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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22993
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INDUS INTERNATIONAL, INC.
(Exact name of Registrant issuer as specified in its charter)
DELAWARE 94-3273443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3301 WINDY RIDGE PARKWAY, ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip code)
(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 [ ]
As of August 9, 2002, the Registrant had outstanding 35,175,023 shares of Common
Stock, $.001 par value.
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TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations - three and six months ended
June 30, 2002 and 2001.................... .................................................3
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001.....................4
Condensed Consolidated Statements of Cash Flows - six months ended
June 30, 2002 and 2001......................................................................5
Notes to Condensed Consolidated Financial Statements............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........11
Item 3. Quantitative and Qualitative Disclosures About Market Risks....................................27
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................28
Item 2. Changes in Securities and Use of Proceeds......................................................28
Item 3. Defaults Upon Senior Securities................................................................28
Item 4. Submission of Matters to a Vote of Security Holders............................................28
Item 5. Other Information..............................................................................29
Item 6. Exhibits and Reports on Form 8-K...............................................................29
Signatures.....................................................................................30
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Software license fees ................... $ 4,310 $ 1,335 $ 8,539 $ 6,350
Services, maintenance and other ......... 26,722 41,800 54,935 79,162
-------- -------- -------- --------
Total revenues ...................... 31,032 43,135 63,474 85,512
Cost of revenues ............................ 16,475 20,424 32,275 41,456
-------- -------- -------- --------
Gross margin ................................ 14,557 22,711 31,199 44,056
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development ............... 12,273 11,810 24,981 23,804
Sales and marketing .................... 7,517 6,849 15,081 15,263
General and administrative ............. 6,309 4,180 8,984 9,682
Restructuring expenses ................. 4,029 7,973 7,425 10,169
-------- -------- -------- --------
Total operating expenses ............. 30,128 30,812 56,471 58,918
-------- -------- -------- --------
Loss from operations ........................ (15,571) (8,101) (25,272) (14,862)
Interest and other income ................... 802 739 996 1,377
-------- -------- -------- --------
Loss before income taxes .................... (14,769) (7,362) (24,276) (13,485)
Provision (benefit) for income taxes ........ 300 (666) 302 (380)
-------- -------- -------- --------
Net loss .................................... $(15,069) $ (6,696) $(24,578) $(13,105)
======== ======== ======== ========
NET LOSS PER SHARE:
Basic ....................................... $ (0.43) $ (0.19) $ (0.70) $ (0.38)
======== ======== ======== ========
Diluted ..................................... $ (0.43) $ (0.19) $ (0.70) $ (0.38)
======== ======== ======== ========
Shares used in computing per share data
Basic ....................................... 35,177 34,791 35,267 34,745
Diluted ..................................... 35,177 34,791 35,267 34,745
See accompanying notes
3
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 47,195 $ 59,901
Marketable securities ......................................... 886 1,757
Restricted cash ............................................... 2,250 --
Billed acccounts receivable, net of allowance for
doubtful accounts of $2,217 at June 30, 2002
and $5,713 at December 31, 2001 ............................ 16,126 31,337
Unbilled accounts receivable .................................. 4,877 14,666
Other current assets .......................................... 6,726 5,445
--------- ---------
Total current assets ....................................... 78,060 113,106
Property and equipment, net ........................................ 20,205 21,877
Restricted cash, non-current ....................................... 2,998 --
Other assets ....................................................... 1,487 2,754
--------- ---------
Total assets ............................................... $ 102,750 $ 137,737
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 5,634 $ 6,190
Income tax liability, net ..................................... 1,041 317
Other accrued liabilities ..................................... 21,652 24,432
Current portion of obligations under capital leases ........... 191 4
Deferred revenue .............................................. 29,330 39,970
--------- ---------
Total current liabilities .................................. 57,848 70,913
Obligations under capital leases and other liabilities ............. 8,617 5,878
Stockholders' equity:
Common stock .................................................. 36 35
Additional paid-in capital .................................... 125,280 123,671
Treasury stock ................................................ (4,681) (2,181)
Note receivable from stockholder .............................. -- (55)
Deferred compensation ......................................... (151) (157)
Accumulated deficit ........................................... (82,865) (58,287)
Accumulated other comprehensive loss .......................... (1,334) (2,080)
--------- ---------
Total stockholders' equity ................................. 36,285 60,946
--------- ---------
Total liabilities and stockholders' equity ................. $ 102,750 $ 137,737
========= =========
See accompanying notes.
4
INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $(24,578) $(13,105)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ......................... 4,179 4,031
Changes in operating assets and liabilities:
Billed accounts receivable ......................... 15,210 11,830
Unbilled accounts receivable ....................... 9,790 (7,427)
Other current assets ............................... (1,280) (1,774)
Other accrued liabilities .......................... 523 5,734
Deferred revenue ................................... (10,640) 4,133
Other operating assets and liabilities ............. (467) (304)
-------- --------
Net cash (used in) provided by operating activities .......... (7,263) 3,118
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ....................... (7,986) (33,041)
Sales of marketable securities ........................... 9,916 47,423
(Increase) decrease in restricted cash ................... (4,923) --
Acquisitions of property and equipment, net .............. (2,645) (1,982)
-------- --------
Net cash (used in) provided by investing activities .......... (5,638) 12,400
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of capital leases .......................... 346 (43)
Net proceeds from issuance of common stock ............... 1,610 490
Purchase of treasury stock ............................... (2,500) --
-------- --------
Net cash (used in) provided by financing activities .......... (544) 447
-------- --------
Effect of exchange rate differences on cash .................. 739 (1,414)
Net (decrease) increase in cash and cash equivalents ......... (12,706) 14,551
Cash and cash equivalents at beginning of period ............. 59,901 37,535
-------- --------
Cash and cash equivalents at end of period ................... $ 47,195 $ 52,086
======== ========
See accompanying notes.
5
INDUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS AND BASIS OF PRESENTATION
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 three principal software products are PassPort, EMPAC
and the recently introduced Indus InSite(TM), which is offered as a hosted
product. These products are implemented by the Company's professional services
organization and supported by its worldwide customer service organization. The
Company derives its revenues from software licensing fees, implementation and
training services, maintenance fees and hosting services. 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' 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, increase tenant
retention, 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
represents proven strategies that enable customers to sustain long-term
competitive advantage.
The Company markets its principal EAM products, known as PassPort, EMPAC and the
recently introduced Indus InSite(TM) hosted product, 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). In March 2002, the Company launched Indus
InSite(TM), a product designed for the collaborative asset management market
that is accessible through the Internet. Indus InSite(TM) was developed using a
pure JAVA 2 EE design, thereby ensuring compliance with Internet standards, and
is designed to deliver collaborative asset management to the mid-tier market of
industries with less complex assets. Indus InSite(TM) 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,
manufacturing, and education and government.
The accompanying unaudited condensed consolidated financial information has been
prepared by management in accordance with generally accepted accounting
principles 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 generally accepted accounting principles 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, 2002 and results of operations and cash flows for
all periods presented have been made. The condensed, consolidated balance sheet
at December 31, 2001 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
December 31, 2001 and are included in the Company's 2001 Annual Report on Form
10-K as filed with the Securities and Exchange Commission. The consolidated
results of operations for the six months ended
6
June 30, 2002 are not necessarily indicative of the results to be expected for
any subsequent quarter or period, or for the entire year ending December 31,
2002.
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which includes net income (loss), plus foreign
currency translation effects and unrealized gain (loss) on securities
investments, amounted to ($13.5) million and ($6.8) million, for the three
months ended June 30, 2002 and 2001, respectively. Comprehensive income (loss)
was ($23.8) million and ($14.5) million for the six months ended June 30, 2002
and 2001, respectively.
