<PAGE> 1
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, 1998
BAAN COMPANY N.V.
Baron van Nagellstraat 89
3770 AC Barneveld
The Netherlands
and
11911 Freedom Drive, Suite 300
Reston, Virginia, USA 20190
(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
Form 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
----
<S> <C>
Financial Information:
Condensed Consolidated Balance Sheets as of
June 30, 1998 (unaudited) and December 31, 1997 ......................................... 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998 and 1997 (unaudited) ................... 4
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1998 and 1997 (unaudited) ................... 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 (unaudited) ............................. 6
Notes to Condensed Consolidated Financial Statements ....................................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................................... 13
</TABLE>
2
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 170,781 $ 111,417
Marketable securities ............................................................... 91,342 104,847
Accounts receivable, net of allowance for doubtful accounts of
$15,815 in 1998 and $15,054 in 1997 .............................................. 285,533 226,798
Due from related parties (includes trade accounts receivable of
$0 in 1998 and $16,500 in 1997) .................................................. 3,804 42,765
Other current assets ................................................................ 61,760 47,680
--------- ---------
Total current assets ............................................................. 613,220 533,507
Property and equipment, at cost ....................................................... 128,815 91,143
Less accumulated depreciation and amortization ....................................... (65,226) (39,137)
--------- ---------
Net property and equipment ............................................................ 63,589 52,006
Software development costs, net of accumulated amortization of
$17,156 in 1998 and $13,396 in 1997 ................................................. 40,576 49,424
Intangible assets, net of accumulated amortization of
$24,382 in 1998 and $19,840 in 1997 ................................................. 39,042 41,085
Other non-current assets .............................................................. 43,476 35,599
Deferred tax asset .................................................................... 11,299 10,788
--------- ---------
Total assets ................................................................ $ 811,202 $ 722,409
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt ......................... $ 2,138 $ 1,730
Accounts payable .................................................................... 55,729 59,729
Income taxes payable ................................................................ 22,739 52,468
Accrued and other current liabilities ............................................... 94,504 80,267
Deferred revenue .................................................................... 81,041 29,872
--------- ---------
Total current liabilities ........................................................ 256,151 224,066
Long-term debt ........................................................................ 192,309 200,718
Long-term deferred revenue ............................................................ 24,063 2,855
Other long-term liabilities ........................................................... 3,818 4,305
Commitments and contingencies
Shareholders' equity:
Common shares, par value - NLG 0.06 per share, 700,000,000 shares authorized;
198,800,138 issued and outstanding in 1998
and 193,698,784 in 1997 .......................................................... 6,049 5,939
Additional paid-in capital .......................................................... 232,310 174,994
Retained earnings ................................................................... 103,950 116,224
Accumulated translation adjustment ................................................. (7,448) (6,692)
--------- ---------
Total shareholders' equity ....................................................... 334,861 290,465
--------- ---------
Total liabilities and shareholders' equity .................................. $ 811,202 $ 722,409
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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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,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
License revenue ........................ $ 98,614 $ 95,989 $173,338 $173,081
License revenue from related parties ... 32,640 4,109 50,821 10,458
-------- -------- -------- --------
Total license revenue ............... 131,254 100,098 224,159 183,539
Maintenance and service revenue ........ 98,825 57,465 185,397 107,241
-------- -------- -------- --------
Total net revenues .................. 230,079 157,563 409,556 290,780
Cost of revenues:
Cost of license revenue ................ 6,444 9,304 13,620 15,037
Cost of maintenance and service revenue 67,879 42,474 136,875 80,483
-------- -------- -------- --------
Total cost of revenues .............. 74,323 51,778 150,495 95,520
-------- -------- -------- --------
Gross profit ............................. 155,756 105,785 259,061 195,260
-------- -------- -------- --------
Operating expenses:
Sales and marketing .................... 58,088 41,751 105,819 79,004
Research and development ............... 35,453 22,825 66,128 41,992
General and administrative ............. 22,874 14,599 44,981 27,280
Restructuring and other expenses ....... 14,400 -- 14,400 --
-------- -------- -------- --------
Total operating expenses ............ 130,815 79,175 231,328 148,276
-------- -------- -------- --------
Income from operations ................... 24,941 26,610 27,733 46,984
Other income, net ........................ 164 1,014 513 1,538
-------- -------- -------- --------
Income before income taxes ............... 25,105 27,624 28,246 48,522
Provision for income taxes ............... 8,034 10,736 9,039 18,850
-------- -------- -------- --------
Net income ............................... $ 17,071 $ 16,888 $ 19,207 $ 29,672
======== ======== ======== ========
Net income per share
Basic .................................. $ 0.09 $ 0.09 $ 0.10 $ 0.16
Diluted ................................ $ 0.08 $ 0.08 $ 0.09 $ 0.15
Shares used in computing per share amounts
Basic .................................. 197,275 190,648 195,953 189,803
