilization by the Combined Company of new distribution channels; and (iii) risks relating to the successful development of current and future products and technologies. The Company has experienced, and may in the future experience, significant fluctuations in revenues and operating results. The Company's revenues and operating results in general, and in particular its revenues from new licenses, are relatively difficult to forecast for a number of reasons, including (i) the relatively long sales cycles for the Company's products, (ii) the variable size and timing of individual license transactions, (iii) changes in demand for the Company's products and services, (iv) competitive conditions in the industry, (v) changes in customer budgets, (vi) the timing of the introduction of new products or product enhancements by the Company or its competitors, (vii) the Company's success in and costs associated with developing and introducing new products, (viii) product life cycles, (ix) changes in the proportion of revenues attributable to license fees versus services, (x) changes in the level of operating expenses, (xi) delay or deferral of customer implementations of the Company's software, (xii) software defects and other product quality problems, and (xiii) other economic conditions generally or in specific industry segments. Further, the purchase of the Company's products generally involves a significant commitment of capital, with the attendant delays frequently associated with large capital expenditures and authorization procedures within large organizations. For these and other reasons, the sales cycles for the Company's products are typically lengthy and subject to a number of significant risks over which the Company has little or no control, including customers' budget constraints and internal authorization reviews. In addition, delays in the completion of a product implementation may require that the revenues associated with such implementation be recognized over a longer period than originally anticipated. Such delays in the implementation or execution of orders have caused, and may in the future cause, material fluctuations in the Company's operating results. Similarly, customers may cancel implementation projects at any time without penalty, and such cancellation could have a material adverse effect on the Company's business or results of operations. Because the Company's expenses are relatively fixed, a small variation in the timing of recognition of specific revenues can cause significant variations in operating results and may in some future period result in losses or have a material adverse effect on the Company's business or results of operations. 1 The Company derives its revenues primarily from software licenses, implementation and training services and maintenance fees. While the Company has derived a significant portion of its revenues from electric utilities to date, it also derives revenues from customers such as the oil and gas companies, petrochemical companies, manufacturers, hospitals, educational systems, governments, transportation authorities and steel and forest product companies. The Company provides its software to customers under contracts, which provide for software license fees and system implementation services. Effective in the three months ended September 30, 1997, The Indus Group, Inc., Inc. began to report applicable new license fees, which typically have ranged from approximately $100,000 to $5 million, on standard software products not requiring substantial modification or customization as earned revenue upon shipment to customers. Previously, because substantial modification and customization of software products was expected by customers, The Indus Group, Inc. had deferred the applicable license fees initially and recognized those fees as earned over the period of modification, customization and other installation services. TSW International, Inc. has always recognized license fees upon shipment of product. Revenues from system implementation services, which typically are time- and material-based, are recognized as direct contract costs are incurred and typically range from one to three times the license fees. Revenues for each quarter depend in part on revenues from the closing of new contracts during the quarter. For contracts with a one-year warranty clause, a portion of license fees is deferred initially and subsequently recognized over the one-year warranty period. After an initial contract period, additional maintenance and support services, for which the Company typically charges 15-18% of the original license fee per year, are subject to separate contracts whereby revenue is recognized ratably over the contract period. In March 1997, The Indus Group, Inc. acquired a 10% interest in TenFold Corporation, a private software company for approximately $8 million in cash. The Indus Group, Inc. received a perpetual, unrestricted license for future applications and tools developed with TenFold's technology. In April 1997, The Indus Group, Inc. acquired Prism Consulting, Inc. a private management-consulting firm, for $4.75 million of The Indus Group, Inc.'s stock at the then current market value and $250,000 in cash. Substantially all of the purchased cost was allocated to intangible assets and is included in investments and intangible assets. The Company has in the past and may in the future acquire complementary products or businesses. Risks associated with such transactions include difficulty in retaining and assimilating the personnel of the combined companies, difficulty in integrating the operations of the combined companies, disruption of Indus' ongoing business, expenses associated with completing the transaction and amortizing acquired intangible assets, and dilution of existing equity holders. There can be no assurance that such transactions will not materially adversely affect Indus' business, financial condition or operating results. 2 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:
Percentages of Total Revenues Years Ended December 31, ----------------------------------------- Statement of Operations Data: 1995 1996 1997 ----- ----- ----- Revenues: Software licensing fees ................................................... 32.2 % 30.1 % 31.6 % Services, maintenance and other ........................................... 67.8 69.9 68.4 ----- ----- ----- Total revenues .......................................................... 100.0 100.0 100.0 ----- ----- ----- Cost of revenues ............................................................. 47.0 44.6 44.4 ----- ----- ----- Gross margin ................................................................. 53.0 55.4 55.6 ----- ----- ----- Operating expenses: Research and development .................................................. 17.8 16.3 15.6 Sales and marketing ....................................................... 19.6 18.5 19.0 General and administrative ................................................ 12.8 10.5 8.5 Compensation charge - stock options ....................................... 18.6 -- -- Merger expenses ........................................................... -- -- 6.8 ----- ----- ----- Total operating expenses ................................................ 68.7 45.3 49.9 ----- ----- ----- Income (loss) from operations ................................................ (15.7) 10.2 5.7 Other income (expense) net ................................................... (2.1) (1.3) (1.1) ----- ----- ----- Income (loss) before income taxes ............................................ (17.8) 8.9 4.6 Provision (benefit) for income taxes ......................................... 0.4 4.8 3.6 Cumulative effect of deferred income taxes provided upon conversion by The Indus Group, Inc. to a C Corporation ....................... -- 4.7 -- ----- ----- ----- Income (loss) before extraordinary item ...................................... (18.2) (0.6) 1.0 Extraordinary item ........................................................... -- -- (0.4) ===== ===== ===== Net income (loss) ............................................................ (18.2) (0.6) 0.6 ===== ===== ===== Pro forma statement of operations as adjusted: Income (loss) before income taxes....................... (17.8) 8.9 Add back portion of compensation charge-stock options................................................. 17.6 -- ----- ----- Income (loss) before income taxes, as adjusted.......... (0.2) 8.9 Provision for income taxes (federal, state and foreign). 5.1 4.8 ----- ----- Pro forma net income (loss)............................. (5.3) 4.1 ===== =====
Revenues. The Company's revenues are derived from software licensing fees and from services, which include implementation and training services coupled with maintenance fees. Total revenues increased 40.5% from $101.8 million in 1995 to $143.0 million in 1996, and 23.8% to $177.0 million in 1997. The year over year increase in license fees is due to additional contracts with new and existing customers and to the change in revenue recognition policy by The Indus Group, Inc in 1997. The overall annual growth in services and maintenance revenue results from the high level of services required to fulfill the implementation needs of the customers. Revenue from international customers (from sales outside the United States, Canada and Mexico) accounted for 18%, 20% and 14% of revenues for the years ending December 31, 1995, 1996, and 1997, respectively. As most of the Company's contracts are denominated in U.S. dollars, foreign currency fluctuations have not impacted the results of operations. Effective in the three months ended September 30, 1997, The Indus Group, Inc. began to report applicable new license fees on standard software products not requiring substantial modification or customization as earned revenue upon shipment to customers. Previously, because substantial modification and customization of software products was expected by customers, The Indus Group, Inc. had deferred the applicable license fees initially and recognized those fees as earned over the period of modification, customization and other installation services. TSW International, Inc., which had not been required to perform substantial customization services, continued to recognize the applicable portion of license fees as earned upon shipment of standard software products to customers. The Company does not believe that the revenue growth experienced in 1997 is necessarily indicative of any revenue growth that may occur in future periods. Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and related costs for implementation (including account executive personnel), (ii) training and customer support services and (iii) sublicense fees to third parties upon the sale of the 3 Company's product containing such third-party software. Gross margin on license fees is substantially higher than gross margin on service revenue, reflecting the low packaging and production costs of software products and third party software costs compared with the relatively high personnel costs associated with providing implementation, maintenance, consulting and training services. Cost of revenues increased 33.1% from $47.9 million in 1995 to $63.7 million in 1996 and 23.3% to $78.6 million in 1997. The 1995 and 1996 increases resulted from the cost of increased services associated with major new license agreements as well as the cost of additional services associated with the expansion of existing projects. The 1997 increase in absolute dollars in cost of revenues was due principally to the need for additional personnel to service the Company's customers. As a percent of total revenue, cost of revenues was 47.0%, 44.6% and 44.4% for the years ended 1995, 1996, and 1997, respectively. Cost of revenues remained relatively flat as a percentage of revenue between 1996 and 1997. Gross Margin. Gross margin improved from 53% in 1995 to 55.4% and 55.6% in 1996 and 1997, respectively. Research and Development (R&D). Research and development expenses consist primarily of: (i) personnel and related costs, (ii) third party consultant fees directly attributable to the development of new software application products, enhancements to existing products and the porting of Indus' products to different platforms and (iii) computer timeshare costs. Research and development expenses increased 28.2% from $18.2 million in 1995 to $23.3 million in 1996 and 18.9% to $27.7 million in 1997, and represented 17.8%, 16.3%, and 15.6%, respectively, of total revenues in those years. While R&D expenses continue to increase year over year in absolute dollars, they declined as a percentage of total revenue due to the overall increase in revenues. During 1997, the Company invested resources in developing PASSPORT Release 6.0 which was completed by July 1997 and EMPAC Release 7.5 which was completed by August 1997. The Company believes that a significant level of investment in R&D is essential to remain competitive. Research and development in absolute dollars for a particular period may vary depending on the projects in progress. Software development costs are expensed as incurred until technological feasibility of the software is established, after which any additional costs are capitalized. To date, the Company has expensed all software development costs because development costs incurred subsequent to the establishment of technological feasibility have not been material. Sales and Marketing. Sales and marketing expenses include personnel costs, which include sales commissions involved in the sales and marketing of the Company's products and services and the costs of advertising, public relations and participation in industry conferences and trade shows. Sales and marketing expenses increased 33.2% from $19.9 million in 1995 to $26.5 million in 1996 and 26.6% to $33.6 million in 1997. As a percent of total revenue, sales and marketing expenses were 19.6%, 18.5%, and 19.0% for 1995, 1996, and 1997, respectively. The growth in sales and marketing expenses in absolute dollars is primarily due to: (i) the addition of personnel, (ii) expansion of strategic alliance program and (iii) changes in the mix of the revenue base on which commission expense is generated. The Company believes that sales and marketing expenses as a percentage of total revenues may continue to increase for the same reasons. General and Administrative. General and administrative expenses include the costs of finance, human resources and administrative operations. General and administrative expenses increased 15.0% from $13.0 million in 1995 to $15.0 million in 1996 and 1997. These expenses represented 12.8%, 10.5%, and 8.5% of total revenues in those years. General and administrative expenses in absolute dollars declined as a percentage of total revenues due to the growth in revenue and the relatively fixed nature of some portions of general and administrative expenses. General and administrative expenses are expected to increase in absolute dollars in future years. Compensation Charge - Stock Options. The Indus Group, Inc. amended its 1992 Stock Option Plan effective September 1995 to accelerate the exercisability of all outstanding stock options. Exercisability had previously been contingent upon certain "liquidity events" such as an initial public offering or an acquisition of The Indus Group, Inc. As a result of this amendment, The Indus Group, Inc. recognized a non-recurring compensation charge of $18.9 million in the third quarter of 1995. Merger and Restructuring. The Company recorded $9.98 million in merger related costs in 1997. This included approximately $6.7 million for transaction fees and professional services, $1.7 million for consulting services incurred by a significant shareholder and $1.6 million for other costs incident to the merger. In addition to the merger-related costs, the Company provided for costs and losses as a result of the restructuring of the Company totaling $ 2.1 million during 1997. Of the total cost, $0.9 million results from excess facilities and $1.2 million from termination costs of excess or redundant employees. Provision for Income Taxes. Income tax expense of $6.4 million represented $6.1 million of federal and state corporate income taxes for The Indus Group, Inc. for the year ended December 31, 1997 and $0.3 of foreign withholding taxes for TSW International, Inc. As of March 31, 1997, TSW International, Inc. has domestic net operating loss carryforwards in excess of $10.0 million which will expire in years 2010 through 2012; domestic research and experimental tax credits of approximately $0.78 million which expire in years 2010 to 2012; domestic and foreign tax credits of approximately $0.506 million which can be carried 4 forward indefinitely; and foreign net operating loss carryforwards of approximately $2.9 million which can be carried forward indefinitely. Those loss carryforwards were subject to a separate taxpayer limitation through December 31, 1997 because TSW International, Inc. remained a separate corporation until that date. No benefit has been accorded those carryovers in the accompanying financial statements. Effective upon its incorporation in 1990, The Indus Group, Inc. elected to have its United States income taxed under Subchapter S of the Code. Accordingly, income tax provisions prior to 1996 were principally attributable to state taxes and taxes imposed by foreign governments on The Indus Group, Inc.'s foreign operations. The Indus Group, Inc.'s S Corporation status terminated effective January 1, 1996, and The Indus Group, Inc. was subject to federal income taxation at the corporate level thereafter. In relation to the termination of S Corporation status as of January 1, 1996, a one-time charge representing a cumulative net federal and state deferred income tax liability of $6.7 million was recorded. Net Income (Loss) The Company's net income was $0.99 million in 1997 compared with a net loss of $0.875 million recorded in 1996, due primarily to increased revenues in the current year. The effect of the increase in revenues is offset by the factors described above and by the net of merger and restructuring charges recorded in 1997 and by the one-time income tax charge associated with the company's conversion to C Corporation status recorded in 1996. The loss in 1995 was in a large part a result of the non-recurring compensation charge upon elimination of the contingency related to stock options. Pro Forma Net Income (Loss). For purposes of presenting comparative earnings and calculating per share data, pro forma net income for the year ended December 31, 1996 reflects the elimination of the $6.7 million nonrecurring cumulative deferred income tax charge upon converting from an S Corporation to a C Corporation. For 1995 pro forma net income reflects the add-back of $17.9 million non-recurring compensation charge incurred upon the elimination of the contingency related to stock options. Liquidity and Capital Resources Historically, The Indus Group, Inc. has financed its activities primarily through cash provided by operations and borrowings under its line of credit. In March 1996, The Indus Group, Inc. received $33.9 million, representing the proceeds (net of underwriting commissions and offering costs) from an initial public offering of 2,500,000 shares of its common stock. These proceeds were used to purchase marketable securities (comprised of municipal and U.S. government obligations) and certain cash equivalent instruments. TSW International, Inc. financed its activities prior to the Merger largely through approximately $38.0 million provided by its principal shareholder in exchange for subordinated notes and preferred stock. Cash provided (used) by operations was ($7.7) million, $8.3 million and ($10.6) million in 1995, 1996 and 1997, respectively. Unbilled accounts receivable increased substantially due to the change in revenue recognition policy by The Indus Group, Inc. in 1997. Investing activities, consisting primarily of the purchase and sale of marketable securities, the acquisitions of investments and intangible assets, and the acquisition of property and equipment, used cash of $3.4 million, $35.7 million, and $5.2 million, in 1995, 1996 and 1997, respectively. Financing activities provided cash of $10.7 million and $13.1 million, in 1995 and 1997 primarily from the drawdown from the Company's lines of credit. Financing activities in 1996 generated cash of $40.9 million primarily from the issuance of redeemable preferred and common stock. As of December 31, 1997, the Company's principal sources of liquidity consisted of approximately $11.1 million in cash and cash equivalents, $16.7 million in marketable securities and a revolving bank line of credit of $35.0 million, which is secured by all of the Company's accounts receivables. The revolving credit facility expires July 31, 1999. The revolving credit facility bears an interest rate of the one month LIBOR rate plus 1.50% (7.19% as of December 31, 1997). This facility replaced and eliminated the prior revolving lines of credit of The Indus Group, Inc. and TSW International, Inc., which bore higher interest rates. Approximately $26.7 million had been drawn down under this line of credit at December 31, 1997. Cash requirements are expected to continue to increase in order to fund: (i) personnel and salary costs, (ii) research and development costs, (iii) investment in additional technical equipment, and (iv) working capital requirements. The Company presently anticipates additional capital expenditures of approximately $16 million in 1998, primarily for equipment and furniture. In addition to its line of credit, the Company's principal commitments at December 31, 1997 consisted of obligations under operating and capital leases for facilities and computer equipment. The Company believes that its existing cash and marketable securities, together with anticipated cash flow from operations and available bank borrowings, will be sufficient to meet its cash requirements during the next 12 months. The foregoing statement regarding the Company's expectations for continued liquidity is a forward-looking statement, and actual results may differ materially depending on a variety of factors, including variable operating results or presently unexpected uses of cash, such as for acquisitions. 