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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934; OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD TO
COMMISSION FILE NO. 0-26052
BAAN COMPANY N.V.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
THE NETHERLANDS
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
VANENBURGERALLEE 13
3882 RH PUTTEN
THE NETHERLANDS
AND
4600 BOHANNON DRIVE
MENLO PARK, CALIFORNIA, USA
(ADDRESSES OF PRINCIPAL EXECUTIVE OFFICES)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock, NLG .01 Par Value
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
As of December 31, 1996, the registrant had outstanding 89,791,297 Common
Shares,
NLG .01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the Registrant has
elected to follow:
Item 17 [ ] Item 18 [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Baan is a leading provider of business management software for an open
systems, client/server computing environment. Companies of all sizes around the
world use Baan's software to control and automate business processes, ranging
from accounting, order management, and inventory procurement, to manufacturing
and finished-goods delivery. Baan's software is targeted to companies needing to
respond quickly to today's competitive global marketplace.
The Company's products are targeted at organizations focused on increasing
their market advantage by continually improving business processes. While its
products have the functional depth for many market segments, the Company has
optimized its products, services, and marketing efforts for key players and
their entire supply/demand chain in four industries: automotive; electronics;
process; and project-based industries, including heavy equipment manufacturing,
project services, and aerospace and defense. Baan selected these markets based
on three factors: well defined supply and demand chains; a focus on industry
best practices; and market dynamics that require continuous assessment and
re-assessment of business processes and the underlying information technology
(IT) infrastructure. Baan actively works with industry leaders in each market
sector to help insure that the Company offers a highly competitive product which
closely meets that industry's unique requirements.
The cornerstone of Baan's strategy is to deliver scaleable, flexible
solutions, which can be rapidly implemented and deliver a clear return on
investment. To do this, the Company focuses on intuitive, graphical business
modeling as a starting point for software implementation. As a result, Baan's
software typically can be configured and implemented in as short a time period
as three to twelve months, which the Company believes provides it with a
competitive advantage. In addition, ongoing adjustments can be made to the
system in response to changing market demands and changes in production and
operational processes -- a capability which the Company calls "Dynamic
Enterprise Modeling." According to leading market analysts such as Aberdeen
Group, Advanced Manufacturing Research, Forrester Research, Gartner Group, and
Patricia Seybold Group, rapid implementation and capabilities for ongoing system
re-configuration are critical differentiators for Baan's market space.
In addition, Baan's software is flexible and can be successfully used in a
variety of business, computing, and manufacturing environments. It offers
functionality for a broad range of manufacturing practices: from make-to-stock
to engineer-to-order manufacturing; single or multi-site environments located in
one or multiple countries; support for an individual assembler or an entire
supply chain; and large or small computing environments running on a broad range
of platforms.
Supported by a decentralized research and development organization, Baan
has adopted a strategy of periodically reinventing its products -- rather than
increasing the complexity of its software by adding layers of code as upgrades
are developed. The Company believes this enables the consistent delivery of
state-of-the-art solutions meeting the requirements of the "extended
enterprise." Baan commenced shipment of its first information systems in The
Netherlands in 1982, and since that time has introduced several new generations
of products. Today, the Company is shipping BAAN IV, consisting of Baan
Applications, Orgware and Baan Tools.
- Baan Applications includes more than 100 integrated software modules for
seven broad areas: manufacturing, constraint planning, distribution and
transportation, finance, service management, project management, and
process manufacturing.
- Orgware is a set of tools, templates, and methodologies for business
modeling and rapid software implementation. Orgware is the linchpin in
Baan's vision for delivering Dynamic Enterprise Modeling, which the
Company believes to be a key competitive differentiator.
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- Baan Tools is a fourth generation language (4GL) software development
toolset used by Baan, its implementation providers, and end user
customers to develop and modify Baan Applications.
Over the past several years, the Company has significantly expanded its
sales and service presence in North American, Latin American and certain
European and Far Eastern markets. The Company's net revenues have grown from
$122.9 million in 1994 to $388.0 million in 1996. The Company's overall number
of employees has more than doubled from 943 persons at December 31, 1994 to
2,389 at December 31, 1996.
The Company manages its business operations through corporate headquarters
in Putten, The Netherlands and Menlo Park, California, as well as through
regional sales and operational offices. Products are sold and supported through
both direct and indirect channels in 59 countries. To augment its own offerings
and infrastructure, the Company has partnered with leading technology and
service providers. This includes implementation and value-added resale partners,
such as Compuware Corporation, Origin International, IBM Global Services, and
KPMG Peat Marwick, and technology partnerships with Digital Equipment
Corporation, IBM, Compaq Computer Corporation, Hewlett-Packard Company, Informix
Software Inc., Intel Corporation, Microsoft Corporation, and Sun Microsystems,
Inc. In 1996, the Company acquired Berclain Group Inc. (Berclain), a provider of
manufacturing synchronization and scheduling software used to synchronize
manufacturing across the supply chain, and Antalys, Inc. (Antalys) which
provides software that enables a company's sales force to accurately and rapidly
configure and price products and services.
The Company has licensed more than 3,500 system installations to date to
more than 2,200 customers worldwide within its targeted markets. Customers
include Asea Brown Boveri Group, The Boeing Company, British Aerospace Limited,
Ford Motor Company, Fujitsu-ICL Systems, Inc., George Weston Foods Ltd., Hitachi
Ltd., Levi Strauss Europe, Mercedes Benz US International, Inc., Northern
Telecom Limited, Noranda Aluminum, Inc., Solectron Corporation, Oki Electric
Industry Co. Ltd., Philips Medical Systems Nederland B.V., and Snap-on
Incorporated.
Baan Company N.V. is a Netherlands holding company with its statutory seat
at Barneveld, The Netherlands, and conducts business through its domestic and
international subsidiaries. The Company's business was founded in 1978 and Baan
Holding B.V., the predecessor of Baan Company N.V., was incorporated in 1983.
References in this Form 20-F to "Baan" or "the Company", unless the context
otherwise requires, relate to Baan Company N.V., its predecessor, Baan Holding
B.V. and its subsidiaries. The Company's headquarters are located at
Vanenburgerallee 13, 3882 RH Putten, The Netherlands, telephone number (31)
341-375555, and at 4600 Bohannon Drive, Menlo Park, California 94025, telephone
number (1) 415-462-4949.
INDUSTRY BACKGROUND
Businesses in recent years have been subject to increasing global
competitive pressures and more demanding vendor-customer relationships. At the
same time, rapidly changing market and consumer specific requirements can cause
companies to stagnate if they are not able to quickly move into a market
opportunity. In addition, issues such as the change to the Year 2000 and the
impending requirement for multi-currency reporting due to the anticipated single
European Monetary Unit are forcing companies to update their information
infrastructure.
To keep up with these pressures, companies must embrace continual change
and process improvement. This involves an ongoing cycle of lowering production
costs, improving product performance and quality, and dramatically shortening
product development and delivery cycles. Customers, distributors, and sales
forces need direct access to manufacturing and supplier information, and
customer demand must become a driver for engineering, manufacturing, and
distribution. Customers must be able to "reach" into the manufacturing
environment and order a product that meets their exact needs, and that is both
manufacturable and profitable for the supplier. This creates risk for most
organizations and their extended enterprise.
Meeting these challenges requires an agile information infrastructure
capable of streamlining an organization and its business processes, and
effectively integrating the entire extended enterprise, from supply chain to
distribution channels. Many organizations have adopted Business Process
Reengineering (BPR) to
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restructure business processes and accommodate these new market dynamics.
Typically, a complete re-engineering effort -- from process definition and
refinement to the implementation of a new information infrastructure -- could
take three to five years at which point the resulting changes could already be
outdated. A different approach is to embrace continual process improvement.
Using information technology (IT) effectively is a core strategy for
successfully implementing -- and subsequently managing the risk of -- continual
change. In the late 1970s the key benefit of technology was speed and
automation. Now, with market dynamics changing faster than ever, IT systems will
become a liability rather than an asset if they cannot keep pace with shifting
requirements. Companies must be able to quickly alter key business processes and
the underlying information infrastructure as market dynamics change.
One component in fulfilling the promise of technology lies in the use of
open systems, client/server architecture, which fundamentally changed the way
companies work by putting more comprehensive information at users' fingertips,
turning a greater number of workers into effective decision-makers. Compared to
traditional mainframe or minicomputer environments which offer fairly restricted
deployment options, client/server environments offer the broadest range of
options for managing data, applications, and user interfaces.
While client/server architecture delivers the right computing environment,
a new class of software products -- called Enterprise Resource Planning (ERP)
systems -- delivers the functionality for streamlining and automating activities
across the enterprise, including the extended enterprise of suppliers and
distribution partners. ERP enables the integration of sales management,
transportation, distribution, manufacturing control, inventory management,
component procurement, product design, and other functions including finance and
reporting for managing overall business performance.
Today's advanced ERP systems leverage the now widely-accepted client/server
environment, giving users more flexibility. These ERP solutions typically offer
an open systems approach, allowing companies to select components from a large
number of IT vendors' products and services, permitting ready integration of
emerging technologies. These new technologies might include On-Line Analytical
Processing (OLAP) solutions, web-based or electronic commerce technologies,
advanced scheduling and planning systems, or advanced customer order
configuration and Sales Force Automation (SFA) applications.
Most of these advanced ERP solutions are excellent for companies engaged in
large-scale BPR projects. However, the combination of client/server technology
and ERP functionality alone does not offer the ability for rapid system
configuration and re-configuration required for companies who wish to follow an
approach of continual process improvement. In addition, the expertise required
for typical ERP system configuration and implementation drives up costs such
that the complete solution -- hardware, database, software, implementation and
ongoing process re-evaluation services -- is not cost effective for the small
and medium-sized enterprise.
THE BAAN SOLUTION
Baan believes its approach to ERP uses technology to not simply automate
processes, but to systematically improve key business processes and the
underlying IT infrastructure as the business climate changes. The Company
believes that its evolutionary approach, called Dynamic Enterprise Modeling,
enables its customers to enhance organizational effectiveness by providing a
framework for characterizing organization structures, business functions and
specific business processes. By linking this business model directly to the
software applications through its Orgware solution, companies can rapidly adapt
and re-adapt Baan's enterprise software so that it matches the most recent set
of business practices, operational procedures, and specific job functions. With
the capability for Dynamic Enterprise Modeling through Orgware and Baan's
applications software, customers can optimize the flow of goods and services
through a complete supply and distribution network, matching production and
delivery processes with market and specific customer demand.
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The Baan product family is based on four core principles which enable the
Company to reach beyond the ERP functionality and deliver on the concept of
Dynamic Enterprise Modeling:
-- OPEN SYSTEMS, CLIENT/SERVER ARCHITECTURE -- BAAN IV is based on a
distributed, client/server architecture. Specifically, Baan's products are
developed for a flexible, three-tiered architecture which separates the
user presentation, application logic and data management functions. This
enables the user to embrace a broad spectrum of computing scenarios, from
centralized to highly decentralized environments. This, coupled with the
fact that the software is independent of hardware, operating system, and
database platforms gives users both scaleability and the capability to
optimize technology resources to meet evolving business needs.
-- LINKING BUSINESS MODELING TO ENTERPRISE APPLICATIONS -- Recognizing
the inevitability of change, Baan has developed Orgware, the enabling
technology behind Dynamic Enterprise Modeling (DEM) which the Company
believes provides it with a competitive advantage. Orgware is a suite of
software implementation tools, methodologies, best business practices
templates, and end-user training solutions for rapid deployment and
re-deployment of Baan software based upon both organizational requirements
as well as individual user's needs. With the capability for DEM, Baan's
software can be implemented in as short a period as three to twelve months.
-- ROBUST FUNCTIONALITY FOR THE EXTENDED ENTERPRISE -- Baan's product
line is specifically targeted at four key vertical markets (automotive,
electronics, process, and project-based industries including heavy
equipment and aerospace and defense). It offers the breadth and depth of
functionality to make the product applicable for companies of all sizes,
from the large assembler to the second- and third-tier supplier. Coupled
with the scaleability of an architecture that can support four users or
several thousand, this enables an organization and its extended
supply/demand chain to create a tightly integrated, real-time information
exchange. Baan's solution includes a broad range of functionality and is
designed for multi-site, multi-national requirements, including multiple
sites utilizing different production and other operational processes in a
multi-lingual, multi-currency environment. Also, the software uniquely
allows for the integration of discrete and process manufacturing activities
within the same technology and application environment which the Company
believes gives it an additional competitive advantage.
-- WHOLE PRODUCT OFFERING -- Baan's product philosophy includes an
expansion of the traditional ERP product offering. Baan is currently
enhancing its product offering with Intelligent Resource Planning
(constraint planning) and new process functionality as well as integrating
Berclain's constraint-based scheduling system and Antalys' sales force
automation software.
In addition, Baan offers the Informix Workgroup Server as standard with all
UNIX shipments. While the products support a range of database technologies
(including Oracle, Sybase, IBM DB2, and Microsoft SQL Server), this gives
customers who are not driven by a database choice a simple, bundled solution.
Similarly, the Company will also offer the full Microsoft BackOffice suite,
including NT, SQL Server, and other standard Microsoft technologies, as part of
its BAAN IV BackOffice solution, currently scheduled to ship in 1997.
STRATEGY
The fundamental strategy of Baan Company is to provide innovative,
technology driven enterprise computing solutions which simplify the
traditionally complex, inflexible, and costly legacy approach to enterprise
software applications. Ultimately, Baan's goal is to enable continuous
improvement in overall business performance, regardless of changes in market
dynamics, business processes, and technological advancements.
Baan's company strategy is based on six key elements as follows:
-- SIMPLIFY THE COMPLEXITY AND REDUCE THE RISK OF TRADITIONAL ERP
IMPLEMENTATION --
Facilitate Fast Implementation and Continuous Business Process
Improvement: With Orgware's modeling tools, quick-start implementation
templates and implementation management methodologies,
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the complexity of ERP implementation is reduced, and return on investment
can be increased. Orgware enables an organization to graphically model its
business environment, including those processes involving external supplier
or demand-chain partners, and then automatically maps the software
applications to the model. By enabling the IT environment to readily
support changes in the business, Orgware is the catalyst for helping
achieve a rapid return on the IT investment in the initial and subsequent
re-implementation projects as changes in the business environment warrant.
Provide the Broadest Range of Scaleable, Open, Client/Server
Technology Options: Baan's products allow businesses to match their system
size and functionality requirements with the appropriate IT components,
including hardware, operating systems, and database. This enables customers
to optimize their technology resources and, because of its open
architecture, allows the user a broad spectrum of computing scenarios from
centralized to highly decentralized environments. The Company's software
supports multiple sites and operating processes, is readily scaleable to
support changing levels of operations, and can be reconfigured to meet
changing needs.
Expand the ERP Framework to Address the Entire Supply/Demand
Chain: Baan expanded the traditional approach to manufacturing planning
and control systems by developing capabilities to support multiple modes of
manufacturing within one enterprise application environment. Baan's
software also leverages communications vehicles such as electronic data
interchange (EDI) and the Internet/Intranet, enhancing the customer's
ability to communicate rapidly and effectively within the supply chain.
Through acquisitions Baan is also in the process of enhancing its product
offering with Berclain's MOOPI product, a synchronization and scheduling
system which supports the agile manufacturing concept within a factory or
throughout the entire manufacturing supply/demand chain, and with Antalys'
laptop and web-(internet) enabled configurator capabilities for products
and services. By anticipating the changing needs of manufacturing companies
and their relations with both customers and suppliers, Baan plans to extend
the scope of its product offering to serve the expanded enterprise.
-- EXPAND GLOBAL DISTRIBUTION, SALES, SERVICES AND SUPPORT CAPABILITIES --
Grow infrastructure to support continued revenue growth: Baan's
strategy is to continue expanding its global infrastructure to provide
sales and support services throughout the major markets of the world. This
global presence positions Baan both to address local markets and to support
its multinational customers.
Expand market presence: Baan has expanded its direct and indirect
sales and support organizations and is currently in 59 countries. The
Company has significantly expanded its sales and service presence in North
America, Latin America and in certain European and Far Eastern markets in
the past few years. For the Company as a whole, employees engaged in sales
and marketing and in billable services (including support) at December 31,
1994 were 229 and 388, respectively, compared to 569 and 959 at December
31, 1996. The Company plans to continue to expand its sales and
distribution channels and customer support organization.
Increase market coverage: The use of direct and indirect sales
channels increases the accessible market and extends the reach of Baan
service capabilities for targeted supply chain networks. The Company's
strategy is to deliver a product and create an infrastructure which makes
it easy for indirect channel partners to represent its products. By
simplifying the implementation process, automating the IT configuration
activity, and creating a channels program and support infrastructure, Baan
intends to open up new channels for sales and services offerings enabling
it to provide local market coverage for small and medium-sized enterprises.
-- SUSTAIN LEADERSHIP THROUGH FOCUS ON STRATEGIC VERTICAL MARKETS --
Establish a reputation for success by knowing the market: Baan is
currently focusing significant marketing resources on certain vertical
markets in which the Company's products provide particular utility, and is
continuing to develop specific configurations, templates and software
packages for customers in these selected markets. These markets are
characterized by a need for highly flexible and
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scaleable solutions to support mixed-mode manufacturing across a dynamic
supply-and-demand chain environment. Targeted markets include the
automotive industry, process, electronics industry, and project-based
industries.
Industry Focus: Baan's industry focus centers around four key areas:
(1) product development is focused on key functionality for each of the
four vertical initiatives; (2) industry focused solution centers are
designed to integrate all activities related to the industry; (3) Baan
recruits and positions partners who are established with strong reputations
for performance within the industry program; (4) Baan secures customer
relationships with industry leaders in the market as "lighthouse accounts"
for demonstrating the quality of Baan's solution, and also providing input
on future product enhancements.
-- LEVERAGE THIRD PARTY IMPLEMENTATION PROVIDERS --
The Company's strategy is to deliver consistent global consulting
programs, resources, and tools for a broad range of implementation
complexities, from multi-site, global projects to departmental projects.
Often the success of ERP systems is tied to highly trained technical
personnel providing implementation and consulting services that enable
customers to rapidly achieve return on their investments. Implementation
partners provide Baan with an additional resource, allowing the Company to
focus on its customers and software development activities.
Integrating consulting services and fast implementation focus: The
Company's implementation providers leverage the tools and methodologies
available in Orgware to help customers rapidly configure and implement the
software to support their specific business processes and procedures. The
Company also supports customers and third party implementation providers
with certain value-added services, including project management,
implementation auditing, product consulting, and technical support.
Merging Baan technology with strategic partners methodologies: The
Company currently has agreements with a number of leading third party
implementation providers, including the systems consulting groups of major
public accounting firms such as KPMG Peat Marwick, ICS Deloitte & Touche,
and systems integrators such as Cap Gemini Sogeti, IBM Global Services, and
Origin International. Partners are encouraged to incorporate their own
implementation methodologies with Orgware's "Target" methodology to deliver
the strongest implementation package possible.
-- CONTINUALLY INNOVATE PRODUCTS --
Baan has adopted a strategy of periodically reinventing its products
to maintain a leading-edge solution. The second and third generations of
its software, introduced in 1991 and 1994, respectively, represented
substantially rewritten code that in each case permitted higher
performance, greater functionality and seamless data compatibility. 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.
Co-makers are key to learning and realizing innovation: Baan
identifies "co-makers" as those partners who expand the definition of its
product as well as expand the Company's knowledge base for creating and
deploying Baan's enterprise application software.
Co-makers include service partners whose practices and methodologies
provide insight on integrating technology and organizations, certain IT
specific vendors, selected niche software applications suppliers whose
specific areas of focus helps Baan expand the scope of functionality
addressed by Baan directly or through partnerships, and a group of
knowledge organizations including research organizations, development
teams, academics and key customers whose knowledge and products enable Baan
to accelerate the delivery of innovative products and methods to the
market.
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-- MAINTAIN BAAN COMPANY VALUES --
The Company is committed to developing and sustaining long-term
relationships with all stakeholders, including customers, employees,
business partners, and shareholders. The Company aspires to lead the global
software market in areas such as customer satisfaction, employee retention
and development, product quality and shareholder return, and fosters a
basic set of guiding principles which it believes will forward this goal.
The core Company values include (i) Innovation: recruiting and
developing employees and partners committed to innovation in an environment
free of departmental and geographic boundaries, (ii) Integrity: the
expectation of honest, open and ethical dealings at all times with all
stakeholders, and (iii) Initiative: personal responsibility and the
willingness to take calculated risks which may improve product or service
offerings. The Company believes that its adherence to these values has
enabled it to build strong relationships with employees, as evidenced by
its historically low rate of employee turnover. In addition, the Company
has enjoyed close working relationships with customers and implementation
providers who, the Company believes, have developed significant confidence
in Baan's performance and commitment.
PRODUCTS
The Baan family of software products consists of Baan Applications, Orgware
and Baan Tools. Together, these products operate as a broad, flexible, fully
integrated family of business control and management software.
SYSTEM DESIGN AND SYSTEM ARCHITECTURE
The Baan family of software products has been designed to support, within a
single or multiple sites, multiple production and operational processes,
permitting the management of multiple production methods -- or "agile
manufacturing" -- including integrated process and discrete manufacturing, as
well as any manufacturing model along the "make-to-stock/engineer-to-order"
continuum. The products support single or multiple production sites within a
single organization or across the extended enterprise, located in one country or
several, and provide the flexibility to adapt to additional sites and processes
as an organization's business evolves.
The concept of "agile manufacturing" is critical to Baan and its customers,
and the product architecture supports differences among production systems using
a technique referred to as the customer order decoupling point (CODP). The CODP
defines the point within production when production changes from standard,
forecasted production to customer order-specific production. Baan's systems help
define the optimal strategic CODP, which then enables Baan's customer's customer
to "reach" into the production environment at different stages and impact their
product, whether the product is in mass or custom production. This decoupling
becomes more critical for companies to manage as they extend their operations
throughout the supply chain. The ability to identify the point of delivering
maximum customer satisfaction with the minimum inventory value is key to supply
chain management.
BAAN IV is an open systems, client/server solution that is technologically
independent, operating on a broad number of different platforms. BAAN IV
supports distributed and mirrored databases, local and wide area networks and
multiple user interfaces (including ASCII, Motif, Windows 95, and currently in
development, a browser interface). The product supports many major languages
(including multi-byte technology to support Asian character sets) and multiple
currencies. In addition, BAAN IV products consist of several hundred generic
business objects that can be readily assembled, configured and reconfigured to
meet the customer's specific systems needs. The Company believes that the
flexible, multi-site, hybrid process (agile manufacturing) capabilities of its
software provides significant competitive advantage relative to other
client/server ERP solutions.