Diluted ................................ 212,000 205,186 211,699 204,526
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income ..................................... $ 17,071 $ 16,888 $ 19,207 $ 29,672
Other comprehensive income:
Foreign currency translation adjustment .... 1,811 (125) (756) (3,118)
------------- ------------- ------------- -------------
Comprehensive income ........................... $ 18,882 $ 16,763 $ 18,451 $ 26,554
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30,
--------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net income ............................................................ $ 19,207 $ 29,672
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization ..................................... 21,657 12,128
Provision (benefit) for deferred income taxes ..................... (298) (131)
Foreign currency transaction (gains) losses ....................... 840 (4,750)
Write-off of software development costs............................ 9,600 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ............................................. (46,182) (70,852)
Due from related parties ........................................ 38,979 (1,217)
Other current assets ............................................ (13,229) (10,899)
Accounts payable ................................................ (28,812) (387)
Accrued liabilities ............................................. 11,569 21,749
Income taxes payable ............................................ (29,683) 14,024
Deferred revenue ................................................ 63,662 13,792
--------- ---------
Net cash provided by operating activities ............................. 47,310 3,129
--------- ---------
Investing activities:
Property and equipment purchased, net ................................. (17,253) (16,111)
Proceeds from the sale of subsidiaries and investment ................. 8,891 --
Increase in capitalized software development costs .................... (10,424) (7,558)
Payment for acquisitions and investments, net of cash acquired ........ (6,413) (3,512)
Purchase of marketable securities ..................................... (91,575) (194,152)
Proceeds from the sale/maturity of marketable securities and short-term
investments ....................................................... 105,080 159,387
Other ................................................................. (6,127) (2,463)
--------- ---------
Net cash used in investing activities ................................. (17,821) (64,409)
--------- ---------
Financing activities:
Net borrowings (payments) under short-term credit facilities .......... 454 (824)
Payments of long-term debt ............................................ (266) (197)
Issuance costs of convertible subordinated notes ...................... -- (875)
Proceeds from issuance of convertible subordinated notes .............. -- 25,000
Proceeds from issuance of common shares ............................... 29,283 11,469
--------- ---------
Net cash provided by financing activities ............................. 29,471 34,573
--------- ---------
Effect of foreign currency exchange rates on cash and cash equivalents 404 (359)
--------- ---------
Increase (decrease) in cash and cash equivalents ...................... 59,364 (27,066)
Cash and cash equivalents at beginning of period ...................... 111,417 236,986
--------- ---------
Cash and cash equivalents at end of period ............................ $ 170,781 $ 209,920
========= =========
Supplemental disclosure of non-cash activities:
Conversion of subordinated notes to common stock ................... $ 8,302 $ --
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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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.
In August 1997, the Company acquired all of the outstanding shares of Aurum
Software, Inc. ("Aurum"). The business combination was accounted for as a
pooling of interests. The accompanying consolidated financial statements are
presented on a combined basis with Aurum for all periods presented.
BUSINESS
Baan Company N.V. (the Company or Baan) is incorporated in The Netherlands.
The Company provides enterprise business management software for an open systems
client/server computing environment. The Company's products address an
organization's entire value chain, from front office functions (such as
interaction with customers and sales) to the more traditional back-office
operations (such as order management and inventory control) associated with
Enterprise Resource Planning ("ERP"). The Company sells and supports its
products through corporate headquarters in Barneveld, The Netherlands and
Reston, Virginia, USA; Business Support Centers in three main locations located
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,
1998 and for the three and six months ended June 30, 1998 and 1997 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, 1998 are not necessarily indicative of results
that may be expected for the entire year. The condensed consolidated balance
sheet at December 31, 1997 has been derived from the audited consolidated
financial statements included in the Company's filing on Form 20-F. 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, 1997 included in the Company's Form 20-F
filed with the Securities and Exchange Commission.
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PRINCIPLES OF CONSOLIDATION
The accompanying financial statements consolidate the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Investments in
companies in which the Company has significant influence are accounted for under
the equity method. Investments in companies in which the Company does not have
significant influence are carried at cost or estimated realizable value, if
less.
PER SHARE INFORMATION
In November 1997, the Company declared a two-for-one stock split of its
common shares effective December 11, 1997. All references in this Form 6-K to
the number of shares and per share amounts have been restated to reflect the
two-for-one split.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which was required to be adopted on December 31,
1997. Under the new requirements, basic net income per share is computed using
the weighted average number of common shares outstanding during the period.
Diluted 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) and convertible securities
when the effect is dilutive. The Company has changed its method of computing
earnings per share and has restated all prior periods.
