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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
BAAN COMPANY N.V.
Baron van Nagellstraat 89
3770 LK Barneveld
The Netherlands
and
2191 Fox Mill Road, Suite 500
Herndon, Virginia, USA 20171
(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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<PAGE> 2
BAAN COMPANY N.V.
FORM 6-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Information (unaudited):
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998.................................. 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998...... 4
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the three and six months ended June 30, 1999
and 1998............................................... 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998................ 6
Notes to Condensed Consolidated Financial Statements...... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
</TABLE>
2
<PAGE> 3
BAAN COMPANY N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 121,003 $ 205,751
Marketable securities..................................... 694 1,080
Accounts receivable, net of allowance for doubtful
accounts of $41,474 in 1999 and $46,595 in 1998........ 236,578 252,129
Income tax receivable..................................... 21,841 45,045
Due from related parties.................................. 5,060 6,297
Other current assets...................................... 64,240 67,032
--------- ---------
Total current assets.............................. 449,416 577,334
Property and equipment, at cost............................. 117,433 129,267
Less accumulated depreciation and amortization.............. (74,203) (66,569)
--------- ---------
Net property and equipment.................................. 43,230 62,698
Software development costs, net of accumulated amortization
of $37,899 in 1999 and $22,620 in 1998.................... 80,532 78,319
Intangible assets, net of accumulated amortization of
$42,219 in 1999 and $32,336 in 1998....................... 86,782 52,644
Other non-current assets.................................... 36,550 52,156
--------- ---------
Total assets...................................... $ 696,510 $ 823,151
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 10,314 $ 523
Accounts payable.......................................... 66,521 74,508
Accrued liabilities....................................... 118,519 179,529
Income taxes payable...................................... 20,390 43,441
Other current liabilities................................. 10,908 7,529
Deferred revenue.......................................... 129,380 147,933
--------- ---------
Total current liabilities......................... 356,032 453,463
Long-term debt.............................................. 190,232 191,013
Long-term deferred revenue.................................. 15,653 17,831
Other long-term liabilities (includes $19,000 due to related
parties in 1999).......................................... 21,772 4,084
Commitments and contingencies
Shareholders' equity:
Common shares, par value -- NLG 0.06 per share,
700,000,000 shares authorized; 206,576,559 and
204,886,317 issued and outstanding in 1999 and 1998,
respectively........................................... 6,224 6,193
Additional paid-in capital................................ 394,018 387,406
Accumulated deficit....................................... (263,533) (235,261)
Accumulated other comprehensive loss...................... (23,888) (1,578)
--------- ---------
Total shareholders' equity............................. 112,821 156,760
--------- ---------
Total liabilities and shareholders' equity........ $ 696,510 $ 823,151
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
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,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
License revenue (includes revenues from related
parties of $5,000 for the three and six months
ended June 30, 1999, and $32,640 and $50,821
for the three and six months ended June 30,
1998).......................................... $ 54,350 $131,254 $119,528 $224,159
Maintenance and service revenue................... 118,450 98,825 229,043 185,397
-------- -------- -------- --------
Total net revenues........................ 172,800 230,079 348,571 409,556
Cost of revenues:
Cost of license revenue........................... 12,897 6,444 27,289 13,620
Cost of maintenance and service revenue........... 85,997 67,879 170,542 136,875
-------- -------- -------- --------
Total cost of revenues.................... 98,894 74,323 197,831 150,495
-------- -------- -------- --------
Gross profit........................................ 73,906 155,756 150,740 259,061
-------- -------- -------- --------
Operating and non-recurring expenses:
Sales and marketing............................... 36,536 53,110 85,593 100,608
Research and development.......................... 30,962 35,453 67,750 66,128
General and administrative........................ 17,255 27,852 34,117 50,192
Non-recurring expenses............................ 424 14,400 424 14,400
-------- -------- -------- --------
Total operating and non-recurring
expenses................................ 85,177 130,815 187,884 231,328
-------- -------- -------- --------
Income (loss) from operations....................... (11,271) 24,941 (37,144) 27,733
Other income (expense), net......................... (1,864) 164 (3,246) 513
-------- -------- -------- --------
Income (loss) before income taxes................... (13,135) 25,105 (40,390) 28,246
Provision (benefit) for income taxes................ (3,941) 8,034 (12,118) 9,039
-------- -------- -------- --------
Net income (loss)................................... $ (9,194) $ 17,071 $(28,272) $ 19,207
======== ======== ======== ========
Net income (loss) per share
Basic............................................. $ (0.04) $ 0.09 $ (0.13) $ 0.10
Diluted........................................... $ (0.04) $ 0.08 $ (0.13) $ 0.09
Shares used in computing per share amounts
Basic............................................. 210,889 197,275 210,444 195,953
Diluted........................................... 210,889 212,000 210,444 211,699
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss)..................................... $ (9,194) $17,071 $(28,272) $19,207
Other comprehensive income (loss):
Currency translation adjustment..................... (4,973) 1,811 (22,310) (756)
-------- ------- -------- -------
Comprehensive income (loss)........................... $(14,167) $18,882 $(50,582) $18,451
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
BAAN COMPANY N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss)........................................... $(28,272) $ 19,207
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 38,441 21,657
Provision for doubtful accounts........................ 3,719 761
Write-off of software development costs................ -- 9,600
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................. (4,699) (46,401)
Due from related parties............................. (8,605) 38,979
Other current assets................................. 27,591 (13,229)
Accounts payable..................................... (1,309) (28,812)
Accrued liabilities.................................. (56,741) 11,569
Income taxes payable................................. (17,467) (29,683)
Deferred revenue..................................... (20,295) 63,662
-------- --------
Net cash provided by (used in) operating activities......... (67,637) 47,310
-------- --------
Investing activities:
Property and equipment purchased............................ (1,860) (17,253)
Property and equipment sold................................. 5,611 --
Proceeds from the sale of subsidiaries and investments...... -- 8,891
Increase in capitalized software development costs.......... (17,561) (10,424)
Payment for acquisitions and investments, net of cash
acquired.................................................. (4,940) (6,413)
Purchase of marketable securities........................... (428) (91,575)
Proceeds from the sale/maturity of marketable securities and
short-term investments.................................... 814 105,080
Other....................................................... 674 (6,127)
-------- --------
Net cash used in investing activities....................... (17,690) (17,821)
-------- --------
Financing activities:
Net borrowings under short-term credit facilities........... 9,758 454
Payments of long-term debt.................................. (744) (266)
Proceeds from issuance of common shares..................... 6,581 29,283
-------- --------
Net cash provided by financing activities................... 15,595 29,471
-------- --------
Effect of foreign currency exchange rates on cash and cash
equivalents............................................... (15,016) 404
-------- --------
Increase (decrease) in cash and cash equivalents............ (84,748) 59,364
Cash and cash equivalents at beginning of period............ 205,751 111,417
-------- --------
Cash and cash equivalents at end of period.................. $121,003 $170,781
======== ========
Supplemental disclosure of non-cash activities:
Conversion of subordinated notes to common stock............ $ -- $ 8,302
======== ========
</TABLE>
The accompanying notes are an integral part of these 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.