The Baan Shell ("B-Shell") isolates BAAN IV application software from the
systems environment, providing interfaces to the systems environment through
platform-specific software drivers. The B-Shell permits a single application
source code for all platforms. To enable BAAN IV to operate on additional
platforms (including hardware, operating systems, databases, networks and user
interfaces) it is only necessary
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to port the B-Shell without any need to modify the application. With the
capabilities of the B-Shell, the Company has been able to provide its end user
customers with greater application consistency, ease of maintenance and
portability, and the ability to quickly adopt new standards.
For example, today Baan is incorporating object linking and embedding (OLE)
automation into its product line. OLE automation is the use of desktop
applications to aid in the entering of data. With BAAN IV, Excel spreadsheets
can be used as the input mechanism for sales, financial, and production
forecasting. Similarly, workflow capabilities will be introduced as a tool to
assist in managing the actual flow of information through an organization. In
addition, Baan is currently in the process of enabling its application for
browser based input and Internet browser based transactions. These application
features are scheduled for release in 1997.
BAAN IV APPLICATIONS
The Company offers a family of Baan application packages which support the
entire business process. The Company's products handle the requirements of
multinational and multi-site enterprises, including multiple sites utilizing
different production and other operational processes. Each application can
operate on a stand-alone basis, integrate with one or more other Baan
Applications, and/or integrate with many other systems. The software
applications are Year 2000 compliant and support requirements for the
anticipated single European Monetary Unit. The functional components include the
following:
<TABLE>
<S> <C> <C> <C>
BAAN MANUFACTURING BAAN DISTRIBUTION BAAN FINANCE BAAN SERVICE
Accounting Bill of Accounts Payable Contract Administration
Alternate Units Distribution Accounts Receivable Contract History
Budget Calculations Inbound/Outbound Activity Based Costing Contract Terms
Capacity Movements Cash Management Installation Control
Requirements Inventory Consolidated Statements Invoicing and Renewals
Planning Locations Credit Control Order Control
Cost Accounting Location Cycle Financial Budgets Order Planning and History
Engr. Change Counting Financial Statements
Control Location Stock Fixed Assets BAAN TRANSPORTATION
Engineering Data History General Ledger Distribution Planning
Management Lot Tracking Inter-Company EDI Order Control
Master Production Lots Supplier Payments Fleet Management
Scheduling Margin Control Fuel Control
Master Requirements Purchase Contracts BAAN PROJECT Hours and Expense
Planning P.O. History Control Control
Network Planning Purchase Orders Definition/Requirements Invoicing
Product Purchase Receipts Estimating/Budgets Order Control
Classification Replenishment Invoicing Order Planning
Product Orders Planning Packing Control
Configurator Sales and Progress/Marketing Public Warehousing
Product Constraints Marketing Simulation Rate Control
Production BoM Activity
Production Order BAAN PROCESS BAAN CONSTRAINT PLANNING
Control Sales Contracts Formula Management Cyclic Planning
Production Order Sales Orders Production Management Resource Master Planning
Planning Sales Quotations Process Routing Resource Planning Data
Production Order Storage Conditions Quality Management Resource Planning Units
Subcontracting Supplier Workflow Management
Hours Reliability Implementation Wizards
Repetitive Warehouse Analysis
Manufacturing Warehouse Cycle
Work Centers Counting
</TABLE>
BAAN Manufacturing: Integrates all planning and logistics requirements
across an enterprise, including multi-site constraint based master production
scheduling, OLE automation for forecasting, capacity requirements planning,
materials requirements planning, production order planning, and project
requirements planning. BAAN Manufacturing provides a broad range of analytical
tools. Functions supported include production control and scheduling (with
Berclain's MOOPI, constraint based scheduling), repetitive manufacturing support
for flow production, project control functionality, engineering data management,
engineering change control, product classification and product configuration.
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BAAN Distribution & Transportation: Supports multi-tiered distribution
strategies as well as supply chain and vendor management. The distribution
application supports purchase control, sales and marketing information, sales
force automation (laptop configurator), OLE automation for sales budgets,
electronic data interchange (EDI), inventory control, inventory location control
and lot control. The application can operate on a stand-alone basis or provide
integration with purchase planning, production planning, distribution
requirements planning and other systems, with assembly based upon decision and
calculation rules. Transportation is designed for distribution, fleet and
warehouse management. The application tracks locations, inventory, storage
orders, inbound orders, outbound orders, transship orders, rates and third party
items; provides order control, order planning, rate control, packing control,
parking control, fuel control and expense control; and manages EDI.
BAAN Finance: Supports a full range of sophisticated financial functions
for single site, multi-site, multinational, multilingual and multi-currency
enterprises. The application integrates with other BAAN applications and with
Baan's Enterprise Information System, permitting mapping of business performance
indicators to industry norms. The application supports multi-dimensional ledger
schemes and multi-company and multi-site capabilities and consolidation. BAAN
Finance also supports full drill-down analysis to permit analysis of
sequentially deeper levels of financial or accounting detail. BAAN Finance links
to external systems to allow for integration with existing systems within the
enterprise. Functions include general ledger, accounts receivable and payable,
cash management, cost allocation, activity-based costing, budgets, fixed assets,
financial statements, OLE automation for financial budgets, and financial
analysis.
BAAN Service: Manages service capabilities, contract requirements, human
and material resources and preventive/periodic maintenance scheduling. The
service and maintenance administrator within the application tracks contracts,
terms, renewals, invoices, history, service order data installation, and
contract and order control.
BAAN Project: Is designed for organizations such as large, global
construction companies, that need to manage multiple, complex, simultaneous
projects. The application supports management of all aspects of human and
material resources across multiple projects and levels of activity. BAAN Project
includes a graphical "industrial planning board" tool that permits "what if"
simulations showing the effects of changes in selected variables at multiple
sites and functions across the enterprise. Functions include estimation,
definition, budget, planning requirements, progress reporting, invoicing and
monitoring projects in the process.
BAAN Process: Includes formulation, co-product/by-product management,
distribution and transportation planning functionality. Traditional process
software vendors have sold modules such as formulation or co-product and
by-product management, but have required links to third-party solutions for
traditional ERP functionality. The Company believes that it has a competitive
advantage in being able to fully integrate process and discrete manufacturing,
as well as different styles of hybrid manufacturing, into one integrated
solution, delivering end-to-end supply chain functionality.
BAAN Constraint-Based Planning: Optimizes operational efficiency by
helping planners automatically identify resource constraints and schedule those
resources to maximize both manufacturing capacity and profitability. It is fully
integrated with order management, production planning and customer service
environments, and supports batch and packaging environments. Constraint-based
planning enables development of feasible production schedules, support for real
time Available-to-Promise and Capable-to-Promise checking, and provides
real-time decision support in ERP environments for key business metrics.
BAAN ORGWARE
Orgware is a set of software tools and methodologies that Baan has
developed to assist customers and implementation providers in configuring,
reconfiguring and implementing BAAN IV applications according to each end user's
unique requirements. The Company believes that Orgware can provide added value
for organizations embracing continuous business process improvements.
Orgware has been designed to enable business professionals to map quickly
and effectively an organization's business processes into BAAN IV applications.
Starting with industry-specific reference models that
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<PAGE> 11
define "best practices" for the industry generally, Orgware permits the mapping
of specific business processes to the flexible BAAN application. Once mapped,
the selected business objects within the system are automatically selected and
configured to perform in the appropriate manner, including the creation of
individual menus for each end user and incorporating workflow procedures and
instructions.
Key functions in Orgware include selection and configuration of
applications, business procedures and business objects, end user desktop
configuration, data conversion, training plan generation, hardware and IT
services configuration, and project budgeting, planning and management.
Additionally, Baan intends to introduce WMS (Workflow Management System) in
BAAN IVc in 1997. WMS will enable an organization to quickly install the Baan
software by streamlining and automating components of implementation. This
includes using an industry specific reference model as a starting point and
leveraging modeling tools linked to the software to tailor the model to
customers' specific practices to configure end-users' desktops.
BAAN TOOLS
Substantially all BAAN software, including the B-Shell, BAAN IV
applications and systems drivers, have been written using BAAN Tools, the 4GL
software tools developed by the Company. These tools facilitate the ongoing
enhancement and modification of the Company's products, as well as customization
of the Company's products to meet unique end user needs.
BAAN Tools provide a full-featured development environment, including a
robust 4GL language, embedded SQL and version release controls to manage changes
or modifications between releases. BAAN Tools also include facilities for
documentation, translation, installation and maintenance of software, as well as
systems administration tools for data management, job management, product
development and presentations. BAAN Tools incorporate an application dictionary,
on-line help, authorizations, multi-tasking, query by forms, graphical front
ends, migration, and data exchange.
PRODUCT DEVELOPMENT
The Company has made substantial investments since its inception in
research and product development. Research and development expenses have
increased from $7,987,000 in 1994 to $42,136,000 in 1996. Employees involved in
research and development work increased from 196 employees at December 31, 1994
to 622 at December 31, 1996.
The Company has adopted a strategy of periodically reinventing its products
in order to maintain a leading edge solution to address end user information
system needs. The Company originally introduced its software in 1989. Subsequent
generations of its software followed in 1991 and 1994. Each new generation of
BAAN software consists of substantially rewritten code providing higher
performance, greater functionality and seamless data compatibility. This process
is designed to ensure that each new generation supports the latest proven
technology available, and that development efforts are focused primarily on
increasing performance and functionality, rather than maintaining legacy
systems.
The Company's research and development are comprised of a research group of
34 employees and a development group of 588 employees at December 31, 1996. The
research group evaluates new and emerging technologies and methodologies. The
organization develops prototypes to test the practical use of new concepts and
helps determine how these concepts might be introduced into the product.
Research areas include intelligent resource planning, object-oriented
technologies and functionality, money requirements planning, logistics tools,
performance tools and extensions to Orgware to more closely integrate software
to the customer's organization.
The development group's activity is structured around multiple small teams.
The Company employs concurrent engineering principles to insure that various
product elements are kept in line with the whole product strategy and
architecture. Based on industrial production principles, each team focuses on
the development of independent software components within a disciplined set of
protocols that enable the components to work together as a final product. This
enables the Company to manage the overall process in
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<PAGE> 12
incremental elements and to track performance, identify problem areas and add
additional resources where necessary. The Company also maintains detailed
release planning procedures to ensure integration, testing and version control
among different teams developing a single release. This team approach also
allows development activity to be decentralized in order to take advantage of
skill sets available in different parts of the world and enable local
requirements to be addressed near the markets where they are best understood.
Development activities are performed primarily in The Netherlands, India and the
United States with additional teams in seven other countries around the world.
The Company's development organization is focusing on enhancements and
customary error corrections to existing versions, and development of future
versions of the Company's software. Development activities are currently focused
principally on the NT version of BAAN IV, including additional functionality in
BAAN IVc and the development of BAAN V. BAAN IVc is scheduled to contain some
OLAP-based functionality, workflow capabilities, support for multiple currency
accounting and the addition of Berclain's MOOPI and Antalys' Sales Configurator
applications. BAAN V is intended to address the requirements of the automotive
assemblers and the supply chain needs of the electronic industry, and enhancing
service management and project to meet the needs of target industries.
SALES AND MARKETING
The Company sells and supports its products through direct and indirect
sales and support organizations in 59 countries, primarily in The Netherlands,
the United States and Germany. The Company maintains corporate headquarters in
Putten, The Netherlands and Menlo Park, California, and maintains regional
offices in Barneveld, The Netherlands (Europe, the Middle East and Africa),
Menlo Park, California (the Americas), and Singapore (Asia/Pacific) to support
direct sales offices, distributors and strategic partners. The Company has
direct sales offices in 28 countries; Argentina, Australia, Austria, Belgium,
Brazil, Canada, Chile, China, Colombia, Denmark, France, Germany, India, Italy,
Japan, Malaysia, Mexico, The Netherlands, Peru, Poland, Singapore, South Africa,
Spain, Sweden, Switzerland, Venezuela, the United Kingdom and the United States.
Baan maintains independent distributors that market the Company's products and
provide first-line support in 31 additional countries. Further, the Company has
granted non-exclusive, worldwide distribution licenses to certain distributors,
while certain other distributors have rights to market the Company's products in
specific country markets and in some cases specific industry segments. This
combination of the direct sales and distributor organizations provides Baan with
a worldwide sales and marketing presence.
The Company's strategy is to continue expanding distribution capabilities
in international markets and throughout a broader range of segments that include
small and medium-sized enterprises. Over the past several years, Baan has
acquired its distributors in The Netherlands, Germany, the United Kingdom,
Canada, Switzerland, France, Austria, Spain, Japan and South Africa. In
addition, the Company established a second headquarters in Menlo Park,
California and established Baan Support Centers (BSC) in The Netherlands, the
United States and India.
The Company is currently focusing significant development and marketing
resources on certain vertical markets in which Baan's products provide
particular utility, including the development of specific configurations,
templates and software packages for these selected markets.
To best serve these markets, Baan's sales and marketing strategy targets
large companies which enable and drive a supply chain in response to customer
demand. Baan has organized sales and marketing programs around a three-tier
model focusing on the customers and suppliers of key industry accounts. These
"lighthouse" accounts provide an understanding of the structure of the industry
as well as consistent feedback on the IT requirements of major industry
segments. Baan's three-tier model comprises (i) a direct sales force focused on
selling to global companies who control the supply-and-demand chain companies in
Baan's target industries, (ii) a direct sales force focused on companies with a
similar profile yet regionally influential and (iii) channel partners providing
the Baan product and related services targeting the second- and third-tier
suppliers of those target accounts.
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<PAGE> 13
From a marketing perspective, Baan is focusing on three key initiatives.
Baan's industry focused marketing has targeted four major industries:
automotive, electronics, process and project-based industries, including
aerospace and defense. The Company's goal is to win key accounts in each
industry and to permeate the supply-and-demand chain of those industries.
Development and recruiting of complementary channel partners who can
cost-effectively deliver the Baan solution to the suppliers of the target
accounts typified by smaller to medium sized enterprises. Baan is working
closely with strategic partners, including Microsoft Corporation, Compaq
Corporation, and Hewlett-Packard Company to recruit partners in key markets
throughout the world who can deliver a total solution to prospective customers
in the targeted verticals.
Knowledge-based Direct Marketing System to support the sales opportunity
for Baan and its channel partners, which is supported by a closed-loop lead
generation process.
In 1996, the Company had net revenues of $187.5 million in its EMEA region,
consisting of Europe, the Middle East and Africa, $147.3 million in North
America, and $53.2 million in the rest of the world. In 1995, the Company had
net revenues of $130.3 million in the EMEA region, $62.7 million in North
America and $23.2 million in the rest of the world. See Note 14 of Notes to
Consolidated Financial Statements.
CUSTOMERS
As of December 31, 1996, the Company had licensed approximately 3,500
system installations to more than 2,200 customers worldwide. Customers range
from four users at the lowest end, to more than 4,000, which the Company
believes demonstrates Baan's capability to deliver a solution at the small,
medium, and large ends of the ERP market. In addition, Baan's customer base
represents the full range of platforms supported -- including database,
hardware, and operating system platforms.
Baan's strategy to focus on key industries -- automotive, electronics,
project/engineer-to-order industries (including heavy equipment, project
engineering, and aerospace and defense), and process industries -- is reflected
in its customer base today. Certain key customers in each vertical market
segment are listed in the table below.
<TABLE>
<S> <C> <C>
ELECTRONICS PROCESS INDUSTRIES AUTOMOTIVE
Advanced Micro Devices, Inc. George Weston Daf Trucks N.V.
Hitachi Ltd. Foods Ltd. Echlin Inc.
Northern Telecom Limited Noranda Aluminum, Inc. Fiat Auto Mains S.r.1.
Sensormatic Electronics Sonoco Products Mercedes Benz US
Corporation Company International, Inc.
Solectron Corporation Sweetheart Holdings Inc.
HYBRID MANUFACTURING
HEAVY EQUIPMENT AEROSPACE AND DEFENSE Allied Signal Lamination
Asea Brown Boveri Group British Aerospace Systems Inc.
BW/IP International, Inc. Limited Eaton Technologies, Inc.
Carrier Corporation Litton Electron Devices Snap-on Incorporated
EUCLID-HITACHI Heavy Lockheed Martin Teknion Furniture Systems
Equipment, Inc. The Boeing Company UARCO Incorporated
Philips Medical Systems B.V.
</TABLE>
The Boeing Company accounted for 13% of total net revenues in 1994. No
customer accounted for 10% or more of total net revenues in 1995 or 1996.
CUSTOMER SERVICE AND SUPPORT
The Company believes that it is essential to customer satisfaction and the
Company's long-term success to facilitate the full and satisfactory
implementation of the Company's products at customer sites. Accordingly, the
Company provides certain value-added support services directly to certain
end-user customers, including project management to promote rapid and efficient
software implementation, product consultancy,
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<PAGE> 14
and technical support. The Company integrates these activities utilizing
relationships with leading third party providers of business process consulting
and implementation and customization services for ERP systems. As of December
31, 1996, the Company had 959 employees in its customer support and service
organization.
Customer Support: The Company's Baan Support Centers (BSCs) provide
technical maintenance and support to Baan's customers and distributors.
Maintenance and support includes error corrections and access to the Company's
help desk. The Baan Global Support organization consists of three main centers,
located in Barneveld, The Netherlands; Grand Rapids, Michigan, USA; and Bombay,
India. This presence helps the Company support customers and partners in
different regions and time zones worldwide. The three centers are closely
connected and have a direct link to the Company's development organization. The
Company is currently expanding its Global Support organization by establishing
additional BSCs in emerging growth areas such as Singapore, Japan, Brazil and
Mexico.
First-line customer maintenance and support currently is provided by the
Baan Support Centers, local sales operations and distributors. The Company is
currently implementing a global customer and call management application, that
will allow its customers to obtain a significant amount of support 24 hours per
day via the World Wide Web. The Company's World Wide Web-based support services
will include the facility for customers to enter calls, check the status of
pending calls, use a knowledge base with frequently asked questions, obtain
technical documentation and is expected to be available in the second half of
1997.
The Company provides maintenance and support services for an annual fee
which entitles customers to receive maintenance and support services as well as
enhancements and updates to their licensed version of software.
Education and Training: The Company offers, for a fee, a comprehensive
education and training program to its customers and to the Company's third party
implementation providers. Classes are offered through in-house facilities at
Company offices in various locations, as well as on-site training services at
customer locations. The Company's training approach is based on standardized
components that can be configured for customer-specific training programs. The
Company has also assisted implementation providers and customers in developing
internal competency centers to support their Baan business activity.
Project Management and Implementation Services: The Company provides
fee-based project management and certain other implementation services to its
customers. Baan's strategy is to focus on those services which are believed to
provide significant value with respect to the quality of implementation
projects, while relying upon third parties to provide implementation and
customization services generally to end user customers.
THIRD PARTY IMPLEMENTATION PROVIDERS
The Company works closely with and is significantly dependent upon third
party implementation providers such as systems consulting and systems
integration firms, to provide implementation and customization services to the
Company's customers. The use of third parties allows the Company to focus on
developing, marketing, distributing and supporting its software as well as
certain value-added implementation services provided by the Company. Although
the Company has agreements with certain of these providers, these agreements are
generally terminable by other parties at any time and do not impose specific
obligations on the part of the third party providers.
The Company maintains the quality of services performed by third party
implementation providers by carefully selecting those organizations, training
them to provide internationally uniform implementation services, evaluating
their performance on a regular basis and providing for the continual exchange of
knowledge and experience. These providers use the Company's methodologies and
tools found in Orgware when conducting implementations, which enhances the
ability of such providers to provide process re-design and implementation
services. The Company's software also supports continual process improvement by
providing ongoing analysis of key business performance criteria, both on a
detailed planning level and on a senior executive information level.
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<PAGE> 15
COMPETITION
The enterprise business application software market is highly competitive,
is changing rapidly, and is significantly affected by new product introductions,
geographical regional market growth, integration of supply chain networks and
issues related to policy (such as the anticipated requirements of the European
Monetary Unit) as well as the Year 2000 issue. Baan's products are targeted at
the market for open systems-based, client/server ERP software solutions, and the
Company's current and prospective competitors offer a variety of products and
solutions to address this market.
The Company's primary competition comes from a large number of independent
software vendors and other sources including (i) companies offering either
standard or fully customized applications that run on mainframe computer
systems, such as SAP AG (SAP); (ii) companies offering applications that run on
AS/400 and other mid-range computers, including System Software Associates,
Inc., Marcam Corporation and J.D. Edwards, (each of which has introduced a
client/server product); and (iii) companies offering applications that run on
UNIX- or Windows NT-based systems in a client/server environment such as SAP,
PeopleSoft, Inc. and Oracle Corporation (Oracle). The Company also faces
indirect competition from suppliers of custom-developed business application
software that have focused mainly on proprietary mainframe- and
minicomputer-based systems with highly customized software, such as the systems
consulting groups of the major public accounting firms, as well as systems
integrators. Additionally, the Company faces indirect competition from
"home-grown" systems developed by the internal MIS departments of large
organizations. In the future, the Company's competitors could introduce products
with more features and lower prices than the Company's products, and could also
seek competitive advantage by bundling existing or new products and services
with other, more established products and services.
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 and Oracle, have
well-established relationships with present or potential customers of the
Company. Further, because the Company's products run on relational database
management systems (RDBMS) and Oracle has the largest market share for RDBMS
software, Oracle may have a competitive advantage in selling its application
products 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 could attempt to increase their presence in this
market by acquiring or forming strategic alliances with competitors of the
Company.
The principal competitive factors affecting the market for the Company's
software products are responsiveness to customer needs, product architecture,
functionality, speed of implementation, ease of use, performance and features,
quality and reliability, breadth of distribution, vendor and product reputation,
quality of customer support and price. Based on these factors, the Company
believes that it has competed effectively to date. In order to be successful in
the future, the Company must continue to respond promptly and effectively to the
challenges of technological change and its competitors' innovations by
continually enhancing its own product offerings or adding to its product
portfolio. There can be no assurance, however, that the Company's products will
continue to compete favorably or that the Company will be successful in the face
of increasing competition from new products and enhancements introduced by
existing competitors or by new companies entering this market. In addition,
because the Company often relies on third party implementation providers for
implementation and other support of its products, there can be no assurance that
these third parties will maintain sufficiently high quality standards so that
the Company's reputation and competitive position will not be adversely
affected.