The following table sets forth the computation of basic and diluted income
per share for the three and six months ended June 30, (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net Income .............................. $ 17,071 $ 16,888 $ 19,207 $ 29,672
======== ======== ======== ========
Denominator:
Denominator for basic income per share-
Weighted average shares ............. 197,275 190,648 195,953 189,803
Common stock equivalents ................ 14,725 14,538 15,746 14,723
-------- -------- -------- --------
Denominator for diluted income per share-
Adjusted weighted average shares and
assumed conversions ................. 212,000 205,186 211,699 204,526
======== ======== ======== ========
Basic income per share .................... $ 0.09 $ 0.09 $ 0.10 $ 0.16
Diluted income per share .................. $ 0.08 $ 0.08 $ 0.09 $ 0.15
</TABLE>
At June 30, 1998 and 1997, approximately 8.7 million shares and 9.1 million
shares, respectively, were issuable upon conversion of the Company's convertible
subordinated notes and were excluded from the computation of diluted earnings
per share because the effect was antidilutive. During the first half of 1998,
approximately 0.4 million shares were issued for the conversion of subordinated
notes.
8
<PAGE> 9
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
As of the quarter ended March 31, 1998, the Company has adopted the
Financial Accounting Standards Board's SFAS No. 130, "Reporting Comprehensive
Income", which requires additional disclosures with respect to certain changes
in assets and liabilities that previously were not required to be reported as
part of results of operations. Additionally, the Financial Accounting Standards
Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which establishes standards for the way that public
business enterprises report information in annual statements and interim
financial reports regarding operating segments, products and services,
geographic areas and major customers. SFAS 131 will be effective for the Company
beginning with its Form 20-F filing for fiscal 1998 and will apply to both
annual and interim financial reporting. The Company is evaluating the impact of
SFAS 131 on its required disclosure. For SFAS 130 disclosure see "Condensed
Consolidated Statements of Comprehensive Income."
In the first quarter of 1998, the Company adopted Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by Statement of
Position 98-4, which provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The adoption of the
SOPs, in certain circumstances, has resulted and may in the future result in the
deferral of software license revenues that would have been recognized upon
delivery of the related software under the preceding accounting standard, SOP
91-1.
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 is effective for fiscal years beginning after June 15,
1999 and cannot be applied retroactively. The Statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
Company is evaluating the impact of SFAS 133.
9
<PAGE> 10
2 ACQUISITIONS
In August 1997, the Company acquired all of the outstanding shares of Aurum
Software, Inc. ("Aurum") for approximately 8,302,000 of the Company's common
shares. Aurum is a provider of enterprise-wide sales-force automation software.
The business combination was accounted for as a pooling of interests. Since the
combination was material to the Company, the accompanying consolidated financial
statements are presented on a combined basis for all periods presented. There
were no significant intercompany transactions between the two companies and no
significant conforming accounting adjustments.
Combined and separate results of the Company and Aurum for the periods
prior to the acquisition were as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Net Revenues:
Aurum Software, Inc......... $ 11,492 $ 20,837
Baan Company ............... 146,071 269,943
-------- --------
$157,563 $290,780
======== ========
Net Income:
Aurum Software, Inc......... $ 502 $ 969
Baan Company ............... 16,386 28,703
-------- --------
$ 16,888 $ 29,672
======== ========
</TABLE>
In May 1998, the Company completed the acquisition of the outstanding
shares of CODA Group plc. ("CODA"). CODA is a provider of financial software.
Under the terms of the share exchange, the Company issued approximately 0.0695
Baan common shares for each outstanding share of CODA, representing an aggregate
of approximately 1.9 million Baan common shares. Outstanding options to purchase
CODA stock were assumed and converted into Baan options at the same exchange
ratio. The business combination was accounted for as a pooling of interests.
CODA's financial statements are not material to the consolidated financial
statements of the Company. The Company did not restate any of its consolidated
financial statements prior to the combination. In connection with the
acquisition of CODA, the Company recognized $14.4 million of restructuring and
other expenses. Restructuring expenses include $9.6 million for the write-off of
software development costs, $3.0 million for related professional fees, and $1.8
million of other restructuring expenses, including severance and other costs
associated with the consolidation of operations.
The following table, expressed in thousands, summarizes the Company's
restructuring and other expenses for the second quarter ended June 30, 1998:
<TABLE>
<CAPTION>
Total Cash Asset Accrual Balance at
Costs Paid Write-offs June 30, 1998
----- ---- ---------- ------------------
<S> <C> <C> <C> <C>
Software development costs...... $ 9,600 $ -- $ 9,600 $ --
Professional fees .............. 3,000 544 -- 2,456
Other restructuring expenses.... 1,800 35 -- 1,765
------- ------- ------- -------
$14,400 $ 579 $ 9,600 $ 4,221
======= ======= ======= =======
</TABLE>
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3 LITIGATION
The Company is party to legal proceedings from time to time. There is no
such proceeding currently pending which the Company believes is likely to have a
material adverse effect upon the Company's business as a whole. Any litigation,
however, involves potential risk and potentially significant litigation costs,
and, therefore, there can be no assurances that any litigation which is now
pending or which may arise in the future will not have such a material adverse
effect.
