INDUS INTERNATIONAL INC - 10-Q Quarterly Report

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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 December 31, 2003

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-22993

INDUS INTERNATIONAL, INC.

(Exact name of Registrant issuer as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		94-3273443 (I.R.S. Employer Identification No.)


3301 Windy Ridge Parkway, Atlanta, Georgia (Address of principal executive offices)		30339 (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 ( )

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

As of February 5, 2004, the Registrant had outstanding 52,015,666 shares of Common Stock, $.001 par value per share.

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
	ITEM 4. CONTROLS AND PROCEDURES
PART II: OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
Exhibit Index
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

TABLE OF CONTENTS


			Page

Part I: Financial Information
Item	1.	Financial Statements (Unaudited):
		Condensed Consolidated Balance Sheets – December 31, 2003 and March 31, 2003		3
		Condensed Consolidated Statements of Operations – three and nine months ended December 31, 2003 and 2002		4
		Condensed Consolidated Statements of Cash Flows – nine months ended December 31, 2003 and 2002		5
		Notes to Condensed Consolidated Financial Statements		6
Item	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item	3.	Quantitative and Qualitative Disclosures about Market Risk		28
Item	4.	Controls and Procedures		29
Part II: Other Information
Item	1.	Legal Proceedings		30
Item	2.	Changes in Securities and Use of Proceeds		30
Item	3.	Defaults upon Senior Securities		30
Item	4.	Submission of Matters to a Vote of Security Holders		30
Item	5.	Other Information		30
Item	6.	Exhibits and Reports on Form 8-K		30
		Signature		32

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)


			December 31, 2003			March 31, 2003

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	25,919		$	32,667
	Marketable securities			—			757
	Restricted cash, current			157			2,834
	Billed accounts receivable, net of allowance for doubtful accounts of $2,329 at December 31, 2003 and $4,375 at March 31, 2003			27,396			26,301
	Unbilled accounts receivable			6,174			12,841
	Income tax receivable			672			5,226
	Other current assets			4,109			8,634

		Total current assets		64,427			89,260
Property and equipment, net				34,340			38,088
Acquired intangible assets				11,793			13,258
Restricted cash, non-current				5,492			2,601
Investments and other assets				6,009			1,303

		Total assets	$	122,061		$	144,510

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Note payable		$	767		$	24,516
	Accounts payable			5,523			5,102
	Income tax payable			4,738			5,038
	Other accrued liabilities			18,443			20,568
	Current portion of obligations under capital leases			124			274
	Deferred revenue			42,818			50,604

		Total current liabilities		72,413			106,102
Note payable and other liabilities				18,424			9,974
Stockholders’ equity:
	Common stock			52			42
	Additional paid-in capital			149,260			135,279
	Treasury stock			(4,681	)		(4,681	)
	Deferred compensation			(48	)		(79	)
	Accumulated deficit			(114,632	)		(101,943	)
	Accumulated other comprehensive gain (loss)			1,273			(184	)

		Total stockholders’ equity		31,224			28,434

		Total liabilities and stockholders’ equity	$	122,061		$	144,510

See accompanying notes.

INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


			Three Months Ended						Nine Months Ended
			December 31,						December 31,

			2003			2002			2003			2002

Revenue:
	Software license fees		$	2,992		$	3,931		$	17,071		$	11,299
	Services:
		Support, Outsourcing and Hosting		15,281			9,778			44,342			28,138
		Consulting, Training and other		16,084			13,525			45,175			45,286

	Total services			31,365			23,303			89,517			73,424

Total revenue				34,357			27,234			106,588			84,723

Cost of revenue:
	Software license fees			63			574			441			2,884
	Services:
		Support, Outsourcing and Hosting		4,868			2,709			15,523			8,576
		Consulting, Training and other		11,081			9,557			33,626			31,724

	Total services			15,949			12,266			49,149			40,300

Total cost of revenue				16,012			12,840			49,590			43,184

Gross margin				18,345			14,394			56,998			41,539

Operating expenses:
	Research and development			7,944			10,157			27,258			33,037
	Sales and marketing			8,468			7,604			25,662			22,376
	General and administrative			5,004			1,554			15,529			10,379
	Restructuring expenses			11			775			34			4,804

		Total operating expenses		21,427			20,090			68,483			70,596

Loss from operations				(3,082	)		(5,696	)		(11,485	)		(29,057	)
Interest and other income (expense)				(87	)		276			(578	)		857

Loss before income taxes				(3,169	)		(5,420	)		(12,063	)		(28,200	)
Provision (benefit) for income taxes				33			482			626			(3,946	)

Net loss			$	(3,202	)	$	(5,902	)	$	(12,689	)	$	(24,254	)

Net loss per share:
Basic			$	(0.06	)	$	(0.17	)	$	(0.27	)	$	(0.69	)

Diluted			$	(0.06	)	$	(0.17	)	$	(0.27	)	$	(0.69	)

Shares used in computing per share data
Basic				51,915			35,205			47,659			35,192
Diluted				51,915			35,205			47,659			35,192

See accompanying notes.

INDUS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


				Nine Months Ended
				December 31,

				2003			2002

Cash flows from operating activities:
Net loss				$	(12,689	)	$	(24,254	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			8,248			6,633
		Changes in operating assets and liabilities:
			Billed accounts receivable		(400	)		(3,009	)
			Unbilled accounts receivable		6,742			6,140
			Other current assets		624			4,700
			Other accrued liabilities		(4,548	)		(481	)
			Deferred revenue		(8,390	)		(397	)
			Other operating assets and liabilities		5,084			(2,540	)

Net cash used in operating activities					(5,329	)		(13,208	)

Cash flows from investing activities:
	Purchase of marketable securities				(1,949	)		(34,967	)
	Sale of marketable securities				2,706			32,743
	Increase in restricted cash				(97	)		(5,012	)
	Acquisition of business				(6,938	)		—
	Capitalized software				(5,076	)		—
	Acquisition of property and equipment				(2,971	)		(2,805	)

Net cash used in investing activities					(14,325	)		(10,041	)

Cash flows from financing activities:
	Proceeds from issuance of note payable				11,254			—
	Payments of capital leases				(202	)		(168	)
	Proceeds from issuance of common stock				274			977
	Purchase of treasury stock				—			(2,500	)

Net cash provided by (used in) financing activities					11,326			(1,691	)

Effect of exchange rate differences on cash					1,580			1,405
Net decrease in cash and cash equivalents					(6,748	)		(23,535	)
Cash and cash equivalents at beginning of period					32,667			61,062

Cash and cash equivalents at end of period				$	25,919		$	37,527

Supplemental noncash financing activities:
	Capital leases addition			$	—		$	557

	Conversion of convertible notes into common stock			$	13,716		$	—

See accompanying notes.

INDUS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial information has been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s (“SEC”) rules and regulations. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position at December 31, 2003 and results of operations and cash flows for all periods presented have been made. The condensed consolidated balance sheet at March 31, 2003 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 three-month period ended March 31, 2003 and the twelve-month period ended December 31, 2002 that are included in the Company’s 2003 Transition Report on Form 10-K as filed with the SEC. This report was filed as a result of the change in the Company’s fiscal year end from December 31 to March 31. The consolidated results of operations for the three and nine months ended December 31, 2003 are not necessarily indicative of the results to be expected for any subsequent quarter or period, or for the entire fiscal year ending March 31, 2004.

2. Stock Based Compensation

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

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma net loss including pro forma compensation expense, net of tax for the three and nine months ended December 31, 2003 and 2002, respectively, is as follows (in thousands except per share amounts):


		Three Months Ended						Nine Months Ended
		December 31,						December 31,

		2003			2002			2003			2002

Net loss as reported		$	(3,202	)	$	(5,902	)	$	(12,689	)	$	(24,254	)
Add: Total stock-based compensation expense determined under the intrinsic value method			12			24			31			72
Deduct: Total stock-based compensation expense determined under fair-value based method for all awards			(1,322	)		(1,392	)		(2,832	)		(5,228	)

Pro forma net loss		$	(4,512	)	$	(7,270	)	$	(15,490	)	$	(29,410	)

Loss per share:
Basic:
	As reported	$	(0.06	)	$	(0.17	)	$	(0.27	)	$	(0.69	)

	Pro forma	$	(0.09	)	$	(0.21	)	$	(0.33	)	$	(0.84	)

Diluted:
	As reported	$	(0.06	)	$	(0.17	)	$	(0.27	)	$	(0.69	)

	Pro forma	$	(0.09	)	$	(0.21	)	$	(0.33	)	$	(0.84	)

Shares used in computing per share data
Basic			51,915			35,205			47,659			35,192

Diluted			51,915			35,205			47,659			35,192

For employee stock options granted with exercise prices at or above the existing market, the Company records no compensation expense. Compensation costs for stock options granted to employees is measured by the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

Pro forma information regarding net income and earnings per share is required by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement.

