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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
BAAN COMPANY N.V.
Zonneoordlaan 17
6710 BG Ede
The Netherlands
and
4600 Bohannon Drive
Menlo Park, California USA
(Addresses of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F
From 20-F X Form 40-F .
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes No X .
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
82 - N.A. .
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BAAN COMPANY N.V.
Form 6-K
TABLE OF CONTENTS
Page
Financial Information (unaudited):
Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Exhibit Index 24
Exhibit A. Statement of Computation of Earnings per Share 25
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
------------- ------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 22,056 $ 12,165
Short-term marketable securities ........................................... 4,146 23,562
Accounts receivable, net of allowance for doubtful accounts
of $6,435 in 1996 and $2,629 in 1995 ..................................... 129,440 87,226
Other current assets ....................................................... 12,225 8,114
--------- ---------
Total current assets ...................................................... 167,867 131,067
Property and equipment, at cost ............................................. 43,527 35,388
Less accumulated depreciation and amortization .............................. (18,097) (13,990)
--------- ---------
Net property and equipment .................................................. 25,430 21,398
Software development costs, net ............................................. 12,079 6,983
Intangible assets, net ...................................................... 26,196 26,524
Other non current assets .................................................... 2,389 649
--------- ---------
Total assets .............................................................. $ 233,961 $ 186,621
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings from banks ........................................... $ 4,572 $ 3,779
Accounts payable ........................................................... 27,211 23,292
Income taxes payable ....................................................... 7,528 5,031
Accrued and other current liabilities ...................................... 35,313 17,834
Deferred revenue ........................................................... 13,552 8,890
Current portion of long-term debt .......................................... 473 501
--------- ---------
Total current liabilities ................................................. 88,649 59,327
Long-term debt .............................................................. 1,281 1,714
Other long-term liabilities ................................................. 3,523 3,455
Deferred income taxes ....................................................... 5,309 8,005
Shareholders' equity:
Common shares, par value - NLG .01 per share, 350,000,000 shares authorized;
88,488,504 issued and outstanding in
1996 (86,246,976 in 1995)* ................................................ 517 503
Additional paid-in capital ................................................. 93,390 88,612
Deferred compensation ...................................................... (924) (1,125)
Retained earnings .......................................................... 42,908 22,873
Accumulated translation adjustment ......................................... (692) 3,257
--------- ---------
Total shareholders' equity ................................................ 135,199 114,120
--------- ---------
$ 233,961 $ 186,621
========= =========
</TABLE>
* Reflects a two-for-one stock split (record date May 15, 1996).
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
License revenue ................. $ 55,698 $30,529 $145,493 $ 70,978
Maintenance and service revenue . 40,114 18,854 108,494 53,714
Hardware and other revenue ...... 1,869 5,065 10,102 15,968
-------- ------- -------- ---------
Total net revenues ............ 97,681 54,448 264,089 140,660
Costs and expenses:
Cost of license revenue ......... 2,668 2,526 8,999 4,254
Cost of maintenance and service
revenue ....................... 32,458 15,715 90,622 41,906
Cost of hardware and other
revenue ....................... 1,505 3,830 7,934 12,549
Sales and marketing ............. 24,795 14,559 67,094 37,339
Research and development ........ 10,761 6,138 27,694 12,956
General and administrative ...... 8,644 5,696 23,739 15,444
Amortization of intangible assets 1,594 1,324 4,569 3,311
-------- ------- -------- ---------
Total costs and expenses ...... 82,425 49,788 230,651 127,759
-------- ------- -------- ---------
Income from operations ........... 15,256 4,660 33,438 12,901
Interest income (expense), net ... (21) 402 147 177
Other income ..................... -- -- -- 1,071
-------- ------- -------- ---------
Income before income taxes
and minority interest ......... 15,235 5,062 33,585 14,149
Provision for income taxes ....... 5,942 2,000 13,098 5,643
Minority interest in earnings
of consolidated subsidiaries .. -- -- -- (72)
-------- ------- -------- ---------
Net income ....................... $ 9,293 $ 3,062 $ 20,487 $ 8,434
======== ======= ======== =========
Net income per share * ........... $ 0.10 $ 0.03 $ 0.22 $ 0.10
======== ======= ======== =========
Shares used in computing per share
amounts * ..................... 95,110 93,306 94,386 87,490
======== ======= ======== =========
</TABLE>
* Reflects a two-for-one stock split (record date May 15, 1996).
