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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________.
Commission File Number: 0-22993
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INDUS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3273443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3301 WINDY RIDGE PARKWAY
ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip code)
(770) 952-8444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price $5.50 of the Common Stock on March
15, 2002, as reported on the Nasdaq National Market, was approximately
$58,894,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may by deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of the registrant's Common Stock, $.001 par
value was 35,410,015 at March 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2002 Annual Meeting of
Stockholders to be held May 9, 2002 are incorporated by reference in Part III
hereof, to the extent stated herein.
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INDUS INTERNATIONAL, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I.........................................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS..........................................................................3
ITEM 2. PROPERTIES......................................................................................23
ITEM 3. LEGAL PROCEEDINGS...............................................................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................23
PART II.......................................................................................................24
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................24
ITEM 6. SELECTED FINANCIAL DATA.........................................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........25
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.....................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............55
PART III......................................................................................................55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................................55
ITEM 11. EXECUTIVE COMPENSATION...........................................................................55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................55
PART IV.......................................................................................................56
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................56
SIGNATURES....................................................................................................59
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS DOCUMENTS INCORPORATED HEREIN BY
REFERENCE, MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE NOT BASED
ON HISTORICAL FACTS, BUT RATHER REFLECT MANAGEMENT'S CURRENT EXPECTATIONS
CONCERNING FUTURE RESULTS AND EVENTS. THESE FORWARD-LOOKING STATEMENTS GENERALLY
CAN BE IDENTIFIED BY THE USE OF PHRASES AND EXPRESSIONS SUCH AS "BELIEVE,"
"EXPECT," "ANTICIPATE," "INTEND," "PLAN," "FORESEE," "LIKELY," "WILL" OR OTHER
SIMILAR WORDS OR PHRASES. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS RELATED TO: THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS
AND INTENTIONS; THE TIMING, AVAILABILITY AND FUNCTIONALITY OF PRODUCTS UNDER
DEVELOPMENT OR RECENTLY INTRODUCED; AND MARKET AND GENERAL ECONOMIC CONDITIONS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR
IMPLIED BY THESE STATEMENTS. IMPORTANT FACTORS THAT MIGHT CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE SUGGESTED BY THE FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION OF THIS REPORT
ENTITLED "DESCRIPTION OF BUSINESS - FACTORS AFFECTING FUTURE PERFORMANCE"
BEGINNING ON PAGE 17. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S OPINIONS ONLY AS OF THE
DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE OR PUBLICLY RELEASE
THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Indus International, Inc. (the "Company" or "Indus") develops, markets,
implements and supports integrated Enterprise Asset Management ("EAM") and
supply chain software and service products for capital-intensive industries
worldwide. The Company's two principal software products are PassPort and EMPAC.
The Company recently introduced a new software product, Indus InSite. These
products are implemented by the Company's professional services organization and
supported by its worldwide customer service organization.
Indus' EAM products benefit customers by reducing maintenance and operating
costs, increasing production capacity and speeds, increasing return on assets,
and maintaining regulatory compliance. Proper maintenance of equipment and
facilities can prevent costly failures, limit disruptions, and minimize
downtime. More efficient use of personnel and better control of spare parts can
reduce costs. Properly maintained equipment can run at higher production speeds
and have a longer life cycle. Delaying new equipment purchases lowers the
capital expense budget. Proper regulatory compliance can help companies avoid
fines and forced shutdowns. Each of these benefits represent proven strategies
that enable customers to sustain long-term competitive advantage.
The Company markets its principal EAM products, known as PassPort and
EMPAC, internationally and to distinct industry segments. Overall Indus'
products and services consist of scalable, flexible business application
software; regional professional services centers positioned throughout the
Americas, Europe, the Middle East and Africa, and Asia Pacific; and service
packages, which support such functional areas as: asset and work management,
materials procurement and eProcurement, knowledge management, safety and
regulatory compliance, mobile computing, electronic document management, and
integration with financial and human resources products.
Historically, the Company has been focused on delivering PassPort and EMPAC
products to industries that have very complex assets, such as utilities
(turbines and repair trucks), oil and gas (drilling platforms and large refining
facilities), defense (airplanes, ships and tanks), pulp and paper (paper
machines), metals and mining (fabrication machinery and mines/production
plants), and process (manufacturing), as illustrated on the right side of the
graph below.
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[CHART]
The Company's multi-product strategy enables PassPort and EMPAC to support
the broadest spectrum of industry needs in these quadrants. The Company
continues to be the premier EAM supplier of complex functionality to large
market, asset intensive industries such as oil and gas, pulp and paper, and
mining and metals with its EMPAC software product, along with the utilities and
defense industries with its PassPort software product. The Company builds
long-term strategic relationships with its clients and has over 25 years of
business process experience serving the utility industry alone. By the end of
2001, the Company's PassPort and EMPAC software products were licensed for use
by over 300,000 end users representing 460 customers in 45 countries.
The recent introduction of Indus InSite, an Internet developed product
designed for the collaborative asset management market, brings Indus EAM
expertise to the mid-tier market of industries that need asset management
functionality, but with higher collaborative capabilities and much lower cost
points. These industries include facilities and property management, consumer
packaged goods, health sciences, manufacturing, and education and government.
The total asset management product is represented by the illustration below.
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[CHART]
PassPort and EMPAC are designed to interoperate with popular third-party
applications that provide best business practice functions to their customers.
Through strategic alliances, the Company works to extend the functional product
footprint to complement the Company's core competency with software providers,
such as Oracle Corporation ("Oracle"), PeopleSoft, Inc. ("PeopleSoft"), i2
Technologies, Inc. ("i2"), Lawson Software, Inc. ("Lawson"), and BEA Systems,
Inc. ("BEA"), as well as with systems integrators, such as Accenture, Deloitte
Consulting, and PricewaterhouseCoopers to create a software series that provides
seamless interoperability with corporate and financial applications, expert
systems, and certain industry specific systems that enable the Company's
customers to improve operating efficiencies, reduce costs, and comply with
governmental regulation.
The Company is committed to the collaborative workplace to ensure its
customers' competitive success and the Company has open-architected PassPort and
EMPAC for effective integration with complimentary products. The Company's
PassPort and EMPAC products are designed for large-scale projects with intensive
record keeping and high volume transactions and are specifically designed for
use with relational database management systems, relying on a mature development
methodology that is ISO 9001-certified. The `server' software is designed to
enable customers to use various operating systems, operate on multiple hardware
platforms, and interoperate with many third-party software applications and
legacy systems. Proprietary systems implementation methodology tools and web
based education tools facilitate rapid and effective deployment and utilization
of the Company's EAM applications. PassPort or EMPAC are typically licensed by
customers, but are also available as a hosted product supported through remote
data centers.
Indus InSite is the first Internet-born and architected collaborative asset
management product designed to deliver collaborative commerce to the mid-tier
market of industries with less complex assets. InSite is offered as a hosted
product. InSite was developed using a pure JAVA 2 EE design, thereby ensuring
compliance with Internet standards, and the Company has spent nearly two years
developing the product, which was formally introduced on October 23, 2001.
This design represents a major product differentiator, as most competitive
designs simply attach an Internet front-end to their current technologies, which
limits their ability to take advantage of the true power of the Internet.
The Company's EAM products include consulting services provided by subject
matter experts. This approach helps customers implement advanced EAM maintenance
principles, materials management theories, and other advanced "best practice"
strategies designed to provide a competitive advantage to the customer. The
service package content comprising this business process improvement product
leverages the knowledge gained from hundreds of customer implementations, the
extensive plant experience of the Company's employees, and the global experience
of its user community.
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Regionally located in close proximity to customer sites, the Company's
professional services organization supports the Indus sales organization. The
resulting process provides a high quality information exchange as customers
learn how the PassPort and EMPAC products address industry-specific
requirements. The Company also offers global 7 (days a week) x 24 (hours a day)
multilingual customer support. The Company believes this combination of
enterprise software, vertically oriented consulting services and worldwide
customer support enables customers to increase equipment and production
capacity, reduce operating costs, and safeguard the workforce and the
environment.
The Company was formed through the combination of The Indus Group, Inc., a
California corporation, and TSW International, Inc., a Georgia corporation, in
August 1997.
Indus, Indus Solution Series, IndusWorld, Indus InSite, PassPort Software
Solutions, ABACUS, ABACUS Toolkit, Sextant, PORTAL/G, PORTAL/95, PORTAL/97,
PORTAL/J, VIEWPORT, Prism Consulting, Enterprise MPAC, EMPAC,
IndusKnowledgeWarehouse, IndusConnect, IndusBuyDemand, IndusAnyWare, IndusASP,
Curator, AssetWare, AssetCare, myindus.com and CareNet are trademarks and
service marks of the Company. All other brand names or trademarks are the
property of their respective holders.
PRODUCTS AND SERVICES
The Company delivers world-class, business process based, EAM products,
scaled and value priced for specific industry segments. The Company targets
industries with highly complex assets through its PassPort and EMPAC software
products. The Company targets industries with less complex assets, such as
property management, consumer packaged goods, health sciences, manufacturing,
and education and government through its recently introduced Indus InSite
software product. These products are implemented by the Company's professional
services organization and supported by its worldwide customer service
organization.