5 Effects of Recent Accounting Pronouncements A new pronouncement containing rules for timing of recognition of software company revenues, particularly license fee revenues where there are multiple elements to be delivered under a contract or arrangement with a customer, will be effective for transactions beginning in 1998. Under the Company's current policy, license fees on standard software products not requiring substantial modification and customization are recognized as revenue upon shipment to customers. The Company has not yet assessed what the impact of these rules will be on its recognition of revenues in its 1998 financial statements. Other recent pronouncements relate primarily to disclosure matters and not to timing of recognition of income. One pronouncement will require disclosure of "comprehensive income", including items such as unrealized gains and losses on foreign currency translation and marketable securities, in addition to income determined under customary accounting rules. Another pronouncement will require additional or different "segment" footnote data. The Company has not yet assessed what the impact of these rules will be in terms of additional or changed disclosures to be included in its 1998 financial statements. Year 2000 Risk Disclosure Like most other companies, the year 2000 computer issue creates risk for the Company. If internal systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Company has initiated a comprehensive project to prepare its computer systems for the year 2000 and plans to have changes to critical systems completed by the first quarter of 1999 to allow time for testing. The Company is also assessing the capability of its products sold to customers over a period of years to handle the year 2000, but does not currently believe there are product issues. Management believes that the likelihood of a material adverse impact due to problems with internal systems or products sold to customers is remote and expects that the cost of these projects over the next two years will not have a material effect on the Company's financial position or overall trends in results of operations. The Company is also developing a plan to contact critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are year 2000 capable or to monitor their progress toward year 2000 capability. There can be no assurance that another company's failure to ensure year 2000 capability will not have an adverse effect on the Company. The Company's operating results are subject to general economic conditions and a variety of risks characteristic of the software industry or specific to the Company, any of which could cause the Company's operating results to differ materially from past results. 6 INDUS INTERNATIONAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS........................... 2 CONSOLIDATED BALANCE SHEETS................................................. 3 CONSOLIDATED STATEMENTS OF OPERATIONS....................................... 4 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY.............................. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS....................................... 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................. 8 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Boards of Directors and Stockholders Indus International, Inc. We have audited the accompanying consolidated balance sheets of Indus International, Inc. as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Indus International, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Palo Alto, California January 27, 1998 2 INDUS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, ------------------------------ 1996 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents ............................................................. $ 13,815 $ 11,052 Marketable securities ................................................................. 26,524 11,880 Billed accounts receivable, less allowance for doubtful accounts of $1,247 and $1,974 on December 31, 1996 and 1997, respectively ......................... 35,861 43,574 Unbilled accounts receivable .......................................................... 19,397 30,349 Other current assets .................................................................. 6,365 5,773 --------- --------- Total current assets ................................................................ 101,962 102,628 Marketable securities - noncurrent ....................................................... 2,129 4,818 Property and equipment, net .............................................................. 12,270 16,570 Investments and intangible assets, net ................................................... -- 12,119 Employee notes receivable ................................................................ 537 416 Other assets ............................................................................. 957 174 --------- --------- $ 117,855 $ 136,725 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under lines of credit ....................................................... $ 15,991 $ 26,650 Current portion of obligations under capital leases ................................... 960 2,404 Accounts payable ...................................................................... 7,006 8,430 Deferred income taxes ................................................................. 3,837 419 Other accrued liabilities ............................................................. 9,732 14,068 Deferred revenue ...................................................................... 21,372 13,419 --------- --------- Total current liabilities ........................................................... 58,898 65,390 --------- --------- Obligations under capital leases and term loans .......................................... 2,126 1,105 Subordinated long-term notes ............................................................. 18,065 -- Redeemable preferred stock of TSW International, Inc. .................................... 18,100 -- Stockholders' equity: Preferred stock ....................................................................... -- -- Common stock .......................................................................... 22 29 Additional paid-in capital ............................................................ 48,649 98,608 Other ................................................................................. (603) (1,719) Accumulated deficit ................................................................... (27,402) (26,688) --------- --------- Total stockholders' equity .......................................................... 20,666 70,230 --------- --------- $ 117,855 $ 136,725 ========= ========= See accompanying notes.
3 INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Years Ended December 31 --------------------------------------------------- 1995 1996 1997 --------- --------- --------- Revenues: Software licensing fees .......................................... $ 32,816 $ 43,060 $ 55,958 Services and maintenance ......................................... 67,824 97,515 119,382 Other revenue .................................................... 1,184 2,463 1,694 --------- --------- --------- Total revenues ................................................. 101,824 143,038 177,034 Cost of revenues .................................................... 47,872 63,738 78,575 --------- --------- --------- Gross margin ........................................................ 53,952 79,300 98,459 --------- --------- --------- Operating expenses: Research and development ......................................... 18,151 23,265 27,664 Sales and marketing .............................................. 19,915 26,523 33,568 General and administrative ....................................... 12,996 14,951 14,991 Compensation charge-stock options ................................ 18,900 -- -- Merger and restructuring expenses ................................ -- -- 12,083 --------- --------- --------- Total operating expenses ....................................... 69,962 64,739 88,306 --------- --------- --------- Income (loss) from operations ....................................... (16,010) 14,561 10,153 Interest and other income ........................................... 213 1,391 1,590 Interest expense .................................................... (2,325) (3,278) (3,558) --------- --------- --------- Income (loss) before income taxes ................................... (18,122) 12,674 8,185 Provision for income taxes .......................................... 423 6,849 6,408 Cumulative effect of deferred income taxes provided upon conversion by The Indus Group, Inc. to a C Corporation ............................................. -- 6,700 -- --------- --------- --------- Income (loss) before extraordinary item ............................. (18,545) (875) 1,777 Extraordinary item .................................................. -- -- (787) --------- --------- --------- Net income (loss) ................................................... $ (18,545) $ (875) $ 990 ========= ========= ========= Pro forma statement of operations as adjusted: Income (loss) before income taxes ................................ $ (18,122) $ 12,674 Add back portion of compensation charge-stock options ............................................. 17,900 -- --------- --------- Income (loss) before income taxes, as ............................ (222) 12,674 adjusted Provision for income taxes (federal, state and foreign) ..................................................... 5,181 6,849 --------- --------- Pro forma net income (loss) ...................................... $ (5,403) $ 5,825 ========= ========= Income (loss) per share (computed on pro forma net income (loss) in 1995 and 1996): Basic Income (loss) before extraordinary item .......................... $ (0.25) $ 0.22 $ 0.06 Extraordinary item ............................................... -- -- (0.03) --------- --------- --------- Net income (loss) ................................................ $ (0.25) $ 0.22 $ 0.03 ========= ========= ========= Diluted Income (loss) before extraordinary item .......................... $ (0.25) $ 0.20 $ 0.05 Extraordinary item ............................................... -- -- 0.02 --------- --------- --------- Net income (loss) ................................................ $ (0.25) $ 0.20 $ 0.03 ========= ========= ========= Shares used in computing per share data Basic ............................................................ 22,027 25,976 28,574 Diluted .......................................................... 22,027 28,821 33,448 See accompanying notes.
