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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
BAAN COMPANY N.V.
Vanenburgerallee 13
3882 RH Putten
The Netherlands
and
4600 Bohannon Drive
Menlo Park, California, USA
(Addresses of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F
From 20-F X Form 40-F .
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes No X .
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
82 - N.A. .
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BAAN COMPANY N.V.
Form 6-K
TABLE OF CONTENTS
Page
Financial Information (unaudited):
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Exhibit Index 24
Exhibit A. Statement of Computation of Earnings per Share 25
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 199,172 $ 198,031
Short-term marketable securities .......................................... 38,990 3,867
Accounts receivable, net of allowance for doubtful accounts
of $10,053 in 1997 and $8,187 in 1996 .................................... 170,567 150,337
Other current assets ....................................................... 16,402 11,814
--------- ---------
Total current assets ..................................................... 425,131 364,049
Property and equipment, at cost .............................................. 56,562 49,535
Less accumulated depreciation and amortization ............................... (22,663) (20,252)
--------- ---------
Net property and equipment ................................................... 33,899 29,283
Software development costs, net .............................................. 17,361 16,147
Intangible assets, net ....................................................... 22,384 24,269
Other non current assets ..................................................... 8,011 6,944
--------- ---------
Total assets ............................................................. $ 506,786 $ 440,692
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings from banks ........................................... $ 38 $ 870
Accounts payable ........................................................... 31,180 35,446
Income taxes payable ....................................................... 24,675 19,664
Accrued and other current liabilities ...................................... 47,498 35,825
Deferred revenue ........................................................... 25,205 11,098
Current portion of long-term debt .......................................... 620 639
--------- ---------
Total current liabilities ................................................ 129,216 103,542
Long-term debt ............................................................... 200,986 176,223
Other long-term liabilities .................................................. 5,494 4,848
Deferred income taxes ........................................................ - 72
Shareholders' equity:
Common shares, par value - NGL .01 per share, 350,000,000 shares authorized;
90,885,678 issued and outstanding in 1997
(89,791,297 in 1996) ..................................................... 529 523
Additional paid-in capital ................................................. 103,004 97,934
Deferred compensation ...................................................... (425) (372)
Retained earnings .......................................................... 70,975 58,658
Accumulated translation adjustment ......................................... (2,993) (736)
--------- ---------
Total shareholders' equity ............................................... 171,090 156,007
--------- ---------
$ 506,786 $ 440,692
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31,
----------------------
1997 1996
-------- -------
<S> <C> <C>
Net revenues:
License revenue ................................. $ 77,369 $40,066
Maintenance and service revenue ................. 46,186 32,797
Hardware and other revenue ...................... 317 5,063
-------- -------
Total net revenues ............................ 123,872 77,926
Costs and expenses:
Cost of license revenue ......................... 5,293 2,793
Cost of maintenance and service revenue ......... 35,257 27,825
Cost of hardware and other revenue .............. 165 3,938
Sales and marketing ............................. 33,685 19,929
Research and development ........................ 17,429 7,752
General and administrative ...................... 10,455 7,270
Amortization of intangible assets ............... 1,448 1,443
-------- -------
Total costs and expenses ...................... 103,732 70,950
-------- -------
Income from operations ............................ 20,140 6,976
Interest income, net .............................. 51 123
-------- -------
Income before income taxes ........................ 20,191 7,099
Provision for income taxes ........................ 7,874 2,768
-------- -------
Net income ........................................ $ 12,317 $ 4,331
======== =======
Net income per share .............................. $ 0.13 $ 0.05
======== =======
Shares used in computing per share amounts ........ 97,672 93,504
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................................... $ 12,317 $ 4,331
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 5,825 4,369
Benefit for deferred income taxes ................................. (343) (105)
Foreign currency transaction (gains) losses ....................... (3,962) 41
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable .............................................. (21,213) (20,167)
Other current assets ............................................. (4,680) (4,786)
Accounts payable ................................................. (2,325) (3,747)
Accrued and other current liabilities ............................ 14,277 8,024
Income taxes payable ............................................. 6,026 1,451
Deferred revenue ................................................. 15,103 9,307
--------- --------
Net cash provided by (used in) operating activities ................. 21,025 (1,282)
--------- --------
INVESTING ACTIVITIES