3. SIGNIFICANT CUSTOMERS
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 project represented 25.4% and 20.7% of the Company's
revenues for the three months and six months ended June 30, 2001, respectively.
On January 2, 2002, the Company announced that the MoD had reduced the scope of
its DSMS project due to budget constraints in its current fiscal year, which
ended March 31, 2002. On January 24, 2002, the Company announced that it
received notification that the MoD has suspended all current contractual work on
this project, as it reviews its priorities against long-term resource
availability. The MoD has not advised the Company when this review will be
completed. The DSMS contract represented 0.3% and 0.6% of the Company's revenues
for the three months and six months ended June 30, 2002, respectively. The
Company generated $15.1 million and $24.6 million of net losses during the first
three months and six months of 2002, respectively, due in significant part to
the suspension of the MoD's DSMS project.
In the third quarter of 2001, the Company announced that Magnox Electric Plc
("Magnox") had selected the Company to provide work management and compliance
system software for eight nuclear stations. The Company is providing a total
business solution, including the PassPort product suite, implementation
services, and five years of application hosting via Indus' web hosting services.
Magnox is a wholly-owned subsidiary of British Nuclear Fuels Ltd ("BNFL"),
operating BNFL's nuclear power stations. The project is scheduled to include
eight site implementations into 2003. The Magnox contract represented 10.5% and
2.3% of the Company's revenues for the three months ended June 30, 2002 and
2001, respectively. The Magnox contract represented 13.4% and 1.2% of the
Company's revenues for the six months ended June 30, 2002 and 2001,
respectively.
Revenues from Xcel Energy Inc. represented 11.9% and 3.0% of the Company's
revenues for the three months ended June 30, 2002 and 2001, respectively.
Revenues from Xcel Energy Inc. represented 8.6% and 2.9% of the Company's
revenues for the six months ended June 30, 2002 and 2001, respectively. These
revenues represent PassPort licensing, professional consulting and
implementation services, and maintenance and support services, including
delivery of the Indus e-Commerce solution, IndusBuyDemand(TM), during the
quarter ending June 30, 2002. As the Company announced in the first quarter of
2002, Xcel Energy, the nation's fourth largest utility company serving both
electricity and natural gas customers, will integrate IndusBuyDemand(TM) into
its existing PassPort solution, which is utilized in Xcel's supply chain,
accounts payable and work management systems. The IndusBuyDemand(TM) application
will add e-procurement capabilities via content management and catalog search
capabilities.
4. RESTRUCTURING EXPENSES
The Company recorded restructuring costs of $2.1 million and $10.2 million in
2000 and 2001, respectively, in connection with the ongoing relocation of the
Company's headquarters and certain administrative functions to Atlanta, Georgia,
severance payments related to the elimination of 56 global positions, and
charges representing lease termination costs for redundant San Francisco office
space. This relocation was approved by the Board of Directors in July 2000 and
the restructuring charges include costs of approximately $2.8 million for
severance pay for employees affected, and approximately $9.5 million for lease
termination costs associated with reducing leased space in San Francisco. The
San Francisco office leases expire May 31, 2008.
The Company recorded restructuring costs of approximately $3.4 million in the
first quarter of 2002, in connection with the suspension of the MoD's DSMS
project and subsequent demobilization and reduction in workforce. A formal
restructuring plan was approved by the Board of Directors in March 2002 and
includes costs of approximately $947,000 for computer lease termination costs
due to the suspension of the DSMS project, approximately $728,000 of severance
payments related to the elimination of 81 global positions, and approximately
$1.7 million for lease termination costs associated with closing the
7
Company's Dallas office and reducing leased space in the Company's Pittsburgh
office. The Dallas lease expires December 31, 2005 and the Pittsburgh lease
expires September 30, 2005.
In the second quarter 2002, the Company incurred restructuring expenses of $4.0
million. These expenses related to a change in the Company's estimates of
previously announced excess lease costs associated with subleasing redundant
office space in San Francisco, Dallas and Pittsburgh. Due to the excess capacity
of available lease space in these markets, lease rates have significantly
declined. In San Francisco, rates have declined from approximately $60 per
square foot at the beginning of 2001 to the $18-$20 per square foot range, which
is below the Company's actual lease cost of $45 per square foot. In Dallas and
Pittsburgh, current lease rates for both markets are in the $10-$14 range, which
is below the Company's actual lease costs of $25-$26 per square foot.
(In thousands) Severance and
Related Costs Equipment Facilities Total
------------- --------- ---------- --------
Balance at 12/31/01 $ 174 $ -- $ 7,332 $ 7,506
----- ------- -------- --------
Payments in Q1 2002 -- (6) (527) (533)
Net accruals in Q1 2002 649 953 1,721 3,323
----- ------- -------- --------
Balance at 3/31/02 $ 823 $ 947 $ 8,526 $ 10,296
----- ------- -------- --------
Payments in Q2 2002 (754) (947) (754) (2,455)
Net accruals in Q2 2002 (44) -- 3,967 3,923
----- ------- -------- --------
Balance at 6/30/02 $ 25 $ -- $ 11,739 $ 11,764
----- ------- -------- --------
In July 2002, the Company announced that it was developing plans for a reduction
in workforce and other cost reductions to restructure and resize the business,
which may result in restructuring charges in the third quarter of 2002. The
Company announced in August 2002 that due to unfavorable financial performance
since the fourth quarter of 2001 and recently completed reviews of worldwide
operations, it would reconfigure its business model to more effectively develop
and support new product offerings and broader distribution alternatives across
the Company's product platforms. The Company advised that these restructuring
changes are designed to minimize the Company's reliance on large-scale projects
and broaden the Company's focus on expanded market segments in order to create
revenue growth. The first of these restructuring actions was taken in July 2002,
with the reduction of 31 positions in professional services and administrative
functions in the United States, Canada and Australia. In addition, in August
2002 the Company announced that due to current customer and development
commitments, the business restructuring initiatives announced in July 2002 are
anticipated to be completed by the end of the second quarter of 2003.
The Company does not anticipate taking any significant further restructuring
charges relating to the suspension of the MoD DSMS project. The Company could
incur future charges or credits, in the event that the underlying assumptions
used to develop the Company's estimates of excess lease costs, such as the
timing and the amount of any sublease income, change.
5. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using net income 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
common and dilutive common equivalent shares outstanding 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 weighted average number of common shares outstanding for the three and six
month periods ended June 30, 2002 is presented below consistent with the three
and six month periods ended June 30, 2001. For the three and six month periods
ending June 30, 2002 and 2001, the Company has not included shares of common
stock issuable upon conversion of options and other convertible securities in
the calculation of EPS as such inclusion would have an anti-dilutive effect.
Approximately 8.9 million and 9.0 million common stock equivalents were
outstanding at June 30, 2002 and 2001, respectively.
8
The calculation of the weighted average number of shares outstanding for the
three month and six month periods ended June 30, 2002 and 2001 are as follows
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Weighted average shares outstanding
- used for basic 35,177 34,791 35,267 34,745
======== ======== ======== ========
Weighted average shares outstanding and
dilutive equivalents - used for diluted 35,177 34,791 35,267 34,745
======== ======== ======== ========
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, Business Combinations. SFAS
No. 141 eliminates the use of the pooling of interests method for all business
combinations initiated after June 30, 2001. SFAS No. 141 also provides new
criteria to determine whether an acquired intangible asset should be recognized
separately from goodwill, and requires expanded disclosure requirements. The
Company adopted SFAS No. 141 in the third quarter of 2001, with no significant
impact on its financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is no longer subject to amortization;
instead it will be subject to new impairment testing criteria. Other intangible
assets will continue to be amortized over their estimated useful lives, although
those with indefinite lives are not to be amortized but will be tested at least
annually for impairment, using a lower of cost or fair value approach. The
Company adopted SFAS No. 142 in the first quarter of 2002, with no significant
impact on its financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business. The
Company adopted SFAS No. 144 in the first quarter of 2002, with no significant
impact on its financial statements.
