<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 March 31, 1998
BAAN COMPANY N.V.
Vanenburgerallee 13
3882 RH Putten
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 (unaudited):
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
</TABLE>
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 188,668 $ 111,417
Marketable securities ........................................................ 95,665 104,847
Accounts receivable, net of allowance for doubtful accounts of
$12,923 in 1998 and $15,054 in 1997 ....................................... 264,161 226,798
Due from related parties (includes trade accounts receivable of
$3,644 in 1998 and $16,500 in 1997) ....................................... 4,079 42,765
Other current assets ......................................................... 60,054 47,680
--------- ---------
Total current assets ................................................. 612,627 533,507
Property and equipment, at cost ................................................ 99,002 91,143
Less accumulated depreciation and amortization ................................. (43,708) (39,137)
--------- ---------
Net property and equipment ..................................................... 55,294 52,006
Software development costs, net of accumulated amortization of
$15,626 in 1998 and $13,396 in 1997 .......................................... 49,785 49,424
Intangible assets, net of accumulated amortization of
$21,013 in 1998 and $19,840 in 1997 .......................................... 38,442 41,085
Other non-current assets ....................................................... 39,544 35,599
Deferred tax asset ............................................................. 10,674 10,788
--------- ---------
Total assets ......................................................... $ 806,366 $ 722,409
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings from banks ............................................. $ 1,426 $ 877
Accounts payable ............................................................. 54,890 59,729
Income taxes payable ......................................................... 48,611 52,468
Accrued and other current liabilities ........................................ 83,264 80,267
Deferred revenue ............................................................. 81,941 29,872
Current portion of long-term debt ............................................ 843 853
--------- ---------
Total current liabilities ............................................ 270,975 224,066
Long-term debt ................................................................. 200,588 200,718
Long-term deferred revenue ..................................................... 22,437 2,855
Other long-term liabilities .................................................... 4,795 4,305
Commitments and contingencies
Shareholders' equity:
Common shares, par value -- NLG 0.06 per share, 700,000,000 shares authorized;
195,675,602 issued and outstanding in 1998
and 193,698,784 in 1997 .................................................. 5,969 5,939
Additional paid-in capital ................................................... 192,718 175,242
Deferred compensation ........................................................ (217) (248)
Retained earnings ............................................................ 118,360 116,224
Accumulated translation adjustment ........................................... (9,259) (6,692)
--------- ---------
Total shareholders' equity ........................................... 307,571 290,465
--------- ---------
$ 806,366 $ 722,409
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31,
---------
1998 1997
-------- --------
<S> <C> <C>
Net revenues:
License revenue ................................ $ 74,724 $ 77,092
License revenue from related parties ........... 18,181 6,349
-------- --------
Total license revenue ....................... 92,905 83,441
Maintenance and service revenue ................ 86,572 49,459
Hardware and other revenue ..................... -- 317
-------- --------
Total net revenues .......................... 179,477 133,217
Cost of revenues:
Cost of license revenue ........................ 7,176 5,733
Cost of maintenance and service revenue ........ 68,996 37,844
Cost of hardware and other revenue ............. -- 165
-------- --------
Total cost of revenues ...................... 76,172 43,742
-------- --------
Gross profit ..................................... 103,305 89,475
-------- --------
Operating expenses:
Sales and marketing ............................ 47,731 37,253
Research and development ....................... 30,675 19,167
General and administrative ..................... 20,264 11,233
Amortization of intangible assets .............. 1,843 1,448
-------- --------
Total operating expenses .................... 100,513 69,101
-------- --------
Income from operations ........................... 2,792 20,374
Other income, net ................................ 349 524
-------- --------
Income before income taxes ....................... 3,141 20,898
Provision for income taxes ....................... 1,005 8,114
-------- --------
Net income ....................................... $ 2,136 $ 12,784
======== ========
Net income per share