Property and equipment purchased ..................................... (7,863) (4,814)
Property and equipment sold .......................................... - 595
Increase in capitalized software development costs ................... (2,718) (1,753)
Payment for acquisition, net of cash acquired ........................ (1,519) (4,698)
Purchases of marketable securities ................................... (42,140) -
Proceeds from maturities of marketable securities .................... 7,017 16,050
Other ................................................................ 109 (442)
--------- --------
Net cash provided by (used in) investing activities .................. (47,114) 4,938
--------- --------
FINANCING ACTIVITIES
Net payments under short-term credit facilities ...................... (459) (3,781)
Payments on long-term borrowings ..................................... (98) (268)
Proceeds from issuance of convertible subordinated notes ............. 25,000 -
Issuance costs of convertible subordinated notes ..................... (875) -
Proceeds from issuance of common shares .............................. 4,904 869
--------- --------
Net cash provided by (used in) financing activities .................. 28,472 (3,180)
Effect of foreign currency exchange rates on cash and cash
equivalents .......................................................... (1,242) (68)
--------- --------
Increase in cash and cash equivalents .................................. 1,141 408
Cash and cash equivalents at beginning of the period ................... 198,031 12,165
--------- --------
Cash and cash equivalents at end of the period ......................... $ 199,172 $ 12,573
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The condensed consolidated financial statements are stated in United
States dollars and are prepared under United States generally accepted
accounting principles for interim financial statements. These condensed
consolidated financial statements do not represent the Dutch statutory financial
statements.
BUSINESS
Baan Company N.V. (the Company or Baan) is incorporated in The
Netherlands. The Company provides open systems, client/server-based Enterprise
Resource Planning (ERP) software. ERP systems permit the enterprise-wide
management of resources, and the integration of sales forecasting, component
procurement, inventory management, manufacturing control, project management,
distribution and transportation, finance and other functions across an
organization.
The Company sells and supports its product 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.
INTERIM FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements at March
31, 1997 and for the three months ended March 31, 1997 and 1996 are unaudited
but include all adjustments (consisting only of normal recurring adjustments)
which the Company considers necessary for a fair presentation of the
consolidated financial position at such date and the consolidated operating
results and cash flows for those periods. Consolidated results for the three
month period ended March 31, 1997 are not necessarily indicative of results that
may be expected for the entire year. The condensed consolidated balance sheet at
December 31, 1996 has been derived from the audited consolidated financial
statements at that date. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission Rules and Regulations. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 1996
included in the Company's Form 20-F filed with the Securities and Exchange
Commission.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
FOREIGN EXCHANGE
Assets and liabilities of the Company's foreign subsidiaries are
translated from their respective functional currencies to United States dollars
at period-end exchange rates. Income and expense items are translated on a
quarterly basis at the average rates of exchange prevailing during the quarter.
The adjustment resulting from translating the financial statements of the
Company's foreign subsidiaries is reflected as an accumulated translation
adjustment in shareholders' equity. Foreign currency transaction gains and
losses are included in results of operations.
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.
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).
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
increase in primary earnings per share of $0.01 for the first quarter ended
March 31, 1997 and will not have any impact for the quarter ended March 31,
1996. The Company has not yet determined what the impact of Statement 128 will
be on the calculation of fully diluted earnings per share.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid debt instruments
with maturities of 90 days or less at the date of purchase to be cash
equivalents. The carrying amounts reported in the balance sheets for cash and
cash equivalents approximates their fair value.
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 March 31, 1997, 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 March 31, 1997, 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 relating to its long-lived assets since 1993.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 ACQUISITIONS
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, (see Note 6 - Subsequent Event).
3 LITIGATION
The Company is involved in legal actions arising in the ordinary
course of business. While the outcome of such matters is 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.
4 LONG-TERM DEBT
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
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $5,000,000 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.
5 SALE OF ACCOUNTS RECEIVABLE
In March 1997, the Company entered into an agreement and assigned
additional accounts receivable under a previous agreement totaling $13,808,000,
subject to limited recourse. Under the terms of the agreements, 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
was $507,000 and is included in selling and marketing expenses in the
accompanying financial statements.
