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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-21471
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AURUM SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction 77-0292260 (I.R.S. Employer
of incorporation or organization) Identification Number)
2350 MISSION COLLEGE BOULEVARD, SUITE 1300 SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices, including zip code)
(408) 986-8100
(Registrant's Telephone Number, Including Area Code)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [_]
The number of issued and outstanding shares of the Registrant's Common
Stock, $0.001 par value, as of June 30, 1997, was 11,667,626.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AURUM SOFTWARE, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 38,848 $ 38,955
Accounts receivable, net............................. 11,593 13,329
Prepaid expenses and other current assets............ 1,857 893
-------- --------
Total current assets................................ 52,298 53,177
Property and equipment, net........................... 5,797 2,899
Other assets.......................................... 2,142 205
-------- --------
Total assets........................................ $ 60,237 $ 56,281
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and capital lease obligations, current
portion............................................. $ 400 $ 650
Accounts payable and accrued compensation............ 3,985 3,588
Other accrued liabilities............................ 3,191 1,584
Deferred revenue..................................... 4,087 2,999
-------- --------
Total current liabilities........................... 11,663 8,821
Notes payable and capital lease obligations, less cur-
rent portion......................................... 336 451
-------- --------
Total liabilities..................................... 11,999 9,272
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value, authorized:
5,000,000 shares;
Issued and outstanding: None........................
Common stock, $0.001 par value, authorized:
25,000,000 shares;
Issued and outstanding: 11,667,626 shares
(11,568,146 shares in 1996)......................... 12 12
Additional paid-in capital......................... 61,664 61,561
Notes receivable from stockholders.................. (960) (1,117)
Accumulated deficit................................. (12,478) (13,447)
Total stockholders' equity......................... 48,238 47,009
-------- --------
Total liabilities and stockholders' equity......... $ 60,237 $ 56,281
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
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AURUM SOFTWARE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ----------------
1997 1996 1997 1996
------- ------ ------- -------
<S> <C> <C> <C> <C>
Revenues
Licenses................................... $ 7,803 $3,346 $13,875 $ 6,217
Services................................... 3,689 2,709 6,962 4,721
------- ------ ------- -------
Total revenues............................ 11,492 6,055 20,837 10,938
------- ------ ------- -------
Cost of revenues:
Licenses................................... 1,015 216 1,455 623
Services................................... 2,512 2,270 5,099 4,256
------- ------ ------- -------
Total cost of revenues.................... 3,527 2,486 6,554 4,879
------- ------ ------- -------
Gross profit................................ 7,965 3,569 14,283 6,059
------- ------ ------- -------
Operating expenses:
Sales and marketing........................ 4,587 2,326 8,155 4,527
Research and development................... 1,946 761 3,684 1,387
General and administrative................. 1,107 401 1,885 714
------- ------ ------- -------
Total operating expenses.................. 7,640 3,488 13,724 6,628
------- ------ ------- -------
Income (loss) from operations............... 325 81 559 (569)
Other income, net........................... 461 11 966 23
Interest expense............................ (25) (36) (57) (61)
------- ------ ------- -------
Income (loss) before provision for income
taxes..................................... 761 56 1,468 (607)
Provision for income taxes.................. (259) 0 (499) 0
------- ------ ------- -------
Net income (loss).......................... $ 502 $ 56 $ 969 $ (607)
======= ====== ======= =======
Net income (loss) per share................. $ 0.04 $ 0.01 $ 0.08 $ (0.15)
======= ====== ======= =======
Shares used in per share calculation........ 12,066 8,973 12,018 4,085
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
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AURUM SOFTWARE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities.......... $ 5,737 $(2,380)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment....................... (3,764) (1,097)
Decrease in restricted cash................................. 24 29
Net cash used in acquisition of Aurum Software U.K. Limited,
investment in Beologic A/S and advance to Aurum Software
U.K. Limited............................................... (1,993) --
------- -------
Net cash used in investing activities...................... (5,733) (1,068)
------- -------
Cash flows from financing activities:
Proceeds from borrowings under line of credit............... -- 1,500
Net proceeds from issuance of mandatorily redeemable con-
vertible preferred stock and common stock, net of issuance
costs...................................................... (6) 883
Proceeds from issuance of common stock and repayment of
notes receivable from shareholders......................... 260 24
Repayments of notes payable and capital lease obligations... (365) (357)
Proceeds from notes payable and sales and leasebacks of
property and equipment..................................... -- 609
------- -------
Net cash provided by (used in) financing activities........ (111) 2,659
------- -------
Net decrease in cash and cash equivalents.................... (107) (789)
Cash and cash equivalents, beginning......................... 38,955 2,795
------- -------
Cash and cash equivalents, ending............................ $38,848 $ 2,006
======= =======
Supplemental disclosure of noncash investing and financing
activities:
Property and equipment purchased included in accounts pay-
able....................................................... $(1,509)
=======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
AURUM SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1.BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and in the
opinion of management include all adjustments, consisting only of normal
recurring adjustments, necessary for their fair presentation. The interim
results presented are not necessarily indicative of results for any subsequent
quarter or for the year ending December 31, 1997.