4 INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)
Total Common Additional Accumulated Stockholders' Stock Capital Other Deficit Equity -------- -------- -------- -------- -------- Balance at December 31, 1994 ........................... $ 131 $ 1,399 $ 13 $(13,389) $(11,846) Issuance of common stock ............................. 481 266 (480) -- 267 Stock options (1) .................................... -- 18,900 -- -- 18,900 Repurchase and retirement of stock ................... -- (122) -- -- (122) Issuance of warrants to common stock ................. -- 570 -- -- 570 Cash distributions to stockholders ................... -- -- -- (9,516) (9,516) Other ................................................ -- -- (181) -- (181) Net loss ............................................. -- -- -- (18,545) (18,545) -------- -------- -------- -------- -------- Balance at December 31, 1995 ........................... 612 21,013 (648) (41,450) (20,473) Conversion of The Indus Group, Inc. to a C Corporation effective January 1, 1996 ............ -- (8,223) -- 8,223 -- Reincorporation ...................................... (494) 494 -- -- -- Issuance of common stock (2) ......................... 4 35,399 -- -- 35,403 Tax benefit from exercise of stock options ........... -- 6,669 -- -- 6,669 Purchase of Indus International, Inc. net assets ............................................ (100) (3) -- -- (103) Other ................................................ -- -- 45 -- 45 Net loss ............................................. -- (6,700) -- 5,825 (875) -------- -------- -------- -------- -------- Balance at December 31, 1996 ........................... 22 48,649 (603) (27,402) 20,666 Issuance of common stock (3) ......................... -- 6,725 -- -- 6,725 Tax benefit from exercise of stock options ........... -- 3,479 -- -- 3,479 Capital contribution by a TSW shareholder ............ -- 1,717 -- -- 1,717 Reincorporation as Indus International, Inc. ......... (4) 4 -- -- -- Redemption of TSW subordinated notes (4) ............. 8 19,937 -- -- 19,945 Exchange of common stock for TSW redeemable preferred stock (5) .................... 3 18,097 -- -- 18,100 Other ................................................ -- -- (1,116) -- (1,116) Net income ........................................... -- -- -- 990 990 Elimination of TSW's net income for the three months ended March 31, 1997 (6) ............. -- -- -- (276) (276) -------- -------- -------- -------- -------- Balance at December 31, 1997 ........................... $ 29 $ 98,608 $ (1,719) $(26,688) $ 70,230 ======== ======== ======== ======== ======== See accompanying notes.
5 INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued) (1) Value of unexercised stock options of The Indus Group, Inc. upon elimination of contingency feature, which had precluded exercise of these options. (2) Includes $33,864 received from February 29, 1996 initial public offering of The Indus Group, Inc. (2,500,000 common shares offered at $15.00 per share less underwriting commission and expenses). (3) Includes $4,750 (339,285 shares of common stock at $14.00 per share) issued with $250 in cash to acquire a management consulting firm. (4) Redemption of TSW International, Inc. subordinated notes and accumulated interest in exchange for 1,235,879 common shares of Indus International, Inc. (5) Exchange of 8,049,025 common shares of Indus International, Inc. for redeemable preferred stock of TSW International, Inc. and 53,937 common shares for accumulated dividends. (6) Net income of TSW International, Inc. for the three months ended March 31, 1997, $276, included in both 1996 and 1997 combined operating results, as a result of change in TSW International, Inc.'s fiscal year end. See accompanying notes. 6 INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, -------------------------------------- 1995 1996 1997 -------- -------- -------- Cash flows from operating activities Net income (loss) ..................................................................... $(18,545) $ (875) $ 990 Elimination of TSW's net income for the three months ended March 31, 1997 ............. -- -- (276) Adjustments to reconcile net income (loss) to net cash used in operating activities: Compensation charge - stock options ................................................ 18,900 -- -- Depreciation and amortization ...................................................... 2,789 3,440 5,969 Provision for doubtful accounts .................................................... 747 370 891 Amortization of deferred compensation .............................................. 48 555 74 Loss on sale of fixed assets ....................................................... 89 -- 332 Write-off goodwill ................................................................. -- 688 -- Cumulative effect of deferred income taxes provided January 1, 1996 ................ -- 6,700 -- Tax benefit from exercise of stock options ......................................... -- -- 3,479 Merger expense resulting from equity transaction ................................... -- -- 2,009 Extraordinary charge to net income from debt extinguishment ........................ -- -- 787 Changes in operating assets and liabilities: Billed accounts receivable ....................................................... (9,455) (6,536) (8,604) Unbilled accounts receivable ..................................................... (9,909) (3,946) (10,952) Other current assets ............................................................. (316) (1,403) 592 Other assets ..................................................................... (22) (3,415) 798 Employee notes receivable ........................................................ 13 (61) 121 Accounts payable ................................................................. 355 (328) 1,424 Deferred income taxes ............................................................ 384 (3,189) (3,418) Income taxes payable ............................................................. 1,906 6,451 -- Other accrued liabilities ........................................................ 2,243 5,889 4,336 Deferred revenue ................................................................. 2,857 3,444 (7,953) Cumulative currency translation .................................................. (229) (9) (1,246) Other ............................................................................ 427 481 20 -------- -------- -------- Net cash (used)/provided by in operating activities .............................. (7,718) 8,256 (10,627) -------- -------- -------- Cash flows from investing activities Purchase of marketable securities ..................................................... -- (39,010) (3,104) Sale of marketable securities ......................................................... -- 10,314 15,100 Investments and intangible assets ..................................................... (642) -- (8,288) Acquisition of property and equipment ................................................. (2,767) (6,982) (8,901) -------- -------- -------- Net cash used in investing activities ................................................. (3,409) (35,678) (5,193) -------- -------- -------- Cash flows from financing activities Net drawdown/(repayment) of line of credit ............................................ 12,471 (81) 10,659 Net drawdown of capital leases/notes payable .......................................... 5,574 725 423 Net proceeds from issuance of redeemable preferred stock .............................. 2,000 5,000 -- Net proceeds from issuance of common stock ............................................ 145 35,399 1,975 Distributions to shareholders ......................................................... (9,517) -- -- Purchase of Indus International, Inc. net assets ...................................... -- (103) -- -------- -------- -------- Net cash provided by financing activities ............................................. 10,673 40,940 13,057 -------- -------- -------- Net increase/(decrease) in cash and cash equivalents .................................. (454) 13,518 (2,763) Cash and cash equivalents at beginning of period ...................................... 751 297 13,815 -------- -------- -------- Cash and cash equivalents at end of period ............................................ $ 297 $ 13,815 $ 11,052 ======== ======== ======== Supplemental disclosures of cash flow information Interest paid ......................................................................... $ 598 $ 1,464 $ 2,004 ======== ======== ======== Income taxes paid ..................................................................... $ 523 $ 5,712 $ 4,775 ======== ======== ======== Supplemental schedule of noncash, investing and financing activities Issuance of common stock in exchange for notes receivable ............................. $ 480 $ -- $ -- Issuance of common stock in exchange for TSW subordinated notes and redeemable preferred stock ............................................................ -- -- 38,045 ======== ======== ======== Issuance of common stock in exchange for investment ................................... $ -- $ -- $ 4,750 ======== ======== ======== See accompanying notes