3. Comprehensive Income (Loss)

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

The following table sets forth the calculation of comprehensive income (loss) for the three and nine months ended December 31, 2003 and 2002 (in thousands):


		Three Months Ended						Nine Months Ended
		December 31,						December 31,

		2003			2002			2003			2002

Net loss		$	(3,202	)	$	(5,902	)	$	(12,689	)	$	(24,254	)
Other comprehensive income (loss), net of taxes:
	Unrealized gain (loss) on investments, net of taxes		(69	)		13			(70	)		34
	Foreign currency translation adjustment, net of taxes		558			473			1,527			2,329

Total other comprehensive income, net of taxes			489			486			1,457			2,363

Comprehensive loss		$	(2,713	)	$	(5,416	)	$	(11,232	)	$	(21,891	)

4. Significant Customers

In 2001, Magnox Electric plc (“Magnox”), a wholly-owned subsidiary of British Nuclear Fuels Ltd (“BNFL”), operating BNFL’s nuclear power stations, 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 software suite, implementation services, and five years of application hosting via Indus’ web hosting services. The Magnox contract represented 10.3% and 14.2% of the Company’s revenue for the three months ended December 31, 2003 and 2002, respectively, and 8.5% and 11.3% of the Company’s revenue for the nine months ended December 31, 2003 and 2002, respectively.

5. Restructuring Expenses

The Company recorded restructuring costs of $11,000 and $34,000 for the three and nine months ended December 31, 2003, respectively.

Restructuring costs of $2.1 million and $10.2 million were recorded for 2000 and 2001 in connection with the relocation of the Company’s headquarters and certain administrative functions to Atlanta, Georgia, severance payments related to the elimination of 56 global positions, and charges representing the estimated excess lease costs associated with subleasing redundant San Francisco office space. This relocation was approved by the Board of Directors in July 2000 and included 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 quarter ended March 31, 2002 as a result of the suspension of the United Kingdom Ministry of Defense project and the Company’s subsequent demobilization and reduction in workforce and required support office facilities. A formal restructuring plan was approved by the Board of Directors in March 2002 and included costs of approximately $947,000 for computer lease termination costs, 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.

In the three-month periods ended June 30 and December 31, 2002, the Company incurred additional restructuring expenses of $4.8 million relating to changes in the Company’s estimates of 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 the San Francisco market, lease rates have declined from approximately $60 per square foot at the beginning of 2001 to the range of $18-$20 per square foot, 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 the three-month period ended March 31, 2003, the Company recorded restructuring expenses of $2.2 million related to a further space consolidation in the Company’s San Francisco offices. An additional floor was made available for sublease due to the cumulative effect of staff reductions. As noted in the preceding paragraph, there is excess space capacity in the San Francisco market. The lease cost of the floor made available for sublease approximates $45 per square foot, and market rates are in the range of $18 - $20 per square foot.

In September 2003, the Company adjusted the restructuring reserve to reflect new sublease arrangements for the Dallas and Pittsburgh facilities. This $271,000 adjustment is fully offset by additional restructuring adjustment charges related to the San Francisco facility which has not yet come under sublease arrangements. Due to lack of interested subtenants, the estimated commencement date for sublease income in San Francisco was delayed, resulting in an adjustment of $271,000.

The Company could incur future increases or decreases to its existing accruals 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.

In March 2003, the Company acquired SCT Utility Systems, Inc., subsequently renamed Indus Utility Systems, or “IUS”, and certain related operations from Systems & Computer Technology Corporation. At the time of this acquisition, the Company recorded a $675,000 liability for IUS employee severance costs as part of a plan to restructure the acquired operations. The costs were recognized as a liability assumed in the purchase business combination. The liability will be paid entirely in cash, with the complete amount being paid in the fiscal year ending March 31, 2004. As of December 31, 2003, $508,000 has been paid in connection with these terminations.

The following is a summary of activity in the restructuring accrual for the nine months ended December 31, 2003 (in thousands):

Company headquarters relocation:


		Severance and
(In thousands)		Related Costs		Equipment		Facilities			Total

Balance at March 31, 2003		$	—	$	—	$	10,236		$	10,236

	Payments in Q1 2004		—		—		(516	)		(516	)
	Accruals in Q1 2004		—		—		12			12
	Adjustments in Q1 2004		—		—		—			—

Balance at June 30, 2003		$	—	$	—	$	9,732		$	9,732

	Payments in Q2 2004		—		—		(571	)		(571	)
	Accruals in Q2 2004		—		—		11			11
	Adjustments in Q2 2004		—		—		271			271

Balance at September 30, 2003		$	—	$	—	$	9,443		$	9,443

	Payments in Q3 2004		—		—		(573	)		(573	)
	Accruals in Q3 2004		—		—		11			11
	Adjustments in Q3 2004		—		—		—			—

Balance at December 31, 2003		$	—	$	—	$	8,881		$	8,881

MoD project suspension:


		Severance and
(In thousands)		Related Costs		Equipment		Facilities			Total

Balance at March 31, 2003		$	5	$	—	$	2,015		$	2,020

	Payments in Q1 2004		—		—		(196	)		(196	)
	Accruals in Q1 2004		—		—		—			—
	Adjustments in Q1 2004		—		—		—			—

Balance at June 30, 2003		$	5	$	—	$	1,819		$	1,824

	Payments in Q2 2004		—		—		(161	)		(161	)
	Accruals in Q2 2004		—		—		—			—
	Adjustments in Q2 2004		—		—		(271	)		(271	)

Balance at September 30, 2003		$	5	$	—	$	1,387		$	1,392

	Payments in Q3 2004		—		—		(189	)		(189	)
	Accruals in Q3 2004		—		—		—			—
	Adjustments in Q3 2004		—		—		—			—

Balance at December 31, 2003		$	5	$	—	$	1,198		$	1,203

IUS Acquisition:


		Severance and
(In thousands)		Related Costs			Equipment		Facilities		Total

Balance at March 31, 2003		$	675		$	—	$	—	$	675

	Payments in Q1 2004		(320	)		—		—		(320	)
	Accruals in Q1 2004		—			—		—		—
	Adjustments in Q1 2004		—			—		—		—

Balance at June 30, 2003		$	355		$	—	$	—	$	355

	Payments in Q2 2004		(149	)		—		—		(149	)
	Accruals in Q2 2004		—			—		—		—
	Adjustments in Q2 2004		—			—		—		—

Balance at September 30, 2003		$	206		$	—	$	—	$	206

	Payments in Q3 2004		(39	)		—		—		(39	)
	Accruals in Q3 2004		—			—		—		—
	Adjustments in Q3 2004		—			—		—		—

Balance at December 31, 2003		$	167		$	—	$	—	$	167

6. Earnings (Loss) Per Share

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

The Company has excluded all outstanding stock options and warrants to purchase common stock from the calculation of diluted net loss per share because all securities are antidilutive for all periods presented. As of December 31, 2003 and 2002, stock options and warrants to purchase common stock in the amount of 10.4 million and 10.2 million shares were outstanding, respectively.

The calculations of the weighted average number of shares outstanding for the three and nine months ended December 31, 2003 and 2002 are as follows (in thousands):


	Three Months Ended				Nine Months Ended
	December 31,				December 31,

	2003		2002		2003		2002

Weighted average shares outstanding - - used for basic		51,915		35,205		47,659		35,192

Weighted average shares outstanding and dilutive equivalents - used for diluted		51,915		35,205		47,659		35,192

7. Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based compensation, regardless of whether the Company accounts for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 148’s amendment of the transition and annual disclosure requirements of SFAS No. 123 are effective for fiscal years ending after December 15, 2002 and were adopted on January 1, 2003. The Company accounts for stock-based compensation using the intrinsic value method prescribed in APB No. 25 and related interpretations. Management has not yet evaluated the alternative transition methods if the Company were to adopt the fair value provisions of SFAS No. 123 under this new standard.

On November 25, 2002, the FASB issued Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others”, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies”, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees, requiring that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. The Company adopted FIN 45 on January 1, 2003 and there was no financial impact associated with the adoption. The following is a summary of agreements that the Company believes fall within the scope of FIN 45.

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

claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations in accordance with SFAS No. 5, Accounting for Contingencies, and records a liability for these obligations when a loss is probable and reasonably estimable. The Company has not recorded any liabilities for these arrangements as of December 31, 2003.