For information regarding the Company's significant accounting policies and
other financial and operating information, see the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Form 10-K.
2.RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share,
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 superseded Accounting Principles Board Opinion
No. 15 and is effective for financial statements issued for periods ending
after December 15, 1997. SFAS 128 requires restatement of all prior-period
earnings per share data presented after the effective dates. SFAS 128 will not
have a material impact on the Company's financial position, results of
operation or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for fiscal years
beginning after December 15, 1997, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally represents
all changes in stockholders' equity except those resulting from investments or
contributions by stockholder. The Company is evaluating alternative formats
for presenting this information, but does not expect this pronouncement to
materially impact the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This statement supersedes Statement of Financial
Accounting Standards No. 14, Financial Reporting for Segment of a Business
Enterprise. The new standard becomes effective for fiscal years beginning
after December 15, 1997, and requires that comparative information from
earlier years be restated to conform to the requirements of this standard. The
Company is evaluating the requirements of SFAS 131 and the effects, if any, on
the Company's current reporting and disclosures.
5
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AURUM SOFTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
3.ACQUISITION/INVESTMENT
In March 1997, the Company signed a share purchase agreement ("the
Agreement") with Aurum Software U.K. Limited, a corporation organized under the
laws of England ("Aurum U.K."), to acquire all the outstanding share capital of
Aurum U.K. from such company's existing shareholders.
Prior to entering into the Agreement, Aurum U.K. had acted as a distributor
of the Company's software products in the United Kingdom and Europe and has
continued to do so subsequent to the purchase. The purchase was accounted for
under the purchase method of accounting.
On April 14, 1997, the Company entered into a Stock Purchase Agreement with
Beologic A/S, a corporation organized under the laws of Denmark ("Beologic"),
pursuant to which it acquired 3,600 shares of Beologic's capital stock,
representing a minority investment in Beologic for $1.4 million. Beologic
develops and supplies software tools for sales configuration products. The
Company has also entered into separate agreements whereby the Company has
agreed to act as a distributor for Beologic's products on a worldwide basis,
and Beologic has agreed to act as a distributor for the Company's products in
Europe. The investment is accounted for under the cost method of accounting.
4.MERGER AGREEMENT
On May 13, 1997, the Company entered into an Agreement and Plan of Merger
pursuant to which it agreed to be acquired by Baan Company, N.V., a corporation
organized under the laws of the Netherlands ("Baan"), in a stock-for-stock
exchange with the Company's stockholders. Under the terms of such agreement,
the Company's stockholders will receive 0.3559322034 Baan Common Shares for
each outstanding share of the Company's Common Stock. The applicable exchange
ratio is subject to adjustment based on the average closing sales price of Baan
Common Shares during the 10 trading days prior to the effectiveness of the
merger. Subject to approval by the Company's stockholders, the merger is
expected to close in the third quarter of 1997.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth
under "Factors That May Affect Future Results" in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission, and elsewhere in or incorporated by reference into this
report. The following discussion should be read in conjunction with the
Company's Condensed Financial Statements and Notes thereto included elsewhere
in this report.
OVERVIEW
Aurum Software, Inc. ("Aurum" or the "Company") is a leading provider of
enterprise-wide sales and marketing information software. The Company
develops, markets and supports the Aurum Customer Enterprise, an integrated
suite of applications that helps automate the field sales, telemarketing,
telesales and customer support functions of a business. The Company's products
are based on advanced client/server and Internet/Intranet technologies and are
designed to provide businesses with integrated, adaptable and mobile software
solutions to meet their competitive business goals.
The Company derives revenues principally from licensing its software and
providing technical product support and consulting services to its customers.
License revenues for the Company's products consist of server fees for one or
more servers and software license fees based on the number of named users. The
Company also derives license revenues from sublicensing third party software
products. License revenues are recognized upon execution of a license
agreement and delivery of software if there are no significant post-delivery
vendor obligations and collection of the receivable is deemed probable. If
significant post-delivery obligations exist or if a product is subject to
customer acceptance, revenues are deferred until no significant obligations
remain or acceptance has occurred. Revenues from services consist primarily of
consulting services, including implementation and adaptation of licensed
software and training, maintenance, and support. Consulting and training
revenues are generally recognized as services are performed, except for
revenues from certain fixed-price contracts or milestone deliverables, which
are recognized on a percentage-of-completion basis or upon milestone delivery.