The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as for 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
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<PAGE> 16
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 and innovative
approaches to applying the technology (such as DEM and Orgware). The Company
believes that the continued development of the DEM concept and its Orgware
product, in concert with its partner certification program, significantly
impacts the quality and quantity of services effort required for software
implementation. Certain of the Company's competitors currently offer products
using client/server architecture and are focusing on reducing the service effort
necessary to implement their products. The Company also believes that many of
its other 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
among providers of client/server-based ERP products is likely to increase
substantially. The Company also believes that by expanding its current product
breadth, it will encounter competitive pressure from niche market competitors.
Increased competition could include greater competition based upon price, 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.
PROPRIETARY RIGHTS AND LICENSING
The Company relies on a combination of the protections provided by
applicable copyright, trademark and trade secret laws, as well as
confidentiality procedures, licensing arrangements and software-based license
management, to establish and protect its rights in its software. Despite the
Company's efforts, it may be possible for third parties to copy certain portions
of the Company's products or reverse engineer or obtain and use information that
the Company regards as proprietary. In addition, the laws of certain countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States or The Netherlands. Accordingly, there can be no
assurances that the Company will be able to protect its proprietary software
against unauthorized third party copying or use, which could adversely affect
the Company's competitive position.
The Company licenses Baan products to end users under license agreements
which are generally in standard form, although each license is individually
negotiated and may contain variations. The standard form agreement allows the
end user to use the Baan products solely on the end user's computer equipment
for the end user's internal purposes, and the end user is generally prohibited
from sublicensing or transferring the Baan products. The agreements generally
provide that the Company's warranty for Baan products is limited to correction
or replacement of the affected product, and in most cases the Company's warranty
liability may not exceed the licensing fees to the end user. The Company's form
agreement also includes a confidentiality clause protecting the Baan products.
Generally, the end user may terminate the license agreement at any time,
although typically the end user remains responsible for any accrued and unpaid
license fee.
Baan products are not only licensed to end users by the Company but also by
independent third party distributors. Although the Company seeks to establish
the conditions under which Baan products are licensed by such distributors to
end users, the Company cannot assure that such distributors do not use other
conditions.
Baan products are generally provided to end users in object code
(machine-readable) format only. From time to time, in limited circumstances, the
Company has licensed source code (human-readable form) subject to customary
protections such as use restrictions and confidentiality. In addition, licensed
end users of Baan products can be beneficiaries of a master source code escrow
for the Baan products, pursuant to which the source code will be released to end
users upon the occurrence of certain events, such as the commencement of
bankruptcy or insolvency proceedings by or against the Company, or certain
material breaches of the agreement. The Company has the right to object to the
release of source code in any such circumstance, and
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<PAGE> 17
to submit the matter to dispute resolution procedures. In the event of any
release of the source code from escrow, the end user's license is limited to use
of the source code to maintain, support and customize Baan products.
The Company from time to time receives notices from third parties claiming
infringement by the Company's products of third party proprietary rights. The
Company expects that software products will increasingly be subject to such
claims as the number of products and competitors in the Company's industry
segment grows and the functionality of products overlap. Any such claim, with or
without merit, could be time-consuming, result in costly litigation, or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. In the event of a successful claim against the Company
and the failure of the Company to develop or license a substitute technology,
the Company's business and operating results would be materially adversely
effected.
EMPLOYEES
As of December 31, 1994, 1995 and 1996, the Company had 943, 1,525 and
2,389 full time employees, respectively, including as of December 31, 1996, 622
employees engaged in research and development, 569 in sales and marketing, 959
in billable services including product support, and 239 in finance and general
administration. In The Netherlands, certain of the Company's employees are
represented by statutory Works Councils. Each such Works Council, required under
Netherlands law to be established by a company with more than a specified number
of employees, is an independent body elected by the employees of a business. In
general, the employer is required to seek the approval and/or advice of the
Works Council before proceeding with making certain significant decisions
affecting the employees and the business. None of the Company's employees is
represented by any collective bargaining agreements and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are excellent. The Company's success depends to a significant extent upon a
limited number of key employees and other members of senior management of the
Company. There can be no assurance that the Company will be successful in
attracting and retaining such personnel, and the failure to attract and retain
such personnel could have a material adverse effect on the Company's business.
ITEM 2. PROPERTIES
The Company's executive offices are located in Putten, The Netherlands and
in Menlo Park, California with its statutory seat at Barneveld, The Netherlands.
The Company also has direct sales offices in 28 countries. The Company leases
its office and research and development facilities with leases of various
duration. Certain of these properties are leased from affiliates of the Company.
The Company is currently seeking additional facilities space to support growth,
but believes that its existing and currently planned domestic and international
facilities will be sufficient to meet its needs for at least the next twelve
months. See Note 13 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to legal proceedings from time to time. There is no
such proceeding currently pending which the Company believes is likely to have a
material adverse effect upon the Company's business. Any litigation, however,
involves potential risk and potentially significant litigation costs, and
therefore there can be no assurance that any litigation which is now pending or
which may arise in the future will not have such a material adverse effect on
the Company's business.
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ITEM 4. CONTROL OF REGISTRANT
To the Company's knowledge, it is not owned or controlled by another
corporation or by any foreign government. The table below sets forth certain
information with respect to the beneficial ownership of Common Shares as of
April 18, 1997 by (i) any person known to the Company to be the owner of more
than ten percent of the Common Shares, and (ii) the total amount of Common
Shares owned by all officers and directors as a group:
<TABLE>
<CAPTION>
SHARES APPROXIMATE
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(2) OWNED
--------------------------------------------------- ------------ -----------
<S> <C> <C>
Baan Investment B.V.(1)............................ 38,788,980 42.66%
Baron van Nagellstraat 89
3771 LK Barneveld
The Netherlands
General Atlantic Partners(3)....................... 7,828,645 8.61%
All directors and executive officers as a group
((22) persons)(4)................................ 49,509,312 54.45%
</TABLE>
- - ---------------
(1) Shares exclude shares owned by Jan Baan and J.G. Paul Baan.
(2) Applicable percentage of ownership is based on 90,921,365 Common Shares
outstanding as of April 18, 1997, together with the applicable options for
each shareholder. Beneficial ownership is determined in accordance with the
rules of the U.S. Securities and Exchange Commission, and includes voting
and investment power with respect to shares. Shares subject to options
currently exercisable within 60 days after April 18, 1997, are deemed
outstanding for computing the percentage ownership of the person holding
such options, but are not deemed outstanding for computing the percentage of
any other person.
(3) Includes 7,443,188 shares held by General Atlantic Partners V, L.P. and
385,457 shares held by GAP Coinvestment Partners, L.P. The general partner
of General Atlantic Partners V, L.P. is General Atlantic Partners, LLC, a
Delaware limited liability company. Includes 750,000 shares subject to an
option granted by General Atlantic Partners V, L.P. and GAP Coinvestment
Partners, L.P. to third parties unaffiliated with the Company. The managing
members of General Atlantic Partners, LLC are Steven A. Denning, David C.
Hodgson, Stephen P. Reynolds, J. Michael Cline, William O. Grabe and William
E. Ford. The same individuals are the general partners of GAP Coinvestment
Partners, L.P. Messrs. Hodgson and Grabe, directors of the Company, are
managing members of General Atlantic Partners, LLC and general partners of
GAP Coinvestment Partners, L.P. Messrs. Hodgson and Grabe disclaim
beneficial ownership of shares owned by General Atlantic Partners V, L.P.
and GAP Coinvestment Partners, L.P. except to the extent of their respective
pecuniary interests therein.
(4) Includes 1,547,688 shares issuable upon exercise of options to purchase
Common Shares granted to executive officers and directors of the Company
which are exercisable within 60 days after April 18, 1997.
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ITEM 5. NATURE OF TRADING MARKET
The Company's Common Shares are quoted on the Nasdaq National Market under
the symbol "BAANF" and on the Official Market of the Amsterdam Stock Exchange
under the symbol "BAAN." The following table lists the high and low closing
prices since the Company's Common Shares began trading on the Nasdaq National
Market on May 19, 1995 and began trading on the Official Market of the Amsterdam
Stock Exchange on May 23, 1995.
<TABLE>
<CAPTION>
NASDAQ NATIONAL AMSTERDAM STOCK
MARKET EXCHANGE
---------------- ------------------------
HIGH LOW HIGH LOW
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1995:
Second Quarter (From May 19,
1995).................... $15 7/16 $11 1/8 NLG 23.95 NLG 17.25
Third Quarter............... 24 3/16 14 7/8 39.15 25.75
Fourth Quarter.............. 23 1/16 17 29/32 37.60 28.25
Fiscal 1996:
First Quarter............... 30 11/16 20 11/32 51.40 33.45
Second Quarter.............. 37 11/16 25 5/16 66.80 42.50
Third Quarter............... 36 26 3/4 62.80 45.90
Fourth Quarter.............. 40 1/8 31 1/4 69.90 56.50
Fiscal 1997:
First Quarter............... 51 3/8 34 7/8 95.40 61.00
</TABLE>
On March 31, 1997, the closing prices of the Company's Common Shares were
$44.63 per share as reported by the Nasdaq National Market and NLG 84.27 per
share as reported by the Official Market of the Amsterdam Stock Exchange.
On March 31, 1997 the exchange rate of Dutch guilders into U.S. dollars
(the New York foreign exchange selling rate) was NLG 1.8885/$1.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITIES HOLDERS
There are currently no limitations either under the laws of The Netherlands
or in the Company's Articles of Association, to the rights of shareholders from
outside The Netherlands to hold or vote Common Shares. Cash distributions, if
any, payable in Dutch guilders may be officially transferred from The
Netherlands and converted into any other currency without Netherlands legal
restrictions, except that for recording purposes such payments and transactions
must be reported by the Company to the Netherlands Central Bank.
ITEM 7. TAXATION
The following is a summary of certain Netherlands and U.S. federal income
tax consequences relating to an investment in the Company's Common Shares. This
summary does not deal with all possible tax consequences relating to an
investment in the Company's Common Shares. In particular, the discussion does
not address the tax consequences under state, local and other (e.g., non-U.S. or
non-Netherlands) tax laws, nor does it address special circumstances that may
apply to any individual investor. Accordingly, each prospective investor should
consult its tax advisor regarding the tax consequences to it of an investment in
the Common Shares. The following discussion is based upon the analysis of the
Code, the Regulations thereunder, current case law, and published rulings, both
for U.S. and Netherlands purposes.
The anticipated tax consequences are subject to change, and such change may
be retroactively effective. If so, the following summary may be affected and may
not be relied upon. Further, any variation or differences from the facts or
representations recited herein, for any reason, might affect the following
discussion, perhaps in an adverse manner, and make them inapplicable. In
addition, the U.S. counsel and the Netherlands tax advisor to the Company both
have undertaken no obligation to update this discussion for changes in facts or
laws occurring subsequent to the date thereof.
18
<PAGE> 20
The summary represents solely the views of the U.S. and Netherlands tax
advisors to the Company as to the interpretation of existing law and,
accordingly, no assurance can be given that the tax authorities or courts in the
U.S. or The Netherlands will agree with the summary hereafter.
NETHERLANDS TAXATION
The following is a summary of Netherlands tax consequences to an owner of
Common Shares who is not, or is not deemed to be, a resident of The Netherlands
for purposes of the relevant tax codes (a "non-resident Shareholder"). The
summary does not address taxes imposed by The Netherlands and its political
subdivisions, other than the dividend withholding tax, individual income tax,
corporate income tax, net wealth tax, and gift and inheritance tax.
NETHERLANDS DIVIDEND WITHHOLDING TAX
The Company does not expect to pay dividends in the foreseeable future. To
the extent that dividends are distributed by the Company, such dividends would
be subject under Netherlands tax law to withholding tax at a rate of 25%.
Dividends include dividends in cash or in kind, constructive dividends and
liquidation proceeds in excess of, for Netherlands tax purposes, recognized
paid-in capital. Stock dividends are also subject to withholding tax unless
distributed out of the Company's paid-in share premium as recognized for
Netherlands tax purposes.
A non-resident shareholder can be eligible for a reduction or a refund of
Netherlands dividend withholding tax under a tax convention which is in effect
between the country of residence of the non-resident shareholder and The
Netherlands. The Netherlands has concluded such conventions with, among others,
the United States and all members of the European Union except Portugal. Under
most of these conventions, Netherlands dividend withholding tax is reduced to a
rate of 15% or less unless the recipient shareholder has a permanent
establishment in The Netherlands to which the Common Shares are attributable.
No withholding tax applies on the sale or disposition of Common Shares to
persons other than the Company and affiliates of the Company.
INCOME TAX AND CAPITAL GAINS
A Shareholder will not be subject to Netherlands income tax with respect to
dividends distributed by the Company on the Common Shares or with respect to
capital gains derived from the sale or disposal of Common Shares in the Company,
provided that:
(i) such holder is neither resident nor deemed to be resident in The
Netherlands;
(ii) such holder does not have an enterprise or an interest in an
enterprise that is, in whole or in part, carried on through a permanent
establishment or a permanent representative in The Netherlands and to which
enterprise or part of an enterprise, as the case may be, the Common Shares
are attributable; and
(iii) such holder does not have a substantial interest or a deemed
substantial interest in the share capital of the Company or, if such holder
does have such an interest, it forms part of the assets of an enterprise.
As of January 1, 1997, a holder of Common Shares will generally not have a
substantial interest if he, his spouse, certain other relatives (including
foster children) or certain persons sharing his household, do not hold, alone or
together, whether directly or indirectly, the ownership of, or certain other
rights over, shares representing five per cent or more of the total issued and
outstanding capital (or the issued and outstanding capital of any class of
shares) of the Company. A deemed substantial interest is present if (part of) a
substantial interest has been disposed of, or is deemed to have been disposed
of, on a non-recognition basis.
19
<PAGE> 21
NET WEALTH TAX
A Shareholder will not be subject to Netherlands net wealth tax in respect
of the Common Shares provided that such Shareholder is not an individual or, if
he is an individual, the conditions described in clauses (i) and (ii) of the
proviso under "Income Tax and Capital Gains" are satisfied.
GIFT, ESTATE OR INHERITANCE TAXES
No gift, estate or inheritance taxes will arise in The Netherlands with
respect to an acquisition of Common Shares by way of a gift by, or the death of,
a Shareholder who is neither resident nor deemed to be resident in The
Netherlands unless (i) such Shareholder at the time of the gift has or at the
time of his death had an enterprise or an interest in an enterprise that is or
was, in whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands and to which enterprise or part of
an enterprise, as the case may be, the Common Shares are or were attributable,
or (ii) in the case of a gift of Common Shares by an individual who at the date
of the gift was neither resident nor deemed to be resident in The Netherlands,
such individual dies within 180 days after the date of the gift while being
resident or deemed to be resident in The Netherlands.
U.S. FEDERAL INCOME TAXATION
For purposes of this summary, a "U.S. Shareholder" is any Shareholder that
is (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States (or any State thereof, including the District of Columbia), or
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of its source. A "Non-U.S. Shareholder" is any
Shareholder that is not a U.S. Shareholder.
TAXATION OF DIVIDENDS
The gross amount (before reduction for withholding taxes) of a distribution
with respect to the Common Shares will be a dividend to a U.S. Shareholder,
taxable as ordinary income, to the extent of the Company's current or
accumulated earnings or profits (as determined under U.S. federal income tax
principles). Distributions paid by the Company in excess of current or
accumulated earnings and profits will be treated as a tax-free return of capital
to the extent of the U.S. Shareholder's adjusted tax basis in his or her Common
Shares, and thereafter as a gain from the sale or exchange of a capital asset.
These dividends are generally not eligible for the dividends-received deduction
otherwise allowed to U.S. corporate shareholders on dividends from U.S. domestic
corporations. The amount of any distribution paid in guilders will be equal to
the U.S. dollar value of the guilders on the date of receipt, regardless of
whether the U.S. Shareholder converts the payment into U.S. dollars. Gain or
loss, if any, recognized by a U.S. Shareholder on the sale or disposition of
guilders will be U.S. source ordinary income or loss. A U.S. Shareholder may
elect annually either to deduct The Netherlands withholding tax (see
"Netherlands Taxation") against its income or take the withholding taxes as a
credit against its U.S. tax liability, subject to U.S. foreign tax credit
limitation rules discussed above. Dividend income will be income from sources
outside the United States for foreign tax credit limitation purposes. Dividend
income generally will be either "passive" income or "financial services" income,
depending on the particular U.S. Shareholder's circumstances.
Payments of dividends on the Common Shares to a Non-U.S. Shareholder
generally will not be subject to U.S. federal income tax unless such income is
effectively connected with the conduct by such Non-U.S. Shareholder of a trade
or business in the United States.
DISPOSITIONS OF COMMON SHARES
A U.S. Shareholder will recognize gain or loss for U.S. federal income tax
purposes upon the sale or other disposition of Common Shares in an amount equal
to the difference between the amount realized and the U.S. Shareholder's tax
basis in the Common Shares. Such gain or loss will be capital gain or loss and
will be long-term capital gain or loss if the Common Shares have been held (or
deemed held) for more than one year.
20
<PAGE> 22
Gain realized by a Non-U.S. Shareholder upon the sale or other disposition
of Common Shares generally will not be subject to U.S. federal income tax unless
(i) the gain is effectively connected with the conduct by such Non-U.S.
Shareholder of a trade or business in the United States or (ii) the Shareholder
is an individual who was present in the United States for at least 183 days in
the taxable year for such sale, exchange or retirement and certain other
conditions are met.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Company may be classified as a "passive foreign investment company"
("PFIC") for United States federal income tax purposes if certain tests are met.
The Company will be a PFIC with respect to a U.S. Shareholder if for any taxable
year in which the U.S. Shareholder held the Company's Shares, either (i) 75% or
more of the gross income of the Company for the taxable year is passive income;
or (ii) the average value during the taxable year of its passive assets (i.e.,
assets that produce passive income or which are held for the production of
passive income) is at least 50% of the average fair market value of all of the
Company's assets for such year. Passive income generally includes dividends,
interest, royalties, rents (other than rents and royalties derived in the active
conduct of a trade or business and not derived from a related person),
annuities, and gains from assets which would produce such income other than
sales of inventory. For the purpose of the PFIC tests, if a foreign corporation
owns directly or indirectly at least 25% by value of the stock of another
corporation, the foreign corporation is treated as owning its proportionate
share of the assets of the other corporation, and as if it had received directly
its proportionate share of the income of such other corporation. The effect of
this special provision with respect to the Company and its direct and indirect
ownership of its subsidiaries is that the Company, for purposes of the income
and assets tests described above, will be treated as owning directly its
proportionate share of the assets of the subsidiaries and of receiving directly
its proportionate share of each of those companies' income, if any, so long as
the Company owns, directly or indirectly, at least 25% by value of the
particular company's stock. Active business income of the Company's subsidiaries
will be treated as active business income of the Company, rather than as passive
income.
If the Company were to be classified as a PFIC, a U.S. Shareholder would be
subject to various adverse U.S. tax consequences. Such adverse consequences
include an interest charge on taxes deemed deferred by them on receipt of
certain "excess" dividend distributions by the Company to the U.S. Shareholder
and on realization of gain on disposition of any of the U.S. Shareholder's
Company stock (all of which distributions and gains would be taxable as ordinary
income at the highest marginal rate). However, the foregoing interest charge
could be avoided if a U.S. Shareholder were to make a qualified electing fund
("QEF") election and the Company were to agree to comply with certain reporting
requirements. If a QEF election were made, the U.S. Shareholder would be
currently taxable on the U.S. Shareholder's pro rata share of the Company's
ordinary earnings and profits and long-term capital gains for each year (at
ordinary income or capital gains rates, respectively), even if no dividend
distributions were received. Based on the nature of the Company's expected
income and assets, management does not expect that the Company should be
classified as a PFIC in the foreseeable future.
FOREIGN PERSONAL HOLDING COMPANIES
The Company or any of its non-U.S. subsidiaries may be classified as a
"foreign personal holding company" ("FPHC") if in any taxable year five or fewer
persons who are U.S. citizens or residents own (directly or constructively
through certain attribution rules) more than 50% of the Company's stock (a "U.S.
group") and more than 60% of the gross income of the Company or the subsidiary
consists of passive income for purposes of the FPHC rules. Because substantially
all of the Company's income is likely to consist of dividends from subsidiaries,
which generally is passive income for purposes of the FPHC rules, it is likely
to meet the income test. Similarly, if more than 60% of the gross income of a
non-U.S. subsidiary of the Company were to consist of dividends, interest,
royalties (other than active business computer software royalties) or other
types of passive income, the subsidiary would meet the FPHC income test.
If the Company or any of its subsidiaries is or becomes an FPHC, each U.S.
Shareholder of the Company (including a U.S. corporation) who held stock in the
Company on the last day of the taxable year of the Company, or, if earlier, the
last day of its taxable year on which a U.S. group existed with respect to the
21
<PAGE> 23
Company would be required to include in gross income as a dividend such
shareholder's pro rata portion of the undistributed income of the Company or the
subsidiary, even if no cash dividend were actually paid. In such case, if the
Company were the FPHC, a U.S. Shareholder would be entitled to increase its tax
basis in the shares of the Company by the amount of a deemed dividend from the
Company. If a subsidiary of the Company were the FPHC, a U.S. Shareholder in the
Company should be afforded similar relief, although the law is unclear as to the
form of the relief.
If either Jan Baan or J.G. Paul Baan were to become a U.S. citizen or
resident, or marry a U.S. citizen or resident, a U.S. group might then exist
based upon the shares considered owned by him (or such U.S. citizen or resident
spouse). Moreover, if a member of either Jan or J.G. Paul Baan's family were to
own one or more shares in the Company and become a U.S. citizen or resident,
shares owned by such Baan brother could be considered owned by such family
member so as to create a U.S. group. Although the Company believes that at the
present time no U.S. group exists, the Company can give no assurances regarding
future ownership of Company shares by members of the Baan family, or future
changes in citizenship or residence of Baan family members which could result in
the creation of a U.S. group and thus cause the Company to be treated as an
FPHC. Moreover, the Company can give no assurance that it will have timely
knowledge of the formation of a U.S. group. In this regard, the Company does not
assume any obligation to make timely disclosure with respect to such status.
If the Company becomes an FPHC, a U.S. person who acquires shares from a
decedent would be denied the step-up of tax basis of such shares to fair market
value or the decedent's basis.