BUSINESS
Baan Company N.V. (the "Company" or "Baan") is incorporated in The
Netherlands. The company is a global provider of enterprise business solutions
that address enterprise technology needs. It offers a comprehensive portfolio of
integrated, best-in-class, component-based applications and services that span
an organization's entire value chain, including E-Business and Web Commerce,
Customer Relationship Management, Enterprise Resource Planning, Supply Chain
Management, and Corporate Knowledge Management. Available on the leading
internet/intranet, client/server, and database platforms, Baan enterprise
solutions are currently in use at 12,000 customer sites worldwide. The Company
sells and supports its products through corporate headquarters in Barneveld, The
Netherlands and Herndon, 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,
1999 and for the three and six months ended June 30, 1999 and 1998 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 months ended June 30, 1999 are not necessarily indicative of results that
may be expected for the entire year. The condensed consolidated balance sheet at
December 31, 1998 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, 1998
included in the Company's Form 20-F filed with the Securities and Exchange
Commission.
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
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
7
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the effect is dilutive. The computation for net loss per share excludes any
anti-dilutive common equivalent shares.
The following table sets forth the computation of basic and diluted income
per share for the three and six months ended June 30, 1999 and 1998 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)......................... $ (9,194) $ 17,071 $(28,272) $ 19,207
======== ======== ======== ========
Denominator:
Denominator for basic income (loss) per
share -- weighted average shares....... 205,889 197,275 205,444 195,953
Common stock equivalents.................. 5,000 14,725 5,000 15,746
-------- -------- -------- --------
Denominator for diluted income (loss) per
share -- adjusted weighted average
shares and assumed conversions......... 210,889 212,000 210,444 211,699
======== ======== ======== ========
Basic income (loss) per share............... $ (0.04) $ 0.09 $ (0.13) $ 0.10
Diluted income (loss) per share............. $ (0.04) $ 0.08 $ (0.13) $ 0.09
</TABLE>
Included in the computation of diluted earnings per share at June 30, 1999,
were approximately 5 million of shares issuable upon the exercise of the
subscription of common shares from the $75 million equity investment from
Fletcher International Limited in December 1998. At June 30, 1999 and 1998,
approximately 8.6 million and 8.7 million, respectively, of 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. For the three and six months ended June 30, 1999, 3.9 million and
3.7 million, respectively, common equivalent shares were excluded from the
computation of diluted earnings per share because the effect was antidilutive.
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
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,
2000 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.
8
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2 LITIGATION
The Company is party to legal proceedings from time to time. There are no
such proceedings 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.
In October of 1998, the Company and certain of its current or former
officers and directors were named as defendants in a purported shareholder class
action lawsuit entitled Salerno v. Baan Company N.V. et al., which was brought
in the United States District Court for the District of Columbia. Seven
additional purported shareholder class action lawsuits were subsequently
brought, each in the same court with substantially similar allegations: that the
Company allegedly violated certain of the U.S. securities laws by making
purportedly false and misleading statements about the Company's operations
during the period from in or around the end of January 1997 through mid-October
1998. The Company has retained outside counsel and intends to vigorously defend.
The several actions have been consolidated and lead plaintiffs and counsel have
been named. On August 4, 1999, the Company moved to dismiss the actions on
grounds, inter alia, that: (i) the U.S. Courts do not have subject matter
jurisdiction over the claims of shareholders who purchased Baan securities on
foreign (non-U.S.) exchanges -- and such foreign traders appear to comprise
approximately 80% of the purported class, and (ii) the complaint fails to
adequately plead alleged claims for securities violations. Plaintiffs have until
October 4, 1999 to submit their response. All discovery in the case has been
stayed pending resolution of the Company's motion.
3 TRANSACTIONS WITH RELATED PARTIES
Jan Baan, formerly Chief Executive Officer and a Managing Director of the
Company, and J.G. Paul Baan, formerly a Supervisory Director of the Company, and
the Company's founders, effectively control a Netherlands limited liability
company called Vanenburg Group B.V. ("VG," formerly Baan Investment B.V. and
Vanenburg Ventures B.V.). As of April 9, 1999, VG has advised that it owns
approximately 20% of the Company's outstanding Common Shares. As described
further below, the Company has entered into various agreements with entities
owned or controlled by VG and has recognized revenue and reimbursement of
expenses from, and incurred costs for goods and services provided by, such
related parties. The Company believes that all such transactions have been
entered into in the ordinary course of business and have been on terms no less
favorable than would have been obtained from unrelated third parties. Since
1998, it has been Company policy to have all material agreements with VG
approved by the independent directors of the Company's Supervisory Board, and
information on all material VG relationships has also been provided to the
Company's Audit Committee.
The Company's Indirect Channel. As part of its efforts to penetrate the
midmarket, the Company and VG entered into a joint venture agreement in the
fourth quarter of 1997 under which Baan Midmarket Solutions ("BMS") was created
(85% owned by VG, 15% by the Company). BMS would act as the wholesaler to the
indirect channel distributors and resellers, and would provide training, lead
generation and sales support to further develop and sustain the channel. Over
the course of 1998, BMS more than doubled the number of channel partners selling
the Company's products into the midmarket -- ending 1998 with approximately 230
Value Added Resellers ("VARs"). For the three and six months ended June 30,
1998, the Company recognized $32.6 million and $47.9 million, respectively, from
sales of licenses to BMS. In light of the Company's acquisition of core BMS
assets in January 1999 (described below), the Company recognized no revenues
from BMS from the first quarter of 1999 forward.
Of the approximately 230 VARs, approximately 15 are owned by VG and
comprise the Vanenburg Business Systems network ("VBS", formerly known as the
Baan Business Systems network). During the first
9
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3 TRANSACTIONS WITH RELATED PARTIES -- (CONTINUED)
quarter of 1998, the Company recognized $2.9 million from the assignment of a
number of customer contracts to VBS. Thereafter, VBS, like the other VARs in the
Baan indirect channel, purchased licenses for resale directly from BMS.
Consequently, the Company recognized no revenue from VBS from the second quarter
of 1998 forward. And although the Company purchased the core BMS assets in
January of 1999 (as described below), the current VBS agreement (assumed by the
Company, along with all VAR agreements, as part of the BMS acquisition) requires
VBS to purchase licenses of the Company's products for resale from an
independent third-party distributor. Consequently, since VBS will not be
purchasing licenses directly from the Company, the Company does not expect to
recognize license revenue from VBS going forward.
The Company's Acquisition of Core BMS Assets. In January 1999, the Company
entered into an agreement with VG pursuant to which the Company purchased (or
was assigned) all VAR agreements that had previously been assigned to BMS and/or
that BMS had entered into since its creation. Approximately 130 BMS employees
also transferred to the Company as part of the transaction.
The purchase price is comprised of the following: (i) $2 million paid in
cash upon execution, representing one-half the total discount negotiated by a
third-party distributor that purchased the BMS inventory existing at the end of
1998; and (ii) a three-year, 15% royalty on the Company's net revenues from its
indirect channel that includes a minimum payment and maximum potential earn out.
