-----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, SmS8p19QUgpGCNMHZXpc+YClHKLQHCpcdlG1nZn6rKlgIvpALp1gU5v4hicMg99I j2EOLTejPLFx8FKuKMF4Zw== 0001041333-99-000004.txt : 19990331 0001041333-99-000004.hdr.sgml : 19990331 ACCESSION NUMBER: 0001041333-99-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 99576889 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 10-K405 ================================================================================ - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year Ended December 31, 1998, 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 10, 1999 as reported on the Nasdaq National Market, was approximately $42,177,854. 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 31,774,206 at March 10, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of Stock- holders to be held May 4, 1999 are incorporated by reference in Part III hereof, to the extent stated herein. - -------------------------------------------------------------------------------- ================================================================================ TABLE OF CONTENTS PART I ITEM 1. DESCRIPTION OF BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL INFORMATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SIGNATURES PART I ITEM 1. DESCRIPTION OF BUSINESS General Indus International, Inc. ("the Company") develops, markets, implements and supports enterprise asset management software and service solutions for capital intensive 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 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 certain industry-specific vendors to create a software series that provides seamless interoperability with corporate and financial applications, expert systems, and certain 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 intensive markets include: electric and gas utilities, telecommunications providers, petrochemical refineries, mining and metals manufacturers, forest product producers, consumer packaged goods manufacturers, 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 Indus sales organization. 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 global 7 (days a week) x 24 (hours a day) multilingual customer support. The Company believes this combination of enterprise software, vertically oriented consulting services and worldwide customer support enables customers to increase equipment and production capacity, reduce operating costs, and safeguard the workforce and the environment. The Company is a leading provider of systems, products, and services addressing the highly specialized needs of the Enterprise Asset Management (EAM) market. As of December 31, 1998, the Company products were licensed for use by over 300,000 end users representing 440 customers in 48 countries. 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. 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") 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 Merger was consummated on August 25, 1997. 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. Products and Services The Company offers software products and service packages, which incorporate sophisticated EAM 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, and Safety and Compliance Systems, which seamlessly integrate to third party corporate financial systems from Oracle, PeopleSoft, and other providers. Beyond providing departmental information to affected workgroups throughout the customer organization, 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), web-based electronic commerce, and handheld mobile units to enable 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, geographic information, outage management, and customer information applications systems available, and other industry-specific programs included in the Company's Business Partner Alliance program. The Indus Software Solutions EAM application business systems comprising the Indus Solution Series are designed to reflect the requirements of specific vertical industry function, and the technical architecture traditionally employed in these industries. The resultant transaction engines are 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 uniquely position Indus to deliver a total solution across the enterprise. Indus Solution Series for Energy and Communications Indus Software Solutions for Energy and Telecommunications provide a series of business applications and business process improvement service packages which meet the needs of both integrated electric and gas utilities or standalone 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. The specific needs of communications companies are also addressed in a related offering for these firms. Specific packaged solutions in this series include: Indus Solution Series for Nuclear Power Generation Indus Solution Series for Conventional Power Generation Indus Solution Series for Energy Delivery Indus Solution Series for Department of Energy Indus Solution Series for Telecommunications Indus Solution Series for Integrated Manufacturing Indus Software Solutions for Integrated Manufacturing provide a set of business applications, which meet the needs of capital-intensive 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 solutions in this series include: Indus Solution Series for Oil,Gas & Chemical Indus Solution Series for Metals & Mining Indus Solution Series for Pulp & Paper Indus Solution Series for Consumer Packaged Goods Indus Solution Series for Public Sector Indus Software Solutions for Public Sector provide a set of business applications which meet the needs of municipalities, public works departments, school districts, universities, and other entities that require robust enterprise and facilities management software to help attract private funds, upgrade infrastructures, and provide services where required. Specific packaged solutions in this series include: Indus Solution Series for Municipalities Indus Solution Series for Higher Education Product Architecture and Development Strategy for Indus Products Commercial Off-the-shelf Technology. The Company utilizes industry- standard tools and technologies to develop its products, enabling Software Solutions comprising this series to evolve along with rapidly emerging standards and best business practices. The Company's Products are 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. The Company's architecture utilizes the functionality of both Oracle and IBM's DB2 databases with both text- based and graphical user interfaces. Commencing with its latest product releases, the Company provides versions of its client products on the Internet, for both E-Commerce (Extranet) and internal (Intranet) applications. The Company's "next generation" clients also support a Windows Explorer navigational ability, which can be accessed from the native product client as well as the Internet. The Company is also the first EAM vendor to provide a suite of Mobile Computing modules to support critical field and warehouse business practices. Partitioned Application Architecture. The layers of the Company's application architecture-the user interface, business logic, data storage, workflow and browser interface-are interoperable but not interdependent and support an n-tier environment. For example, changes to the database layer are not dependent on the user interface. The partitioning built into the Company 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 Company's architecture is designed to be an open system with Application Program Interfaces ("APIs") that enable easy interoperability and extension at the application level. The APIs are 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. The Company's applications can be installed in a network configuration to enable 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. The efficient network architecture inherent in its Indus products 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 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 Company's entire product suite, as well as implementation requirements and best practice selections of interest to specific vertical industries. A critical component of the ABACUS implementation is the partnership between the software provider (the Company) and the customer. At the outset of the project, the Company assigns a Project Manager or Account Executive to help ensure a successful, on-schedule implementation. Throughout the implementation process, the Company's/Customer's team defines and then executes a customer-specific, yet time-proven, implementation process that focuses heavily on critical Business Process Improvement (BPI) and Return on Investment (ROI) processes to drive current and future customer success. The Company has also developed alliances with several of the "big five" firms as well as smaller third party implementers and providers. This ensures that customers with specific requirements can leverage the value-added services of these firms when implementing the Indus Solution Series. 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. These workbenches include programming tools, data services workbenches for data load and system interface exercises, data migration tools, and archiving mechanisms. 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 leverages critical third party components, such as RDBMS, Network, and Operating system tools, to help customers manage their software both during implementation and production. 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. Indus Education Services and Products, the Company's training division, designs, manages, and implements comprehensive education and training solutions for its user community. The Company's training and technical professionals provide instructional design and courseware development services, training coordination support, train-the-trainer and end-user programs, and technical training for customer installations worldwide. In addition, the Company has developed a comprehensive set of training courseware 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. The Company also provides computer-based and web-based training modules to provide additional value to customers who desire these training needs. Finally, the Indus Solution Series product online help and wizards, including its CoPilot tool, help to guide the new user through standard work processes by providing context-sensitive assistance and pop-up screens. 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-intensive markets include: electric and gas utilities, telecommunications providers, petrochemical refineries, mining and metals, forest products producers, consumer packaged goods manufacturers, educational systems, and governmental institutions. As of December 31, 1998, 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 or 1998. Sales and Marketing The corporate marketing function is organized into vertical business areas, which comprise capital intensive facilities and process industries targeted by the Company. By segmenting the market into vertical business areas, the Company can package and deliver its products and service offerings effectively to the industries it serves. As discussed in the Indus Solution Series discussion earlier, these markets and subsectors consist of the following:
Energy/Communications - ------------------------------- Nuclear power generation Conventional power generation Energy delivery Department of Energy Telecommunications Integrated Process Manufacturing - ------------------------------- Oil, Gas, and Chemical Metals and Mining Pulp and Paper CPG Public Sector - ------------------------------- Municipalities Higher Education
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 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, 1998, the Company's Sales and Marketing organization consisted of 138 employees. The marketing staff is based at the Company's corporate headquarters in San Francisco, while the sales organization is decentralized throughout the three operational centers. The direct sales cycle begins with the generation of a sales lead, or the receipt of a request for proposal from a prospect, which is followed by qualification of the lead, an analysis of the customer's needs, response to a request for proposal, one or more presentations to the customer utilizing the special knowledge of the industry vertical pre- sales staff, customer internal sign-off activities, and contract negotiation and finalization. While the sales cycle varies depending on the customer, the sales cycle generally requires 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 ongoing customer communication programs through IndusWorld, the Company's international user group. In addition, the Company's Account Manager Program provides regional support and specialized attention for each of its customers. Account Managers assist in implementing licensed applications over multi-year engagements, promote licensing of additional applications, and encourage existing customers to identify and help fund new applications. 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 staff leveling 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, PriceWaterhouseCoopers, 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 with evolving releases of software and hardware upgrades. Cooperative marketing, joint trade show participation, and vendor fair participation at the the CompanyWORLD EXPO 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, Identitech, Inc., Intermat, Meridium Corporation, Primavera, Sqribe Technologies Corporation, Tadcom, and Telxon Corporation. For the Energy Delivery Industry, Energy Delivery integration is provided with AM/FM/GIS solutions from Intergraph, SHL Vision and Smallworld Corporation. 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 extending the capabilities of the products to interoperate with selected third-party software products available from alliance partners such as Oracle, PeopleSoft and others. These efforts include developing new applications that address new horizontal and vertical functions, which enhances the intellectual property content of the Company's offerings and ensures 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, 1998, the Company had 311 employees engaged in research and development. The Company's research and development expenses were approximately $23.3 million, $27.7 million, and $30.4 million in 1996, 1997 and 1998 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, the Company's principal competitor, and other software vendors such as Mincom, PSDI, Marcam, and Datastream. 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 point applications, including Severn Trent and Logica. 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. 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, 1998, the Company employed 1,037 people, of which 311 were primarily engaged in research and development activities, 494 in post-sales support and customer project operations, 138 in sales and marketing, and 94 in administration and finance. None of the Company's employees is 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, 1998 were as follows:
Name of Nominee Age Principal Occupation - ------------------------- ----- ------------------------------------------ Robert W. Felton....... 60 Chief Executive Officer and Chairman of the Board William J. Grabske .... 56 President and Chief Operating Officer Kerry P. Lamson ....... 47 Senior Vice President of Worldwide Marketing Philip C. Mezey ....... 39 Senior Vice President of Development Robert A. Pocsik ...... 57 Senior Vice President of Human Resources and Administration C. Jeffrey Simpson .... 49 Executive Vice President of Worldwide Sales Albert J. Wood ........ 42 Vice President of Finance and Treasurer
- ---------------- 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. Mr. Felton is a founder of The Indus Group, Inc. and has been on the Board of Directors since the consummation of the Merger on August 25, 1997. He served as Chairman of the Board until March 17, 1999. He also served as Chief Executive Officer of the Company until December 31, 1998. From 1988 until August 25, 1997, he was the Chairman, President and Chief Executive Officer of The Indus Group, Inc. Mr. Grabske was elected as Chief Executive Officer and director of the Company on January 1, 1999. He was also elected as Chairman of the Board of Directors on March 17, 1999. He has served as President since June 15, 1998. From June 15, 1998 until December 31, 1998, he served as Chief Operating Officer of the Company. From September 1995 to June 1998, Mr. Grabske was President of the Utilities Industry at EDS, a technical services company. From August 1990 to August 1995, Mr. Grabske was Senior Vice President a Managing Director of JWP International, a technical services company. Mr. Lamson has served as Senior Vice President of Worldwide Marketing of the Company since May 1998. From March 1996 to April 1998, Mr. Lamson was Vice President of Applications Product Marketing for Oracle Corporation, an information management software company. From January 1993 to March 1996, Mr. Lamson was Director of Electronic Commerce and Integration Products for Systems Software Associates, an enterprise application software company. Mr. Mezey has served as Senior Vice President of Development of the Company since July 1998. Prior to July 1998, he was Vice-President of Development of the Company since the consummation of the Merger on August 25, 1997. From January 1991 to August 25, 1997, he was the Vice President of Development of The Indus Group, Inc. Mr. Pocsik has served as Senior Vice President of Human Resources and Administration since October 1998. From January 1997 to June 1998, he served as Managing Director of Imcor, an executive development and search firm. From December 1992 to December 1997, he was President and Chief Executive officer of Haden Wegman, an engineering infra-structure firm. Mr. Simpson became a consultant to the Chief Executive Officer on January 1, 1999 and left the Company March 1999. Mr. Simpson served as Executive Vice President of Worldwide Sales since May 1998. From July 1996 to May 1998, he invested in and consulted in several startup software companies in Atlanta. Prior to July 1996, he served as Field Vice President of the Communications Industry at Oracle Corporation, an information management software company. Mr. Wood has served as Vice President of Finance and Treasurer since December 1997. From September 1996 to September 1997, Mr. Wood was Controller for Prism Solutions, a software and consulting services company. From November 1993 to September 1996, Mr. Wood was Director of Finance/Treasurer and Sales Controller for Pyramid Technology, a computer manufacturing and consulting services company. 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. Volatility of Operating Results Fluctuating Operating Results. The Company's operating results have fluctuated in the past, and the Company's results may fluctuate significantly in the future depending on a number of factors, including (i) the relatively long sales cycles for its products, (ii) the variable size and timing of individual license transactions, (iii) changes in demand for their products and services, (iv) competitive conditions in the industry, (v) changes in customer budgets, (vi) the timing of the introduction of new products or product enhancements by each such company or its competitors, (vii) their success in and costs associated with developing and introducing new products, (viii) product life cycles, (ix) variability in new licenses obtained, (x) changes in the proportion of revenues attributable to license fees versus services, (xi) changes in the level of operating expenses, (xii) delay or deferral of customer implementations of their software, (xiii) software defects and other product quality problems, and (xiv) other economic conditions generally or in specific process industry segments. Further, the purchase of the Company's products generally involves a significant commitment of capital, with the attendant delays frequently associated with large capital expenditures and authorization procedures within large organizations. For these and other reasons, the sales cycles for the Company's products are typically lengthy and subject to a number of significant risks over which each such company has little or no control, including customers' budget constraints and internal authorization reviews. In addition, delays in the completion of a product implementation may require that the revenues associated with such implementation be recognized over a longer period than originally anticipated. Such delays in the implementation or execution of orders have caused, and may in the future cause, material fluctuations in the Company's operating results. Similarly, customers may cancel implementation projects at any time without penalty, and such cancellations could have a material adverse effect on the Company's business or results of operations. Because the Company's expenses are relatively fixed, a small variation in the timing of recognition of specific revenues can cause significant variations in operating results from quarter to quarter and may in some future quarter result in losses or have a material adverse effect on the Company's business or results of operations. Additional factors that may contribute to future fluctuations in the Company's quarterly operating results include, but are not limited to: (i) development and introduction of new operating systems that require additional development efforts; (ii) introduction or enhancement of products by the Company or its competitors; (iii) changes in pricing policies of the Company or its competitors; (iv) increased competition; (v) technological changes in computer systems and environments; (vi) the ability of the Company to timely develop, introduce and market new products; (vii) quality control of products sold; (viii) market acceptance of new products and product enhancements; (ix) the Company's success in expanding its sales and marketing programs; (x) personnel changes; (xi) foreign currency exchange rates; (xii) mix of products sold; (xiii) acquisition costs; and (xiv) general economic conditions. Management of Growth; Dependence on Key Personnel The Company's business has grown rapidly in recent periods, with total revenues increasing from $143.0 million in 1996 to $177.0 million in 1997 and $195.5 million in 1998. The growth of the Company's business and expansion of customer base has placed a strain on management and operations. The recent expansion has also resulted in substantial growth in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations, resulting in increased responsibility for management personnel. In the future, the Company will be required to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and to expand, train and manage its employee work force. There can be no assurance that the Company will be able to effectively manage such growth. Our failure to do so would have a material adverse effect on its business, operating results and financial condition. Competition for qualified sales, technical and other personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified employees in the future. If the Company were unable to hire and retain such personnel, particularly those in key positions, its business, operating results and financial condition would be materially adversely affected. The Company's future success also depends in significant part upon the continued service of its key technical, sales and senior management personnel. The loss of the services of one or more of this key employees could have a material adverse effect on its business, operating results and financial condition. Additions of new and departures of existing personnel, particularly in key positions, can be disruptive and have a material adverse effect on the Company's business, operating results and financial condition. Intense Competition The enterprise asset management software solutions business is highly competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. The Company's 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., Project Software & Development, Inc.and DataStream, 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 is developing PassBook integration products to provide interoperability with Oracle's corporate financial applications and PeopleSoft's corporate financial, payroll and human resources 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 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. Rapid Technological Change; Need to Develop New Products; Requirement for Frequent Product Transitions The industries in which the Company participates are intensely competitive and characterized by rapid technological change, evolving industry standards in computer hardware and software technology changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies, the emergence of new standards or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, the Company's success will depend in part upon its ability to continue to enhance existing products and expand its products, continue to provide enterprise solutions and develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve customer acceptance. Customer requirements include, but are not limited to, product operability and support across distributed and changing heterogeneous hardware platforms, operating systems, relational databases and networks. There can be no assurance that the Company's products will achieve customer acceptance or will adequately address the changing needs of the marketplace or that the Company will be successful in developing and marketing enhancements to its existing products or new products incorporating new technology on a timely basis. The Company has in the past experienced delays in product development, and there can be no assurance that the Company will not experience further delays in connection with its current product development or future development activities. If the Company is unable to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially and adversely affected. Because the Company has limited resources, the Company must effectively manage and properly allocate and prioritize its product development efforts and its porting efforts relating to newer products and operating systems. There can be no assurance that these efforts will be successful or, even if successful, that any resulting products or operating systems will achieve customer acceptance. International Operations International revenue (from sales outside the United States, Canada and Mexico) accounted for approximately 20%, 14% and 13% of total revenues in 1996, 1997 and 1998, respectively. The Company maintains an operational presence in the United Kingdom and France. In addition, the Company has established sales and support offices in Europe and Australia; 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 may require significant management attention and financial resources and could adversely affect the Company's operating margin. To the extent the Company is unable to effect these additions efficiently and in a timely manner, its growth, if any, in international sales will be limited, and its business, operating results and financial condition could be materially and adversely affected. There can be no assurance that the Company will be able to maintain or increase international market demand for its products. The Company's international business will also involve a number of additional risks, including lack of acceptance of localized products, cultural differences in the conduct of business, longer accounts receivable payment cycles, greater difficulty in accounts receivable collection, seasonality due to the slow-down in European business activity during the Company's third fiscal quarter, unexpected changes in regulatory requirements and royalty and withholding taxes that restrict the repatriation of earnings, tariffs and other trade barriers, and the burden of complying with a wide variety of foreign laws. The Company's international sales will be generated primarily through its international sales subsidiaries and indirect sales channel partners and are expected to be denominated in local currency, creating a risk of foreign currency translation gains and losses. To the extent profit is generated or losses are incurred in foreign countries, the Company's effective income tax rate may be materially and adversely affected. In some markets, localization of the Company's products will be essential to achieve market penetration. The Company may incur substantial costs and experience delays in localizing its products, and there can be no assurance that any localized product will ever generate significant revenue. There can be no assurance that any of the factors described herein will not have a material adverse effect on the Company's future international sales and operations and, consequently, its business, operating results and financial condition. Recent economic trends, particularly in the Asia-Pacific marketplace, have caused a heightened awareness of the impact this portion of the world's economy can have on the overall economy. As the Asia-Pacific market currently represents almost one-third of the world's buying power and approximately 3% of the Company's revenues are to this region, changes in this area's economic growth rate may impact suppliers of product into that market. While the actual magnitude of the business at risk is unknown, it is likely that capital spending in this market will decrease and thus, the Company's ability to increase revenues in this region may be negatively impacted. Dependence on Proprietary Technology; Risks of Infringement The Company's success is heavily dependent upon its proprietary technology. The Company will rely on a combination of the protections provided under applicable copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements, to establish and protect its proprietary rights. As part of its confidentiality procedures, the Company will generally enter into non-disclosure agreements with its employees, distributors and corporate partners, and license agreements with respect to its software, documentation and other proprietary information. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse engineer or obtain and use information that the Company regards as proprietary the Company's products or technology without authorization, or to develop similar technology independently. Moreover, the laws of certain countries do not protect the Company's proprietary rights to the same extent, as do the laws of the United States. Furthermore, the Company has no patents, and existing copyright laws afford only limited protection. The Company will make source code available for certain of its products and the provision of such source code may increase the likelihood of misappropriation or other misuses of the Company's intellectual property. Accordingly, there can be no assurance that the Company will be able to protect its proprietary software against unauthorized third party copying or use, which could adversely affect the Company's competitive position. The Company is not aware that any of its products infringe the proprietary rights of third parties. There can be no assurance that a third party will not assert that the Company's technology violates its patents in the future. As the number of software products in the industry increases and the functionality of these products further overlap, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims, with or without merit, can be time consuming and expensive to defend or could require the Company to enter into royalty and licensing agreements. Such claims might require the Company to enter into royalty or license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. Lengthy Sales and Implementation Cycle; Large Order Size The purchase and implementation of the Company's software solutions by a customer will generally involve a significant commitment of capital over a long period of time, with the risk of delays frequently associated with large capital expenditures and implementation procedures within an organization, such as budgetary constraints and internal approval review. During the sales process, the Company may devote significant time and resources to a prospective customer, including costs associated with multiple site visits, product demonstrations and feasibility studies, and experience significant delays over which the Company will have no control. In addition, following license sales, the implementation of the Company's products will involve a lengthy process, including customer training and consultation. A successful implementation will require a close working relationship between the Company, the customer and, if applicable, third party consultants and systems integrators who assist in the process. These factors may increase the costs associated with completion of any given sale, and risks of cancellation or delay of such sales. Dependence on Licensed Technology Elements of the Company's products, particularly in its EMPAC workflow engine, are licensed from third parties under license agreements. The loss of the Company's right to use and license such technology could limit the Company's ability to successfully market certain modules of EMPAC. While the Company believes that the it would be able to either license or develop alternatives to such component technologies, there can be no assurance that the Company would be able to do so, or that such alternatives would achieve market acceptance or be available on a timely basis. Failure to obtain the necessary licenses or to develop needed technologies could have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Third Parties Implementation and development of EMPAC software depends on proprietary technology licensed from third parties. Implementation of EMPAC requires the use of the Windows environment licensed from Microsoft Corporation. The introduction and increased market acceptance of operating systems that are incompatible with the Company's products, or the failure of Microsoft's operating systems to achieve continued market acceptance, could adversely affect the market for the Company's products. EMPAC also relies on certain proprietary features of the database management system developed by Oracle. The introduction and increased market acceptance of database management systems that are incompatible with the Company's products, or the failure of Oracle products to achieve continued market acceptance, could adversely affect the market for the Company's products. In addition, certain elements of EMPAC have been developed in PowerBuilder, a client/server development product that has been traditionally database independent. Sybase, Inc. acquired Powersoft Corporation, which licenses PowerBuilder, in 1994. If PowerBuilder does not continue to be database independent, future development of the Company's Windows-based components which operate in conjunction with the Oracle database management system may be adversely affected. Although the Company's strategy has been to develop software products that are minimally dependent on any particular element of the underlying platform, there can be no assurance that the Company will be able to avoid the obsolescence of its products due to rapid technological change and evolving industry standards. Risk of Software Defects; Product Liability The sale and support of the Company's products may entail the risk of product liability claims. The license agreements of the Company typically contain provisions designed to limit exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Past and Future Acquisitions. The Company, as well as its predecessor corporations, The Indus Group, Inc. and TSW International, Inc. has made acquisitions in the past. Acquisitions of companies, divisions of companies or products entail numerous risks, including difficulty in successfully assimilating acquired operations, diversion of management's attention and loss of key employees of acquired companies. In 1997, The Indus Group, Inc. completed two acquisitions. In 1994 and 1995, TSW International, Inc. concluded a total of three acquisitions of companies, divisions of companies or products. The Company may make additional acquisitions in the future. Products acquired by The Indus Group, Inc. and TSW International, Inc. in the past required significant additional development before they could be marketed and some failed to generate any revenue for The Indus Group, Inc. or TSW International, Inc. Any problems related to acquisitions could have a material adverse effect on the Company's business, operating results and financial condition. In addition, future acquisitions by the Company may result in dilutive issuance of equity securities, incurring additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense. These factors could have a material adverse effect on the Company's business, operating results and financial condition. ITEM 2. PROPERTIES Certain information concerning the Company's office space at December 31, 1998 is set forth below:
Location Principal use Footage Ownership - -------------------------------------- -------------------------------- --------- --------- Domestic Offices: Atlanta, GA...................... Regional Headquarters, Research 105,654 Lease and Development, Sales and Marketing, Operations San Francisco, CA................ Corporate Headquarters, Research 79,513 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 1,975 Lease International Offices: Woking, Surrey, United Kingdom... Regional Operations 9,300 Lease Brisbane, Australia.............. Regional Operations 6,695 Lease Paris, France..................... Regional Operations 6,660 Lease Chertsey, Surrey, United Kingdom. Regional Operations 5,500 Lease Toronto, Canada.................. Regional Operations 2,180 Lease Executive offices in Australia Sales 650 Lease
In the third and fourth quarter of 1998, the Company entered into additional lease agreements for additional office space, in Canada and San Francisco of 2,180 and 12,835 square feet, respectively. Management is currently and will continue to evaluate additional leased facilities to accommodate the anticipated growth in operations for 1999. 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 1998. 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 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 Fiscal 1998: First quarter.................................... $ 10-1/2 $ 7 Second quarter................................... 12 8 Third quarter.................................... 11-1/2 4-7/8 Fourth quarter................................... 7 3 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 10, 1999 was 375. 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 consolidated financial statements and notes thereto and other financial information included elsewhere herein. During 1997, The Indus Group, Inc. entered into an Agreement and Plan of Merger and Reorganization with TSW International, Inc. The merger was consummated on August 25, 1997 and was accounted for as a pooling of interests. All financial information was restated to reflect the combined operations of The Indus Group, Inc. and TSW International, Inc. The summary consolidated statements of operations data for the years ended December 31, 1996, 1997, and 1998 and summary consolidated balance sheet data as of December 31, 1997 and 1998 are derived from and qualified by reference to the audited financial statements of the Company which are included elsewhere herein. The summary consolidated balance sheet data as of December 31, 1994, 1995 and 1996 and the summary consolidated statement of operations for the years ended December 31, 1994 and 1995 are derived from the audited financial statements of the Company which are not included herein. INDUS INTERNATIONAL, INC. SUMMARY CONSOLIDATED FINANCIAL DATA
Years Ended December 31, --------------------------------------- --------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- (in thousands, except per share data) Statement of operations data: Revenues: Software licensing fees (1) (2) ................. $15,380 $32,816 $43,060 $55,958 $55,546 Services and maintenance ........................ 41,901 67,824 97,515 119,382 138,956 Other revenue ................................... 824 1,184 2,463 1,694 975 --------- --------- --------- --------- --------- Total revenues ................................ 58,105 101,824 143,038 177,034 195,477 Cost of revenues ................................... 27,664 47,872 63,738 78,575 103,517 --------- --------- --------- --------- --------- Gross margin ....................................... 30,441 53,952 79,300 98,459 91,960 --------- --------- --------- --------- --------- Operating expenses: Research and development ....................... 19,063 18,151 23,265 27,664 30,372 Sales and marketing ............................. 13,084 19,915 26,523 33,568 31,517 General and administrative ...................... 10,352 12,996 14,951 14,991 15,270 Compensation charge-stock options (3) ........... -- 18,900 -- -- -- Merger and restructuring expenses(4) ............ -- -- -- 12,083 -- --------- --------- --------- --------- --------- Total operating expenses ...................... 42,499 69,962 64,739 88,306 77,159 --------- --------- --------- --------- --------- Income (loss) from operations ...................... (12,058) (16,010) 14,561 10,153 14,801 Other income (expense) net ......................... (783) (2,112) (1,887) (1,968) (936) --------- --------- --------- --------- --------- Income (loss) before taxes ......................... (12,841) (18,122) 12,674 8,185 13,865 Provision (benefit) for income taxes ............... (1,195) 423 6,849 6,408 450 Cumulative effect of deferred income taxes provided upon conversion by Indus to C Corporation(5) ..................................... -- -- 6,700 -- -- --------- --------- --------- --------- --------- Income (loss) before extraordinary item ............ (11,646) (18,545) (875) 1,777 13,415 Extraordinary item ................................. -- -- -- (787) -- --------- --------- --------- --------- --------- Net Income (loss) .................................. ($11,646) ($18,545) ($875) $990 $13,415 ========= ========= ========= ========= ========= 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) - basic (7) .... ($0.25) $0.22 $0.03 $0.44 ========= ========= ========= ========= Shares used in computing per share data ............ 22,027 25,976 28,574 30,717 ========= ========= ========= =========