As noted above, certain U.S. tax consequences depend on the composition of
the income of the Company and its subsidiaries. The tax law is not entirely
clear as to the proper classification of all relevant types of income which the
Company and its subsidiaries may realize. Accordingly, there can be no assurance
that management's expectations described in the preceding section will be
fulfilled.
STATE AND LOCAL TAXES
State and local treatment may differ from federal income tax treatment.
Each U.S. Shareholder should seek tax advice with respect to applicable state
and local taxes.
22
<PAGE> 24
ITEM 8. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and Notes
thereto and other financial information included elsewhere in this Form 20-F.
The statement of operations data set forth below for the years ended December
31, 1994, 1995 and 1996 and the balance sheet data as of December 31, 1995 and
1996 have been derived from the audited Consolidated Financial Statements of the
Company included elsewhere in this Form 20-F. The statement of operations data
for the years ended December 31, 1992 and 1993 and the balance sheet data at
December 31, 1993 have been derived from audited financial statements not
included herein. The balance sheet data at December 31, 1992 has been derived
from unaudited financial statements not included herein. The operating results
for any period are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
License revenue............................. $17,002 $23,277 $ 60,348 $112,966 $ 224,237
Maintenance and service revenue............. 15,246 26,513 46,206 79,887 152,426
Hardware and other revenue.................. 14,562 13,636 16,370 23,357 11,295
------- -------- -------- -------- --------
Total net revenues.................. 46,810 63,426 122,924 216,210 387,958
------- -------- -------- -------- --------
Cost of revenues:
Cost of license revenue..................... 890 1,489 3,032 5,699 13,074
Cost of maintenance and service revenue..... 11,780 21,716 35,116 64,255 125,257
Cost of hardware and other revenue.......... 13,112 12,030 13,229 18,714 8,895
------- -------- -------- -------- --------
Total cost of revenues.............. 25,782 35,235 51,377 88,668 147,226
------- -------- -------- -------- --------
Gross profit.................................. 21,028 28,191 71,547 127,542 240,732
------- -------- -------- -------- --------
Operating expenses:
Sales and marketing......................... 8,015 19,724 41,770 57,052 99,932
Research and development.................... 3,679 4,851 7,987 18,718 42,136
General and administrative.................. 3,588 3,228 10,110 23,590 33,039
Amortization of intangible assets........... -- 1,279 2,172 4,701 6,125
Non-recurring operating expenses............ -- 1,071 4,172 -- --
------- -------- -------- -------- --------
Total operating expenses............ 15,282 30,153 66,211 104,061 181,232
------- -------- -------- -------- --------
Income (loss) from operations................. 5,746 (1,962) 5,336 23,481 59,500
Net interest and other income (expense)....... 3,944 (311) (991) 1,687 63
------- -------- -------- -------- --------
Income (loss) before income taxes and minority
interest.................................... 9,690 (2,273) 4,345 25,168 59,563
Provision for income taxes.................... 2,362 608 2,171 9,817 23,230
Minority interest in (earnings) losses of
consolidated subsidiaries................... (479) 752 (976) (72) --
------- -------- -------- -------- --------
Net income (loss)............................. $ 6,849 $(2,129) $ 1,198 $ 15,279 $ 36,333
======= ======== ======== ======== ========
Net income (loss) per share(1)................ $ 0.10 $ (0.03) $ 0.02 $ 0.17 $ 0.38
======= ======== ======== ======== ========
Shares used in per share calculation(1)....... 67,510 75,470 79,388 89,044 94,707
======= ======== ======== ======== ========
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
marketable securities....................... $ 2,076 $ 404 $ 6,885 $ 35,727 $ 201,898
Working capital............................... 6,880 2,577 5,286 71,740 260,507
Total assets.................................. 29,947 47,273 77,587 186,621 440,692
Long-term debt, less current portion.......... 5,055 4,682 2,005 1,714 176,223
Shareholders' equity.......................... 8,906 14,794 27,811 114,120 156,007
</TABLE>
- - ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
ITEM 9. 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 that are subject to risks and
uncertainties. The Company's actual results could differ materially from those
projected in the forward-looking statements discussed herein. Factors that could
cause or contribute to such differences include but are not limited to, those
set forth under "Risk Factors" and elsewhere in this Form 20-F.
OVERVIEW
The Company's business was founded in 1978 to provide financial and
administrative consulting services and, in 1981, undertook the objective of
providing broadly applicable, enterprise-wide information systems that are
readily adaptable to changing technologies and end-user needs. The Company
commenced shipment of its first information systems in The Netherlands in 1982,
and since that time has introduced several new generations of products and
expanded its operations to encompass most major markets around the world. As a
result of expansion in the market for open systems client/server-based ERP
systems, greater market acceptance of the Company's products, and the Company's
international expansion of its business, the Company's revenues have grown
rapidly in recent years, increasing from $122.9 million in 1994 to $388.0
million in 1996.
The Company realized an operating loss in 1993 and was only slightly
profitable in 1994 before achieving a higher level of profitability in 1995 and
1996. The loss in 1993 and limited profitability in 1994, notwithstanding
substantial revenue increases in each such year, primarily reflected expenses
associated with a strategic effort by the Company to expand its international
presence, particularly in North America, as well as certain non-recurring
operating expenses. Results for 1994 reflected $14.8 million in software license
revenues from one large contract with The Boeing Company. Absent such contract,
the Company would not have been profitable in 1994.
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 receivable is deemed probable. Maintenance and service revenues are
derived from maintenance support services, training and consulting. Maintenance
revenues from customer maintenance fees for ongoing customer support and product
updates are recognized ratably over the term of the maintenance, 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.
24
<PAGE> 26
In the last three years, the Company has experienced a significant increase
in license revenue as a percentage of total net revenue. This has resulted from
the Company's strategies to focus on core software development and distribution
capabilities, to rely increasingly on third parties to provide the
implementation and customization services required by the Company's end-user
customers, and to de-emphasize the resale of third party hardware systems on an
OEM basis. In addition, in 1994 the Company introduced Version 3.0 of its
software product line, which expanded the multi-site, multinational, financial
capabilities and other functionality. As a result, the Company has realized
increased revenues from large individual licenses since 1994 from customers such
as Advanced Micro Devices, Inc., The Boeing Company, Carrier, Levi Strauss
Europe, Solectron, Northern Telecom Limited, Philips Medical Systems Nederland
B.V., and Snap-on Incorporated. The Company expects that revenues from large
individual licenses will continue to represent a large percentage of total net
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
has 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. dollars 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 revenue 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 currency transaction gains and losses. In 1994, the Company incurred
$1.9 million in foreign currency transaction losses. At the end of 1994, the
Company reevaluated its currency management process, particularly in light of
its significantly expanded North American operations, and has established
programs to reduce its foreign currency exposure. In 1995 and 1996, the Company
incurred a foreign currency net loss of $253,000 and of $170,000, respectively.
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 exchange 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. See "Risk Factors -- International Operations and Currency
Fluctuations."
25
<PAGE> 27
ANNUAL RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total net revenues represented by certain items reflected in the Company's
statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues................................................... 100% 100% 100%
Cost of revenues............................................... 42 41 38
--- --- ---
Gross profit................................................... 58 59 62
--- --- ---
Operating expenses:
Sales and marketing.......................................... 34 26 26
Research and development..................................... 6 9 11
General and administrative................................... 8 11 9
Amortization of intangible assets............................ 2 2 1
Non-recurring operating expenses............................. 3 -- --
--- --- ---
Total operating expenses............................. 53 48 47
--- --- ---
Income from operations......................................... 5 11 15
Net interest and other income (expense)........................ (1) 1 --
--- --- ---
Income before income taxes and minority interest............... 4 12 15
Provision for income taxes..................................... 2 5 6
Minority interest in earnings of consolidated subsidiaries..... (1) -- --
--- --- ---
Net income..................................................... 1% 7% 9%
=== === ===
</TABLE>
Net Revenues. The following table sets forth, for the periods indicated,
revenues by category and the percentage of total net revenues represented by
each such category:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
$ % $ % $ %
--------- --- --------- --- --------- ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
License revenue................... $ 60,348 49% $ 112,966 52% $ 224,237 58%
Maintenance and service revenue... 46,206 38 79,887 37 152,426 39
Hardware and other revenue........ 16,370 13 23,357 11 11,295 3
-------- --- -------- --- -------- ---
Total net revenues........ $ 122,924 100% $ 216,210 100% $ 387,958 100%
======== === ======== === ======== ===
</TABLE>
Total net revenues increased 79% ($171.7 million) to $388.0 million in 1996
from $216.2 million in 1995, and increased 76% in 1995 ($93.3 million) from
$122.9 million in 1994, primarily due in each case to increased license revenues
and associated maintenance and service revenues. License revenues increased 98%
($111.3 million) to $224.2 million in 1996 from $113.0 million in 1995, and
increased 87% ($52.6 million) in 1995 from $60.3 million in 1994. License
revenues also increased each year as a percentage of total net revenues. These
increases in license revenues and in license revenue as a percentage of total
net revenue resulted from both an increase in the number of software licenses
and a higher average transaction size, and reflected the broader market trend
toward client/server computing, acceptance of the Company's products, and
expansion of the Company's operations, particularly in North America, Latin
America and Asia Pacific. The Company's two largest software licenses in 1994
(The Boeing Company and Northern Telecom Limited) accounted for approximately
24% and 11%, respectively, of total license revenues in that year. No customer
accounted for 10% or more of total license revenue in 1995 or 1996.
The Company operates its business in three principal geographic regions,
namely, EMEA (Europe, Middle East and Africa), North America (United States and
Canada) and Rest of World (Asia Pacific and
26
<PAGE> 28
Latin America). Total net revenues in the EMEA region increased 44% ($57.2
million) to $187.5 million in 1996 from $130.3 million in 1995 and increased 66%
($51.7 million) in 1995 from $78.6 million in 1994, representing 48%, 60% and
64% of total net revenues, respectively. Total net revenues in the North America
region increased 135% ($84.6 million) to $147.3 million in 1996 from $62.7
million in 1995 and increased 66% ($25.0 million) in 1995 from $37.7 million in
1994, representing 38%, 29% and 31% of total net revenues, respectively.
Finally, total net revenues in the Rest of World region increased 129% ($30.0
million) to $53.1 million in 1996 from $23.2 million in 1995 and increased 254%
($16.6 million) in 1995 from $6.5 million in 1994, representing 14%, 11% and 5%
of total net revenues, respectively. The shift of the net revenue percentages
from EMEA to other regions from year to year reflects the continued expansion in
the U.S. and the Rest of World region.
Within the EMEA region, a large proportion of the Company's total net
revenues is derived from The Netherlands and Germany. In 1996, 1995 and 1994,
net revenues from the Company's operations in The Netherlands were $82.6
million, $71.4 million and $50.2 million, respectively, and represented 21%, 33%
and 41% of total net revenues, respectively, with export sales of less than 10%
of total net revenues from sales to unaffiliated customers for those years. For
the Company's German operations, total net revenues increased to $54.1 million
in 1996 from $40.0 million in 1995 and $25.8 million in 1994, representing 14%,
18% and 21% of total net revenues, respectively.
In 1994, the Company commenced establishment of a second headquarters
facility in Menlo Park, California, established Baan Support Centers (BSC) in
the United States and India, acquired the outstanding minority interests in the
Company's Canadian and U.K. distributors and Canadian software developer, and
established (directly or through acquisitions of distributors) a total of 18 new
sales and service offices in a total of 10 countries. In 1995, the Company
acquired the remaining minority interest in its German operations, selected
assets and liabilities of its Japanese distributor and, beginning in the third
quarter, consolidated the results of its South African distributor after its
acquisition by a related party. In 1996, the Company acquired Berclain Group
Inc., a Canadian provider of manufacturing synchronization and scheduling
solutions, and Antalys, Inc., a U.S. provider of configuration management
software. Both combinations were accounted for as a pooling of interests. (See
Note 12 of Notes to Consolidated Financial Statements.) The Company has
particularly focused on expansion of its North American operations, commencing
in 1993. In 1994, after a period of limited returns from such investments, the
Company changed its U.S. senior management team and reorganized its U.S. and
Canadian operations. These changes have contributed to significant growth in net
revenues in North America. North American net revenues for the years ended 1996,
1995 and 1994 were $147.3 million, $62.7 million and $37.7 million,
respectively. The Company's North American operations did not achieve
profitability until the second half of 1994 because of costs associated with
changing its U.S. senior management team and reorganizing U.S. operations in the
first half of 1994. The number of employees in North America has grown from 180
at December 31, 1994 to 309 at December 31, 1995 and 637 at December 31, 1996.
In addition, the Company's operating expenses (exclusive of general corporate
expenses) in North America increased from $29.2 million in 1994 to $44.7 million
in 1995 and $102.7 million in 1996. The Company expects that revenues in North
America will continue to represent a substantial percentage of total revenues,
although there can be no assurance that the Company will continue to achieve
success in North American markets. The Company's operations are subject to risks
inherent in international business activities, including risks related to
currency fluctuations. See "Risk Factors -- International Operations and
Currency Fluctuations" and Note 14 of Notes to Consolidated Financial
Statements.
Maintenance and service revenues increased 91% ($72.5 million) to $152.4
million in 1996 from $79.9 million in 1995, and increased 73% ($33.7 million) in
1995 from $46.2 million in 1994. These increases were primarily attributable to
increased maintenance fees and services to a larger installed base of customers,
which in turn was a result of the growth in product licenses. As a percentage of
total net revenues, maintenance and service revenues were 39% in 1996, as
compared to 37% in 1995, and 38% in 1994. Hardware and other revenues as a
percentage of total net revenues were 3%, 11% and 13% for 1996, 1995 and 1994,
respectively. Hardware and other revenues have decreased as a percentage of
total net revenues as the Company continues to expand in international markets
where customers require complete hardware and software installations less
27
<PAGE> 29
frequently. Further, the Company has sought to de-emphasize the resale of third
party hardware on an OEM basis.
GROSS PROFIT. The following table sets forth, for the periods indicated,
gross profit and gross margin for each revenue category:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1994 1995 1996
------------------ ------------------- -------------------
% OF % OF % OF
REVENUE REVENUE REVENUE
$ CATEGORY $ CATEGORY $ CATEGORY
-------- -------- --------- -------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross profit:
License................... $ 57,316 95% $ 107,267 95% $ 211,163 94%
Maintenance and service... 11,090 24 15,632 20 27,169 18
Hardware and other........ 3,141 19 4,643 20 2,400 21
------- -------- --------
Total gross
profit.......... $ 71,547 58 $ 127,542 59 $ 240,732 62
======= ======== ========
</TABLE>
The Company's gross profit as a percentage of total net revenues was 62% in
1996, as compared to 59% in 1995 and 58% in 1994. The increase in gross margin
in 1996 compared to 1995 and 1994 primarily reflects the Company's strategy to
increase license revenues as a percentage of total net revenues, to reduce the
Company's emphasis on directly providing implementation services and to reduce
the Company's focus on resale of third party hardware.
Gross margin on license revenue remained relatively constant in 1996 as
compared to 1995 and 1994. Cost of license revenues consists primarily of
amortization of capitalized software, the cost of third party software, and the
cost of media and freight. Amortization of capitalized software, included in
cost of license revenue, amounted to $2.5 million, $2.1 million and $962,000 in
1996, 1995 and 1994, respectively.
Gross margin on maintenance and service revenues decreased to 18% in 1996
from 20% in 1995 and 24% in 1994. The decrease in 1996 compared to 1995 and 1994
was primarily due to the Company's investment in its customer support
capabilities and the increased use of subcontractors in 1996. The decrease in
1995 compared to 1994 was primarily due to the diversion of internal personnel
to work on a nonbillable product upgrade program in the second half of 1995,
resulting in increased use of higher cost, third party subcontractors for
customer maintenance and service activities. This program was completed in the
fourth quarter of 1995. Cost of maintenance and service revenues consists
primarily of cost of product support, consulting and training, including
associated software engineering services. The Company currently anticipates this
margin to improve in the near future.
Gross margin on hardware and other revenues increased to 21% in 1996 from
20% in 1995 and 19% in 1994. Cost of hardware and other revenue is a function of
specific contracts. Cost of hardware and other revenues consist primarily of
third party hardware configured and sold with the Company's licensed software.
SALES AND MARKETING. The following table sets forth, for the periods
indicated, sales and marketing expenses and such expenses as a percentage of
total net revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------- ------------- -------------
$ % $ % $ %
-------- --- -------- --- -------- ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing expenses.............. $ 41,770 34% $ 57,052 26% $ 99,932 26%
</TABLE>
The Company's sales and marketing expenses increased 75% ($42.9 million) to
$99.9 million in 1996 from $57.1 million in 1995, and increased 37% ($15.3
million) in 1995 from $41.8 million in 1994, representing 26%, 26% and 34% of
net revenues, respectively. These increases in absolute spending in sales and
marketing activities reflect the Company's commitment to expand its
international sales channels and the associated hiring of additional sales staff
and sales support personnel in all geographic regions. Also, 1996
28
<PAGE> 30
included charges of $8.3 million to bad debt expense to increase the general
allowance for bad debt because of the substantial increase in accounts
receivable during 1996. Sales and marketing as a percentage of total net
revenues was 34% in 1994 compared to 26% in 1995 and 1996 reflecting the
building of infrastructure in Germany, the United Kingdom and North America and
the recognition of $1.9 million of foreign currency transaction losses in 1994.
The Company expects that sales and marketing expenses will continue to grow in
absolute dollars as the Company continues to expand its sales and distribution
channels and customer support organization.
RESEARCH AND DEVELOPMENT. The following table sets forth, for the periods
indicated, research and development expenses and such expenses as a percentage
of total net revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
------------ ------------- -------------
$ % $ % $ %
------- --- -------- --- -------- ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Research and development expenses....... $ 7,987 6% $ 18,718 9% $ 42,136 11%
</TABLE>
Research and development expenses increased 125% ($23.4 million) to $42.1
million in 1996 from $18.7 million in 1995, and increased 134% in 1995 from $8.0
million in 1994. The increases in research and development expenses year over
year reflect the Company's continuing investment in the development of new and
enhanced products and new technologies, primarily consisting of the hiring of
additional research and development personnel, as well as $2.5 million in
expenses in 1995 relating to the Company's program to upgrade installations of
Version 3.0 of the Company's product to Version 3.1 to consolidate corrections
of software errors. This program was completed in the fourth quarter of 1995. As
a percentage of total net revenues, research and development expenses increased
to 11% in 1996 from 9% in 1995, and 6% in 1994, due to the Company's continued
investment in development of new products and technologies as well as the
version upgrade program referred to above. Research and development personnel
totaled 622 people at December 31, 1996, as compared to 330 people at December
31, 1995 and 196 people at December 31, 1994. This staff is located primarily in
The Netherlands, with a smaller number of research and development personnel in
India, the United States and various other locations. Research and development
personnel represented 26% of the Company's total employees at December 31, 1996,
as compared to 22% and 21% at December 31, 1995 and 1994, respectively.
Certain software development costs related to completion of internally
developed products are capitalized in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for Software Costs." In 1996, 1995 and
1994, the Company capitalized 17%, 17% and 18%, respectively, of aggregate
research and development expenditures. Aggregate research and development
expenditures in such years, including both research and development expenses and
capitalized software costs, were $50.9 million, $22.7 million and $9.7 million,
respectively.
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 increase its research and development expenses
significantly, and such expenses may increase as a percentage of total net
revenues.
GENERAL AND ADMINISTRATIVE. The following table sets forth, for the
periods indicated, general and administrative expenses and such expenses as a
percentage of total net revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------- ------------- -------------
$ % $ % $ %
-------- --- -------- --- -------- ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
General and administrative expenses........ $ 10,110 8% $ 23,590 11% $ 33,039 9%
</TABLE>
General and administrative expenses increased 40% ($9.4 million) to $33.0
million in 1996 from $23.6 million in 1995, and increased 133% ($13.5 million)
in 1995 from $10.1 million in 1994. As a percentage of total net revenues, such
expenses were 9% in 1996 compared to 11% in 1995 and 8% in 1994. The increases
in general and administrative expenses in absolute dollars reflect the expansion
of the Company's operations with
29
<PAGE> 31
the resulting increase of additional general and administrative personnel and
infrastructure costs. Such costs included the hiring of certain key executives
into finance and general corporate positions and the payroll and facilities
costs incurred in establishing administrative and finance support personnel in
multiple locations. General and administrative expenses decreased as a
percentage of total net revenues in 1996 due principally to achieving certain
economies of scale. The Company expects that general and administrative expenses
will continue to increase in absolute dollars as the Company continues to
enhance its finance staff and install additional internal systems to support the
Company's recent growth in operations.
AMORTIZATION OF INTANGIBLE ASSETS AND NON-RECURRING OPERATING
EXPENSES. The following table sets forth, for the periods indicated, other
operating expenses and such expenses as a percentage of total net revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996
------------ ------------ ------------
$ % $ % $ %
------ --- ------ --- ------ ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amortization of intangible assets........... $2,172 2% $4,701 2% $6,125 2%
Non-recurring operating expenses............ 4,172 3 -- -- -- --
</TABLE>
Amortization of intangible assets of $6.1 million, $4.7 million and $2.2
million in 1996, 1995 and 1994, respectively, arose from the Company's
acquisitions of certain international distributors and of a Canadian software
development company during such periods. The higher amortizations in the more
current periods reflects acquisitions made in prior periods. 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, with
lesser charges in following years. See Notes 3 and 12 of Notes to Consolidated
Financial Statements.
Non-recurring operating expenses were $4.2 million in 1994, contributing
significantly to the Company's limited profitability in 1994. There were no
non-recurring operating expenses in 1995 or 1996. These expenses in 1994
consisted of $2.3 million in legal fees and provisions taken in connection with
the Company's litigation with Computer Associates, $900,000 in severance costs
associated with the reorganization of U.S. operations, a $500,000 provision for
expected costs of terminating certain rights held by a distributor in the
southeastern United States, and a charge of $486,000 for in-process research and
development related to the acquisition of the remaining minority interest in the
Company's Canadian software developer. The severance costs were settled in cash
during the year and no liabilities associated with the reorganization of U.S.
operations remained at December 31, 1994. At the date of the 1994 acquisition of
the Canadian software company, the Company concluded that the in-process
research and development had no alternative future use after taking into
consideration the potential for usage of the software in different products,
resale of the software and internal usage, and accordingly charged such amounts
to the Company's operations.
