UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

Commission File Number: 0-22993

INDUS INTERNATIONAL, INC.

(770) 952-8444
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes x   No o

As of August 4, 2004, the Registrant had outstanding 57,243,992 shares of Common Stock, $.001 par value.

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDUS INTERNATIONAL, INC.

See accompanying notes.

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INDUS INTERNATIONAL, INC.

See accompanying notes.

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INDUS INTERNATIONAL, INC.

See accompanying notes.

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INDUS INTERNATIONAL, INC.

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial information has been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s (“SEC”) rules and regulations. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2004 and results of operations and cash flows for all periods presented have been made. The condensed, consolidated balance sheet at March 31, 2004 has been derived from the audited consolidated financial statements at that date. Certain prior period amounts have been reclassified to conform to current period classifications.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended March 31, 2004 that are included in the Company’s 2004 Annual Report on Form 10-K as filed with the SEC. The consolidated results of operations for the three months ended June 30, 2004 are not necessarily indicative of the results to be expected for any subsequent quarter or period, or for the entire fiscal year ending March 31, 2005.

2. Restructuring Expenses

The Company recorded restructuring costs of $10.5 million and $12,000 for the three months ended June 30, 2004 and 2003, respectively.

In the three months ended June 30, 2004, the Company recorded restructuring charges of $10.5 million for adjustments to the existing accounting accruals from prior restructurings and for new restructuring charges related to office and business consolidations and employee severance. An adjustment to the Company’s expected sublease income for two remaining unoccupied floors in San Francisco from the restructuring initiative in 2000, as revised in 2002 and 2003, comprised $1.4 million of this expense. Due to the continuing surplus of office space capacity in the San Francisco market and the relatively short time period remaining on the lease compared with potential tenant requirements, the Company determined that there would be no future sublease income and recorded restructuring charges to fully accrue for the remaining lease obligation for these two floors. Further consolidation of office space in San Francisco and Atlanta resulted in $7.8 million in new restructuring charges for the quarter. This consolidation includes vacating three floors in Atlanta and one additional floor in San Francisco. The remaining $1.3 million in restructuring expense is associated with the elimination of approximately 70 positions, including the transfer of certain functions to the company-owned office buildings in Columbia, South Carolina and the outsourcing of some development functions to India. These restructuring charges have been recorded in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 112, “Employer’s Accounting for Postemployment Benefits.”

Between January 1, 2000 and March 31, 2004, the Company recorded restructuring charges totaling $22.7 million. Restructuring costs of $2.1 million and $10.2 million were recorded for fiscal years 2000 and 2001 in connection with the relocation of the Company’s headquarters and certain administrative functions to Atlanta, Georgia, severance payments related to the elimination of 56 global positions, and charges representing the estimated excess lease costs associated with subleasing redundant San Francisco office space. In fiscal year 2002, the Company recorded restructuring costs of approximately $8.2 million, of which $3.4 million related to the suspension of the United Kingdom Ministry of Defense (“MoD”) project and the Company’s subsequent demobilization and reduction in workforce and required support office facilities and $4.8 million related to changes in the Company’s estimates of excess lease costs associated with subleasing redundant office space in San Francisco, Dallas and Pittsburgh. In the three-month period ended March 31, 2003, the Company recorded restructuring expenses of $2.2 million related to further space consolidation in the Company’s San Francisco office.

The restructuring accruals remaining as of June 30, 2004 are included in the Condensed Consolidated Financial Statements in “Accrued liabilities” for amounts due within one year and “Other liabilities” for amounts due after one year. The following is a summary of activity in the restructuring accruals for the three months ended June 30, 2004 (in thousands):

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Company headquarters relocation:

MoD project suspension:

Office and business consolidation:

3. Loss per Share

Basic loss per share is computed using net loss and the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per share is computed using net income and the weighted average number of outstanding common shares and dilutive common stock equivalents during each period, reflecting the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The Company has excluded all outstanding stock options, warrants and convertible notes to purchase common stock from the calculation of diluted net loss per share because all securities are antidilutive for the periods presented. As of June 30, 2004 and 2003, stock options, warrants and convertible notes to purchase an aggregate of 11.1 million and 20.6 million shares, respectively, were outstanding. The 8% Convertible Notes issued to fund the acquisition of Indus Utility Systems, Inc. (“IUS”) were converted into 9,751,859 shares of common stock in July 2003.

The weighted average numbers of shares outstanding used in the calculations of basic and fully-diluted loss per share for the three months ended June 30, 2004 are 57,063,257 shares. The weighted average numbers of shares outstanding used in the calculations of basic and fully-diluted loss per share for the three months ended June 30, 2003 are 42,078,601 shares.