PassPort and EMPAC
PassPort and EMPAC support an organization's operations and maintenance
workforce, inventory management and procurement professionals, safety and
compliance engineers, and other decision making personnel affected by asset care
decisions throughout the enterprise. This customer user group is supported by
such Indus software products as: asset and work management systems, materials
and procurement systems, eProcurement systems, and safety and compliance
systems, which seamlessly integrate to third party corporate financial systems
from Oracle, PeopleSoft, i2, Lawson, and other providers. Beyond providing
departmental information to affected workgroups throughout the customer
organization, EAM techniques employed by the Company integrate process control
systems and optimize capacity utilization through just-in-time maintenance
management practices. PassPort and EMPAC incorporate sophisticated EAM
methodologies, including reliability centered maintenance ("RCM"), total
productive maintenance ("TPM"), web-based electronic commerce, and handheld
mobile units to enable customers to apply Indus software products as a means to
achieving a strategic and competitive advantage.
EAM application business systems comprising PassPort and EMPAC are designed
to reflect the requirements of specific vertical industry functions, and the
technical architecture traditionally employed in these industries. The resultant
transaction engines are designed to support PassPort and EMPAC. Functions within
the application product lines have been tailored to encapsulate vertical
business processing requirements that are augmented by subject matter expertise
and consulting service packages, which uniquely position Indus to deliver a
total product across the enterprise.
PassPort and EMPAC Target Markets
PassPort and EMPAC, for large market, asset-intensive industries, requiring
complex functionality, provide a series of business applications and business
process improvement service packages that meet the EAM needs of businesses such
as utilities, oil and gas, pulp and paper, mining and metals, defense, and
process. PassPort is an integrated work management and supply chain software
product, originally architected for the nuclear and highly regulated process
manufacturing environment. Primary PassPort customers are very large operations
that need size scalability and product depth, such as regulatory compliance for
hazardous chemicals, radiation exposure, and fugitive emissions. EMPAC is an
integrated maintenance, inventory, and purchasing software product, originally
architected for discrete manufacturing plants, mining operations, and paper
mills. Primary EMPAC customers are medium and large operations that need
flexible product configurability to fit different plant sizes and product lines,
as well as product width, such as integration capabilities with financial and
human resources software products.
Product Architecture and Development Strategy
Both PassPort and EMPAC offer a high degree of flexibility, rapid
implementation, and scalability across multiple databases and operating systems.
These products are compatible with popular productivity software such as word
processors and spreadsheets. The Company utilizes industry-standard tools and
technologies to develop products, enabling software products comprising this
series to evolve along with rapidly emerging standards. The products are also
scalable, permitting changes in network size, server platforms, and other
architectural components with minimal disruption. The Company's products are
designed for ease of use and are largely
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platform independent, running on industry-standard UNIX and MVS servers,
including the IBM RS/6000, HP 9000, and Sun Solaris systems. The Company's
architecture utilizes the power and functionality of relational database
management systems from both Oracle and IBM with both text-based and graphical
user interfaces.
The Company provides versions of its client products on the Internet, for
both E-Commerce (extranet) and internal (intranet) applications. The Company's
clients also support a Windows Explorer navigational ability, which can be
accessed from the native client as well as the Internet. Standard Internet
protocols are used to integrate PassPort and EMPAC with popular office software
on the user's desktop. Users may also execute reports on the server and view
them through the web browser. The Company was also the first EAM vendor to
provide a suite of mobile computing modules to support critical field and
warehouse business practices.
The real-time, collaborative architecture of PassPort and EMPAC relies upon
an application server to process all application logic that is used by the web
browser to render the user interface. The database server carries out data
management functions. Integration with market-leading lightweight directory
access protocols, or LDAP, provides common user definitions and security between
various PassPort and EMPAC applications and other LDAP-compliant applications.
Additionally, the use of extensible markup language, or XML, and messaging over
hypertext transfer protocol, or HTTP, as well as open application programming
interfaces, or APIs, accessible via COM, Java, and C/C++, augment its
integration capabilities.
The PassPort and EMPAC security architecture incorporate extensive security
features designed to protect sensitive data managed by the application from
unauthorized retrieval or modification. It uses the capabilities of its own
applications, the client operating system software, some of the security
features of the relational database management system platforms, as well as
certain third-party security products, such as LDAP directory servers.
Implementation Methodology and Related Services
Indus products are implemented through the Company's proprietary ABACUS
tools and implementation methodology. ABACUS consists of software-driven
analytical tools, implementation plans and educational resources that
encapsulate the Company's extensive experience in implementing enterprise
management software products. ABACUS provides a step-by-step implementation life
cycle framework for all installation, integration, and education and business
review activities. In addition, ABACUS enhances the ongoing effectiveness of
Indus software products and assists customers in improving their business
processes.
ABACUS software tools use a time-sensitive and track-oriented approach to
help customers and the Company's business experts, technical specialists and
training professionals implement the Company's applications. In addition to
interactively identifying implementation procedures, ABACUS contains over 575
"best practice" examples of how such procedures were performed by other process
industry companies, drawn from the Company's extensive experience in
implementing EAM software products. The Company currently licenses ABACUS
software tools in conjunction with Indus software products, which includes the
use of the ABACUS ToolKit, a version of the ABACUS software that allows
customers to tailor their internal project goals and objectives with other
corporate initiatives, modify implementation plans and associated deliverables,
supporting specific project/progress reporting, etc. Versions of ABACUS products
have been created to effectively address the Company's entire product suite, as
well as implementation requirements and "best practice" selections of interest
to specific vertical industries.
A critical component of the ABACUS implementation is the partnership
between the software provider (the Company) and the customer. At the outset of
the project, the Company assigns a Project Manager or Account Executive to help
ensure a successful, on-schedule implementation. Throughout the implementation
process, the Indus team defines and then executes a customer-specific, yet
time-proven, implementation process that focuses heavily on critical Business
Process Improvement ("BPI") and Return on Investment ("ROI") processes to drive
current and future customer success. The Company has also developed alliances
with large systems integrators, as well as smaller third-party implementers and
providers. This ensures that customers with specific requirements can leverage
the value-added services of these firms when implementing PassPort or EMPAC.
PassPort/EMPAC Workbenches
A series of workbenches assist information engineers in the development of
business application systems and post-development implementation support for
large-scale projects. These workbenches include programming tools, data services
workbenches for data load and system interface exercises, and data migration
tools. These productivity tools help the Company demonstrate rapid development
of high-quality, highly functional applications on predictable schedules and
within established budgets.
The Company also licenses PassPort and EMPAC workbenches to customers
desiring the ability to modify business applications to suit internal needs and
to perform system administration and maintenance over the application life
cycle.
Hosted Products
PassPort and EMPAC are available as a hosted product fully supported
through remote data centers. The Indus hosted product provides the EAM
excellence of PassPort and EMPAC, integrated web-enabled applications, and the
Internet's e-business
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opportunities. The Company is responsible for the customer's hosted system and
is the single point of contact for any functionality issues related to PassPort
or EMPAC. PassPort or EMPAC are accessible over the Internet or a dedicated
network, via a web browser. The hosted product offers comprehensive
functionality, reduces implementation time, and service levels are guaranteed.
The Indus hosted product integrates with customer legacy systems,
delivering a true best-of-breed product. It includes many touch points with
other industry software application leaders such as Oracle and PeopleSoft. The
hosted product provides the flexibility of both packaged and tailored products.
The packaged product is a pre-configured, turnkey system that addresses the
traditional needs of organizations. The tailored product provides the proven
flexibility to ensure that unique organizational needs are completely fulfilled.
The hosted product contains robust, layered security to protect the
data. Firewall products are provided to guard entry points into the hosted
environment. Proactive monitoring provides alerts to the System Security
Operations staff. Digital certificates secure the web servers, and all
communication is via SSL, a security protocol that provides communications
privacy over the Internet. Database access is only available via the
application, which has embedded security measures. Based on an authenticated ID
and password, access is limited to a user's job functions.
The Company's hosted product infrastructure partners provide a suite of
services that expertly manage mission-critical software. With a large,
multi-specialized, technical staff of certified engineers, the infrastructure
partners provide the level of services and expertise necessary to ensure secure,
scalable, high-performance operation 24 hours a day. Their services include
installation and maintenance of hardware and software, core software expertise,
high-volume backup and recovery systems, and constant, proactive monitoring by
their server operations center.
INDUS INSITE
The Company's experience working with customers in many different markets, and
its ongoing research and development efforts highlighted an opportunity to
develop a product to meet market needs. The evolution of collaborative business
models and Internet software technologies provided an opportunity for a
different maintenance product.
What Does InSite Do?
Indus InSite addresses the need for, and the benefits associated with,
collaboration, which is typically defined as "working together towards a shared
objective." Collaboration occurs between different departments within an
organization as well as between separate divisions and even completely separate
companies. Most vertical industries are outsourcing activities that are
"non-core" to a company's business model. Breaking down barriers of geography
and language has resulted in a push to expand operations into new global
markets. Geography, time zones, monetary systems, divergent cultures, functional
and organizational differences, technology and application disparities all
create gaps between distributed teams that share a common goal of contributing
to a growing number of day-to-day and strategic business activities.
[GRAPHIC]
Many companies are looking for ways to bridge these gaps, tying into
cross-organizational business processes, sharing important operational data,
integrating with the business systems that run the enterprise, and providing a
valuable cross-enterprise platform for rich collaboration.
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Collaboration In The Maintenance World
In the realm of asset lifecycle management, collaboration can have
tangible benefits. Many companies are outsourcing certain maintenance activities
to external firms that have a certain expertise or qualification. Typically,
these organizations coordinate maintenance activities via telephone, fax, email,
or paper work transactions. The asset owner and the maintenance contractor share
a common goal - the maximum performance and optimization of that asset.