INCOME TAXES. The effective tax rate for the years ended December 31, 1996
and 1995 was 39%. The effective tax rate for the year ended December 31, 1994
was 50%. The effective rates for those years were higher than the statutory rate
primarily due to operating profits in higher tax jurisdictions and the non-
deductible status of goodwill amortization.
At December 31, 1996, the Company had foreign net operating loss
carryforwards of approximately $23.0 million. Approximately $12.0 million of
these carryforwards have no expiration dates and the balance expire in the year
2000 or later. For financial accounting purposes, the benefit of these losses
has been recorded as a reduction of the provision for Netherlands income taxes
in 1996, 1995 and 1994.
NET INTEREST AND OTHER INCOME. Interest income in 1996 and 1995 of $1.1
million and $1.4 million, respectively, was primarily a result of interest
earned on the proceeds of the Company's initial public offering in May 1995.
Interest expense of $1.1 million, $775,000 and $1.1 million in 1996, 1995 and
1994, respectively, related primarily to interest on working capital lines of
credit and long term debt. See Note 5 of Notes to Consolidated Financial
Statements.
MINORITY INTEREST. Minority interest in earnings and losses of
consolidated subsidiaries in 1995 and 1994 related to the Company's German and
Canadian subsidiaries, and to a lesser extent, the Company's U.K. and
30
<PAGE> 32
Dutch subsidiaries. The Company acquired the remaining interest in such Dutch,
U.K. and Canadian subsidiaries in 1994 and the remaining interest in such German
subsidiary in 1995.
QUARTERLY RESULTS OF OPERATIONS
The Company typically experiences variability in its quarterly operating
results due principally to seasonal year-end capital purchases by large
corporate customers, which is common in the industry. As a result, license
revenue in the first quarter of 1995 and 1996 was lower than license revenue in
the fourth quarter of the prior year. The lower license revenue level was
partially offset by the growth in lower-margined maintenance and service revenue
in the first quarter of 1995 and more than offset by that growth in the first
quarter of 1996. The Company expects this trend to continue in the first quarter
of 1997.
Historically, the first quarter of a fiscal year experiences a lower gross
profit because of the effect of seasonal year-end capital purchases by large
corporate customers in the prior quarter. The Company expects this trend to
continue for the first quarter of 1997. Gross profit increased significantly in
the fourth quarter of 1996 because license revenue increased significantly as a
percentage of total net revenue to 64% compared to 57% in the prior quarter and
because of improved margins for maintenance and service revenue in the fourth
quarter. Sales and marketing expenses have remained relatively consistent at
approximately 26% of total net revenues for the last eight quarters. Research
and development expenses increased quarter to quarter throughout 1995 and 1996,
except for the fourth quarter of 1995, as the Company continued to focus on
development of new and enhanced products. In addition, the increase in research
and development expenses in the second half of 1995 reflected $2.5 million of
expenses related to the Company's non-billable program to upgrade installations
of Version 3.0 of the Company's software product to Version 3.1. General and
administrative expenses grew relatively consistently in 1995 and throughout 1996
as the Company continued to enhance its financial staff and to install systems
to support the Company's growth.
The Company's revenues in general, and in particular its license revenues,
are relatively difficult to forecast and will continue to exhibit
period-to-period fluctuations 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. Accordingly, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. See "Risk Factors -- Variability of Quarterly Operating Results"
and Note 15 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents and
short-term marketable securities of $201.9 million and working capital of $260.5
million. In 1996, the Company's operating activities provided net cash of $21.7
million, primarily as a result of income before depreciation and amortization of
intangibles more than offset the growth of accounts receivable. Accounts
receivable net of allowance for doubtful accounts was $150.3 million at December
31, 1996 compared to $87.2 million at December 31, 1995. In December 1996, the
Company entered into an agreement pursuant to which it sold $17,040,000 of its
existing accounts receivable, subject to limited recourse. See Note 10 of Notes
to Consolidated Financial Statements. Accounts receivable days' sales
outstanding (the ratio of the quarter-end accounts receivable balance to
quarterly revenues, multiplied by 90) was 109 days as of December 31, 1996,
compared with 104 days as of December 31, 1995. The Company's allowance for
doubtful accounts increased to $8.2 million at December 31, 1996 from $2.6
million at the end of 1995 because of the substantial increase in accounts
receivable in 1996. While the Company believes that its allowance for doubtful
accounts as of December 31, 1996 remains 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.
31
<PAGE> 33
Investing activities used $11.2 million of cash in 1996. Property and
equipment purchases of $21.3 million and an increase of $10.7 million in
capitalized software development costs were only partially offset by net
maturities of marketable securities of $19.7 million. In February 1997, the
Company acquired a small German software company for approximately $2.0 million.
As of March 21, 1997, with the exception of the additions of property and
equipment, the Company had no significant capital commitments. The Company
currently anticipates that additions to property and equipment in 1997 will be
at similar levels to 1996.
Financing activities provided cash of $175.8 million, primarily because of
the issuance of $175 million of unsecured convertible subordinated notes due
2001. See Note 5 of Notes to Consolidated Financial Statements.
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 40 million (or
$22.9 million, based on the exchange rate at December 31, 1996). In addition,
certain of the Company's subsidiaries have additional bank credit agreements for
relatively small amounts. As of December 31, 1996, the Company had short-term
borrowings against all of its lines of credit of $1,769,000 with $899,000 of the
borrowings presented as a reduction in cash as they effectively reduce the
availability of cash to the Company from its Dutch bank. The weighted average
interest rate on the short-term borrowings was 19.4% at December 31, 1996.
Under the terms of the credit facility with ABN AMRO Bank, the Company, its
Netherlands subsidiaries, and Baan USA, Inc. have pledged their accounts
receivable as collateral for the credit facililty. Furthermore, these entities
may not transfer title to any of their assets outside the normal course of
business without the express written consent of the bank. See Note 5 of Notes to
Consolidated Financial Statements.
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 consider acquisitions of complementary
businesses, products or technologies, which could require additional financing.
Such acquisitions could include the acquisition of one or more distributors, but
no such 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
required, or that such additional capital will be available on acceptable terms.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 20-F contain
forward-looking statements that are based on current expectations, estimates and
projections about the industries in which the Company operates, management's
beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," variations
of such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performances
and involve certain risks and uncertainties which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements in
this Form 20-F report.
Factors that could cause or contribute to such differences include but are
not limited to those set forth under "Risk Factors". In addition, such
statements could be affected by general industry and market conditions and
growth rates, and general domestic and international economic conditions,
including interest rate and currency exchange rate fluctuations.
32
<PAGE> 34
RISK FACTORS
In addition to the other information contained and incorporated by
reference in this Form 20-F, the following factors should be carefully
considered in evaluating the Company and its business:
OPERATING HISTORY; LIMITED PROFITABILITY
The Company has experienced substantial revenue growth in recent 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 due largely to recognition of $14.8 million in
software license 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. During 1996, the
Company has experienced increases in accounts receivable as revenues have
increased. Accounts receivable days sales outstanding (the ratio of the
quarter-end accounts receivable balance to quarterly revenues, multiplied by 90)
were 104 and 109 days as of December 31, 1995 and 1996, respectively. These
increases in accounts receivable, together with increased investments by the
Company in infrastructure and expansion of operations, have impacted cash flow
from operations. Although the Company has in recent periods generated cash from
operations, there can be no assurance that cash flow from operations in future
periods will not be further impacted. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's net revenues and operating results can vary, sometimes
substantially, from quarter to quarter. The Company's license revenues have in
recent periods increased as a percentage of total net revenues. License revenues
increased from 49% of total net revenues in 1994 to 52% and 58% of total net
revenues in 1995 and 1996, respectively. 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 three 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. While
the Company believes that its allowance for doubtful accounts as of December 31,
1996 remains 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.
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.
33
<PAGE> 35
The Company believes that fourth quarter revenues have historically been
positively impacted by year-end capital purchases by larger corporate customers.
This seasonality, which the Company believes is common in the computer software
industry, is 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NORTH AMERICAN OPERATIONS
The Company commenced its investment program in North America in 1993 and
has a limited number of operational installations of its products at customer
sites in North America. Accordingly, the Company has only a limited number of
reference customer sites in North America. Many of these customers continue to
implement the Company's products, and some of these customers 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 establishing relationships with third party
implementation providers, that are necessary to support customer installations
of Baan's software and provide other customer services. The number of employees
in North America has grown from 168 at December 31, 1993 to 180, 309 and 637 at
December 31, 1994, 1995 and 1996, respectively. In addition, the Company's
operating expenses (exclusive of general corporate expenses) in North America
have increased from $13.1 million for the year ended December 31, 1993 to $29.2
million, $44.7 million and $102.7 million for the years ended December 31, 1994,
1995 and 1996, respectively. 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 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.
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in the last five years, with total
net revenues increasing from $46.8 million in 1992 to $388.0 million in 1996.
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.
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 control 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. See "Management -- Directors and Executive Officers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
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CONVERTIBLE SUBORDINATED NOTES : LEVERAGE
In December of 1996, the Company incurred $175 million of indebtedness with
the sale of 4.5% convertible subordinated notes due 2001. That amount increased
by an additional $25 million (for a total of $200 million convertible notes)
when an over-allotment option was exercised in January of 1997. As a result of
this additional indebtedness, the Company's principal and interest obligations
increased substantially. The degree to which the Company is leveraged could
materially adversely affect the Company's ability to obtain additional financing
for working capital, acquisitions or other purposes and could make it more
vulnerable to industry downturns and competitive pressures. The Company's
ability to meet its debt service obligations will be dependent upon the
Company's future performance, which will be subject to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control.
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 products and
solutions to address this market. The Company's primary competition comes from a
large number of independent software vendors and other sources including SAP AG
("SAP"), Oracle Corporation ("Oracle"), System Software Associates, Inc.
("SSA"), and PeopleSoft, Inc. ("PeopleSoft"). In addition, the Company faces
indirect competition from suppliers of custom-developed business application
software that have focused mainly on proprietary mainframe and
minicomputer-based systems with highly customized software, such as the systems
consulting groups of major accounting firms and systems integrators. The Company
also faces indirect competition 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, Oracle and PeopleSoft, have
well-established relationships with customers of the Company. Further, because
the Company's products run on relational database management systems (RDBMS) and
Oracle has the largest market share for RDBMS software, Oracle may have a
competitive advantage in selling its application products 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 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 other 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
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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 successor operating systems. 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
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 product enhancements and new products
can require long development and testing periods to achieve market acceptance.
The Company has on occasion 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 the Company's
most recent software release, BAAN IV, 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 new releases or
with the performance of the Company's products could also 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 new releases or were to be
dissatisfied with product functionality or performance, it could materially
adversely affect the Company's business and operating results.
INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS
The Company's products are currently marketed in the United States, The
Netherlands, Germany and 56 other countries. Sales in the United States, The
Netherlands and Germany accounted for 34%, 21% and 14%, respectively, of the
Company's net revenues in the year ended December 31, 1996. The Company's
operations are subject to risks inherent in international business activities,
including, in particular, general economic conditions in each country, overlap
of different tax structures, management of an organization spread over various
countries, unexpected changes in regulatory requirements, compliance with a
variety of foreign laws and regulations, and longer accounts receivable payment
cycles in certain countries. Other risks associated with international
operations include import and export licensing requirements, trade restrictions
and changes in tariff and freight rates.
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
has 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
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<PAGE> 38
normal business operations 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 foreign currency transaction gains and losses. In
1994, the Company incurred $1.9 million in foreign currency transaction losses.
At the end of 1994, the Company reevaluated its currency management process, and
established programs to reduce its foreign currency exposure. In 1995, the
Company incurred a foreign currency transaction net loss of $253,000. Starting
in the fourth quarter of 1995, the Company has established controls regarding
the use of derivative financial instruments, which it uses primarily to 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. In the year ended December 31, 1996, the
Company incurred a net foreign currency transaction loss of $170,000. 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 exchange 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RELIANCE ON CERTAIN RELATIONSHIPS
The Company relies on a number of consulting and systems integration firms
to enhance its marketing, sales and customer support efforts, particularly with
respect to implementation and support of its products as well as lead generation
and assistance in the sales process. As the Company continues to implement its
strategy of focusing on the licensing of its core software products, the Company
will remain dependent upon third party implementation providers for product
implementation, customization, customer support services and end user training.
Many such firms have similar, and often more established, relationships with the
Company's principal competitors. There can be no assurance that these third
party implementation providers will provide the level and quality of service
required to meet the needs of the Company's customers, that the Company will be
able to maintain an effective, long term relationship with these third parties,
or that these parties will continue to meet the needs of the Company's
customers. If the Company is unable to develop and maintain effective, long-term
relationships with these third parties, or if these parties fail to meet the
needs of the Company's customers, the Company's business would be adversely
affected. Although the Company has agreements with certain of these providers,
these agreements are generally terminable by the third party providers at any
time and do not impose specific obligations on the part of the third party
providers. Further, there can be no assurance that these third party
implementation providers, many of which have significantly greater financial,
technical, personnel 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.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a limited number
of members of senior management of the Company and other key employees. The
Company does not maintain key man life insurance on any personnel. The loss of
the service of one or more key employees could have a material adverse effect on
the Company. In addition, the Company believes that its future success will also
depend in large part upon its ability to attract and retain highly skilled
technical, management, sales and marketing personnel. Competition for such
personnel in the computer software industry is intense. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel, and the failure to attract and retain such personnel could have a
material adverse effect on the Company's business.
ABILITY TO ENFORCE THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of the protections provided under
applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing arrangements, to establish and protect
its rights in its software. Despite the Company's efforts, it may be possible
for unauthorized third
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parties to copy certain portions of the Company's products or to reverse
engineer or obtain and use information that the Company regards as proprietary.
In addition, the laws of certain countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States or The
Netherlands. Accordingly, there can be no assurance that the Company will be
able to protect its proprietary software against unauthorized third party
copying or use, which could adversely affect the Company's competitive position.
The Company, from time to time, receives notices from third parties
claiming infringement by the Company's products of third party proprietary
rights. There can be no assurance that legal action claiming patent or other
intellectual property infringement will not be commenced against the Company, or
that the Company would necessarily prevail in such litigation given the complex
technical issues and inherent uncertainties in intellectual property litigation;
and in the event a claim against the Company was successful and the Company
could not obtain a license on acceptable terms or develop or license a
substitute technology, the Company's business and operating results would be
materially adversely affected. The Company expects that software products will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products
overlap. Any such claim, with or without merit, could be time-consuming, result
in costly litigation and require the Company to enter into royalty and licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable by the Company, or at all. In the event of a
successful claim against the Company and the failure of the Company to develop
or license a substitute technology, the Company's business and operating results
would be materially adversely effected.
LEGAL PROCEEDINGS
The Company is party to legal proceedings from time to time. There is no
such proceeding currently pending which the Company believes is likely to have a
material adverse effect upon the Company's business as a whole. Any litigation,
however, involves potential risk and potentially significant litigation costs,
and therefore there can be no assurances that any litigation which is now
pending or which may arise in the future will not have such a material adverse
effect.
CONTROL BY EXISTING SHAREHOLDERS
Baan Investment B.V. owns approximately 43% of the Company's outstanding
Common Shares. Jan Baan and J.G. Paul Baan, by virtue of their positions as
managing directors of Baan Investment B.V. and the control they exercise over
the entities that own and control the shares of Baan Investment B.V.,
effectively have the power to vote the Common Shares of the Company owned by
Baan Investment B.V. Messrs. Baan and Baan will therefore also have the
effective power to influence significantly the outcome of matters submitted for
shareholder action, including the appointment of members of the Company's
Management and Supervisory Boards and the approval of significant change in
control transactions, and may be deemed to have control over the management and
affairs of the Company. This significant equity interest in the Company may have
the effect of making certain transactions more difficult absent the support of
Jan Baan and J.G. Paul Baan, and may have the effect of delaying or preventing a
change in control of the Company.
POSSIBLE VOLATILITY OF SHARE PRICE
The market price of the Company's Common Shares has experienced significant
fluctuations and may continue to fluctuate significantly. The market price of
the Common Shares may be significantly affected by factors such as the
announcement of new products or product enhancements by the Company or its
competitors, technological innovation by the Company or its competitors,
quarterly variations in the Company's results of operations, changes in earnings
estimates by market analysts, and general market conditions or market conditions
specific to particular industries. In particular, the stock prices for many
companies in the technology and emerging growth sector have experienced wide
fluctuations which have often been unrelated to the operating performance of
such companies. Such fluctuations may adversely affect the market price of the
Common Shares.
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FOREIGN PERSONAL HOLDING COMPANY TAX RISK
The Company or certain of its subsidiaries may in the future be
characterized as a foreign personal holding company ("FPHC") if: (i) Jan Baan or
J.G. Paul Baan or a member of either of their families were to become a U.S.
resident or citizen, or to marry a U.S. resident or citizen and (ii) more than
60% of the gross income of the Company or a subsidiary were considered foreign
personal holding company income. If such treatment were to occur, U.S.
residents, citizens, corporations and other persons subject to U.S. taxation on
the basis of net income who hold Common Shares would be required to include in
their gross income as a dividend their pro rata portion of any undistributed
income of the Company or a subsidiary so classified as a FPHC, even if no cash
dividend were actually paid. Although neither the Company nor any subsidiary is
currently a FPHC, the Company can give no assurances that changes in ownership
of the shares currently held by Baan Investment B.V., or changes in ownership or
residency of Jan Baan or J.G. Paul Baan or members of either of their families,
will not cause the Company to be treated as a FPHC, nor is the Company
undertaking any obligation to determine or disclose at any time in the future
its status as a FPHC. See "Taxation -- United States Federal Income
Taxation -- Foreign Personal Holding Companies."
ENFORCEABILITY OF UNITED STATES JUDGMENTS AGAINST NETHERLANDS CORPORATIONS,
DIRECTORS AND OFFICERS
Judgments of United States courts, including judgments against the Company,
its directors or its officers predicated on the civil liability provisions of
the federal securities laws of the United States, are not directly enforceable
in The Netherlands.
OTHER MATTERS RELATED TO DUTCH COMPANIES
As a Netherlands "naamloze vennootschap" (N.V.), the Company is subject to
certain requirements not generally applicable to corporations organized in
United States jurisdictions. Among other things, the issuance of shares by the
Company must be submitted for resolution of the general meeting of shareholders,
except to the extent such authority to issue shares has been delegated by the
general meeting of shareholders to another corporate body. The issuance of
shares by the Company is generally subject to shareholder preemptive rights,
except to the extent that such preemptive rights have been excluded or limited
by the general meeting of shareholders (subject to a qualified majority of
two-thirds of the votes if less than 50% of the outstanding share capital is
present or represented) or, in case the authority to issue shares has been
delegated to another corporate body that has also been empowered by the general
meeting of shareholders to exclude or limit such preemptive rights, by such
corporate body. In this regard, the general meeting of shareholders has
authorized the Management Board of the Company, upon approval by the Supervisory
Board, to issue any authorized and unissued shares of the Company at any time up
to and including April 30, 2000, and has authorized the Management Board, upon
approval by the Supervisory Board, to exclude or limit shareholder preemptive
rights with respect to any issuance of such shares up to and including such
date. Such authorizations may be renewed by the general meeting of shareholders
from time to time, or by the Company's Articles of Association pursuant to an
amendment to that effect, for up to five years at a time. This authorization
would also permit the issuance of shares in an acquisition, provided that
shareholder approval is required in connection with a statutory merger (except
that, in certain limited circumstances, the board of management of a surviving
company may resolve to legally merge the company). Shareholders do not have
preemptive rights with respect to shares which are issued against payment other
than in cash, shares which are issued to employees of the Company or of a group
company or shares which are issued to someone exercising a previously acquired
right to subscribe for shares. In addition, certain major corporate decisions
are subject to prior approval or advice by the Works Council established at Baan
Development B.V. and Baan Nederland B.V., two Dutch subsidiaries of the Company.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Managing Directors, executive officers and Supervisory Directors of the
Company, and their ages, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- - ------------------------------- --- ----------------------------------------------
<S> <C> <C>
Jan Baan(1)(2)................. 51 Managing Director, Chairman of the Board of
Managing Directors and Chief Executive
Officer
Amal M. Johnson(3)............. 44 Managing Director, Executive Vice President,
Baan Affiliates & Marketing
Tom C. Tinsley(4).............. 43 Managing Director, President and Chief
Operating Officer
Konrad Bank.................... 49 President Asia Pacific Operations
Kevin E. Calderwood............ 36 President Americas Operations
John J. Cordio................. 36 Vice President Consulting, Americas Operations
Wim H. Heijting................ 31 General Counsel and Secretary to the Board
Robert R. Lewis................ 38 Chief Operating Officer, EMEA Operations
Gerrit J. van Munster.......... 33 Vice President, Human Resources
Christine B. Pittman........... 43 Vice President Consulting
Laurens van der Tang........... 31 Executive Vice President, Research and
Development
Otto M. van der Tang........... 28 Vice President Support
Karl-Heinz Voss................ 48 Vice President EMEA Operations
Jan Westerhoud(4).............. 44 Chief Financial Officer
J.G. Paul Baan(1).............. 46 Supervisory Director
William O. Grabe(2)............ 59 Supervisory Director
David C. Hodgson(2)(4)......... 40 Supervisory Director
Graham J. Sharman.............. 58 Supervisory Director
J.C. (Hans) Wortmann........... 46 Supervisory Director
</TABLE>
- - ---------------
(1) Jan Baan B.V. (a personal holding company of Jan Baan) and J.G. Paul Baan
are Managing Director and Supervisory Director of the Company, respectively.
Jan Baan B.V. has nominated Jan Baan to act on its behalf and perform its
obligations on the Board. This structure has been used by Jan Baan for
personal financial purposes. Jan Baan and J.G. Paul Baan are brothers.
(2) Member of Compensation Committee.
(3) Amal Johnson has been named Managing Director, pending her appointment to
such position at the next general meeting of shareholders as required by
Netherlands law.
(4) Member of Audit Committee.
Jan Baan founded the Company's business in May 1978 and has been its
Chairman and Chief Executive Officer since the Company's inception.
Amal M. Johnson joined the Company as President of Baan U.S.A., Inc., a
subsidiary of the Company, in October 1994. In February 1995, Ms. Johnson was
additionally named Vice President, Americas Operations of the Company and in
January 1996 was promoted to Executive Vice President, Americas Operations. In
January 1997, Ms. Johnson was appointed as Executive Vice President, Baan
Affiliates & Marketing and acting Managing Director, pending approval of such
appointment at the next general meeting of shareholders as required by
Netherlands law. In her current capacity, Ms. Johnson is responsible for all
strategic partnering and acquisitions and for their operations after the
acquisition, as well as managing the indirect channel and other business issues.