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Operating activities
Net income ........................................................ $ 20,487 $ 8,434
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................... 13,574 8,784
Minority interest in earnings of consolidated
subsidiaries ................................................... -- 72
Benefit for deferred income taxes ............................... (797) (821)
Foreign currency transaction (gains) and losses ................. (60) 249
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ............................................ (44,035) (22,881)
Other current assets ........................................... (6,713) (2,044)
Accounts payable ............................................... 4,018 (2,882)
Accrued and other current liabilities .......................... 14,176 2,964
Income taxes payable ........................................... 81 2,019
Deferred revenue ............................................... 4,655 (516)
-------- --------
Net cash provided by (used in) operating activities ............. 5,386 (6,622)
-------- --------
INVESTING ACTIVITIES
Property and equipment purchased ................................ (14,876) (10,863)
Property and equipment sold ..................................... 3,615 2,839
Increase in capitalized software development costs .............. (5,491) (2,216)
Payment for acquisition, net of cash acquired ................... (3,567) (7,244)
Purchases of marketable securities .............................. -- (15,578)
Proceeds from maturities of marketable securities ............... 19,417 --
Other ........................................................... (129) (175)
-------- --------
Net cash used in investing activities ........................... (1,031) (33,237)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) under short-term
credit facilities .............................................. 690 (4,805)
Payments on long-term borrowings ................................ (727) (404)
Proceeds from issuance of common shares ......................... -- 56,193
Proceeds from issuance under stock plans ........................ 4,789 3,153
-------- --------
Net cash provided by financing activities ....................... 4,752 54,137
-------- --------
Effect of foreign currency exchange rates on cash and cash
equivalents ...................................................... 784 (364)
-------- --------
Increase in cash and cash equivalents ............................. 9,891 13,914
Cash and cash equivalents at beginning of the period .............. 12,165 6,885
-------- --------
Cash and cash equivalents at end of the period .................... $ 22,056 $ 20,799
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The accompanying condensed consolidated financial statements are stated
in United States dollars and were prepared in conformity with accounting
principles generally accepted in the United States for interim financial
statements. These condensed consolidated financial statements do not represent
the Dutch statutory financial statements.
BUSINESS
Baan Company N.V. (the Company or Baan) is incorporated in The
Netherlands. The Company provides open systems, client/server-based Enterprise
Resource Planning (ERP) software. ERP systems permit the enterprise-wide
management of resources and the integration of sales forecasting, component
procurement, inventory management, manufacturing control, project management,
distribution, transportation, finance and other functions across an
organization. The BAAN family of software products has been designed for rapid
implementation, flexibility and scaleability.
The Company sells and supports its product through corporate
headquarters in Ede, The Netherlands and Menlo Park, California (USA),
International Service Centers in The Netherlands, the United States and India,
and direct and indirect distribution channels.
INTERIM FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements at
September 30, 1996 and for the three and nine months ended September 30, 1996
and 1995 are unaudited but include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of consolidated financial position at such date and consolidated
operating results and cash flows for those periods. Consolidated results for the
three and nine month periods ended September 30, 1996 are not necessarily
indicative of results that may be expected for the entire year. The condensed
consolidated balance sheet at December 31, 1995 has been derived from the
audited consolidated financial statements at that date. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to Securities and Exchange Commission Rules and Regulations.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes for the year ended
December 31, 1995 included in the Company's Form 20-F filed March 25, 1996 with
the Securities and Exchange Commission.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
SECONDARY OFFERING
In March 1996, the Company completed a secondary offering of 8,716,364
common shares at $27.50 a share, which reflects a two-for-one stock split
(record date May 15, 1996). All shares in the secondary offering were sold by
and all related costs were charged to the selling shareholders.
FOREIGN EXCHANGE
Assets and liabilities of the Company and its foreign subsidiaries are
translated from their respective functional currencies to United States dollars
at period-end exchange rates. Income and expense items are translated on a
quarterly basis at the average rates of exchange prevailing during the quarter.
Adjustments resulting from translating the financial data of the Company and its
foreign subsidiaries are reflected in the accumulated translation adjustment
component of shareholders' equity. Foreign currency transaction net gains and
losses are included in consolidated results of operations and were a gain of
approximately $60,000 and a loss of $249,000 for the nine month periods ended
September 30, 1996 and 1995, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are not held for trading purposes and
are limited to short-term foreign currency forward contracts. The Company uses
such contracts primarily to offset the effects of exchange rate fluctuations on
intracompany cash flows denominated in foreign currencies. These cash flows
include trade accounts, royalties, service fees and loans denominated
principally in European and Asian currencies and the Canadian dollar. Realized
and unrealized gains and losses on short-term derivative contracts are
recognized in results of operations.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PER SHARE INFORMATION
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of shares issuable upon the exercise
of stock options (using the treasury stock method).
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid debt instruments
with maturities of 90 days or less at the date of purchase to be cash
equivalents. The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents approximates their fair value.
MARKETABLE SECURITIES
All debt securities for which the Company has both the positive intent
and ability to hold to maturity, and all marketable securities, are classified
as securities available-for-sale and are carried at fair value. Management
determines the proper classifications of debt and marketable equity securities
at the time of purchase and reevaluates such classifications at each balance
sheet date. By policy, the Company's investments are primarily in short-term
notes. As of September 30, 1996, all such securities were designated as
available-for-sale and are carried at fair value. The difference between cost
and fair value at September 30, 1996 and December 31, 1995 was not material.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2 BUSINESS COMBINATIONS
In May 1995, the Company acquired the remaining 40% minority interest
in Baan Deutschland GmbH in exchange for $7.2 million in cash and 600,000 shares
of the Company's common stock. The acquisition was accounted for as a purchase
and resulted in approximately $14.3 million in identified intangibles and
goodwill, including tax effects associated with the identified intangibles.