6 SUBSEQUENT EVENT
On May 13, 1997, the Company signed a definitive agreement to acquire
all of the outstanding shares of Aurum Software, Inc. ("Aurum"). Aurum is a
provider of customer relationship management software.
Under the terms of the agreement, which has been approved by the Board
of Directors of each firm, Baan will issue approximately .3559 Baan common
shares for each outstanding share of Aurum stock, representing an aggregate of
approximately 4.2 million Baan common shares, subject to adjustments in certain
events. Outstanding options to purchase Aurum stock will be assumed and
converted into Baan options at the same exchange ratio. The transaction is
valued at $21.00 per share of Aurum stock, or an aggregate value of
approximately $250 million, based upon the firms respective closing stock prices
on May 9, 1997.
The acquisition is expected to be accounted for as a pooling of
interests and to qualify as a tax free reorganization. The acquisition is
subject to the approval of Aurum's stockholders and appropriate government
agencies, and is expected to close in the third quarter of 1997. At closing, the
Company expects to recognize a one-time charge related to certain acquisition
costs and related expenses.
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BAAN COMPANY N.V.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains trend
analysis and other forward-looking statements 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 "Certain Factors That May Effect Future Results of Operations" in
this Form 6K, and the factors discussed in the Company's Form 20-F filed with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal source of revenues consists of license fees and
related services, including consulting, implementation, training and
maintenance. In addition, in The Netherlands and certain other European markets,
the Company has historically resold third party hardware on an original
equipment manufacturer ("OEM") basis to meet the needs of customers in these
markets for total system solutions. License revenues are derived from software
licensing fees, and are recognized upon delivery if no significant vendor
obligations remain, amounts are due within one year, and collection of the
resulting 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.
A significant portion of the Company's business is conducted in
currencies other than the U.S. dollar (the currency in which its financial
statements are stated), primarily the Dutch guilder and the German mark. The
Company has historically recorded a majority of its expenses in guilders,
especially research and development expenses, and a substantial majority of its
revenues have been denominated in guilders, marks and, more recently U.S.
dollars. As a result, appreciation in the value of the guilder relative to the
value of the U.S. dollar
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could adversely affect operating results. Foreign currency transaction gains and
losses arising from normal business operations (for example, gains and losses
arising from the change in foreign exchange rates between the dates of booking
revenues and collecting the foreign currency receivable) are credited to or
charged against earnings in the period incurred. As a result, fluctuations in
the value of the currencies in which the Company conducts its business relative
to the U.S. dollar have caused and will continue to cause currency transaction
gains and losses. The Company uses derivative financial instruments on a
selected basis to help offset the effects of exchange rate changes on
intracompany cash flow exposures denominated in foreign currencies. These
exposures include firm trade accounts, royalties, service fees and loans. The
Company continues to evaluate its currency management policies. Notwithstanding
the measures the Company has adopted, due to the number of currencies involved,
the constantly changing currency exposures and the substantial volatility of
currency rates, there can be no assurance that the Company will not experience
currency losses in the future, nor can the Company predict the effect of
exchange rate fluctuations upon future operating results.
NET REVENUES
Net revenues increased by 59% ($45.9 million) to $123.9 million in the
three month period ended March 31, 1997 compared to $77.9 million in the
corresponding period in 1996. EMEA (Europe, Middle East and Africa) net revenues
were 45% and 53% of total net revenues for the three month periods ended March
31, 1997 and 1996, respectively. North America's percentages of net revenues
were 39% for the first quarter of 1997 compared to 33% for the same period in
1996. Latin America and Asia Pacific combined contributed 16% for the three
month period ended March 31, 1997 compared to 14% for the same period in 1996.
The shift in net revenue percentages in the geographies reflects the Company's
continued expansion of operations in the U.S. and internationally.
License revenues increased by 93% ($37.3 million) to $77.4 million for
the three month period ended March 31, 1997 compared to $40.1 million in the
corresponding period in 1996. License revenues as a percentage of total net
revenues were 62% for the quarter ended March 31, 1997 compared to 51% for the
corresponding period in 1996. The increase in license revenues and in license
revenue as a percentage of total net revenues resulted from both an increase in
the number of software licenses and a higher transaction size, and reflected the
broader market trend toward client/server computing, continued market acceptance
of the Company's products, and the expansion of the Company's operations,
particularly in North America, Latin America and Asia Pacific.