Maintenance revenues are recognized ratably over the term of the maintenance
period, which is typically one year. For all periods presented, the Company
has recognized revenue in accordance with the Statement of Position 91-1 on
"Software Revenue Recognition" dated December 12, 1991, issued by the American
Institute of Certified Public Accountants.
The license of the Company's software products often involves an enterprise-
wide decision by prospective customers and generally requires the Company to
provide a significant level of education to prospective customers regarding
the use and benefits of the Company's products. In addition, the
implementation of the Company's products requires a significant commitment of
resources by prospective customers and is commonly associated with substantial
reengineering efforts which may be performed by the customer or third-party
system integrators. The cost to the customer of the Company's product is
typically only a portion of the related hardware, software, development,
training and integration costs of automating a sales and marketing system. For
these reasons, the sales and implementation cycles associated with the license
of the Company's products is often lengthy and may be subject to a variety of
significant delays beyond the Company's control. Given these factors, any
reduction or delay in sales to or implementations by prospective customers
could have a material adverse effect on the Company's business, operating
results, and financial condition.
In North America, the Company markets its software primarily through its
direct sales organization. The Company's direct sales force employs a
consultative sales process, working closely with customers to understand and
define their needs. In addition, the direct sales force works closely with
strategic systems technology and sales methodology partners to identify
specific customer opportunities and requirements.
7
<PAGE>
Outside North America, the Company has historically marketed its software
through key distribution organizations. In March 1997, the Company acquired
all the outstanding share capital of Aurum Software U.K. Limited, a
corporation organized under the laws of England, and is now marketing and
selling its products in the United Kingdom through a direct sales force. In
April 1997, the Company entered into agreements with Beologic A/S, a
corporation organized under the laws of Denmark ("Beologic"), pursuant to
which the Company made a minority equity investment in Beologic. In addition,
Beologic agreed to act as a distributor for the Company's products in Europe,
and the Company agreed to act as a distributor for Beologic's products in
North America. Beologic develops and supplies software tools for sales
configuration products.
The Company intends to continue to grow its direct sales force in North
America and to pursue international distribution primarily through key
distribution agreements and, in selected countries where management determines
it to be appropriate, through a direct sales force. As the Company's existing
direct sales forces in the United States and the United Kingdom are relatively
small, the Company's ability to achieve revenue growth in the future will
depend largely on its success in recruiting and training sufficient direct
sales, technical, and customer support personnel, in developing distribution
relationships with third party distributors outside the United States, and
establishing and maintaining relationships with its strategic partners. Any
failure by the Company to expand its direct sales force or other distribution
channels, or to expand its technical and customer support staff, could
materially and adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be
successful in attracting and retaining qualified international distributors or
that it will be successful in implementing direct sales programs in selected
international markets. If the Company is unable to obtain qualified
international distribution partners or is otherwise unable to penetrate
strategically important international markets, the Company's business,
operating results and financial condition could be materially and adversely
affected.
The Company's revenues generally reflect a relatively high amount of sales
per order. The loss or delay of an individual order, therefore, can have a
material impact on the revenue and quarterly results of operations of the
Company. The timing of license revenue is difficult to predict because of the
length of the Company's sales cycle. Because the Company's operating expenses
are based on anticipated revenue trends and because a higher percentage of the
Company's expenses are relatively fixed, a delay in the recognition of revenue
from a limited number of license transactions could cause significant
variations in operating results from one quarter to the other and could result
in losses. As a result of these and other factors, revenues for any quarter
are subject to significant fluctuations, and the Company believes that period-
to-period comparisons should not be relied upon as indicators of future
performance. It is likely that in some future quarter the Company's operating
results may be below the expectations of public market analysts and investors,
which would adversely affect the price of the Company's Common Stock.
RESULTS OF OPERATIONS
Revenues
Total revenues increased 90% from $6.1 million for the three months ended
June 30, 1996 to $11.5 million for the three months ended June 30, 1997 and
91% from $10.9 million for the six months ended June 30, 1996 to $20.8 million
for the six months ended June 30, 1997. The increase was due to significant
growth in license revenues and growth in service revenues.
Licenses. License revenues increased 133% from $3.3 million for the three
months ended June 30, 1996 to $7.8 million for the three months ended June 30,
1997 and 123% from $6.2 million for the six months ended June 30, 1996 to
$13.9 million for the six months ended June 30, 1997. As a percentage of total
revenues, license revenues increased to 68% in the second quarter of 1997 from
55% in the second quarter of 1996 and increased to 67% for the six months
ended June 30, 1997 from 57% for the six months ended June 30, 1996. The
increases in license revenues in absolute dollars and as a percentage of total
revenues were due to purchases of products by Baan for resale, increased
market acceptance of the Company's Windows-based products, expansion of the
Company's product line, and the expansion of the Company's direct sales force
from 30 employees at June 30, 1996 to 55 at June 30, 1997. Revenue from
international accounts in Canada, Europe, Japan, and Australia/New
8
<PAGE>
Zealand accounted for 20% of license revenues for the three months ended June
30, 1997 and were insignificant for the three months ended June 30, 1996. In
addition, Beologic's configurator products sold pursuant to the Company's
distribution agreement with Beologic dated April 1997, accounted for 13% of
license revenues for the three months ended June 30, 1997.