7 INDUS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Significant Accounting Policies Organization and Business Business Indus International, Inc. develops, markets and supports a proprietary line of enterprise asset management software and implementation services. The Company serves as an agent of change for its customers, who seek to improve their return on investment and efficiencies in core business functions in the utilities and energy industry, process, discreet and consumer packaged goods companies, as well as educational, municipal and transportation authorities worldwide. Merger The Indus Group, Inc. entered into an agreement and plan of merger and reorganization on June 5, 1997 with TSW International, Inc., a Georgia corporation (the "Merger"), pursuant to which The Indus Group, Inc. and TSW International, Inc. each became subsidiaries of a new Delaware corporation named Indus International, Inc. (the "Company") which was formed for the purpose of the transactions contemplated under the Merger. On December 31, 1997, the Company's subsidiaries, The Indus Group, Inc. and TSW International, Inc., each merged with and into the Company (the "Roll-up Merger"). The Company, as the surviving corporation, assumed all obligations of the two subsidiaries, in connection with the Roll-up Merger. The Merger was consummated on August 25, 1997, as a tax-free reorganization pursuant to the provisions of Section 368 of the Internal Revenue Code of 1986, and has been accounted for as a pooling of interests. In connection with the Merger, (a) each share of outstanding common stock of The Indus Group, Inc. was converted into one share of Common Stock of the Company ("Common Stock") and (b) each outstanding share of common stock of TSW ("TSW Common Stock"), and each outstanding share of preferred stock of TSW ("TSW Preferred Stock"), was converted into approximately 2.73 shares of the Company's Common Stock; (c) the outstanding subordinated floating rate notes of TSW (including accrued interest thereon) were exchanged for an aggregate of 1,235,879 shares of the Company's Common Stock; (d) all rights to receive any unpaid dividends on TSW Preferred Stock were converted into an aggregate of 53,937 shares of the Company's Common Stock and (e) each outstanding option or warrant to purchase TSW Common Stock was converted into an option or warrant, respectively, to purchase that number of shares of the Company's Common Stock determined by multiplying the number of shares of TSW Common Stock subject to such option or warrant by approximately 2.73, at an exercise price per share of the Company's Common Stock equal to the exercise price per share of TSW Common Stock pursuant to such option or warrant divided by approximately 2.73. Based on the capitalization of TSW International, Inc. as of August 25, 1997, approximately 10.2 million shares of the Company's Common Stock were issued in the transaction and the Company has reserved approximately 7.9 million shares of its Common Stock for issuance pursuant to the assumption of outstanding options and warrants to purchase TSW Common Stock. As a result of the transaction, the Company incurred charges to operations of $9.98 million of Merger related costs during fiscal 1997 that primarily related to approximately $6.7 million for transaction fees and professional services, $1.7 million for consulting services incurred by a significant stockholder and $1.6 million for other costs incident to the Merger. Of the total charge, cash outflow to date is $7.6 million and $700,000 are future outflows as of December 31, 1997. The future outflows will primarily be paid during the next 9 months. In addition to the Merger related costs, the Company accrued costs and losses for the restructuring of the Company totaling $2.1 million. Of the total cost, $916,000 results from excess facilities that will be vacated and $1.2 million from termination costs of excess or redundant employees. Of the total charge, cash outflow to date is $404,000. Prior to the Merger, TSW International, Inc. used a fiscal year ending on March 31. Accordingly, the restated financial statements combine the March 31, 1996 and March 31, 1997 financial statements of TSW International, Inc. with the December 31, 1995 and 1996 financial statements of The Indus Group, Inc., respectively. Revenues and the net income of TSW International, Inc. for the three-month period ended March 31, 1997 were $21.4 million and $0.3 million respectively, with the net income reflected as an adjustment to retained earnings effective January 1, 1997. 8 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Separate results of the combined entities for the years 1995 and 1996 and for the period ending August 25, 1997 (date of Merger) are as follows (in thousands):
The Indus Group TSW Combined --------------- --------- --------- Eight months ended August 25, 1997 (Unaudited) Revenue .......................................................... $ 57,862 $ 28,034 $ 85,896 --------- --------- --------- Net Income (loss) ................................................ 5,680 (2,887) 2,793 ========= ========= ========= 1996 Revenue .......................................................... 75,939 67,099 143,038 --------- --------- --------- Net Income (loss) ................................................ 2,528 (3,403) (875) ========= ========= ========= 1995 Revenue .......................................................... 53,791 48,033 101,824 --------- --------- --------- Net Loss ......................................................... $ (6,820) $ (11,725) $ (18,545) ========= ========= =========
Significant Accounting Policies Basis of Presentation All periods include the combined results of The Indus Group, Inc. and TSW International, Inc. on a pooling-of-interests basis, as a result of the Merger effective August 25, 1997. The consolidated financial statements include the accounts of Indus International, Inc. and its subsidiaries (collectively, the Company). All significant intercompany balances and transactions have been eliminated. The functional currencies of the Company's foreign subsidiaries are their respective local currencies. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are included in stockholder's equity. Revenue Recognition The Company provides its software to customers under contracts which provide for both software license fees and system implementation services. Revenues from system implementation services, which generally are time- and material-based, are recognized as direct contract costs are incurred. Effective in the quarter ended September 30, 1997, The Indus Group, Inc. began to report applicable new license fees on standard software products not requiring substantial modification or customization as earned revenue upon shipment to customers. Previously, because substantial modification and customization of software products was expected by customers, The Indus Group, Inc. had deferred the applicable license fees initially and recognized those fees as earned over the period of modification, customization and other installation services. TSW International, Inc. which had not been required to perform substantial customization services, continued to recognize the applicable portion of license fees as earned upon shipment of standard software products to customers. A portion of license fees is deferred initially and subsequently recognized over the one-year period during which continuing maintenance and support services are provided to customers under the contracts. After that initial contract period, additional maintenance and support services are subject to separate contracts for which revenue is recognized ratably over the contract period. Unbilled accounts receivable represent amounts related to revenue which has been recorded either as deferred revenue or earned revenue but which has not been billed. Generally, unbilled amounts are billed within 90 days. Deferred revenue represents primarily unearned license fees and unearned maintenance and support fees. 9 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Concentration of Credit Risk The Company's customers are generally large companies in the utilities and energy industry, process, discreet and consumer packaged goods companies, as well as educational, municipal and transportation authorities. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company maintains allowances for potential credit losses and such losses have been within management's expectations. No individual customers represented greater than 10% of sales in 1995, 1996 and 1997. Cash Equivalents and Marketable Securities The Company considers all highly liquid, low risk debt instruments with a maturity of three months or less from the date of purchase to be cash equivalents. The Company generally invests its cash and cash equivalents in money market accounts and agency repurchase agreements, which are secured by government agency securities. The Company presently classifies all marketable securities as available-for-sale investments and carries them at fair market value. Marketable securities represent U.S. government obligations and indirect investments in municipal obligations. Marketable securities classified as long-term mature no later than July 1, 1999. Unrealized holding gains and losses, net of taxes, are included in stockholders' equity. Property and Equipment Property and equipment is stated at cost. Equipment under capital leases is stated at lower of fair market value or the present value of the minimum lease payments at the inception of the lease. Depreciation on office and computer equipment and furniture is computed using the straight-line method over estimated useful lives of four to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or their estimated useful lives. Capitalized Software No amounts related to internally developed software have been capitalized. Purchased software costs included in other assets resulted principally from the acquisition by TSW International, Inc. of SQL Systems International plc. These costs are amortized over three years, the estimated life of the related product. Amortization expense recorded in 1995, 1996, and 1997 was approximately $356,000, $459,000, and $294,000 respectively. Investments and Intangibles, net In 1997, The Indus Group, Inc. acquired convertible preferred stock in Tenfold Corporation, a privately held software company in the development stage, for approximately $8 million in cash. This investment, which if converted would result in a 10% interest, is carried at cost. Also in 1997, The Indus Group, Inc. acquired a management consulting firm for $4.75 million in common stock (339,285 shares of The Indus Group, Inc. valued at $14 per share) and $250,000 in cash. The $5 million acquisition cost is being amortized over a four year period, which is consistent with the related employment, confidentiality and non-competition agreements. Advertising Costs Advertising costs are charged to expense in the period the costs are incurred. Advertising expense was approximately $370,000, $486,000 and $472,000 in 1995, 1996, and 1997, respectively. 