Services agreements with customers may also contain indemnity provisions for death, personal injury or property damage caused by Company personnel or contractors in the course of performing services to customers. These agreements, generally agree to indemnify, defend and hold harmless the customer in connection with death, personal injury and property damage claims made by third parties with respect to actions of the Company’s personnel or contractors. The indemnity provisions generally provide for Company control of defense and settlement and cover costs and damages finally awarded against the customer. The indemnity obligations contained in services agreements generally have no specified expiration date and no specified monetary limitation on the amount of award covered. The Company has not previously incurred costs to settle claims or pay awards under these indemnification obligations and estimates the fair value of these potential obligations to be nominal. Accordingly, no liabilities have been recorded for these agreements as of December 31, 2003.

The Company generally warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer for six months to a year, depending upon the software license. Additionally, contracts generally warrant that services will be performed consistent with generally accepted industry standards or, in some instances, specific service levels through completion of the agreed upon services. If necessary, provision will be made for the estimated cost of product and service warranties based on specific warranty claims and claim history. There has been no significant recurring expense under these product or service warranties. As a result, the estimated fair value of any potential obligations under these agreements is nominal and, accordingly, no liabilities have been recorded for warranties as of December 31, 2003.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities”. This Interpretation was revised in December 2003. FIN 46 provides guidance for companies having ownership of variable interest entities, typically referred to as special purpose entities, in determining whether to consolidate such variable interest entities. FIN 46 has immediate applicability for variable interest entities created after January 31, 2003 or interests in variable interest entities obtained after that date. For interests in variable interest entities obtained prior to February 1, 2003, FIN 46 becomes effective for the Company as of March 31, 2004. The Company has no significant variable interests in any entities and does not believe that it is reasonably possible that it will consolidate or disclose information about a variable interest entity once FIN 46 becomes effective.

8. Income Taxes

In the nine months ended December 31, 2002, the Company recorded a tax benefit of $4.7 million to reflect the impact of a change to US federal income tax law allowing the carryback of net operating losses for five years rather than two years permitted under previous law.

At December 31, 2003, the Company had a net operating loss of approximately $61.4 million, inclusive of losses through the first nine months of the fiscal year ending March 31, 2004, to carry forward which, subject to certain limitations, may be used to offset future income through 2024.

9. 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 December 31, 2003, 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 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.

10. Restricted Cash

Certain certificates of deposit, performance bonds, compensating balances and other accounts are considered restricted cash. The Company had restricted cash of approximately $5.7 million on December 31, 2003 and $5.4 million on March 31, 2003. Restricted cash of $5.7 million on December 31, 2003 includes $157,000 classified as current assets and $5.5 million classified as non-current assets. The $157,000 restricted cash classified as current assets is a compensating balance arrangement to support a standby letter of credit established in May 2003. The $5.5 million classified as non-current assets is comprised of $2.6 million in compensating balances to support letters of credit, a compensating balance for a $2.3 million performance bond, and a $0.6 million certificate of deposit.

In May 2008, $2.3 million of the $2.6 million in restricted cash used for the letters of credit will be released. The $0.6 million certificate of deposit is used as collateral for the Company’s $11.5 million mortgage and will be released in April 2008. The $2.3 million supporting the performance bond will be released in 2006.

11. Segment Information

Indus is managed along geographic lines. Following is a table of geographic information:


		Three Months Ended						Nine Months Ended
		December 31,						December 31,

		2003			2002			2003			2002

Revenue (based on selling location):
	North America	$	27,614		$	17,652		$	87,791		$	59,566
	United Kingdom		4,693			6,788			13,134			19,871
	Others		2,050			2,794			5,663			5,286

Total consolidated revenue		$	34,357		$	27,234		$	106,588		$	84,723

Income (loss) from operations:
	North America	$	15,032		$	8,534		$	47,837		$	28,016
	United Kingdom		2,326			3,798			6,395			10,413
	Others		987			2,062			2,766			3,110
Corporate administrative and other expenses			(21,427	)		(20,090	)		(68,483	)		(70,596	)

Total consolidated loss from operations		$	(3,082	)	$	(5,696	)	$	(11,485	)	$	(29,057	)

Total assets:
	North America	$	103,959		$	71,069
	United Kingdom		9,952			23,661
	Others		8,150			5,660

Total consolidated assets		$	122,061		$	100,390

License fee revenue from the Enterprise Asset Management (EAM) and Customer Relationship Management (CRM) software suites was $2.4 million and $0.6 million, respectively, for the three months ended December 31, 2003 and $13.6 million and $3.5 million, respectively, for the nine months then ended. All of the license fee revenue for the prior year periods was derived from EAM software, since the CRM software was acquired in the IUS acquisition.

12. Litigation

On March 5, 2003, the Company acquired IUS from Systems and Computer Technology Corporation (“SCT”). IUS (formerly known as SCT Utility Systems, Inc.) is a defendant in a claim brought by KPMG Consulting, Inc. (now known as BearingPoint, Inc.) on June 2, 2002 in the Circuit Court of the 11th Judicial Circuit. The claim alleges damages of approximately $15.8 million based on allegations of breach of contract and detrimental reliance on alleged promises that were not fulfilled. IUS has asserted multiple defenses and counterclaims. Pursuant to the terms of the Purchase Agreement among the Company and SCT and its affiliates, SCT and those affiliates of SCT that were a party to the Purchase Agreement agreed to defend IUS against the claims in this suit and to indemnify the Company and IUS from all losses relating thereto.

The Company has received an inquiry from the federal government requesting documents and employee interviews related to certain Department of Energy facilities with which the Company does business. The Company is cooperating fully with this inquiry. The Company has been made aware that this inquiry is the result of a qui tam complaint, which is currently under seal, against the Company relating to its billing practices at these facilities. The Company believes that it has meritorious defenses to the claims contained in this action and intends to defend them vigorously. Based upon information currently available to the Company and due to the inherent uncertainties of the litigation process, the Company is unable to predict the outcome of such claims or to determine whether an adverse outcome would have a material adverse effect on the Company’s financial condition or results of operations.

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.

13. Significant Changes and Events

In July 2003, the Company’s stockholders approved the issuance of 9,751,859 shares of the Company’s common stock in exchange for the Company’s $14.7 million in 8% Convertible Notes, including accrued interest, issued in March 2003 to finance a portion of the IUS acquisition. The Notes were automatically converted into common stock upon receipt of stockholder approval at a price of $1.50 per share.

In September 2003, the Company executed a promissory note in the principal amount of $11.5 million secured by a mortgage on the Company’s real property located in Columbia, South Carolina. The promissory note bears interest at an annual rate of 6.5% and is payable in monthly installments of principal and interest (determined on a 15-year amortization schedule) through October 1, 2008, at which time the remaining principal balance of $7.7 million is due and payable. The Company may extend the maturity date at that time for one additional five year term at a variable rate of interest. The proceeds from this note were used to repay the $10.0 million promissory note issued to SCT Financial Corporation in connection with the acquisition of IUS. At December 31, 2003, approximately $767,000 of the promissory note is included in current liabilities and $10.5 million is classified as long-term debt.

14. Subsequent Events

On January 21, 2004, the Company acquired Wishbone Systems, Inc. for an aggregate purchase price of $6.7 million plus the assumption of $1.0 million of Wishbone debt. The Company financed the acquisition purchase price and concurrently repaid the debt with cash from currently available funds. Wishbone Systems is a provider of workforce management and optimization software. The allocation of the purchase price to the assets and liabilities acquired is presently in process. The results of Wishbone Systems, Inc. will be included in the Company’s results of operations from January 22, 2004 forward.

On February 9, 2004, the Company completed a private placement offering of 5 million shares of the Company’s common stock, at a price per share of $3.10. Net proceeds from this offering will be used to replenish cash used in the acquisition of Wishbone Systems as well as for general working capital. The Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the 5 million shares.

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

Forward Looking Statements

In addition to historical information, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not based on historical facts, but rather reflect 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. These statements, which speak only as of the date given, are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our expectations or projections. These risks include, but are not limited to, the successful integration

of the acquisition of Wishbone Systems, including the challenges inherent in diverting our management’s attention and resources from other strategic matters and from operational matters, the successful rationalization of the Wishbone Systems business and products, ability to realize anticipated or any synergies or cost-savings from the acquisition, current market conditions for Indus’ and Wishbone System’s products and services, our ability to achieve growth in our core product offerings and the combined Indus offerings, market acceptance and the success of Indus products, the success of our product development strategy, our competitive position, the ability to enter into new partnership arrangements and to retain existing partnership arrangements, uncertainty relating to and the management of personnel changes, timely development and introduction of new products, releases and product enhancements, current economic conditions and the timing and extent of a recovery, heightened security and war or terrorist acts in countries of the world that affect our business, and other risks identified 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 22. 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.