Services. Service revenues increased 36% from $2.7 million for the three
months ended June 30, 1996 to $3.7 million for the three months ended June 30,
1997 and increased 48% from $4.7 million for the six months ended June 30, 1996
to $7.0 million for the six months ended June 30, 1997. As a percentage of
total revenues, service revenues decreased slightly from 45% to 32% for the
three month periods ended June 30, 1996 and 1997, respectively, and from 43% to
33% for the six months ended June 30, 1996 and 1997, respectively. The dollar
increase in service revenues was primarily due to increased demand for
consulting and systems integration services arising from a larger installed
customer base. Also contributing to the increase in service revenues is the
increase in maintenance revenues resulting from a larger installed customer
base and higher maintenance renewal rates. The decrease as a percentage of
total revenues was attributable to the higher growth rate of license revenues
relative to service revenues. The Company continues its strategy of using
third-party integration partners, which is intended to allow the Company more
time to focus on license sales, which have higher margins than service
revenues.
Costs of Revenues
Cost of Licenses. Cost of licenses consists primarily of license fees and
royalties paid to third party software providers and, to a lesser extent,
product media, product duplication and shipping. Cost of license revenues
increased from $216,000 for the three months ended June 30, 1996 to $1.0
million for the three months ended June 30, 1997 and from $623,000 for the six
months ended June 30, 1996 to $1.5 million for the six months ended June 30,
1997. As a percentage of total revenues, cost of licenses increased from 4% for
the three months ended June 30, 1996 to 9% for the three months ended June 30,
1997 and from 6% for the six months ended June 30, 1996 to 7% for the six
months ended June 30, 1997. As a percentage of total license revenues, cost of
licenses also increased from 7% for the three months ended June 30, 1996 to 13%
for the three months ended June 30, 1997 and from 10% for the six months ended
June 30, 1996 to 11% for the six months ended June 30, 1997. The increases in
cost of licenses as a percentage of total revenues and as a percentage of total
license revenues were attributable primarily to royalty payments related to the
sale of Beologic's configurator product.
Cost of Services. Cost of services consists primarily of personnel-related
costs incurred in providing consulting services, training and maintenance to
customers. Cost of services increased from $2.3 million for the three months
ended June 30, 1996 to $2.5 million for the three months ended June 30, 1997
and from $4.3 million for the six months ended June 30, 1996 to $5.1 million
for the six months ended June 30, 1997. As a percentage of total revenues, cost
of services decreased from 37% for the three months ended June 30, 1996 to 22%
for the three months ended June 30, 1997 and from 39% for the six months ended
June 30, 1996 to 24% for the six months ended June 30, 1997. As a percentage of
total service revenues, cost of services also decreased from 84% for the three
months ended June 30, 1996 to 68% for the three months ended June 30, 1997 and
from 90% for the six months ended June 30, 1996 to 73% for the six months ended
June 30, 1997. The decrease in cost of services as a percentage of total
revenues was due to a higher revenue base and as a percentage of total service
revenues to economies of scale and a higher service revenue base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, advertising, direct mail, seminars, public relations, trade shows,
travel and other related selling and marketing expenses. Sales and marketing
expenses increased from $2.3 million for the three months ended June 30, 1996
to $4.6 million for the three months ended June 30, 1997 and from $4.5 million
for the six months ended June 30, 1996 to $8.2 million for the six months ended
June 30, 1997. Sales and marketing expenses represented 38% and 40% of total
9
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revenues for the three months ended June 30, 1996 and 1997, respectively, and
41% and 39% for the six months ended June 30, 1996 and 1997, respectively. The
dollar increase in sales and marketing expenses reflected the expansion of the
Company's direct sales force and increased expenses associated with a higher
level of marketing activity by the Company.
Research and Development. Research and development expenses relate primarily
to engineering personnel. Costs related to research and development of
products are charged to research and development expenses as incurred.
Research and development expenses increased from $761,000 for the three months
ended June 30, 1996 to $1.9 million for the three months ended June 30, 1997
and $1.4 million for the six months ended June 30, 1996 to $3.7 million for
the six months ended June 30, 1997. Research and development expenses
represented 13% and 17% of total revenues for the three months ended June 30,
1996 and 1997, respectively, and 13% and 18% for the six months ended June 30,
1996 and 1997, respectively. Both the dollar increase and the increase in
research and development expenses as a percentage of total revenues were due
primarily to increased investment in new product development accompanied by an
increase in personnel.