December 31, --------------------------------------- --------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- (in thousands) Balance sheet data: Working capital .................................. $226 ($291) $43,064 $37,238 $58,609 Total assets ..................................... 39,857 57,734 117,855 136,725 150,785 Short-term debt .................................. 4,496 16,481 16,951 29,054 21,005 Long-term debt ................................... 665 1,222 2,126 1,105 257 Subordinated long-term notes ..................... 9,650 16,251 18,065 -- -- TSW redeemable preferred stock ................... 11,100 13,100 18,100 -- -- Total stockholder's equity ....................... (11,846) (20,473) 20,666 70,230 86,075 (1) Effective in the third quarter of 1997, Indus International, 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. (3) Reflects nonrecurring expense incurred in the third quarter of 1995 in connection with an amendment to The Indus Group, Inc.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. (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. (7) After $0.03 per share loss from extraordinary item in 1997. Fully diluted per share amounts differ in 1996 ($0.20) and 1998 ($0.38).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements located in the Research and Development, Sales and Marketing, and Liquidity and Capital Resources sections as a result of the factors set forth below, among others. 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) the percentage of license fees attributable to third party software, (xi) changes in the level of operating expenses, (xii) delay or deferral of customer implementations of the Company's software, (xiii) software defects and other product quality problems, and (xiv) effect of AICPA Statements of Position on the Company's revenue recognition, (xv) 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. 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.. On December 31, 1997, the Company's subsidiaries, The Indus Group, Inc. and TSW International, Inc., each merged with and into the Company. The Company, as the surviving corporation, assumed all obligations of the two subsidiaries. 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. See Note 1 to the Consolidated Financial Statements Other risks relating to the Company's business as a result of the Merger include: (i) the Combined Company's ability to manage growth; (ii) the utilization by the Company of new distribution channels; and (iii) risks relating to the successful integration of current and future products and technologies. 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. Revenues from software license fees, which typically have ranged from approximately $100,000 to $5 million for initial software license fees, are recognized as earned revenue in accordance with AICPA Statement of Position 97-2, Software Revenue Recognition, when persuasive evidence of arrangement exists, delivery has occurred, the license fee is fixed and determinable and collection of the resulting receivable is deemed probable. 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. had 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 depend in part on revenues from the closing of new contracts during the year. 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, Indus International, 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 purchase cost was allocated to intangible assets and is included in investments and intangible assets. In September 1998, the Company purchased the right, title and interest to the intellectual property related to radiological recording and tracking software called Total Exposure for $469,000. The $469,000 acquisition cost is being amortized over a two and a half-year period. 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 the company's 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. 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: 1996 1997 1998 ---------- ---------- ---------- Revenues: Software licensing fees ................... 30.1% 31.6% 28.4% Services, and maintenance and other ....... 69.9% 68.4% 71.6% ---------- ---------- ---------- Total revenues .......................... 100.0% 100.0% 100.0% Cost of revenues ............................. 44.6% 44.4% 53.0% ---------- ---------- ---------- Gross margin ................................. 55.4% 55.6% 47.0% ---------- ---------- ---------- Operating expenses: Research and development .................. 16.3% 15.6% 15.5% Sales and marketing ....................... 18.5% 19.0% 16.1% General and administrative ................ 10.4% 8.5% 7.8% Merger and restructuring expenses ......... -- 6.8% -- ---------- ---------- ---------- Total operating expenses ................ 45.2% 49.9% 39.4% ---------- ---------- ---------- Income (loss) from operations ................ 10.2% 5.7% 7.6% Other income (expense) net ................... -1.3% -1.1% -0.5% ---------- ---------- ---------- Income (loss) before income taxes ............ 8.9% 4.6% 7.1% Provision for income taxes ................... 4.8% 3.6% 0.2% 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 ...... -0.6% 1.0% 6.9% Extraordinary item ........................... -- -0.4% -- ---------- ---------- ---------- Net income (loss) ............................ -0.6% 0.6% 6.9% ========== ========== ========== Pro forma statement of operations as adjusted: Income (loss) before income taxes ......... 8.9% Provision for income taxes (federal, state and foreign) .............................. 4.8% ---------- Pro forma net income (loss) ............... 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 23.8% from $143.0 million in 1996 to $177.0 million in 1997, and 10.4% to $195.5 million in 1998. The increase in total revenue is largely attributable to the growth in services revenue, which was partially offset by a decrease in license fees, due to lower than anticipated licensing agreements with new and existing customers in 1998. 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 20%, 14% and 13% of revenues for the years ending December 31, 1996, 1997, and 1998, respectively. As most of the Company's existing contracts are denominated in U.S. dollars, foreign currency fluctuations have not significantly impacted the results of operations. 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 1998 is necessarily indicative of any revenue growth that may occur in future periods. Cost of Revenues. Cost of revenues consists primarily of: (i) personnel and related costs for implementation (including account executive personnel), (ii) training and customer support services and (iii) sublicense fees to third parties upon the sale of the Company's product containing such third-party software. Gross margin on license fees 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 23.3% from $63.7 million in 1996 to $78.6 million in 1997 and 31.7% to $103.5 million in 1998. The 1996 increase 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 and 1998 increase in absolute dollars in cost of revenues was due principally to the need for additional personnel to service the Company's customers. Research and Development (R&D). Research and development expenses consist primarily of: (i) personnel and related costs and, (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. Research and development expenses increased 18.9% from $23.3 million in 1996 to $27.7 million in 1997 and 9.8% to $30.4 million in 1998, and represented 16.3%, 15.6%, and 15.5%, respectively, of total revenues in those years. While R&D expenses continue to increase year over year in absolute dollars, they declined slightly as a percentage of total revenue due to the overall increase in revenues. During 1998, the Company invested resources in developing PASSPORT Release 6.1 which was completed by April 1998 and EMPAC Releases 7.6.16, 7.6.17 and 7.7 which were completed by January 1998, April 1998 and August 1998, respectively. 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. 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 26.6% from $26.5 million in 1996 to $33.6 million in 1997 and decreased 6.1% to $31.5 million in 1998. As a percent of total revenue, sales and marketing expenses were 18.5%, 19.0%, and 16.1% for 1996, 1997, and 1998, respectively. The decrease in sales and marketing expenses in absolute dollars is primarily due to (i) restructuring of the sales force, and (ii) changes in the mix of the revenue base on which commission expense is generated. General and Administrative. General and administrative expenses include the costs of finance, human resources and administrative operations. General and administrative expenses were level at $15.0 million in 1996 and 1997, with a 1.9% increase to $15.3 million in 1998. These expenses represented 10.5%, 8.5%, and 7.8% 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. 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 resulted from excess facilities and $1.2 million from termination costs of excess or redundant employees. Provision for Income Taxes. Income tax expense of $0.45 million represented federal and state corporate income taxes for the Company, for the year ended December 31, 1998 and reflects a $5.0 million tax benefit for utilization of net operating loss carryovers and other tax credits. As a result of the Merger, Indus International, Inc. has domestic net operating loss carryforwards in excess of $10.2 million which will expire in years 2010 through 2012 if not utilized; domestic research and experimental tax credits of approximately $0.72 million which expire in years 2010 to 2012 if not utilized; domestic and foreign tax credits of approximately $0.84 million which expire in years 1998 through 2002 if not utilized; and foreign net operating loss carryforwards of approximately $2.9 million which can be carried forward indefinitely. 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 $13.4 million in 1998 compared with net income of $0.99 million recorded in 1997, due primarily to increased revenues in the current year and merger and restructuring expenses incurred in 1997. In 1996 the Company incurred a net loss of $0.875 million due to the effect of the one-time income tax charge associated with the company's conversion to C Corporation status. 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. Liquidity and Capital Resources Indus International, Inc. finances its activities primarily through cash provided by operations and borrowings under its line of credit. Historically, The Indus Group, Inc. has financed its activities primarily through cash provided by operations and borrowings under its line of credit and a public offering of Common Stock. 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 by (used in) operations was $8.3 million, ($10.6) million and $24.0 million in 1996, 1997 and 1998, respectively. Unbilled accounts receivable decreased substantially in 1998 due to the increased effort and efficiency in the Company's billing process. 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 $35.7 million, $5.2 million, and $5.8 million, in 1996, 1997 and 1998, respectively. Financing activities in 1996 generated cash of $40.9 million primarily from the issuance of redeemable preferred and common stock. Financing activities provided cash of $13.1 million, in 1997 primarily from the drawdown from the Company's lines of credit. Financing activities in 1998 used $5.7 million primarily due to repayments under the Company's lines of credit. As of December 31, 1998, the Company's principal sources of liquidity consisted of approximately $39.2 million in cash, cash equivalents and 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 1.25% (6.74% as of December 31, 1998). Approximately $19.7 million had been drawn down under this line of credit at December 31, 1998. 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 $12 million in 1999, primarily for equipment and furniture. In addition to its line of credit, the Company's principal commitments at December 31, 1998 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. Year 2000 Risk Disclosure The Year 2000 Issue and the Nature and Effects of the Year 2000 on Information Technology (IT) and Non-IT Systems: The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company's plan to resolve the Year 2000 Issue involves the continuing effort in the following four phases: assessment, remediation, testing, and implementation. To date, the Company has made progress in identifying of all systems that could be significantly affected by the Year 2000 and have identified areas that require Y2K testing services. The completed assessment could indicate that most of the Company's significant information technology systems will be affected, particularly the general ledger, project accounting and billing systems. In addition, the Company is in the process of gathering information about the Year 2000 compliance status of its significant suppliers and subcontractors and will continue to monitor their compliance. Status of Progress in Becoming Year 2000 Compatible: The Company has a formal Year 2000 Program focusing on four key areas: 1) Information Technology, addressing internal software and business systems; 2) the Company's Products; 3) Third Party, addressing the preparedness of non- IT suppliers; 4) the Company's Facilities. For each readiness area, based on a phased approach, the Company is performing a worldwide risk assessment, remediating and conducting testing, implementing solutions, and communicating with employees, suppliers and customers to raise awareness of the Year 2000 problem. The Year 2000 Program is managed by full time Y2K project personnel. The Company has inventoried key suppliers of goods and services to the Company and has mailed surveys to many of these suppliers. It is the process of evaluating responses and following-up. The Company intends to disqualify potentially non- compliant sources and re-qualify alternative sources to help mitigate potential business disruptions. Information Technology Program: The Company is continuing it's assessment of internal applications and computer hardware. The program is addressing not only the supplier's year 2000 product integrity but also assesses the supplier's ability to provide product and services. Hardware assessment includes workstations, servers, telecommunication equipment and other items. The assessment of major applications, servers and networks is 75% complete and is due for completion at the end of March 1999. Presently, 80% of the major applications have been verified compatible, 20% require upgrade or testing. Furthermore 20% of the servers and networks that required action have been addressed. These phases run concurrently for different systems. Completion of the testing phase for all significant systems is expected by June 30, 1999, with all remediated systems fully tested and implemented by September 30, 1999. Product Readiness Program: This program focuses on identifying and resolving the Year 2000 issues existing in the Company's currently supported products. It encompasses a number of activities including product testing, evaluation, product engineering and quality assurance. The program began in 1998 and work will continue through 1999. Third Party Program: The Company is querying its significant suppliers and subcontractors that do not share information systems with the Company (external agents Testing and implementation are scheduled for June 1999 completion. To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. There may be certain third parties, such as utilities, telecommunication companies or material vendors where alternate arrangements or sources are limited or unavailable. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non- compliance by external agents is not determinable. Indus Facilities Program: The Company is conducting an assessment of all the Indus facilities and facility suppliers worldwide. The assessment is approximately 25% complete as of February 1999. The expected completion date for surveying the facilities and facility suppliers is March 1999. Remediation is approximately 15% complete as of February 1999. Testing and implementation of affected equipment is expected to be 90% complete by July 1999. Contingency Plans: The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 program. The Company is currently evaluating the status of completion to determine whether such a plan is necessary. There can be no assurance that the Company will be able to develop a contingency plan that will adequately address issues that may arise in the year 2000. Failure by the Company to develop and implement, if necessary, an appropriate contingency plan could have a material impact on the operations of the Company. Costs: The Company will utilize both internal and external resources to reprogram, or replace, test, and implement the software and operating equipment for Year 2000 modifications. The total cost of the Year 2000 project is currently estimated at an amount up to $3.0 million and will be funded through operating cash flows. To date, the Company has incurred approximately $1 million, related to all phases of the Year 2000 project. The majority of the total costs will be incurred during the next four quarters. The Company is continuing its assessment and refining its cost estimates. There can be no assurance, however that there will not be a delay in, or increased costs associated with the programs described in this section. Summary: Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, the Company may have difficulty in processing customer invoices or payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. ITEM 7A. MARKET RISKS The Company's cash flow can be exposed to market risks primarily in the form of changes in interest rates in its short term borrowings under its revolving bank line of credit as well as its investments in certain available-for-sale securities. The revolving bank line of credit bears an interest rate of the one month LIBOR rate plus 1.25% and can fluctuate with changes in the monthly LIBOR rate. If the LIBOR rate adversely increased by 100 basis points, the Company's interest expense would increase by approximately $146,000 per annum. The Company's cash management and investment policies restrict investments to highly liquid, low risk debt instruments. The Company currently does not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move (decrease in) interest rates along the entire interest rate yield curve would adversely affect the net fair value of all interest sensitive financial instruments by approximately $251,000 at December 31, 1998. The Company's earnings or cash flow is currently not subject to material fluctuations due to changes in foreign currency exchange rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDUS INTERNATIONAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND 1997 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Indus International, Inc. as of December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG Palo Alto, California January 26, 1999 INDUS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, ---------------------- 1997 1998 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ........................... $11,052 $23,554 Marketable securities ............................... 11,880 15,596 Billed accounts receivable, less allowance for doubtful accounts of $1,974 and $3,578 on December 31, 1997 and 1998, respectively ............ 43,574 56,921 Unbilled accounts receivable ........................ 30,349 21,474 Other current assets ................................ 5,773 5,517 ---------- ---------- Total current assets .............................. 102,628 123,062 Marketable securities - noncurrent ..................... 4,818 -- Property and equipment, net ............................ 16,570 15,906 Investments and intangible assets, net ................. 12,119 11,364 Employee notes receivable .............................. 416 322 Other assets ........................................... 174 131 ---------- ---------- $136,725 $150,785 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under lines of credit ..................... $26,650 $19,650 Accounts payable .................................... 8,430 9,482 Deferred income taxes ............................... 419 -- Other accrued liabilities ........................... 14,068 16,721 Current portion of obligations under capital leases . 2,404 1,355 Deferred revenue .................................... 13,419 17,245 ---------- ---------- Total current liabilities ......................... 65,390 64,453 ---------- ---------- Obligations under capital leases and term loans ........ 1,105 257 Commitments and contingencies .......................... Stockholders' equity: Preferred stock ..................................... -- -- Common stock ........................................ 29 32 Additional paid-in capital .......................... 98,608 102,622 Deferred compensation and other...................... (262) (740) Accumulated deficit ................................. (26,688) (13,273) Accumulated other comprehensive income .............. (1,457) (2,566) ---------- ---------- Total stockholders' equity ............................. 70,230 86,075 ---------- ---------- $136,725 $150,785 ========== ==========
See accompanying notes. INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, -------------------------------- 1996 1997 1998 ---------- ---------- ---------- Revenues: Software licensing fees ................... $43,060 $55,958 $55,546 Services and maintenance .................. 97,515 119,382 138,956 Other revenue ............................. 2,463 1,694 975 ---------- ---------- ---------- Total revenues .......................... 143,038 177,034 195,477 Cost of revenues ............................. 63,738 78,575 103,517 ---------- ---------- ---------- Gross margin ................................. 79,300 98,459 91,960 ---------- ---------- ---------- Operating expenses: Research and development .................. 23,265 27,664 30,372 Sales and marketing ....................... 26,523 33,568 31,517 General and administrative ................ 14,951 14,991 15,270 Merger and restructuring expenses ......... -- 12,083 -- ---------- ---------- ---------- Total operating expenses ................ 64,739 88,306 77,159 ---------- ---------- ---------- Income (loss) from operations ................ 14,561 10,153 14,801 Interest and other income .................... 1,391 1,590 1,118 Interest expense ............................. (3,278) (3,558) (2,054) ---------- ---------- ---------- Income (loss) before income taxes ............ 12,674 8,185 13,865 Provision for income taxes ................... 6,849 6,408 450 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 ...... (875) 1,777 13,415 Extraordinary item ........................... -- (787) -- ---------- ---------- ---------- Net income (loss) ............................ ($875) $990 $13,415 ========== ========== ========== Pro forma statement of operations as adjusted: Income (loss) before income taxes ......... 12,674 Provision for income taxes (federal, state and foreign) .............................. 6,849 ---------- Pro forma net income (loss) ............... $5,825 ========== Income (loss) per share (computed on pro forma net income (loss) in 1996): Basic Income (loss) before extraordinary item ... $0.22 $0.06 $0.44 Extraordinary item ........................ -- ($0.03) -- ---------- ---------- ---------- Net income (loss) ......................... $0.22 $0.03 $0.44 ========== ========== ========== Diluted Income (loss) before extraordinary item ... $0.20 $0.05 $0.38 Extraordinary item ........................ -- ($0.02) -- ---------- ---------- ---------- Net income (loss) ......................... $0.20 $0.03 $0.38 ========== ========== ========== Shares used in computing per share data Basic ..................................... 25,976 28,574 30,717 Diluted ................................... 28,821 33,448 35,263
See accompanying notes. INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)
Accumulated Common Common Additional Deferred Other Total Stock Stock Paid-In CompensationAccumulated ComprehensiveStockholders' Shares Amount Capital and Other Deficit Income Equity -------- --------- ---------- ----------- ----------- ------------ ------------ Balance at December 31, 1995 ................. 723 $612 $21,013 ($432) ($41,450) ($216) ($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 (1) ............... 18,678 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 ...................................... -- -- 96 -- -- 96 Net loss ................................... -- (6,700) -- 5,825 -- (875) Unrealized loss on marketable securities ... Foreign currency translation ............... -- -- -- -- ($42) (42) -- -- -- -- ($9) (9) ------------ Comprehensive loss.......................... (926) -------- --------- ---------- ----------- ----------- ------------ ------------ Balance at December 31, 1996 ................. 19,401 22 48,649 (336) (27,402) (267) 20,666 Capital contribution by a TSW shareholder .. -- 1,717 -- -- -- 1,717 Reincorporation as Indus International, Inc. (4) 4 -- -- -- -- Issuance of common stock (2) ............... 1,196 -- 6,725 -- -- -- 6,725 Tax benefit from exercise of stock options . -- 3,479 -- -- -- 3,479 Redemption of TSW subordinated notes (3) ... 1,290 8 19,937 -- -- -- 19,945 Exchange of common stock for TSW redeemable preferred stock (4) .......... 8,049 3 18,097 -- -- -- 18,100 Elimination of TSW's net income for the three months ended March 31, 1997 (5) ... -- -- -- (276) -- (276) Other ...................................... -- -- 74 -- -- 74 Net income ................................. 990 990 Unrealized loss on marketable securities ... 56 56 Foreign currency translation ............... (1,246) (1,246) ------------ Comprehensive loss ......................... (200) -------- --------- ---------- ----------- ----------- ------------ ------------ Balance at December 31, 1997 ................. 29,936 29 98,608 (262) (26,688) (1,457) 70,230 Exercise of stock options ............... 1,507 2 2,750 -- -- -- 2,752 Tax benefit from exercise of stock options . -- 294 -- -- -- 294 Sale of common stock under ESPP ............ 174 1 970 -- -- -- 971 Note receivable from stockholder ........... -- (492) -- -- (492) Other ...................................... -- -- 14 -- -- 14 Net income ................................. -- -- -- 13,415 -- 13,415 Unrealized loss on marketable securities ... -- -- -- -- (6) (6) Foreign currency translation ............... (1,103) (1,103) ------------ Comprehensive income ....................... 12,306 -------- --------- ---------- ----------- ----------- ------------ ------------ Balance at December 31, 1998 ................. 31,617 $32 $102,622 ($740) ($13,273) ($2,566) $86,075 ======== ========= ========== =========== =========== ============ ============
See accompanying notes. INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued) (1) 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). (2) 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. (3) Redemption of TSW International, Inc. subordinated notes and accumulated interest in exchange for 1,235,879 common shares of Indus International, Inc. (4) 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. (5) 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. INDUS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, ----------------------------- 1996 1997 1998 --------- --------- --------- Cash flows from operating activities: Net income (loss) ............................... ($875) $990 $13,415 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: Depreciation and amortization ................ 3,440 5,969 7,922 Provision for doubtful accounts .............. 370 891 1,604 Amortization of deferred compensation ........ 555 74 14 Loss on sale of fixed assets ................. -- 332 (24) Write-off goodwill ........................... 688 -- -- Cumulative effect of deferred income taxes provided January 1, 1996 ................... 6,700 -- -- Tax benefit from exercise of stock options ... -- 3,479 294 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 ................. (6,536) (8,604) (14,951) Unbilled accounts receivable ............... (3,946) (10,952) 8,875 Other current assets ....................... (1,403) 592 256 Other assets ............................... (3,415) 798 (43) Employee notes receivable .................. (61) 121 94 Accounts payable ........................... (328) 1,424 1,052 Deferred income taxes ...................... (3,189) (3,418) (419) Income taxes payable ....................... 6,451 -- -- Other accrued liabilities .................. 5,889 4,336 2,653 Deferred revenue ........................... 3,444 (7,953) 3,826 Cumulative currency translation ............ (9) (1,246) (1,103) Other ...................................... 481 20 547 --------- --------- --------- Net cash (used in)/provided by in operating activities ............................... 8,256 (10,627) 24,012 --------- --------- --------- Cash flows from investing activities: Purchase of marketable securities ............... (39,010) (3,104) (8,612) Sale of marketable securities ................... 10,314 15,100 9,796 Investments and intangible assets ............... -- (8,288) (628) Acquisition of property and equipment ........... (6,982) (8,901) (6,418) Other -- -- 18 --------- --------- --------- Net cash (used in)/provided by investing activities .................................... (35,678) (5,193) (5,844) --------- --------- --------- Cash flows from financing activities: Net drawdown/(repayment) of line of credit ...... (81) 10,659 (7,000) Net drawdown/repayment of capital leases/notes payable .......................... 725 423 (1,897) Net proceeds from issuance of redeemable preferred stock ............................... 5,000 -- -- Net proceeds from issuance of common stock ...... 35,399 1,975 3,231 Purchase of Indus International, Inc. net assets .................................... (103) -- -- --------- --------- --------- Net cash used in/provided by financing 40,940 13,057 (5,666) activities .................................... --------- --------- --------- Net increase/(decrease) in cash and cash equivalents ................................... 13,518 (2,763) 12,502 Cash and cash equivalents at beginning of period ........................................ 297 13,815 11,052 --------- --------- --------- Cash and cash equivalents at end of period ...... $13,815 $11,052 $23,554 ========= ========= ========= Supplemental disclosures of cash flow information: Interest paid ................................... $1,464 $2,004 $1,245 ========= ========= ========= Income taxes paid ............................... $5,712 $4,775 $735 ========= ========= ========= Supplemental schedule of noncash, investing and financing activities: Issuance of common stock in exchange for TSW subordinated notes and redeemable preferred stock ........................................... $ -- $38,045 $ -- ========= ========= ========= Issuance of common stock in exchange for stockholder note receivable...................... $ -- $ -- $492 ========= ========= ========= Issuance of common stock in exchange for investment ...................................... $ -- $4,750 $ -- ========= ========= =========