7. INCOME TAXES
In March 2002, the United States federal income tax laws were changed to allow
for the carry back of net operating losses to the previous five years, whereas
previously the maximum period of carry back was two years. The Company filed for
a tentative refund under the new law and in July received a refund of $2.5
million. This refund is subject to Internal Revenue Service review, and due to
uncertainties surrounding its amount and realization, it was not reflected in
the consolidated financial statements at June 30, 2002. The Company will
evaluate any significant remaining uncertainties surrounding this refund and
will base its accounting for the refund on the results of the evaluation, prior
to December 31, 2002. Under the assumption that the refund amount will be fully
allowed on review, the Company will have a net operating loss of $11.7 million
to carry forward which, subject to certain limitations, may be used to offset
future income through 2020.
8. STOCK REPURCHASE
In July 1999, the Company's Board of Directors approved a stock repurchase
program for up to 2.0 million shares of the Company's outstanding common stock.
The Company is authorized to use available cash to buy back its shares in open
market transactions from time to time, subject to price and market conditions.
As of June 30, 2002, the Company held as treasury stock 435,500 shares that had
been repurchased under the program.
In April 2002, the Company entered into an agreement with Robert W. Felton, a
founder of the Company and former Chief Executive Officer and Chairman of the
Board of Directors. Under this agreement, the Company repurchased 500,000 shares
of
9
the Company's common stock from Mr. Felton at a price of $5.00 per share, which
approximated market value at the time of the purchase, for an aggregate purchase
price of $2.5 million. As part of this agreement, Mr. Felton agreed not to
transfer or enter into any agreement to transfer the remainder of his shares of
the Company's common stock for a period of one year. These repurchased shares
are also held as treasury stock.
9. RESTRICTED CASH
Certain certificates of deposit, performance bonds, compensating balances and
other accounts are considered restricted cash based upon the terms of the
agreements. The Company had restricted cash of approximately $5.3 million on
June 30, 2002 and $0.3 million on December 31, 2001.
During the first quarter of 2002, the Company generated a net loss of $9.5
million, due mainly to the suspension of the MoD's DSMS project. This loss
during the first quarter of 2002 (as well as the Company's second quarter 2002
loss of $15.1 million) triggered a default of the profitability and minimum
tangible net worth covenants within the Company's revolving bank line of credit.
This default requires the Company to establish and maintain a restricted
compensating balance with the lender, California Bank & Trust, equal to all
outstanding credit line and letter of credit usage. On April 1, 2002 the Company
established a restricted, interest bearing, compensating balance account for
$2.3 million, to support a standby letter of credit for the same amount, held by
the Company's San Francisco office landlord. No other usage of the line of
credit is anticipated and the Company will maintain the restricted compensating
balance.
At June 30, 2002, the Company had additional, non-current restricted cash of
approximately $3.0 million, consisting of performance bonds invested in
certificates of deposit and bank guarantees, with maturities exceeding 12
months. The largest of these is a 1.8 million Pound Sterling ($2.7 million)
performance bond that was established in April 2002 for the Magnox project,
which matures in July 2003. The recoverability of these restricted investments
is generally tied to specific performance criteria in license and/or
professional services contracts.
10. LITIGATION
In June 2000, the Company was served with a demand for arbitration by William
Grabske, the Company's former Chief Executive Officer. Mr. Grabske seeks
enforcement of a purported Settlement Agreement and Mutual Release. The demand
seeks severance pay and reimbursement of expenses of approximately $1.0 million
plus interest, options for approximately 200,000 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.
10
ITEM 2. 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
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations - Factors Affecting Future Performance" beginning on page 19. 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. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission ("SEC"), including the Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 and subsequent
quarterly report on Form 10-Q for the fiscal first quarter ended March 31, 2002.
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, and restructuring. 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 the Notes to Consolidated Financial Statements, contained within the
Company's 2001 Annual Report on Form 10-K, as filed with the SEC.
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
11
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 or
failure of its customers to make required payments. The Company fully reserves
for all billed accounts receivable over 120 days, plus 1.5% of the remaining
billed accounts receivable, plus any other amounts where the Company deems there
is collectibility risk. If the methodology the Company uses to calculate these
estimates does not properly reflect future collections, revenue could be
overstated or understated. On an ongoing basis, the Company evaluates the
collectibility of accounts receivable based upon historical collections and an
assessment of the collectibility of specific accounts. The Company evaluates the
collectibility of specific accounts using a combination of factors, including
the age of the outstanding balance(s), evaluation of the account's financial
condition and credit scores, recent payment history, and discussions with the
Company's account executive for the specific customer and with the customer
directly. Based upon this evaluation of the collectibility of accounts
receivable, any increase or decrease required in the allowance for doubtful
accounts is reflected in the period in which the evaluation indicates that a
change is necessary. If the financial condition of the Company's customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The allowance amounted to $2.2 million as
of June 30, 2002 and $5.7 million as of December 31, 2001. The reduction in the
allowance from December 31, 2001 to June 30, 2002 is due to lower revenues
during the first six months of 2002, translating to a lower billed accounts
receivable balance and correspondingly lower reserves necessary. Additionally,
during the first six months of 2002 significant collection activity has resulted
in the Company reducing the reserve balance.
The Company generates a significant portion of revenues and corresponding
accounts receivable from sales to the utility industry. As of June 30, 2002,
approximately $13.1 million of the Company's gross billed accounts receivable
were attributable to software license fees and support and services sales to
utility customers. In determining the Company's allowance for doubtful accounts,
the Company has considered the utility industry's financial condition, as well
as the financial condition of individual utility customers. The Company does not
foresee collectibility issues related to the utility industry in general, except
for specific customers for which the Company has specifically reserved for
potential uncollectibility.
The Company generated 11.9% of its revenues during the quarter ended June 30,
2002 from a single customer, Xcel Energy, in the United States. As of June 30,
2002, approximately $1.7 million of the Company's accounts receivable were
attributable to this customer. The Company generated 10.5% of its revenues
during the quarter ended June 30, 2002 from a single customer, Magnox, in the
United Kingdom. As of June 30, 2002, approximately $1.4 million of the Company's
accounts receivable were attributable to this customer. The Company does not
anticipate accounts receivable collectibility issues related to these customers.
The Company generates a significant portion of its revenues and corresponding
accounts receivable through sales denominated in currencies other than the U.S.
Dollar. As of June 30, 2002, approximately $6.6 million of the Company's gross
billed accounts receivable were denominated in foreign currencies, of which
approximately $2.1 million were denominated in Pound Sterling. Historically, the
foreign currency gains and losses on these receivables have not been
significant, and the Company has determined that foreign currency derivative
products are not required to hedge the Company's exposure. If there were a
significant decline in the Pound Sterling exchange rate, the U.S. Dollar
equivalents received from the Company's customers could be significantly less
than the reported amount. A decline in the exchange rate of the Pound Sterling
to the U.S. Dollar of 10% from the rate as of June 30, 2002 would result in an
exchange loss of approximately $0.2 million.