Basic .......................................... $ 0.01 $ 0.07
Diluted ........................................ $ 0.01 $ 0.06
Shares used in computing per share amounts
Basic .......................................... 194,630 188,958
Diluted ........................................ 211,398 203,866
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31,
---------
1998 1997
-------- --------
<S> <C> <C>
Net income: .................................... $ 2,136 $ 12,784
Other comprehensive income:
Foreign currency translation adjustment .... (2,567) (2,993)
-------- --------
Comprehensive income (loss) .................... $ (431) $ 9,791
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31,
---------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net income ............................................................ $ 2,136 $ 12,784
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 9,725 6,233
Provision (benefit) for deferred income taxes ..................... (30) (343)
Foreign currency transaction (gains) losses ....................... 211 (3,962)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ............................................. (44,055) (16,714)
Due from related parties ........................................ 38,684 (1,490)
Other current assets ............................................ (13,199) (5,050)
Accounts payable ................................................ (3,134) (3,731)
Accrued liabilities ............................................. 4,116 15,503
Income taxes payable ............................................ (3,808) 6,026
Deferred revenue ................................................ 72,183 16,128
--------- ---------
Net cash provided by operating activities ............................. 62,829 25,384
--------- ---------
Investing activities:
Property and equipment purchased ...................................... (9,412) (8,354)
Proceeds from sale of subsidiaries and investments..................... 8,891 --
Increase in capitalized software development costs .................... (4,627) (2,718)
Payment for acquisitions and investments, net of cash acquired ........ (3,769) (2,053)
Purchase of marketable securities ..................................... (45,317) (42,140)
Proceeds from the sale/maturity of marketable securities and short-term
investments ......................................................... 54,499 7,017
Other ................................................................. (4,408) 109
--------- ---------
Net cash used in investing activities ................................. (4,143) (48,139)
--------- ---------
Financing activities:
Net borrowings (payments) under short-term credit facilities .......... 477 (459)
Payments of long-term debt ............................................ (127) (296)
Issuance costs of convertible subordinated notes ...................... -- (875)
Proceeds from issuance of convertible subordinated notes .............. -- 25,000
Proceeds from issuance of common shares ............................... 17,505 4,898
--------- ---------
Net cash provided by financing activities ............................. 17,855 28,268
--------- ---------
Effect of foreign currency exchange rates on cash and cash equivalents 710 (1,242)
--------- ---------
Increase in cash and cash equivalents ................................. 77,251 4,271
Cash and cash equivalents at beginning of period ...................... 111,417 236,986
--------- ---------
Cash and cash equivalents at end of period ............................ $ 188,668 $ 241,257
========= =========
</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.
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 Putten, 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 March 31,
1998 and for the three months ended March 31, 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-month period ended
March 31, 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 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, 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 months ended March 31, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31,
---------
1998 1997
-------- --------
<S> <C> <C>
Numerator:
Net Income .............................. $ 2,136 $ 12,784
======== ========
Denominator:
Denominator for basic income per share-
weighted average shares ............. 194,630 188,958
Common stock equivalents ................ 16,768 14,908
-------- --------
Denominator for diluted income per share-
adjusted weighted average shares and
assumed conversions ................. 211,398 203,866
======== ========
Basic income per share .................... $ 0.01 $ 0.07
Diluted income per share .................. $ 0.01 $ 0.06
</TABLE>
At March 31, 1998 and 1997, approximately 9.1 million shares issuable upon
conversion of the Company's convertible subordinated notes were excluded from
the computation of diluted earnings per share because the effect was
antidilutive.
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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 (Loss)" and Note 5 to Notes to
Condensed Consolidated Financial Statements.
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.
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.