Maintenance and service revenues increased 41% ($13.4 million) to $46.2
million for the three month period ended March 31, 1997 compared to $32.8
million for the same period in 1996. This increase was 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 37% and 42% for the
quarters ended March 31, 1997 and 1996, respectively.
In addition, the increase of license revenue and maintenance and
service revenue, as a percentage of total net revenues, reflected the decrease
in hardware and other revenue in the comparative three month periods.
Hardware and other revenues decreased 94% to $317,000 in the three
month period ended March 31, 1997 from $5.1 million for the same period in 1996.
The decrease in hardware
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and other revenue reflects the Company's continued expansion into international
markets where customers require complete hardware and software installations
less frequently. Further, the Company has sought to de-emphasize the resale of
third party hardware on an OEM basis.
GROSS PROFIT
The following table, expressed in thousands, sets forth, for the
periods indicated, gross profit and gross margin for each revenue category:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---- ----
<S> <C> <C> <C> <C>
$ % $ %
- - - -
Gross profit:
License ........................ $72,076 93% $37,273 93%
Maintenance and service ........ 10,929 24 4,972 15
Hardware and other ............. 152 48 1,125 22
------- -------
Total gross profit ............. $83,157 67% $43,370 56%
======= =======
</TABLE>
The Company's gross profit as a percentage of total net revenues was
67% and 56% for the three month periods ended March 31, 1997 and 1996,
respectively. Gross margin on license revenue was 93% for the three month
periods ended March 31, 1997 and 1996. Cost of license revenue consists
primarily of amortization of capitalized software, the cost of third party
software and the cost of media and freight. Amortization of capitalized software
amounted to $1,287,000 and $686,000 for the three month periods ended March 31,
1997 and 1996, respectively.
Gross margin on maintenance and service revenues was 24% and 15% for
the three month periods ended March 31, 1997 and 1996, respectively. The gross
margin increase for the first quarter of 1997 compared to the same period in
1996 was primarily due to improvements in utilization rates and pricing
structure. Cost of maintenance and service revenues consist primarily of cost of
product support, consulting and training, including associated software
engineering activities.
SALES AND MARKETING
The Company's sales and marketing expenses increased 69% ($13.8
million) to $33.7 million in the three month period ended March 31, 1997 from
$19.9 million for the corresponding period in 1996. The increase reflects 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. Sales and marketing expenses included a net foreign currency
transaction gain of $3,962,000 in the first quarter of 1997, which was offset by
a charge to bad debt expense of $4.0 million to increase the general allowance
for bad debt. As a percentage of total net revenues, sales and marketing
expenses were 27% for the three month period ended March 31, 1997 compared to
26% for the same period in 1996. The Company
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expects that sales and marketing expenses will grow in absolute dollars as the
Company continues to expand its sales and distribution channels and customer
support organization.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 125% ($9.7 million) to
$17.4 million for the three month period ended March 31, 1997 from $7.8 million
for the same period in 1996. As a percentage of total net revenues, research and
development expenses were 14% and 10% for the three month periods ended March
31, 1997 and 1996, respectively. These increases 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. The Company capitalized 13% of aggregate research and
development costs in the three month period ended March 31, 1997 compared to 18%
for the corresponding period in 1996. Capitalization rates may vary from period
to period because of the timing of specific significant projects. Aggregate
research and development costs including both research and development costs and
capitalized software costs were $20.1 million and $9.5 million for the three
month periods ended March 31, 1997 and 1996, 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 in
absolute dollars over time.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 44% ($3.2 million) to
$10.5 million for the three month period ended March 31, 1997 from $7.3 million
for the comparable period in 1996. The increase reflects the expansion of the
Company's operations with 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 included in establishing administrative and
finance support personnel in multiple locations. As a percentage of total net
revenues, general and administrative expenses were 8% and 9% for the three month
periods ended March 31, 1997 and 1996, respectively. The Company expects that
general and administrative expenses will continue to increase in absolute
dollars in 1997 as the Company continues to expand its finance staff and install
additional internal systems to support the Company's growth in operations.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets remained unchanged at $1.4 million
for the three month periods ended March 31, 1997 and 1996. The Company expects
that amortization of intangible assets associated with prior acquisitions will
result in charges of approximately $6.4 million per year through 1998 and will
decline in following years.