10 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Income Taxes Effective January 1, 1996, The Indus Group, Inc. elected C Corporation status for income tax purposes. Prior to 1996, The Indus Group, Inc. was an S Corporation and, as a result, income determined on the cash basis for income tax purposes was taxable to the shareholders, and not The Indus Group, Inc., for federal and certain state income tax purposes. In connection with the termination of S Corporation status on January 1, 1996, a $6.7 million cumulative effect charge was recorded. The majority of the cumulative effect charge is due to changing from the cash basis of accounting as an S Corporation to the accrual basis of accounting as a C Corporation. The related deferred tax liability is payable over four years. TSW International, Inc. had accumulated operating loss carryovers of approximately $10.3 million through its fiscal year end March 31, 1997 (included with the December 31, 1996 year end of The Indus Group, Inc.). Those loss carryovers were subject to a separate taxpayer limitation through December 31, 1997 because TSW International, Inc. remained as a separate corporation until that date. No benefit has been accorded those carryovers in the accompanying financial statements. The provision for income taxes included in the accompanying financial statements represents state and foreign taxes in all years and federal income taxes of The Indus Group, Inc. and Indus International, Inc. for 1996 and 1997, without any benefit for the operating losses or operating loss carryovers of TSW International, Inc. Pro Forma Statement of Operations Data Pro forma net income data in 1995 includes a $1 million nonrecurring compensation charge representing the fair value of the options granted in 1995 and excludes an $18.9 million nonrecurring compensation charge representing the value of unexercised non-qualified stock options upon elimination of the contingency feature. The contingency feature was intended to preserve The Indus Group, Inc.'s S Corporation qualification by limiting the number of shareholders. If The Indus Group, Inc. had not been an S Corporation, no liquidity event contingency feature would have been necessary and the value of all stock options would have been measured at their grant dates. Pro forma net income in 1995 and 1996 reflects provisions for income taxes assuming The Indus Group, Inc. was taxed as a C Corporation in both years. Per Share Data The average outstanding share numbers used in computing basic earnings per share data in 1997 and pro forma basic earnings (loss) per share data in 1995 and 1996 reflect the average outstanding shares of each of the merged companies, as adjusted for the effective exchange rates, and also the equivalent common shares required for the redemption of the preferred stock of TSW International, Inc. As a result of new accounting pronouncements, certain additional equivalent shares are no longer included in the computation. Additional equivalent shares related to options and warrants are included in the diluted computations only. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Recent Accounting Pronouncements A new pronouncement containing rules for timing of recognition of software company revenues, particularly license fee revenues where there are multiple elements to be delivered under a contract or arrangement with a customer, will be effective for transactions beginning in 1998. Under the Company's current policy, license fees on standard software products not requiring substantial modification and customization are recognized as revenue upon shipment to customers. The Company has not yet assessed what the impact of these rules will be on its recognition of revenues in its 1998 financial statements. Other recent pronouncements relate primarily to disclosure matters and not to timing of recognition of income. One pronouncement will require disclosure of "comprehensive income", including items such as unrealized gains and losses on foreign currency translation and marketable securities, in addition to income in determined under customary accounting rules. Another pronouncement will require additional or different "segment" footnote data. The Company has not yet assessed what the impact of these rules will be in terms of additional or changed disclosures to be included in its 1998 financial statements. 11 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 2. Marketable Securities The following is a summary of marketable securities, all of which are available for sale (in thousands):
Gross Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------- ------- -------- ------- 1996 U.S. Treasury securities and obligations of U.S. government agencies .................................. $16,067 $ -- $ (65) $16,002 Municipal obligations ........................................ 13,628 23 -- 13,651 ------- ------- -------- ------- $29,695 $ 23 $ (65) $29,653 ======= ======= ======== ======= Included in: Cash and cash equivalents .................................... $ 1,000 $ -- $ -- $ 1,000 Short term investments ....................................... 26,579 10 (65) 26,524 Long term investments ........................................ 2,116 13 -- 2,129 ------- ------- -------- ------- $29,695 $ 23 $ (65) $29,653 ======= ======= ======== ======= 1997 U.S. Treasury securities and obligations of U.S. government agencies .................................. $ -- $ -- $ -- $ -- Municipal obligations ........................................ 23,649 24 -- 23,673 ------- ------- -------- ------- $23,649 $ 24 $ -- $23,673 ======= ======= ======== ======= Included in: Cash and cash equivalents .................................... $ 6,975 $ -- $ -- $ 6,975 Marketable securities-current ................................ 11,874 6 -- 11,880 Marketable securities-non current ............................ 4,800 18 -- 4,818 ------- ------- -------- ------- $23,649 $ 24 $ -- $23,673 ======= ======= ======== =======
There have been no significant realized gains or losses on sales of marketable securities. 3. Property and Equipment Property and equipment is recorded at cost and consists of the following (in thousands): 1996 1997 ------- ------- Furniture & fixtures ................................... $ 3,984 $ 4,615 Office equipment ....................................... 16,383 19,089 Leasehold improvements ................................. 2,391 2,617 Capitalized software ................................... 1,899 2,763 Capital lease .......................................... -- 4,104 ------- ------- $24,657 $33,188 Less accumulated depreciation and amortization ......... 12,387 16,618 ------- ------- $12,270 $16,570 ======= ======= 12 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 4. Other Accrued Liabilities Other accrued liabilities consists of the following (in thousands): December 31 ---------------------- 1996 1997 ------- ------- Merger and restructuring ......................... $ -- $ 1,898 Accrued commissions .............................. 2,257 3,089 Accrued payroll and related expenses ............. 2,093 2,674 Other accrued liabilities ........................ 5,382 6,407 ------- ------- $ 9,732 $14,068 ======= ======= 5. Lines of Credit The Company has a revolving bank line of credit of $35.0 million, which is secured by all of the Company's accounts receivables. The revolving credit facility expires on July 31, 1999 and bears an interest rate of the one month LIBOR rate plus 1.5% (7.19% as of December 31, 1997). This facility replaced and eliminated The Indus Group, Inc. and TSW International, Inc., revolving lines of credit, which bore higher interest rates. Borrowings outstanding under this line of credit were $26.7 million at December 31, 1997. Stand-by letters of credit outstanding on this line of credit were $0.6 million at both December 31, 1996 and 1997, respectively. The line of credit agreement contains certain affirmative and negative covenants. The Company was in compliance with these covenants at December 31, 1997. 6. Related Party Transactions Immediately prior to the Merger, TSW International, Inc. had subordinated long-term notes of $15,706,000 and accrued interest of $4,075,000 that were payable to its principal stockholder. The notes bore an interest rate of prime plus 1.5% with varying maturity dates from July 31, 1999 to October 13, 2000. Pursuant to the Merger, the outstanding subordinated floating rate notes of TSW International, Inc. and accrued interest were exchanged for an aggregate of 1,235,879 common shares of the Company. Deferred issuance costs in connection with the notes were written off as an extraordinary item in 1997. In 1997, TSW International, Inc. forgave two notes receivable from officers and stockholders totaling $457,000. TSW International, Inc. lent an additional $161,850 to the individuals for payment of taxes in conjunction with the note forgiveness. The Company held employee notes receivable totaling $537,000 and $416,000 at December 31, 1996 and 1997, respectively, from officers and employees of the Company. In 1995, TSW International, Inc. purchased approximately $557,000 of specified research and development services from a company in which its principal shareholder had an ownership interest for a portion of the year. Through 1995, The Indus Group, Inc had a software license and royalty agreement with its Chief Executive Officer and principal shareholder. In 1995, accrual and payment under this agreement was waived. 13 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 7. Commitments The Company leases its office facilities under various operating lease agreements. The leases require monthly rental payments in varying amounts through 2005. These leases also require the Company to pay all property taxes, normal maintenance, and insurance on the leased facilities. Total rental expense under these leases (in thousands) was approximately $4,508, $6,683 and $5,215 for 1995, 1996 and 1997, respectively. Future minimum lease payments under all non-cancelable operating leases are as follows (in thousands): Operating Capital Years Ending December 31 Leases Leases - ------------------------ ------ ------ 1998 .......................................... $ 4,347 $ 2,404 1999 .......................................... 4,441 1,053 2000 .......................................... 3,919 197 2001 .......................................... 2,419 19 2002 .......................................... 1,899 4 Thereafter .................................... 4,057 -- ------- ------- Total minimum payments required .................... $21,082 $ 3,677 ======= Less amounts representing interest ................. 168 ------- Present value of future lease payments ............. $ 3,509 Less current portion ............................... 