The minimum guaranteed payment is approximately $41 million. To the extent this
minimum is not earned in full via the royalty, the Company would be obligated to
pay VG the difference between the earned amounts and the minimum guaranty. The
maximum potential earn-out is the guaranteed minimum payment plus up to an
additional $44 million.
A more detailed summary of the Baan indirect channel, and BMS's role in it,
is set forth in the Company's Form 20-F for 1998 (Item 13) on file with the
Securities and Exchange Commission.
Other Company -- VG Relationships. For the three and six months ended June
30, 1999, the Company charged VG $2.4 million and $4.3 million, respectively,
for certain Information Technology ("IT") services, pursuant to an IT services
agreement between the parties under which the Company provides VG use of the
Company's IT and telephony infrastructure. Pricing was based on third-party
information the Company obtained concerning outsource rates charged for similar
arrangements by third parties. During the third quarter of 1999, the IT services
agreement was terminated and the Company will no longer be providing these IT
services to VG. For the three and six months ended June 30, 1998, the Company
charged VG $4.0 million and $7.7 million, respectively, for IT services. Such
amounts have been reflected as reductions in operating expenses in the
accompanying Condensed Consolidated Financial Statements.
In March 1999, the Company entered into a development agreement with a
wholly-owned subsidiary of VG. Under the agreement, the subsidiary agreed to pay
the Company $5 million as a one-time development fee for perpetual use of the
existing version of the licensed Baan technology, and $1 million representing
annual upgrade fees of $500,000 over each of the next two years for any
enhancements to the licensed technology. The agreement was contingent on an
independent valuation and Supervisory Board approval and, therefore, the $6
million was recorded as deferred revenue in the first quarter of 1999. During
the second quarter of 1999, an independent valuation and Supervisory Board
approval were received and the $5 million of license revenue was recognized.
During 1998, the Company entered into OEM agreements with certain software
companies owned or controlled by VG. During the first six months of 1999,
royalties and development expenses in connection with such agreements were not
material. There were no such expenses during the first half of 1998.
In addition, the Company has entered into several agreements with VG
entities under which the Company paid VG certain product, marketing, services,
or lease fees during 1998 and 1999. These agreements
10
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BAAN COMPANY N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3 TRANSACTIONS WITH RELATED PARTIES -- (CONTINUED)
include royalty agreements under which the Company is authorized to resell
instructional or other materials created by certain companies owned or
controlled by VG; subcontracting agreements whereby the Company retains the
services of certain VG entities to assist in fulfilling customer commitments;
and lease agreements for certain of the Company's Netherlands facilities that
were properties owned by VG entities. The total costs and expenses incurred by
the Company during the first half of 1998 and 1999 associated with these
agreements were not material.
4 NON-RECURRING ACTIVITIES
In October 1998, the Company announced a comprehensive reorganization plan
to reduce the Company's expense levels and to streamline operations. In
connection with the reorganization, the Company recognized a non-recurring
charge of approximately $140.5 million during the fourth quarter of 1998. During
the second quarter of 1999, $13.2 million of restructuring costs previously
recorded were paid. In addition, the Company made certain changes to the
reorganization plan resulting in a reversal of approximately $6.6 million. The
reversal of this accrual is reflected in non-recurring expenses in the
accompanying Condensed Statements of Operations.
During the second quarter of 1999, the Company disposed of one of its
global sales units to help further reduce costs. As a result, the Company
recognized a non-recurring charge of approximately $7.0 million during the
second quarter of 1999. This charge is included in non-recurring expenses in the
accompanying Condensed Statements of Operations. The non-recurring charge is
comprised of severance-related costs of approximately $3.5 million, office
closure costs of approximately $3.0 million, and other contractual commitments
of approximately $0.5 million.
The following table, expressed in thousands, summarizes the Company's
fourth quarter of 1998 and second quarter of 1999 non-recurring expenses and
remaining accrual as of June 30, 1999:
<TABLE>
<CAPTION>
TOTAL CASH ASSET REVERSAL ACCRUAL BALANCE
COSTS PAID WRITE-OFFS OF ACCRUAL AT JUNE 30, 1999
-------- ------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Q4 1998 reorganization:
Asset write-downs............. $ 27,299 $ -- $27,299 $ -- $ --
Loss on disposal of assets.... 58,030 8,903 45,988 1,200 1,939
Severance-related costs....... 22,204 21,641 -- -- 563
Sales and marketing
programs................... 21,694 1,601 14,693 5,400 --
Closure of offices............ 9,849 9,220 -- -- 629
Other non-recurring charges... 1,425 1,425 -- -- --
-------- ------- ------- ------ ------
$140,501 $42,790 $87,980 $6,600 $3,131
======== ======= ======= ====== ======
Q2 1999 disposal:
Severance-related costs....... $ 3,443 $ 1,524 -- -- $1,919
Closure of offices............ 3,040 454 -- -- 2,586
Other non-recurring charges... 541 178 -- -- 363
-------- ------- ------- ------ ------
$ 7,024 $ 2,156 -- -- $4,868
======== ======= ======= ====== ======
</TABLE>
During the second quarter of 1998, the Company completed the acquisition of
the outstanding shares of CODA Group plc. ("CODA"), a provider of financial
software. In connection with the acquisition of CODA, the Company recognized
$14.4 million of non-recurring expenses consisting of $9.6 million for the
write-off of software development costs, $3.0 million for related professional
fees, and $1.8 million of restructuring expenses, including severance and other
costs associated with the consolidation of operations.
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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 "Risk Factors" in this Form 6-K, and the factors discussed in the
Company's Form 20-F for fiscal 1998 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. The Company recognizes 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.
TOTAL NET REVENUES
Total net revenues decreased 25% ($57.3 million) to $172.8 million and 15%
($61.0 million) to $348.6 million in the three and six months ended June 30,
1999, respectively, when compared to the corresponding periods in 1998. Net
revenues for EMEA (Europe, Middle East and Africa), North America and for Latin
America and Asia Pacific combined for the three months ended June 30, 1999 were
54%, 36% and 10%, respectively, compared to 53%, 40% and 7% for the
corresponding period in 1998. Net revenues for EMEA, North America and for Latin
America and Asia Pacific combined for the six months ended June 30, 1999 were
51%, 40% and 9%, respectively, compared to 50%, 42% and 8% for the corresponding
period in 1998.
LICENSE REVENUE
License revenue decreased 59% ($76.9 million) to $54.4 million for the
three month period ended June 30, 1999 compared to $131.3 million in the same
period in 1998. For the six months ended June 30, 1999, license revenue
decreased 47% ($104.7 million) to $119.5 million compared to $224.2 million in
the same period in 1998. License revenue as a percentage of total net revenues
was 31% and 34% for the three and six months ended June 30, 1999, respectively,
compared to 57% and 55% for the same periods in 1998. The Company believes that
the enterprise applications software market is being negatively impacted by a
number of industry-wide issues including: (i) global economic difficulties and
uncertainty; (ii) reductions in capital expenditures by large customers; (iii)
increasing competition; and (iv) increased customer focus on addressing Year
2000 problems. The Company believes the impact of these market forces was
initially more pronounced upon the Company because, as compared to certain of
its competitors, license fees had comprised of a greater percentage of the
Company's total revenue, as compared to non-license revenues such as
maintenance, service and consulting. These factors have, in turn, given rise to
a number of market trends that have slowed license revenue growth, including (a)
longer sales cycles; (b) increased uncertainty of customers in making purchasing
decisions; (c) deferral or delay of IT projects and generally reduced
expenditures for software; (d) reallocation of reduced capital expenditures to
fix Year 2000 problems of existing systems; and (e) increased price competition.