Overview

Indus International, Inc. (the “Company” or “Indus”) is a leading global provider of integrated enterprise asset management (“EAM”) and customer relationship management (“CRM”) software, and provides consulting, support services, ASP hosting and outsourcing for its various software products within these categories. The Company’s EAM software suites are marketed to capital-intensive industries with complex asset structures worldwide, while the CRM software suites are marketed primarily to the utility markets.

In March 2003 Indus acquired the business of SCT Utility Systems, the provider of the CRM software and related services discussed in the preceding paragraph. SCT Utility Systems was renamed Indus Utility Systems (“IUS”) and the operations of Indus and IUS were combined in the succeeding months, with a merger of IUS into Indus occurring in November, 2003. During the period since acquisition, many of the operations of Indus and IUS have been combined in such a manner that it is not always practicable to attribute and/or quantify variances specifically to either entity in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Indus’ license revenue is derived through licensing comprehensive software packages to new customers, and new or complementary software components to existing customers. The licensing cycle for new customers can be quite lengthy due to the potential customers’ commitments of funds and implementation resources. Economic conditions generally and in a particular industry will have an impact on Indus’ ability to generate new licenses at any point in time. Services revenue is generated as the services are provided.

Indus’ EAM solutions help its customers better manage the full array of their assets and optimize their enterprises. The Company offers three principal EAM software suites – PassPort, EMPAC and Indus InSite. PassPort and EMPAC are targeted to large market, asset-intensive industries, requiring complex functionality. Each provides a series of business applications and business process improvement service packages that meet the EAM needs of businesses such as utilities, oil and gas, chemicals, pulp and paper, mining and metals, defense, and process. InSite is web browser compatible and is tailored for less asset-intensive industries that can benefit from managing their distributed assets and facilities more efficiently. Indus has recently released InSite EE, which combines the architecture and feature functionality of EMPAC with the user interface of InSite into a single product offering.

Indus offers CRM solutions, the primary component of which is Indus’ customer information systems (“CIS”), to the energy and utility markets. Advantage CIS is the Company’s flagship CRM offering and supports the core customer management and billing processes of utilities. Advantage CIS allows clients to acquire customers, generate customers’ bills, maintain customers’ accounts, and generate service orders. Advantage is augmented by EnerLink which includes BillGen, a complex billing solution that helps energy and utility companies design, market, administer, and bill innovative pricing options to meet market requirements. Companion offerings provide for additional functionality requirements of the energy and utility industry. Indus’ Fuels Management Systems manages the acquisition, transportation and inventory of fuels, primarily coal, used to generate electricity.

Indus provides an array of services to customers. Consulting services assist customers in design, implementation and configuration of Indus software and provide training to users; support services provide help-desk solutions to software problems and interface with development teams to modify software where appropriate; hosting services provide Indus software solutions and computer services from remote data centers; and outsourcing services, acquired in the IUS acquisition, provide on-site operation of customers’ computer services.

On January 21, 2004, Indus acquired Wishbone Systems, Inc. for $6.7 million in cash and assumption of $1 million in Wishbone debt, all of which was paid from current cash funds at the time of acquisition. Wishbone Systems is a provider of workforce management and optimization software, and its functionality will provide Indus the opportunity to enter the Service Delivery Management marketplace to both present and potential customers, and also to offer Indus’ existing software solutions to Wishbone’s customer base.

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, revenue 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.

The Company has identified the following policies as critical to the Company’s business operations and the understanding of the Company’s results of operations. For a detailed discussion of the application of these and other accounting policies, see the Notes to Consolidated Financial Statements contained within the Company’s 2003 Transition Report on Form 10-K, as filed with the SEC.

Revenue Recognition:

Revenue recognition rules for software companies are very complex and often subject to interpretation. Very specific and detailed guidelines in measuring revenue are followed; however, certain judgments affect the application of the Company’s revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter-to-quarter and could result in future operating losses.

Revenue arises from two sources: (a) software license fees and (b) services. Software license fees are generated from licensing the rights to use Indus software products. Services revenue is generated from sales of customer support services (maintenance contracts), consulting and implementation services, outsourcing, hosting services and training services for customers that license the Company’s products.

For license arrangements that do not require modification of the software, revenue is recognized in accordance with accounting standards for software companies, including Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, related interpretations, including Technical Practice Aids, and SEC Staff Accounting Bulletin No. 101, which encompasses revenue recognition for all public companies.

License fee revenue is recognized when a non-cancelable license agreement becomes effective as evidenced by a signed contract, product shipment, a fixed or determinable license fee and assurance of collection. If the license fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If a nonstandard acceptance period is provided, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.

In software arrangements that include rights to multiple software products and/or services, the total arrangement fee is allocated among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence (“VSOE”) of fair value of such undelivered elements with the residual amounts of revenue allocated to delivered elements. Elements included in multiple element arrangements may consist of software products, maintenance (which includes customer support services and unspecified upgrades), hosting and consulting services. VSOE is based on the price generally charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change when the element is sold separately. If VSOE does not exist for an undelivered element, the total arrangement fee will be taken to revenue over the life of the contract.

Revenue from consulting and implementation services is generally time and material based and is recognized as the work is performed. Delays in project implementation will result in delays in revenue recognition. Some professional consulting services involve fixed-price and/or fixed-time arrangements and are recognized using contract accounting, which requires the accurate estimation of the cost, scope and duration of each engagement. Revenue and the related costs for these projects are recognized on the percentage-of-completion method, with progress-to-completion measured by using labor cost inputs and with revisions to estimates reflected in the period in which changes become known. Project losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future consulting margins on these projects may be negatively affected or losses on existing contracts may need to be recognized.

Revenue from maintenance and support services is recognized ratably over the term of the contract, typically one year.

Revenue from outsourcing and web hosting (also referred to as “ASP” or application service provider) services is recognized based upon contractually agreed upon rates per user or service, over a contractually defined time period.

Accounts Receivable and Allowance for Doubtful Accounts:

Billed and unbilled accounts receivable 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. This allowance is formula-based, supplemented by an evaluation of specific accounts where there may be collectibility risk. If the methodology the Company uses to calculate this allowance 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, recent payment history, and discussions with the Company’s account executive for the specific customer. Based upon this evaluation of collectibility, 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 for doubtful accounts was $2.3 million as of December 31, 2003 and $4.4 million as of March 31, 2003. The reduction in the allowance from March 31, 2003 to December 31, 2003 is due to the write-off to the allowance of invoices related to a specific customer dispute. The amount written-off was fully included in the March 31, 2003 allowance for doubtful accounts.

The Company generates a significant portion of revenue and corresponding accounts receivable from sales to companies in the utility industry. As of December 31, 2003, approximately $21.1 million of the Company’s gross billed accounts receivable were attributable to software license fees and services sales to utility customers. In determining the Company’s allowance for doubtful accounts, the Company has considered the financial condition of the utility industry as a whole, as well as the financial condition of individual utility customers. Within the past several years, there have been well-publicized issues with certain utility companies as a result of activities in the unregulated wholesale sectors. While the utility industry customers served by Indus are generally in the regulated or retail sector, their unregulated affiliated activities might affect the ability to collect amounts due. The credit status of customers is monitored and, where deemed necessary, a provision is made for potential uncollectibility.

Revenue from sales denominated in currencies other than the U.S. Dollar resulted in approximately $3.0 million of the Company’s December 31, 2003 gross billed accounts receivable being denominated in foreign currencies. No individual foreign currency exceeded 5% of gross billed accounts receivable. 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 the value of the U.S. dollar significantly declined versus one or more foreign currencies, the U.S. Dollar equivalents received from the Company’s customers could be significantly less than the December 31, 2003 reported amount.

Valuation of goodwill and intangible assets:

The acquisition of IUS in March 2003 resulted in the recording of goodwill, which represents the excess of the purchase price over the fair value of assets acquired, as well as other definite-lived intangible assets.

Under present accounting rules (SFAS No. 142), goodwill is no longer subject to amortization; instead it is subject to new impairment testing criteria. Other acquired definite-lived intangible assets are being amortized over their estimated useful lives, although those with indefinite lives are not to be amortized but are tested at least annually for impairment, using a lower of cost or fair value approach. The Company did not identify any asset impairment at March 31, 2003 and will continue to test for impairment on an annual basis or on an interim basis if circumstances change that would indicate the possibility of impairment. The impairment review may require an analysis of future projections and assumptions about the Company’s operating performance. If such a review indicates that the assets are impaired, an expense would be recorded for the amount of the impairment, and the corresponding impaired assets would be reduced in carrying value.