4 TRANSACTIONS WITH AFFILIATES
Vanenburg Ventures B.V. ("VVBV"), formerly known as Baan Investment B.V.,
together with its subsidiaries and related parties, is controlled by Jan and
J.G. Paul Baan, and owns approximately 39% of the outstanding common shares of
the Company. VVBV has invested in various new technologies, educational
programs, research projects and sales, consulting and support activities in the
ERP market. Often, these investments take the forms of joint ventures or
partnerships, whose activities are aimed at the ERP market for packaged
application software for business and business process improvement. VVBV and
entities owned or controlled by VVBV have made expenditures and incurred
substantial costs in connection with these investment activities and start-up of
business operations. These expenses are not included in the Company's
consolidated financial statements. In the opinion of Company management, all
significant costs directly benefiting the Company incurred by such entities have
been recorded as an expense by the Company. The Company has entered into various
agreements with such entities owned or controlled by VVBV and has recognized
revenue and reimbursement of expenses from, and incurred costs for goods and
services provided by, such related parties. For the three and six months ended
June 30, 1998, the Company charged VVBV $4.6 million and $8.0 million,
respectively, for the reimbursement of management information systems and
marketing costs and services provided by the Company. Costs incurred by the
Company and charged from VVBV and its affiliated entities to the Company were
not material for the three and six month periods ended June 30, 1998 and 1997.
The Company has approximately 220 small and medium sized enterprise ("SME")
channel partners. Included in the Company's channel partners are approximately
15 companies which are owned by BBS Holding B.V., a majority-owned subsidiary of
VVBV. These BBS-related entities are commonly referred to as the Baan Business
Systems network ("BBS"). The Company sold licenses directly to BBS for resale to
third party end-users primarily through the third quarter of 1997. For the six
months ended June 30, 1998 and 1997, the Company recognized revenue from BBS of
$2.9 million and $10.5 million, respectively.
During the fourth quarter of 1997, BBS began purchasing the Baan products
primarily from Baan Midmarket Solutions ("BMS"), which was formed with an 85%
ownership by VVBV and 15% ownership by the Company. The Company has assigned a
majority of its existing reseller agreements to BMS. For the three and six
months ended June 30, 1998, the Company recognized revenues from BMS of $32.6
million and $47.9 million, respectively, from sales of licenses to BMS for their
resale to third party end-users.
Through 1997, sales to third party and related party indirect channel
partners were recorded at the time of product shipment, subject to certain
conditions including an evaluation of the amount
11
<PAGE> 12
of inventory carried by the reseller channel. Commencing in 1998, the Company
has recognized revenues on sales to the indirect channel partners based on
reseller sales to end-users.
In the first quarter of 1998, the Company sold certain of its subsidiaries
in Latin America for approximately $3.6 million and its minority interest in a
software company for approximately $5.3 million to VVBV. These proceeds were
received in the first quarter of 1998 and approximated the Company's carrying
value in such assets. The Company did not realize a gain or loss on these
transactions.
12
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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 6-K, and the factors discussed in the Company's Form 20-F for fiscal
1997 filed with the Securities and Exchange Commission.
OVERVIEW
The Company's principal source of revenues consists of license fees and
related services, including consulting, education and maintenance. License
revenues are derived from software licensing fees, and are recognized upon the
execution of a signed agreement, delivery of the software, an assessment that
the resulting fee is fixed and determinable, and collection of the resulting
receivable is deemed probable. Through 1997, sales to third party and related
party indirect channel partners were recorded at the time of product shipment,
subject to certain conditions including an evaluation of the amount of inventory
carried by the reseller channel. Commencing in 1998, the Company has recognized
revenues on sales to the indirect channel partners based on reseller sales to
end-users. Maintenance revenues for ongoing customer support and product updates
are recognized ratably over the term of the maintenance period, which is
typically twelve months. Service revenues from training and consulting are
recognized when the services are performed.
13
<PAGE> 14
TOTAL NET REVENUES
Total net revenues increased 46% ($72.5 million) to $230.1 million and 41%
($118.8 million) to $409.6 million in the three and six month periods ended June
30, 1998, respectively, when compared to the corresponding periods in 1997. 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, 1998
were 53%, 40% and 7%, respectively, compared to 48%, 41% and 11% for the
corresponding period in 1997. Net revenues for EMEA, North America and for Latin
America and Asia Pacific combined for the six month period ended June 30, 1998
were 50%, 42% and 8%, respectively, compared to 45%, 42% and 13% for the
corresponding period in 1997.
LICENSE REVENUE
License revenue increased 31% ($31.2 million) to $131.3 million and 22%
($40.6 million) to $224.2 million for the three and six month periods ended June
30, 1998, respectively, compared to $100.1 million and $183.5 million in the
same periods in 1997. License revenue as a percentage of total net revenues was
57% and 55% for the three and six month periods ended June 30, 1998,
respectively, compared to 64% and 63% for the same periods in 1997.