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NET INTEREST INCOME
Net interest income decreased to $51,000 for the first quarter of 1997,
compared to $123,000 for the same period in 1996. Interest earned in the first
quarter of 1997 from the investment of the proceeds from the convertible notes
was substantially offset by interest expense on those same notes. The decrease
was primarily due to interest expense on working capital lines of credit and
long-term debt.
INCOME TAXES
The effective tax rate for the three months ended March 31, 1997 and
1996 was 39%. The effective tax rates were higher than the statutory rate
primarily due to operating profits in higher tax jurisdictions and the
nondeductible status of goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had cash, cash equivalents and
marketable securities of $238.2 million and working capital of $295.9 million.
In the first three months of 1997, the Company's operating activities provided
net cash of $21.0 million. Net income before depreciation and amortization of
intangibles and the increase of deferred revenues was partially offset by the
growth of accounts receivable in the first quarter of 1997. Deferred revenue
increased by $14.1 million during the quarter to $25.2 million primarily due to
the annual maintenance billing that was completed in the first quarter. Accounts
receivable net of allowance for doubtful accounts was $170.6 million at March
31, 1997 compared to $150.3 million at December 31, 1996. In March 1997, the
Company assigned $13.8 million of its existing accounts receivables, subject to
limited recourse. See Note 5 of the Notes to Condensed Consolidated Financial
Statements. Accounts receivable days' sales outstanding (the ratio of the
quarter-end accounts receivable balance to the combination of quarterly revenues
plus the change in deferred revenue during the quarter, multiplied by 90) was
111 days for both the quarter ended March 31, 1997 and the year ended December
31, 1996.
Investing activities used $47.1 million in the three month period ended
March 31, 1997. Purchases of marketable securities of $42.1 million and
equipment purchases of $7.9 million were only partially offset by proceeds from
maturities of marketable securities of $7.0 million. As of May 14, 1997, with
the exception of the semi-annual interest payments on the convertible debt of
$4.5 million per payment and additions of property and equipment, the Company
had no significant capital commitments.
Financing activities provided cash of $28.5 million which was primarily
because of the additional issuance of $25 million of unsecured convertible
subordinated notes and proceeds of $4.9 million from the issuance of common
stock. 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
($21 million, based on the exchange rate at March 31, 1997). In addition,
certain of the Company's other subsidiaries have additional bank credit
agreements for relatively small amounts. Interest rates for all of these
facilities range from approximately 4.25% to 30%. As of March 31, 1997, the
Company had short-term borrowings of $268,000 against its lines of
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credit with $230,000 of the borrowings presented as a reduction in cash as they
effectively reduce the available cash to the Company from its Dutch bank.
The Company believes that existing cash and cash equivalents and
marketable securities, together with 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. In addition, continued growth in the Company's business may from time
to time require additional capital. There can be no assurance that additional
capital will be available to the Company if and when needed, or that such
additional capital will be available on acceptable terms.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
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. Due to the Company's limited operating history on a
significant international scale, the rate of growth of the Company's business
and the variability of operating results in past periods, there can be no
assurance that the Company's revenues will continue at the current level or will
grow, or that the Company will be able to sustain profitability on a quarterly
or annual basis.
Variability of Quarterly Operating Results
The Company's net revenues and operating results can vary, sometimes
substantially, from quarter to quarter. The Company'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 March 31,
1997 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 assurance 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 and indirect 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.
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The Company believes that fourth quarter revenues have historically
been positively impacted by year-end capital purchases by some large 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 license
revenues in any year being lower than license revenues in the immediately
preceding fourth quarter.
North American Operations
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. As a result of this expansion, the Company must continue to implement
and improve its operational and financial control systems and to expand, train
and manage its employee base and relationships with third party implementation
providers, in order to provide high-quality training, product implementation and
other customer services. These factors have placed, and are expected to continue
to place, a significant strain on the Company's management and operations. There
can be no assurance that the Company's North American operations will continue
to be successful or that the Company will be able to manage effectively the
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. 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.