Restructuring:

The Company has accrued the cost of redundant leased office space in San Francisco, Dallas and Pittsburgh through restructuring charges in the period January 1, 2000 through December 31, 2003. The accrual is included in the consolidated financial statements in “Other Accrued Liabilities” for amounts due within one year and “Note Payable and Other Liabilities” for amounts due after one year. The redundant office space was a result of the Company’s relocation of its headquarters and certain administrative functions from San Francisco to Atlanta in 2000 and 2001, and the suspension of the United Kingdom Ministry of Defense contract in 2002. Additions to the accrual were made in 2002 and 2003 due to additional vacated office space and the deterioration of the rental markets in all three locations. This deterioration has resulted in the Company receiving less than anticipated amounts in sublease arrangements due to lower lease rates and longer times taken to sublease the office space. The Company reviews this accrual and evaluates its adequacy on an ongoing basis. Should rental conditions deteriorate to the point where the redundant office space is not ever leased, the Company will incur additional charges totaling approximately $1.4 million over the period from fiscal year 2004 through 2008. Should rental conditions improve, it is possible that higher than anticipated sublease income will be generated. Any required increase or decrease in this accrual will be reflected in the period in which the evaluation indicates that a change is necessary.

Consolidated Results of Operations

Revenue

The Company’s revenue is derived from software license fees and from services, which include customer support, consulting, outsourcing and hosting. Total revenue increased 26% to $34.3 million for the three months ended December 31, 2003 from $27.2 million for the same period of 2002. For the nine month period ended December 31, 2003, total revenue increased $21.9 million, or 26%, from $84.7 million in the same period of 2002. For both the three month and nine month periods, the growth in total revenue is principally attributable to revenue generated by the IUS business acquired in March 2003, although the merger of the operations makes quantifying the actual amount fully attributable to the IUS operations impracticable. In spite of the increase in revenue in the comparable periods, the Company continues to experience some effects from a fragile spending environment for information technology in the form of delayed and cancelled buying decisions by customers for major software and services purchases and pressures from customers and competitors to discount prices.

Software license fees:

Revenue from software license fees decreased $0.9 million, or 24%, to $3.0 million in the quarter ended December 31, 2003 from $3.9 million for the same period of 2002. While the overall dollar value of new license arrangements increased from 2002, revenue recognition accounting rules required deferral of a portion of the aggregate amount of fees due to provisions of certain of these arrangements. License fee revenue from the EAM and CRM software suites was $2.4 million and $0.6 million, respectively, for the three months ended December 31, 2003 and $13.6 million and $3.5 million, respectively, for the nine months then ended. All of the license fee revenue for the prior year periods was derived from EAM software, since the CRM software was acquired in the IUS acquisition.

Revenue from software license fees increased $5.8 million, or 51%, to $17.1 million in the nine months ended December 31, 2003 from $11.3 million for the same period of 2002. A major factor in this increase was the recognition of $6.0 million in revenue previously deferred, as the criteria for revenue recognition was met during the period.

Support, Outsourcing and Hosting:

Revenue from customer support, outsourcing and hosting services increased $5.5 million, or 56%, to $15.3 million for the three months ended December 31, 2003 from $9.8 million in the same period of 2002. This increase was attributable to $1.1 million

growth in hosting revenue, $1.9 million growth from the inclusion of the acquired outsourcing business, and increased customer support from the IUS business acquired in March 2003.

Revenue from customer support, outsourcing and hosting services increased $16.2 million, or 58%, to $44.3 million for the nine months ended December 31, 2003 from $28.1 million in the same period of 2002. Contributing to the increase was a $2.3 million growth in the hosting business, $6.6 million growth from the inclusion of the acquired outsourcing business and increased customer support from the IUS business acquired in March 2003.

Consulting, Training and Other:

Revenue from consulting, training and other services increased by $2.6 million, or 19%, to $16.1 million for the three months ended December 31, 2003 from $13.5 million in the same period of 2002. The increase is attributable to the inclusion of the acquired business in the results for the 2003 period.

While revenue for the nine months ended December 31, 2003 was virtually unchanged from the same period in 2002, inclusion of revenue from the acquired IUS business in the nine months of 2003 was offset by the overall decline the Company has experienced in consulting services due to economic conditions within the consulting sector and the Company’s lower levels of license bookings in late 2002 and early 2003, which directly impacted consulting services.

Cost of Revenue

Cost of revenue consists of (i) personnel and related costs for consulting, training and customer support services, (ii) amortization of license fees paid to third parties for inclusion of their products in the Company’s software, and (iii) personnel, data maintenance and related costs for outsourcing and hosting services. Gross profits on license fees are substantially higher than gross profits on services revenue, due to the relatively high personnel costs associated with the various services. The Company has not yet begun to amortize the capitalized costs of internally developed software. Amortization of such costs will begin when the software is generally available and will be included in the cost of revenue for software license fees.

Cost of Services-Customer Support, Outsourcing and Hosting:

The cost of customer support, outsourcing and hosting services increased $2.2 million, or 80%, from $4.9 million for the three months ended December 31, 2003 and $2.7 million for the same period of 2002. The increase is attributable to the IUS acquired business in the 2003 results. Outsourcing services, which are lower margin services, were not previously offered by the Company prior to the acquisition date and represented $1.1 million of the cost increase during the 2003 period.

The cost of customer support, outsourcing and hosting services increased $6.9 million, or 81%, from $15.5 million for the nine months ended December 31, 2003 and $8.6 million for same period of 2002. The increase was attributable to the inclusion of the acquired business. Outsourcing costs of $4.1 million are included in the nine months of 2003 as a result of the acquired business.

Cost of Services-Consulting, Training and Other:

Consulting, training and other services margin decreased to 26% from 30% for the nine months ended December 31, 2003 and 2002, respectively. The decrease in margin for the nine months ended December 31, 2003 compared to the same period of 2002 was a result of lower staff utilization and the incorporation of the acquired business, with lower margins in its consulting services.

Operating Expenses

Research and Development:

Research and development expenses comprise 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 decreased $2.3 million, or 22%, to $7.9 million in the three months ended December 31, 2003 from $10.2 million in the same period of 2002. The decrease is due to the capitalization of $1.7 million in labor costs in

the 2003 period related to creating a version of the PassPort product to meet market requirements in Japan and other Asian countries.

Research and development expenses decreased $5.7 million, or 17%, to $27.3 million in the nine months ended December 31, 2003 from $33.0 million in the same period of 2002. The decrease in research and development expenses in the nine months ended December 31, 2003 was due to staffing reductions and capitalization of $4.3 million in labor costs.

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 $0.8 million, or 11%, to $8.5 million in the three months ended December 31, 2003 from $7.6 million in the same period of 2002. Sales and marketing expenses increased 15% to $25.7 million in the nine months ended December 31, 2003 from $22.4 million in the same period of 2002. In each case, the increase in sales and marketing expense was due to an increased sales force, including those sales and marketing employees of the acquired business, who are included in the 2003 period.

General and Administrative:

General and administrative expenses include personnel and other costs of the Company’s finance, human resources and administrative operations.

General and administrative expenses increased $3.4 million, or 222%, to $5.0 million in the three months ended December 31, 2003 from $1.6 million in the same period of 2002. The 2002 period includes certain fiscal year end adjustments that reduced overall expenses levels that were not duplicated in the 2003 period. In addition, the 2003 period includes general and administrative expenses of the acquired business that are not included in the same period of 2002.

General and administrative expenses increased 50% to $15.5 million in the nine months ended December 31, 2003 from $10.4 million in the same period of 2002 due to the inclusion of general and administrative expenses of the acquired business that were not included in the same period of 2002, along with the 2002 year end adjustments discussed above.

Restructuring Expenses:

The Company recorded $0.8 million and $4.8 million in restructuring charges in the three and nine months ended December 31, 2002, respectively. The charges resulted from changes in the Company’s estimates of excess lease costs associated with subleasing redundant office space in San Francisco, Dallas and Pittsburgh. At the time of the IUS acquisition, the Company recorded a $675,000 liability for IUS employee severance costs as part of a plan to restructure the acquired operations. The costs were recognized as a liability assumed in the purchase business combination and did not affect operating expenses for the nine month period ended December 31, 2003.

Interest and Other Income (Expense)

Interest:

Interest income is generated from the Company’s investments in marketable securities and interest-bearing cash and cash equivalents. Other income (expense) is generated from foreign exchange gains or losses.