General and Administrative. General and administrative expenses include
personnel costs for administration, finance, human resources and general
management in addition to legal and accounting expenses and other professional
services. General and administrative expenses increased from $401,000 for the
three months ended June 30, 1996 to $1.1 million for the three months ended
June 30, 1997 and $714,000 for the six months ended June 30, 1996 to $1.9
million for the six months ended June 30, 1997. General and administrative
expenses represented 7% and 10% of total revenues for the three months ended
June 30, 1996 and 1997, respectively, and 7% and 9% for the six months ended
June 30, 1996 and 1997, respectively. The dollar increase in general and
administrative expenses and the increase as a percentage of total revenues
were attributable primarily to increased expenses associated with becoming a
publicly traded company in October 1996 and expenses relating to the proposed
acquisition of the Company by Baan.
Other Income. Other income, net, consists primarily of interest income
offset by expenses relating to sales taxes and other fees and licenses. Other
income, net, increased from $11,000 for the three months ended June 30, 1996
to $461,000 for the three months ended June 30, 1997 and $23,000 for the six
months ended June 30, 1996 to $966,000 for the six months ended June 30, 1997.
Other income represented less than 1% and 5% of the total revenues for the
three months ended June 30, 1996 and 1997, respectively, and less than 1% and
5% for the six months ended June 30, 1996 and 1997, respectively. The dollar
increase in other income and the percentage increase as a percentage of total
revenues were attributable to interest income of $1.0 million arising
primarily from investment of the proceeds of the Company's initial public
offering in short-term highly liquid investments.
Provision for Income Taxes. Income taxes have been provided for at an
effective rate of approximately 34% which consists primarily of federal and
state taxes. The Company accounts for income taxes under the liability method.
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates, on a quarterly basis, the recoverability of the deferred
tax assets and the level of the valuation allowance. The ultimate realization
of these deferred tax assets is dependent on the Company's ability to generate
taxable income in the future.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $38.8 million in cash and cash equivalents
and $40.6 million of working capital. The Company also has available a $3.0
million bank line of credit, which is collateralized by the assets of the
Company and requires that certain financial covenants be maintained. The line
of credit also contains a restrictive covenant that limits the Company's
ability to pay cash dividends or make stock repurchases in excess of $350,000
without the prior written consent of the lender. The line expired on July 14,
1997. As of June 30, 1997, there were no amounts outstanding under the line of
credit agreement.
10
<PAGE>
The Company believes that existing cash balances and cash from operations
will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. Although operating activities
may provide cash in certain periods, to the extent that the Company
experiences growth in the future, the Company anticipates that its operating
and investing activities may use cash. Consequently, any such growth may
require the Company to obtain additional equity or debt financing. There can
be no assurances that any necessary additional financing will be available to
the Company on commercially reasonable terms, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements and other prospective information relating to future events. These
forward-looking statements and other information are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including the following:
In May 1997, the Company entered an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which it agreed to be acquired by Baan in a
stock-for-stock exchange with the Company's stockholders (the "Merger"). The
Merger is subject to approval by the Company's stockholders and is expected to
close in the third quarter of 1997. Although the Company will continue to
operate independently as a wholly-owned subsidiary of Baan after the Merger,
the Merger involves a significant amount of integration of two companies that
have previously operated independently. Among the factors considered by the
Board of Supervisory Directors and the Board of Managing Directors of Baan and
the Board of Directors of the Company in connection with their respective
approval of the Merger Agreement and the Merger were the perceived
opportunities for broadened product offerings and marketing efficiencies that
could result from the Merger. No assurance can be given that difficulties will
not be encountered in integrating certain products, technologies or operations
of the Company with Baan or that the benefits expected from such integration
will be realized or that Aurum employee morale will not be adversely affected
by the integration process. There can be no assurance that either company will
retain its key personnel, that the engineering teams of Baan and the Company
will successfully cooperate and realize any technological benefits or that
Baan or the Company will realize any of the other anticipated benefits of the
Merger. In addition, the public announcement of the Merger and the
consummation of the Merger could result in the cancellation, termination or
nonrenewal of arrangements with the Company by suppliers, distributors or
customers of the Company or the loss of certain key employees of the Company,
or the termination of negotiations or delays in ordering by prospective
customers of the Company as a result of uncertainties that may be perceived as
a result of the Merger. For example, customers or potential customers of the
Company who utilize back-office enterprise software marketed by competitors of
Baan could terminate or delay orders with Aurum due to perceived uncertainties
over the Company's continued commitment to providing products and enhancements
or support services for the Company's products which are used in conjunction
with a competing back-office enterprise software. In fact, the Company
believes it has experienced some delays in product orders due to the
announcement of the Merger. Any significant amount of cancellations,
terminations, delays or nonrenewals of arrangements with the Company or loss
of key employees or termination of negotiations or delays in ordering could
have a material adverse effect on the business, operating results or financial
condition of the Company.