Restructuring:
At June 30, 2002, the Company had a balance in accrued liabilities of
approximately $11.8 million related to restructuring charges. This restructuring
liability represents lease costs for redundant San Francisco office space, due
to the relocation of the Company's headquarters and certain administrative
functions to Atlanta, Georgia, in 2000 and 2001, as well as lease costs
associated with closing the Company's Dallas office and reducing leased space in
the Company's Pittsburgh office, due to the
12
suspension of the MoD's DSMS project and subsequent demobilization and reduction
in workforce. The Company could incur future charges or credits, in the event
that the underlying assumptions used to develop the Company's estimates of
excess lease costs, such as the timing and the amount of any sublease income,
change.
Currently, the Company has sublease arrangements for four of the five redundant
San Francisco office floors. The Company estimates that the remaining floor will
come under sublease arrangements in 2003. The four floors currently under
subleases are projected to generate approximately $5.4 million in sublease
income from July 2002 through May 2008, the date of the expiration of these
leases. The Company estimates that sublease arrangements for all five floors
could generate approximately $6.4 million of sublease income from July 2002
through May 2008. If the Company is unable to sublease the remaining floor, the
shortfall of $1.0 million of estimated sublease income will generate charges
against the Company's income from 2003 through 2008, with the 2003 charge being
approximately $77,000. Conversely, the Company could generate higher than
estimated sublease income from 2002 through 2008, if the remaining floor is
sublet faster and/or at higher than estimated sublease rental rates. Any
required increase or decrease in the restructuring accrual would be reflected in
the period in which the evaluation indicates that a change is necessary.
Currently, the Company has no sublease arrangements for the redundant Dallas and
Pittsburgh office space. The Company estimates that the Dallas office space will
come under sublease arrangements in January 2003 and the Pittsburgh office space
will come under sublease arrangements in April 2003. The Company estimates that
sublease arrangements for all of the Dallas and Pittsburgh office space could
generate approximately $0.9 million of sublease income from 2003 through 2005.
If the Company is unable to sublease the office space, the shortfall of $0.9
million of estimated sublease income will generate charges against the Company's
income from 2003 through 2005. Conversely, the Company could generate higher
than estimated sublease income from 2003 through 2005 from faster signing of
subleases and/or from higher than estimated sublease rental rates. Any required
increase or decrease in the restructuring accrual would be reflected in the
period in which the evaluation indicates that a change is necessary.
13
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain line items in the Company's consolidated
statements of operations:
Percentage of Total Revenues
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
------ ------ ------ ------
ACTUAL ACTUAL ACTUAL ACTUAL
------ ------ ------ ------
REVENUES:
Software license fee ..................... 13.9% 3.1% 13.5% 7.4%
Services, maintenance and other .......... 86.1% 96.9% 86.5% 92.6%
------ ------ ------ ------
Total Revenues ....................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................. 53.1% 47.3% 50.8% 48.5%
------ ------ ------ ------
Gross margin ................................. 46.9% 52.7% 49.2% 51.5%
------ ------ ------ ------
OPERATING EXPENSES:
Research and development ................ 39.6% 27.4% 39.4% 27.8%
Sales and marketing ..................... 24.2% 15.9% 23.8% 17.9%
General and administrative .............. 20.3% 9.7% 14.1% 11.3%
Restructuring expenses .................. 13.0% 18.5% 11.7% 11.9%
------ ------ ------ ------
Total operating expenses .............. 97.1% 71.5% 89.0% 68.9%
------ ------ ------ ------
Loss from operations ......................... (50.2%) (18.8%) (39.8%) (17.4%)
Interest and other income .................... 2.6% 1.7% 1.6% 1.6%
------ ------ ------ ------
Loss before income taxes ..................... (47.6%) (17.1%) (38.2%) (15.8%)
Provision (benefit) for income taxes ......... 1.0% (1.6%) 0.5% (0.5%)
------ ------ ------ ------
Net loss ..................................... (48.6%) (15.5%) (38.7%) (15.3%)
====== ====== ====== ======
Revenues. The Company's revenues are derived from software licensing fees and
from professional services, which include implementation and training services,
customer funded development, support fees and hosting fees. During the three
months ended June 30, 2002, total revenues decreased 28% to $31.0 million, as
compared to $43.1 million in the same period of 2001. In the first six months of
2002, total revenues decreased 26% to $63.5 million, as compared to $85.5
million in the same period of 2001.
Revenues from software licensing fees were 14% and 3% of total revenues for the
three months ended June 30, 2002 and 2001, respectively, and were 13% and 7% of
total revenues for the six months ended June 30, 2002 and 2001, respectively.
Revenues from software licensing fees increased 223% to $4.3 million in the
quarter ended June 30, 2002 from $1.3 million for the same period of 2001, and
increased 34% to $8.5 million for the six months ended June 30, 2002 from $6.4
million for the same period of 2001. The increase in license fees is a result of
implementation and delivery from the deferred license revenue backlog the
Company had when entering 2002, partially offset by a lower level of new license
revenue bookings during 2002. The lower new license revenue bookings during 2002
are due primarily to the weakness in capital spending in the primary vertical
markets served by the Company, which include utilities, defense, pulp and paper,
mining and metals, and oil and gas. The year-to-date new license revenue
bookings for the Company were $3.6 million through June 30, 2002, which was
significantly below the $15.0 million booked for the same period of 2001. The
year-to-date license bookings for 2002 of $3.6 million included the imputed
license value of $2.0 million from a web hosting sale with Smurfit Stone
Container Corporation. The $2.0 million booking value for this contract
represents the license revenue that would have been booked had this been a
traditional license. Revenue from this web hosting contract, when and if
recognized, will be recognized as service revenue.
Revenues from support and services were 86% and 97% of total revenues for the
three months ended June 30, 2002 and 2001, respectively, and were 87% and 93% of
total revenues for the six months ended June 30, 2002 and 2001, respectively.
Revenues from support and services decreased by 36% to $26.7 million for the
three months ended June 30, 2002 from $41.8 million in the same period of 2001,
and decreased by 31% to $54.9 million for the six months ended June 30, 2002
from $79.2 million in the same period of 2001. This decrease is primarily
attributable to the suspension of the MoD's DSMS project,
14
which was previously announced in January 2002. Excluding the DSMS project,
revenues from support and services decreased by 14% to $26.6 million for the
three months ended June 30, 2002 from $30.8 million in the same period of 2001,
and decreased 11% to $54.6 million for the six months ended June 30, 2002 from
$61.5 million in the same period of 2001. Excluding the DSMS project, the lower
2002 revenues from support and services are due to lower implementation
consulting services in 2002 resulting from the Company's lower level of new
license revenue bookings during 2002, as well as lower services revenue from the
multi-year British Energy project as it winds down toward completion in early
2003. These decreases were partially offset by higher services and web hosting
revenue from the Magnox project, which started in the second quarter of 2001.
The Magnox contract represented 10.5% and 2.3% of the Company's revenues for the
three months ended June 30, 2002 and 2001, respectively, and 13.4% and 1.2% of
the Company's revenues for the six months ended June 30, 2002 and 2001,
respectively.
From a geographic perspective, during the three months ended June 30, 2002, 71%
of revenues were generated in North America, 22% of revenues were generated in
EMEA (Europe, Middle East and Africa), and the remaining 7% were generated in
APAC (Asia and the Pacific Rim), as compared to 58% of revenues from North
America, 38% from EMEA and 4% from APAC during the three months ended June 30,
2001. During the first six months of 2002, 71% of revenues were generated in
North America, 24% of revenues were generated in EMEA, and the remaining 5% were
generated in APAC, as compared to 61% of revenues from North America, 34% from
EMEA and 5% from APAC during the six months ended June 30, 2001. As most of the
Company's contracts for the three and six months ending June 30, 2002 and 2001
are denominated in U.S. dollars, foreign currency fluctuations have not
significantly impacted the Company's results of operations.