Interest income and other income (expense) decreased 132% to ($87,000) for the three months ended December 31, 2003 from $276,000 for the same period in 2002, and decreased 167% to ($0.6 million) for the nine months ended December 31, 2003 from $0.8 million for the same period in 2002. The decrease is a result of foreign exchange loss, a decrease in the average cash balances available for investment for the period and lower market interest rates.

Interest expense is related to debt financing used to fund the March 5, 2003 IUS acquisition and capital lease arrangements. In connection with the acquisition, the Company executed a promissory note in the principal amount of $10 million in favor of SCT Financial Corporation, a subsidiary of Systems & Computer Technology Corporation, secured by a mortgage on IUS real property. This note was paid in full on September 5, 2003 with proceeds from an $11.5 million mortgage on the same property.

At the time of the acquisition, the Company also issued 8% Convertible Notes which were converted to common stock on July 29, 2003.

Interest expense increased from $17,000 for the three months ended December 31, 2002 to $243,000 for the three months ended December 31, 2003 and increased from $50,000 for the nine months ended December 31, 2002 to $1.0 million for same period of 2003. For both the three month and nine month periods, the increase in interest expense is due to the acquisition-related debt.

Other Income (Expense):

Foreign exchange losses in the nine month period ending December 31, 2003 were $129,000 as compared with a $435,000 gain for the same period of 2002. This variance reflects the recent decline in the value of the U.S. Dollar and its impact on the Company’s non-U.S. subsidiaries holding U.S. Dollar cash and receivable balances, and the realization of a significant foreign exchange gain in 2002.

Provision (Benefit) for Income Taxes

Income taxes include federal, state and foreign income taxes.

In the nine months ended December 31, 2002 the Company recorded a tax benefit of $4.7 million to reflect the impact of a change to US federal income tax law allowing the carryback of net operating losses for five years rather than two years permitted under previous law.

At December 31, 2003, the Company had a net operating loss carryforward of approximately $6.5 million related to stock options. The tax benefit for this carryforward will be directly allocated to contributed capital as realized.

Liquidity and Capital Resources

Sources and Uses of Cash:

As of December 31, 2003, the Company’s principal sources of liquidity consisted of approximately $25.9 million in cash and cash equivalents. In addition, the Company had $5.7 million in short- and long-term restricted cash, for a total of $31.6 million, as compared to $38.9 million at March 31, 2003.

The Company maintained three standby letters of credit at December 31, 2003 in the amount of approximately $5.2 million. These letters of credit require the Company to maintain a corresponding compensating balance equal to the amount of the letters of credit; the compensating balances are included in restricted cash.

During the nine-month period ended December 31, 2003:

• Cash of $5.3 million was used in operating activities, primarily for financing the Company’s net loss of $12.7 million and the payment of $2.7 million of restructuring costs accrued in prior years.

• Cash of $14.3 million was used in investing activities, including $6.9 million in connection with the acquisition of IUS and $5.1 million in capitalized software costs.

• Cash of $11.3 million was generated from financing activities from the proceeds of a mortgage on the Company’s real property.

Future Cash Requirements:

The Company’s primary commitments are its leased office space in Atlanta, Georgia, San Francisco, California, and Woking, England and payments on the promissory note discussed in “Acquisition Financing” below. The Company leases its office space under non-cancelable lease agreements that expire at various times through 2012. The March 31, 2003 commitments for future minimum lease payments under all non-cancelable leases, net of contracted sublease income, combined with required payments on the promissory note, are as follows (in thousands):


	Net
Years Ending March 31,	Payments

2004	$	9,175
2005		9,527
2006		7,875
2007		6,915
2008		6,810
Thereafter		16,695

Total minimum payments required	$	56,997

Except for operating/capital leases, the Company has no guarantees of debt or similar capital commitments to third parties, written options on non-financial assets, standby repurchase agreements, or other commercial commitments. The Company does not anticipate any material capital expenditures for the next 12 months.

Acquisition Financing:

The cost of the IUS acquisition on March 5, 2003 approximated $35.8 million, which the Company financed with approximately $24.8 million from the private placement and a $10.0 million promissory note. This note was paid in full on September 5, 2003 with proceeds from a $11.5 million promissory note secured by certain real property located in Columbia, South Carolina. The promissory note bears interest at an annual rate of 6.5% and is payable in monthly installments of principal and interest (determined on a 15-year amortization) through October 1, 2008, at which time the remaining principal balance of $7.7 million is due and payable. The Company may extend the maturity date at that time for one additional five year term at a variable rate of interest.

On January 21, 2004, the Company acquired Wishbone Systems, Inc. for $6.7 million plus assumption of $1.0 million in Wishbone Systems debt which was paid concurrent with the acquisition. The acquisition was financed from the Company’s current cash balance.

Cash Analysis:

The Company believes that its existing cash, cash equivalents and marketable securities, together with anticipated cash flows from operations, will be sufficient to meet its cash requirements for at least the next 12 months.

The foregoing statement regarding the Company’s expectations for continued liquidity is a forward-looking statement, and actual results may differ materially depending on a variety of factors, including variable operating results, 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

Our business may suffer from risks associated with growth and acquisitions, including the acquisition of Wishbone Systems.

All acquisitions, including the Wishbone Systems acquisition, involve specific risks. Some of these risks include:

• the assumption of unanticipated liabilities and contingencies;

• diversion of our management’s attention;

• inability to achieve market acceptance of acquired products; and

• possible reduction of our reported asset values and earnings because of:

• goodwill impairment;

• increased interest costs;

• issuances of additional securities or debt; and

• difficulties in integrating acquired businesses and assets.

As we grow and attempt to integrate any business and assets that we may acquire, including those in the Wishbone Systems acquisition, we can give no assurance that we will be able to:

• properly maintain and take advantage of the business or value of any acquired business and assets;

• identify suitable acquisition candidates;

• complete any additional acquisitions; or

• integrate any acquired businesses or assets into our operations.

Our operating results have fluctuated in the past and may continue to fluctuate significantly from quarter-to-quarter which could negatively affect our results of operations and our stock price.

Our operating results have fluctuated in the past, and our results may fluctuate significantly in the future. Our operating results may fluctuate from quarter-to-quarter and may be negatively affected as a result of a number of factors, including:

• the relatively long sales cycles for our products;

• the variable size and timing of individual license transactions;

• delays associated with product development, including the development and introduction of new releases of existing products;

• the development and introduction of new operating systems and/or technological changes in computer systems that require additional development efforts;

• our success in, and costs associated with, developing, introducing and marketing new products;

• changes in the proportion of revenues attributable to license fees, hosting fees and services;

• changes in the level of operating expenses;

• software defects and other product quality problems and the costs associated with solving those problems; and

• successful completion of customer funded development.

Changes in operating expenses or variations in the timing of recognition of specific revenues resulting from any of 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 our business or results of operations.

If we are unable to become profitable and cash flow positive in the near future, our business and long-term prospects may be harmed.

We generated net operating losses of $3.2 million and $12.7 million in the three and nine months ended December 31, 2003, and we used cash of approximately $2.2 million and $6.7 million in the three and nine months ended December 31, 2003, respectively. For the three-month transition period ended March 31, 2003, we generated net operating losses of $9.9 million and used cash of approximately $4.9 million. If we are unable to produce future profitability or positive cash flow it will negatively affect our capacity to implement our business strategy and may require us to take actions in the short-term that will impair the long-term prospects of our business. If we are unable to produce future profitability or positive cash flow it may also result in liquidity problems and impair our ability to finance our continuing business operations on terms that are acceptable to us. Further, we may need to enter into financing transactions that are dilutive to our stockholders’ equity ownership in our company.

If the market does not accept our new products and new modules or upgrades to the existing products that we launch from time to time, our operating results and financial condition would be materially adversely affected.

From time to time, we acquire new products and launch new products and new modules or upgrades to existing products. For example, in January 2004 we acquired the Wishbone Service Suite, a suite of workforce management modules that forms a part of our service delivery management product offering. In addition, in December 2003, we introduced InSite EE, the consolidation of our EMPAC and Indus InSite enterprise asset management products into a single development platform. There can be no assurance that any of our new or enhanced products, including the Wishbone Service Suite and InSite EE, will be sold successfully or that they can achieve market acceptance. Our future success with these products and other next generation product offerings will depend on our ability to accurately determine the functionality and features required by our customers, as well as the ability to enhance our products and deliver them in a timely manner. We cannot predict the present

and future size of the potential market for our next generation of products, and we may incur substantial costs to enhance and modify our products and services in order to meet the demands of this potential market.