Performance may be measured by uptime, output, availability, operation within a
specified range, or some other measurement. Their working relationship may be
governed by contracts specifying the terms.
A collaborative relationship might involve both parties sharing common
performance information and key performance indicators (KPI's). They could
access the same asset monitors for real-time statistical information. They could
use a shared communication protocol for updates, alerts and reporting. Their
work management systems could intersect so that a Work Request from the asset
owning company becomes a Work Order for the maintenance company, and their
completed task process updates both companies' systems.
The benefit of this form of collaboration is faster maintenance
response time and accuracy, resulting in optimal asset productivity. It means
lower costs owing to more accurate asset management, and streamlined
communication. It improves asset management capabilities with shared, real-time
performance measures so that both companies are working from the same
intelligence.
Another example is represented between a manufacturing company and
their distributors. Many companies have a network of distributors, often in
different countries, time zones and languages. Coordinating production schedules
can be difficult with variable supply and output constraints. Communication
errors, production shortages, cost overruns, and excessive inventory can result.
In the collaborative world, all these groups work as a team, with a common goal
of optimized production and distribution. It is difficult if these groups are
divisions of the same company, and it is even more difficult for separate
companies operating in different countries, languages, currencies, time zones,
and units of measurement.
True collaboration results when these companies share common
information and measurements of inventory levels, production schedules, and
asset performance. Benefits are achieved when their business processes work
together ensuring fast access to accurate information in a common language.
Ideally they could work in their own language and terms while still accessing a
common source of information.
Indus InSite - Facilitating Collaboration
Indus InSite delivers sustainable benefits--competitive advantages,
operational excellence, and maximum profitability-- through uncompromising
functionality, intellectual property, and scalability. Indus recognized the need
and opportunity for a new product that could facilitate collaboration and
deliver tangible benefits. InSite was developed from the ground-up to address
these challenges and deliver accelerated return on investment. InSite was built
around four key design philosophies: pure Internet, ease of use, business
intelligence and collaboration. These design philosophies ensured that InSite
would enable Indus to help its clients to architect their collaborative
enterprise. The specific features and functions result in business value in many
areas.
Accelerated ROI
Using advanced decision and data search technologies, InSite provides a
self-evident system interface allowing customers' employees to use the system
easily and effectively, to find problems within the business operation and then
to fix those problems and prevent them in the future. Comprehensive e-Learning
tools are integrated with the product so that any user can quickly learn how to
use it, and become productive within hours, versus months for a traditional EAM
product. This means system implementation and data conversions from customers
legacy systems are accomplished within 2-3 months rather than the traditional
12-18 months required by more complex enterprise asset management systems.
Operational Intelligence
InSite transforms data into information that forms the basis of
operational intelligence. Information is analyzed and "pushed" to the right user
at the right time to optimize decision-making. Key performance indicators
provide the executive management team with instantaneous access to production
alarms as well as production performance data. This business value allows them
to make just-in-time or even predictive decisions that will significantly
eliminate production downtime, stabilize equipment uptime, and ensure that a
company runs leaner as well as smoother.
Workforce Mobility
InSite allows end users to use a full suite of pagers, personal digital
assistants and cellular telephony to better inform a wealth of geographically
distributed personnel inside and outside of a customer's business. InSite
provides customers' employees and partners, no matter where they are in the
world, with information on work order status, equipment problems, labour
problems,
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production issues and even inventory issues. By having this data instantly
available, InSite empowers these people to make fast decisions that can resolve
production issues before they become major problems.
Investment Protection
For its development of InSite, the Company used current available
technology with development methodologies and techniques to create a modular
product that can grow and adapt to customers future needs. The Company decided
to use the BEA JAVA 2 EE Internet-born architecture that allowed Indus to
totally separate the platform design from the functional design. This allows the
customer's InSite software investment to evolve with numerous enhancements at
both the platform and the functional level. For example, the benefit of
component development within the Indus partner BEA framework allows the user the
ability to add, subtract, enhance or otherwise modify specific functionality of
the software with no impact on the rest of the software. The result is a product
where future software releases are backward compatible with their particular
configurations.
Lower Entry Cost
InSite is a hosted application product without any up-front license
fees. When a customer signs up for a three-year contract or longer, the Company
can show the customer how the Company will reduce the associated information
technology cost. The trend towards applications delivered as web services via
application service providers or hosted products is growing. IT departments
today are under cost and performance pressures, and the ability to eliminate new
hardware, networks, software and support allows the IT department to concentrate
more attention on supporting the information of IT, not the infrastructure.
Enabled Collaboration
InSite was developed with the capabilities to bridge the gaps between
geographies, organizations, applications, languages, and functions. Open
communication protocols, and the modular architecture promote integrated
information and business processes in multiple languages, currencies, and even
technologies.
Finally, InSite can provide standard Enterprise Application Interfaces
("EAI") using XML technology that allows the customer to easily integrate
e-Commerce, e-Procurement, e-Services and many other Internet-based capabilities
into the customers operations. Internal departments, as well as external
partners, suppliers, and contractors can share common performance data and work
processes to achieve their common objectives. This allows purchasing groups to
collaborate with their suppliers, which will lower their capital equipment costs
or even their day-to-day operational supply procurement costs. As suppliers
increasingly share asset lifecycle management responsibilities with customers,
or assume full responsibility with performance guarantees, InSite becomes a
valuable tool to enable the exchange of information about asset performance and
history between the supplier and asset owner. Even contractors can use InSite to
accelerate maintenance response time, and truly collaborate with their clients.
CUSTOMER SERVICE AND SOFTWARE MAINTENANCE
Indus World Wide Customer Service provides high-quality assistance to help
customers increase productivity and system availability. The Company combines
state-of-the-art technology and a highly skilled team of professionals to
deliver service through an international infrastructure designed to respond
promptly and effectively to customer needs.
The Company offers a variety of service options for each of its products.
Indus World Wide Customer Service Centers are strategically located in North
America, the United Kingdom, and the Asia Pacific region. Two of the Company's
service programs are `5 x 24' and `7 x 24', which provide extended telephone
service after business hours for production-down and critical issues, 24 hours a
day, 5 and 7 days a week, respectively. No matter the point-of-origin of the
call, or what time, our toll-free number automatically routes the customer's
call to a fully staffed Indus Customer Service Center. By accessing a global
customer service database, the Company's customer service professionals can
share the most up-to-date technical information and provide fast, consistent
responses to customer issues around the clock from anywhere in the world
eService is Indus' web-based mechanism for allowing our customers to access
information about our products and services, as well as log cases, suggest
product enhancements, and search for patches or resolutions to common product
issues. This service is available 24-hours-a-day, 7-days-a-week.
TRAINING
The Indus Learning Center, the Company's training division, designs,
manages, and implements comprehensive education and training products for its
user community. The Company's training professionals provide instructional
design and courseware development services, training coordination support,
train-the-trainer and end-user programs, and technical training for customer
installations worldwide. Open enrollment training courses are provided at the
Company's training centers in Atlanta, Georgia; Toronto, Canada; Woking,
England; and Brisbane, Australia. Training is also provided at customer sites at
the customer's option. The Indus Learning Center has developed a comprehensive
set of e-Learning training materials to educate and train customers and
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internal staff. The e-Learning products include web-based-training courses and
Indus e-Class, an on-line step-by-step guide for cycling through Indus product
screens.
CUSTOMERS
The Company provides enterprise management software products to large
process industry customers primarily in the energy industry, continuous process
industries, industrial manufacturing industry, and the public sector. Customer
groups within these capital-intensive markets include: electric and gas
utilities, telecommunications providers, petrochemical refineries, mining and
metals, forest products producers, consumer packaged goods manufacturers,
educational systems, and governmental and military institutions. The Company
intends to target industries with less complex assets, such as property
management, consumer packaged goods, health sciences, manufacturing, education
and government, and others through its recently introduced Indus InSite software
product.
As of December 31, 2001, the Company's products were licensed for use by
over 300,000 end-users representing 460 customers in 45 countries.
In the first quarter of 2001, the Company announced that the United
Kingdom's Ministry of Defense "MoD" had selected the Company as the application
provider for the MoD's Defense Stores Management Solution ("DSMS") for logistics
and asset management. The DSMS contract represented 23.3% of the Company's total
revenues in 2001. One other customer accounted for 12.2% and 13.2% of Company's
total revenues in 2000 and 1999.
In January 2002, the Company announced that it received notification that
the MoD suspended all current contractual work on the DSMS project, as it
reviews its priorities against long-term resource availability. The MoD has not
advised the Company when this review will be completed. The Company cannot
assure investors that the DSMS project will be resumed, or if it is resumed what
the scope of work will be involved. The Company expects to incur operating
losses in the near term as a result of the suspension of the DSMS project.
SALES AND MARKETING
The corporate marketing function is organized into vertical business areas,
which comprise capital-intensive facilities and process industries targeted by
the Company. By segmenting the market into vertical business areas, the Company
can package and deliver its products and service offerings effectively to the
industries it serves. These markets and sub sectors consist of the following:
UTILITIES, COMMUNICATIONS AND DEFENSE INDUSTRIES
Water and waste treatment
Nuclear power generation
Fossil power generation
Hydroelectric power generation
Energy transmission and substations
Energy distribution and delivery
Defense logistics Communications
ENERGY RESOURCE EXTRACTION AND PROCESS INDUSTRIES
Chemical, petrochemical, oil, and gas
Metals and mining
Pulp, paper and forest
Process manufacturing
Discrete manufacturing
Pharmaceuticals and biotech
Consumer packaged goods
Public transit
Education and government
The Company markets and sells its products and services in three primary
areas of the world:
- the Americas, with direct sales representatives in the US, Canada and
Latin America;
- Europe, the Middle East and Africa, with direct sales representatives in
the UK, France and the United Arab Emirates;
- and Asia-Pacific, with direct sales representatives in Australia and
Japan.