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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
MARCH 31, 1997
------------------
<S> <C>
Net Revenues:
Aurum Software, Inc. .... $ 9,345
Baan Company ............ 123,872
--------
$133,217
========
Net Income:
Aurum Software, Inc. .... $ 467
Baan Company ............ 12,317
--------
$ 12,784
========
</TABLE>
In November 1997, the Company acquired all of the outstanding shares of
Beologic A/S ("Beologic") for approximately 1,278,000 shares of the Company's
common shares. Beologic is a sales configurator company. The business
combination was accounted for as a pooling of interests. Because Beologic's
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 combination.
In May 1998, the Company completed the acquisition of over 90% 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 treated as a
pooling of interests. Because 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.
The Company is currently reviewing the direct and anticipated integration costs
related to this transaction.
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.
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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 first quarter of 1998, the
Company charged VVBV $3.4 million for the reimbursement of management
information systems and marketing costs and services provided by the Company.
Costs incurred by the Company and charged by VVBV and its affiliated entities to
the Company were not material for the three-month periods ended March 31, 1998
and 1997.
The Company has approximately 150 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 recognized revenues of approximately $0 million and $5.1
million from the BBS Holding B.V. enterprises during the periods ending March
31, 1998 and 1997, respectively, from that company's licensing of Baan products.
In addition, during 1997, the Company assigned a number of its SME license
contracts and trade accounts receivable to various BBS companies. In
consideration for the assignment, the BBS companies paid for the
then-outstanding third party trade accounts receivable assigned to them and, in
addition, agreed to pay the Company an amount representing the value of certain
potential future license revenues forgone by the Company as a result of pricing
differences between customary terms in direct sales versus indirect channel,
third party contracts. Such pricing differences resulted in the Company's
recognition of license revenues of $2.9 million and $1.2 million for the three
months ended March 31, 1998 and 1997, respectively.
During the fourth quarter of 1997, Baan Midmarket Solutions ("BMS") was
formed, with an 85% ownership by VVBV and 15% ownership by the Company. Pursuant
to the related agreement, the Company agreed to provide certain services to BMS
in return for reimbursement of the costs of such services and assigned a
majority of its existing reseller agreements to BMS. In the first quarter of
1998, the Company recognized revenues of approximately $15.3 million from sales
of licenses to BMS for their resale to third party 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 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.
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.
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5 COMPREHENSIVE INCOME
During the quarter, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income". Statement No. 130 requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes changes in the balances
of items that are reported directly as a separate component of Shareholders'
Equity.
The Company had changes to its accumulated translation adjustment of
($2,567,000) and ($2,993,000) for the three months ended March 31, 1998 and
1997, respectively.
Withholding taxes have not been provided on undistributed earnings of
foreign subsidiaries. The Company remits only those earnings which are
considered to be in excess of the reasonably anticipated working capital needs
of the foreign subsidiaries with the balance considered to be permanently
reinvested in the operations of the foreign subsidiaries.
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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 filed with
the Securities and Exchange Commission.
OVERVIEW
The Company's principal source of revenues consists of license fees and
related services, including consulting, training 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 or 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 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 period, which is typically twelve
months. Service revenues from training and consulting are recognized when the
services are performed.
Approximately $43 million of license revenue was deferred in the first
quarter of 1998, primarily because of uncertainties related to the
implementation of Statement of Position ("SOP") 97-2. This larger than
anticipated deferral resulted in a decrease of gross profit as a percentage of
total revenues and an increase in operating expenses as a percentage of total
net revenues for the quarter ended March 31, 1998 compared to the comparable
period in 1997.
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
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<PAGE> 14
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 assurances 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.
NET REVENUES
Net revenues increased 35% ($46.3 million) to $179.5 million in the
three-month period ended March 31, 1998 compared to $133.2 million in the
corresponding period in 1997, primarily due to increased maintenance and service
revenues. EMEA (Europe, Middle East and Africa) net revenues were 48% and 42% of
total net revenues for the three-month periods ended March 31, 1998 and 1997,
respectively. North America's percentages of net revenues were 43% for the first
quarter of 1998 and 1997. Latin America and Asia Pacific combined contributed 9%
for the three-month period ended March 31, 1998 compared to 15% for the same
period in 1997.