2,404 ------- Long term portion .................................. $ 1,105 ======= In 1995, Sumitomo Bank issued four irrevocable stand-by letters of credit totaling $29,967. In 1996, Sumitomo Bank issued two additional irrevocable stand-by letters of credit totaling $370,000. These letters are a requirement of two of the Company's licensing agreements. This letter of credit requirement will terminate in January 1998. In 1996, Nations Bank issued an irrevocable standby letter of credit for $200,000, as a requirement for a licensing agreement. In 1997, this letter of credit was increased to $325,000. This letter of credit will expire March 1998. 8. Stockholders' Equity On June 4, 1997, the articles of incorporation for Indus International, Inc. were filed. The following is a summary of the authorized and issued Preferred and Common Stock of Indus International, Inc: December 31 1997 ------------ Preferred Stock Authorized shares, $.001 par value per share ............... 10,000,000 Issued and outstanding ..................................... -- Amount ..................................................... $ -- Common Stock Authorized shares, $.001 par value per share ............... 100,000,000 Issued and outstanding ..................................... 29,935,980 Amount (in thousands) ...................................... $ 29,936 14 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 8. Stockholders' Equity - (Continued) The Board of Directors is authorized, subject to any limitations prescribed by Delaware law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, preferences and rights of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding), without any further vote or action by the stockholders. The Board of Directors may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power of other rights of the holders of Common Stock. Thus, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of Preferred Stock. In June 1995, The Indus Group, Inc. issued 162,622 shares of common stock to several employees in exchange for notes aggregating $109,626. The notes will be forgiven over a five-year period provided the note holders continue their employment with the Company. Additional deferred compensation of $370,000 was recorded for the difference between the notes and the deemed fair value of the shares at the date of issuance. The $479,626 total deferred compensation is being amortized over the five-year period. 9. Stock Plans Stock Option and Benefit Plans Upon consummation of the Merger, The Indus Group, Inc. and TSW International, Inc. stock option plans terminated and each outstanding option under the plans as well as any individual non-plan options of TSW International, Inc. were assumed and converted into options to purchase Indus International, Inc. Common Stock, at the respective exchange rates in the Merger. The Company has two stock option plans under which employees, directors and consultants may be granted rights to purchase Common Stock. 1997 Stock Option Plan The 1997 Stock Option Plan (the "Stock Plan") provides for the grant of incentive stock options to employees, including officers and directors, and consultants of the Company or any subsidiary of the Company. A total of 5,000,000 shares has been reserved for issuance under the Stock Plan. The incentive stock options will be granted at not less than fair market value of the stock on the date of grant. The options will generally vest over one to four years and have a maximum term of ten years. 1997 Director Stock Option Plan Each director who is not an employee of the Company is automatically granted a nonstatutory stock option to purchase 10,000 shares of Common Stock of the Company (the "First Option") on the date such person becomes a director or, if later, on the effective date of the 1997 Director Stock Option Plan (the "Director Option Plan"). Thereafter, each such person will automatically be granted an option to acquire 2,500 shares of the Company's Common Stock (the "Subsequent Option") upon such outside director's re-election at each Annual Meeting of Stockholders, provided that on such date such person has served on the Board of Directors for at least six months. A total of 200,000 shares have been reserved for issuance under the Director Option Plan. Each option granted under the Director Option Plan will become exercisable as to 25% of the Shares subject to such option on each anniversary of its date of grant. 15 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 9. Stock Plans - (Continued) The activity under the option plans, combined, was as follows:
Options Outstanding -------------------------- Shares Available Number of Price for Grant Shares Per Share ---------------- --------- --------- Balances at December 31, 1994 7,040,963 2,748,197 $ 0.28 - $ 1.65 Shares reserved .......... -- -- Options granted .......... (627,847) 627,847 $ 0.35 - $ 4.20 Options canceled ......... 56,440 (56,440) $ 0.28 Options exercised ........ -- -- ---------- ---------- Balances at December 31, 1995 6,469,556 3,319,604 $ 0.28 - $ 4.20 Shares reserved .......... 1,600,000 -- Options granted .......... (2,925,942) 2,925,942 $ 3.38 - $22.75 Options canceled ......... 7,350 (7,350) $ 0.28 - $16.50 Options exercised ........ -- (916,845) $ 0.28 - $ 0.69 ---------- ---------- Balances at December 31, 1996 5,150,964 5,321,351 $ 0.28 - $22.75 Shares reserved .......... 8,400,000 -- Options granted .......... (4,396,604) 4,396,604 $ 3.94 - $25.75 Options canceled ......... 577,466 (577,466) $ 0.28 - $25.00 Options exercised ........ -- (784,481) $ 0.28 - $15.00 Plan shares expired ...... (8,027,326) -- ========== ========== Balances at December 31, 1997 1,704,500 8,356,008 $ 0.28 - $25.75 ========== ==========
1992 Stock Option Plan (former Indus Group, Inc.) Under a stock option plan of The Indus Group, Inc. effective prior to its becoming a C Corporation, options granted would not be exercisable until a "liquidity event" had occurred. A liquidity event was defined as the sale of more than 20% of the voting stock interest to an independent party or parties or an acquisition of the Company, which would result in termination of the plan. Options granted would expire on the earlier of termination of employment or ten years. Upon expiration of an option, the Company was obligated to pay the optionee the increase in book value over the term of the option ("the book value appreciation feature"). If any options were exercised, the Company would retain the right to repurchase the issued shares at their then book value upon termination of employment. As of September 29, 1995, the Board of Directors eliminated the liquidity event contingency, thereby causing the options then outstanding as to 1,791,970 common shares to be exercisable in their entirety. As a result, these options were valued as of September 30, 1995 for financial statement purposes and a one-time charge of $18,900,000 was recorded in the statement of operations. The book value appreciation feature, in the event of expiration of an option, also was eliminated at that time. 1997 Employee Stock Purchase Plan Indus International, Inc. has an employee stock purchase plan under which 1,000,000 shares of Common Stock have been reserved for issuance. The plan allows for eligible employees to purchase stock at 85% of the lower of the fair market value of the Company's Common Stock as of the first day of each six-month offering period or the fair market value of the stock at the end of the offering period. The initial offering period began November 1997. Purchases will be limited to 10% of each employee's compensation. The Company has not issued any stock under the plan. Under a prior employee stock purchase plan of The Indus Group, Inc. 71,309 and 39,101 shares were issued in 1996 and 1997, respectively, at prices ranging from $12.75 to $17.21 per share. 16 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 10. Alternative Method of Valuing Stock Options For employee stock options granted with exercise prices at or above the existing market price and without any contingent feature as to the optionee's ability to exercise (other than the passage of time as a continuing employee), the Company records no compensation expense. The following pro forma data is based on an alternative in which employee stock options granted after 1994 are valued at grant date based on the Black-Scholes option pricing model, a model that was developed to value options subject to an active trading market. Although employee stock options are not subject to a trading market, active or inactive, the pro forma disclosures that follow are required by applicable accounting pronouncements. The Indus Group, Inc. estimated the fair value for these options at the date of grant using the minimum value method for 1995 and the Black-Scholes option pricing model for 1996 and 1997, with the following weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of 6.0%, 5.75% and 6.43%, dividend yields of 0%; volatility factors of the expected market price of the company's stock of 0.0, 0.75 and 0.60; and an expected life of the options of one, four and six years. TSW International, Inc. estimated the fair value for these options at the date of grant using the minimum value option pricing model for 1995 and 1996 and the Black-Scholes option pricing model for 1997, with the following weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of 5.86%, 6.15% and 6.43%, dividend yields of 0%; volatility factors of the expected market price of the company's stock of 0.0, 0.0 and 0.60, and an expected life of the options of five years for 1995, 1996 and 1997. Indus International, Inc. has estimated the fair value for the options at the date of grant using the Black-Scholes option pricing model, with the following weighted-average assumptions for 1997: risk-free interest rate of 6.43%, dividend yield of 0%, volatility factor of the expected market price of the company's stock of 0.60, and an expected life of the options of six years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information net income (loss) including pro forma compensation expense, net of tax for the years ended December 31, 1995, 1996 and 1997, respectively, is as follows (in thousands except for earnings per share information): 1995 1996 1997 -------- -------- -------- Pro forma net income (loss)........... $(20,207) $ 5,740 $ (1,546) Pro forma net income (loss) per share. $ (0.92) $ 0.22 $ (0.05) 17 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 10. Alternative Method of Valuing Stock Options - (Continued) The following table summarizes information about stock options outstanding as of December 31, 1997.