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In addition to these direct marketing and sales resources, the Company
utilizes business partner relationships and channel partner programs directly
and indirectly in other parts of the world. As of December 31, 2001, the
Company's Sales and Marketing organization consisted of 111 employees. The
marketing staff is based at the Company's office in Atlanta, Georgia, while the
sales organization is decentralized throughout the three operational centers.
The direct sales cycle begins with the generation of a sales lead, or the
receipt of a request for proposal from a prospect, which is followed by
qualification of the lead, an analysis of the customer's needs, response to a
request for proposal, one or more presentations to the customer utilizing the
special knowledge of the industry vertical pre-sales staff, customer internal
sign-off activities, and contract negotiation and finalization. While the sales
cycle varies depending on the customer, the sales cycle generally requires from
three to eighteen months.
In support of its sales force, the Company conducts comprehensive
industry-specific vertical marketing programs which include public relations,
trade advertising, industry seminars, trade shows and ongoing customer
communication programs through IndusWorld, the Company's international user
group. In addition, the Company's Account Manager Program provides regional
support and specialized attention for each of its customers. Account Managers
assist in implementing licensed applications over multi-year engagements,
promote licensing of additional applications, and encourage existing customers
to identify and help fund new applications and expanded core offerings.
STRATEGIC RELATIONSHIPS
INDUS STRATEGIC CLIENT PROGRAM
The Indus Strategic Client Program is designed to create a relationship in
which all participants receive benefits. The Company and its strategic clients
take mutual responsibility for the overall success of the program. The program
establishes the collaborative planning framework to recommend improvements to
the business processes of both parties, implement innovative and cost-effective
solutions to business needs, and engage each other in the Company's strategic
vision. The program improves the competitive positioning of Indus and the
strategic clients, enhances the ROI that strategic clients receive from
implementing PassPort, EMPAC or InSite, and continues the high quality and
reliability of Indus products, project support, and customer service.
The Company anticipates that the Strategic Client Program will result in
ongoing refinement and/or extension of PassPort, EMPAC, or InSite, such that
Indus will maintain its leadership position in the EAM marketplace. Additional
specific objectives include the following:
- - Work collaboratively to document return on investment by customers.
- - Identify appropriate partner applications.
- - Fully leverage Indus products to support the strategic clients' growth
strategies.
- - Identify new products and extensions to existing products that support the
Company's strategic objectives.
The Company has identified the following criteria for participation in the
Strategic Client Program:
- - Commitment to PassPort, EMPAC, or InSite and agreement to act as a
reference site.
- -- Recognized knowledge and business improvement leaders in their industry.
- -- Deployment of a collaborative strategy with strategic software partners.
- -- Willingness to commit resources to exploit opportunities and sustain their
competitive advantage.
INDUS SOFTWARE PARTNER PROGRAM
Through its Software Partner Program, the Company offers a series of
partner programs designed to increase the number of software products it can
provide to its customers, enabling Indus to continue to focus on developing and
delivering functionally advanced EAM products.
The Company believes that the need to forge strategic partnerships is
continually increasing as the needs of the Company's customers evolve and the
global marketplace expands. By combining the Company's own market-leading EAM
software with its partners' considerable strengths in products, services and
market-focused products, the Company provides its customers the leverage needed
to increase its return on assets, while providing the Company with additional
software license fees and services.
The Company partners with the "best in class" to ensure that its customers
receive leading products and services in the marketplace. These partners must
demonstrate the market leadership and vision that enables the Company to deliver
the high level of excellence that its customers have come to expect.
The Software Partner Program consists of three partner categories, three
partner levels, and distinction as to whether a partner is certified or not.
Each partnership level (Premier, Associate and Embedded) and the category of
partner certification (EAI, eBusiness
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and CSP) drive the nature of the relationship. The Company is also developing a
new partner level, for strategic partners, which would work with Indus to
aggressively extend the breadth of the Company's portfolio and market reach,
while generating incremental and new revenue. The following provides brief
descriptions for each type of existing partner level and category:
Partner Levels:
1. PREMIER: This level of partner is critical to the Company's success in
providing enhanced product functionality, competitive positioning and
product differentiation.
2. ASSOCIATE: This level of partner provides added value to the Company's
products through services and/or product functionality.
3. EMBEDDED: These partners are established market leaders that broaden and
enhance our core infrastructure thus shortening development time and
accelerating time to market. Each Embedded Partner has the opportunity to
partner at any of the three specific levels of partnership.
Partner Categories:
1. ENTERPRISE APPLICATION INTEGRATION (EAI): These are partners that provide
middleware software or applications that are used to develop a module(s) of
the Company's application suite. By definition and the nature of their
products, EAI partners are certified as Indus Solution Services Partners
through the integration of the partner offering into Indus' products. By
the nature of these partners, their partner level is considered Strategic.
2. EBUSINESS: These are partners that deliver part of the eBusiness product
suite. Business Partners may or may not be certified. This depends on the
partner and how they want to be positioned with the Company to the customer
community. The products provided by the eBusiness partner extend the value
of the Company's software through their offerings. Each eBusiness partner
has the opportunity to partner at any of the three specific levels of
partnership.
3. COMPLIMENTARY SOLUTION PROVIDERS (CSP): These are partners that provide
products that extend the value of the Company's software through their
offerings. CSP partners may or may not be certified. This depends on the
partner and how they want to be positioned with the Company to the customer
community.
INDUS SOFTWARE PARTNERS
The Company works with a variety of partners to create the widest range of
possible products for its customers. The following list highlights several of
the Company's Partners:
1. ORACLE CORPORATION -- both an Enterprise Resource Planning partner and a
B2B eComerce partner helping the Company to leverage B2B technology.
2. BEA SYSTEMS INC. -- supports the Company's customers' need to design and
automate business processes that integrate back-end applications and
e-commerce technologies.
3. PEOPLESOFT -- for corporate financial, human resources, and payroll
systems.
4. ALTAVISTA -- a complimentary product partner with its first full-text
search service.
5. I2 TECHNOLOGIES -- expands the Company's global inventory visibility and
search capabilities by enabling business-to-business end-users to find,
analyze, organize, and monitor product and supplier content (catalogs).
6. BUSINESS OBJECTS -- provides business intelligence that lets organizations
access, analyze, and share information internally with employees and
externally with customers, suppliers, and partners.
7. WIZART -- a complete internationalization workbench that allows in a very
short time the translation of information internally (messages, external
components) and externally (no recompilation).
RESEARCH AND DEVELOPMENT
The Company has a dedicated research, development, and software engineering
organization, and regularly releases new products and enhancements to existing
products. Research and development efforts are directed at increasing product
functionality, improving product performance, and extending the capabilities of
the products to interoperate with selected third-party software products
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available from alliance partners such as Oracle, PeopleSoft, BEA, AltaVista, i2,
and others. These efforts include developing new applications that address new
horizontal and vertical functions.
The Company believes that research and development is most effectively
accomplished if customers are involved in the process. Through direct customer
involvement and consensus input from user group oversight committees, product
content is improved and the customer acceptance of new software deployment is
significantly increased. In addition, the interactive development process
promotes increased customer awareness of the technological features of the
product and fosters greater product loyalty.
As of December 31, 2001, the Company had 347 employees engaged in research
and development. The Company's research and development expenses were
approximately $33.8 million, $51.6 million and $49.5 million in 1999, 2000 and
2001, respectively. Customers, as part of service contracts, fund certain
development costs. Reimbursed development costs are included as part of cost of
revenues.
COMPETITION
The EAM software products business is highly competitive, constantly
changing, and significantly affected by new product and technology innovations
brought about by industry participants. The Company believes that the principal
competitive factors in its businesses will be:
- product performance and functionality;
- adaptability to new trends driven by technology and customer
requirements;
- cost of internal product development as compared with cost of purchase of
products supplied by outside vendors; cost of ongoing maintenance; and
- time-to-market with, and market acceptance of, new products, including
Indus InSite; and new enhancements, functionality and services.
The Company's success also depends significantly on its ability to develop
more advanced products more quickly and less expensively than its existing and
potential competitors and to educate potential customers of the benefits of
licensing the Company's products. The Company's competitors include companies in
the enterprise, departmental, and point products market segments. At the
enterprise product level, the Company's main competitors are SAP, Oracle, and
Industrial and Financial Systems ("IFS"). The Company counters these competitors
by offering product sets that provide baseline integration to Oracle's corporate
financial and human resources applications, SAP's financial applications, and
PeopleSoft's corporate financial, payroll, and human resources applications. In
the departmental or plant products market for "Tier 1", customers having annual
revenues greater than one billion Dollars, the Company competes primarily with
other EAM software vendors such as SAP, Mincom Corp., and IFS. In "Tier 2",
markets with customers having annual revenues between $250 million and one
billion Dollars, the Company competes with MRO Software, Inc. (formerly Project
Software & Development, Inc.), Marcam, Gores, Invensys, and Datastream Systems,
Inc. Point products vendors such as Severn Trent Systems, Synercom, and others
provide competing software products to industry sub-sectors such as transmission
and distribution of electric power for utilities.