Approximately $43 million of license revenue was deferred in the first quarter
of 1998, primarily because of the impact of the implementation of Statement of
Position ("SOP") 97-2. The predominant impact involved customers electing to
finance the purchase of license software through independent third-party
financing agreements to which the Company was a party. The revenue deferred will
be recognized according to the payment terms agreed to by the customer and its
lending institution. As of the second quarter of 1998, the Company has removed
itself as a party to such financing agreements.
MAINTENANCE AND SERVICE REVENUE
Maintenance and service revenue increased 72% ($41.4 million) to $98.8
million and 73% ($78.2 million) to $185.4 million for the three and six month
periods ended June 30, 1998, respectively, compared to $57.5 million and $107.2
million for the same periods in 1997. These increases were primarily
attributable to increased maintenance fees and services to a larger installed
base of customers and an increase in consulting and education services, which in
turn were a result of the growth in product licenses in prior quarters. As a
percentage of total net revenues, maintenance and service revenue was 43% and
45% for the three and six month periods ended June 30, 1998, respectively,
compared to 36% and 37% for the same periods in 1997.
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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,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
% OF % OF % OF % OF
REVENUE REVENUE REVENUE REVENUE
$ CATEGORY $ CATEGORY $ CATEGORY $ CATEGORY
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross profit:
License ........ $124,810 95% $ 90,794 91% $210,539 94% $168,502 92%
Maintenance and
Services .... 30,946 31 14,991 26 48,522 26 26,758 25
-------- -------- -------- --------
Total gross profit $155,756 68 $105,785 67 $259,061 63 $195,260 67
======== ======== ======== ========
</TABLE>
The Company's gross profit as a percentage of total net revenues was 68%
and 63% for the three and six month periods ended June 30, 1998, respectively,
compared to 67% for each of the same periods in 1997. The decrease in gross
margin for the six months ended June 30, 1998 primarily reflects the deferral of
license revenue discussed above.
Gross margin on license revenue was 95% and 94% for the three and six month
periods ended June 30, 1998, respectively, compared to 91% and 92% for the same
periods in 1997. The gross margin increase for the 1998 periods compared to the
same periods in 1997 were primarily due to decreases in royalties to third
parties for reseller agreements. Cost of license revenues consists primarily of
amortization of capitalized software, the cost of third party software, and the
cost of media and freight. Amortization of capitalized software, included in
cost of license revenue, amounted to $2.6 million and $4.9 million for the three
and six month periods ended June 30, 1998, respectively, compared to $1.3
million and $2.6 million for the same periods in 1997.
Gross margin on maintenance and service revenues was 31% and 26% for the
three and six month periods ended June 30, 1998, respectively, compared to 26%
and 25% for the same periods in 1997. The gross margin increase for the second
quarter of 1998 compared to the same period in 1997 was primarily due to a
decrease in subcontractor costs. Cost of maintenance and service revenues
consists primarily of cost of product support, consulting and training,
including associated software engineering services.
SALES AND MARKETING
The Company's sales and marketing expenses increased 39% ($16.3 million) to
$58.1 million and 34% ($26.8 million) to $105.8 million in the three and six
month periods ended June 30, 1998, respectively, from $41.8 million and $79.0
million for the same periods in 1997. The increase in absolute spending in sales
and marketing activities reflects the Company's commitment to expand its
international sales channels and the associated hiring of additional
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<PAGE> 16
sales staff and sales support personnel in all geographic regions. Sales and
marketing expenses also include net foreign currency transaction losses of $0.6
million and $0.8 million for the three and six months ended June 30, 1998,
respectively, compared to net gains of $0.8 million and $4.8 million for the
corresponding periods in 1997. 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, 1998, respectively, compared to 26% and 27% for the same periods in
1997. The Company expects that sales and marketing expenses will continue to
grow in absolute dollars as the Company continues to expand its sales and
distribution channels and customer support organization.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 55% ($12.6 million) to $35.5
million and 57% ($24.1 million) to $66.1 million for the three and six month
periods ended June 30, 1998, respectively, from $22.8 and $42.0 million for the
same periods in 1997. As a percentage of total net revenues, research and
development expenses were 15% and 16% for the three and six month periods ended
June 30, 1998, respectively, compared to 14% for each of the same periods in
1997. The increase in research and development expenses in absolute dollars
reflects 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 12% of
aggregate research and development expenditures for the three and six month
periods ending June 30, 1998 and 1997. Aggregate research and development
expenditures, including both research and development expenses and capitalized
software costs, were $40.3 million and $75.1 million for the three and six month
periods ended June 30, 1998, respectively, compared to $25.8 million and $47.7
million for the same periods in 1997.