The Company expects these factors to continue to impact license revenues and
that these trends will continue during 1999 until global economic conditions
improve and Year 2000 compliance is complete.
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MAINTENANCE AND SERVICE REVENUE
Maintenance and service revenue increased 20% ($19.7 million) to $118.5
million and 24% ($43.6 million) to $229.0 million for the three and six month
periods ended June 30, 1999, respectively, compared to $98.8 million and $185.4
million for the same periods in 1998. These increases were primarily
attributable to increased maintenance fees and services to a larger installed
base of customers. As a percentage of total net revenues, maintenance and
service revenue was 69% and 66% for the three and six month periods ended June
30, 1999, respectively, compared to 43% and 45% for the same periods in 1998.
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,
----------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
% OF % OF % OF % OF
REVENUE REVENUE REVENUE REVENUE
$ CATEGORY $ CATEGORY $ CATEGORY $ CATEGORY
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross profit:
License.......................... $41,453 76% $124,810 95% $ 92,239 77% $210,539 94%
Maintenance and Services......... 32,453 27 30,946 31 58,501 26 48,522 26
------- -- -------- -- -------- -- -------- --
Total gross profit......... $73,906 43 $155,756 68 $150,740 43 $259,061 63
======= == ======== == ======== == ======== ==
</TABLE>
The Company's gross profit as a percentage of total net revenues was 43%
for each of the three and six month periods ended June 30, 1999, respectively,
compared to 68% and 63% for the same periods in 1998. The decrease in gross
margin for the three and six months ended June 30, 1999, compared to the same
periods in 1998, is a result of the shift in business mix from higher margin
license revenue to lower margin maintenance and service revenue.
Gross margin on license revenue was 76% and 77% for the three and six
months ended June 30, 1999, respectively, compared to 95% and 94% for the same
periods in 1998. Cost of license revenues consists primarily of amortization of
capitalized software, the cost of third party software, and the cost of media
and freight. The decrease in gross margins on license revenue from 1998 to 1999
is due primarily to lower license revenue and higher amortization of capitalized
software costs. Amortization of capitalized software amounted to $7.7 million
and $15.3 million for the three and six months ended June 30, 1999,
respectively, compared to $2.6 million and $4.9 million for the same periods in
1998.
Gross margin on maintenance and service revenues was 27% and 26% for the
three and six month periods ended June 30, 1999, respectively, compared to 31%
and 26% for the same periods in 1998. The gross margin decrease for the second
quarter of 1999 compared to the same period in 1998 was primarily due to an
increase 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 decreased 31% ($16.6 million) to
$36.5 million and 15% ($15.0 million) to $85.6 million in the three and six
month periods ended June 30, 1999, respectively, from $53.1 million and $100.6
million for the same periods in 1998. The second quarter of 1999 reflects the
impact of the fourth quarter of 1998 reorganization effort aimed at streamlining
operations and reducing costs. Sales and marketing expenses also include net
foreign currency transaction gains of $8.1 million and $10.9 million for the
three and six months ended June 30, 1999, respectively, compared to net losses
of $0.6 million and $0.8 million for the corresponding periods in 1998. These
foreign currency transaction gains and losses result from the worldwide cash
management activities undertaken by the Company in support of its sales and
marketing subsidiaries. The Company's subsidiaries, which act as sales offices,
supplement their cash requirements with loans from the parent company in The
Netherlands. In addition, the loans are used to settle various intercompany
transactions such as required royalty payments. These intercompany accounts are
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<PAGE> 14
denominated in the functional currency of the subsidiary in order to centralize
foreign exchange risk with the parent company in The Netherlands. Accordingly,
the intercompany loans result in currency gains and losses, which are recorded
as sales and marketing expenses since they relate to operations of the Company's
sales subsidiaries. As a percentage of total net revenues, sales and marketing
expenses were 21% and 25% for the three and six month periods ended June 30,
1999, respectively, compared to 23% and 25% for the same periods in 1998.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 13% ($4.5 million) to $31.0
million and increased 2% ($1.6 million) to $67.7 million for the three and six
month periods ended June 30, 1999, respectively, from $35.5 and $66.1 million
for the same periods in 1998. As a percentage of total net revenues, research
and development expenses were 18% and 19% for the three and six month periods
ended June 30, 1999, respectively, compared to 15% and 16% for the same periods
in 1998. The decrease in research and development expenses in absolute dollars
for the second quarter of 1999 is primarily a result of additional capitalized
research and development expenses and lower third-party costs. The Company
capitalized 16% and 13% of aggregate research and development expenditures for
the three and six month periods ending June 30, 1999, respectively, compared to
12% for each of the same periods in 1998. Aggregate research and development
expenditures, including both research and development expenses and capitalized
software costs, were $36.6 million and $78.1 million for the three and six month
periods ended June 30, 1999, respectively, compared to $40.3 million and $75.1
million for the same periods in 1998.
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 decreased 38% ($10.6 million) to $17.3
million and 32% ($16.1 million) to $34.1 million for the three and six month
periods ended June 30, 1999, respectively, from $27.9 million and $50.2 million
for the same periods in 1998. As a percentage of total net revenues, general and
administrative expenses were 10% for both the three and six months ended June
30, 1999, respectively, compared to 12% for both of the same periods in 1998.
The decrease in general and administrative costs in absolute dollars is
primarily a result of the fourth quarter of 1998 reorganization effort aimed at
streamlining operations and reducing costs. General and administrative expenses
include charges of $2.0 million and $3.8 million to bad debt expense for the
three and six months ended June 30, 1999, respectively, compared to $5.0 million
and $5.2 million for the same periods in 1998. General and administrative
expenses also include the amortization of intangible assets of $4.4 million and
$9.9 million for the three and six months ended June 30, 1999, respectively,
compared to $2.6 million and $4.4 million for the same periods in 1998. The
amortization arose from certain of the Company's acquisitions.