Options Options Outstanding Exercisable -------------------------------------------- ------------------------ Weighted- Weighted- Weighted- Average Average Average Number of Remaining Exercise Number of Exercise Range of Exercise Prices Shares Contractual Life Price Shares Price ------------------------ ----------- ---------------- ----- -------- ----- $ 0.28 - $ 1.65 1,752,531 4.56 $ 1.06 1,573,470 $ 0.99 $ 2.20 - $ 2.20 8,354 7.24 2.20 8,354 2.20 $ 3.38 - $ 3.38 1,894,485 8.70 3.38 927,132 3.38 $ 3.94 - $13.50 486,212 9.27 5.47 103,657 5.02 $13.75 - $13.75 3,290,750 9.85 13.75 - - $14.13 - $25.75 923,676 8.58 16.62 179,256 16.67 --------- ---- ------- --------- ------- Total 8,356,008 8.30 $ 8.56 2,791,869 $ 2.95 ========= ==== ======= ========= =======
The weighted average fair value of options granted in 1995, 1996 and 1997 is $3.91, $8.57 and $8.20, respectively, using these alternative methods of valuation. 11. Employee Benefit and Profit-Sharing Plans The Company has a defined contribution 401(K) plan. All employees over the age of 21 who have completed at least one-half year of service are eligible to participate. Each participant may elect to have amounts deducted from his or her compensation and contributed to the plan up to 15% of his or her base salary. All contributions are fully vested at the time the employee becomes an active participant. The Company also has a profit sharing plan. All employees over the age of 21 who have completed at least one-half year of service are eligible to participate. Contributions to the plan are at the discretion of the board of directors and are made to eligible employees' individual accounts in proportion to their base salary. Contribution expense related to the profit sharing plan for 1995, 1996 and 1997 was approximately $238,000, $250,000 and $250,000, respectively. 18 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 12. Geographic Information Geographic information is as follows (in thousands):
1995 1996 1997 --------- --------- --------- Net sales (based on destination) United States .......................................................... $ 79,287 $ 101,691 $ 135,763 International (including United States exports shown below): Europe ............................................................... 9,259 16,891 14,668 Asia ................................................................. 5,060 7,987 7,070 Canada ............................................................... 1,772 12,252 15,422 Other ................................................................ 6,446 4,217 4,111 --------- --------- --------- Total International ....................................................... 22,537 41,347 41,271 --------- --------- --------- Total consolidated net sales ........................................... $ 101,824 $ 143,038 $ 177,034 ========= ========= ========= Income from operations United States .......................................................... $ 42,011 $ 56,377 $ 75,506 International: Europe ............................................................... 4,906 9,364 8,158 Asia ................................................................. 2,681 4,428 3,932 Canada ............................................................... 939 6,792 8,577 Other ................................................................ 3,416 2,338 2,286 Corporate administrative and other expenses ............................... (69,962) (64,738) (88,306) Interest and other expenses, net .......................................... (2,113) (1,887) (1,968) ========= ========= ========= Total consolidated income (loss) before income taxes ...................... $ (18,122) $ 12,674 $ 8,185 ========= ========= ========= Identifiable assets United States .......................................................... $ 41,536 $ 100,105 $ 118,918 International: Europe ............................................................... 8,025 8,834 5,490 Asia ................................................................. 2,163 3,951 3,225 Canada ............................................................... 3,114 3,228 5,895 Other ................................................................ 2,896 1,737 3,197 ========= ========= ========= Total consolidated identifiable assets .................................... $ 57,734 $ 117,855 $ 136,725 ========= ========= ========= United States export sales (reported in international sales above) Europe ............................................................... $ 2,017 $ 7,337 $ 3,201 Asia ................................................................. 1,766 2,326 871 Canada ............................................................... 1,772 12,252 15,422 Other ................................................................ 6,446 4,217 4,069 ========= ========= ========= Total consolidated export sales ........................................... $ 12,001 $ 26,132 $ 23,563 ========= ========= =========
19 INDUS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 13. Income Taxes The provision for income taxes (state and foreign only in 1995) consists of the following (in thousands): 1995 1996 1997 -------- -------- -------- Current: Federal ..................... $ -- $ 7,639 $ 7,993 State and foreign ........... 193 2,497 1,823 -------- -------- -------- Deferred: ...................... 193 10,136 9,816 -------- -------- -------- Federal ..................... -- (2,522) (3,057) State and foreign ........... 230 (765) (351) -------- -------- -------- 230 (3,287) (3,408) -------- -------- -------- $ 423 $ 6,849 $ 6,408 ======== ======== ======== The effective rate of the provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before provision for income taxes as follows: Percentage -------------- 1996 1997 ---- ---- Federal statutory rate ................... 35.0 % 35.0 % Merger expenses .......................... -- 41.1 State taxes, net of federal benefit ...... 6.5 9.3 Foreign Taxes ............................ 2.3 3.7 FSC benefit .............................. (2.3) (1.5) R&D credit ............................... (1.1) (4.8) TSW NOL tax benefit, net ................. 8.6 (10.3) Other .................................... 5.0 5.8 ---- ---- 54.0 % 78.3 % ==== ==== The 1996 and 1997 current federal and state tax provisions do not reflect the tax savings of $6,669,000 and $3,479,000, respectively resulting from deductions associated with the exercise of stock options by employees in 1996. This tax benefit has been included in additional capital. Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred tax liability are as follows (in thousands): December 31, -------------------- 1996 1997 -------- -------- Accounts receivable allowances ......................... $ (444) $ (804) Tax over book depreciation and amortization ............ 703 782 Nondeductible accruals ................................. (1,287) (2,100) Deferred licensing fee revenue ......................... (7,027) (4,641) State income taxes ..................................... (339) (672) Conversion from cash to accrual basis of accounting .... 8,612 5,542 Net operating loss and tax credit carryforwards ........ (6,445) (6,826) Other, net ............................................. -- (2) -------- -------- Subtotal ............................................ (6,227) (8,721) Less valuation allowance ............................... 10,064 9,140 -------- -------- Net deferred tax liability ............................. $ 3,837 $ 419 ======== ======== The additional taxable income resulting from the change by The Indus Group, Inc. from the cash to accrual basis of accounting for income taxes in 1996 will be reportable in taxable income over the years 1996 through 1999. The valuation allowance is attributable to TSW International, Inc.'s net operating loss and tax credit carryforwards and other temporary differences on the date of the Merger. 20 EX-21.1 3 LIST OF SUBSIDIARIES EXHIBIT 21.1 INDUS INTERNATIONAL, INC. LIST OF SUBSIDIARIES NAME OF SUBSIDIARY (AND DOING BUSINESS AS) STATE OF INCORPORATION ------------------------------------------ ---------------------- Indus Group North America, Inc. California Indus Foreign Sales Corporation U.S. Virgin Islands TSW International, Ltd. United Kingdom TSW International, S.A. France TSW International Pty Ltd. Australia TSW International Software Pte. Ltd. Singapore EX-23.1 4 CONSENT OF ERNST & YOUNG LLP, IND. AUDITORS EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Indus International, Inc. of our report dated January 27, 1998, included in the 1997 Annual Report to the Stockholders of Indus International, Inc. Our audits also included the financial statement schedule of Indus International, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-36995) pertaining to the 1997 Stock Plan, 1997 Director Option Plan and 1997 Employee Stock Purchase Plan of Indus International, Inc. of our report dated January 27, 1998, with respect to the consolidated financial statements of Indus International, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Palo Alto, California March 26, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Indus International, Inc.'s, Annual Report on Form 10-K for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 0001041333 INDUS INTERNATIONAL, INC. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 11,052 11,880 45,548 (1,974) 0 102,628 33,188 (16,618) 136,725 65,390 0 0 0 29 70,201 136,725 0 177,034 0 78,575 88,306 0 3,558 8,185 6,408 1,777 0 (787) 0 990 0.03 0.03
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