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 make significant investments in its research and
development activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 57% ($8.3 million) to $22.9
million and 65% ($17.7 million) to $45.0 million for the three and six month
periods ended June 30, 1998, respectively, from $14.6 million and $27.3 million
for the same periods in 1997. As a percentage of total net revenues, general and
administrative expenses were 10% and 11% for the three and six month periods
ended June 30, 1998, respectively, compared to 9% for each of the same periods
in 1997. The increase in general and administrative expenses in absolute dollars
reflects the expansion of the Company's operations with the resulting increase
of additional personnel and infrastructure costs. The Company expects that
general and administrative expenses will continue to increase in absolute
dollars as the Company continues to enhance its general and administrative staff
and install additional internal systems to support the Company's growth in
operations. General and administrative expenses also include the amortization of
intangible assets of $2.6 million and $4.4 million for the three and six months
ended June 30, 1998, respectively, compared to $1.4 million and $2.8 million for
the same periods in 1997. The amortization arose from certain of the Company's
acquisitions in prior years.
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<PAGE> 17
RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses were $14.4 million for the three and six
month periods ended June 30, 1998. These non-recurring expenses related to the
acquisition of CODA in May 1998. Restructuring expenses include $9.6 million for
the write-off of software development costs, $3.0 million for related
professional fees, and $1.8 million of other restructuring expenses, including
severance and other costs associated with the consolidation of operations. See
Note 2 of the Notes to Condensed Financial Statements.
NET OTHER INCOME
Net other income decreased to $0.2 million and $0.5 million for the three
and six months ended June 30, 1998, respectively, compared to $1.0 million and
$1.5 million for the same periods in 1997. Net other income was primarily a
result of interest earned on investments in short-term marketable securities
being greater than the interest expense related to working capital lines of
credit, long-term debt, interest expense on the convertible notes, and the
amortization of debt issuance costs.
INCOME TAXES
In July 1997, the Company was notified by the Dutch tax authorities that it
qualified for a reduced tax rate for the next ten years effective January 1997
on certain income as defined in the agreement. Based on this ruling and other
initiatives, the Company decreased its effective tax rate to 32%. The effective
tax rate for the three and six months ended June 30, 1997 was 39%. The effective
rate for the three and six months ended June 30, 1997 was higher than the
statutory rate primarily due to operating profits in higher tax jurisdictions
and the non-deductible status of goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash, cash equivalents and short-term
marketable securities of $262.1 million and working capital of $357.1 million.
In the first six months of 1998, the Company's operating activities provided net
cash of $47.3 million. Accounts receivable net of allowance for doubtful
accounts was $285.5 million at June 30, 1998 compared to $226.8 million at
December 31, 1997. Accounts receivable days' sales outstanding (the ratio of the
quarter-end accounts receivable balance to quarterly revenues, multiplied by 90)
was 112 days as of June 30, 1998, compared with 102 days as of December 31,
1997. Excluding the impact of acquiring CODA, accounts receivable days' sales
outstanding was 104 days as of June 30, 1998.
Investing activities used $17.8 million of cash in the six month period
ended June 30, 1998. As of June 30, 1998, with the exception of the additions to
property and equipment and capitalized software development costs, the Company
had no significant capital commitments.
Financing activities provided cash of $29.5 million in the six-month period
ended June 30, 1998, primarily from the issuance of common shares of $29.3
million upon exercise of stock options and for the Company's employee stock
purchase plan.
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<PAGE> 18
The Company has a credit facility with ABN AMRO Bank in The Netherlands
which allows the Company and its subsidiaries to borrow up to NLG 40 million (or
$19.6 million, based on the exchange rate at June 30, 1998). In addition,
certain of the Company's subsidiaries have additional bank credit agreements for
relatively small amounts. As of June 30, 1998, the Company had short-term
borrowings against all of its lines of credit of $1.4 million.
The Company believes that existing cash, cash equivalents and short-term
marketable securities, cash generated by operations, and existing credit
facilities, will be sufficient to meet the Company's working capital needs and
currently planned capital expenditure requirements for the next twelve months.
The Company may from time to time consider acquisitions of complementary
businesses, products or technologies, which could require additional financing.
In addition, 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 required, or
that such additional capital will be available on acceptable terms.
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<PAGE> 19
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 only become more
significant in the past two fiscal years. 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 the Company has made significant changes in
its business focus, including greater emphasis on sales to larger customers. As
a result, the Company has realized an increasingly high portion of total net
revenues from individually large licenses, which could contribute to greater
quarterly variability.
The Company's software products generally are shipped as orders are
received. As a result, license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. Because the Company's
operating expenses are based on anticipated revenue levels and because a high
percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
result in losses. The Company plans to increase expenditures in order to fund
continued build-up of international operations, greater levels of research and
development, a larger direct sales and marketing staff, development of new
distribution and resale channels, and broader customer support capability,
although annual expenditures will depend upon ongoing results and evolving
business needs. To the extent such expenses precede or are not subsequently
followed by increased revenues, the Company's operating results would be
materially adversely affected.
The Company believes that fourth quarter revenues have historically been
positively impacted by year-end capital purchases by larger corporate customers.