Ms. Johnson was President of ASK Computer Systems, a division of The ASK Group,
Inc., a provider of ERP systems, from August 1993 to June 1994. From February
1977 to June 1993, Ms. Johnson held a number of management positions at IBM,
most recently as Trading Area General Manager.
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Tom C. Tinsley joined the Company in November 1995 as Managing Director,
President and Chief Operating Officer. Mr. Tinsley previously was a managing
director of McKinsey & Co., a management consulting firm, where he had been
employed for eighteen years and most recently headed the firm's global
information technology practice. While with McKinsey & Co., Mr. Tinsley served
key clients in the electronics and information technology sectors in the United
States, Scandinavia and The Netherlands. Mr. Tinsley holds a Bachelors of Arts
degree in Government and Theology from the University of Notre Dame in South
Bend, Indiana, and a M.B.A. from Stanford University.
Konrad Bank, together with Mr. Voss, formed in 1981 the predecessor to the
Company's German subsidiary. Mr. Bank served as Managing Director of that entity
since its inception and was responsible for its operations. This German entity
became a distributor of Baan software in 1989 and was acquired by the Company in
part in 1993 and in its entirety in 1995. In January 1996, Mr. Bank was named
Vice President, Southeast Europe and latter that year became co-President of
EMEA Operations along with Mr. Voss. In January 1997, Mr. Bank was named
President of Asia Pacific Operations and in that capacity is responsible for the
Company's operations in the Asia Pacific region.
Kevin Calderwood joined the Company in August 1993 and held several sales
positions in its North American operations. Most recently, in January 1997, he
became the Company's President of Americas Operations with responsibility for
operations in North, Central and South America. Before joining the Company, Mr.
Calderwood was Vice President of Sales & Marketing for PRC McLean, a systems
integration company, from April 1992 to July 1993. From May 1988 to April 1992,
Mr. Calderwood held several sales positions with Oracle Corporation, most
recently as a Regional Sales Manager.
John Cordio joined the Company in October of 1996 as regional Vice
President of Consulting for the Americas. In his position, Mr. Cordio is
responsible for the Company's service organization in North, Central and South
America. Prior to joining the Company, Mr. Cordio had eight years experience as
a consultant from September 1988 to September 1996 with Ernst & Young LLP, most
recently as a partner. Mr. Cordio is a Certified Public Accountant and holds an
MBA and BBA from the University of Wisconsin-Madison.
Wim H. Heijting joined Baan International B.V. in October 1990 as Account
Manager, India. In September 1991, Mr. Heijting was appointed Secretary to the
Baan International B.V. Board of Directors and in April 1992 became General
Counsel. In January 1995, Mr. Heijting was promoted to Secretary to the Board of
Directors and General Counsel of the Company. Mr. Heijting holds a masters
degree in Business Law from Leiden University.
Robert Lewis joined the Company in July 1996 as Senior Vice President of
Global Channel Sales. In January 1997, Mr. Lewis became Chief Operating Officer
of EMEA Operations, who with Mr. Voss, has responsibility for operations in
Europe, the Middle East and Africa. Prior to joining the Company, Mr. Lewis was
General Manager of System Software Associates, Inc. (SSA) from June 1995 to June
1996. From June 1992 to June 1995, Mr. Lewis founded and was Chairman and
President of Exigent Computer Group, a sytems integration and distribution
services company. From June 1989 to September 1992, Mr. Lewis was with Software
Alternative, most recently as a branch manager.
Gerrit van Munster joined the Company in January 1988 as a Project Manager
and was promoted to Manager of Personnel and Organization in June 1989. In
January 1994, Mr. van Munster became Human Resource Manager of the Company's
operations in Europe. Mr. van Munster was promoted to Director, Human Resources
in June 1994 and Vice President, Human Resources in January 1996, and is
responsible for overseeing the Company's personnel resources. He holds a
bachelor degree from the Higher Nautical School in Delfzijl.
Christine Pittman joined the Company in January 1996 as Vice President of
Consulting. In her position, Ms. Pittman is responsible for the Company's
consulting services world-wide. Ms. Pittman was formerly from Legent, from
December 1992 to November 1995, where most recently she served as Senior VP of
Technology Services. From October 1982 to December 1992, Ms. Pittman was with GE
Information Services, most recently as General Manager of its Electronic
Commerce Division.
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Laurens van der Tang joined the Company in June 1986. After having held
various positions in Implementation and Consultancy, in October 1990 he became
responsible for Product Development, and in January 1992 he was named Vice
President, Product Development. In January 1995, he was promoted to Vice
President, Research of the Company and, in March 1997, to Executive Vice
President, Research and Development. In his current capacity, Mr. van der Tang
is responsible for the management and strategy of the Company's product research
and development groups. Laurens van der Tang is the brother of Otto van der
Tang.
Otto M. van der Tang joined Baan International B.V. in July 1990 as an
Export Account Manager. He was promoted to Manager, International Sales and
Support in June 1992, to Manager, Channels and Alliances in August 1993, and to
Vice President, Services in August 1995, then Vice President of Support in
January 1996. Mr. van der Tang's current responsibilities include overseeing the
Company's worldwide support organization. Mr. van der Tang holds a Masters
degree in Business Economics from the University of Rotterdam. Otto van der Tang
is the brother of Laurens van der Tang.
Karl-Heinz Voss, together with Konrad Bank, formed in 1981 the predecessor
to the Company's German subsidiary. Mr. Voss served as Managing Director of that
entity since its inception and was responsible for its operations. This German
entity became a distributor of Baan software in 1989 and was acquired by the
Company in part in 1993 and in its entirety in 1995. In January 1996, Mr. Voss
was named Vice President, Central Europe. Later that year, Mr. Voss became
co-President of EMEA Operations along with Mr. Bank and then the region's sole
President in January 1997. In this latest capacity, Mr. Voss is responsible for
the Company's operations in Europe, the Middle East and Africa.
Jan Westerhoud joined the Company in October 1995 as Vice President,
Controller and was promoted to Chief Financial Officer in February of 1996. Mr.
Westerhoud is responsible for the financial organization and management of the
Company. Mr. Westerhoud's responsibilities include treasury, taxes and
management information systems. Prior to joining the Company, Mr. Westerhoud was
a partner of Moret Ernst & Young Accountants, the Company's independent
auditors, since 1989. Mr. Westerhoud is a qualified public auditor ("RA") in The
Netherlands. He holds a degree in accounting from Nivra University.
J.G. Paul Baan joined the Company's business in January 1982 and was named
Managing Director of the Company's Netherlands operating subsidiary in January
1986. In January 1994 he was named Chief Operating Officer, in January 1995 he
was appointed Vice Chairman and Managing Director and in October 1995 he was
appointed President. In April, 1996, Mr. Baan resigned as Vice Chairman,
Managing Director and President of the Company and was appointed Chairman of the
Board of Supervisory Directors of the Company and President of Baan Investment
B.V. J.G. Paul Baan is the brother of Jan Baan.
William O. Grabe became a Supervisory Director of the Company in May 1995
and served as Chairman of the Board of Supervisory Directors until April 1995.
Mr. Grabe is a Managing Member of General Atlantic Partners, LLC and has been
affiliated with General Atlantic Partners, LLC since April 1992. From 1984 until
March 1992, Mr. Grabe was a Corporate Vice President at IBM. Mr. Grabe is also a
director of Integrated Systems Solutions Corp., a wholly-owned subsidiary of
IBM; Gartner Group, Inc., a provider of information technology research and
analysis; Centura Corporation, a client/server software company; the Coda Group
plc, a financial applications software company; Marcam Corporation, a process
manufacturing application software company; and several other companies in the
computer software and services industry, including companies in which General
Atlantic Partners, LLC or one of its affiliates is an investor.
David C. Hodgson became a Supervisory Director of the Company in May 1995.
Mr. Hodgson has been a Managing Member of General Atlantic Partners, LLC, New
York, New York, since its formation in 1989. Mr. Hodgson also serves as a
director of Walker Interactive, a financial applications software company, and
several other companies in the computer software and services industry,
including companies in which General Atlantic Partners, LLC or one of its
affiliates is an investor.
Graham J. Sharman became a Supervisory Director of the Company in May 1995.
Mr. Sharman has been a director of McKinsey & Co. since 1984, and since July
1994 has been Professor of International Distribution Logistics at the Technical
University of Eindhoven in The Netherlands.
42
<PAGE> 44
J.C. (Hans) Wortmann became a Supervisory Director of the Company in May
1995. Since 1989, Mr. Wortmann has been a Professor at the School of Technology
Management of the Technical University of Eindhoven in The Netherlands. Mr.
Wortmann is a member of the Board of Directors of the Foundation of Mental
Health, Eindhoven.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of cash compensation of all Managing Directors,
Supervisory Directors and executive officers of the Company or a group (19
persons) paid or accrued for services in all capabilities for the year ended
December 31, 1996 was approximately $3,200,000.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
1993 Stock Plan. The 1993 Stock Plan was initially adopted by the
Management Board and approved by the shareholders of Baan Holding B.V. as of
December 1993, and subsequent amendments increased the aggregate number of
shares reserved for issuance thereunder to 16,000,000. The 1993 Stock Plan will
terminate in December 2003 unless terminated earlier by the Management Board
upon the authority of the Supervisory Board. The 1993 Stock Plan provides for
grants of options to employees and consultants (including officers and
directors) of the Company and its affiliates. The 1993 Stock Plan may be
administered by the Management Board or Supervisory Board of the Company, or
both, or by a committee appointed by either or both such Boards in a manner that
satisfies the legal requirements relating to the administration of stock plans
under all applicable laws (the "Administrator"). The 1993 Stock Plan is
currently administered by the Management Board of the Company.
The 1993 Stock Plan includes appendices setting forth specific provisions
providing for the grant of options to employees in certain countries to address
certain securities and tax laws in such respective countries. Appendix A of the
1993 Stock Plan sets forth provisions governing options intended to qualify as
incentive stock options within the meaning of Section 422 of the U.S. Internal
Revenue Code of 1986, as amended (the "Code").
The exercise price of options granted under the 1993 Stock Plan is
determined by the Administrator. With respect to incentive stock options granted
under the 1993 Stock Plan, the exercise price must be at least equal to the fair
market value per share of the Common Shares on the date of grant, and the
exercise price of any incentive stock option granted to a participant who owns
more than 10% of the voting power of all classes of the Company's outstanding
share capital must be equal to at least 110% of fair market value of the Common
Stock on the date of grant. In addition, pursuant to Netherlands tax law, the
exercise prices of options granted under the 1993 Stock Plan through January
1995, as established by the Management Board, has been reviewed and agreed upon
by The Netherlands national tax authorities as reflecting the fair market value
of the Common Shares on the date of grant.
The maximum term of an option granted under the 1993 Stock Plan may not
exceed ten years from the date of grant (five years in the case of a participant
who owns more than 10% of the voting power of all classes of the Company's
outstanding share capital). In the event of termination of an optionee's
employment or consulting arrangement, options may only be exercised, to the
extent vested as of the date of termination, for a period not to exceed 90 days
(12 months, in the case of termination as a result of death or disability)
following the date of termination, but in no event later than the expiration
date of each option as set forth in the optionee's option agreement. Options may
not be sold or transferred other than by will or the laws of descent and
distribution, and may be exercised during the life of the optionee only by the
optionee.
Options outstanding under the 1993 Stock Plan generally vest and become
exercisable, assuming continued service as an employee or consultant, for
non-Dutch employees at the rate of 20% of the shares subject to an option on the
first anniversary of the commencement of vesting date and 1/60th of the shares
each month thereafter, and for Dutch employees at a rate of 1/60th of the shares
each month following the commencement of vesting date, such that in each case
all shares under an option vest in full five years from the commencement of the
vesting date assuming continued service as an employee or consultant. Options
outstanding under the 1993 Stock Plan generally have a term of ten years.
43
<PAGE> 45
In the event of a merger of the Company with or into another corporation,
all outstanding options may be assumed or equivalent options substituted by the
successor corporation or its parent or subsidiary. In the absence of such
assumption or substitution, to the extent not exercised, all options shall
terminate as of the closing of the merger.
As of December 31, 1996, the Company's directors and executive officers (22
persons) had outstanding options to purchase an aggregate of approximately
5,000,000 Common Shares. As of December 31, 1996, under both the 1995 Directors
Option Plan and the 1993 Stock Plan, options to purchase an aggregate 9,474,000
Common Shares were outstanding and 2,965,000 shares remained available for
future grants. See Note 6 of Notes to Consolidated Financial Statements.
1995 Director Option Plan. The Company has reserved an aggregate of
800,000 Common Shares for issuance under its 1995 Director Option Plan (the
"Director Plan"). The Director Plan was adopted by the Managing Directors and
approved by the shareholders of Baan Holding B.V. in March 1995. The Director
Plan provides for automatic and nondiscretionary grants of nonstatutory stock
options to Supervisory Directors of the Company. Each person who becomes a
Supervisory Director after July 1, 1995 (other than individuals who immediately
prior thereto served as a Managing Director of the Company) shall automatically
be granted an option to purchase 64,000 Common Shares of the Company ("First
Option"). In addition, each Supervisory Director shall automatically be granted
an option to purchase 16,000 Common Shares (a "Subsequent Option") on January 1
of each year, provided that on such date he or she has served on the Board for
at least six months. The exercise price of options granted to Supervisory
Directors will be 100% of the fair market value of the Common Shares on the date
of grant. First Options under the Director Plan vest at the rate of 25% of the
shares subject thereto on each anniversary of the date of grant, assuming
continuous status as a director. Subsequent Options vest in full four years from
the date of grant, again assuming continuous status as a director. All options
granted under the Director Plan will have a term of ten years. In the event of
any merger, sale of assets or other transaction involving a change in control of
the Company, all options outstanding under the Director Plan will become
exercisable in full, and the option will be assumed or an equivalent option
substituted by the successor corporation or its parent or subsidiary. Options
for a total of 64,000 shares have been granted as of March 21, 1997 under the
Director Plan. The Director Plan will expire in the year 2005.
1995 Employee Stock Purchase Plan. The Company has reserved an aggregate
of 2,000,000 Common Shares for issuance under its 1995 Employee Stock Purchase
Plan for U.S. Employees (the "U.S. ESPP") and 1995 Employee Stock Purchase Plan
of non-U.S. Employees (the "Non-U.S. ESPP"). The U.S. ESPP and the Non-U.S. ESPP
were adopted by the directors and approved by the shareholders in February 1995.
The U.S. ESPP is intended to qualify under Section 423 of the Code and permits
eligible U.S. employees of the Company to purchase Common Shares through payroll
deductions of up to 10% of their compensation provided that no more than an
aggregate of 400,000 shares may be issued in any offering period and no employee
may purchase more than $25,000 worth of stock in any calendar year. The U.S.
ESPP has been implemented with six-month offering periods, provided that the
first such period commenced on May 19, 1995, the date of the Company's initial
public offering, and ended on October 31, 1995. The price of Common Shares
purchased under the U.S. ESPP will be 85% of the lower of the fair market value
of the Common Shares on the first or last day of each offering period. The U.S.
ESPP will expire in the year 2005.
As of March 21, 1997, the Company has issued an aggregate of approximately
572,000 Common Shares under the U.S. ESPP and the Non-U.S. ESPP and has
approximately 1,428,000 shares remaining for issuance under these plans.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In November 1994, Jan Baan and J.G. Paul Baan, each an officer and (each
through a respective personal holding company) a Managing Director of the
Company, established a foundation under Netherlands law named Oikonomos (the
"Foundation"), to carry out charitable activities throughout the world. In
establishing the Foundation, Jan Baan and J.G. Paul Baan desired to transfer the
economic value of their indirect (through Baan Barneveld Beheer B.V.) share
interests in the Company to the Foundation while
44
<PAGE> 46
retaining effective voting control over such shares. In order to accomplish
this, Messrs. Baan and Baan established or caused to be established the
Foundation, a company called Baan Investment B.V. ("Baan Investment") and a
share administration foundation called Stichting Administratie Kantoor Baan
Investment (the "Share Administration Foundation"). Jan Baan and J.G. Paul Baan
are the managing directors of Baan Investment and the directors of the Share
Administration Foundation. Messrs. Baan and Baan transferred all of the shares
in the Company from Baan Barneveld Beheer B.V. ("BBB"), a company beneficially
owned and controlled by them, to Baan Investment. All of the shares of Baan
Investment are held by the Share Administration Foundation, which therefore has
the right to vote all the shares of Baan Investment. In exchange for the
acquisition of shares in Baan Investment by the Share Administration Foundation,
the Share Administration Foundation transferred to the Foundation depositary
receipts representing the economic interest in the shares of Baan Investment.
Jan Baan and J.G. Paul Baan, as managing directors of Baan Investment and
directors of the Share Administration Foundation, effectively retain voting
control of these shares of the Company, which constitutes approximately 43% of
the Company's outstanding Common Shares. The ability of Baan Investment to
transfer the shares of the Company is subject to certain approval rights of BBB.
In exchange for the transfer of the shares to Baan Investment, BBB received
a note in the aggregate amount of NLG 50 million. This note bears interest at a
rate of 10% per year. An aggregate of approximately NLG 23.3 million principal
amount of the note was repaid out of the proceeds of Common Shares sold by Baan
Investment pursuant to the Company's initial public offering, and the remainder
of the principal amount of the note was repaid out of the proceeds of the Common
Shares sold by Baan Investment in the Company's 1996 follow-on public offering.
The Company has entered into management agreements with Jan Baan B.V. (a
personal holding company of Jan Baan) and Paul Baan B.V. (a personal holding
company of J.G. Paul Baan). These management agreements each provided for an
initial one year term, with automatic renewal for subsequent one year terms. Jan
Baan B.V. has designated Jan Baan as its nominee to perform the obligations of
Jan Baan B.V. as Managing Director of the Company, and Paul Baan B.V. has
designated J.G. Paul Baan as its Managing Director. The management agreement
with Paul Baan B.V. was terminated in April, 1996. In addition, the Company has
entered into a management agreement with Tom Tinsley that provides for a salary
at an initial rate of $400,000 per year, a target bonus each year equal to 50%
of gross salary, and the grant of an option to purchase 960,000 Common Shares at
a price of $17.905 per share, with a portion vested immediately and the balance
vesting over 48 months. Mr. Tinsley's agreement also provides for a severance
payment, in the event of his termination by the Company without cause, equal to
six months of gross salary plus a six-month pro rata portion of any bonus to
which he would be entitled. In addition, Mr. Tinsley's options will continue to
vest for six months following the date of termination.
The Company has entered into indemnification agreements with its directors
and officers.
During 1996, the Company entered into license distribution agreements with
BBS Holdings B.V. (BBS), a partially owned subsidiary of the Company's principal
shareholder. The distribution agreements allow BBS to sell the Company's
software to small and medium sized enterprises around the world. During the year
ended December 31, 1996, the Company recognized revenues of approximately $14.5
million from BBS.
The Company believes that all related-party transactions entered into with
the Company were on terms no less favorable to the Company than would be
obtained from unrelated third parties. Any future transactions between the
Company and its executive officers, directors and affiliates will be on terms no
less favorable to the Company than can be obtained from unaffiliated third
parties, and any material transactions with such persons will be approved by a
majority of the members of the Company's Supervisory Board.
45
<PAGE> 47
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages 49-67 incorporated herein by reference.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Annual Financial Statements:
Report of Moret Ernst & Young Accountants, Independent Auditors............. 48
Consolidated Balance Sheets................................................. 49
Consolidated Statements of Operations....................................... 50
Consolidated Statements of Shareholders' Equity............................. 51
Consolidated Statements of Cash Flows....................................... 52
Notes to Consolidated Financial Statements.................................. 53
</TABLE>
(B) EXHIBITS
<TABLE>
<S> <C>
1.1 English translation of Articles of Association of the Company lodged with the Chamber
of Commerce and Industry for Arnhem, The Netherlands*
2.1 Indenture, dated as of December 15, 1996, between the Company and Marine Midland Bank,
as Trustee, relating to the 4.5% Convertible Subordinated Notes***
2.2 Form of Notes included in Exhibit 2.1.***
3.1 Form of Indemnification Agreement between the Company and directors and officers*
3.2 1993 Stock Plan, as amended on May 1, 1995, and form of Option Agreement thereunder*
3.3 1995 Director Option Plan*
3.4 1995 Employee Stock Purchase Plan for U.S. Employees*
3.5 1995 Employee Stock Purchase Plan for Non-U.S. Employees*
3.6 Management Agreement between the Company and Jan Baan B.V., together with form of
Agreement among the Company, Jan Baan B.V. and Jan Baan*
3.7 Management Agreement between the Company and Paul Baan B.V., together with form of
Agreement among the Company, Paul Baan B.V. and J.G. Paul Baan*
3.8 Employment Agreement dated as of January 1, 1994 between the Company and Ernst
Jilderda, in Dutch, with summary in English*
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C>
3.9 Agreement dated as of August 3, 1994 between the Company and Boeing*+
3.11 Employment Agreement between the Company and M.R. Rangaswami*
3.12 Share Purchase Agreement between the Company, Baan U.S.A. Inc., 173461 Canada Inc.,
Neil Hindle, Patrick Lavoie and Baan Process Inc. dated as of May 12, 1995*
3.13 Agreement dated May 15, 1995 between the Company and Baan Deutschland GmbH regarding
the Company's acquisition of Baan Deutschland GmbH*
3.14 Employment Agreement between the Company and Tom Tinsley**
3.15 Settlement Agreement and Mutual Release between the Company and David C. Cairns**
3.19 Employment Agreement dated as of September 29, 1994 between the Company and Amal
Johnson*
A.1 Subsidiaries of the Company
A.2 Consent of Moret Ernst & Young Accountants, Independent Auditors
A.3 Statement Regarding Computation of Per Share Earnings
</TABLE>
- - ---------------
* Incorporated by reference to the Registration Statement (Registration
Statement No. 33-91598) on Form F-1 effective on May 19, 1995
** Incorporated by reference to the Registration Statement (Registration
Statement No. 333-00800) on Form F-1 effective on March 1, 1996
*** Incorporated by reference to the Registration Statement (Registration
Statement No. 333-24201) on Form F-3 filed on March 31, 1997
+ Confidential treatment granted.
47
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Baan Company N.V.