NON-RECURRING EXPENSES
During the fourth quarter of 1998, the Company completed key elements of
its reorganization plan to reduce costs and gain efficiencies across all aspects
of the organization. In connection with these efforts, the Company recorded
non-recurring charges of $140.5 million related to restructuring, losses on the
disposal of certain under-performing business entities and other assets, and
other asset write-downs. The restructuring component of the charge was $55.2
million and included severance-related expenses for over 1000 employees, costs
associated with the cancellation of certain marketing and sales programs, and
costs related to the consolidation and closure of approximately 50 offices. The
Company disposed of certain non-strategic business entities and recognized a
loss of $58.0 million in connection with the disposal of those assets. The
Company also recognized a charge of $27.3 million for the write-down of certain
long-lived assets in connection with the reorganization. During the second
quarter of 1999, the Company made certain changes in the reorganization plan
resulting in a reversal of approximately $6.6 million. The reversal of this
accrual is reflected in non-recurring expenses in the accompanying Condensed
Statements of Operations. Approximately $3.1 million of
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<PAGE> 15
the fourth quarter of 1998 non-recurring charge remains accrued as of June 30,
1999. See Note 4 of the Notes to Condensed Financial Statements.
During the second quarter of 1999, the Company disposed of one of its
global sales units to help further reduce costs. As a result, the Company
recognized a non-recurring charge of approximately $7.0 million during the
second quarter of 1999. This charge is included in non-recurring expenses in the
accompanying Condensed Statements of Operation. The non-recurring charge is
comprised of severance-related costs of approximately $3.4 million, office
closure costs of approximately $3.0 million, and other contractual commitments
of approximately $0.5 million.
In connection with the acquisition of CODA Group plc. in the second quarter
of 1998, the Company recognized non-recurring charges of $14.4 million
consisting of a $9.6 million write-down of duplicative capitalized software
development costs, a $3.0 million non-recurring charge for related professional
fees, and a $1.8 million restructuring charge, primarily severance related costs
and other costs associated with the consolidation of operations.
NET OTHER INCOME AND EXPENSE
Net other expense was $1.9 million for the three months ended June 30, 1999
compared to net other income of $0.2 million for the same period in 1998. Net
other expense was $3.2 million for the six months ended June 30, 1999 compared
to net other income of $0.5 million for the same period in 1998. Net other
expense is primarily interest expense on the convertible notes and 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.
At December 31, 1998 the Company had net operating losses generated in
various countries totaling approximately $445,449,000 of which $333,000,000,
$25,074,000 and $67,905,000 were generated in The Netherlands, Germany and the
United States, respectively. The Netherlands and Germany net operating losses
can be carried forward indefinitely to offset future taxable income. The net
operating losses generated in the United States expire in 2008 or later. As of
December 31, 1998, the Company established a valuation allowance for all net
operating losses.
The Company's effective tax for 1998 was 6%, primarily due to benefits
realized from the carryback of operating losses. The effective tax rate for the
three and six months ended June 30, 1999 was 30%.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash, cash equivalents and marketable
securities of $121.7 million and working capital of $93.4 million. For the six
months ended June 30, 1999, the Company's operating activities used net cash of
$67.6 million. Accounts receivable net of allowance for doubtful accounts was
$236.6 million at June 30, 1999 compared to $252.1 million at December 31, 1998.
Accounts receivable days' sales outstanding (the ratio of the quarter-end
accounts receivable balance to quarterly revenues, multiplied by 90) was 123
days as of June 30, 1999, compared with 173 days as of December 31, 1998.
Investing activities used $17.7 million of cash in the six-month period
ended June 30, 1999. As of June 30, 1999, 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 $15.6 million in the six-month period
ended June 30, 1999, primarily $10.0 million from short-term working capital
borrowings in connection with partner marketing activities and approximately
$6.6 million from the issuance of common shares upon exercise of stock options
and for the Company's employee stock purchase plan.
As of June 30, 1999, the Company had a credit facility with ABN AMRO Bank
in The Netherlands which allowed the Company and its subsidiaries to borrow up
to NLG 40 million (or $18.8 million, based on
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<PAGE> 16
the exchange rate at June 30, 1999). In July 1999, the Company replaced this
line of credit with a $75 million revolving credit facility collateralized by
certain of the Company's receivables. In addition, certain of the Company's
subsidiaries have additional bank credit agreements for relatively small
amounts. As of June 30, 1999, the Company had no short-term borrowings against
any of its lines of credit.
The Company's long-term debt consists principally of $190 million of
unsecured convertible subordinated notes ("Notes") due in 2001. The Notes are
redeemable by the Company prior to December 16, 1999 under certain conditions
and are redeemable by the Company at any time after such date. At the
Noteholders' option, the Notes are convertible into common shares at any time
with each $1,000 principal amount of Note convertible into approximately 23
common shares. Accordingly, if the notes are called for redemption at a time
when the share price exceeds $22, it is in the Noteholders' economic interest to
convert the Notes rather than accept redemption. The Notes were issued with the
expectation that Noteholders would convert rather than accept redemption.
However, as the Company can not predict what the Company's stock price will be
in 2001, there can be no assurance that the Company will be able to satisfy its
monetary obligations under the Notes through the issuance of common shares.
In December 1998, Fletcher International Limited ("Fletcher") made a $75
million equity investment in the Company. Fletcher paid $75 million to the
Company in exchange for subscription to common shares, which will be purchased
during the period August 1, 1999 through December 31, 2001. The number of common
shares and the price per share will be based on future stock price movement and
will be calculated when the shares are purchased. In no event may the exercise
price exceed $16.00 per share, which results in the minimum issuance of
approximately 5 million common shares. Subject to certain terms, the agreement
also provides for an additional investment of up to $150 million in the Company
over the next three years (again based on a formula based on the market price of
the Company shares at or around the time of exercise). For nine months
commencing October 1, 1999, the Company has the right to require Fletcher to
purchase up to $75 million worth of additional common shares. To the extent that
the Company has not fully exercised its right, Fletcher has the right to
purchase any unexercised portion during the remaining term of the agreement.
Also, for 27 months commencing October 1, 1999, Fletcher has the additional
right to purchase another $75 million in common shares.
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's business may from time to time require additional capital. There
can be no assurance that additional capital will be available to the Company if
and when required, or that such additional acceptable terms.
YEAR 2000
Background. Some computer hardware, software and other date-dependent
equipment were designed with programming code in which calendar year data is
abbreviated to only two digits (e.g., 1998 is abbreviated to 98). As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are commonly referred to as the "Year 2000 Problem."
The Company believes that the demand for its products to date has been
positively impacted by the increased corporate awareness of the Year 2000
Problem and the need to upgrade and/or replace legacy applications in order to
accommodate the change in date to the year 2000. The Company's standard software
offerings introduced since 1993 have been designed to be Year 2000 compliant (as
defined in detail below). The Company and certain of its competitors have
experienced a deceleration of the rate of growth in new license sales in recent
periods, as compared to the growth rates experienced in the enterprise business
management software marketplace in immediately preceding periods, as companies
complete their preparation for the Year 2000 or determine it may be too late to
complete such preparations in advance of Year 2000. The Company believes that
this deceleration will continue for the foreseeable future.
Customer Products. Since the introduction of its Triton 2.2(d) product in
1993, the Company has designed its standard Enterprise Resource Planning ("ERP")
software to be Year 2000 compliant (i.e., with
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<PAGE> 17
the capability of processing accurately inputted 4-digit year values so that it
will be able to correctly recognize the Year 2000 and any inputted year, and
that it will also be able to recognize the Year 2000 as a leap year). The
Company believes that current versions of other standard products to which the
Company has recently acquired ownership are also now Year 2000 compliant.