This seasonality, which the Company believes is common in the computer software
industry, is likely to increase as the Company focuses on larger corporate
accounts, and typically results in first quarter revenues in any year being
lower than revenues in the immediately preceding fourth quarter.
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<PAGE> 20
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in the last five years. The growth
of the Company's business and expansion of the Company's customer base has
placed a significant strain on the Company's management and operations. 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, education 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 increased
by an additional $25 million (for a total of $200 million convertible notes)
when an over-allotment option was exercised in January of 1997. As a result of
this additional indebtedness, the Company's principal and interest obligations
increased substantially. The degree to which the Company is leveraged could
materially adversely affect the Company's ability to obtain additional financing
for working capital, acquisitions or other purposes and could make it more
vulnerable to industry downturns and competitive pressures. The Company's
ability to meet its debt service obligations will be dependent upon the
Company's future performance, which will be subject to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control.
COMPETITION
The enterprise business application software market is highly competitive,
is rapidly changing, and is significantly affected by new product introductions,
geographical regional market growth, integration of supply chain networks and
issues related to policy such as the anticipated requirements of the European
Monetary Unit and the year 2000 date change. The Company's products are targeted
at the 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. In
its traditional ERP manufacturing markets, the Company's primary competition
comes from a number of large independent software vendors including SAP AG
("SAP"), Oracle Corporation ("Oracle"), J.D. Edwards & Company ("JDE"), 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
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groups of major accounting firms and systems integrators. The Company also faces
indirect competition from systems developed by the internal MIS departments of
large organizations.
As the Company pursues its strategy to more aggressively target the SME
market and to expand into enterprise applications beyond the traditional ERP
solutions, it expects to have additional competitors from both a number of
smaller companies that offer such applications for the SME market, as well as
established ERP vendors, such as SAP, Oracle and PeopleSoft. For its products
outside the ERP market segment, the Company competes with a number of companies,
including Siebel Systems, that offer software solutions for the customer
interaction software ("CIS") or front-office productivity market, and i2
Technologies, Inc. and Manugistics Group, Inc. that offer software solutions for
supply chain management.
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 present and potential customers of the
Company. Further, because the Company's ERP products run on relational database
management systems ("RDBMS") and Oracle has the largest market share for RDBMS
software, Oracle may have a competitive advantage in selling its application
products to its RDBMS customer base. The Company may also face market resistance
from the large installed base of legacy systems because of the reluctance of
these customers to commit the time and effort necessary to convert to an open
systems-based client/server software solution. Furthermore, companies with
significantly greater resources than the Company could attempt to increase their
presence in this market by acquiring or forming strategic alliances with
competitors of the Company.
The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as recommendations of its products during the evaluation stage of the
purchase process. Although the Company seeks to maintain close relationships
with these third party implementation providers, many of these third parties
have similar, and often more established, relationships with the Company's
principal competitors. If the Company is unable to develop and retain effective,
long-term relationships with these third parties, it would adversely affect the
Company's competitive position. Further, there can be no assurance that these
third parties, many of which have significantly greater financial, technical and
marketing resources than the Company, will not market software products in
competition with the Company in the future or will not otherwise reduce or
discontinue their relationships with or support of the Company and its products.
The Company believes that its success has been due in part to its focus on
the client/server architecture of its software products. Certain of the
Company's competitors currently offer products using client/server architecture
and are focusing on reducing the entire service effort necessary to implement
their products. The Company also believes that by expanding its current product
breadth, it will encounter competitive pressure from established competitors in
these markets. 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.
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<PAGE> 22
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's software products is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, changes in customer requirements, and frequent new product
introductions and enhancements. The Company's future success will depend upon
its ability to continue to enhance its current product line and to develop and
introduce new products that keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve market acceptance.
In particular, the Company must continue to anticipate and respond adequately to
advances in RDBMS software and desktop computer operating systems such as
Microsoft Windows and successor operating systems. There can be no assurance
that the Company will be successful in developing and marketing, on a timely and
cost-effective basis, fully functional product enhancements or new products that
respond to technological advances by others, or that its new products will
achieve market acceptance.
Historically, the Company has issued significant new releases of its
software products approximately every two years with interim releases on a more
frequent basis. As a result of the complexities inherent in both the RDBMS and
client/server environments and the broad functionality and performance demanded
by customers for ERP products, major new product enhancements and new products
can require long development and testing periods to achieve market acceptance.
The Company has on occasion experienced delays in the scheduled introduction of
new and enhanced products. In addition, software programs as complex as those
offered by the Company may contain undetected errors or "bugs" when first
introduced or as new versions are released that, despite testing by the Company,
are discovered only after a product has been installed and used by customers.
There can be no assurance that the Company's most recent software releases or
future releases of the Company's products will not contain 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. 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.