In the future, the Company may also face competition from PeopleSoft and
SPL WorldGroup B.V., if these vendors elect to broaden their products to include
some components of EAM functionality. In addition, the Company faces competition
from suppliers of custom-developed business application software that have
focused largely on proprietary mainframe- and microcomputer-based systems with
highly customized software, such as the systems consulting groups of major
accounting firms and systems integrators. A host of Internet-based application
vendors, who offer state-of-the-art systems that can complement the PassPort,
EMPAC, or InSite, may become competitors in certain cases where they attempt to
extend their products to cover the entire range of Supply Chain Management or
other activities. The Company also faces competition from systems developed by
the internal MIS departments of large organizations.
The Company believes it has a number of competitive strengths that will
help it maintain its leadership within the EAM space. First is the Company's
depth and breadth of products, with some of the most comprehensive EAM products
on the market developed with over 25 years or experience, which has led Indus to
capture much of the "Tier 1" market. Second is the Company's scalability, with
products able to scale up to multiple thousands of users. Third is the Company's
substantial installed base of "Tier 1" clients, providing a source for selling
additional services and add-on modules, as well as providing client references
that can help the Company close deals with new prospects. Finally, the new Indus
InSite product will potentially enable the Company to break into the "Tier 2"
market.
PROPRIETARY RIGHTS AND LICENSING
The Company relies on a combination of the protections provided under
applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing arrangements to establish and protect
its rights in its software. Despite the Company's efforts, it may be possible
for unauthorized third parties to copy certain portions of the Company's
products or to reverse
14
engineer or obtain and use information that the Company regards as proprietary.
In addition, the laws of certain countries do not protect the Company's
proprietary rights to the same extent, as do the laws of the United States.
Furthermore, the Company has no patents, and existing copyright laws afford only
limited protection. Accordingly, there can be no assurance that the Company will
be able to protect its proprietary software against unauthorized third party
copying or use, which could adversely affect the Company's competitive position.
The Company licenses its applications to customers under license
agreements, which are generally in standard form, although each license is
individually negotiated and may contain variations. The standard form agreement
allows the customer to use the Company's products solely on the customer's
computer equipment for the customer's internal purposes, and the customer is
generally prohibited from sub-licensing or transferring the applications. The
agreements generally provide that the Company's warranty for its products is
limited to correction or replacement of the affected product, and in most cases
the Company's warranty liability may not exceed the licensing fees from the
customer. The Company's form agreement also includes a confidentiality clause
protecting proprietary information relating to the licensed applications.
The Company's products are generally provided to customers in object code
(machine-readable) format only. From time to time, in limited circumstances, the
Company has licensed source code (human-readable form) subject to customary
protections such as use restrictions and confidentiality agreements. In
addition, customers can be beneficiaries of a master source code escrow for the
applications, pursuant to which the source code will be released to end users
upon the occurrence of certain events, such as the commencement of bankruptcy or
insolvency proceedings by or against the Company, or certain material breaches
of the agreement. The Company has the right to object to the release of the
source code in such circumstances, and to submit the matter to dispute
resolution procedures. In the event of any release of the source code from
escrow, the customer's license is limited to use of the source code to maintain,
support and configure the Company applications.
The Company may from time to time receive notices from third parties
claiming infringement by the Company's products of proprietary rights of others.
As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software developers may become increasingly subject to infringement claims. Any
such claims, with or without merit, can be time consuming and expensive to
defend or could require the Company to enter into royalty and licensing
agreements. Such agreements, if required, may not be available on terms
acceptable to the Company, or at all.
EMPLOYEES
As of December 31, 2001, the Company employed 899 people, of which 347 were
primarily engaged in research and development activities, 374 in post-sales
support and customer project operations, 111 in sales and marketing, and 67 in
administration and finance. None of the Company's employees are represented by a
labor union. The Company has experienced no work stoppages and believes that its
relationship with its employees is excellent.
The Company's future success depends, in large part, on the continued
service of its key management, sales, product development and operational
personnel and on its ability to attract and retain highly qualified employees,
including management personnel. There can be no assurance that the Company will
be successful in attracting, retaining and motivating key personnel.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 2002 were as follows:
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION
Thomas R. Madison.............................. 56 Chairman of the Board of Directors
Kent O. Hudson................................. 48 President and Chief Executive Officer
Richard H. Beatty.............................. 55 Executive Vice President and Chief Operating Officer
J. Michael Highland............................ 41 Executive Vice President Finance and Administration and Chief
Financial Officer
Mr. Madison has served as Chairman of the Board of Directors of the Company
since December 19, 2001 and as a director of the Company since April 24, 2001.
From January 2001 until December 2001, Mr. Madison served as an independent
management consultant. From May 1999 until January 2001, he served as President
and Chief Executive Officer of Talus Solutions, implementers of products and
services that optimize pricing strategies and practices based upon customer
buying behaviors. From March 1994 until May 1999, Mr. Madison served as Group
President and Corporate Vice President of Computer Sciences Corp.
Mr. Hudson has served as President and Chief Executive Officer and a
director of the Company since January 11, 2000. During 1999, he was a consultant
to the Company. From August 1998 to January 2000, he served as the President of
Trinity Coast, Inc., a management consulting firm. From July 1997 to September
1998, he was President and Chief Executive Officer of Strategic Resource
Solutions, the non-regulated subsidiary of Carolina Power and Light. From
November 1991 to June 1997, he was founder
15
and Chief Executive Officer of Applied Computer Technologies, an EAM software
product for educational institutions, prior to its acquisition by Carolina Power
and Light.
Mr. Beatty has served as Executive Vice President and Chief Operating
Officer and a director of the Company since January 11, 2000. From 1996 to
August 1999 he was an independent consultant. From 1992 to 1996 he served as
President, Consulting Services for SHL SYSTEMHOUSE. From 1980 to 1992 he was a
Partner at Andersen Consulting.
Mr. Highland has served as Executive Vice President Finance and
Administration and Chief Financial Officer since February 1, 2001. He served as
Chief Operating Officer for Gainor Medical Management, Inc., a diabetes disease
management provider and medical device distributor from 1996 to 1999 and was
their Chief Financial Officer from 1995 to 1996. From 1994 to 1995 he was the
Chief Financial Officer of Automated Systems Design, Inc., and from 1991 to 1994
he was a manager with Arthur Andersen & Co.
EMPLOYMENT AGREEMENTS
All the executive officers of the Company have employment contracts with
the Company, except for Mr. Highland, whose employment contract expired in
January 2002.
16
FACTORS AFFECTING FUTURE PERFORMANCE
The Company's Operating Results May Fluctuate Significantly from Quarter to
Quarter.
The Company's operating results have fluctuated in the past, and the Company's
results may fluctuate significantly in the future. Prior to the third quarter of
2001, the Company had generated net operating losses for the seven prior
quarters, starting with a $6.8 million loss in the fourth quarter of 1999,
increasing to a $20.2 million loss in the second quarter of 2000, and decreasing
subsequently to a $6.7 million loss in the second quarter of 2001. Although the
Company was profitable in the third and fourth quarters of 2001, the Company
does not expect to be profitable in the near term and may not be profitable in
future quarters. Operating results of the Company may fluctuate from quarter to
quarter, depending on a number of factors, including:
- the relatively long sales cycles for its products;
- delays or deferral in the completion of product implementation;
- the variable size and timing of individual license transactions;
- changes in demand for its products and services;
- market acceptance of new products, including Indus InSite and any next
generation product offerings;
- the development and introduction of new operating systems and/or
technological changes in computer systems that require additional development
efforts;
- competitive conditions in the industry, including changes in the pricing
policies of the Company or its competitors;
- changes in customer budgets;
- the introduction of new products or product enhancements by the Company
or its competitors;
- the Company's success in, and costs associated with, developing,
introducing and marketing new products, including the necessary software and
technology for Indus InSite, its eBusiness offerings and its next generation
product initiatives;
- product life cycles;
- changes in the proportion of revenues attributable to licensing fees
versus services;
- changes in the level of operating expenses;
- delay or deferral of customer implementations of their software;
- software defects and other product quality problems;
- the successful completion of customer funded development and
implementation projects;
- the success in expanding sales and marketing programs;
- personnel changes, including changes in Company management;
- changes in the Company's sales organization;
- fluctuations in foreign currency exchange rates;
- effect of SEC requirements and AICPA Statements of Position on the
Company's revenue recognition; and
- other economic conditions, generally, or in specific vertical industry
segments.
Changes in operating expenses or variations in the timing of recognition of
specific revenues resulting from any of the these factors can cause significant
variations in operating results from quarter to quarter and may in some future
quarter result in losses or have a material adverse effect on the Company's
business or results of operations.
Market Acceptance of Indus InSite and other New Products
In October 2001, the Company announced its hosted, Internet-based EAM product,
Indus InSite. There can be no assurance that any of the Company's new products,
including Indus InSite, its e-initiatives, and web-based offerings, will be sold
successfully or that they can achieve market acceptance. The Company's future
success with Indus InSite and other next generation product offerings will
depend on its ability to accurately determine the functionality and features
required by its customers, as well as the ability to enhance its products and
deliver them in a timely manner. The Internet market is an emerging market that
may undergo rapid technological change. The Company cannot predict the present
and future size of the potential market for Indus InSite and its e-initiatives.
The Company may incur substantial costs to enhance and modify its products and
services in order to meet the demands of this potential market.