Intangible assets and goodwill are amortized on a straight-line basis over a
useful life of five to eight years.
In October 1995, the Company acquired selected assets and assumed
certain liabilities of its Japanese distributor in exchange for $2.4 million. In
March 1996, the Company acquired its distributor in Spain for $4.7 million.
These acquisitions were effective as of October 31, 1995 and March 1, 1996,
respectively, and were accounted for as purchases.
In May 1996, the shareholders of Berclain Group Inc. (Berclain) agreed
to exchange their shares in Berclain for 544,000 shares of the Company's common
stock. Berclain is a Canadian software company and a provider of manufacturing
synchronization and scheduling solutions. The merger was effective May 31, 1996
and was accounted for as a pooling of interests. Because Berclain's financial
statements were not material to the consolidated financial statements for the
Company, the Company did not restate any of its consolidated financial
statements prior to the merger. Consolidation of Berclain at May 31, 1996
reduced the Company's retained earnings by approximately $452,000.
3 LITIGATION
In February 1996 the Company received correspondence from counsel for
the COBRE Group, Inc. (which does not compete in the ERP market) stating their
belief that the Company's TRITON OrgWare software infringes their U.S. Patent
(No. 5,321,610) issued in June 1994. The letter also impliedly threatens legal
action in the event the Company does not either provide an appropriate
explanation why there is no infringement, or obtain a license under the patent,
or discontinue offering the OrgWare software. The Company has reviewed the
claims of the patent in relation to the OrgWare software, and based upon such
review the Company intends to contest any claim of infringement and does not
believe that resolution of this matter, whether or not litigation is commenced,
would have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
The Company is involved in certain legal actions arising in the
ordinary course of business. While the outcome of such matters are currently not
determinable, it is management's opinion that these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4 SHAREHOLDERS' EQUITY
On May 13, 1996, the shareholders of the Company approved a two-for-one
stock split distributed on May 29, 1996 to shareholders of record on May 15,
1996. Accordingly, the authorized number of common shares increased from 175
million to 350 million. All references in this Form 6-K to number of shares and
per share amounts have been retroactively restated to reflect the split.
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BAAN COMPANY N.V.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains trend
analysis and other 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. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth below and elsewhere in this Form 6-K, particularly in the
section, "Certain Factors That May Affect Future Results of Operations."
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal source of revenues consists of license fees and
related services, including consulting, implementation, training and
maintenance. In addition, in The Netherlands and certain other European markets,
the Company has historically resold third party hardware on an original
equipment manufacturer ("OEM") basis to meet the needs of customers in these
markets for total system solutions. License revenues are derived from software
licensing fees, and are recognized upon delivery if no significant vendor
obligations remain, amounts are due within one year, and collection of the
resulting receivables is deemed probable. Maintenance and service revenues are
derived from maintenance support services, training and consulting. Service
revenues from customer maintenance fees for ongoing customer support and product
updates are recognized ratably over the term of the maintenance agreement, which
is typically twelve months. Service revenues from training and consulting are
recognized when the services are performed. Hardware revenues are derived from
resales of third party hardware in connection with licenses of the Company's
software, and are recognized upon installation and recognition of the related
license revenue.
A significant portion of the Company's business is conducted in
currencies other than the U.S. dollar (the currency in which its financial
statements are stated), primarily the Dutch guilder and the German mark. The
Company has historically recorded a majority of its expenses in guilders,
especially research and development expenses, and a substantial majority of its
revenues have been denominated in guilders, marks and, more recently, U.S.
dollars. As a result, appreciation in the value of the guilder relative to the
value of the U.S. dollar could adversely affect operating results. Foreign
currency transaction gains and losses arising from normal business operations
(for example, gains and losses arising from the change in foreign exchange rates
between the dates of booking revenues and collecting the foreign currency
receivable) are credited to or charged against earnings in the period incurred.
As a result, fluctuations in the value of the currencies in which the Company
conducts its business relative to the U.S. dollar have caused and will continue
to cause transaction gains and losses. Net transaction gains and
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losses for the three and nine month periods ended September 30, 1996 was a net
loss of $76,000 and a net gain of $60,000, respectively, as compared to a net
loss of $187,000 and $249,000 for the same periods in 1995. Starting in the
fourth quarter of 1995, the Company began using derivative financial instruments
on a selected basis to help offset the effects of exchange rate changes on
intracompany cash flow exposures denominated in foreign currencies. These
exposures include firm trade accounts, royalties, service fees and loans. The
Company continues to evaluate its currency management policies. Notwithstanding
the measures the Company has adopted, due to the number of currencies involved,
the constantly changing currency exposures and the substantial volatility of
currency rates, there can be no assurance that the Company will not continue to
experience currency losses in the future, nor can the Company predict the effect
of exchange rate fluctuations upon future operating results.
