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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 June 30, 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
<TABLE>
<CAPTION>
Page
Financial Information (unaudited):
<S> <C>
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 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 23
Exhibit 11.1 Statement of Computation of Earnings per Share 24
</TABLE>
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1997 1996
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 171,073 $ 198,031
Short-term marketable securities ........................................... 38,632 3,867
Accounts receivable, net of allowance for doubtful accounts
of $8,441 in 1997 and $8,187 in 1996 ..................................... 221,453 150,337
Other current assets ....................................................... 22,230 11,814
--------- ---------
Total current assets ..................................................... 453,388 364,049
Property and equipment, at cost .............................................. 61,454 49,535
Less accumulated depreciation and amortization ............................... (25,862) (20,252)
--------- ---------
Net property and equipment ................................................... 35,592 29,283
Software development costs, net .............................................. 20,881 16,147
Intangible assets, net ....................................................... 20,760 24,269
Other non current assets ..................................................... 9,685 6,944
--------- ---------
Total assets ............................................................. $ 540,306 $ 440,692
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings from banks ........................................... $ 37 $ 870
Accounts payable ........................................................... 32,959 35,446
Income taxes payable ....................................................... 32,613 19,664
Accrued and other current liabilities ...................................... 52,578 35,825
Deferred revenue ........................................................... 22,394 11,098
Current portion of long-term debt .......................................... 578 639
--------- ---------
Total current liabilities ................................................ 141,159 103,542
Long-term debt ............................................................... 200,928 176,223
Other long-term liabilities .................................................. 5,254 4,920
Shareholders' equity:
Common shares, par value - NLG .01 per share, 350,000,000 shares authorized;
91,399,453 issued and outstanding in 1997 (89,791,297 in 1996) ........... 532 523
Additional paid-in capital ................................................. 109,307 97,934
Deferred compensation ...................................................... (381) (372)
Retained earnings .......................................................... 87,361 58,658
Accumulated translation adjustment ......................................... (3,854) (736)
--------- ---------
Total shareholders' equity ............................................... 192,965 156,007
--------- ---------
$ 540,306 $ 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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
License revenue ........................ $ 92,295 $ 49,729 $169,664 $ 89,795
Maintenance and service revenue ........ 53,552 35,583 99,738 68,380
Hardware and other revenue ............. 224 3,170 541 8,233
-------- -------- -------- --------
Total net revenues ................... 146,071 88,482 269,943 166,408
Costs and expenses:
Cost of license revenue ................ 8,289 3,538 13,582 6,331
Cost of maintenance and service revenue 39,885 30,339 75,142 58,164
Cost of hardware and other revenue ..... 77 2,491 242 6,429
Sales and marketing .................... 37,164 22,370 70,849 42,299
Research and development ............... 20,879 9,181 38,308 16,933
General and administrative ............. 12,106 7,825 22,561 15,095
Amortization of intangible assets ...... 1,386 1,532 2,834 2,975
-------- -------- -------- --------
Total costs and expenses ............. 119,786 77,276 223,518 148,226
-------- -------- -------- --------
Income from operations ................... 26,285 11,206 46,425 18,182
Interest income, net ..................... 578 45 629 168
-------- -------- -------- --------
Income before income taxes ............... 26,863 11,251 47,054 18,350
Provision for income taxes ............... 10,477 4,388 18,351 7,156
-------- -------- -------- --------
Net income ............................... $ 16,386 $ 6,863 $ 28,703 $ 11,194
======== ======== ======== ========
Net income per share ..................... $ 0.17 $ 0.07 $ 0.29 $ 0.12
======== ======== ======== ========
Shares used in computing per share amounts 98,298 94,543 97,985 94,024
======== ======== ======== ========
</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>
Six Months Ended
June 30,
1997 1996
--------- ---------
<S> <C> <C>
Operating Activities
Net income ........................................................... $ 28,703 $ 11,194
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 11,166 8,814
Benefit for deferred income taxes ................................. (131) (421)
Foreign currency transaction gains ................................ (4,750) (136)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable .............................................. (73,861) (25,302)
Other current assets ............................................. (10,048) (6,185)
Accounts payable ................................................. (276) 1,889
Accrued and other current liabilities ............................ 19,862 10,506
Income taxes payable ............................................. 14,024 2,492
Deferred revenue ................................................. 12,704 6,009
--------- ---------
Net cash provided by (used in) operating activities ................. (2,607) 8,860