Risk Associated with the United Kingdom's Ministry of Defense ("MoD") Agreement
In the first quarter of 2001, the Company announced that the United Kingdom's
MoD had selected the Company as the application provider for the MoD's DSMS for
logistics and asset management. The DSMS contract accounted for approximately
23.3% of the Company's revenues for the year ended December 31, 2001. In January
2002, the Company announced that the MoD has suspended all current contractual
work on the DSMS project as it reviews its priorities against long-term resource
availability. The MoD has not advised the Company when this review will be
completed. The Company cannot assure investors that the DSMS project will be
resumed, or if it is resumed what the scope of work will be involved. Moreover,
the Company has demobilized resources that were working on the DSMS project and
in the event that the DSMS project is resumed, there can be no assurance that
the Company will be able to remobilize its resources in a timely and efficient
manner. The Company expects to incur operating losses in the near term as a
result of the suspension of the DSMS project.
17
The Company anticipates generating a net loss during the first quarter of
2002, due primarily to the suspension of the MoD's DSMS project and related
restructuring charges the Company anticipates taking during the first quarter of
2002. A loss during the first quarter of 2002 would trigger a default of the
profitability covenant within the bank line of credit. Such a default would
require the Company to maintain a compensating balance, equal to all outstanding
credit line and letter of credit usage, with the lender. Other than the existing
$2.25 million standby letter of credit, no other usage of the line of credit is
anticipated and the Company believes it will be able to fund the compensating
balances without negatively impacting the operations of the business. The
Company also believes that the lender would provide us with a waiver if we
maintain the required compensating balance; however, our expectations of future
operating results and continued compliance with our debt covenants cannot be
assured and the lender's actions are not controllable by the Company. If our
projections of future operating results are not achieved and our line of credit
is placed in default, we would not experience a material adverse impact on our
reported financial position and results of operations because we are not in
reliance of the line of credit, except for our $2.25 million standby letter of
credit.
Indus InSite Subscription Revenue Model
Indus InSite is a hosted product, which is being made generally available
in 2002. Initially, the Company plans to sell this product through subscription
agreements under which customers will pay a relatively low monthly or annual fee
for the right to use the InSite services. The InSite service offering is
delivered via software products that are hosted by the Company and accessed by
its customers via the Internet, leased lines, a virtual private network, or
other communications methods offered by the Company. As a result, customers will
not need to create or maintain an extensive internal information system to
support the product, and the customer's cost to discontinue their subscriptions,
not renew at the end of the term, or to switch to other products, would be lower
than purchasing a license for a fee, as under the traditional license fee-based
revenue model. Moreover, the Company does not have extensive experience in
hosting applications, and the hosting industry is relatively young. If the
Company does not accurately predict the volume of traffic, or if the Company
encounters technical difficulties with the InSite software or its third-party
hosting service providers, the Company may experience slower response times or
other problems with the service. Any delays in response times or other
performance problems could result in customers discontinuing their use of the
service or not renewing at the end of the term. If a significant number of
customers discontinue their subscriptions, or choose not to renew them, it could
have material adverse impact on the Company's future revenue, and on the
Company's overall results of operations.
Market acceptance of Indus InSite depends, in part, on the continued acceptance
of the Internet for business transactions.
The development of the Internet as a medium for business transactions, and asset
management in particular, is in a relatively formative stage. As Indus continues
to develop and market Indus InSite and other Internet-based products, the
success of those products will depend on the continued use and development of
the Internet as a tool for the transaction of business, and asset management in
particular. Indus cannot assure investors that the infrastructure or
complementary services necessary to maintain the Internet will be developed or
maintained. If the Internet fails as a medium for business transactions, and
asset management in particular, it would have a material adverse affect on the
market acceptance of Indus InSite and other Internet-based products we develop.
Security risks and concerns may deter the use of the Internet, which could
adversely affect the market acceptance of Indus InSite.
A significant barrier to the adoption and success of Internet-based products
like Indus InSite is the secure transmission of confidential information over
public networks. Advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments could result in compromises or
breaches of security systems. If any well-publicized compromises of security
were to occur, it could have the effect of substantially reducing the use of the
Internet for commerce and communications. Anyone who circumvents the security
measures for Indus InSite could misappropriate proprietary information or cause
interruptions in the services Indus provides through InSite and its other
Internet-based products. The Internet is a public network, and data is sent over
this network from many sources. In the past, computer viruses, software programs
that disable or impair computers, have been distributed and have rapidly spread
over the Internet. Computer viruses could be introduced into the Indus InSite
system or those of the Company's customers or suppliers, which could disrupt
Indus InSite or make it inaccessible to customers. Indus may be required to
expend significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that the Company's activities may involve the storage and transmission of
proprietary information, security breaches could expose the Company to a risk of
loss or litigation and possible liability. The Company's security measures may
be inadequate to prevent security breaches, and the adoption of Indus InSite and
the Company's business in general would be materially harmed if we do not
prevent them.
Changes in Management
The Company has had significant turnover at the executive management level
during 2000 and early 2001. The current executive management team has only
recently begun to work together, and they may be unable to integrate and work
effectively as a team. There can be no assurance that the Company will be able
to motivate and retain the current executive management team or that they will
be able to work together effectively. If the Company loses any members of its
executive management team or they are unable to work together effectively, the
Company's business, operations and financial results could be adversely
affected.
18
Hiring and Retaining Employees
The Company's future success depends, in significant part, upon the continued
service of its key technical, sales and senior management personnel, as well as
its ability to attract and retain new personnel. Competition for qualified
sales, technical and other personnel is intense, and there can be no assurance
that the Company will be able to attract, assimilate or retain additional highly
qualified employees in the future. If the Company were unable to hire and retain
personnel, particularly in senior management positions, its business, operating
results and financial condition would be materially adversely affected.
Additions of new personnel and departures of existing personnel, particularly in
key positions, can be disruptive and have a material adverse effect on the
Company's business, operating results and financial condition.
The Company underwent two reductions in force during the first quarter of
2002, largely in response to the suspension of the DSMS project by the MoD and
general weakness in capital expenditures in the markets that the Company serves.
The Company may not be able to rehire these people if the DSMS project is
resumed or when general economic conditions improve, which could adversely
affect the Company's future operating results.
Managing Operations
Changes to the Company's business and customer base have placed a strain on
management and operations. Previous expansion had resulted in substantial growth
in the number of Company employees, the scope of its operating and financial
systems and the geographic area of its operations, resulting in increased
responsibility for management personnel. In the future, the Company will be
required to improve its financial and management controls, reporting systems and
procedures on a timely basis and to expand, train and manage its employee work
force. There can be no assurance that the Company will be able to effectively
manage its operations and failure to do so would have a material adverse effect
on its business, operating results and financial condition.
Risks Related to Restructuring
During 2000 and 2001, the Company restructured some of its operations by,
among other things, relocating its corporate headquarters and administrative
functions to Atlanta, Georgia from San Francisco, California. On March 21, 2002,
the Board of Directors approved a formal restructuring plan that will
necessitate taking a restructuring charge in the first quarter of 2002, largely
in connection with the suspension of the DSMS project by the MoD. These types of
restructurings have operational risks, including reduced productivity and lack
of focus as the Company hires, terminates and assimilates a substantial number
of new employees. In addition, there can be no assurance that the Company will
achieve the anticipated cost savings from these restructurings and any failure
to achieve the anticipated cost savings could cause the Company's financial
results to fall short of expectations. Moreover, the Company has taken charges
for restructuring expenses in connection with its restructuring, including an
$8.0 million charge in the second quarter of 2001 and an anticipated $3.620
million charge in the first quarter or 2002, and there can be no assurance that
additional charges for restructuring expenses will not be taken in future
quarters. Significant future restructuring charges could cause financial results
to be unfavorable.
Intense Competition
The EAM market is intensely competitive. In order to remain competitive, the
Company must continually enhance its baseline software and integration products
and develop new products in a timely fashion. The Company believes that the
principal competitive factors in its businesses will be:
- - product performance and functionality;
- - adaptability to new trends driven by technology and customer requirements;
- - cost of internal product development as compared with cost of purchase of
products supplied by outside vendors;
- - cost of ongoing maintenance; and
- - time-to-market with, and market acceptance of, new products, including Indus
InSite; and new enhancements, functionality and services.
The Company's success also depends significantly on its ability to develop
more advanced products more quickly and less expensively than its existing and
potential competitors and to educate potential customers of the benefits of
licensing the Company's products. Some of the Company's competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company, which may allow them to introduce products with more features,
greater functionality and lower prices than the Company's products. These
competitors could also bundle existing or new products with other, more
established products in order to effectively compete with the Company.
19
In addition, because there are relatively low barriers to entry for the
software market, the Company expects additional competition from other
companies. Increased competition is likely to result in price reductions,
reduced gross margins and loss of sales volume, any of which could materially
and adversely affect the Company's business, operating results, and financial
condition. Any material reduction in the price of the Company's products would
negatively affect its gross revenues and could have a material adverse effect on
its business, operating results, and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and the failure to do so would have a material adverse
effect upon the Company's business, operating results, and financial condition.
Possible Decrease in Market Demand
Overall demand for enterprise software may grow more slowly or actually
decrease in upcoming quarters and years because of unfavorable general economic
conditions, decreased spending by companies in the industries the Company serves
or otherwise. This may reflect a saturation of the market for enterprise
software as well as deregulation and retrenchment affecting the way companies
purchase enterprise software. To the extent that a slowdown in the market for
enterprise software market materializes, the Company's business, results of
operations and financial condition are likely to be materially adversely
affected.