4. Comprehensive Income (Loss)

Comprehensive income (loss) includes net loss, foreign currency translation adjustments and unrealized gains and losses on securities investments that are excluded from net income (loss) and reflected in stockholders’ equity.

The following table sets forth the calculation of comprehensive income (loss) for the three months ended June 30, 2004 and 2003, respectively (in thousands):

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5. Stock-Based Compensation

As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, the Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and accordingly recognizes no compensation expense for the stock option grants as long as the exercise price is equal to or more than the fair value of the shares at the date of grant.

For purposes of pro forma disclosures, as required by SFAS No. 123, which also requires that the pro forma information be determined as if the Company had accounted for its employee stock option grants under the fair value method required by SFAS No. 123, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma net loss including pro forma compensation expense, net of tax for the three months ended June 30, 2004 and 2003, respectively, is as follows (in thousands, except per share amounts):

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6. Recent Accounting Pronouncements

In January 2003, the FASB issued and subsequently revised in December 2003, FIN No. 46, “Consolidation of Variable Interest Entities”, which clarifies the consolidation accounting guidance of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. Such entities are known as variable interest entities (“VIE”). Controlling financial interests of a VIE are identified by the exposure of a party to the VIE to a majority of either the expected losses or residual rewards of the VIE, or both. Such parties are primary beneficiaries of the VIE, and FIN No. 46 requires that the primary beneficiary of a VIE consolidate the VIE. FIN No. 46 also requires new disclosures for significant relationships with VIEs, whether or not consolidation accounting is either used or anticipated. Application of FIN No. 46 is required in the financial statements of public entities that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities for periods after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company adopted FIN No. 46 on March 31, 2004, and there was no impact on the Company’s financial position and results of operations as a result of such adoption. The Company had no VIEs during the three months ended June 30, 2004.

7. Income Taxes

The provisions for income taxes for the three months ended June 30, 2004 and 2003 are attributable to the withholding of income taxes on revenues generated from foreign countries. At June 30, 2004, the Company had a net operating loss of approximately $58.3 million, inclusive of losses for the three months ended June 30, 2004, to carry forward which, subject to certain limitations, may be used to offset future income through 2025.

8. Restricted Cash

The Company had restricted cash of approximately $6.8 million at June 30, 2004 and $5.6 million at March 31, 2004 supporting letters of credit and performance bonds totaling $6.2 million and $5.0 million, respectively. At both dates there was $0.6 million in an interest bearing cash account collateralizing the Company’s note payable.

9. Segment Information and Geographic Data

The Company operates in one reportable segment, service delivery management (“SDM”) and sells software and services offerings to enable the three principal components of SDM: enterprise asset management, customer relationship management and workforce management. Neither the acquisition of Indus Utility Systems nor the acquisition of Wishbone Systems resulted in a new business segment for the Company. The Company manages its business by geographic areas.

Geographic revenue information for the three months ended June 30, 2004 and 2003 is based on the selling location. Long-lived asset information is based on the physical location of the assets at the end of each period. Following is a table of geographic information (in thousands):

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10. Litigation

In February, 2003, Integral Energy Australia brought a claim against IUS in the Supreme Court of New South Wales, Australia, relating to the implementation of IUS software. On March 5, 2003, the Company acquired IUS from Systems and Computer Technology Corporation (“SCT”). IUS was subsequently merged into the Company, and the Company is now the defendant in this lawsuit. The amount of damages asserted against the Company is not determinable. Pursuant to the terms of the Purchase Agreement among the Company and SCT and its affiliates, SCT and those affiliates of SCT that were a party to the Purchase Agreement agreed to defend the Company against the claims in this suit and to indemnify the Company from all losses relating thereto.

In 2002, the Company received an inquiry from the federal government requesting documents and employee interviews related to certain Department of Energy facilities with which the Company does business. The Company was made aware that this inquiry was the result of a qui tam complaint against the Company in the United States District Court of Virginia (Case No. CA01-1260-A) relating to its billing practices at these facilities. The Company has settled this matter with the federal government and the relator. Under the terms of this settlement the Company paid the federal government $500,000 and relator’s counsel $45,000 in July 2004. The settlement was provided for by the Company at March 31, 2004. The court has dismissed this action with prejudice. There was no factual finding or adjudication of wrongdoing by the Company as part of the settlement.

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. 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.

11. Guarantees and Indemnifications

The Company accounts for guarantees and indemnifications in accordance with Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.”