Net Revenues
Net revenues increased by 79% ($43.2 million) to $97.7 million in the
three month period ended September 30, 1996 compared to $54.4 million in the
corresponding period in 1995. EMEA (Europe, Middle East and Africa) net revenues
were 49% and 59% of total net revenues for the three month periods ended
September 30, 1996 and 1995, respectively. North America's percentages of net
revenues was 36% for the third quarter of 1996 compared to 34% for the same
period in 1995. Latin America and Asia Pacific jointly contributed 15% for the
three month period ended September 30, 1996 compared to 7% for the same period
in 1995.
Net revenues increased 88% ($123.4 million) to $264.1 million in the
nine month period ended September 30, 1996 compared to $140.7 million in the
same period in 1995. EMEA net revenues were 50% of net revenues for the first
nine months of 1996, while North America was 35% and Latin America and Asia
Pacific jointly was 15%. The corresponding percentages of net revenues for the
same period in 1995 for EMEA, North America and Latin America and Asia Pacific
jointly were 60%, 30% and 10%, respectively. The shift in the net revenue
percentages in the geographical regions for the 1996 periods as compared to same
periods in 1995 reflects the Company's continued expansion in the U.S. and
elsewhere internationally.
License revenue increased by 82% to $55.7 million for the three month
period ended September 30, 1996 compared to $30.5 million in the corresponding
period in 1995. License revenue as a percentage of total net revenues was 57%
for the quarter ended September 30, 1996 compared to 56% for the corresponding
period in 1995. License revenue increased by 105% to $145.5 million for the nine
month period ended September 30, 1996 compared to $71.0 million in the
corresponding period in 1995. License revenue as a percentage of total net
revenues was 55% for the nine month period ended September 30, 1996 compared to
50% for the same period in 1995. These increases in license revenue and in
license revenue as a percentage of total net revenues resulted from both an
increase in the number of software licenses and a higher average deal size due
to larger configurations sold, and reflected the broader market trend toward
client/server computing, continued market acceptance of the Company's products,
and the expansion of the Company's operations, particularly in North America,
Latin America and Asia Pacific.
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Maintenance and service revenues increased 113% to $40.1 million for
the three month period ended September 30, 1996 compared to $18.9 million for
the same period in 1995. Maintenance and service revenues increased 102% to
$108.5 million for the nine month period ended September 30, 1996 compared to
$53.7 million for the same period in 1995. As a percentage of total net
revenues, maintenance and service revenue was 41% for the three and nine month
periods ended September 30, 1996 compared to 35% and 38%, respectively, for the
same periods in 1995. These increases were primarily the result of the growth of
software licenses in the prior 1996 quarters and the later half of 1995.
Hardware and other revenues decreased to $1.9 million and $10.1 million for the
three and nine month periods ended September 30, 1996, respectively, compared to
$5.1 million and $16.0 million for the same periods in 1995. Hardware and other
revenues as a percentage of total net revenues were 2% and 4% for the three and
nine month periods ended September 30, 1996, respectively, compared to 9% and
12% for the same periods in 1995. Hardware and other revenues have decreased as
a percentage of total net revenue as the Company continues to expand in
international markets where customers require complete hardware and software
installations less frequently. Further, the Company has sought to de-emphasize
the resale of third party hardware on an OEM basis.
Gross Profit
The following table, expressed in thousands, sets forth, for the
periods indicated, gross profit and gross margin for each revenue category:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
$ % $ % $ % $ %
<S> <C> <C> <C> <C>
Gross profit:
License....................................................... $53,030 95% $ 28,003 92% $136,494 94% $66,724 94%
Maintenance and service ...................................... 7,656 19 3,139 17 17,872 16 11,808 22
Hardware and other ........................................... 364 19 1,235 24 2,168 21 3,419 21
------- -------- -------- -------
Total gross profit $61,050 62 $ 32,377 59 $156,534 59 $81,951 58
======= ======== ======== =======
</TABLE>
The Company's gross profit as a percentage of total net revenues was
62% and 59% for the three and nine month periods ended September 30, 1996,
respectively, as compared to 59% and 58% for the same periods in 1995. Gross
margin on license revenue was 95% and 94% for the three and nine month periods
ended September 30, 1996, respectively, compared to 92% and 94% for the same
periods in 1995. Cost of license revenue consists primarily of amortization of
capitalized software, the cost of third party software and the cost of media and
freight. Amortization of capitalized software amounted to $578,000 and
$1,851,000 for the three and nine month periods ended September 30, 1996,
respectively, compared to $563,000 and $1,567,000 for the same periods in 1995.
The increase in gross margin percentage on license
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revenue in the third quarter of 1996 compared to the same period in 1995 was
primarily due to larger royalties amounts in the 1995 quarter.
Gross margin on maintenance and service revenues was 19% and 16% for
the three and nine month periods ended September 30, 1996, respectively, as
compared to 17% and 22% for the same periods in 1995. The gross margin increase
to 19% in the third quarter of 1996 compared to 17% in the same period in 1995
was primarily due to improvements in utilization rates and pricing structure.