The Company has made available on its Web site, at www.baan.com, complete
information on the Year 2000 compliance of the Company's products, for the
benefit of customers, potential customers, and other interested parties. It also
provided a direct mailing to its current customer list expressly identifying for
customers those Company products that are Year 2000 compliant and those that are
not; that mailing also referred customers to the Company Web site for the most
current information. However, management believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting the
Company's software products have been identified or corrected, due to the
complexity of these products, the fact that the Company's products operate on
computer systems and networks from other vendors not under the Company's
control, and the fact that the Company's products interact with software from
other vendors not under the Company's control.
The Company typically requires Year 2000 compliance warranties from
third-party vendors whose products are sold in conjunction with or incorporated
into the Company's software products. However, the Company has limited or no
control over the actions of these third-party suppliers. Any failure of these
third parties to comply with these Year 2000 warranties or to resolve Year 2000
problems with their products in a timely manner could have a material adverse
effect on the Company's business, financial condition, and results of operation.
In its mailing to customers, and on its Web site, the Company urges customers to
perform a comprehensive Year 2000 audit of its internal IT systems that operate
with the Company's products, and to contact third-party vendors to obtain Year
2000 assurances with respect to those products that interface with or are used
in combination with the Company's products.
The question of whether a software manufacturer is liable in any way to
customers of its installed base who are operating earlier, non-Year 2000
compliant versions of its products has not yet been decided by any court, to the
best of the Company's knowledge, although some such claims or related claims are
pending. To date, the Company has not been the subject of a Year 2000 claim. To
the extent that a customer may assert any such claim against the Company in the
future, whether on some contract, tort or other theory, the Company believes it
has strong defenses to any such claim (both in contract and on other grounds).
However, 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.
Costs -- Customer Products. The total cost to the Company of completing
any required modifications, upgrades or enhancements to its software products to
ensure they are Year 2000 compliant is virtually impossible to calculate; since
the Company's standard software products are designed to be Year 2000 compliant,
any "compliance costs" are in effect a part of normal, ongoing development
costs.
Internal Information Infrastructure. The Year 2000 Problem could affect
computers, software, and other equipment used, operated, or maintained by the
Company plus office and facilities equipment such as fax machines, photocopiers,
telephone switches, security systems, elevators, and other office
infrastructure. Accordingly, the Company has undertaken a review (which remains
ongoing) of all internal computer programs and systems material to business
operations, to ensure that the programs and systems will be Year 2000 compliant.
Based on the review to date, the Company believes that its internal computer
systems are or will be Year 2000 compliant in a timely manner. Certain of the
Company's back office systems are operating with recent versions of the
Company's standard ERP software (which software, as noted above, is designed to
be Year 2000 compliant), thereby limiting to some extent the breadth of any Year
2000 compliance issues with respect to the Company's internal systems. The
Company has also sent a query letter to certain of its significant vendors of
internal information technology infrastructure seeking representations from such
vendors that their products are Year 2000 compliant. To date the Company has
received a limited number of responses to these query letters. 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
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will not experience unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems.
Costs -- Internal Information Infrastructure. The total cost to the
Company of completing any required modifications, upgrades, or replacements of
these internal systems is difficult to estimate. As noted above, the Company's
assessment of its internal systems remains ongoing. Nonetheless, through June
30, 1999, the Company's best estimate was that it would cost the Company between
$500,000 and $1,000,000 to upgrade its internal systems (both in terms of actual
upgrade expenses and personnel costs).
Potential Consequences of Year 2000 Issues. The Company is attempting to
identify and resolve all Year 2000 problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000
problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could suffer a significant number of operational
inconveniences and inefficiencies for the Company and its clients that may
divert management's time and attention and financial and human resources from
its ordinary business activities. Additionally, the Company does not anticipate
a significant number of serious system failures that may require significant
efforts by the Company or its clients to prevent or alleviate material business
disruptions. In this regard, the Company has not yet formulated contingency
plans to deal with any such unforeseen problems.
INTRODUCTION OF EURO
Background. In January 1999, a new currency called the "Euro" was
introduced in certain European Economic and Monetary Union ("EMU") countries. By
June 30, 2002 at the latest, all participating EMU countries are expected to be
operating with the Euro as their single currency. As a result, in less than one
year, computer software used by many companies headquartered or maintaining a
subsidiary in a participating EMU country is expected to be Euro-enabled, and in
less than four years all companies headquartered or maintaining a subsidiary in
a participating EMU country will need to be Euro-enabled. The transition to the
Euro will involve changing budgetary, accounting and fiscal systems in companies
and public administration, as well as the simultaneous handling of parallel
currencies and conversion of legacy data.
Customer Products. Current versions of the Company's standard ERP software
products are designed to, or with currently available updates will, accommodate
the implementation of the Euro in compliance with current legislation. In
addition, the Company offers two "backported" versions, Triton 3.1b.7 and Baan
IVb5, that will also support the implementation of the Euro. The Company's ERP
product also provides for "multi-base currency conversion," which allows users
to adopt the Euro in a phased approach alongside running existing home currency.
The Company believes that current versions of other products to which the
Company has recently acquired ownership are also now Euro compliant.
The Company offers products from third-party vendors that contain Euro
functionality and are sold in conjunction with or incorporated into the
Company's software products. However, the Company has limited or no control over
the actions of these third-party suppliers. Any failure of these third parties
to comply with the Euro guidelines or to resolve Euro problems with their
products in a timely manner could have a material adverse effect on the
Company's business, financial condition, and results of operation.
The Company has made available on its Web site, at www.baan.com, complete
information on the Euro compliance of the Company's products for the benefit of
customers, potential customers, and other interested parties. However,
management believes that it is not possible to determine with complete certainty
that all Euro problems affecting the Company's software products have been
identified or corrected, due to the complexity of these products, the fact that
the Company's products operate on computer systems and networks from other
vendors not under the Company's control, and the fact that the Company's
products interact with software from other vendors not under the Company's
control.
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Internal Accounting and Invoicing Systems. The Company is not aware of any
material operation issues or costs associated with preparing its own internal
systems for the Euro. As noted above, certain of the Company's back office
systems are operating with recent versions of the Company's ERP software,
thereby limiting to some extent the breadth of any Euro compliance issues with
respect to the Company's internal systems. The Company does utilize third party
vendor equipment and software products that may or may not be Euro compliant.
Although the Company is currently taking steps to address the impact, if any, of
Euro compliance for such third party products, the failure of any critical
components to operate properly in a Euro environment may have an adverse effect
on the business or results of operations of the Company or require the Company
to incur expenses to remedy such problems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Foreign Exchange. The Company is subject to risks typical of a global
business, including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange volatility.
The Company's exposure to foreign exchange rate fluctuations arises mainly
from intracompany transactions relating to financing activities, royalty charges
and other cost allocations which flow through intracompany accounts with its
subsidiaries. These intracompany accounts are typically denominated in the
functional currency of the subsidiary in order to centralize the foreign
exchange risk with the parent company in the Netherlands.