--------- ---------
Investing activities
Property and equipment purchased ..................................... (15,909) (9,685)
Property and equipment sold .......................................... 3,562 3,413
Increase in capitalized software development costs ................... (7,558) (3,220)
Payment for acquisition, net of cash acquired ........................ (1,519) (3,567)
Purchases of marketable securities ................................... (194,152) --
Proceeds from maturities and sales of marketable securities .......... 159,387 16,546
Other ................................................................ (2,481) (101)
--------- ---------
Net cash provided by (used in) investing activities .................. (58,670) 3,386
--------- ---------
Financing activities
Net payments under short-term credit facilities ...................... (459) (3,650)
Payments on long-term borrowings ..................................... (197) (571)
Proceeds from issuance of convertible subordinated notes ............. 25,000 --
Issuance costs of convertible subordinated notes ..................... (875) --
Proceeds from issuance of common shares .............................. 11,209 3,623
--------- ---------
Net cash provided by (used in) financing activities .................. 34,678 (598)
--------- ---------
Effect of foreign currency exchange rates on cash and cash
equivalents .......................................................... (359) 776
--------- ---------
Increase (decrease) in cash and cash equivalents ....................... (26,958) 12,424
Cash and cash equivalents at beginning of the period ................... 198,031 12,165
--------- ---------
Cash and cash equivalents at end of the period ......................... $ 171,073 $ 24,589
========= =========
</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. 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
June 30, 1997 and for the three and six months ended June 30, 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 and
six month periods ended June 30, 1997 are not necessarily indicative of results
that may be expected for any future quarter or 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.
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.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 and other common equivalents will be
excluded. The impact is expected to result in an increase in primary earnings
per share of $0.01 for the second quarter ended June 30, 1997 and 1996 and an
increase of $0.03 and $0.01 for the six months ended June 30, 1997 and 1996,
respectively. The Company has not yet determined what the impact of Statement
128 will be on the calculation of fully diluted earnings per share.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 June 30, 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 June 30, 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.
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.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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, the Company will issue approximately 0.3559 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 $275 million, based upon the firms' respective closing stock
prices on August 13, 1997.
The acquisition, which is expected to be accounted for as a
pooling of interests, 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 direct transaction and anticipated integration costs of $8 to $10 million.
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
consolidated results of its operations.
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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 approximately $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 June and March 1997, the Company assigned accounts receivable
totaling $3.7 million and $13.8 million, respectively, subject to limited
recourse. Under the terms of the agreements, the purchaser assumed all credit
loss risk. The proceeds from the sales 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 were
$209,000 and $507,000 for the June and March 1997 transactions, respectively,
and are included in selling and marketing expenses in the appropriate periods in
the accompanying financial statements.
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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 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
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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 65% ($57.6 million) to $146.1 million
and 62% ($103.5 million) to $269.9 million in the three and six month periods
ended June 30, 1997, respectively, when compared to the corresponding periods in
1996. Net revenues for EMEA (Europe, Middle East and Africa), North America and
for Latin America and Asia Pacific combined for the three month period ended
June 30, 1997 were 52%, 36% and 12%, respectively, compared to 49%, 34% and 17%
for the corresponding period in 1996. Net revenues for EMEA, North America and
for Latin America and Asia Pacific combined for the six month period ended June
30, 1997 were 49%, 37% and 14%, respectively, compared to 51%, 34%, and 15% for
the same period in 1996. The shift in net revenue percentages in the geographies
for the six month periods reflects the Company's continued expansion of
operations. The shift in net revenue percentages for the three months ended June
30, 1997 and 1996 reflects the timing of certain license contracts at the end of
the quarter.
License revenues increased by 86% ($42.6 million) to $92.3
million and 89% ($79.9 million) to $169.7 million for the three and six month
periods ended June 30, 1997, respectively, compared to $49.7 million and $89.8
million in the corresponding periods in 1996. License revenues as a percentage
of total net revenues were 63% for the three and six month periods ended June
30, 1997, compared to 56% and 54% for the corresponding periods 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.