License revenues increased 11% ($9.5 million) to $92.9 million for the
three-month period ended March 31, 1998 compared to $83.4 million in the
corresponding period in 1997. License revenues as a percentage of total net
revenues were 52% for the quarter ended March 31, 1998 compared to 63% for the
corresponding period in 1997. Related party revenues were $18.2 million and $6.3
million for the period ending March 31, 1998 and 1997, respectively.
Approximately $43 million of license revenue was deferred in the first quarter
of 1998, primarily because of uncertainties related to the implementation of
Statement of Position ("SOP") 97-2. The predominant uncertainty 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 because of these financing agreements 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 agreements and believes that this will strengthen its ability to
recognize revenue under the new SOP.
Maintenance and service revenues increased 75% ($37.1 million) to $86.6
million for the three-month period ended March 31, 1998 compared to $49.5
million for the same period in 1997. This increase was 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 revenues were 48% and 37% for the
quarters ended March 31, 1998 and 1997, respectively.
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<PAGE> 15
GROSS PROFIT
The following table, expressed in thousands, sets forth, for the periods
indicated, gross profit and gross margin for each revenue category:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
% OF % OF
REVENUE REVENUE
$ CATEGORY $ CATEGORY
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross profit:
License ............... $ 85,729 92% $ 77,708 93%
Maintenance and service 17,576 20 11,615 23
Hardware and other .... -- -- 152 48
-------- --------
Total gross profit ...... $103,305 58 $ 89,475 67
======== ========
</TABLE>
The Company's gross profit as a percentage of total net revenues was 58%
and 67% for the three-month periods ended March 31, 1998 and 1997, respectively.
The decrease in gross margin in 1998 compared to 1997 primarily reflects the
deferral of license revenue discussed above.
Gross margin on license revenue remained relatively constant for the first
quarter of 1998 as compared to 1997. 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 $2.3 million and $1.3 million for the
three-month periods ended March 31, 1998 and 1997, respectively.
Gross margin on maintenance and service revenues was 20% and 23% for the
three-month periods ended March 31, 1998 and 1997, respectively. The decrease in
the first quarter of 1998 compared to the same period in 1997 was primarily due
to the increased hiring of service personnel who were not fully billable in the
first quarter of 1998 and increased 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 28% ($10.5 million) to
$47.7 million in the three-month period ended March 31, 1998 from $37.3 million
for the corresponding period 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 sales staff
and sales support personnel in all geographic regions. Sales and marketing
expenses include charges of $0.2 million and $4.0 million to bad debt expense
for the first quarter of 1998 and 1997, respectively. Sales and marketing
expenses also includes a net foreign currency transaction loss of $211,000 in
the first quarter of 1998 compared to a net gain of $4.0 million for the
corresponding period in 1997. As a percentage of total net revenues, sales and
marketing expenses were 27% and 28% for the three-months ended March 31, 1998
and 1997, respectively. 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.
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<PAGE> 16
RESEARCH AND DEVELOPMENT
Research and development expenses increased 60% ($11.5 million) to $30.7
million for the three-month period ended March 31, 1998 from $19.2 million for
the same period in 1997. As a percentage of total net revenues, research and
development expenses were 17% and 14% for the three-month periods ended March
31, 1998 and 1997, respectively. 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
both three-month periods ending March 31, 1998 and 1997. Aggregate research and
development expenditures, including both research and development expenses and
capitalized software costs, were $34.9 million and $21.9 million for the
three-month periods ended March 31, 1998 and 1997, respectively.
The Company believes it is critical to the Company's future success to
continue to develop new and enhanced products and technologies. Accordingly, the
Company intends to continue to make significant investments in its research and
development activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 80% ($9.0 million) to $20.3
million for the three-month period ended March 31, 1998 from $11.2 million for
the comparable period in 1997. As a percentage of total net revenues, such
expenses were 11% and 8% for the three-month periods ended March 31, 1998 and
1997, respectively. 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.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased slightly to $1.8 million for
the quarter ended March 31, 1998 compared to $1.4 million for the same period in
1997. The amortization arose from certain of the Company's acquisitions in prior
years.