The decrease for the first nine months of 1996 to 16% compared to 22% for the
same period in 1995 was primarily due to the Company's investment in its
customer support capabilities and the increased use of outside contractors in
1996. The Company currently anticipates this margin to improve, although not
significantly, over the next few quarters. Cost of maintenance and service
revenues consists primarily of cost of product support, consulting and training,
including associated software engineering activities.
Gross margin on hardware and other revenues was 19% and 21% for the
three and nine month periods ended September 30, 1996 as compared to 24% and 21%
for the same periods in 1995. Gross margin on hardware and other revenues is a
function of specific contracts and consists primarily of third party hardware
configured and sold with the Company's licensed software.
Sales and Marketing
The Company's sales and marketing expenses increased 70% ($10.2
million) to $24.8 million in the three month period ended September 30, 1996
from $14.6 million for the corresponding period in 1995. These expenses
increased 80% ($29.8 million) to $67.1 million in the nine month period ended
September 30, 1996 from $37.3 million for the same period in 1995. The increases
in absolute spending in sales and marketing activities reflect the Company's
continued commitment to expand its international sales channels and the
associated hiring of additional sales staff and sales support personnel in all
major geographic regions. As a percentage of total net revenues, sales and
marketing expenses were 25% for the three and nine month periods ended September
30, 1996 as compared to 27% for the same periods in 1995. The Company expects
that sales and marketing expenses will grow in absolute dollars as the Company
continues to expand its sales and distribution channels and customer support
organization.
Research and Development
Research and development expenses increased 75% ($4.6 million) to $10.8
million for the three month period ended September 30, 1996 from $6.1 million
for the same period in 1995. These expenses increased 114% ($14.7 million) to
$27.7 million for the nine month period ended September 30, 1996 from $13.0
million for the same period in 1995. These increases are primarily because of
the hiring of additional research and development personnel. Research and
development expenses consist of the cost of development of new and enhanced
products and technologies. The Company capitalized 15% and 16% of software
development costs in the three and nine month periods ended September 30, 1996,
respectively, and 14% and 15% for the
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corresponding periods in 1995. Capitalization rates may vary from period to
period because of the timing of particular projects. Aggregate research and
development costs including both research and development costs and capitalized
software costs were $12.7 million and $32.8 million for the three and nine month
periods ended September 30, 1996, respectively, compared to $7.1 million and
$15.2 million for the same periods in 1995.
The Company believes it is critical to the Company's future success to
continue to develop new and enhanced products and technologies. Accordingly, the
Company intends to continue to expand its research and development activities
over time.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 52% ($2.9 million) to
$8.6 million for the three month period ended September 30, 1996 from $5.7
million for the comparable period in 1995. These expenses increased 54% ($8.3
million) to $23.7 million for the nine month period ended September 30, 1996
compared to $15.4 million for the same period in 1995. The increases reflect the
expansion of the Company's operations with the resulting increase of additional
general and administrative personnel and infrastructure costs. As a percentage
of total net revenues, general and administrative expenses were 9% for the three
and nine month periods ended September 30, 1996 compared to 10% and 11% for the
same periods in 1995.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased to $1.6 million and $4.6
million for the three and nine month periods ended September 30, 1996,
respectively, compared to $1.3 million and $3.3 million for the same periods in
1995. The higher amortizations in the 1996 periods reflects the additional
amortization of intangibles recognized in connection with various acquisitions
completed in 1995. The Company expects that amortization of intangible assets
associated with prior acquisitions will result in charges of approximately $6.4
million per year through 1998 and will decline in following years.
NET INTEREST INCOME (EXPENSE)
Net interest income (expense) was net interest expense of $(21,000) and
net interest income of $147,000 for the three and nine month periods ended
September 30, 1996, respectively, as compared to a net interest income of
$402,000 and $177,000 for the same periods in 1995. The larger interest income
balances in 1995 were primarily due to the interest income earned on the
proceeds from the Company's initial public offering (IPO) received in May 1995
and smaller cash balances in 1996 on which interest income was earned.
OTHER INCOME
Other income of $1,071,000 in 1995 arose from the gain on sale of a
Canadian subsidiary (Baan Process Inc.) to Baan Process's former shareholders of
$675,000 and a benefit from the termination of the Company's defined benefit
pension plan of $396,000.
15
<PAGE> 16
Income Taxes
The effective tax rate for the 1996 periods was 39% as compared to 40%
for the 1995 periods. The effective tax rates for these periods are higher than
the statutory rate primarily due to the effect of non-deductible goodwill
amortization and the realization of operating profits in higher tax
jurisdictions.