If the market for service delivery management solutions does not grow as anticipated or if our service delivery management solutions are not accepted in the market, we may not be able to grow our business.

From time to time, we expand into new markets. For example, in January 2004 we announced our service delivery management solutions for utilities. The market for service delivery management solutions is an emerging market. If customer demand in this emerging market does not grow as anticipated or if our service delivery management solution is not accepted in the market place, then we may not be able to grow our business.

If we experience delays in product development or the introduction of new products or new versions of existing products, our business and sales will be negatively affected.

We have in the past experienced delays in product development that have negatively affected our relationships with existing customers and have resulted in lost sales of our products and services to existing and prospective customers and our failure to recover our product development costs. There can be no assurance that we will not experience further delays in connection with our current product development or future development activities. If we are 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, our business, operating results and financial condition will be materially and adversely affected. Because we have limited resources, we must effectively manage and properly allocate and prioritize our product development efforts and our 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.

Delays in implementation of our software or the performance of our professional services may negatively affect our business.

Following license sales, the implementation of our products and their extended solutions generally involves a lengthy process, including customer training and consultation. In addition, we are often engaged by our existing customers for other lengthy professional services projects. A successful implementation or other professional services project requires a close working relationship between us, the customer and, if applicable, third-party consultants and systems integrators who assist in the process. These factors may increase the costs associated with completion of any given sale, increase the risks of collection of amounts due during implementation or other professional services projects, and increase risks of cancellation or delay of such projects. Delays in the completion of a product implementation or with any other professional services project may require that the revenues associated with such implementation or project be recognized over a longer period than originally anticipated, or may result in disputes with customers regarding performance by us and payment by the customers. Such delays in the implementation have caused, and may in the future cause, material fluctuations in our operating results. Similarly, customers may typically cancel implementation projects at any time without penalty, and such cancellation could have a material adverse effect on our business or results of operations. Because our 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 further quarter result in losses or have a material adverse effect on our business or results of operations.

Continued decrease in demand for our products and services will impair our business and could materially adversely affect our results of operations and financial condition.

During 2002 and the first part of 2003 we experienced a decrease in demand for our products and related services, which we believe was due to unfavorable general economic conditions and decreased capital spending by companies in the industries we serve. If these unfavorable economic conditions persist, our business, results of operations and financial condition are likely to be materially adversely affected.

Moreover, overall demand for enterprise asset management software and customer information systems in general may grow slowly or decrease in upcoming quarters and years because of unfavorable general economic conditions, decreased spending by companies in need of our solutions or otherwise. This may reflect a saturation of the market for enterprise asset management software and customer information systems generally, as well as deregulation and retrenchment affecting the way companies purchase our software. To the extent that there is a slowdown in the overall market for our solutions, our business, results of operations and financial condition are likely to be materially adversely affected.

Our success depends upon our ability to attract and retain key personnel.

Our future success depends, in significant part, upon the continued service of our key technical, sales and senior management personnel, as well as our ability to attract and retain new personnel. Competition for qualified sales, technical and other personnel is intense, and there can be no assurance that we will be able to attract, assimilate or retain additional highly qualified employees in the future. Our ability to attract, assimilate and retain key personnel may be adversely impacted by the fact that we have reduced our work force by 27% in 2002 and 19% in 2003 and that, in order to reduce our operating expenses, we have generally not increased wages or salaries over the last two years and have generally not awarded bonuses or other incentives to our employees. If we are unable to offer competitive salaries and bonuses, our key technical, sales and senior management personnel may be unwilling to continue service for us, and it may be difficult for us to attract new personnel. If we were unable to hire and retain personnel, particularly in senior management positions, our business, operating results and financial condition would be materially adversely affected. Further additions of new personnel and departures of existing personnel, particularly in key positions, can be disruptive and have a material adverse effect on our business, operating results and financial condition.

Our failure to realize the expected benefits of our recent restructurings, including anticipated cost savings, could result in unfavorable financial results.

Over the last several years we have undertaken several internal restructuring initiatives. For example, during 2000 and 2001, we restructured some of our operations by, among other things, relocating our corporate headquarters and administrative functions to Atlanta, Georgia from San Francisco, California. In March 2002, our Board of Directors approved a restructuring plan that, among other things, resulted in a reduction in force and the closing of our Dallas office. During the second half of 2002, due to unfavorable financial performance since the fourth quarter of 2001 and management reviews of worldwide operations, we reconfigured our business model and implemented several reductions in workforce and other cost reductions to restructure and resize the business. These types of internal restructurings have operational risks, including reduced productivity and lack of focus as we terminate some employees and assign new tasks and provide training to other employees. In addition, there can be no assurance that we will achieve the anticipated cost savings from these restructurings and any failure to achieve the anticipated cost savings could cause our financial results to fall short of expectations and adversely affect our financial position.

We have taken charges for restructuring of $2.1 million in 2000, $10.2 million in 2001, $8.2 million in 2002, $2.2 million in the transition period ended March 31, 2003, and $34,000 in the nine months ended December 31, 2003, and there can be no assurance that additional charges for restructuring expenses will not be required in future periods. Significant future restructuring charges could cause financial results to be unfavorable.

The strain on our management may negatively affect our business and our ability to execute our business strategy.

Changes to our business and customer base have placed a strain on management and operations. Previous expansion had resulted in substantial growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations, resulting in increased responsibility for management personnel. Our restructuring activities in recent years and our acquisitions of IUS and Wishbone Systems have recently placed additional demands on management. In connection with our restructuring activities and our acquisitions of IUS and Wishbone Systems, we will be required to effectively manage our operations, improve our financial and management controls, reporting systems and procedures on a timely basis and to train and manage our employee work force. There can be no assurance that we will be able to effectively manage our operations and failure to do so would have a material adverse effect on our business, operating results and financial condition.

The market for our products is highly competitive, and we may be unable to maintain or increase our market share.

Our success depends, in part, on our ability to develop more advanced products more quickly and less expensively than our existing and potential competitors and to educate potential customers on the benefits of licensing our products. Some of our competitors have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base than us, which may allow them to introduce products with more features, greater functionality and lower prices than our products. These competitors could also bundle existing or new products with other, more established products in order to effectively compete with us.

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 our business, operating results, and financial condition. Any material reduction in the price of our products would negatively affect our gross revenues and could have a material adverse effect on our business, operating results, and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors, and if we fail to do so we may be unable to maintain or increase or market share.

If we don’t respond to rapid technological change and evolving industry standards, we will be unable to compete effectively.

The industries in which we participate 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 our existing products obsolete and unmarketable. As a result, our success will depend in part upon our ability to enhance our existing asset management solutions, customer information system products and service delivery management solutions, expand our products offerings through development or acquisition, 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 or acquired by us will achieve customer acceptance or will adequately address the changing needs of the marketplace. There can also be no assurance that we will be successful in developing, acquiring and marketing new products or enhancements to our existing products that incorporate new technology on a timely basis.

Our growth is dependent upon the successful development of our direct and indirect sales channels.

We believe that our future growth also will depend on developing and maintaining successful strategic relationships or partnerships with systems integrators and other technology companies. One of our strategies is to continue to increase the proportion of customers served through these indirect channels. Our inability to partner with other technology companies and qualified systems integrators could adversely affect our results of operations. Because lower unit prices are typically charged on sales made through indirect channels, increased indirect sales could reduce our average selling prices and result in lower gross margins. As indirect sales increase, our direct contact with our customer base will decrease, and we may have more difficulty accurately forecasting sales, evaluating customer satisfaction and recognizing emerging customer requirements. In addition, sales of our products through indirect channels may reduce our consulting service revenues, as the third-party systems integrators reselling our products provide these services. Further, when third-party integrators install our products and train customers to us our products, it could result in more instances of incorrect product installation, failure to properly train the customer, or general failure of an integrator to satisfy the customer, which could have a negative effect on our relationship with the integrator and the customer. Such problems could damage our reputation and the reputation of our products and services. In addition, we may face additional competition from these systems integrators and third-party software providers who develop, acquire or market products competitive with our products.

Our strategy of marketing our products directly to customers and indirectly through systems integrators and other technology companies may result in distribution channel conflicts. Our direct sales efforts may compete with those of our indirect channels and, to the extent different systems integrators target the same customers, systems integrators may also come into conflict with each other. Any channel conflicts that develop may have a material adverse effect on our relationships with systems integrators or hurt our ability to attract new systems integrators to market our products.

If we fail to comply with laws or government regulations, we may be subject to penalties and fines.