Rapid Technological Change; Need to Develop New Products; Requirement for
Frequent Product Transitions
The industries in which the Company participates are characterized by rapid
technological change, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies, the emergence of new standards or changes in customer requirements
could render the Company's existing products obsolete and unmarketable. As a
result, the Company's success will depend in part upon its ability to continue
to enhance existing products and expand its products, continue to provide
enterprise products and develop and introduce new products that keep pace with
technological developments, satisfy increasingly sophisticated customer
requirements and achieve customer acceptance. Customer requirements include, but
are not limited to, product operability and support across distributed and
changing heterogeneous hardware platforms, operating systems, relational
databases and networks. There can be no assurance that any future enhancements
to existing products or new products developed by the Company will achieve
customer acceptance or will adequately address the changing needs of the
marketplace. There can also be no assurance that the Company will be successful
in developing and marketing enhancements to its existing products or new
products incorporating new technology on a timely basis.
Risks Related to Delays in Product Development
The Company has in the past experienced delays in product development, and
there can be no assurance that the Company will not experience further delays in
connection with its current product development or future development
activities. If the Company is unable to develop and introduce new products, or
enhancements to existing products, in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially and adversely affected.
Because the Company has limited resources, the Company must effectively manage
and properly allocate and prioritize its product development efforts and its
porting efforts relating to newer products and operating systems. There can be
no assurance that these efforts will be successful or, even if successful, that
any resulting products or operating systems will achieve customer acceptance.
Risks Related to Growth of International Operations
International revenues (from sales outside the United States) accounted
for approximately 32%, 31% and 41% of total revenues in 1999, 2000 and 2001. The
Company maintains an operational presence in the United Kingdom, Canada,
Australia, France and Japan. In addition, the Company has established sales and
support offices in England, France, Canada, Australia and Japan, and expects
international sales to continue to become a more significant component of its
business. However, there can be no assurance that the Company will be able to
maintain or increase international market demand for its products. In addition,
international expansion may require the Company to establish additional foreign
operations and hire additional personnel. This may require significant
management attention and financial resources and could adversely affect the
Company's operating margin. To the extent the Company is unable to expand
foreign operations in a timely manner, its growth, if any, in international
sales will be limited, and its business, operating results and financial
condition could be materially and adversely affected.
Risks Related to Foreign Exchange Rate Fluctuations
At December 31, 2001, a significant portion of the Company's cash was held
in British Pounds. In the future, the Company may need to exchange some of the
cash held in British Pounds, or other foreign currencies, to U.S. Dollars. The
Company does not engage in hedging transactions, and an unfavorable foreign
exchange rate at the time of conversion to U.S. Dollars would adversely affect
the net fair value of the foreign denominated cash upon conversion.
20
Risks Related to International Operations Generally
The Company's international business also involves a number of additional
risks, including:
- - lack of acceptance of localized products;
- - cultural differences in the conduct of business;
- - longer accounts receivable payment cycles;
- - greater difficulty in accounts receivable collection;
- - seasonality due to the annual slow-down in European business activity during
the Company's third fiscal quarter;
- - unexpected changes in regulatory requirements and royalty and
withholding taxes that restrict the repatriation of earnings;
- - tariffs and other trade barriers; and
- - the burden of complying with a wide variety of foreign laws.
The Company's international sales are generated primarily through its
international sales subsidiaries and indirect sales channel partners creating a
risk of foreign currency translation gains and losses. To the extent profit is
generated or losses are incurred in foreign countries, the Company's effective
income tax rate may be materially and adversely affected. In some markets,
localization of the Company's products will be essential to achieve market
penetration. The Company may incur substantial costs and experience delays in
localizing its products, and there can be no assurance that any localized
product will ever generate significant revenues. There can be no assurance that
any of the factors described herein will not have a material adverse effect on
the Company's future international sales and operations and, consequently, its
business, operating results and financial condition.
Dependence on Proprietary Technology
The Company's success is heavily dependent upon its proprietary technology.
The Company relies on a combination of the protections provided under applicable
copyright, trademark and trade secret laws, confidentiality procedures and
licensing arrangements, to establish and protect its proprietary rights. As part
of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, distributors and corporate
partners, and license agreements with respect to its software, documentation and
other proprietary information. Despite these precautions, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or obtain and use information that the Company regards as
proprietary, to use the Company's products or technology without authorization,
or to develop similar technology independently. Moreover, the laws of some other
countries do not protect the Company's proprietary rights to the same extent, as
do the laws of the United States. Furthermore, the Company has no patents and
existing copyright laws afford only limited protection. The Company has made
source code available from time-to time for certain of its products and
providing such source code may increase the likelihood of misappropriation or
other misuses of the Company's intellectual property. Accordingly, there can be
no assurance that the Company will be able to protect its proprietary software
against unauthorized third party copying or use, which could adversely affect
the Company's competitive position.
Risks of Infringement
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that a third party
will not assert that the Company's technology violates its patents or other
proprietary rights in the future. As the number of software products in the
industry increases and the functionality of these products further overlap, the
Company believes that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend or could require the Company to enter into
royalty and licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
Lengthy Sales and Implementation Cycle; Large Order Size
The purchase and implementation of the Company's software products by a
customer generally involves a significant commitment of capital over a long
period of time, with the risk of delays frequently associated with large capital
expenditures and implementation procedures within an organization, such as
budgetary constraints and internal approval review. During the sales process,
the Company may devote significant time and resources to a prospective customer,
including costs associated with multiple site visits, product demonstrations and
feasibility studies, and experience significant delays over which the Company
will have no control. In addition, following license sales, the implementation
of the Company's products will involve a lengthy process, including customer
training and consultation. A successful implementation requires a close working
relationship between the Company, the customer and, if applicable, third party
consultants and systems integrators who assist in the process. These factors may
increase the costs associated with completion of any given sale, and risks of
cancellation or delay of such sales. Delays in the completion of a product
implementation may require that the revenues associated with such implementation
be recognized over a longer period than originally anticipated. Such delays in
the implementation or execution of orders have caused, and may in the future
cause, material fluctuations in the Company's operating results. Similarly,
customers may cancel implementation projects at any time without penalty, and
such cancellations could have a material adverse effect on the Company's
business or results of operations. Because the Company's expenses are relatively
fixed, a small variation in the timing of recognition of specific revenues can
cause significant variations in operating results from quarter to quarter and
may in some future quarter result in losses or have a material adverse effect on
the Company's business or results of operations.
21
Dependence on Licensed Technology from Third Parties
Elements of the Company's products are licensed from third parties under
agreements, which may include certain warranties and representations that the
Company typically seeks to pass through to the end users through contractual
provisions. The loss of the Company's right to use and license such technology
could limit the Company's ability to successfully market certain modules or
products. While the Company believes that it would be able to either license or
develop alternatives to such component technologies, there can be no assurance
that the Company would be able to do so, or that such alternatives would achieve
market acceptance or be available on a timely basis. Failure to obtain the
necessary licenses or to develop needed technologies could have a material
adverse effect on the Company's business, operating results and financial
condition.
Risk of Software Defects; Product Liability
The sale and support of the Company's products may entail the risk of
product liability claims. The license agreements of the Company typically
contain provisions designed to limit exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in such license agreements may not be effective as a result of
federal, state or local laws or ordinances or unfavorable judicial decisions. A
successful product liability claim brought against the Company relating to its
product or third party software embedded in the Company's products could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Effect of Securities and Exchange Commission ("SEC") Requirements and American
Institute of Certified Public Accountants ("AICPA") Statements of Position on
the Company's Revenue Recognition
In October 1997, the AICPA issued Statement of Position No. 97-2 "Software
Revenue Recognition" ("SOP 97-2"), which superceded SOP No. 91-1. SOP No. 97-2
was effective for the Company's fiscal year beginning June 1, 1998, as amended
by SOP No. 98-4 and SOP No. 98-9, and provides guidance on applying generally
accepted accounting principles for software recognition transactions. In
December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101") which provides further revenue
recognition guidance. The accounting profession continues to review certain
provisions of SOP No. 97-2 and SAB 101 with the objective of providing
additional guidance on implementing consistent standards for software revenue
recognition. Depending on the outcome of these reviews and the issuance of
implementation guidelines and interpretations, the Company may be required to
change its revenue recognition policies and business practices, and such changes
could have a material adverse impact on the Company's business, results of
operations or financial position.
Pending Litigation
The Company is involved in certain pending litigation with former employees
that, if resolved unfavorably to the Company, may require the Company to pay
material cash payments in settlement. Any such payment could adversely affect
the cash position of the Company. See Part II - Item 1 - "Legal Proceedings" for
further discussion.
22
ITEM 2. PROPERTIES
Certain information concerning the Company's office space at December 31,
2001 is set forth below:
SQUARE OWNERSHIP
LOCATION PRINCIPAL USE FOOTAGE INTEREST
--------------------------------------- ------------------------------------ ------------- ----------------
DOMESTIC OFFICES:
Atlanta, GA...................... Corporate Headquarters, Research 107,200 Lease
and Development, Sales and
Marketing, Operations
San Francisco, CA................ Regional Operations, Research and 108,158 Lease
Development, Sales and Marketing,
Operations
Pittsburgh, PA................... Regional Operations 30,821 Lease
Dallas, TX....................... Regional Operations 9,042 Lease
Lake Oswego, OR.................. Regional Operations 5,057 Lease
Irvine, CA....................... Regional Operations 2,502 Lease
INTERNATIONAL OFFICES:
Woking, Surrey, United Kingdom Regional Operations 10,300 Lease
Brisbane, Australia.............. Regional Operations 6,695 Lease
Paris, France.................... Regional Operations 6,660 Lease
Toronto, Canada.................. Regional Operations 7,969 Lease
The amount noted in the above chart for the Company's San Francisco office
includes 18,313 square feet currently under sub-lease. See Note 6 to the
Consolidated Financial Statements.