See accompanying notes 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 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 1997 that related primarily 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 through December 31, 1998 is $8.28 million and $1.7 million represented a noncash transaction. 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 resulted from excess facilities that have been vacated and $1.2 million from termination costs of excess or redundant employees. Of the total charge, cash outflow through December 31, 1998 is $1.4 million and $0.7 million are future outflows as of December 31, 1998. The future outflows are expected to be paid in the first 6 months of 1999. Prior to the Merger, TSW International, Inc. reported on a fiscal year ending on March 31. Accordingly, the 1996 financial statements combine the March 31, 1997 financial statements of TSW International, Inc. with the December 31, 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. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Indus International, Inc. and its subsidiaries (collectively, the Company). All significant intercompany balances and transactions have been eliminated. All periods prior to the Merger include the combined results of The Indus Group, Inc. and TSW International, Inc. on a pooling of interests basis. 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 and other comprehensive income. 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. The revenues from software license fees are recognized as earned revenue in accordance with AICPA Statement of Position 97-2, Software Revenue Recognition, when persuasive evidence of arrangement exists, delivery has occurred and the license fee is fixed and determinable. Effective in the quarter ended September 30, 1997, Indus International, 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. 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 60 to 90 days. Deferred revenue represents primarily unearned maintenance and support fees and unearned license fees, which have been billed but for which future obligations remain. Foreign Currency Translation The financial statements of foreign subsidiaries have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. Concentration of Credit Risk The Company's customers are generally large companies in the utilities and energy industries, process, discreet and consumer packaged goods companies, as well as industrial manufacturing and the public sector. 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 revenues in 1996, 1997 or 1998. 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 markets, mutual funds, commercial paper and corporate notes. The Company presently classifies all marketable securities as available-for-sale investments and carries them at fair market value. Unrealized holding gains and losses, net of taxes, are included in accumulated other comprehensive income (loss) within stockholders' equity. Property and Equipment Property and equipment is stated at cost. Equipment under capital leases is stated at lower of fair market value or the present value of the minimum lease payments at the inception of the lease. Depreciation on office and computer equipment and furniture is computed using the straight-line method over estimated useful lives of four to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or their estimated useful lives. Software Development Costs 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. Purchased software costs included in other assets resulted principally from the acquisition by TSW International, Inc. of SQL Systems International plc. These costs have been amortized over three years, the estimated life of the related product. Amortization expense recorded in 1996, 1997, and 1998 was approximately $459,000, $294,000, and $424,810 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. In 1998, the Company purchased the rights; title and interest to the intellectual property related to radiological recording and tracking software called Total Exposure for $469,000. The $469,000 acquisition cost is being amortized over a two and one-half year period, which is the expected period of benefit. Advertising Costs Advertising costs are charged to expense in the period the costs are incurred. Advertising expense was approximately $486,000, $472,000, and $222,330 in 1996, 1997 and 1998, respectively. 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. 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 current benefit for the operating losses or operating loss carryovers of TSW International, Inc. As a result of the merger of TSW International, Inc., Indus International, Inc. inherited net operating loss carryovers of approximately $18.7 million, or approximately $7.5 million in potential tax benefits. In 1998, benefits of approximately $4.7 million were recognized, reducing the provision for federal income taxes in that period. Pro Forma Statement of Operations Data Pro forma net income data in 1996 excludes the $6.7 million cumulative effect charge due to the termination of S Corporation status by The Indus Group, Inc. on January 1, 1996. 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. Per Share Data Basic and diluted earnings per share have been calculated using the weighted average common shares outstanding during the periods. The average outstanding share numbers used prior to the Merger 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. Common equivalent shares from stock options and warrants are included in the diluted per share calculations unless their inclusion would be antidilutive. The components of basic and diluted earnings per share were as follows (in thousands, except per share amounts):
Years ended December 31, ----------------------------- 1996 1997 1998 --------- --------- --------- Net income (*) $5,825 $990 $13,415 --------- --------- --------- Weighted average shares of common stock outstanding ............................... 25,976 28,574 30,717 --------- --------- --------- Shares used in computing basic net income per share ..................................... 25,976 28,574 30,717 --------- --------- --------- Basic net income per share (*) 0.22 0.03 0.44 --------- --------- --------- Calculation of shares outstanding for computing diluted net income per share: Shares used in computing basic net income per share 25,976 28,574 30,717 Shares to reflect the effect of the assumed conversion of: Employee stock options .................. 1,500 3,353 2,091 Warrants ................................ 1,345 1,521 2,455 --------- --------- --------- Shares used in computing full-diluted net income per share ............................ 28,821 33,448 35,263 --------- --------- --------- Diluted net income per share (*) 0.20 0.03 0.38 --------- --------- ---------
(*) Proforma per share data for 1996 is based on proforma net income, which is exclusive of the $6.7 million cumulative deferred income tax provision made upon conversion of The Indus Group, Inc. to a C Corporation status. 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. Stock Based Compensation Compensation costs for stock options granted to employees is measured by the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Note 10 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net earnings (loss) and per share data for 1996, 1997 and 1998 as if the Company had elected to recognize compensation cost based upon fair value of options granted at grant date. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") in 1998. Other comprehensive income (primarily foreign currency translation effects) and comprehensive income are shown in the Statement of Stockholders' Equity. The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in 1998. SFAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. The Company's operations are treated as one operating segment. AICPA Accounting Standards Executive Committee Statement of Position 97-2, Software Revenue Recognition, ("SOP 97-2") and Statement of Position 98-4 ("SOP 98-4"), Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition or SOP 98- 4, which contain new rules for timing of recognition of software company revenues, particularly as to license fee revenues where there are multiple elements to be delivered under a contract or arrangement with a customer, became effective for transactions beginning in 1998. Management believes the Company's current policy and its practices conform to the rules in these new accounting pronouncements. 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 In December 1998, the American Institute of Certified Public Accountants or AICPA issued Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect Certain Transactions, or SOP 98-9. SOP 98-9 amends SOP 98-4 to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. The Company has not yet determined the effect of the final adoption of SOP 98-9 on its future revenues and results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Financial Instruments and for Hedging Activities", which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. SFAS No. 133 is effective for years beginning after June 15, 1999 and is not anticipated to have a significant impact on the Company's results of operations or financial condition when adopted. 2. Marketable Securities The following is a summary of marketable securities, all of which are available for sale (in thousands):
Gross Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ----------- ---------- December 31, 1997 - ------------------- 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 ========== =========== =========== ========== December 31, 1998 - ------------------- Marketable securities - current ..... $6,100 $ -- $ -- $6,100 Certificates of deposit ............. 4,000 -- -- 4,000 Commercial Paper and corporate notes 8,983 8 -- 8,991 Municipal Obligations ............... -- -- -- -- ---------- ----------- ----------- ---------- $19,083 $ -- $ -- $19,091 ========== =========== =========== ========== Included in: Cash and cash equivalents ......... $3,495 -- -- $3,495 Marketable securities-current ..... 15,588 -- -- 15,596 Marketable securities-non current . -- -- -- -- ---------- ----------- ----------- ---------- $19,083 $ -- $ -- $19,091 ========== =========== =========== ==========
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):
December 31, ----------------------- 1997 1998 ----------- ----------- Furniture and fixtures ....................... $4,615 $4,895 Office equipment ............................. 23,193 26,260 Leasehold improvements ....................... 2,617 2,795 Internally used capitalized software ......... 2,763 3,382 ----------- ----------- 33,188 37,332 Less accumulated depreciation and amortization ................................. 16,618 21,426 ----------- ----------- $16,570 $15,906 =========== ===========
Equipment leased under capital leases is included in property and equipment. At December 31, 1998 and 1997, equipment under capital leases was $3,940,000 and $4,104,000, respectively, with accumulated depreciation of $2,328,000 and $1,586,000, respectively. 4. Other Accrued Liabilities Other accrued liabilities consists of the following (in thousands):
December 31, ----------------------- 1997 1998 ----------- ----------- Accrued merger and restructuring ............. $1,898 -- Accrued commissions .......................... 3,089 2,527 Accrued payroll and related expenses ......... 2,674 5,513 Accrued taxes payable ........................ 600 1,489 Other accrued liabilities .................... 5,807 7,192 ----------- ----------- $14,068 $16,721 =========== ===========
5. Lines of Credit The Company has a revolving bank line of credit in the amount of $35.0 million, which is secured by all of the Company's accounts receivable. The revolving credit facility expires on July 31, 1999 and bears an interest rate of the one month LIBOR rate plus 1.5% (6.74% as of December 31, 1998). 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 $19.7 million at December 31, 1998 and $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, 1997 and 1998, respectively. The line of credit agreement contains certain affirmative and negative covenants. The Company was in compliance with these financial covenants at December 31, 1998 and 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 two officers/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. 7. Commitments The Company leases its office facilities under various operating lease agreements. The leases require monthly rental payments in varying amounts through 2011. 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 $6,683, $5,215, and $6,831 for 1996, 1997 and 1998, respectively. Future minimum lease payments under all non-cancelable operating leases are as follows (in thousands):
Operating Capital Years Ending December 31, Leases Leases - ------------------------------------ ----------- ----------- 1999 ................................... $5,607 $1,425 2000 ................................... 5,102 237 2001 ................................... 3,175 19 2002 ................................... 2,419 4 2003 ................................... 2,366 -- Thereafter ............................. 4,270 -- ----------- ----------- Total minimum payments required ............. $22,939 $1,685 =========== Less amounts representing interest .......... 73 ----------- Present value of future lease payments ...... $1,612 Less current portion ........................ 1,355 ----------- Long term portion ........................... $257 ===========
8. Stockholders' Equity The following is a summary of the authorized and issued preferred and common Stock of Indus International, Inc:.