Revenues from Xcel Energy Inc. represented 11.9% and 3.0% of the Company's
revenues for the three months ended June 30, 2002 and 2001, respectively, and
8.6% and 2.9% of the Company's revenues for the six months ended June 30, 2002
and 2001, respectively. Revenues from the Magnox contract represented 10.5% and
2.3% of the Company's revenues for the three months ended June 30, 2002 and
2001, respectively, and 13.4% and 1.2% of the Company's revenues for the six
months ended June 30, 2002 and 2001, respectively.
The Company had total deferred revenue of $29.3 million at June 30, 2002 and
$40.0 million as of December 31, 2001. The decrease in total deferred revenue,
excluding deferred licensing, is due to the lower 2002 implementation consulting
services generated from the Company's lower level of new license bookings during
2002. The Company had deferred licensing revenue in the amount of $15.5 million
at June 30, 2002 and $21.1 million at December 31, 2001. The decrease in
deferred licensing revenue reflects more recognition of revenue from the
deferred license bookings generated prior to 2002 than was deferred during the
first six months of 2002 from new licensing contracts.
Cost of Revenues. Cost of revenues consists of (i) personnel and related costs
for implementation and consulting services, (ii) training and customer support
services, (iii) amortization of license fees paid to third parties for inclusion
of their products in the Company's software, and (iv) personnel, data
maintenance and related costs for web hosting services. Gross profits on license
fees are substantially higher than gross profits on services revenues,
reflecting the low packaging and production costs of software products compared
with the relatively high personnel costs associated with providing
implementation, maintenance, consulting, training, and web hosting services.
The cost of licensing revenue was $1.9 million and $0.1 million for the three
month periods ended June 30, 2002 and 2001, respectively, and $2.0 million and
$0.4 million for the six month periods ended June 30, 2002 and 2001,
respectively. Gross margins on licensing fees were 57% and 94% during the three
months ended June 30, 2002 and 2001, respectively, and were 77% and 94% during
the six months ended June 30, 2002 and 2001, respectively. The higher cost of
licensing revenue in 2002 and lower 2002 margin are the result of the product
mix where license fees recognized in 2002 were more dependent on third party
products than license fees recognized in 2001. For example, the delivery during
the second quarter of 2002 of IndusBuyDemand(TM) to Xcel Energy Inc included a
significant third party software component.
The cost of support and services was $14.6 million and $20.3 million for the
three month periods ended June 30, 2002 and 2001, respectively, and $30.3
million and $41.1 million for the six month periods ended June 30, 2002 and
2001, respectively. Gross margins on support and services were 45% and 51%
during the three months ended June 30, 2002 and 2001, respectively, and were 45%
and 48% during the six months ended June 30, 2002 and 2001, respectively. The
decrease in margin was a result of lower professional services utilization with
the demobilization of resources, due to the suspension of the MoD's DSMS
project, as well as lower overall service margins due to the loss of higher
margin DSMS professional services implementation margins.
15
Total gross margin as a percentage of revenues decreased to 47% for the three
months ended June 30, 2002 from 53% for the same period in 2001, and decreased
to 49% for the six months ended June 30, 2002 from 52% for the same period in
2001. The decrease in overall gross margins is a result of higher third party
costs for license fees, lower service margins due to the loss of higher margin
DSMS margins and also due to lower professional services utilization, partially
offset by a higher mix of license revenues (which have a higher margin than
services) to total revenues.
Research and Development. Research and development expenses consist of personnel
and related costs, computer processing costs and third party consultant fees
directly attributable to the development of new software application products
and enhancements to existing products.
Research and development expenses increased 4% to $12.3 million in the three
months ended June 30, 2002 from $11.8 million in the same period of 2001, and
increased 5% to $25.0 million in the six months ended June 30, 2002 from $23.8
million in the same period of 2001. The increase in research and development
expenses is due to increased development funding in areas such as language
translation for Japan (to support the joint sales and implementation alliance
agreement announced June 24, 2002 with J-Power, formerly known as Electric Power
Development Co., which also chose Indus EAM solutions in the fourth quarter of
2001 to implement across its 58 hydro power plants) and other target markets, as
well as increased web hosting activities to support the Company's web hosted
PassPort applications for existing customers, such as Smurfit Stone Container
Corporation and Magnox-British Nuclear Fuels Limited, and Indus InSite(TM)
hosting.
As a percentage of total revenues, research and development expenses were 40%
and 27% for the three months ended June 30, 2002 and 2001, respectively, and
were 39% and 28% for the six months ended June 30, 2002 and 2001, respectively.
The Company believes that a significant level of investment in research and
development is important to remain competitive. To date, the Company has
expensed all software development costs as incurred.
Sales and Marketing. Sales and marketing expenses include personnel costs, sales
commissions, and the costs of advertising, public relations, and participation
in industry conferences and trade shows.
Sales and marketing expenses increased 10% to $7.5 million in the three months
ended June 30, 2002 from $6.8 million in the same period of 2001, and decreased
1% to $15.1 million in the six months ended June 30, 2002 from $15.3 million in
the same period of 2001. The increase in sales and marketing expenses in the
second quarter of 2002 from the second quarter of the prior year was related to
increased InSite sales and marketing initiatives in support of the product
launch in March 2002 and ongoing sales efforts. On a year-to-date basis for
2002, InSite sales and marketing spending is $2.9 million compared to less than
$0.2 million for the comparable period of 2001. Overall Indus sales and
marketing spending for the first six months of 2002 is almost flat with the
comparable period for 2001, with the increase in InSite spending offset by a
comparable reduction for PassPort and EMPAC as the Company continues to review
and rationalize ongoing sales and marketing investments in the Company's core
vertical and geographic markets. As a percentage of total revenues, sales and
marketing expenses were 24% and 16% for the three months ended June 30, 2002 and
2001, respectively, and were 24% and 18% for the six months ended June 30, 2002
and 2001, respectively.
General and Administrative. General and administrative expenses include the
costs of the Company's finance, human resources and administrative operations.
General and administrative expenses increased 51% to $6.3 million in the three
months ended June 30, 2002 from $4.2 million in the same period of 2001, and
decreased 7% to $9.0 million in the six months ended June 30, 2002 from $9.7
million in the same period of 2001. The increase in general and administrative
expenses in the second quarter of 2002 is a result of $3.0 million of operating
charges in conjunction with the separation agreements for the Company's departed
Chief Executive Officer and Chief Operating Officer. Excluding the $3.0 million
of separation charges, general and administrative expenses in 2002 would have
been 21% lower than the comparable three months of 2001 and 38% lower than the
comparable six months of 2001. This reduction in general and administrative
expenses, excluding the $3.0 million of separation charges, is a result of lower
salaries and benefits from reduced headcount and lower lease costs due to the
elimination of redundant space in the Company's San Francisco, Dallas and
Pittsburgh offices (see Restructuring Expenses below). As a percentage of total
revenues, general and administrative expenses were 20% (11% excluding the $3.0
million of separation charges) and 10% for the three months ended June 30, 2002
and 2001, respectively, and were 14% (9% excluding the $3.0 million of
separation charges) and 11% for the six months ended June 30, 2002 and 2001,
respectively.