The Company conducts a significant portion of its business in currencies
other than the U.S. dollar (the currency in which its financial statements are
stated), primarily the Euro. While the Company has historically recorded a
majority of its expenses in Dutch guilders (and, since January 1999, is
recording such expenses in Euros), especially research and development expenses,
the Company realizes a large portion of its revenues in U.S. dollars in addition
to guilders (now, Euros). As a result, fluctuation in the value of the Euro
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, there are a number of currencies involved,
currency exposures are constantly changing and currency exchange rates continue
to have significant volatility. The Company may experience currency losses in
the future, and the Company cannot predict the effect of exchange rate
fluctuations upon future operating results.
Interest Rates. The Company invests its surplus cash in a variety of
financial instruments, consisting principally of bank time deposits and
short-term marketable securities with maturities of less than one year. Cash
balances held by subsidiaries are invested in short-term time deposits with the
local operating banks.
The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash
equivalent and short-term investments are treated as "available for sale" under
SFAS 115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. The Company's
investment securities are held for purposes other than trading and have
maturities of less than one year.
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FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 6-K contain
forward-looking statements that are based on current expectations, estimates and
projections about the industries in which the Company operates, management's
beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," variations
of such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performances
and involve certain risks and uncertainties which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements in
this Form 6-K report.
A number of risks that could cause or contribute to such differences have
been set forth above. Additional factors include but are not limited to those
set forth under "Risk Factors" below. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic and international economic conditions, including interest rate and
currency exchange rate fluctuations.
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RISK FACTORS
In addition to the other information contained and incorporated by
reference in this Form 6-K, the following factors, which are not intended to be
all-inclusive, should be carefully considered in evaluating Baan and our
business:
BAAN HAS A LIMITED INTERNATIONAL OPERATING HISTORY, AND HAS RECENTLY
RESTRUCTURED OUR OPERATIONS.
Baan has experienced substantial revenue growth in recent years, but our
profitability has varied widely on a quarterly and annual basis. Baan
experienced losses and limited profitability prior to 1996. In addition,
notwithstanding revenue growth and profitability increases through 1996 and
1997, in 1998 Baan's license revenues declined significantly and we incurred a
large loss from operations. If Baan is unable to stabilize and ultimately
increase license revenues, Baan's business, operating results and financial
condition would be materially adversely affected. In the fourth quarter of 1998,
Baan began an effort to streamline and restructure our operations in order to
reduce operating costs. This effort resulted in Baan reducing our workforce by
approximately 20% and restructuring our operations through the sales of certain
operating units of Baan. To the extent that Baan's streamlining, restructuring
and cost reductions efforts are not successful, Baan's operating results will be
materially adversely affected.
INDUSTRY-WIDE CONDITIONS HAVE RESULTED IN REDUCED LICENSE REVENUES.
Baan believes that the enterprise applications software market is being
negatively impacted by a number of generic issues including: global economic
difficulties and uncertainty; reductions in capital expenditures by large
customers; increasing competition; and increased customer focus on addressing
Year 2000 problems. These factors have, in turn, given rise to a number of
market trends that have negatively impacted license revenues including:
- longer sales cycles;
- increased uncertainty of customers in making purchasing decisions;
- deferral or delay of IT projects and generally reduced expenditures for
software;
- reallocation of reduced capital expenditures to fix Year 2000 problems of
existing systems; and
- increased price competition and price reductions for licensed software.
These conditions and factors contributed to a decline in Baan's license
revenues in 1998 from 1997. Baan expects these factors to continue to adversely
affect our license revenues and that these trends will continue into 1999 until
global economic conditions improve and Year 2000 problems are resolved. Because
of the high degree of uncertainty these factors and trends have created in the
marketplace, Baan is currently unable to predict whether our license revenues
will stabilize at current levels, or when Baan will return to profitability.
BAAN IS SUBJECT TO VARIABILITY OF QUARTERLY OPERATING RESULTS.
Baan's net revenues and operating results can vary, sometimes
substantially, from quarter to quarter. Baan's revenues in general, and in
particular our license revenues, are relatively difficult to forecast due to a
number of reasons. These include:
- the relatively long sales cycles for Baan's products, which make it
difficult to predict the timing of customer purchase decisions;
- the size and timing of individual license transactions;
- the timing of the introduction of new products or product enhancements by
Baan or our competitors, which can affect customer purchase decisions;
- the potential for delay or deferral of customer implementations of Baan's
software or changes in customer budgets;
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- seasonality of technology purchases and other general economic
conditions.
Baan'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 Baan's operating expenses are based
on anticipated revenue levels and because a high percentage of Baan'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.
BAAN HAS DEBT OBLIGATIONS UNDER OUTSTANDING CONVERTIBLE SUBORDINATED NOTES.
In December 1996, Baan incurred $175 million of indebtedness through the
sale of 4.5% convertible subordinated notes payable in the year 2001. That
amount increased by an additional $25 million in January of 1997 (for a total of
$200 million convertible notes) when an over-allotment option was exercised. As
a result of this indebtedness, Baan has substantial principal and interest
obligations. As of June 30, 1999, $190 million convertible notes were
outstanding. Baan's current debt obligations could make it much more difficult
for Baan to obtain additional financing in the future, if such financing is
needed for working capital, acquisitions or other purposes. This debt burden
could also make Baan more vulnerable to industry downturns and competitive
pressures. Further, Baan's working capital declined from $123.9 million at June
30, 1998 to $93.4 million at June 30, 1999. Baan's ability to meet its debt
service obligations will be dependent upon our future performance, which will be
subject to financial, business and other factors affecting the operations of
Baan, many of which are beyond our control. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
BAAN FACES INTENSE COMPETITION.
The enterprise business application software market is highly competitive.
The market 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. Baan's products span
an organization's entire value chain, including E-Business and Web Commerce,
Customer Relationship Management, Enterprise Resource Planning, Supply Chain
Management, and Corporate Knowledge Management, and are available on the leading
internet/intranet, client/server, and database platforms. Baan's current and
prospective competitors offer a variety of products and solutions to address
these markets. Baan's primary competition comes from a number of large
independent software vendors including SAP AG ("SAP"), Oracle Corporation
("Oracle"), J.D. Edwards & Company ("JDE"), Siebel Systems, i2 Technologies, and
PeopleSoft, Inc. ("PeopleSoft"). In addition, Baan 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.
Baan has been seeking to more aggressively target the Small to Medium Sized
Enterprises ("SME") market and to expand into enterprise applications beyond the
traditional ERP solutions. As Baan pursues these strategies, Baan expects to
face additional competition from a number of companies that offer such
applications for the SME market, as well as established ERP vendors such as SAP,
Oracle and PeopleSoft. For our products outside the ERP market segment, Baan
competes with a number of companies, with particular strength in these markets,
such as Siebel Systems in the customer interaction software ("CIS") or
front-office productivity market, along with i2 Technologies, Inc. and
Manugistics Group, Inc. in the supply chain management software market.
Many of Baan's competitors have significant competitive advantages over
Baan, including longer operating histories, significantly greater financial,
technical, marketing and other resources, greater name recognition, and a larger
installed base of customers. In addition, certain competitors, such as SAP,
Oracle and PeopleSoft, have well-established relationships with present and
potential customers of Baan. Furthermore, companies with significantly greater
resources than Baan could attempt to increase their presence in the market by
acquiring or forming strategic alliances with competitors of Baan, and such
companies may be in a better position to withstand the current slowdown in the
ERP market. There can be no assurance that Baan will be able to compete
successfully with existing or new competitors.