Year 2000
The Company believes that the demand for the Company's products has been
positively impacted by the increased corporate awareness of the year 2000
problems and the need to upgrade and/or replace legacy applications in order to
accommodate the change in date to the year 2000. Once these companies have
completed their preparations, the software industry and the Company may
experience a significant deceleration from the strong annual growth rates
recently experienced in the client server and applications software marketplace.
The Company has designed and tested the most current versions of its
products to be year 2000 compliant. There can be no assurances that the
Company's current products do not contain undetected errors or defects
associated with the year 2000 date functions that may result in material costs
to the Company. It has been widely reported that a significant amount of
"business interruption" litigation will arise out of year 2000 compliance
issues. It is uncertain whether or to what extent the Company may be affected by
such litigation.
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the year 2000, there
can be no assurance that the Company will not experience unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are composed predominantly of the
Company's own software products with respect to software and which also include
third party software and hardware technology. Likewise, there can be no
assurance that vendors that provide products or services to the Company, or the
Company's customers, will not experience negative consequences and/or material
costs caused by undetected errors or defects in the technology used in their
internal systems, or in taking necessary steps to remedy so-called year 2000
problems. Although the Company is not aware that any such vendors are
experiencing or incurring such material consequences or costs, any such problems
experienced by such vendors could have a material adverse impact on the Company.
INTEGRATION OF ACQUISITIONS
As part of its strategy to complement and expand its existing business and
product offerings, the Company has acquired a number of companies including, in
August 1997, Aurum Software, Inc. ("Aurum"), a provider of enterprise-wide
sales-force automation software and distribution services. In addition, in May
1998 the Company completed its acquisition of CODA Group plc ("CODA"), a
provider of financial software. The Company may continue to pursue acquisitions
of other companies with potentially complementary product lines, technologies
and businesses.
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Acquisitions 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
acquired businesses. 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
liabilities and additional amortization expenses related to goodwill and other
intangible assets, which could adversely affect the Company's results of
operations.
INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS
The Company's products are currently marketed in the United States,
Germany, The Netherlands, and over 75 other countries. The Company's operations
are subject to risks inherent in international business activities, including,
in particular, general economic conditions in each country (for example, the
Company notes the volatile market conditions affecting most of the Pacific Rim
region which are typical of the kinds of foreign economic conditions that could
have a material adverse impact on the Company), overlap of different tax
structures, management of an organization spread over various countries,
unexpected changes in regulatory requirements, compliance with a variety of
foreign laws and regulations, and longer accounts receivable payment cycles in
certain countries. Other risks associated with international operations include
import and export licensing requirements, trade restrictions and changes in
tariff and freight rates.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar (the currency in which its financial statements are
stated), primarily the Dutch guilder and the German mark. The Company has
historically recorded a majority of its expenses in guilders, especially
research and development expenses, and a substantial majority of its revenues
has been denominated in guilders, marks and, more recently, U.S. dollars. As a
result, appreciation in the value of the guilder relative to the value of the
U.S. dollar could adversely affect operating results. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the U.S. dollar have caused and will continue to cause
foreign currency transaction gains and losses. The Company continues to
evaluate its currency management policies. Notwithstanding the measures the
Company has adopted, due to the number of currencies involved, the constantly
changing currency exposures and the substantial volatility of currency exchange
rates, there can be no assurance that the Company will not experience currency
losses in the future, nor can the Company predict the effect of exchange rate
fluctuations upon future operating results.
ABILITY TO ENFORCE THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of the protections provided under
applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing arrangements, to establish and protect
its rights in its software. Despite the Company's efforts, it may be possible
for unauthorized third-parties to copy certain portions of the Company's
products or to reverse engineer or obtain and use information that the Company
regards as proprietary. In addition, the laws of certain countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States or The Netherlands. Accordingly, there can be no assurance
that the Company will be able to protect its proprietary software against
unauthorized third-party copying or use, which could adversely affect the
Company's competitive position.
The Company, from time to time, receives notices from third-parties
claiming infringement by the Company's products of third-party proprietary
rights. There can be no assurance that legal action claiming patent or other
intellectual property infringement will not be commenced against the Company,
or that the Company would necessarily prevail in such litigation given the
complex technical issues and inherent uncertainties in intellectual property
litigation; and in the event a claim against the Company was successful and the
Company could not obtain a license on acceptable terms or develop or
license a substitute technology, the Company's business and operating results
would be materially adversely affected. The Company expects that software
products will increasingly be subject to such claims as the number of products
and competitors in the Company's industry segment grows and the functionality
of products overlap. Any such claim, with or without merit, could be
time-consuming, result in costly litigation and require the Company to enter
into royalty and licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all.
In the event of a successful claim against the Company and the failure of the
Company to develop or license a substitute technology, the Company's business
and operating results would be materially adversely effected.
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/ N.M. (Klaas) Wagenaar
---------------------------------
N.M. (Klaas) Wagenaar
Chief Operating Officer and
Chief Financial Officer
Date: September 1, 1998
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