We have audited the accompanying consolidated balance sheets of Baan
Company N.V. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Baan Company
N.V. and subsidiaries at December 31, 1995 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with accounting principles
generally accepted in the United States.
MORET ERNST & YOUNG ACCOUNTANTS
Utrecht, The Netherlands
January 24, 1997
48
<PAGE> 50
BAAN COMPANY N.V.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 12,165 $198,031
Marketable securities................................................ 23,562 3,867
Accounts receivable, net of allowance for doubtful accounts of $2,629
in 1995 and $8,187 in 1996........................................ 87,226 150,337
Other current assets................................................. 8,114 11,814
-------- --------
Total current assets......................................... 131,067 364,049
Property and equipment, at cost........................................ 35,388 49,535
Less accumulated depreciation and amortization......................... (13,990) (20,252)
-------- --------
Net property and equipment............................................. 21,398 29,283
Software development costs net of accumulated amortization of $4,698 in
1995 and $8,159 in 1996.............................................. 6,983 16,147
Intangible assets, net of accumulated amortization of $7,564 in 1995
and $13,025 in 1996.................................................. 26,524 24,269
Other non current assets............................................... 649 6,944
-------- --------
Total assets................................................. $186,621 $440,692
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings from banks..................................... $ 3,779 $ 870
Accounts payable..................................................... 23,292 35,446
Accrued liabilities.................................................. 10,728 25,013
Payroll taxes........................................................ 3,422 6,133
Income taxes payable................................................. 5,031 19,664
Other current liabilities............................................ 3,684 4,679
Deferred revenue..................................................... 8,890 11,098
Current portion of long-term debt.................................... 501 639
-------- --------
Total current liabilities.................................... 59,327 103,542
Long-term debt......................................................... 1,714 176,223
Other long-term liabilities............................................ 3,455 4,848
Deferred income taxes.................................................. 8,005 72
Commitments and contingencies
Shareholders' equity:
Common shares, par value -- NLG .01 per share, 350,000,000 shares
authorized; 89,791,297 issued and outstanding in 1996 (86,246,976
in 1995).......................................................... 503 523
Additional paid-in capital........................................... 88,612 97,934
Deferred compensation................................................ (1,125) (372)
Retained earnings.................................................... 22,873 58,658
Accumulated translation adjustment................................... 3,257 (736)
-------- --------
Total shareholders' equity................................... 114,120 156,007
-------- --------
$186,621 $440,692
======== ========
</TABLE>
See accompanying notes.
49
<PAGE> 51
BAAN COMPANY N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
License revenue.......................................... $ 60,348 $112,966 $224,237
Maintenance and service revenue.......................... 46,206 79,887 152,426
Hardware and other revenue............................... 16,370 23,357 11,295
------- ------- -------
Total net revenues............................... 122,924 216,210 387,958
Costs and expenses:
Cost of license revenue.................................. 3,032 5,699 13,074
Cost of maintenance and service revenue.................. 35,116 64,255 125,257
Cost of hardware and other revenue....................... 13,229 18,714 8,895
Sales and marketing...................................... 41,770 57,052 99,932
Research and development................................. 7,987 18,718 42,136
General and administrative............................... 10,110 23,590 33,039
Amortization of intangible assets........................ 2,172 4,701 6,125
Non-recurring operating expenses......................... 4,172 -- --
------- ------- -------
Total costs and expenses......................... 117,588 192,729 328,458
------- ------- -------
Income from operations..................................... 5,336 23,481 59,500
Interest income............................................ -- 1,391 1,137
Interest expense........................................... (1,109) (775) (1,074)
Other income, net.......................................... 118 1,071 --
------- ------- -------
Income before income taxes and minority interest........... 4,345 25,168 59,563
Provision for income taxes................................. 2,171 9,817 23,230
Minority interest in (earnings) of consolidated
subsidiaries............................................. (976) (72) --
------- ------- -------
Net income................................................. $ 1,198 $ 15,279 $ 36,333
======= ======= =======
Net income per share....................................... $ 0.02 $ 0.17 $ 0.38
======= ======= =======
Shares used in computing per share amounts................. 79,388 89,044 94,707
======= ======= =======
</TABLE>
See accompanying notes.
50
<PAGE> 52
BAAN COMPANY N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL ACCUMULATED TOTAL
------------------- PAID-IN DEFERRED RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ADJUSTMENT EQUITY
---------- ------ ---------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993..... 64,234,400 $373 $ 9,565 $ -- $ 6,396 $(1,540) $ 14,794
Issuance of common shares for
cash......................... 9,600,000 56 8,015 -- -- -- 8,071
Issuance of options for
purchase of remaining
minority interest in
subsidiary................... -- -- 200 -- -- -- 200
Issuance of common shares for
purchase of remaining
minority interest in
subsidiary................... 963,520 6 812 -- -- -- 818
Currency translation
adjustment................... -- -- -- -- -- 2,730 2,730
Deferred compensation related
to grant of stock options.... -- -- 866 (866) -- -- --
Net income..................... -- -- -- -- 1,198 -- 1,198
---------- ---- ------- ------- ------- ------- --------
Balance at December 31, 1994..... 74,797,920 435 19,458 (866) 7,594 1,190 27,811
Issuance of common shares for
purchase of remaining
minority interest in
subsidiary................... 600,000 4 4,496 -- -- -- 4,500
Issuance of common shares
pursuant to initial public
offering, net of offering
costs of $7,807 and including
a related tax benefit of
$2,209....................... 8,000,000 50 58,352 -- -- -- 58,402
Issuance of common shares under
stock purchase plan, and upon
exercise of stock options
including $856 tax benefit... 2,849,056 14 5,749 -- -- -- 5,763
Deferred compensation related
to grant of stock options.... -- -- 557 (557) -- -- --
Amortization of deferred
compensation................. -- -- -- 298 -- -- 298
Currency translation
adjustment................... -- -- -- -- -- 2,067 2,067
Net income..................... -- -- -- -- 15,279 -- 15,279
---------- ---- ------- ------- ------- ------- --------
Balance at December 31, 1995..... 86,246,976 503 88,612 (1,125) 22,873 3,257 114,120
Issuance of common shares for
business acquisitions........ 1,459,000 8 -- -- (548) -- (540)
Issuance of common shares under
stock purchase plan, and upon
exercise of stock options
including $797 tax benefit... 2,085,321 12 9,927 -- -- -- 9,939
Reversal of deferred
compensation from stock
option cancellations......... -- -- (605) 605 -- -- --
Amortization of deferred
compensation................. -- -- -- 148 -- -- 148
Currency translation
adjustment................... (3,993) (3,993)
Net income..................... -- -- -- -- 36,333 -- 36,333
---------- ---- ------- ------- ------- ------- --------
Balance at December 31, 1996..... 89,791,297 $523 $ 97,934 $ (372) $58,658 $ (736) $ 156,007
========== ==== ======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
51
<PAGE> 53
BAAN COMPANY N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income...................................................... $ 1,198 $ 15,279 $ 36,333
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 7,286 12,977 18,539
Purchased in-process research and development.............. 486 -- --
Minority interest in earnings of consolidated
subsidiaries............................................. 976 72 --
Provision (benefit) for deferred income taxes.............. (1,575) 2,165 (7,187)
Foreign currency transaction losses........................ 1,877 253 170
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable...................................... (13,235) (49,449) (63,893)
Other current assets..................................... (219) (1,759) (5,546)
Accounts payable......................................... 4,663 10,666 12,200
Accrued liabilities...................................... 2,111 5,188 12,205
Payroll taxes............................................ 352 713 2,899
Income taxes payable..................................... 3,419 2,052 14,023
Other current liabilities................................ (1,565) (1,376) 746
Deferred revenue......................................... 6,644 (1,340) 1,227
-------- -------- --------
Net cash provided by (used in) operating activities............. 12,418 (4,559) 21,716
-------- -------- --------
Investing activities:
Property and equipment purchased................................ (6,858) (17,101) (21,273)
Property and equipment sold..................................... 810 3,152 3,893
Increase in capitalized software development costs.............. (1,721) (3,932) (10,705)
Payment for acquisitions, net of cash acquired.................. (4,122) (9,652) (3,806)
Purchases of marketable securities.............................. -- (33,862) (14,286)
Proceeds from maturities of marketable securities............... -- 10,300 33,982
Other........................................................... 131 1,217 967
-------- -------- --------
Net cash used in investing activities........................... (11,760) (49,878) (11,228)
-------- -------- --------
Financing activities:
Net borrowings (payments) under short-term credit facilities.... 570 (767) (3,249)
Payments on long-term borrowings................................ (3,889) (687) (757)
Issuance costs of convertible subordinated notes................ -- -- (4,375)
Proceeds from issuance of convertible subordinated notes........ -- -- 175,000
Proceeds from issuance of common shares......................... 8,071 61,101 9,142
-------- -------- --------
Net cash provided by financing activities....................... 4,752 59,647 175,761
Effect of foreign currency exchange rates on cash and cash
equivalents................................................... 1,071 70 (383)
-------- -------- --------
Increase in cash and cash equivalents........................... 6,481 5,280 185,866
Cash and cash equivalents at beginning of year.................. 404 6,885 12,165
-------- -------- --------
Cash and cash equivalents at end of year........................ $ 6,885 $ 12,165 $198,031
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................... $ 936 $ 649 $ 445
======== ======== ========
Taxes......................................................... $ -- $ 5,661 $ 12,869
======== ======== ========
Tax benefit related to issuance of common shares................ $ -- $ 3,065 $ 797
======== ======== ========
</TABLE>
See accompanying notes.
52
<PAGE> 54
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The consolidated financial statements are stated in United States dollars
and are prepared under United States generally accepted accounting principles.
These 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
Company's BAAN family of software products has been designed for rapid
implementation, flexibility and scaleability.
The Company sells and supports its products through corporate headquarters
in Putten, The Netherlands and Menlo Park, California, USA, Business Support
Centers in The Netherlands, the United States and India, and direct and indirect
distribution channels.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements consolidate the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
FOREIGN EXCHANGE
Assets and liabilities of the Company's foreign subsidiaries are translated
from their respective functional currencies to United States dollars at year-end
exchange rates. Income and expense items are translated on a quarterly basis at
the average rates of exchange prevailing during the quarter. The adjustment
resulting from translating the financial statements of the Company's foreign
subsidiaries is reflected as an accumulated translation adjustment in
shareholders' equity. Net foreign currency transaction losses are included in
results of operations and were approximately $1,877,000, $253,000 and $170,000
for the years 1994, 1995 and 1996, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the management
of its foreign currency exposures. Realized and unrealized gains and losses on
foreign currency forward contracts are normally marked to market and recognized
in results of operations. Any realized and unrealized gains and losses on
contracts used to hedge intracompany transactions of a long-term investment
nature are included in the accumulated translation adjustment in shareholders'
equity.
REVENUE RECOGNITION
License revenue is derived from software licensing fees. Maintenance and
service revenue is derived from maintenance support services, training and
consulting. Hardware revenue is derived from resales of third party hardware in
connection with licenses of the Company's software. License and hardware revenue
is recognized upon delivery if no significant vendor obligations remain, amounts
are due within one year and collection of the resulting receivable is deemed
probable. Delivery is further defined in certain contracts as delivery of the
product master or first copy for noncancelable product licensing arrangements
under which the customer has certain software reproduction rights. The Company
accrues for any remaining insignificant vendor obligations
53
<PAGE> 55
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and post contract support obligations at the point that revenue from the
software license is recognized. Returns and allowances (which have not been
significant through December 31, 1996) are estimated and provided for at the
time of sale. Service revenue from customer maintenance fees for ongoing
customer support and product updates is recognized ratably over the term of the
maintenance, which is typically twelve months. Payments for maintenance fees are
generally made in advance and are nonrefundable. Service revenue from consulting
and training is billed separately and is recognized when the services are
performed. Costs of third party implementation services are accrued by the
Company as incurred.
SOFTWARE DEVELOPMENT COSTS
Costs related to research, design and development of computer software are
expensed as incurred. Certain software development costs related to completion
of internally developed products are capitalized at the point that technological
feasibility is established, normally at the completion of a detail program
design. Capitalized amounts are reported at the lower of unamortized cost or net
realizable value. These costs are amortized on a product-by-product basis. The
annual amortization expense is the greater of the amount computed using the
ratio of current revenue to the total anticipated revenue for the product or the
straight line method over the estimated life of the product (generally three
years), starting when the product is available for general release to customers.
Amortization of software development costs was approximately $962,000,
$2,138,000 and $2,464,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. Such amortization is included in cost of license revenue.
DEPRECIATION AND AMORTIZATION
Property and equipment and intangible assets are stated at cost.
Depreciation and amortization of such assets is provided on the straight-line
method over the following estimated useful lives:
<TABLE>
<S> <C>
-- Computer equipment................ 3 - 5 years
-- Automobiles....................... 5 years
-- Furniture......................... 5 - 7 years
-- Leasehold improvements............ lesser of lease term or estimated useful life
-- Goodwill.......................... 8 years
-- Customer lists.................... 5 years
-- Assembled workforce............... 7 years
</TABLE>
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). Pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins and Staff policy, for the
periods prior to the Company's May 1995 initial public offering (IPO),
computations include all common and common equivalent shares issued or granted
within twelve months of the IPO as if they were outstanding for all periods
presented 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 amount reported in the balance sheets for cash and cash equivalents
approximates their fair value.
54
<PAGE> 56
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARKETABLE SECURITIES
Debt securities that the Company has both the positive intent and ability
to hold to maturity are carried at amortized cost. Debt securities that the
Company does not have the positive intent and ability to hold to maturity and
all marketable equity 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 designations as
of each balance sheet date. By policy, the Company's investments are primarily
in short term notes. As of December 31, 1996, all such securities were
designated as available-for-sale. Accordingly, these securities are carried at
fair value. As the difference between cost and fair value at December 31, 1996
was immaterial, no adjustments have been made to the historical carrying value
of the investments and no unrealized gains or losses have been recorded as a
separate component of shareholders' equity.
ASSET IMPAIRMENT
The Company recognizes impairment losses on its long-lived assets held for
use when its estimate of the undiscounted future cash flows expected to be
generated by such assets is less than their carrying amount. Measurement of the
impairment loss is based on the fair value of the asset. Generally, fair value
will be determined using valuation techniques such as the present value of the
expected future cash flows. The carrying value of long-lived assets is reviewed
on a regular basis for the existence of facts or circumstances both internally
and externally that may suggest impairment. The Company has not recognized any
impairment losses for the years ended December 31, 1994, 1995 and 1996.
USE OF ESTIMATES
The preparation of 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.
2 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Leasehold improvements................................... $ 862 $ 3,307
Computer equipment....................................... 20,143 35,622
Automobiles.............................................. 4,578 402
Furniture and other...................................... 9,805 10,204
------- -------
$35,388 $49,535
======= =======
</TABLE>
Depreciation and amortization expense related to property and equipment was
$4,152,000, $5,840,000 and $9,795,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
55
<PAGE> 57
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consist of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Goodwill................................................. $11,278 $12,136
Customer lists........................................... 12,145 9,267
Assembled workforce...................................... 3,101 2,866
------- -------
$26,524 $24,269
======= =======
</TABLE>
Amortization expense related to intangible assets was $2,172,000,
$4,701,000 and $6,125,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
4 MARKETABLE SECURITIES
The following is a summary of marketable securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Corporate notes.......................................... $17,614 $3,867
US government agency notes............................... 5,948 --
------- -------
$23,562 $3,867
======= =======
</TABLE>
All securities held as of December 31, 1996 are due within one year. The
gross realized gains for the years ended December 31, 1995 and 1996 have been
immaterial. For the purpose of determining realized gains and losses, the cost
of securities sold is based on specific identification.
5 BORROWING ARRANGEMENTS
CREDIT AGREEMENTS
The Company has a credit facility with a Dutch bank which allows the
Company to borrow up to NLG 40,000,000 ($22,929,000 based on the exchange rate
at December 31, 1996). Certain of the Company's subsidiaries may borrow up to
$10,000,000 under this credit facility. Interest on borrowings under the credit
facility accrues at the Dutch Central Bank's promissory note rate plus 1.5% (a
total of 4% at December 31, 1996) with a minimum interest rate of 4% and is
payable quarterly. Outstanding borrowings under the credit facility at December
31, 1995 and 1996 amounted to $2,884,000 and $0, respectively.
The Company, its Netherlands subsidiaries, and Baan USA, Inc. have pledged
their accounts receivable as collateral for the credit facility. Furthermore,
these entities may not transfer title to any of their assets outside the normal
course of business without the express written consent of the bank.
Certain of the Company's subsidiaries have agreements with their credit
institutions which allow them to carry deficit balances in their demand deposit
accounts. Borrowings under such agreements amounted to $895,000 and $948,000 at
December 31, 1995 and 1996, respectively.
Two of the short term borrowings by the Company's subsidiaries at December
31, 1996 are guaranteed by a standby letter of credit, thereby reducing the
availability of funds to the Company under its NLG 40,000,000 credit facility.
As of December 31, 1996, $899,000 of such borrowings were guaranteed by the
Company. As these borrowings effectively reduce the availability of cash to the
Company from its Dutch bank, they have been presented as a reduction in cash and
cash equivalents in the accompanying financial statements.
The Company's most recent US acquisition (Antalys) has a $2,000,000
revolving line of credit (Line) which matures May 4, 1997. Advances on the Line
are limited to the lesser of $2,000,000 or 60% of Antalys'
56
<PAGE> 58
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts receivable that are less than 90 days old. Interest on the Line accrues
at the lender's announced prime rate plus 1% (a total of 9.25% at December 31,
1996) and is due monthly. The Line is secured by Antalys' accounts receivable.
Borrowings under the Line amounted to $821,000 at December 31, 1996.
The weighted average interest rates on the short-term borrowings were 8.6%
and 19.4% at December 31, 1995 and 1996, respectively.
LONG-TERM DEBT
The Company's long-term debt obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------ --------
<S> <C> <C>
Convertible subordinated notes, 4.50%, due December 15,
2001................................................... $ -- $175,000
Guilder denominated loans, 7.5% to 7.75%, due September
30, 2000 and December 31, 2001......................... 2,119 1,576
Other.................................................... 96 286
------ --------
2,215 176,862
Less current portion..................................... 501 639
------ --------
$1,714 $176,223
====== ========
</TABLE>
In December 1996, the Company issued $175,000,000 of 4.5% unsecured
convertible subordinated notes (Notes) pursuant to an indenture dated as of
December 15, 1996 (Indenture). The Notes are convertible into the Company's
common shares at any time after the 90th day following the last original issue
date of the Notes at a conversion price of $44.00 per share. The Notes are
redeemable by the Company under certain conditions after December 16, 1998 and
at any time after December 16, 1999. Until the Notes are converted or redeemed,
the Company will pay interest semi-annually, commencing June 15, 1997. In
January 1997, the Company issued another $25,000,000 of Notes under the same
terms and conditions. The Notes are subordinated in right of payment to all
existing and future Senior Indebtedness (as defined in the Indenture) of the
Company.
Costs of $4,375,000 incurred in connection with issuing the Notes have been
capitalized and are being amortized to interest expense over the term of the
Notes. Such costs are included in other non current assets in the accompanying
financial statements.
In 1987 and 1988, the Company obtained loans of NLG 2,000,000 and NLG
4,000,000 (Loans), respectively. The Loans collectively require semi-annual
principal payments of NLG 325,000 ($186,000 based on the exchange rate at
December 31, 1996) which began in 1992. The interest rates on the Loans will be
adjusted in 1998 to interest rates which will be comparable to interest rates
offered to similar borrowers as determined by the lender.
The aggregate amount of maturities subsequent to December 31, 1996 for all
long-term debt based on the exchange rates at December 31, 1996 were as follows
(in thousands):
<TABLE>
<S> <C>
1997.............................................. $ 639
1998.............................................. 392
1999.............................................. 344
2000.............................................. 372
2001.............................................. 175,115
--------
$176,862
========
</TABLE>
57
<PAGE> 59
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6 SHAREHOLDERS' EQUITY
COMMON SHARES
In June 1994, the Company issued 9,600,000 common shares at $0.85 to
existing shareholders for approximately $8,071,000. Issuance costs and expenses
were not material. The proceeds of the issuance were used for working capital
requirements.
In May 1995, the Company's shareholders approved an increase in the number
of authorized shares from 10,000,000 to 175,000,000. In connection with this
increase, the shareholders authorized a four-for-one stock split which first
increased the par value to NLG .08 and then split it to NLG .02 per share.
In May 1995, the Company completed its initial public offering (IPO) of
14,600,000 common shares at $8.00 a share, of which 8,000,000 shares were sold
by the Company and 6,600,000 shares were sold by selling shareholders. The
Company received proceeds of approximately $58,402,000 from the IPO, net of
issuance costs of $7,807,000 and included a related tax benefit of $2,209,000.
In May 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. The par value of the common shares decreased from NLG .02 to NLG
.01. All references in the accompanying financial statements to number of
shares, per share amounts, stock option data and market prices of the Company's
common stock have been retroactively restated to reflect the stock split.
The Company is able to declare or pay dividends in any currency or multiple
currencies as deemed appropriate by management, although the Company has no
present intent to declare any dividend.
STOCK PLANS
In December 1993, shareholders approved the 1993 Stock Plan (Plan). Through
this Plan and subsequent amendments, the Company has reserved a total of
16,000,000 common shares for grant thereunder to employees and consultants. The
shares may be authorized but unissued, or reacquired common stock. The number of
shares of common shares covered under the Plan shall be proportionately adjusted
for any increase or decrease in the number of shares issued for which the
Company receives no consideration.
Should granted options expire or become unexercisable for any reason, the
unpurchased shares which were subject thereto shall become available for future
grant under the Plan. The term of each option shall not exceed a period of ten
years from the grant date and each option generally vests over five years. The
Plan expires in 2003. The exercise price is determined by the Plan's
administrator.
In February 1995, the Company adopted the 1995 Employee Stock Purchase
Plans (U.S. ESPP and Non-U.S. ESPP). The U.S. ESPP permits eligible employees of
Baan USA to purchase common shares through payroll deductions of up to the
lesser of 10% of their compensation, or $25,000 in any year. The price of common
shares purchased under the U.S. ESPP will be 85% of the lower of the fair market
value of the Company's common shares on the first or last day of each offering
period. The Non-U.S. ESPP terms are modified for local rules governing such
plans. A total of 2,000,000 common shares are available for grant under the two
Employee Stock Purchase Plans. Approximately 572,000 common shares were issued
under these plans through December 31, 1996.