The risks and difficulties associated with integrating the Company with Baan
will be increased as a result of Baan's recent acquisition of Antalys, which
following the Merger is expected to be combined with the Company. Although
Baan believes that Antalys' sales force configurator software products are
complementary to the Company's software products, the integration of the
Company with Baan (including Antalys) will also require the integration of the
Company's software product offerings and coordination of the Company's
research and development and sales and marketing efforts with those of Baan
(including Antalys). The difficulties of such assimilation may be increased by
the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining three
different corporate cultures. In addition, the process of integrating the
Company with Baan (including Antalys) will require substantial attention from
management and could cause the interruption of, or a loss of momentum in, the
business activities of Baan or the Company.
The Company recently entered into a supply arrangement with Beologic, a
competitor of Antalys, to provide the Company with its products. In connection
with this supply arrangement, the Company made a $1.4 million equity
investment in Beologic, has made significant royalty advances to Beologic, and
is obligated to make
11
<PAGE>
additional royalty advances during the term of the parties' agreements. In
addition, following the announcement of the Merger, the Company and Beologic
entered an amendment to their agreements that, among other things, permits the
Company to integrate Beologic's products with those of Antalys. Nevertheless,
there can be no assurance that the Company will be able to integrate such
products successfully, and until Antalys' and the Beologic products are
integrated or otherwise reconciled, there could be uncertainty in the
marketplace which could result in cancellations, terminations or delays of
orders from customers.
Although the Company has experienced significant growth in revenues during
the last three years and during the quarterly periods reported on in this
report, the Company does not believe that prior growth rates are sustainable or
indicative of future operating results. Although the Company has achieved
limited quarterly profitability in each quarter since the quarter ended June
30, 1996, there can be no assurance that the Company will be able to sustain
profitability on a quarterly basis.
The Company's quarterly results have varied significantly in the past and may
vary significantly in the future, depending on a number of factors, many of
which are beyond the Company's control and many of which could have a material
adverse effect on the Company's revenues and profitability during any
particular quarterly or annual period. These factors include, among others, the
ability of the Company to develop, introduce and market new and enhanced
versions of its software on a timely basis, the demand for the Company's
software, the size, timing and contractual terms of significant orders, the
timing and significance of software product enhancements and new software
product announcements by the Company or its competitors, budgeting cycles of
the Company's potential customers, customer order deferrals in anticipation of
enhancements of new software products, the cancellations of licenses or
maintenance agreements, software defects and other product quality problems,
and general domestic and international economic and political trends. Moreover,
the timing of revenue recognition can be affected by many factors, including
the timing of contract execution and delivery and customer acceptance, if
applicable. In part because of lengthy sales and implementation cycles, the
timing between initial customer contact and fulfillment of criteria for revenue
recognition can be lengthy and unpredictable, and revenues in any given period
may be adversely affected as a result of such unpredictability. The Company has
limited backlog. As a result, software revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter, cannot be
accurately predicted, and may vary significantly. The Company has also
experienced seasonality in its business, in part due to customer buying
patterns. In recent years, the Company has generally had stronger demand for
its software products in the quarters ending in June and December and weaker
demand in the quarters ending in March and September.
The Company incorporates into its products certain software and other
technologies licensed to it by third-party developers. Among the principal
developers of these licensed technologies are Business Objects, Inc., which
licenses an On- Line Analytical Processing ("OLAP") tool that enables the
analysis of sales and customer data at both the server and client sites of a
user's network; Centura Corporation, which licenses a SQL-based laptop database
that is used principally in the Company's SalesTrak product; and First Floor
Software, Inc., which licenses an intelligent agent that monitors changes in
sales and customer data accessed through the World Wide Web. The Company's
license agreements with Business Objects and Centura expire in March 2000 and
December 1997, respectively. In addition, the Company's agreement with First
Floor expired in June 1997. Although the Company and First Floor have continued
to work together, no renewal has been formalized. There is no assurance that
any of these agreements will be renewed following expiration on terms favorable
to the Company, if at all. Because the Company's products incorporate software
developed and maintained by third parties, the Company is to a certain extent
dependent upon such third parties' abilities to maintain or enhance their
current products, to develop new products on a timely and cost-effective basis
and to respond to emerging industry standards and other technological changes.