16
Restructuring Expenses. In the second quarter of 2002, the Company incurred
restructuring expenses of $4.0 million. These expenses related to a change in
the Company's estimates of previously announced excess lease costs associated
with subleasing excess office space in San Francisco. In the first quarter of
2002, the Company incurred $3.4 million of restructuring expenses related to the
suspension of the MoD's DSMS project and subsequent demobilization and reduction
in workforce, and elimination of excess leased office space in Dallas and
Pittsburgh.
In the second quarter of 2001, restructuring expenses of $8.0 million were
incurred, resulting from estimated excess lease costs associated with subleasing
redundant San Francisco office space and the relocation of certain
administrative functions from San Francisco to Atlanta.
The $3.4 million of restructuring charges for the first quarter of 2002 are
related to the suspension of the MoD's DSMS project and subsequent
demobilization and reduction in workforce. Included in these restructuring
charges were costs of approximately $947,000 for computer lease termination
costs due to the suspension of the DSMS project, approximately $728,000 of
severance payments related to the elimination of 81 global positions, and
approximately $1.7 million for lease termination costs associated with closing
the Company's Dallas office and reducing leased space in the Company's
Pittsburgh office. The Dallas lease expires December 31, 2005 and the Pittsburgh
lease expires September 30, 2005. The $2.2 million of restructuring charges for
the first quarter of 2001 relate to the relocation of certain administrative
functions from San Francisco to Atlanta.
The Company announced in July 2002 that it was developing plans for a reduction
in workforce and other cost reductions to restructure and resize the business,
which may result in restructuring charges in the third quarter of 2002. The
Company announced in August 2002 that due to unfavorable financial performance
since the fourth quarter of 2001 and recently completed reviews of worldwide
operations, it would reconfigure its business model to more effectively develop
and support new product offerings and broader distribution alternatives across
the Company's product platforms. The Company advised that these restructuring
changes are designed to minimize the Company's reliance on large-scale projects
and broaden the Company's focus on expanded market segments in order to create
revenue growth. The first of these restructuring actions was taken in July 2002,
with the reduction of 31 positions in professional services and administrative
functions in the United States, Canada and Australia. In addition, in August
2002 the Company announced that due to current customer and development
commitments, the business restructuring initiatives announced in July 2002 are
anticipated to be completed by the end of the second quarter of 2003. It is
anticipated by the Company that these additional restructuring initiatives, will
enable the Company to reduce its operating cost by over $7 million on an
annualized basis. Accordingly, the Company anticipates that it will take an
additional restructuring charge, which the Company cannot presently estimate,
for the quarter ended September 30, 2002.
The Company does not anticipate taking any significant further restructuring
charges relating to the suspension of the MoD DSMS project. The Company could
incur future charges or credits, in the event that the underlying assumptions
used to develop the Company's estimates of excess lease costs, such as the
timing and the amount of any sublease income, change. The Company could also
incur future charges which the Company cannot presently estimate, through the
end of the second quarter of 2003, for more restructuring of the business.
Interest and Other Income. Interest and other income are generated from the
Company's investments in marketable securities and interest-bearing cash and
cash equivalents. Interest and other income increased 9% to $0.8 million for the
three month period ended June 30, 2002 from $0.7 million for the same period in
2001, and decreased 28% to $1.0 million for the six month period ended June 30,
2002 from $1.4 million for the same period in 2001. The increase during the
second quarter of 2002 was due to foreign exchange gains, offset by lower
interest income, as compared to the same period in 2001. The decrease on a
year-to-date basis from 2002 to 2001 is due to lower interest income and $0.3
million of foreign exchange losses during the first quarter of 2002, partially
offset by $0.4 million of foreign exchange gains during the second quarter of
2002. There was a foreign exchange gain of $0.1 million for the first quarter of
2001. The decrease in interest income is a result of a lower interest rate
environment. The Company expects a continuation of lower interest income based
upon lower expected cash balances and expected continuation of current low
interest rates.
Provision (benefit) for Income Taxes. The provision for income taxes of $0.3
million for the quarter ended June 30, 2002 and the income tax benefit of $0.7
for the quarter ended June 30, 2001, include federal, state and foreign income
taxes. The provision for income taxes of $0.3 million for the six month period
ended June 30, 2002 and the income tax benefit of $0.4 for the six month period
ended June 30, 2001, include federal, state and foreign income taxes. The
Company's effective tax rate was (2.0%) and 9.0% for the three months ended June
30, 2002 and 2001 respectively, and was (1.2%) and 2.8% for the six
17
months ended June 30, 2002 and 2001 respectively. The income tax provision for
the second quarter and year-to-date 2002 is attributable to income generated in
the United Kingdom. The income tax benefit for the second quarter and
year-to-date 2001 is attributable to foreign income taxes receivable, reduced
partially for a tax provision for income generated in the United Kingdom where
tax loss carry forwards were insufficient to offset income generated. The tax
provision for income generated in the United Kingdom was $0.3 million and $0.6
million for the three and six month periods ended June 30, 2001. For U.S.
Federal income tax purposes, the Company entered the third quarter of 2002 with
an $11.7 million net operating loss carry forward which, subject to certain
limitations, may be used to offset against future income through 2020.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company's principal sources of liquidity consisted of
approximately $47.2 million in cash and cash equivalents, $1.6 million in short
and long-term marketable securities, and $5.3 million in short and long-term
restricted cash, for a total of $54.1 million, as compared to $63.5 million at
December 31, 2001, and $55.5 million at June 30, 2001. The Company's revolving
credit facility for $15 million expires on May 31, 2003. Borrowings under the
line of credit bear interest at the prime rate or LIBOR rate plus 1.00%. There
were $2.3 million in standby letters of credit outstanding on this line of
credit as of June 30, 2002.
During the first quarter of 2002, the Company generated a net loss of $9.5
million, due mainly to the suspension of the MoD's DSMS project, as well as a
slow-down in capital spending in the vertical markets that the Company serves.
The Company also generated a $15.1 million net loss during the second quarter of
2002, due to the suspension of the MoD's DSMS project, a slow-down in
professional services, $4.0 million of related restructuring charges taken
during the second quarter of 2002, and $3.0 million of operating charges in
conjunction with the separation agreements for the Company's departing Chief
Executive Officer and Chief Operating Officer. These losses during the first and
second quarters of 2002 triggered a default of the profitability and minimum
tangible net worth covenants within the Company's revolving bank line of credit.
This default requires the Company to establish and maintain a restricted
compensating balance with the lender, California Bank & Trust, equal to all
outstanding credit line and letter of credit usage. On April 1, 2002 the Company
established a restricted, interest bearing, compensating balance account for
$2.3 million, to support a standby letter of credit for the same amount, held by
the Company's San Francisco office landlord. No other usage of the line of
credit is anticipated and the Company will maintain the restricted compensating
balance.
The lender has provided the Company with a waiver for the first and second
quarters of 2002. In addition, the lender has provided the Company with a
forward looking waiver for each quarter after the second quarter of 2002, up to
an including the quarter ending March 31, 2003 (the line of credit expires on
May 31, 2003), if the Company maintains the required compensating balance. The
Company is not in reliance on the line of credit, except for the $2.3 million
standby letter of credit.
At June 30, 2002, the Company had additional, non-current restricted cash of
approximately $3.0 million, consisting of performance bonds invested in
certificates of deposit and bank guarantees, with maturities exceeding 12
months. The largest of these is a 1.8 million Pound Sterling ($2.7 million)
performance bond that was established in April 2002 for the Magnox project,
which matures in July 2003. The recoverability of these restricted investments
is generally tied to specific performance criteria in license and/or
professional services contracts.