Maintenance and service revenues increased 50% ($18.0 million) to
$53.6 million and 46% ($31.4 million) to $99.7 million for the three and six
month periods ended June 30, 1997, respectively, compared to $35.6 million and
$68.4 million for the same periods in 1996. 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 37%
for the three and six month periods ended June 30, 1997, compared to 40% and 41%
for the corresponding periods in 1996.
In addition, the increase of license revenue and maintenance and
service revenue, as a percentage of total net revenues for the three and six
month periods ended June 30, 1997
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compared to the same periods in 1996, reflected the decrease in hardware and
other revenue in the 1997 periods. The decrease in hardware 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 continues 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 June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
1997 1996 1997 1996
---- ---- ---- ----
$ % $ % $ % $ %
- - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross profit:
License ............... $ 84,006 91% $ 46,191 93% $156,082 92% $ 83,464 93%
Maintenance and service 13,667 26 5,244 15 24,596 25 10,216 15
Hardware and other .... 147 66 679 21 299 55 1,804 22
-------- -------- -------- --------
Total gross profit .... $ 97,820 67% $ 52,114 59% $180,977 67% $ 95,484 57%
======== ======== ======== ========
</TABLE>
The Company's gross profit as a percentage of total net revenues
was 67% for each of the three and six month periods ended June 30, 1997 compared
to 59% and 57% for the corresponding periods in 1996. Gross margin on license
revenue was 91% and 92% for the three and six month periods ended June 30, 1997,
respectively, compared to 93% for each of the three and six month periods ending
June 30, 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 $1,290,000 and
$2,577,000 for the three and six month periods ended June 30, 1997,
respectively, compared to $587,000 and $1,273,000 for the corresponding periods
in 1996. The decrease in gross margin percentage on license revenue in 1997 was
primarily due to increased royalties on third party products in the second
quarter of 1997.
Gross margin on maintenance and service revenues was 26% and 25%
for the three and six month periods ended June 30, 1997, respectively, as
compared to 15% for the three and six month periods ended June 30, 1996. The
gross margin increase for the 1997 periods compared to the same periods in 1996
were 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 66% ($14.8
million) to $37.2 million and 67% ($28.6 million) to $70.8 million in the three
and six month periods ended June 30, 1997, respectively, from $22.4 million and
$42.3 million for the corresponding periods in 1996. These increases 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
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geographic regions. Sales and marketing expenses included a net foreign currency
transaction gain of $4.8 million for the six months ended June 30, 1997. $4.0
million of that gain was recorded in the first quarter of 1997 and 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 25% and 26% for the three and six month periods ended June 30,
1997, respectively, compared to 25% for each of the same periods in 1996. The
Company expects that sales and marketing expenses will grow in absolute dollars
as the Company continues to expand its sales and distribution channels and
customer support organization.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 127% ($11.7 million)
to $20.9 million and 126% ($21.4 million) to $38.3 million for the three and six
month periods ended June 30, 1997, respectively, from $9.2 million and $16.9
million for the same periods in 1996. As a percentage of total net revenues,
research and development expenses were 14% for each of the three and six month
periods ended June 30, 1997 compared to 10% for the same periods in 1996. 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 and six month periods
ended June 30, 1997 compared to 14% and 16% for the corresponding periods 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 $23.9 million and $44.0 million for the three and six month periods ended
June 30, 1997, respectively, compared to $10.6 and $20.2 for the corresponding
periods in 1996.
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 55% ($4.3 million)
to $12.1 million and 49% ($7.5 million) to $22.6 million for the three and six
month periods ended June 30, 1997, respectively, compared to $7.8 million and
$15.1 million for the comparable periods in 1996. The increases reflect 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%
for the three and six month periods ended June 30, 1997 compared to 9% for each
of the corresponding periods in 1996. The Company expects that general and
administrative expenses will continue to increase in absolute dollars as the
Company continues to expand its finance staff and install additional internal
systems to support the Company's growth in operations.