In the event that the Company's agreements with its third-party vendors should
fail to be renewed or the products licensed from such vendors should fail to
address the requirements of the Company's software products, the Company would
be required to find alternative software products or technologies of equal
performance or functionality. There can be no assurance that the Company would
be able to replace the functionality provided by any third party software
currently offered in conjunction with the Company's products in the event that
such software becomes obsolete or incompatible with future versions of the
Company's products, that such software is not adquately maintained or updated,
or that such software proves otherwise unavailable to the Company. The absence
of or any significant delay in the replacement of that functionality could have
a material adverse effect on the Company's business, operating results and
financial condition.
12
<PAGE>
The Company believes that its continued growth and profitability will require
expanded distribution for its products, particularly internationally. In North
America, the Company has sold its products primarily through its direct sales
organization and has supported its customers with its technical and customer
support staff. International sales have been insignificant to date, but the
Company intends to expand its international operations and enter additional
international markets through partnerships with international distributors or,
in selected countries, through direct sales. Continued expansion, domestically
and internationally, will require significant investments of management
attention and financial resources, which could adversely affect the Company's
operating margins and earnings, if any. The Company's growth to date has
already challenged the Company's personnel and management resources.
Internationally, the Company's ability to achieve revenue growth in the future
will depend in part on its ability to establish productive relationships with
distributors in Europe and the Pacific Rim. The competition for qualified
international distributors is intense, however. The Company has in the past
experienced difficulty in obtaining qualified distributors, and there can be no
assurance that the Company can attract and retain qualified distributors. Both
domestically and in selected foreign countries, the Company continues to invest
significant resources to expand its direct sales force. The Company believes
the complexity of its products and the large-scale deployments anticipated by
customers will also require a number of highly trained support personnel.
Competition for qualified sales and consulting employees is intense, both
domestically and internationally, and the Company has at times experienced
difficulty in recruiting qualified personnel. Any failure by the Company to
expand its direct sales force or other distribution channels, or to expand its
technical and customer support staff, could materially and adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that any expansion of the Company's direct or indirect distribution
channels will result in an increase in revenues or profitability. In addition,
international expansion of the Company's business poses a number of risks which
could have a material adverse effect on the Company's operating results in the
event that revenues from international operations comprise a greater percentage
of the Company's total revenues in the future. These risks include changes in
foreign currency exchange rates, longer payment cycles, greater difficulty in
accounts receivable collection, difficulties in managing and staffing
international operations, seasonal fluctuations in business activities in
various parts of the world, including the slow-down in European business
activity during the Company's third fiscal quarter, cultural differences in the
conduct of business, tariffs, duties, price controls or other restrictions on
foreign currencies, trade barriers and other factors.
As a result of the foregoing as well as other factors, the Company's
operating results and stock price may be subject to significant volatility,
particularly on a quarterly basis. The market price of the Company's Common
Stock has fluctuated significantly since its initial public offering in October
1996 and could be subject to significant fluctuations in the future based upon
a number of factors, including any shortfall in the Company's revenues or net
income from revenues or net income expected by securities analysts,
announcements of new products by the Company or its competitors, quarterly
fluctuations in the Company's financial results or the financial results of
other software companies, including direct competitors of the Company, changes
in analysts' estimates of the Company's financial performance or the financial
performance of competitors or the financial performance of software companies
in general, general conditions in the software industry, changes in prices for
the Company's products or competitors' products, changes in revenue growth
rates for the Company or its competitors, as well as other events or factors.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations, which have particularly affected the market price for
the securities of many technology companies and which have often been unrelated
to the operating performance of the specific companies. Such broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. Since the announcement of the signing of the Merger Agreement with Baan,
the trading price of the Company's shares has been tied to the trading price of
Baan's Common Shares on the Nasdaq National Market and has reflected the
exchange ratio established in the Merger Agreement discounted to reflect the
risk that the Merger will not be completed. If the Merger fails to close for
any reason, including failure to obtain stockholder approval, such failure
would likely have an immediate adverse effect on the trading price of the
Company's shares and could have a material adverse effect on the Company's
business, financial condition, and results of operations.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is party to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. Management has reviewed pending legal matters and believes that the
resolution of such matters will not have a significant adverse affect on the
Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Stockholders of the Company was held on May 30,
1997, at which time the following matters were acted upon:
<TABLE>
<CAPTION>
VOTES
VOTES WITHHELD/ BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTES
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
1.Election of Directors
Mary E. Coleman................... 10,231,598 -- 7,663 --
David D. Buchanan................. 9,492,871 -- 746,390 --
Mark Leslie....................... 10,207,583 -- 31,678 --
Robert J. Loarie.................. 10,231,821 -- 7,440 --
Robert M. Obuch................... 10,233,661 -- 5,600 --
Jeffrey T. Webber................. 10,207,360 -- 31,901 --
Charles C. Wu..................... 10,231,821 -- 7,440 --
2. Ratification of Coopers & Lybrand
L.L.P. as independent accountants
for the Company for the year
ending December 31, 1997......... 10,179,471 57,640 2,150 --
</TABLE>
ITEM 5. OTHER INFORMATION
The Company has entered into the Merger Agreement with Baan Company N.V.