In March 1995, the Company adopted the 1995 Director Stock Option Plan
(Director Plan). Under the terms of the Director Plan, each person who becomes a
Supervisory Director after July 1, 1995 shall automatically be granted an option
to purchase 64,000 common shares of the Company (Initial Options), with an
additional grant of 16,000 common shares on January 1, of each subsequent year
(Subsequent Options). Initial Option grants vest in four equal annual increments
and the Subsequent Option grants vest in full on the
58
<PAGE> 60
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fourth anniversary of the date of the grant. All options have a term of ten
years and are to be granted at fair market value at the date of grant. In the
event of a merger or sale of the Company, all options granted become exercisable
immediately. The Company has reserved a total of 800,000 common shares for grant
under the Director Plan.
Option activity under the plans, excluding the U.S. ESPP and Non-U.S. ESPP,
was as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE PRICE
FOR GRANT SHARES PER SHARE
---------- ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993........... 8,000,000 -- --
Additional shares authorized for
issuance.......................... 4,000,000 -- --
Granted.............................. (9,636,000) 9,636,000 $ 0.86
Canceled or expired.................. 756,000 (756,000) $ 0.85
---------- ---------- ------
Balance at December 31, 1994........... 3,120,000 8,880,000 $ 0.86
Additional shares authorized for
issuance.......................... 2,800,000 -- --
Granted.............................. (4,260,000) 4,260,000 $ 8.78
Canceled or expired.................. 1,362,000 (1,362,000) $ 1.03
Exercised............................ -- (2,474,000) $ 0.88
---------- ---------- ------
Balance at December 31, 1995........... 3,022,000 9,304,000 $ 4.46
Additional shares authorized for
issuance.......................... 2,000,000 -- --
Granted.............................. (2,881,000) 2,881,000 $ 27.02
Canceled or expired.................. 824,000 (824,000) $ 2.07
Exercised............................ -- (1,887,000) $ 2.99
---------- ---------- ------
Balance at December 31, 1996........... 2,965,000 9,474,000 $ 11.82
========== ========== ======
</TABLE>
As of December 31, 1994, 1995 and 1996, exercisable stock options were
368,000, 1,992,000 and 2,578,000, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - ---------------------------------------------------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING NUMBER AVERAGE PRICE NUMBER AVERAGE PRICE
EXERCISE PRICES CONTRACTUAL LIFE OUTSTANDING PER SHARE EXERCISABLE PER SHARE
- - ---------------- ---------------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.85 - $ 8.00 28 months 5,247,000 $ 1.77 1,899,000 $ 1.72
$13.20 - $24.69 48 months 2,595,000 $ 20.33 565,000 $ 18.89
$26.44 - $36.00 54 months 1,632,000 $ 30.58 114,000 $ 34.46
</TABLE>
The Company recorded for financial statement purposes deferred compensation
expense of $1,423,000 for the difference between the grant price and the deemed
fair value of certain of the Company's common share options granted in the third
and fourth quarters of 1994 and in the first quarter of 1995. This amount is
being amortized over the vesting period of the individual options, generally
five years. Compensation expense was approximately $298,000 and $148,000 for the
years ended December 31, 1995 and 1996, respectively. During 1996, certain
options were canceled which further reduced deferred compensation by $605,000.
At December 31, 1996, deferred compensation totaled $372,000.
59
<PAGE> 61
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" (SFAS No. 123), the Company has
elected to follow Accounting Principles Board's Opinion No. 25 "Accounting for
Stock Issued to Employees" (APB No. 25) in accounting for stock-based awards to
employees. Under APB No. 25, the Company generally recognizes no compensation
expense with respect to such awards.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of SFAS No. 123. The fair value of the Company's stock-based awards
to employees was estimated using a Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
------------- -------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected life (months).......................... 60 56 6 6
Expected volatility............................. 19% 50% 12% 50%
Risk-free interest rate......................... 5.7% 6.1% 5.6% 6.2%
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock
based awards to employees is amortized over the options' vesting period (for
options) and the six-month purchase period (for stock purchases under the ESPP).
The Company's pro forma net income and net income per share for 1995 and 1996 is
as follows (in thousands except for net income per share):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net income............................................... $13,704 $28,654
Net income per share..................................... $ 0.16 $ 0.31
</TABLE>
As SFAS No. 123 is applicable only to awards granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until approximately
1999.
The weighted-average fair value of options granted during 1995 and 1996 was
$4.10 and $13.12, respectively.
7 STATEMENTS OF OPERATIONS INFORMATION
Non-recurring operating expenses for the year ended December 31, 1994,
consisted of (in thousands):
<TABLE>
<S> <C>
Purchased in-process research and development....................... $ 486
Legal costs associated with estimated litigation settlement costs... 2,786
Severance costs and other........................................... 900
------
Total..................................................... $4,172
======
</TABLE>
60
<PAGE> 62
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Severance costs of $900,000 in 1994 arose from the reorganization of the
Company's United States operations. A total of 29 employees were terminated at
that time. These termination amounts were settled in cash during the year and no
liabilities remained at December 31, 1994.
Other income in 1995 arose from the curtailment and settlement gain arising
from the termination of the Company's defined benefit pension plan of
approximately $396,000 and from the gain on the sale of one of the Company's
subsidiaries to its former shareholders of approximately $675,000.
8 INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards Board No. 109. Income (loss) before income taxes and
minority interest consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
The Netherlands............................... $ 5,911 $20,233 $49,229
Rest of the world............................. (1,566) 4,935 10,334
------- ------- -------
Income before income taxes and minority
interest.................................... $ 4,345 $25,168 $59,563
======= ======= =======
</TABLE>
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Current:
The Netherlands.............................. $ 2,357 $4,947 $22,184
Germany...................................... 1,259 2,282 4,393
Other countries.............................. 130 422 3,840
------- ------- -------
Total current........................ 3,746 7,651 30,417
Deferred:
The Netherlands.............................. (1,739) 2,017 (7,410)
Germany...................................... 164 149 223
------- ------- -------
Total deferred....................... (1,575) 2,166 (7,187)
------- ------- -------
Provision for income taxes..................... $ 2,171 $9,817 $23,230
======= ======= =======
</TABLE>
The Company's effective income tax provision differs from The Netherlands'
statutory rate of 35% due to the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Expected tax at statutory rate.................. $1,521 $8,808 $20,847
Amortization of goodwill........................ 386 435 661
Foreign earnings taxed at higher rates.......... 251 512 1,881
Other, net...................................... 13 62 (159)
------ ------ -------
Provision for income taxes...................... $2,171 $9,817 $23,230
====== ====== =======
Effective tax rate.............................. 50% 39% 39%
</TABLE>
61
<PAGE> 63
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Intangible assets....................................... $ 5,491 $ 4,208
Deferred revenues....................................... 3,796 --
Software development costs.............................. 2,048 4,856
------- ------
Total deferred tax liabilities.................. 11,335 9,064
Deferred tax assets:
Expenses not currently deductible....................... 112 975
Net operating losses of foreign subsidiaries............ 3,218 8,017
------- ------
Total deferred tax assets....................... 3,330 8,992
------- ------
Total net deferred tax liabilities........................ $ 8,005 $ 72
======= ======
</TABLE>
At December 31, 1996, the Company had foreign net operating loss
carryforwards of approximately $23,000,000. Approximately $12,000,000 of these
carryforwards have no expiration date and the balance expires in 2000 or later.
For financial accounting purposes, the benefit of these losses has been recorded
as a reduction of the provision for Dutch income taxes in 1994, 1995 and 1996.
No deferred income taxes have been provided for the income tax liability
which may be incurred on repatriation of the undistributed earnings of the
Company's consolidated foreign subsidiaries because the Company intends to
reinvest such earnings indefinitely.
9 FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has strict controls regarding the use of derivative financial
instruments, which is limited to short-term foreign currency forward contracts.
The Company uses these contracts primarily to 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 primary exposures are denominated in European and Asian
currencies. The Company does not hold these derivative financial instruments for
trading purposes.
The Company's foreign currency forward contracts all have maturities of
less than one year. These forward contracts are summarized below (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
European currencies...................................... $ 7,814 $ 61,805
Asian currencies......................................... 4,662 16,187
Other currencies......................................... 1,471 3,150
------- -------
Total.......................................... $ 13,947 $ 81,142
======= =======
</TABLE>
The amounts represent the U.S. dollar equivalent of commitments to sell
foreign currencies.
62
<PAGE> 64
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents............... $ 12,165 $ 12,165 $ 198,031 $ 198,031
Marketable securities................... 23,562 23,562 3,867 3,867
Financial liabilities
Short term borrowings................... 3,779 3,779 870 870
Convertible subordinated notes.......... -- -- 175,000 175,577
Other long term borrowings (including
current portion)..................... 2,215 2,215 1,862 1,862
Off balance sheet instruments
Foreign currency forward contracts...... -- 13,927 -- 80,676
</TABLE>
The estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies as discussed below.
However, considerable judgment is required in interpreting market data to
develop the fair value estimates. Accordingly, the estimates presented above are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange.
Cash equivalents and marketable securities -- The carrying amount
approximates fair value because of the short maturity of these instruments.
Short term borrowings -- The carrying amount approximates fair value
because of the short maturity of these instruments.
Convertible subordinated notes -- The fair value of the Notes was
based on quoted market prices of the Notes.
Other long-term borrowings -- The fair value of these financial
instruments is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Foreign currency forward contracts -- The fair value of the contracts
was based on the estimated amount at which they could be settled based on
quoted exchange rates.
10 CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, marketable
securities, accounts receivable, and financial instruments used in hedging
activities.
The Company places its cash equivalents and marketable securities with high
credit quality financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution.
Credit risk associated with accounts receivable is limited due to the large
number of customers comprising the Company's customer base and their dispersion
among many different industries and geographical regions. The Company does not
require collateral to support customer receivables. The Company also maintains
reserves for potential losses, and all credit losses to date have been within
management's expectations. For the year ended December 31, 1994 the Company
charged a write off of approximately
63
<PAGE> 65
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$250,000 to bad debt expense. For the year ended December 31, 1995, the Company
charged $902,000 to bad debt expense. Bad debt write offs in 1995 were $147,000.
For the year ended December 31, 1996, the Company charged $8,310,000 to bad debt
expense. Bad debt write offs in 1996 were $1,618,000.
In December 1996, the Company entered into an agreement pursuant to which
it sold $17,040,000 of its existing accounts receivable, subject to limited
recourse. Under the terms of the agreement, the purchaser assumed all credit
loss risk. The proceeds from the sale were less than the face amount of the
accounts receivable by an amount which approximates the short-term unsecured
borrowing cost of the Company's customers. The discount from the face amount was
$602,000 and is included in selling and marketing expenses in the accompanying
financial statements. The balance of the sold accounts receivable was
$16,438,000 as of December 31, 1996.
The counterparties to the agreements relating to the Company's foreign
exchange instruments consist of a number of major high credit-quality
international financial institutions. The Company, by policy, limits the
financial exposure and the amount of agreements entered into with any one
financial institution. While the notional amounts of financial instruments are
often used to express the volume of these transactions, the potential accounting
loss on these transactions if all counterparties failed to perform is limited to
the amounts, if any, by which the counterparties' obligations under the
contracts exceed the obligations of the Company to the counterparties.
11 TRANSACTIONS WITH AFFILIATES
During 1996, the Company entered into license distribution agreements with
BBS Holdings B.V. (BBS), a partially owned subsidiary of the Company's principal
shareholder. The distribution agreements allow BBS to sell the Company's
software to small and medium-sized enterprises around the world. During the year
ended December 31, 1996, the Company recognized revenues of approximately
$14,532,000 from BBS.
12 ACQUISITIONS AND DISPOSITIONS
In May 1995, the Company purchased the remaining 40% minority interest in
Baan Deutschland GmbH, a German company, for approximately $12,100,000
consisting of approximately $7,600,000 of cash and 600,000 common shares of the
Company's stock valued at $4,500,000. In October 1995, the Company acquired
certain assets and liabilities of Techno Infinitus Ltd. (Techno), a Japanese
company, for approximately $2,400,000 in cash. In March 1996, the Company
purchased 100% of the outstanding stock of Baan Iberica, a Spanish company, for
approximately $4,700,000 in cash. Baan Deutschland GmbH, Techno (renamed Baan
Japan Ltd.) and Baan Iberica are distributors of the Company's products in
Germany, Japan and Spain, respectively.
All of the above acquisitions were accounted for under the purchase method
and the assets and liabilities were recorded at their fair values on the
acquisition dates. Results of operations include these distributors from the
dates of acquisition.
After allocating a portion of the purchase price for these acquisitions to
tangible assets and liabilities, $8,276,000 was allocated to customer lists,
$2,126,000 to assembled workforce, and $344,000 to developed software and
$10,348,000 to goodwill of which $3,625,000 was the result of the tax effect of
the identified intangible assets.
The following unaudited pro forma financial information assumes the
respective acquisitions occurred at the beginning of the periods in which the
acquisitions took place and, for comparative purposes, at the beginning of the
immediately preceding year. These results have been prepared for informational
purposes only and are not necessarily indicative of the operating results that
would have occurred had the acquisitions
64
<PAGE> 66
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been made as discussed above. In addition, they are not intended to be a
projection of future results. The following information is expressed in
thousands except for net income per share:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues................................. $ 132,192 $ 227,819 $ 387,958
Net income............................... 404 14,105 36,333
Net income per share..................... $ 0.01 $ 0.31 $ 0.38
</TABLE>
The results of all the above periods reflect the amortization of software,
goodwill and other intangible assets arising from the various acquisitions.
In May 1995, the Company entered into an agreement (the "Agreement") with
the former shareholders of Baan Process Inc. Pursuant to such Agreement, the
Company sold all outstanding shares of Baan Process Inc. to the former
shareholders of that company, together with certain identified assets and
liabilities. The Company retained the rights to all of the intellectual property
of Baan Process Inc., the majority of its employees and all of its physical
facilities, operating leases, fixed assets and related capital leases. The
proceeds received by the former shareholders of Baan Process Inc. from sales of
shares in the Company's initial public offering were used to settle the former
shareholders' obligations under the Agreement. The settlement of the terms of
the Agreement resulted in a net gain of approximately $675,000.
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
shares. Berclain is a Canadian software company and a provider of manufacturing
synchronization and scheduling solutions. The business combination was effective
May 31, 1996 and was accounted for as a pooling of interests. In November 1996,
the shareholders of Antalys, Inc. (Antalys) agreed to exchange their shares in
Antalys for 915,000 shares of the Company's common shares. Antalys is an
American software company and a provider of configuration management software
that automates the configuration and pricing for products and services. The
business combination was effective November 30, 1996 and was accounted for as a
pooling of interests. Because Berclain's and Antalys' financial statements were
not material to the consolidated financial statements of the Company, the
Company did not restate any of its consolidated financial statements prior to
the combinations. Consolidation of Berclain and Antalys reduced the Company's
retained earnings by approximately $548,000.
13 COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases for its corporate offices, domestic
distribution center, foreign subsidiary offices, domestic field sales offices,
certain data-processing equipment, telephone equipment, and other office
equipment. Rental expense for operating leases for the years ended December 31,
1994, 1995 and 1996 was approximately $3,527,000, $4,118,000 and $7,659,000,
respectively.
Minimum annual rental commitments under noncancelable operating leases for
periods subsequent to December 31, 1996, including amounts due to affiliates
(based upon the exchange rates at December 31, 1996), are as follows (in
thousands):
<TABLE>
<S> <C>
1997....................................................... $ 10,147
1998....................................................... 8,681
1999....................................................... 5,685
2000....................................................... 4,287
2001....................................................... 3,434
Thereafter................................................. 783
-------
Total minimum rental commitments................. $ 33,017
=======
</TABLE>
65
<PAGE> 67
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Company is involved in 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 condition or results of its
operations.
14 INDUSTRY SEGMENT, GEOGRAPHIC AND OTHER INFORMATION
The Company designs, manufactures, and markets applications software for
business processes and operates in a single industry segment.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
The Netherlands.................................. $ 50,243 $ 71,352 $ 82,622
Germany.......................................... 25,822 39,975 54,073
Other European operations, including South Africa
in 1995 and 1996.............................. 2,564 19,011 50,803
U.S. and Canadian operations..................... 37,747 62,714 147,333
Other international operations................... 6,548 23,158 53,127
-------- -------- --------
Total net revenues....................... $122,924 $216,210 $387,958
======== ======== ========
Transfers between geographic regions (eliminated on
consolidation):
The Netherlands.................................. $ 11,884 $ 39,245 $ 70,469
Germany.......................................... 191 1,006 686
Other European operations, including South Africa
in 1995 and 1996.............................. 502 529 1,513
U.S. and Canadian operations..................... 864 2,335 4,317
Other international operations................... 760 2,086 999
-------- -------- --------
Total.................................... $ 14,201 $ 45,201 $ 77,984
======== ======== ========
Income (loss) from operations:
The Netherlands.................................. $ (2,901) $ (9,990) $ (6,407)
Germany.......................................... 5,327 11,345 22,359
Other European operations, including South Africa
in 1995 and 1996.............................. (1,910) 4,451 9,900
U.S. and Canadian operations..................... 8,573 18,058 44,678
Other international operations................... (833) 4,575 4,137
General corporate expenses....................... (2,920) (4,958) (15,167)
-------- -------- --------
Income from operations................... $ 5,336 $ 23,481 $ 59,500
======== ======== ========
Identifiable assets:
The Netherlands.................................. $ 34,045 $ 75,751 $240,768
Germany.......................................... 15,295 41,335 44,943
Other European operations, including South Africa
in 1995 and 1996.............................. 3,793 16,968 48,858
U.S. and Canadian operations..................... 20,061 35,217 66,373
Other international operations................... 4,393 17,350 39,750
-------- -------- --------
Total identifiable assets................ $ 77,587 $186,621 $440,692
======== ======== ========
</TABLE>
66
<PAGE> 68
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts charged between geographic regions are based on terms similar to
those offered to third parties.
Revenues from Boeing Company amounted to $15,902,000 in 1994. No other
customer accounted for 10% or more of consolidated net revenues in 1994. In 1995
and 1996, the Company had no customer which accounted for 10% or more of
consolidated net revenues.
Sales from The Netherlands to unaffiliated customers in foreign countries
were less than 10% of total revenues from sales to unaffiliated customers in
1994, 1995 and 1996.
15 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1995
Net revenues.......................... $38,869 $47,343 $ 54,448 $ 75,550
Gross margin.......................... 21,769 27,805 32,377 45,591
Income from continuing operations..... 3,665 5,422 5,062 11,020
Net income............................ 2,099 3,273 3,062 6,845
Net income per share.................. 0.03 0.04 0.03 0.07
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Net revenues.......................... $77,926 $88,482 $ 97,681 $ 123,869
Gross margin.......................... 43,370 52,114 61,050 84,198
Income from continuing operations..... 7,099 11,251 15,235 25,978
Net income............................ 4,331 6,863 9,293 15,846
Net income per share.................. 0.05 0.07 0.10 0.17
</TABLE>
67
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BAAN COMPANY N.V.
By: /s/ JAN WESTERHOUD
------------------------------------
Jan Westerhoud
Chief Financial Officer
Date: April 28, 1997
68
<PAGE> 70
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE NUMBER
- - ------- ------------------------------------------------------------------------- -----------
<S> <C> <C>
A.1 Subsidiaries of the Company..............................................
A.2 Consent of Moret Ernst & Young Accountants, Independent Auditors.........
A.3 Statement Regarding Computation of Per Share Earnings....................
</TABLE>
69
<PAGE> 71
EXHIBIT A.1
The following is a list of all the subsidiaries of the Company:
Baan International B.V.
Baan Development B.V.
Baan Software B.V.
Baan Austria GmbH
Baan (Schweiz) AG
Baan Nederland B.V.
Baan Belgium N.V.
Baan France S.A.
Baan Nordic AB
Baan UK Ltd.
Baan Deutschland GmbH
Tech @ Spree Software Technologies GmbH
TAS Tele-Anwender-Service GmbH
Baan South Africa (Proprietary) Limited
Baan U.S.A., Inc.
Baan Canada, Inc.
Baan Latin America, Inc.
Baan Brasil Sistemas de Informatica Ltda.
Baan Mexico, S.A. de C.V.
Baan Mexico Servicios, S.A. de C.V.
Baan Argentina Ltda.
Baan Colombia Ltda.
Baan Venezuela, S.A.
Baan Info Systems India Pvt. Ltd.
Baan Software India Pvt. Ltd.
Baan Japan Co., Ltd.
Baan (Malaysia) Sdn. Bhd.
Baan Singapore Pte. Ltd.
Baan Australia Pty. Ltd.
Baan Iberica I.S., S.A.
Baan Polska Sp. Z.o.o.
Baan Italia S.r.1.
Baan Chile Sistemas de Informatica Ltda.
Baan China Limited
Baan Peru, S.A.
Berclain Group Inc.
Berclain Canada Inc.
Berclain USA Ltd.
Berclain (Deutschland) GmbH
Antalys, Inc.
70
<PAGE> 72
EXHIBIT A.2
CONSENT OF MORET ERNST & YOUNG ACCOUNTANTS,
INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-92502) pertaining to the 1993 Stock Plan, the 1995 Director
Option Plan, the 1995 Employee Stock Purchase Plan for U.S. Employees and the
1995 Employee Stock Purchase Plan for Non-U.S. Employees of our report dated
January 24, 1997, with respect to the consolidated financial statements of Baan
Company N.V. included in the Annual Report (Form 20-F) for the year ended
December 31, 1996.
MORET ERNST & YOUNG ACCOUNTANTS
Utrecht, The Netherlands
April 28, 1997
71
<PAGE> 73
EXHIBIT A.3
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
PRIMARY: 1994 1995 1996
- - --------------------------------------------------------------- ------ ------- -------
<S> <C> <C> <C>
Common Shares outstanding...................................... 64,234 77,766 87,920
Common Shares options (when dilutive).......................... 764 7,680 6,787
Shares related to SAB No. 64 and 83............................ 14,390 3,598 --
------ ------- -------
Total weighted average common and common equivalent shares
outstanding.................................................. 79,388 89,044 94,707
====== ======= =======
Net income..................................................... $1,198 $15,279 $36,333
====== ======= =======
Net income per share........................................... $ 0.02 $ 0.17 $ 0.38
====== ======= =======
</TABLE>
Fully diluted information is not presented as there would be no impact on
earnings per share data.
72