Liquidity and Capital Resources
As of September 30, 1996, the Company had cash, cash equivalents and
marketable securities of $26.2 million and working capital of $79.2 million. In
the first nine months of 1996, the Company's operating activities provided net
cash of $5.4 million, as net income before depreciation and amortization of
intangibles was only partially offset by the growth of accounts receivable for
the period. Accounts receivable net of allowance for doubtful accounts was
$129.4 million at September 30, 1996 compared to $87.2 million at December 31,
1995. Accounts receivable days' sales outstanding (the ratio of the quarter-end
accounts receivable balance to quarterly revenues, multiplied by 90) was 119
days at the end of the third quarter of 1996 as compared to 104 days as of
December 31, 1995. Days sales outstanding increased during the nine month period
ended September 30, 1996 primarily due to slower customer payments, particularly
in EMEA during the summer months, and deferred payment terms on some of the
larger deals in the fourth quarter of 1995 to accommodate customers.
Investing activities used $1.0 million of cash in the nine month period
ended September 30, 1996, due to $19.4 million of proceeds from the maturing of
marketable securities offset by property and equipment purchases of $14.9
million and the increase in capitalized software development costs of $5.5
million. As of November 11, 1996, with the exception of planned additions of
property and equipment, the Company had no significant capital commitments.
Financing activities provided cash of $4.8 million, primarily arising
from the payment of debt being substantially offset by proceeds from the
issuance of common stock related to the employee stock purchase plan and upon
the exercise of stock options. The Company has a credit facility with ABN AMRO
Bank in The Netherlands which allows the Company and its subsidiaries to borrow
up to NLG 20 million, ($12.0 million, based on the exchange rate at September
30, 1996) at an interest rate of approximately 4% at September 30, 1996. In
addition, certain of the Company's subsidiaries have additional bank credit
agreements which allow them to effect aggregate short term borrowings of up to
$3.2 million (based on the applicable exchange rates on September 30, 1996).
Interest rates for these facilities are approximately 9 1/2% (Germany, Spain and
Canada), 20% (Brazil) and 35% (Colombia). As of September 30, 1996, the Company
had short-term borrowings against its lines of credit of $4.6 million.
The Company believes that existing cash and cash equivalents and
short-term marketable securities, cash generated by operations and existing
credit facilities, will be sufficient to meet the Company's working capital
needs and currently planned capital expenditure requirements for the next twelve
months. The Company may from time to time
16
<PAGE> 17
consider acquisitions of complementary businesses, products or technologies
which may require additional financing. Such acquisitions could include the
acquisition of one or more distributors, but no currently contemplated
acquisition, if effected, is likely to be material to the Company's financial
condition. In addition, continued growth in the Company's business may from time
to time require additional capital. There can be no assurance that additional
capital will be available to the Company if and when needed, or that such
additional capital will be available on acceptable terms.
17
<PAGE> 18
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Operating History; Limited Profitability
The Company has experienced substantial revenue growth in each of the
last four years, but its profitability, as a percentage of net revenues, has
varied widely on a quarterly and annual basis. The Company was not profitable in
1993, and was only slightly profitable in 1994 notwithstanding recognition of
$14.8 million in net revenues from one large customer contract. Absent such
contract, the Company would not have been profitable in 1994. Due to the
Company's limited operating history on a significant international scale, the
rate of growth of the Company's business and the variability of operating
results in past periods, there can be no assurance that the Company's revenues
will continue at the current level or will grow, or that the Company will be
able to sustain profitability on a quarterly or annual basis.
Variability of Quarterly Operating Results
The Company's net revenues and operating results can vary, sometimes
substantially, from quarter to quarter. The Company expects that license
revenues are likely to increase as a percentage of total net revenues in future
periods as a result of the Company's focus on increasing the use of third party
implementation providers for implementation services and on reducing hardware
sales. The Company's revenues in general, and in particular its license
revenues, are relatively difficult to forecast due to a number of reasons,
including (i) the relatively long sales cycles for the Company's products, (ii)
the size and timing of individual license transactions, (iii) the timing of the
introduction of new products or product enhancements by the Company or its
competitors, (iv) the potential for delay or deferral of customer
implementations of the Company's software, (v) changes in customer budgets, and
(vi) seasonality of technology purchases and other general economic conditions.
In the last two years, and particularly in its U.S. operations, the Company has
made significant changes in its business focus, including greater emphasis on
sales to larger customers. As a result, the Company has realized an increasingly
high portion of total net revenues from individually large licenses which could
contribute to greater quarterly variability.
The Company's allowance for doubtful accounts increased in 1995 and
the first three quarters of 1996. While the Company believes that its allowance
for doubtful accounts as of September 30, 1996 is adequate, a significant
portion of the Company's accounts receivable at such date are derived from sales
of large licenses, often to new customers with which the Company does not have a
payment history. Accordingly, there can be no assurances that the allowance will
be adequate to cover any receivables which are later determined to be
uncollectible, particularly if one or more large receivables becomes
uncollectible. Accounts receivable days' sales outstanding (the ratio of the
quarter-end accounts receivable balance to quarterly revenues, multiplied by 90)
was 119 days at the end of the third quarter of 1996 as compared to 104 days as
of December 31, 1995. Days sales outstanding increased during the nine month
period ended September 30, 1996 primarily due to slower customer payments,
particularly in EMEA during the summer months, and deferred payment terms on
some of the larger deals in the fourth quarter of 1995 to accommodate customers.