("Baan") on May 13, 1997 pursuant to which it agreed to be acquired by Baan in
a merger transaction. In the Merger, each holder of the Company's Common Stock
will receive 0.3559322034 Baan Common Shares for each outstanding share of the
Company's Common Stock (the "Exchange Ratio"), representing an aggregate of
4,152,884 Baan Common Shares based on the number of shares of Aurum Common
Stock outstanding on June 30, 1997. The Exchange Ratio was determined based on
the closing price of Baan Common Shares on May 9, 1997, $59.00 per share,
reflecting a purchase price of $21 per share of Aurum Common Stock. The
Exchange Ratio is subject to increase in the event that the average closing
sales price of Baan Common Shares over the 10 trading days prior to the date
of effectiveness of the merger (the "Baan Stock Value") is less than $50 per
share. In such event, the Exchange Rate increases to the product of the
initial Exchange Ratio, 0.3559322034, times a fraction, the numerator of which
is $50.00 and the denominator of which is the Baan Stock Value. The Exchange
Ratio does not adjust further below a Baan Stock Value of $40 per share, and
accordingly the maximum Exchange Ratio is 0.4449152542 and the maximum number
of Baan Common Shares issuable in respect of Aurum Common Stock (based on the
number of shares of Aurum Common Stock outstanding on June 30, 1997) is
5,191,105 Baan Common Shares.
14
<PAGE>
The acquisition, which is expected to close in the third quarter of 1997,
will be accounted for as a tax free pooling of interests and is subject to the
approval of the Company's stockholders. Certain of the Company's stockholders
holding a majority of its Common Stock have entered agreements to vote in
favor of the acquisition, and the Company has granted Baan an option to
acquire 19.9% of its outstanding Common Stock which is exercisable under
certain circumstances.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
<S> <C>
11.1............................. Computation of Net Income (Loss) Per Share.
27.1............................. Financial Data Schedule.
</TABLE>
(b) REPORTS OF FORM 8-K
The Registrant filed no Current Reports on Form 8-K during the quarter ended
June 30, 1997.
15
<PAGE>
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, in the City of Santa Clara,
California.
AURUM SOFTWARE, INC.
/s/ Christopher L. Dier
By: ___________________________________
Christopher L. Dier Vice President,
Finance (Duly Authorized Officer and
Principal Financialand Accounting
Officer)
Date: August 14, 1997
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
<S> <C>
11.1.......................... Computation of Net Income (Loss) Per Share.
27.1.......................... Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 11.1
AURUM SOFTWARE, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
1997 1996 1997 1996
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income (loss).............................. $ 502 $ 56 $ 969 $ (607)
======= ====== ======= ======
Weighted average common shares outstanding..... 11,626 3,056 11,598 2,930
Common stock equivalents relating to options
and preferred stock........................... 440 4,762 420 --
Common stock and common stock options issued
during the 12-month period prior to the
initial public offering in accordance with
Staff Accounting Bulletin No. 83 (using the
treasury stock method)........................ -- 1,155 -- 1,155
------- ------ ------- ------
12,066 8,973 12,018 4,085
======= ====== ======= ======
Net income (loss) per share(1)................. $ 0.04 $ 0.01 $ 0.08 $(0.15)
======= ====== ======= ======
</TABLE>
- --------
(1) There is no difference between primary and fully diluted net income (loss)
per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 38,848 0
<SECURITIES> 0 0
<RECEIVABLES> 11,908 0
<ALLOWANCES> (315) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 52,298 0
<PP&E> 9,410 0
<DEPRECIATION> (3,613) 0
<TOTAL-ASSETS> 60,237 0
<CURRENT-LIABILITIES> 11,663 0
<BONDS> 0 0
0 0
0 0
<COMMON> 12 0
<OTHER-SE> 48,226 0
<TOTAL-LIABILITY-AND-EQUITY> 60,237 0
<SALES> 11,492 20,837
<TOTAL-REVENUES> 11,492 20,837
<CGS> (3,527) (6,554)
<TOTAL-COSTS> (7,640) (13,724)
<OTHER-EXPENSES> 461 966
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (25) (57)
<INCOME-PRETAX> 761 1,468
<INCOME-TAX> (259) (499)
<INCOME-CONTINUING> 502 969
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 502 969
<EPS-PRIMARY> 0.04 0.08
<EPS-DILUTED> 0.04 0.08
</TABLE>