December 31, December 31, 1997 1998 ------------ ------------ Preferred Stock Authorized shares, $.001 par value per share .. 10,000,000 10,000,000 Issued and outstanding ........................ -- -- Amount ........................................ -- -- Common Stock Authorized shares, $.001 par value per share .. 100,000,000 100,000,000 Issued and outstanding ........................ 29,935,980 31,617,126 Amount ........................................ 29,936 31,617
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. In 1998, the Company loaned a then officer/stockholder $491,770 in conjunction with the exercise of stock options. The note is secured by a pledge of 100,000 shares of the Company's stock. 9. Stock Plans Stock Option and Benefit Plans Upon consummation of the Merger, the stock option plans of The Indus Group, Inc. and TSW International, Inc. 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 three stock option plans under which employees, directors and consultants may be granted rights to purchase common stock. 1997 Stock Plan The 1997 Stock Plan and Indus International Company Share Option Plan (the "Stock Plan") provide for the grant of incentive or nonstatutory stock options to employees, including officers and directors, and nonstatutory options only to consultants of the Company. A total of 7,000,000 shares have been reserved for issuance under the Stock Plan. The incentive stock options will be granted at not less than fair market value of the stock on the date of grant. The options will generally vest over one to four years and have a maximum term of ten years. 1997 Director's Option Plan Each director who is not an employee of the Company is automatically granted a nonstatutory stock option to purchase 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's Option Plan (the "Director Option Plan"). Thereafter, each such person will automatically be granted an option to acquire 5,000 shares of the Company's Common Stock (the "Subsequent Option") upon such outside director's re-election at each Annual Meeting of Stockholders, provided that on such date such person has served on the Board of Directors for at least six months. A total of 200,000 shares has 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. The 1998 Indus International, Inc. Company Share Option Plan (the "UK Stock Plan") provides for the grant of stock options to employees of Indus International, Ltd. (a UK foreign subsidiary of the Company). A total of 500,000 shares have been reserved for issuance under the Stock Plan. The 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 three years and have a maximum term of three years. The activity under the option plans, combined, was as follows:
Options Outstanding Shares -------------------------------- Available Number for of Grant Shares Price Per Share - ------------------------------- ----------- ------------ ------------------- 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 forfeited ......... 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 forfeited ......... 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 Shares reserved ........... 2,500,000 -- Options granted ........... (7,744,071) 7,744,071 $3.69 - $10.38 Options forfeited ......... 5,511,630 (5,511,630) $0.67 - $25.75 Options exercised ......... -- (1,506,678) $0.28 - $5.34 Plan shares expired ....... (548,870) -- ----------- ------------ Balances at December 31, 1998. 1,423,189 9,081,771 $0.28 - $18.15 =========== ============
On December 11, 1998, the Company offered its employees a stock option repricing program that allowed the employees to exchange on a one for one share basis any options priced above the December 14, 1998 closing price of Indus International, Inc. stock, which was $4.56. As a result, approximately 4,051,696 options on 4,051,696 shares were surrendered by eligible employees and exchanged for substitute options. The repriced options are not exercisable before June 14, 1999. 1997 Employee Stock Purchase Plan The Company has an employee stock purchase plan under which 1,000,000 shares of common stock have been reserved for issuance. The plan allows for eligible employees to purchase stock at 85% of the lower of the fair market value of the Company's common stock as of the first day of each six-month offering period or the fair market value of the stock at the end of the offering period. The initial offering period began November 1997. Purchases are limited to 10% of each employee's compensation. Under the plan the Company issued 174,468 shares in 1998, at prices ranging from $4.54 to $6.97 per share. 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. 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 Black-Scholes option pricing model for 1996 and 1997 with the following weighted-average assumptions for 1996 and 1997, respectively: risk-free interest rates of 5.75% and 6.43%, dividend yields of 0%; volatility factors of the expected market price of the company's stock of 0.75 and 0.60, and an expected life of the options of 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 1996 and the Black-Scholes option pricing model for 1997, with the following weighted-average assumptions for 1996 and 1997, respectively: risk-free interest rates of 6.15% and 6.43%, dividend yields of 0%; volatility factors of the expected market price of the company's stock of 0.0 and 0.60, and an expected life of the options of five years for 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 and 1998, respectively: risk-free interest rate of 6.43% and 5.14%, dividend yields of 0%, volatility factor of the expected market price of the company's stock of 0.60 and 0.70, and an expected life of the options of six years for options granted under the 1997 Stock Plan and the 1997 Director's Option Plan and three years for options granted under the 1998 Indus International, Inc. Company Share Option Plan. 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, 1996, 1997 and 1998, respectively, is as follows (in thousands except for earnings per share information):
Year Ended December 31, ----------------------------- 1996 1997 1998 --------- --------- --------- Pro forma net income (loss)............ $5,740 ($1,546) ($6,122) Pro forma net income (loss) per share.. $0.22 ($0.05) ($0.20) Pro forma diluted net income (loss) per share $0.20 ($0.05) ($0.17)
The following table summarizes information about stock options outstanding as of December 31, 1998.
Options Vested and Exercisable Options Outstanding -------------------------------- -------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of OutstandingContractual Exercise ExercisableExercise Exercise Prices in shares Life Price in shares Price - ---------------- ---------- ----------- --------- ---------- --------- $0.28 - $0.67 463,305 4.54 $0.41 463,305 $0.41 $1.00 - $2.20 261,579 4.81 1.64 256,929 1.64 $3.38 - $4.50 1,416,158 7.98 3.53 804,987 3.46 $4.56 - $4.56 4,753,370 9.01 4.56 27,875 4.56 $4.88 - $8.50 1,855,672 9.39 8.24 223,070 8.12 $13.75 - $18.50 331,687 7.43 15.55 137,655 15.57 ---------- ----------- --------- ---------- --------- Total 9,081,771 8.52 5.26 1,913,821 3.91 ========== =========== ========= ========== =========
The weighted average fair value of options granted in 1996 and 1997 was $8.57 and $8.20, respectively. In 1998, the weighted average fair value of options granted under the UK Stock Plan was $3.58 and under the remaining plans is $2.70, 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 did not contribute any matching funds in 1996 or 1997; in 1998, the matching contribution was $847,281. 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 1996 and 1997 was approximately $250,000 in each year. The Company did not contribute to the profit sharing plan in 1998. 12. Geographic Information Geographic information is as follows (in thousands):
Year Ended December 31, ----------------------------- 1996 1997 1998 --------- --------- --------- Net sales (based on destination) United States ............................ $101,691 $135,763 $149,282 International (including United States exports shown below): Europe ................................. 16,891 14,668 19,491 Asia ................................... 7,987 7,070 233 Canada ................................. 12,252 15,422 20,491 Other .................................. 4,217 4,111 5,980 --------- --------- --------- Total International ......................... 41,347 41,271 46,195 --------- --------- --------- Total consolidated net sales ............. $143,038 $177,034 $195,477 ========= ========= ========= Income from operations United States ............................ $56,377 $75,506 $78,105 International: Europe ................................. 9,364 8,158 10,179 Asia ................................... 4,428 3,932 (392) Canada ................................. 6,792 8,577 (3,109) Other .................................. 2,338 2,286 7,177 Corporate administrative and other expenses . (64,738) (88,306) (77,159) Interest and other expenses, net ............ (1,887) (1,968) (936) --------- --------- --------- Total consolidated income (loss) before income taxes ....................... $12,674 $8,185 $13,865 ========= ========= ========= Identifiable assets United States ............................ $100,105 $118,918 $124,373 International: Europe ................................. 8,834 5,490 13,261 Asia ................................... 3,951 3,225 242 Canada ................................. 3,228 5,895 9,407 Other .................................. 1,737 3,197 3,502 --------- --------- --------- Total consolidated identifiable assets ...... $117,855 $136,725 $150,785 ========= ========= ========= United States export sales (reported in international sales above) Europe ................................. $7,337 $3,201 -- Asia ................................... 2,326 871 -- Canada ................................. 12,252 15,422 -- Other .................................. 4,217 4,069 1,703 --------- --------- --------- Total consolidated export sales ............. $26,132 $23,563 $1,703 ========= ========= =========
Due to the Merger, the Company has an increased international presence and supports the majority of international sales through foreign subsidiaries. 13. Income Taxes The provision for income taxes consists of the following (in thousands):
Year Ended December 31, ----------------------------- 1996 1997 1998 --------- --------- --------- Current: Federal ............................... $7,639 $7,993 $484 State and foreign ..................... 2,497 1,823 385 --------- --------- --------- 10,136 9,816 869 --------- --------- --------- Deferred: Federal ............................... (2,522) (3,057) -- State and foreign ..................... (765) (351) (419) --------- --------- --------- (3,287) (3,408) (419) --------- --------- --------- $6,849 $6,408 $450 ========= ========= =========
The effective rate of the provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before provision for income taxes as follows:
Percentage Year Ended December 31, ----------------------------- 1996 1997 1998 --------- --------- --------- Federal statutory rate ................... 35.0 % 35.0 % 35.0 % Merger expenses .......................... -- 41.1 -- State taxes, net of federal benefit ...... 6.5 9.3 0.4 Foreign taxes ............................ 2.3 3.7 -- FSC benefit .............................. (2.3) (1.5) (2.1) R&D credit ............................... (1.1) (4.8) -- TSW net operating loss carryovers......... 8.6 (10.3) (33.6) Other .................................... 5.0 5.8 3.5 --------- --------- --------- 54.0 % 78.3 % 3.2 % ========= ========= =========
The 1996, 1997, and 1998 current federal and state tax provisions do not reflect the tax savings of $6,669,000, $3,479,000, and $294,000, respectively resulting from deductions associated with the exercise of stock options by employees in 1996. This tax benefit has been included in additional paid in 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, ------------------- 1997 1998 --------- --------- Deferred Tax Assets: Accounts receivable allowances ...................... $804 $966 Tax over book depreciation........................... (782) 341 Nondeductible accruals .............................. 2,100 2,362 Deferred licensing fee revenue ...................... 4,641 1,723 Net operating loss carryforwards .................... 4,901 3,963 Research and other credit carryforwards ............. 1,383 1,744 Foreign tax credits and losses ...................... 1,216 2,045 --------- --------- 14,263 13,144 Valuation allowance ................................. (9,140) (10,390) --------- --------- 5,123 2,754 Deferred Tax Liabilities: Conversion from cash to accrual basis of accounting . 5,542 2,754 --------- --------- Net deferred tax liability .......................... $419 -- ========= =========
As of December 31, 1998, the Company had federal net operating loss carryforwards of approximately $10.2 million. The net operating loss carryforwards will expire beginning in 2010 through 2012, if not utilized. The Company also has domestic research and experimental tax credits of approximately $0.72 million which expire in years 2010 to 2012 if not utilized; domestic and foreign tax credits of approximately $0.84 million which expire in years 1998 through 2002 if not utilized; and foreign net operating loss carryforwards of approximately $2.9 million which can be carried forward indefinitely. Due to the Company's limited earnings history, the net deferred tax asset has been fully offset by a valuation allowance. Approximately $2.95 million of the valuation allowance for deferred tax assets relates to benefits of stock option deductions which, when recognized, will be allocated directly to additional paid in capital. 14. Litigation A customer of the Company has filed an American Arbitration Association Demand for Arbitration that claims breach of contract related to the purchase of the Company's software. The Company disputes this claim and intends to defend the action vigorously. The Company believes it has adequate legal defenses and that the ultimate outcome of this action will not have a material effect on the Company's financial position and results of operations. However, the ultimate outcome of any litigation is uncertain, and therefore an unfavorable outcome could have a material negative impact on the Company. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14(a) (the "Proxy Statement") not later that 120 days after the end of the fiscal year covered by this Report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's Directors required by this Item is incorporated by reference to the information contained under the captions "Election of Director-Nominees" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement. The information concerning the Company's officers required by this Item is included in the Section in Part I hereof entitled "Executive Officers". ITEM 11. EXECUTIVE COMPENSATION The information concerning the Company's Executive Officers required by this Item is incorporated by reference to the information contained under the captions "Proposal One - Election of Directors - Director Compensation and Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning security ownership required by this Item is incorporated by reference to the information contained under the caption "Security Ownership of Management; Principal Stockholders" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information contained under the caption "Certain Relationships and Related Transactions" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The Financial Statements required by this item, together with the report of independent auditors, are filed as part of this Form 10- K. See Index to Consolidated Financial Statements under Item 8. (2) Financial Statement Schedule The following financial statement schedule of Indus International, Inc. for the years ended December 31, 1998, 1997 and 1996 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 following exhibits are filed herewith or incorporated by reference.