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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 was
increased by an additional $25 million (for a total of $200 million convertible
notes) when an over-allotment option was exercised in January 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 system 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 in 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. Further, 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
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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
relationship 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 to increase substantially, which could result in price
reductions and loss of market share. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors or that
competition will not have a material adverse effect on the Company's business.
Rapid Technological Change and New Products
The market for the Company's software products is characterized by
rapid technological advances, evolving industry standards in computer hardware
and software technology, changes in customer requirements, and frequent new
product introductions and enhancements. The Company's future success will depend
upon its ability to continue to enhance its current product line and to develop
and introduce new products that keep pace with technological developments,
satisfy increasingly sophisticated customer requirements and achieve market
acceptance. In particular, the Company must continue to anticipate and respond
adequately to advances in RDBMS software and desktop computer operating systems
such as Microsoft Windows and its 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
BAAN family of software products approximately every two years with interim
releases on a more frequent basis. As a result of the complexities inherent in
both the RDBMS and client/server environments and the broad functionality and
performance demanded by customers for ERP products, major new product
enhancements and new products can require long development and testing periods
to achieve market acceptance. The Company has experienced delays in the
scheduled introduction of new and enhanced products. In addition, software
programs as complex as those offered by the Company may contain undetected
errors or "bugs" when first introduced or as new versions are released that,
despite testing by the Company, are discovered only after a product has been
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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.
Integration of Acquisitions
As part of its strategy to complement and expand its existing business
and product offerings, the Company has recently entered into several acquisition
agreements with third parties. In November 1996, the Company completed the
acquisition of Antalys, Inc. ("Antalys"), a provider of order management and
product configuration software. In addition, in May 1997, the Company signed an
agreement to acquire Aurum Software, Inc. ("Aurum"), a provider of
enterprise-wide sales-force automation software and distribution services. The
Company expects to continue to pursue acquisitions of other companies with
potentially complementary product lines, technologies and businesses. Although
the Company currently has no agreement, understanding or arrangement with
respect to any additional acquisitions, the Company evaluates potential
strategic business opportunities which may be material in size and scope on an
ongoing basis.
Acquisitions, including those entered into by the Company to date,
involve a number of risks and difficulties, including technology acceptance,
expansion into new geographic markets and business areas, the diversion of
management's attention, the assimilation of the operations and personnel of
acquired companies and the integration of acquired companies' business and
financial reporting systems with those of the Company. There can be no assurance
that the Company will successfully integrate the operations of Antalys and Aurum
or other business acquisitions. If any such acquisition were to be unsuccessful,
the Company's results of operations could be materially adversely affected.
Further, possible future acquisitions by the Company could result in dilutive
issuances of debt or equity securities, the incurrence of additional debt and
contingent liablilities and additional amortization expenses related to goodwill
and other intangible assets, which could adversely affect the Company's results
of operations.
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Additional considerations
Due to the factors noted above, as well as other factors that may
affect the Company's operating results, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of, or be able to confirm, any such shortfalls until late
in the fiscal quarter, or following the end of the quarter because license fees
are often recorded late in a quarter. Finally, the stock prices for many
companies in the technology and emerging growth sector have experienced wide
fluctuations, which have often been unrelated to individual company operating
performance. The Company participates in a dynamic industry and the Company's
stock price may experience significant volatility.
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SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAAN COMPANY N.V.
By: /s/ Jan Westerhoud
------------------------------
Jan Westerhoud
Chief Financial Officer
Date: May 16, 1997
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BAAN COMPANY N.V.
EXHIBIT INDEX
Page
Exhibit A Statement of Computation of Earnings per Share 25
24
<PAGE> 1
BAAN COMPANY N.V.
EXHIBIT A -
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
------- -------
<S> <C> <C>
Primary (i)
Weighted average common shares
outstanding ............................ 90,361 86,635
Dilutive stock options ....................... 7,311 6,869
------- -------
97,672 93,504
======= =======
Net income ................................... $12,317 $ 4,331
======= =======
Net income per share ......................... $ 0.13 $ 0.05
======= =======
</TABLE>
(i) The difference between primary and fully diluted earnings per share is
immaterial.
25