Management is currently and will continue to evaluate leased facilities to
meet operational requirements for 2002. The Company owns substantially all of
the equipment used in its facilities.
ITEM 3. LEGAL PROCEEDINGS
In June 2000, the Company was served with a demand for arbitration by
William Grabske, the Company's former Chief Executive Officer. Mr. Grabske seeks
enforcement of a purported Settlement Agreement and Mutual Release. The demand
seeks severance pay and reimbursement of expenses of approximately $1.0 million
plus interest, options for approximately 20,000 shares of stock in the Company,
and fees and costs. The Company intends to vigorously contest Mr. Grabske's
demand and has asserted various counterclaims.
The Company does not believe that, individually or in aggregate, the legal
matters to which it is currently a party are likely to have a material adverse
effect on its results of operations or financial condition.
From time to time, the Company is involved in other legal proceedings
incidental to the conduct of its business. The outcome of these claims cannot be
predicted with certainty. The Company intends to defend itself vigorously in
these actions. However, any settlement or judgment may have a material adverse
effect on the Company's results of operations in the period in which such
settlement or judgment is paid or payment becomes probable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 2001.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq
National Market under the symbol "IINT". The following table sets forth the high
and low sales prices of the Company's common stock for the periods indicated.
HIGH LOW
------ -------
Year ended December 31, 2000
First Quarter $13.63 $5.94
Second Quarter 9.94 5.50
Third Quarter 9.31 3.53
Fourth Quarter 6.00 1.50
Year ended December 31, 2001
First Quarter $ 5.25 $1.63
Second Quarter 9.09 3.94
Third Quarter 8.60 4.90
Fourth Quarter 7.90 5.24
On March 7, 2002, there were 193 holders of record of our common stock.
Because many of these shares are held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
The Company has not declared or paid any cash dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company anticipates that any future earnings will be retained to finance the
continuing development of its business.
On July 15, 1999, the Company's Board of Directors approved a stock
repurchase program for up to 2,000,000 shares of the Company's outstanding
common stock. The Company is authorized to use available cash to buy back its
shares in open market transactions from time to time, subject to price and
market conditions. No purchases were made in 2000 or in 2001. As of December 31,
2001, the Company held, as treasury stock, 435,500 shares that had been
repurchased at a cost of $2.2 million under the program.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and notes thereto and other financial
information included elsewhere herein. During 1997, The Indus Group, Inc.
entered into an Agreement and Plan of Merger and Reorganization with TSW
International, Inc. The merger was consummated on August 25, 1997 and was
accounted for as a pooling of interests. All financial information was restated
to reflect the combined operations of The Indus Group, Inc. and TSW
International, Inc. The summary consolidated balance sheet data as of December
31, 2000 and 2001 and summary consolidated statements of operations data for the
years ended December 31, 1999, 2000, and 2001 are derived from and qualified by
reference to the audited consolidated financial statements of the Company, which
are included elsewhere herein. The summary consolidated balance sheet data as of
December 31, 1997, 1998 and 1999 and the summary consolidated statement of
operations for the years ended December 31, 1997 and 1998 are derived from the
audited consolidated financial statements of the Company which are not included
herein, but have been previously filed with the SEC.
24
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
REVENUES: (in thousands, except per share data)
Software licensing fees $ 55,958 $ 55,546 $ 19,071 $ 12,622 $ 21,005
Services and maintenance 119,382 138,956 158,160 131,956 154,989
Other revenue 1,694 975 1,274 1,111 20
--------- --------- --------- --------- ---------
Total revenues 177,034 195,477 178,505 145,689 176,014
Cost of revenues (1) 78,575 103,517 98,050 90,880 81,116
--------- --------- --------- --------- ---------
Gross margin 98,459 91,960 80,455 54,809 94,898
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 27,664 30,372 33,801 51,607 49,522
Sales and marketing 33,568 31,517 31,667 49,348 30,242
General and administrative 14,991 15,270 18,145 20,944 17,398
Merger and restructuring expenses 12,083 -- -- 2,063 10,188
--------- --------- --------- --------- ---------
Total operating expenses 88,306 77,159 83,613 123,962 107,350
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 10,153 14,801 (3,158) (69,153) (12,452)
Gain on sale of investment in TenFold Corporation -- -- 38,170 -- --
Other income (expense) net (1,968) (936) 3,120 3,712 2,412
--------- --------- --------- --------- ---------
Income (loss) before taxes 8,185 13,865 38,132 (65,441) (10,040)
Provision (benefit) for income taxes 6,408 450 14,295 (6,666) 36
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 1,777 13,415 23,837 (58,775) (10,076)
Extraordinary item (787) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 990 $ 13,415 $ 23,837 $ (58,775) $ (10,076)
========= ========= ========= ========= =========
Income (loss) per share (2) $ 0.03 $ 0.44 $ 0.74 $ (1.72) $ (0.29)
========= ========= ========= ========= =========
Shares used in computing per share data 28,574 30,717 32,109 34,248 34,857
========= ========= ========= ========= =========
DECEMBER 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
BALANCE SHEET DATA: (in thousands)
Working capital $ 37,238 $ 58,609 $ 95,872 $ 43,466 $ 42,193
Total assets 136,725 150,785 168,901 140,732 137,737
Short-term debt 29,054 21,005 301 71 4
Long-term debt 1,105 257 163 71 --
Total stockholders' equity 70,230 86,075 118,352 68,957 60,946
(1) Includes a $6.8 million write-down of third party software available for
sale in 2000.
(2) After $0.03 per share loss from extraordinary item in 1997. Fully diluted
per share amount in 1997, after loss from extraordinary item, does not
differ from the basic $0.03 per share amount indicated above. Fully diluted
per share amounts differ in 1998 ($0.38) and 1999 ($0.68). See Note 1 to
the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are not based on historical facts,
but rather reflect management's current expectations concerning future results
and events. These forward-looking statements generally can be identified by the
use of phrases and expressions such as "believe," "expect," "anticipate,"
"intend," "plan," "foresee," "likely," "will" or other similar words or phrases.
Forward-looking statements include, without limitation, statements related to:
the Company's plans, objectives, expectations and intentions; the timing,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. These forward-looking
statements are subject to known and unknown risks and uncertainties that could
cause actual results, performance or achievements to be different from any
future results, performance and achievements expressed or implied by these
statements. Important factors that might cause actual results to differ
materially from those suggested by the forward-looking statements include, but
are not limited to, those discussed in the section of this report entitled
"Description of Business - Factors Affecting Future Performance" beginning on
page 17. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements.
25
On January 22, 2002, the SEC issued Financial Reporting Release No. 61,
Release No. 33-8056, Commission Statement about Management's Discussion and
Analysis of Financial Condition and Results of Operations. The SEC's statement
contains suggested enhanced MD&A disclosures covering liquidity, special purpose
entities and other off-balance sheet arrangements, contractual obligations and
commercial commitments, energy and other commodity contracts, and related party
and other transactions conducted at arm's-length. The Company adopted these
suggested disclosures for reporting within this report and related financial
statements, footnotes, and MD&A. Exclusive of operating leases of the Company's
office facilities and computers and equipment necessary in the ordinary course
of the Company's business, the Company has no special purpose entities or other
off-balance sheet arrangements. The adoption of these disclosure requirements
did not have a significant impact on the Company's financial statements.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to revenue recognition,
accounts receivable and allowance for doubtful accounts, deferred tax assets,
property and equipment, investments, accrued expenses, restructuring, debt
covenants, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We have identified the policies below as critical to the Company's
business operations and the understanding of the Company's results of
operations. For a detailed discussion on the application of these and other
accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements.
Revenue Recognition:
Revenues from the Company's professional consulting and implementation
services are generally time and material based and are recognized as the work is
performed. Delays in project implementation will result in delays in revenue
recognition. Some professional consulting services involve fixed-price and/or
fixed-time arrangements and are recognized using contract accounting, which
requires the accurate estimation of the cost, scope and duration of each
engagement. Revenue and the related costs for these projects are recognized on
the percentage-of-completion method, with progress-to-completion measured by
using labor cost inputs and with revisions to estimates reflected in the period
in which changes become known. Project losses are provided for in their entirety
in the period they become known, without regard to the percentage-of-completion.
If the Company does not accurately estimate the resources required or the scope
of work to be performed, or does not manage its projects properly within the
planned periods of time or satisfy its obligations under the contracts, then
future consulting margins on these projects may be negatively affected or losses
on existing contracts may need to be recognized.
Accounts Receivable and Allowance for Doubtful Accounts:
Billed and unbilled accounts receivable comprise trade receivables that
are credit based and do not require collateral. The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company records a
provision for uncollectible accounts on sales in the same period as the related
revenues are recorded. These estimates are based upon historical collection
patterns. If the historical data the Company uses to calculate these estimates
does not properly reflect future collections, revenue could be overstated. On an
ongoing basis, the Company also evaluates the collectibility of accounts
receivable based upon historical collections and an assessment of the
collectibility of specific accounts. The Company evaluates the