18
<PAGE> 19
The Company's software products generally are shipped as orders are
received. As a result, license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. Because the Company's
operating expenses are based on anticipated revenue levels and because a high
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 quarter to quarter and could
result in losses. The Company plans to increase expenditures in order to fund
continued build-up of international operations, greater levels of research and
development, a larger direct sales and marketing staff, development of new
distribution and resale channels, and broader customer support capability,
although annual expenditures will depend upon ongoing results and evolving
business needs. To the extent such expenses precede or are not subsequently
followed by increased revenues, the Company's operating results would be
materially adversely affected.
The Company believes that fourth quarter revenues have historically
been positively impacted by year-end capital purchases by some large corporate
customers, as well as the Company's sales compensation plans. These seasonal
factors, which the Company believes are common in the computer software
industry, are likely to increase as the Company focuses on larger corporate
accounts, and typically result in first quarter revenues in any year being lower
than revenues in the immediately preceding fourth quarter.
North American Operations
The Company has a limited number of operational installations of its
products at customer sites in North America, and therefore only a limited number
of reference customers in North America. The Company has recently entered into
major license agreements with several North American customers. Many of these
customers continue to implement the Company's products, and some are in the
early stage of implementation. If the Company were to experience significant
implementation problems at these or other reference sites in North America (or
elsewhere), it could significantly impact future sales and operating results in
North America (and elsewhere). In addition, in order to support the anticipated
growth of the Company's business in the North American market, the Company
continues to incur significant costs to build corporate infrastructure ahead of
anticipated revenues. This includes developing experienced resources, through
both internal hiring and established relationships with third party
implementation providers, that are necessary to support customer installations
of the BAAN software and provide other services. As a result of this expansion,
the Company must continue to implement and improve its operational and financial
control systems and to expand, train and manage its employee base and
relationships with third party implementation providers, in order to provide
high-quality training, product implementation and other customer services. These
factors have placed, and are expected to continue to place, a significant strain
on the Company's management and operations. There can be no assurance that the
Company's North American operations will continue to be successful or that the
Company will be able to manage effectively an increased level of operations in
North America. Any lack of success in North American markets or inability to
manage these activities effectively would have a material adverse effect on the
Company's results of operations.
19
<PAGE> 20
Management of Growth
The Company's business has grown rapidly in the last five years. The
growth of the Company's business and expansion of the Company's customer base
has placed a significant strain on the Company's management and operations. In
addition, the Company has had recent changes in senior management. Moreover,
certain of the Company's senior executive officers have had limited or no prior
management experience as senior executives in large, public software companies.
The Company's recent expansion has resulted in substantial growth in the number
of its employees, the scope of its operating and financial systems and the
geographic area of its operations, resulting in increased responsibility for
both existing and new management personnel. The Company's ability to support the
growth of its business will be substantially dependent upon having in place
highly trained internal and third party resources to conduct pre-sales activity,
product implementation, training and other customer support services.
Accordingly, the Company's future operating results will depend on the ability
of its officers and other key employees to continue to implement and improve its
operational, customer support and financial support systems, to expand, train
and manage its employee base and to work effectively with third party
implementation providers. There can be no assurance that the Company will be
able to manage its recent or any future expansion successfully, and any
inability to do so would have a material adverse effect on the Company's results
of operations.
Competition
The information management application software market is highly
competitive, is changing rapidly, and is significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for open systems,
client/server, Enterprise Resource Planning (ERP) software solutions, and the
Company's current and prospective competitors offer a variety of solutions to
address this market. The Company's primary competition comes from a large number
of independent software vendors and other sources and, in addition, faces
indirect competition from suppliers of custom-developed business application
software and from systems developed by the internal MIS departments of large
organizations.
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
the Company, greater name recognition, and a larger installed base of customers.
In addition, certain competitors, including SAP AG and Oracle Corporation
("Oracle"), have well-established relationships with customers of the Company.
Further, because the Company's products run in relational database management
systems (RDBMS) and Oracle has the largest market share for RDBMS software,
Oracle may have a competitive advantage in selling to its RDBMS customer base.
The Company may also face market resistance from the large installed base of
legacy systems because of the reluctance of these customers to commit the time
and effort necessary to convert to an open systems-based client/server software
solution. Furthermore, as the client/server computing market develops, companies
with significantly greater resources than the Company
20
<PAGE> 21
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with competitors of the Company.
The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as recommendations of its products during the evaluation stage of the
purchase process. Although the Company seeks to maintain close relationships
with these third party implementation providers, many of these third parties
have similar, and often more established, relationships with the Company's
principal competitors. If the Company is unable to develop and retain effective,
long-term relationships with these third parties, it would adversely affect the
Company's competitive position. Further, there can be no assurance that these
third parties, many of which have significantly greater financial, technical and
marketing resources than the Company, will not market software products in
competition with the Company in the future or will not otherwise reduce or
discontinue their relationships with or support of the Company and its products.