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AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets remained relatively consistent
at $1.4 million and $2.8 million for the three and six month periods ended June
30, 1997, respectively, compared to $1.5 million and $3.0 million for the same
periods in 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.
NET INTEREST INCOME
Net interest income increased to $578,000 and $629,000 for the
three and six month periods ended June 30, 1997, respectively, compared to
$45,000 and $168,000 for the three and six month periods ended June 30, 1996.
Interest expense on the convertible notes, working capital lines of credit and
amortization of debt issuance costs were more than offset by interest earned
from the investment of the proceeds from the convertible notes.
INCOME TAXES
The effective tax rate for the three and six months ended June
30, 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.
In July 1997, the Company was notified that it qualified for a
reduced tax rate for the next ten years effective January 1997. Based on this
ruling and other initiatives, the Company expects its effective tax rate to
decrease significantly. The Company will record an adjustment in the third
quarter of 1997 that reduces its effective tax rate to approximately 32%, year
to date.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash, cash equivalents and
marketable securities of $209.7 million and working capital of $312.2 million.
In the first six months of 1997, the Company's operating activities used net
cash of $2.6 million. Net income before depreciation and the amortization of
intangibles and the increase in accrued liabilities was offset by the increase
in net accounts receivable. Accounts receivable net of allowance for doubtful
accounts was $221.5 million at June 30, 1997 compared to $150.3 million at
December 31, 1996. Deferred revenue increased by $12.7 million for the six month
period ended June 30, 1997 to $22.4 million primarily due to the annual
maintenance billing completed in the first quarter. In June and March 1997, the
Company assigned $3.7 million and $13.8 million, respectively, 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
quarterly revenues, multiplied by 90) was 136 days as of June 30, 1997 compared
to 109 days as of December 31, 1996. DSO increased primarily due to the growth
of extended payment terms, particularly in Europe, and the timing of substantial
customer payments that were not received before the end of the second quarter.
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<PAGE> 16
Investing activities used $58.7 million in the six month period
ended June 30, 1997. Purchases of marketable securities of $194.2 million and
equipment purchases of $15.9 million were only partially offset by proceeds from
maturities and sales of marketable securities of $159.4 million. As of August
14, 1997, with the exception of the semi-annual interest payments on the
convertible debt of $4.5 million per payment, direct costs of the Aurum
transaction and additions of property and equipment, the Company had no
significant capital commitments.
Financing activities provided cash of $34.7 million, which was
primarily because of the additional issuance of $25.0 million of unsecured
convertible subordinated notes and proceeds of $11.2 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 ($20.4 million, based on the exchange rate at June 30, 1997). The
interest rate for this facility is 4.25%.
The Company believes that existing cash, 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 at least the
next twelve months. Continued growth in the Company's business and other factors
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 June 30, 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 growth of the Company's business in the
North American market, the Company continues to incur significant costs to build
infrastructure ahead of anticipated revenues. 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.
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.
The Notes are convertible into the Company's common shares at a
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<PAGE> 19
conversion price of $44.00 per share. 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 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,
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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
early focus on the client/server architecture of its software products. However,
the Company's principal competitors currently offer products using client/server
architecture, and the Company believes that other competitors are actively
developing client/server-based 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
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.
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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.
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/ Amal Johnson
------------------------------
Amal Johnson
Managing Director and
Executive Vice President
Date: August 20, 1997
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BAAN COMPANY N.V.
EXHIBIT INDEX
Page
Exhibit 11.1 Statement of Computation of Earnings per Share 24
23
<PAGE> 1
BAAN COMPANY N.V.
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary (i)
Weighted average common shares
outstanding ............ 91,186 87,645 90,774 87,140
Dilutive stock options ....... 7,112 6,898 7,211 6,884
------- ------- ------- -------
98,298 94,543 97,985 94,024
======= ======= ======= =======
Net income ................... $16,386 $ 6,863 $28,703 $11,194
======= ======= ======= =======
Net income per share ......... $ 0.17 $ 0.07 $ 0.29 $ 0.12
======= ======= ======= =======
</TABLE>
(i) The difference between primary and fully diluted
earnings per share is immaterial.
24