Exhibit Number Exhibit 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) 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) 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) 10.37 Stock Purchase Agreement dated January 13, 1999 between Robert W. Felton, Warburg Pincus Investors, L.P. and Indus International, Inc. 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. The following reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1998. Form 8K reporting Item 5 (dated October 16, 1998) was filed November 2, 1998. 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/ William J. Grabske -------------------- William J. Grabske Chairman of the Board of Directors, President and Chief Executive Officer Date: March 29, 1998 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints William J. Grabske and Albert J. Wood, 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/ William J. Grabske Chairman of the Board of Directors, March 29, 1999 - --------------------------- President and Chief Executive Officer (William J. Grabske) Principal Executive Officer /s/ Albert J. Wood Vice President of Finance and March 29, 1999 - --------------------------- Treasurer, Principal Financial and (Albert J. Wood) Accounting Officer /s/ Robert W. Felton Director March 29, 1999 - --------------------------- (Robert W. Felton) /s/ William H. Janeway Director March 29, 1999 - --------------------------- (William H. Janeway) /s/ Joseph P. Landy Director March 29, 1999 - --------------------------- (Joseph P. Landy) /s/ Jeanne D. Wohlers Director March 29, 1999 - --------------------------- (Jeanne D. Wohlers)
EXHIBIT INDEX
Exhibit Number Exhibit 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) 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) 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) 10.37 Stock Purchase Agreement dated January 13, 1999 between Robert W. Felton, Warburg Pincus Investors, L.P. and Indus International, Inc. 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. INDUS INTERNATIONAL, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)
Charged to Balance at Charged to Other Charges- AddBalance at Beginning Costs and Account- (Deduct)- Ending Year Description of Period Expenses Describe Describe (1)of Period - ----------- --------------- ---------- --------- --------- ----------- ---------- Allowance for 1998 doubtful amounts $1,974 $2,130 -- ($526) $3,578 1997 Allowance for doubtful amounts 1,247 945 -- (218) 1,974 1996 Allowance for doubtful amounts 1,238 573 -- (564) 1,247
EX-10.37 2 STOCK PURCHASE AGREEMENT EXHIBIT 10.37 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is made by and among Robert Felton ("Seller"), Warburg, Pincus Investors, L.P. ("Buyer") and Indus International, Inc. (the "Company") as of January 13, 1999. RECITALS A. Seller desires to sell Five Million (5,000,000) shares of Common Stock of the Company owned by him (the "Shares") to Buyer; B. Buyer desires to buy the Shares from Seller; and C. Company is willing to waive any rights it may have under its corporate policies to prohibit the sale of the Shares from Buyer to Seller provided that Buyer agrees to vote shares of Common Stock of the Company held by it in the manner described herein; Therefore, in consideration of the above recitals and the mutual covenants herein contained, the Parties agree as follows: 1. The Shares Transaction. 1.1 Purchase and Sale of Shares. Subject to the terms and conditions hereof and in reliance upon the representations, warranties and agreements contained herein, Buyer agrees to purchase from Seller and Seller agrees to sell to Buyer the Shares at a price per Share of $5.00 for aggregate consideration of $25,000,000 (the "Purchase Price"). 1.2 Closing Date. The closing of the purchase and sale of the Shares hereunder (the "Closing") shall be held at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304 on January15, 1999 or such other time and place as the parties shall agree to (the"Closing Date"). 1.3 Delivery. At Closing, Seller shall deliver to Buyer a certificate representing the Shares duly endorsed to Buyer against delivery to Seller of check or wire transfer payable to the order of Seller in the amount of the Purchase Price. 1.4 Waiver by Company. The Company waives any rights it may have under any of its corporate policies to restrict the transactions described above in this Section 1. 2. Representation and Warranties of Buyer and Seller. 2.1 Title of Seller. Seller hereby represents that Seller has full right, title and ownership in the Shares free of any liens or encumbrances. 2.2 Buyer's Knowledge. Buyer hereby represents that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the transactions contemplated by this Agreement and that it has had full access to all material information relating to the Company necessary to evaluate such transactions. 2.3 Seller's Knowledge. Seller hereby represents that he has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the transactions contemplated by this Agreement and that he has had full access to all material information relating to the Company necessary to evaluate such transactions. 2.4 Legend. Buyer understands that the Shares will be considered "restricted securities" under the Securities Act of 1933, as amended and will bear an appropriate legend reflecting that status. 3. Voting Agreement. 3.1 Voting. With respect to any proposal (including proposals relating to the election of directors) presented to the holders of the capital stock of the Company whether at an annual or special meeting of stockholders or pursuant to a written consent, Buyer shall exercise its voting rights with respect to any shares of capital stock of the Company owned by it such that shares of capital stock of the Company owned by Buyer or its affiliates (collectively "Warburg Shares") are voted as follows: (a)Buyer may vote in its sole and absolute discretion its Warburg Shares such that the Warburg Shares voted by it pursuant to this Clause 3.1(a) plus all other Warburg Shares voted on such proposal represent 50% or less of the votes eligible to be cast on such proposal. (b) Buyer shall vote its Warburg Shares not voted pursuant to clause (a) above, if any, in the same proportions as the other stockholders of the Company vote their shares of capital stock entitled to vote on such proposal. 3.2 Enforcement. Buyer and Company hereby agree that it is impossible to measure in money the damages which will accrue to Company as a result of a failure by Buyer to perform its obligations under this Section 3 and agree that the terms of this Section 3 shall be specifically enforceable. If the Company institutes any action or proceeding to specifically enforce the provisions hereof, Buyer hereby waives the claim or defense therein that Company has an adequate remedy at law, and Buyer shall not offer in any such action or proceeding the claim or defense that such remedy at law exists. 3.3 Waiver. Buyer's obligations under this Section 3 may be waived, terminated or modified only by the written agreement of Buyer and Company. 4. Miscellaneous. 4.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Delaware, without regard to any provisions thereof relating to conflicts of laws among different jurisdictions. The parties hereby agree to submit to the jurisdiction of the federal and state courts of the State of California with respect to the breach or interpretation of this Agreement or the enforcement of any and all rights, duties, liabilities, obligations, powers, and other relations between the parties arising under this Agreement. 4.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Buyer, Seller or the Company and the closing of the transactions contemplated hereby. 4.3 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 4.4 Entire Agreement; Amendment. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. Except as provided in Section 3, neither this Agreement nor any term hereof maybe amended, waived, discharged or terminated other than by a written instrument signed by Buyer, Seller and Company. 4.5 Notices, Etc. All notices and other communications required or permitted hereunder, shall be in writing and shall be personally delivered, sent by facsimile, mailed by registered or certified mail, postage prepaid, return receipt requested, or delivered by a nationally recognized overnight courier, addressed: If to Buyer: Warburg, Pincus Investors, L.P. 466 Lexington Avenue New York, New York 10017 Attn: Joseph P. Landy If to Seller: Robert Felton 91 Tiger Tail Court Orinda, CA 94563 If to Company: Indus International, Inc. 60 Spear Street San Francisco, CA 94105 Any such notice or communication shall be deemed to have been received (A) in the case of personal delivery or delivery by telecopier, on the date of such delivery, (B) in the case of a commercial overnight courier, on the next business day after the date when sent and (C) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted. 4.6 Waiver of Conflict. Each party to this Agreement that has been or continues to be represented by Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, hereby acknowledges that Rule 3-310 of the Rules of Professional Conduct promulgated by the State Bar of California requires an attorney to avoid representations in which the attorney has or had a relationship with another party interested in the representation without the informed written consent of all parties affected. By executing this Agreement, each such party gives his or its informed written consent to the representation of the Company by Wilson, Sonsini, Goodrich &Rosati in connection with this Agreement and the transactions contemplated hereby. 4.7 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 4.8 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute one instrument. In witness whereof, the parties have executed this Agreement as of thefirst date set above. SELLER BUYER Warburg, Pincus Investors, L.P. By: Warburg, Pincus & Co., its General Partner /s/ Robert W. Felton By: /s/ Joseph P. Landy - ------------------------------- ------- - -------------- Robert W. Felton COMPANY /s/ William J. Grabske - ------------------------------- William J. Grabske 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 Indus UK, Inc. California Indus International, Ltd. United Kingdom Indus International, S.A. France Indus International Pty Ltd. Australia Indus International Software Pte. Ltd. Singapore Indus International Canada, Inc. Canada 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 the Registration Statements (Form S-8 Nos. 333-36995 and 333-70475) pertaining to the 1997 Director Option Plan, 1997 Employee Stock Purchase Plan and 1997 Stock Plan of Indus International, Inc. of our report dated January 26, 1999, with respect to the consolidated financial statements and schedule of Indus International, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Palo Alto, California March 26, 1999 EX-27.1 5 ARTICLE 5 FIN. DATA SCHEDULE FOR 10-K
5 This schedule contains summary financial information extracted from the Indus International, Inc.'s Annual Report on Form 10-K ffor the year ended December 31, 1998 and is qualified in our by reference to such Financial Statements. 1,000 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 23,554 15,596 60,499 (3,578) 0 123,062 37,332 (21,426) 150,785 64,453 0 0 0 32 86,043 150,785 0 195,477 103,517 103,517 77,159 0 2,054 13,865 450 13,415 0 0 0 13,415 $0.44 $0.38
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