NET OTHER INCOME
Net other income decreased to $349,000 for the first quarter of 1998
compared to $524,000 for the same period 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.
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<PAGE> 17
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-months ended March 31, 1997 was 39%. The effective rate
for the 1997 quarter 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 March 31, 1998, the Company had cash, cash equivalents and short-term
marketable securities of $284.3 million and working capital of $341.7 million.
In the first three months of 1998, the Company's operating activities provided
net cash of $62.8 million, primarily as a result of income before depreciation
and amortization of intangibles and the increase of deferred revenues more than
offsetting the decrease in operating assets and liabilities. Deferred revenues
increased by $72.2 million during the quarter to $104.4 million primarily due to
the deferral of $43 million of license revenue in the first quarter of 1998 and
the annual maintenance billing completed during the quarter. Accounts receivable
net of allowance for doubtful accounts was $267.8 million at March 31, 1998
compared to $243.3 million at December 31, 1997. During the first quarter of
1997, the Company entered into an agreement pursuant to which it sold $13.8
million of its existing accounts receivable. No accounts receivable were sold in
the first quarter of 1998. Accounts receivable days' sales outstanding (the
ratio of the quarter-end accounts receivable balance to quarterly revenues,
multiplied by 90) was 134 days as of March 31, 1998, compared with 102 days as
of December 31, 1997. The 134 days at March 31, 1998 would have been reduced by
26 days if $43 million of revenue had not been deferred in the first quarter of
1998.
Investing activities used $4.1 million of cash in the three-month period
ended March 31, 1998. Net proceeds from the sale and maturities of marketable
securities and short-term investments of $9.2 million and net proceeds from the
sale of subsidiaries and investment of $8.9 million were more than offset by the
net purchase of property and equipment of $9.4 million, the increase in
capitalized software development costs of $4.6 million, the net payment for
acquisitions and investments of $3.8 million, and other miscellaneous investing
activities of $4.4 million. As of June 30, 1998, with the exception of the
semi-annual interest payments on the convertible debt of $4.5 million per
payment, the additions of property and equipment, and the direct costs
associated with the acquisition of CODA, the Company had no significant capital
commitments.
Financing activities provided cash of $17.9 million in the three-month
period ended March 31, 1998, primarily because of the proceeds from the issuance
of common shares of $17.5 million upon exercise of stock options.
The Company has a credit facility with ABN AMRO Bank in The Netherlands
which allows the Company and its subsidiaries to borrow up to NLG 40 million (or
$19.2 million, based on the exchange rate at March 31, 1998). In addition,
certain of the Company's subsidiaries have additional bank credit agreements for
relatively small amounts. As of March 31, 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
17
<PAGE> 18
the next twelve months. The Company may from time to time consider acquisitions
of complementary businesses, products or technologies, which could require
additional financing. Such acquisitions could include the acquisition of one or
more distributors, but no such contemplated acquisition, if effected, is likely
to be material to the Company's financial condition. In addition, continued
growth in the Company's business 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 license revenues have
increased in recent periods as a percentage of total net revenues. 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.
19
<PAGE> 20
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in the last five years. The growth
of the Company's business and expansion of the Company's customer base has
placed a significant strain on the Company's management and operations. 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 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 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.
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<PAGE> 21
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 and Oracle. 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
21
<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 release, BAAN
IV, 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.
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 expects to continue to pursue
acquisitions of other companies with potentially complementary product lines,
technologies and businesses.
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
22
<PAGE> 23
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.
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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<PAGE> 24
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
Senior Vice President,
Administration & Chief
Financial Officer and Chief
Operating Officer
Date: July 9, 1998
24