Cash used in operating activities was $7.3 million for the six months ended June
30, 2002. $25.0 million of cash generated from accounts receivable changes, from
improved collections, offset the cash used to finance the Company's $24.6
million net loss for the period and other working capital usage, including a
$10.6 million decrease in deferred revenue due to the Company recognizing more
license revenue from the deferred account than was added to the deferred account
from new license bookings during the first six months of 2002.
Cash used in investing activities was $5.6 million for the six months ended June
30, 2002. The Company generated net cash of $1.9 million from the
sales/purchases of marketable securities. Capital expenditures were $2.6 million
for the six months ended June 30, 2002 and were made to support the Company's
internal information systems. Restricted cash increased by $5.0 million related
to the short-term $2.3 million compensating balance necessary to support the
Company's standby letter of credit held by its San Francisco office landlord,
and to the long-term $2.7 million performance bond that was established in April
2002 for the Magnox project, which matures in July 2003.
Cash used in financing activities was $0.5 million for the six months ended June
30, 2002, due to a $2.5 million repurchase of the Company's stock, partially
offset by $1.6 million generated from the exercise of employee stock options and
purchases
18
from the employee stock purchase plan. In April 2002, the Company entered into
an agreement with Robert W. Felton, a founder of the Company and former Chief
Executive Officer and Chairman of the Board of Directors. Under this agreement,
the Company repurchased 500,000 shares of the Company's common stock from Mr.
Felton at a price of $5.00 per share, for an aggregate purchase price of $2.5
million. As part of this agreement, Mr. Felton agreed not to transfer or enter
into any agreement to transfer the remainder of his shares of the Company's
common stock for a period of one year.
There was a positive $0.7 million impact on cash from the effect of foreign
exchange rate differences during the six months ended June 30, 2002.
As of June 30, 2002, the Company's primary commitments are its leased office
space in Atlanta, San Francisco and Woking, England. The Company leases its
office space under non-cancelable lease agreements that expire at various times
through 2012.
The Company believes that its existing cash, cash equivalents, marketable
securities, and restricted cash, together with anticipated cash flows from
operations will be sufficient to meet its cash requirements for at least the
next 12 months; however, this belief is based upon management's assumption that
it will be successful in reducing or eliminating the Company's operating losses
in the next several quarters. If management is not successful in reducing
operating losses and additional sources of cash are not available to the
Company, this would result in a material adverse effect on the Company's
financial results. The foregoing statement regarding the Company's expectations
for continued liquidity is a forward-looking statement, and actual results may
differ materially depending on a variety of factors, including variable
operating results, continued operating losses, presently unexpected uses of cash
and the factors discussed under the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Future Performance."
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
generated operating losses of $9.5 million in the first quarter of 2002 and
$15.1 million in the second quarter of 2002, does not expect to be profitable on
a quarterly basis until some point in 2003, 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(TM)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(TM), its e-initiatives and
web-based offerings and its next generation product initiatives;
- - product life cycles;
- - changes in the proportion of revenues attributable to licensing fees,
hosting fees and services;
- - changes in the level of operating expenses;
- - delay or deferral of customer implementations of their software;
- - software defects and other product quality problems;
- - successful completion of customer funded development and implementation
projects;
- - success in expanding sales and marketing programs;
19
- - 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(TM) and other New Products
In March 2002, the Company launched its hosted, Internet-based EAM product,
Indus InSite(TM). There can be no assurance that any of the Company's new
products, including Indus InSite(TM), 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(TM) 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(TM) its e-initiatives and web-based offerings. 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 Magnox Electric Plc ("Magnox") Implementation and Indus
Hosting
In the third quarter of 2001, the Company announced that Magnox Electric Plc
("Magnox") had selected the Company to provide work management and compliance
system software for eight nuclear stations. The Company is providing a total
business solution, including the PassPort product suite, implementation
services, and five years of application hosting via Indus' web hosting services.
Magnox is a wholly owned subsidiary of British Nuclear Fuels Ltd ("BNFL"),
operating BNFL's nuclear power stations. The project is scheduled to include
site implementations through the second quarter of 2003. The Magnox contract
represented 13.4% of the Company's revenues for the six months ended June 30,
2002. Due to the size of this project, problems with the successful and timely
completion of the implementation and/or Indus web hosting, or the cancellation
or material alteration of the contract for any reason may have a material
adverse effect on the future financial results or financial position of the
Company.
Risk Associated with the United Kingdom's Ministry of Defense ("MoD") Agreement
On January 2, 2002, the Company announced that the MoD had reduced the scope of
its DSMS project due to budget constraints in the MoD's fiscal year, which ended
March 31, 2002. On January 24, 2002, the Company announced that it received
notification that the MoD has suspended all current contractual work on this
project, as it reviews its priorities against long-term resource availability.
The MoD has not advised the Company when this review will be completed. The DSMS
contract represented 23.3% of the Company's revenues for the twelve months ended
December 31, 2001. The Company generated a $24.6 million net loss during the
first six months of 2002, due to the suspension of the MoD's DSMS project,
including $3.4 million of related restructuring charges. The Company cannot
assure investors that the DSMS project will be resumed, or if it is resumed what
the scope of work will involve. 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 during the next several quarters at a minimum, as a result of
the suspension of the DSMS project.
Indus InSite(TM) Subscription Revenue Model
Indus InSite(TM) is a hosted product, which was launched in March 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 Indus InSite(TM) services. The Indus InSite(TM) 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.
20
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 Indus InSite(TM) 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, overall results of
operations, and financial position.
Risks Associated with Liquidity and Bank Line of Credit
As of June 30, 2002, the Company's principal sources of liquidity consisted of
approximately $54.1 million in cash and cash equivalents, short and long-term
marketable securities, and short and long-term restricted cash, as compared to
$63.5 million at December 31, 2001. The Company believes that its existing cash,
cash equivalents, marketable securities, and restricted cash, together with
anticipated cash flows from operations will be sufficient to meet its cash
requirements for at least the next 12 months; however, this belief is based upon
management's assumption that it will be successful in reducing or eliminating
the Company's operating losses in the next several quarters. If management is
not successful in reducing operating losses and additional sources of cash are
not available to the Company, this would result in a material adverse effect on
the Company's financial position.
The Company generated a $9.5 million net loss during the first quarter of 2002,
and a $15.1 million loss during the second quarter of 2002. This loss during the
first quarter of 2002 triggered a default of the profitability and minimum
tangible net worth covenants within the Company's bank line of credit. As a
result of this default, the Company is required to maintain a compensating
balance, equal to all outstanding credit line and letter of credit usage, with
the lender. Other than a continuing $2.3 million standby letter of credit, no
other usage of the line of credit is anticipated and the Company has funded the
compensating balance without negatively impacting the operations of the
business. However, the lender's requirement that the Company maintain a
compensating balance for all credit line usage effectively negates the Company's
ability to use the bank line of credit for any reason other then its current
letter of credit purposes and could negatively impact the Company's liquidity.
The lender has provided the Company with a waiver for the first and second
quarters of 2002. In addition, the lender has provided the Company with a
forward looking waiver for each quarter after the second quarter of 2002, up to
an including the quarter ending March 31, 2003 (the line of credit expires on
May 31, 2003), if the Company maintains the required compensating balance. The
Company is not in reliance on the line of credit, except for the $2.3 million
standby letter of credit.
Market acceptance of Indus InSite(TM) 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(TM) 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(TM) 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(TM).
A significant barrier to the adoption and success of Internet-based products
like Indus InSite(TM) 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(TM) could misappropriate proprietary
information or cause interruptions in the services Indus provides through Indus
InSite(TM) 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
21
could be introduced into the Indus InSite(TM) system or those of the Company's
customers or suppliers, which could disrupt Indus InSite(TM) 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(TM) and the Company's
business in general would be materially harmed if we do not prevent them.