We are not directly subject to regulation by any governmental agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations addressing the products and services we provide. We do, however, license our products and provide services, from time to time, to the government, government agencies, government contractors and to other customers that are in industries regulated by the government. As a result, our operations, as they relate to our relationships with governmental entities and customers in regulated industries, are governed by certain laws and regulations. These laws and regulations are subject to change without notice to us. In some instances, compliance with these laws and regulations may be difficult or costly, which may negatively affect our business and results of operation. In addition, if we fail to comply with these laws and regulations, we may be subject to significant penalties and fines that could materially negatively affect our business, results of operations and financial position.

If we are unable to expand our international operations, our operating results and financial condition could be materially and adversely affected.

International revenues (from sales outside the United States) accounted for approximately 31%, 41% and 34% of total revenues for the years ended December 31, 2000, 2001 and 2002, respectively, and 35% of total revenues for the transition period ended March 31, 2003. During the nine months ended December 31, 2003, international revenues accounted for approximately 21%

of total revenues. We maintain an operational presence and have established support offices in the United Kingdom, Canada, Australia, France and Japan. We expect international sales to continue to be a material component of our business. However, there can be no assurance that we will be able to maintain or increase international market demand for our products. In addition, international expansion may require us to establish additional foreign operations and hire additional personnel. This may require significant management attention and financial resources and could adversely affect our operating margins. To the extent we are unable to expand foreign operations in a timely manner, our growth, if any, in international sales will be limited, and our business, operating results and financial condition could be materially and adversely affected.

Exchange rate fluctuations between the U.S. Dollar and other currencies in which we do business may result in currency translation losses.

At December 31, 2003, a significant portion of our cash was held in Pound Sterling or other foreign currencies (Australian Dollars, Canadian Dollars, Euros, and Japanese Yen). In the future, we may need to exchange some of the cash held in Pound Sterling, or other foreign currencies, to U.S. Dollars. We do 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.

The success of our international operations is subject to many uncertainties.

Our international business also involves a number of additional risks, including:

• lack of acceptance of localized products;

• cultural differences in the conduct of business;

• longer accounts receivable payment cycles;

• greater difficulty in accounts receivable collection;

• seasonality due to the annual slow-down in European business activity during the third calendar quarter;

• unexpected changes in regulatory requirements and royalty and withholding taxes that restrict the repatriation of earnings;

• tariffs and other trade barriers;

• the burden of complying with a wide variety of foreign laws; and

• negative effects relating to hostilities, war or terrorist acts.

To the extent profit is generated or losses are incurred in foreign countries, our effective income tax rate may be materially and adversely affected. In some markets, localization of our products will be essential to achieve market penetration. We may incur substantial costs and experience delays in localizing our 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 our future international sales and operations and, consequently, our business, operating results and financial condition.

We have only limited protection of our proprietary rights and technology.

Our success is heavily dependent upon our proprietary technology. We rely on a combination of the protections provided under applicable copyright, trademark and trade secret laws, confidentiality procedures and license arrangements to establish and protect our proprietary rights. As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and corporate partners, and license agreements with respect to our software, documentation and other proprietary information. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or obtain and use information that we regard as proprietary, to use our products or technology without authorization, or to develop similar technology independently. Moreover, the laws of some countries do not protect our proprietary rights to the same extent as do the laws of the United States. Furthermore, we have no patents and existing copyright laws afford only limited protection. We license source code for certain of our products and providing such source code may increase the likelihood of misappropriation or other misuses of our intellectual property. Accordingly, there can be no assurance that we will be able to protect our proprietary software against unauthorized third-party copying or use, which could adversely affect our competitive position.

We may not be successful in avoiding claims that we infringe other’s proprietary rights.

We are not aware that any of our products, including the products we acquired in the IUS and Wishbone Systems acquisitions, infringe the proprietary rights of third parties. There can be no assurance, however, that a third-party will not assert that our 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, we believe 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 us to enter into royalty and license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results and financial condition.

As a result of lengthy sales and implementation cycle and the large size of our typical orders, any delays we experience will affect our operating results.

The purchase and implementation of our 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, we 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 we will have no control. Any such delays in the execution of orders have caused, and may in the future cause, material fluctuations in our operating results.

Customer claims, whether successful or not, could be expensive and could harm our business.

The sale and support of our products may entail the risk of product liability claims. Our license agreements 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 us relating to our product or third-party software embedded in our products could have a material adverse effect upon our business, operating results and financial condition.

Additional shares will become eligible for sale, and significant sales of such shares could result in a decrease in the price of our common stock.

The market price of our common stock could drop as a result of sales of large numbers of shares in the market, or the perception that such sales could occur. On February 9, 2004 we completed a private placement for 5 million shares of the Company’s common stock and agreed to register these shares for resale without restriction with the Securities and Exchange Commission. When the registration statement covering these shares becomes effective, the shares will be freely transferable.

Since there is minimal trading volume in our common stock, stockholders wishing to sell even small numbers of shares could have a negative impact on the price of our common stock. If the holders of significant amounts of our common stock, including those stockholders who acquired shares of our common stock in connection with the financing of the IUS acquisition, desire to sell their shares, our stock price would be materially, negatively affected.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company’s cash flow can be exposed to market risks relating to the fluctuation in the value of 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 $0.3 million at December 31, 2003.

The Company provides services to customers in the United States, Europe, Asia Pacific and elsewhere throughout the world. As a result, the Company’s 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 the Company continues to expand its operations, more contracts may be denominated in Australian and Canadian Dollars, Pound Sterling, Euros and Japanese Yen. A strengthening of the U.S. Dollar could make the Company’s 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 $0.7 million at December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective, in all material respects, in the timely alerting of them to material information relating to our company and its consolidated subsidiaries required to be included in our Exchange Act reports.

There has not been any change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are filed herewith or are incorporated by reference:


Exhibit
Number		Description

31.1		Rule 13a-14(a)/15d-14(a) Certification of CEO

31.2		Rule 13a-14(a)/15d-14(a) Certification of CFO

32.1		Section 1350 Certification of CEO

32.2		Section 1350 Certification of CFO

		(b) On October 29, 2003, the Company filed a Current Report on Form 8-K, announcing financial results for the quarter ended September 30, 2003.

SIGNATURE

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: February 10, 2004		/s/ Jeffrey A. Babka

		Jeffrey A. Babka
		Executive Vice President Finance and
		Administration and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Exhibit Index


Exhibit
Number		Description

31.1		Rule 13a-14(a)/15d-14(a) Certification of CEO

31.2		Rule 13a-14(a)/15d-14(a) Certification of CFO

32.1		Section 1350 Certification of CEO

32.2		Section 1350 Certification of CFO

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Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

	•		Cash of $5.3 million was used in operating activities, primarily for financing the Company’s net loss of $12.7 million and the payment of $2.7 million of restructuring costs accrued in prior years.

	•		Cash of $14.3 million was used in investing activities, including $6.9 million in connection with the acquisition of IUS and $5.1 million in capitalized software costs.

	•		Cash of $11.3 million was generated from financing activities from the proceeds of a mortgage on the Company’s real property.

•		the assumption of unanticipated liabilities and contingencies;

•		diversion of our management’s attention;

•		inability to achieve market acceptance of acquired products; and

•		possible reduction of our reported asset values and earnings because of:

	•	goodwill impairment;

	•	increased interest costs;

		•	issuances of additional securities or debt; and

		•	difficulties in integrating acquired businesses and assets.

	•		properly maintain and take advantage of the business or value of any acquired business and assets;

	•		identify suitable acquisition candidates;

	•		complete any additional acquisitions; or

	•		integrate any acquired businesses or assets into our operations.

	•		the relatively long sales cycles for our products;

	•		the variable size and timing of individual license transactions;

	•		delays associated with product development, including the development and introduction of new releases of existing products;

	•		the development and introduction of new operating systems and/or technological changes in computer systems that require additional development efforts;

	•		our success in, and costs associated with, developing, introducing and marketing new products;

	•		changes in the proportion of revenues attributable to license fees, hosting fees and services;

	•		changes in the level of operating expenses;

	•		software defects and other product quality problems and the costs associated with solving those problems; and

	•		successful completion of customer funded development.

	•		lack of acceptance of localized products;

	•		cultural differences in the conduct of business;

	•		longer accounts receivable payment cycles;

	•		greater difficulty in accounts receivable collection;

	•		seasonality due to the annual slow-down in European business activity during the third calendar quarter;

	•		unexpected changes in regulatory requirements and royalty and withholding taxes that restrict the repatriation of earnings;

	•		tariffs and other trade barriers;

	•		the burden of complying with a wide variety of foreign laws; and

	•		negative effects relating to hostilities, war or terrorist acts.