The Company believes that its success has been due in part to its
focus on the client/server architecture of its software products. Certain of the
Company's competitors currently offer products using client/server architecture,
and the Company believes that many of its competitors are actively developing
client/server-based products, including certain large, well-established software
companies that have announced their intent to introduce client/server ERP
products. As a result, competition (including price competition) is likely to
increase substantially, which could result in price reductions and loss of
market share. There can be no assurance that the Company will be able to compete
successfully with existing or new competitors or that competition will not have
a material adverse effect on the Company's business.
Rapid Technological Change and New Products
The market for the Company's software products is characterized by
rapid technological advances, evolving industry standards in computer hardware
and software technology, changes in customer requirements, and frequent new
product introductions and enhancements. The Company's future success will depend
upon its ability to continue to enhance its current product line and to develop
and introduce new products that keep pace with technological developments,
satisfy increasingly sophisticated customer requirements and achieve market
acceptance. In particular, the Company must continue to anticipate and respond
adequately to advances in RDBMS software and desktop computer operating systems
such as Microsoft Windows and its successors. There can be no assurance that the
Company will be successful in developing and marketing, on a timely and
cost-effective basis, fully functional product enhancements or new products that
respond to technological advances by others, or that its new products will
achieve market acceptance.
Historically, the Company has issued significant new releases of its
BAAN family of software products approximately every two years with interim
releases on a more frequent basis. As a result of the complexities inherent in
both the RDBMS and client/server environments and the broad functionality and
performance demanded by customers for ERP products, major new
21
<PAGE> 22
product enhancements and new products can require long development and testing
periods to achieve market acceptance. The Company has experienced delays in the
scheduled introduction of new and enhanced products. In addition, software
programs as complex as those offered by the Company may contain undetected
errors or "bugs" when first introduced or as new versions are released that,
despite testing by the Company, are discovered only after a product has been
installed and used by customers. For example, Version 3.0 contained certain
identified software errors which required correction in Version 3.1. There can
be no assurance that Version 3.1 or future releases of the Company's products
will not contain further software errors. Any such errors could impair the
market acceptance of these products and adversely affect operating results.
Problems encountered by customers installing and implementing releases or with
the performance of the Company's products could have a material adverse effect
on the Company's business and operating results. Customers have only recently
commenced implementation of the Baan IV version of the Company's software. If
the Company were to experience delays in the introduction of new and enhanced
products, or if customers were to experience significant problems with the
implementation and installation of this or future releases or are dissatisfied
with product functionality or performance, it could materially adversely affect
the Company's business and operating results.
Additional considerations
Due to the factors noted above, as well as other factors that may
affect the Company's operating results, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of, or be able to confirm, such shortfalls until late in
the fiscal quarter, or following the end of the quarter because license fees are
often recorded late in a quarter, which could result in an even more immediate
and adverse effect on the trading price of the Company's common stock. Finally,
the stock prices for many companies in the technology and emerging growth sector
have experienced wide fluctuations, which have often been unrelated to
individual company operating performance. The Company participates in a dynamic
industry and the Company's stock price may experience significant volatility.
22
<PAGE> 23
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.
BAAN COMPANY N.V.
Date: November 13, 1996 By: /s/ Jan Westerhoud
-----------------------
Jan Westerhoud
Chief Financial Officer
23
<PAGE> 24
BAAN COMPANY N.V.
EXHIBIT INDEX
Page
Exhibit A Statement of Computation of Earnings per Share 25
24
<PAGE> 25
BAAN COMPANY N.V.
EXHIBIT A -
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE *
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
Primary (i)
- -----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding ................ 88,335 84,824 87,538 75,164
Stock related to SAB No. 64 and 83 -- -- -- 4,798
Dilutive stock options ........... 6,775 8,482 6,848 7,528
------- ------- ------- -------
95,110 93,306 94,386 87,490
======= ======= ======= =======
Net income ....................... $ 9,293 $ 3,062 $20,487 $ 8,434
======= ======= ======= =======
Net income per share ............. $ 0.10 $ 0.03 $ 0.22 $ 0.10
======= ======= ======= =======
</TABLE>
* Reflects a two-for-one stock split (record date May 15, 1996).
(i) The difference between primary and fully diluted earnings per share is
immaterial.
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 22,056
<SECURITIES> 4,146
<RECEIVABLES> 135,875
<ALLOWANCES> 6,435
<INVENTORY> 0
<CURRENT-ASSETS> 167,867
<PP&E> 43,527
<DEPRECIATION> 18,097
<TOTAL-ASSETS> 233,961
<CURRENT-LIABILITIES> 88,649
<BONDS> 1,281
0
0
<COMMON> 517
<OTHER-SE> 134,682
<TOTAL-LIABILITY-AND-EQUITY> 233,961
<SALES> 0
<TOTAL-REVENUES> 97,681
<CGS> 0
<TOTAL-COSTS> 61,426
<OTHER-EXPENSES> 20,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (21)
<INCOME-PRETAX> 15,235
<INCOME-TAX> 5,942
<INCOME-CONTINUING> 9,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,293
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