Decrease in Demand for the Company's Products and Services and the Overall EAM
Market
In recent quarters the Company has experienced a decrease in demand for its core
PassPort and EMPAC products and related services, which the Company believes is
due to unfavorable general economic conditions and decreased capital spending by
companies in the industries the Company serves. If these economic conditions
persist, the Company's business, results of operations and financial condition
are likely to be materially adversely affected.
Moreover, overall demand for enterprise software products and services in
general may grow slowly or decrease in upcoming quarters and years because of
unfavorable general economic conditions, decreased capital spending by companies
in need of EAM solutions or otherwise. This may reflect a saturation of the
market for enterprise software solutions generally, as well as deregulation and
retrenchment affecting the way companies purchase EAM software. To the extent
that there is a slowdown in the overall market for EAM software, the Company's
business, results of operations and financial condition are likely to be
materially adversely affected.
Changes in Management
The Company has had significant turnover at the executive management level from
2000 through July 2002, including the appointment of a new Chief Financial
Officer in April 2002 and a new Chief Executive Officer in July 2002, as well as
the elimination of the Chief Operating Officer position in July 2002. 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.
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. For example, the Company is in
the process of restructuring its sales force and it actively recruiting to fill
several key sales positions. 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 is not able to hire and retain personnel to fill
the positions created by its internal restructuring, 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.
In addition, 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 industries that the
Company serves. The Company may not be able to rehire these people, or hire
other qualified personnel, if the DSMS project is resumed or when general
economic conditions improve, which could adversely affect the Company's future
operating results.
Risks Related to Restructuring
Over the last several years the Company has undertaken several internal
restructuring initiatives. For example, 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, which resulted in the elimination of 56 global positions.
In March 2002, the Board of Directors approved a formal restructuring plan that,
among other things, resulted in the elimination of 81 global positions and the
closing of the Company's Dallas office. In July and August 2002, the Company
22
announced that, due to unfavorable financial performance since the fourth
quarter of 2001 and recently completed reviews of worldwide operations, it would
reconfigure its business model and is developing plans for one or more
reductions in workforce and other cost reductions to restructure and resize the
business. The first of these restructuring actions was taken in July 2002, with
the reduction of 31 positions in professional services and administrative
functions in the United States, Canada and Australia. These types of internal
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 and adversely affect the Company's
financial position.
The Company has taken charges for restructuring expenses, including an $8.0
million charge in the second quarter of 2001, a $3.4 million charge in the first
quarter or 2002, and a $4.0 million charge in the second quarter of 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.
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. The planned restructuring (discussed
above) has recently placed additional demands on management. In connection with
this planned restructuring, the Company will be required to effectively manage
its operations, improve its financial and management controls, reporting systems
and procedures on a timely basis, and to train and manage its employee work
force. There can be no assurance that the Company will be able to effectively
manage its operations during this restructuring and failure to do so would have
a material adverse effect on its business, operating results and financial
condition.
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, market acceptance of, enhancements to
functionality of, new services and new products, including Indus
InSite(TM).
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.
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.
Rapid Technological Change; Need to Develop New Products; Requirement for
Frequent Product Transitions
23
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. During
the quarter and six months ending June 30, 2002, international revenues
accounted for approximately 34% and 35% of total revenues, respectively. 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, 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 June 30, 2002, a significant portion of the Company's cash was held in Pound
Sterling and other foreign currencies (Australian Dollars, Euros, Japanese Yen,
and French Francs). In the future, the Company may need to exchange some of the
cash held in Pound Sterling, 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.
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;
24
- - 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 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. Any such delays in the execution of orders have caused,
and may in the future cause, material fluctuations in the Company's operating
results.
In addition, following license sales, the implementation of the Company's
PassPort and EMPAC products generally involves 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
25
the process. These factors may increase the costs associated with completion of
any given sale, risks of collection of amounts due during implementation, 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 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.
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. Reliance on software licensed from third parties can materially
impact the cost of licensing revenue and reduce gross margins on licensing fees
for some software modules of products. Moreover, 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.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's cash flow can be exposed to market risks in the form of changes in
interest rates in its short-term borrowings available under its revolving bank
line of credit as well as its investments in certain available-for-sale
securities. The Company's cash management and investment policies restrict
investments to highly liquid, low risk debt instruments. The Company currently
does not use interest rate derivative instruments to manage exposure to interest
rate changes. A hypothetical 100 basis point adverse move (decrease in) interest
rates along the entire interest rate yield curve would adversely affect the net
fair value of all interest sensitive financial instruments by approximately $0.5
million at June 30, 2002.
We provide our services to customers in the United States, Europe, Asia Pacific
and elsewhere throughout the world. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Sales are primarily made in U.S.
Dollars; however, as we continue to expand our operations, more of our contracts
may be denominated in Australian Dollars, Pound Sterling, Euros and Japanese
Yen. A strengthening of the U.S. Dollar could make our products less competitive
in foreign markets. A hypothetical 5% unfavorable foreign currency exchange move
versus the U.S. Dollar, across all foreign currencies, would adversely affect
the net fair value of foreign denominated cash, cash equivalent and investment
financial instruments by approximately $1.3 million at June 30, 2002.
27
PART II: OTHER INFORMATION
ITEM 1. 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 200,000 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 2, 2002, the Company sold 68,369 shares of its Common Stock to an
accredited investor under Section 506 of Regulation D at a purchase price of
$2.90 per share, for an aggregate purchase price of $198,270.10. This sale was
made pursuant to the exercise of a warrant held by the accredited investor. The
proceeds of the sale shall be used for working capital purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company held its annual meeting of stockholders on May 9, 2002.
b. Richard H. Beatty, Gayle A. Crowell, Edward Grzedzinski, Kent O.
Hudson, William H. Janeway, Joseph P. Landy, Thomas R. Madison, Jr.,
Thomas S. Robertson and Thomas E. Timbie were elected to the Board of
Directors at the Company's annual meeting.
c. At the annual meeting, the Company's stockholders voted on the
following matters:
(1) The election of nine (9) Directors. All Directors nominated were
elected.
Name of Director Number of Votes For Number of Votes Withheld
Richard H. Beatty* 25,640,177 404,680
Gayle A. Crowell 25,975,481 69,376
Edward Grzedzinski 25,975,881 68,976
Kent O. Hudson* 25,637,777 407,080
William H. Janeway 25,975,481 69,376
Joseph P. Landy 25,975,481 69,376
Thomas R. Madison, Jr. 25,635,757 409,100
Thomas S. Robertson 25,976,081 68,776
Thomas E. Timbie 25,975,081 69,776
28
*Note: Messrs. Beatty and Hudson subsequently resigned from the Board
effective June 30, 2002 and the Board was reduced in size to seven
directors.
(2) Ratification and approval of the appointment by the Board of
Directors of Ernst & Young LLP as independent auditors of the Company
for the year ending December 31, 2002. There were 25,985,281 votes cast
in favor of the appointment and 57,976 votes were cast against it.
There were 1,600 abstentions and no broker non-votes.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the
quarter ended June 30, 2002.
The following exhibits are filed herewith or incorporated by reference.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
99.1 Chief Executive Officer and Chief Financial Officer certifications
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INDUS INTERNATIONAL, INC.
(Registrant)
Date: August 14, 2002
/s/ Jeffrey A. Babka
-----------------------------------------
Jeffrey A. Babka
Executive Vice President Finance and
Administration and Chief Financial Officer
Principal Financial & Accounting Officer
30
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
99.1 Chief Executive Officer and Chief Financial Officer certifications
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
31