License and hosting agreements with customers generally contain infringement indemnity provisions. Under these agreements, the Company agrees to indemnify, defend and hold harmless the customer in connection with patent, copyright, trademark or trade secret infringement claims made by third parties with respect to the customer’s authorized use of our products and services. The indemnity provisions generally provide for the Company to control defense and settlement and cover costs and damages finally awarded against the customer. The indemnity provisions also generally provide that if the Company products infringe, or in the Company’s opinion it is likely that they will be found to infringe, on the rights of a third-party Indus will, at its option and expense, procure the right to use the infringing product, modify the product so it is no longer infringing, or return the product for a partial refund that reflects the reasonable value of prior use. The Company has not previously incurred costs to settle claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations

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in accordance with SFAS No. 5, “Accounting for Contingencies,” and records a liability for these obligations when a loss is probable and reasonably estimable. The Company has not recorded any liabilities for these arrangements as of June 30, 2004.

Services agreements with customers may also contain indemnity provisions for death, personal injury or property damage caused by the Company’s personnel or contractors in the course of performing services to customers. These agreements, generally agree to indemnify, defend and hold harmless the customer in connection with death, personal injury and property damage claims made by third parties with respect to actions of the Company’s personnel or contractors. The indemnity provisions generally provide for the Company’s control of defense and settlement and cover costs and damages finally awarded against the customer. The indemnity obligations contained in services agreements generally have no specified expiration date and no specified monetary limitation on the amount of award covered. The Company has not previously incurred costs to settle claims or pay awards under these indemnification obligations and estimates the fair value of these potential obligations to be nominal. Accordingly, no liabilities have been recorded for these agreements as of June 30, 2004.

The Company generally warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer for six months to a year, depending upon the software license. Additionally, contracts generally warrant that services will be performed consistent with generally accepted industry standards or, in some instances, specific service levels through completion of the agreed upon services. If necessary, provision will be made for the estimated cost of product and service warranties based on specific warranty claims and claim history. There has been no significant recurring expense under these product or service warranties.

12. Goodwill and Acquisition-Related Intangible Assets

Goodwill, which represents the excess of purchase price over fair value of net assets acquired, increased by $443,000 during the three months ended June 30, 2004 as a result of a purchase price adjustment for the acquisition of Wishbone Systems and costs to relocate certain Wishbone Systems employees to the Company’s Atlanta offices. These two events were anticipated at the time of the acquisition of Wishbone Systems. Goodwill is not amortized, but is subject to impairment testing criteria. For purposes of its impairment testing, the Company considers itself to be a single reporting unit and assesses goodwill impairment on an enterprise-wide level. The Company evaluates the carrying value of goodwill annually as of December 31 and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. The Company has recorded goodwill of $0.4 million associated with the acquisition of IUS and $7.0 million associated with the acquisition of Wishbone Systems. No impairment losses have been recorded through June 30, 2004.

Acquisition-related intangible assets are stated at cost less accumulated amortization, and include values for developed technology, customer base, contracts and trade names. Acquired technology is being amortized over the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. Other intangible assets are being amortized on a straight-line basis over a period of two to fifteen years. Total amortization expense for intangible assets was $520,000 and $454,000 for the three months ended June 30, 2004 and 2003, respectively, and is included in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations.

Acquisition-related intangible assets consist of the following (in thousands):

The weighted-average amortization period for all acquired intangible assets is approximately eleven years. Trademarks and technology have a weighted-average amortization period of five years and contracts and customer base have a weighted-average amortization period of thirteen years. The Company expects amortization expense from acquired intangible assets as of June 30, 2004 for the next five years to be as follows (in thousands):

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13. Software Development Costs

The Company accounts for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, whereby costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs are capitalized. Through December 31, 2002, software development costs incurred subsequent to the establishment of technological feasibility were not significant, and all software development costs were charged to research and development expense in the accompanying consolidated statements of operations during that time.

The Company capitalized certain development costs related to the internationalization of its products to Asian markets of $7.7 million through March 31, 2004. During the three months ended June 30, 2004, the product was generally released for sale and the related capitalized software development costs became subject to amortization. In accordance with the provisions of SFAS No. 86, amortization is determined as the greater of the amount computed using (a) the ratio that current gross revenues for the product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product including the period being reported on. Amortization expense of $1.7 million was recorded in the three months ended June 30, 2004 and is included in “Cost of revenue: Software license fees” in the accompanying Condensed Consolidated Statements of Operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

In addition to historical information, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
(“MD&A”) 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 managem