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Baan relies on a number of systems consulting and systems integration firms
for implementation and other customer support services. Baan also relies on
these firms to recommend Baan's products to potential customers as the potential
customers are evaluating different competitive offerings. Although Baan seeks to
maintain close relationships with these third-party implementation providers,
many of these firms have similar, and often more established, relationships with
Baan's principal competitors. If Baan is unable to develop and retain effective,
long-term relationships with these third-parties, it would adversely affect
Baan's competitive position.
BAAN MUST ATTRACT AND RETAIN KEY EMPLOYEES.
Baan is largely dependent on a limited number of members of our senior
management and other key employees. Baan does not maintain key man life
insurance on any personnel. In addition, Baan believes that we must be able to
attract and retain highly skilled technical, management, sales, and marketing
personnel in order to continue to compete successfully. Competition for such
personnel in the computer software industry is intense. Baan may not be able to
attract and retain such personnel, and if Baan is not able to do so, this would
have a material adverse effect on Baan's business.
BAAN FACES RAPID TECHNOLOGICAL CHANGE AND MUST CONTINUE TO DEVELOP NEW PRODUCTS
TO REMAIN COMPETITIVE.
The market for Baan'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. In order to remain competitive, Baan must
continue to enhance our current product line and to develop and introduce new
products that keep pace with technological developments, evolving market needs
and increasingly sophisticated customer requirements. Baan believes it must
continue to expand product functionality to meet customer needs across broader
horizontal markets and in targeted vertical market segments. In addition, Baan
must continue to anticipate and respond adequately to advances in RDBMS
software, desktop computer operating systems such as Microsoft Windows and
successor operating systems, and the highly dynamic and evolving world of
e-commerce and use of the Internet. Baan may not 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 in achieving market acceptance for new products.
Baan has on occasion experienced delays in the scheduled introduction of
new and enhanced products. In addition, software programs as complex as those
offered by Baan may contain undetected errors or "bugs" when first introduced or
as new versions are released. Despite our testing, these bugs sometimes are only
discovered after a product has been installed and used by customers. Baan's most
recent software releases and future software releases may 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 Baan's products could
also have a material adverse effect on Baan's business and operating results. If
Baan 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 Baan's
business and operating results.
BAAN FACES CHALLENGES CONCERNING THE INTEGRATION OF ACQUISITIONS.
As part of our strategy to complement and expand our existing business and
product offerings, Baan has acquired a number of companies. In June 1998 Baan
acquired CAPS Logistics Inc. ("CAPS Logistics"), a supplier of logistics and
transportation, planning and scheduling software; in May 1998 Baan acquired CODA
Group plc ("CODA"), a provider of financial software; and in August 1997 Baan
acquired Aurum Software, Inc. ("Aurum"), a provider of enterprise-wide
sales-force automation software and distribution services. Baan 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. They include:
- uncertainty as to market acceptance of the acquired technologies and
products;
- risks of expansion into new geographic markets and business areas;
- the diversion of management's attention created by the expansion of
business breadth and integration challenges; and
- difficulties associated with the assimilation of the operations and
personnel of acquired companies and the integration of acquired
companies' business and financial reporting systems.
Baan may not be able to successfully integrate the operations of acquired
businesses. If any such acquisition were to be unsuccessful, Baan's results of
operations could be materially adversely affected.
THERE ARE OBSTACLES IN MANAGING INTERNATIONAL OPERATIONS.
Baan's products are currently marketed in the United States, Germany, The
Netherlands, and over 80 countries worldwide. Accordingly, Baan's operations are
subject to the risks inherent in international business activities. These risks
include:
- general economic conditions in each country (for example, we note the
volatile market conditions affecting most of the Pacific Rim region and
Latin America);
- overlap of different tax structures and potential high tax levels;
- the complexity of managing an organization spread over various countries;
- unexpected changes in regulatory requirements;
- costs and delays associated with 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.
VANENBURG GROUP B.V. OWNS A SIGNIFICANT EQUITY INTEREST IN BAAN.
Vanenburg Group B.V. ("VG") owned approximately 20% of Baan's outstanding
Common Shares at April 9, 1999. Jan Baan and J.G. Paul Baan, by virtue of their
positions as managing directors of VG and the control they exercise over the
entities that own and control the shares of VG, effectively have the power to
vote the Common Shares of Baan owned by VG. Messrs. Jan Baan and J.G. Paul Baan
therefore may be deemed to have the effective power to significantly influence
the outcome of matters submitted for shareholder action, including the
appointment of members of Baan's Management and Supervisory Boards and the
approval of any significant change in control transactions. This significant
equity interest in Baan may make certain transactions more difficult absent the
support of Jan Baan and J.G. Paul Baan, and may have the effect of delaying or
preventing any proposed change in control of Baan.
VANENBURG GROUP B.V. CONTROLS APPROXIMATELY ONE-THIRD OF SALES FROM BAAN'S
INDIRECT CHANNEL.
Commencing in 1996, Baan began building an indirect channel as part of our
strategy to penetrate the SME market. Approximately 15 of its approximately 230
VARs (value added resellers) are VG subsidiaries known as the "Vanenburg
Business Systems" network (or "VBS"). VG announced in the Fall of 1998 its
intention to reorganize and/or sell certain of its assets due in part to
pressure from lenders. Sales from VBS comprise approximately one-third of total
sales in Baan's indirect channel. While down from approximately half of all
indirect sales in 1996 and much of 1997, VBS remains a large percentage of
Baan's indirect channel. Consequently, any sale of, or operating pressures on,
VBS could have a material impact on Baan's indirect channel performance.
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THIRD PARTY AGREEMENTS.
Baan has contracted with a number of third parties and VG entities from
whom we license software for resale (through various OEM, reseller, and
distribution agreements) and/or who provide support or service to Baan or its
customers. Consequently, any sale of, or operating pressures on, these third
parties could have a material impact on Baan's business.
YEAR 2000 UNCERTAINTIES.
Baan's ability to achieve Year 2000 compliance and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
our ability to identify all Year 2000 issues associated with Baan's products;
third-party products sold by Baan or third-party products used in Baan's
internal systems; the availability and cost of programming and testing
resources; the ability and willingness of third-party vendors to modify
propriety software; the extent to which customers access Baan's Year 2000 Web
site in order to access the Year 2000 exposure associated with their Baan
systems and their ability and willingness to take appropriate upgrade and
corrective measures; and unanticipated problems that may by identified in Baan's
ongoing compliance review.
BAAN'S SHARE PRICE HAS BEEN HIGHLY VOLATILE.
The market price of Baan's Common Shares has experienced significant
volatility. The price of Baan's Common Shares (split adjusted) has increased
from $4.00 per share in Baan's initial public offering in May 1995 to $54.125 in
April 1998, and has decreased to a trading price at April 30, 1999 of $9.375 per
share. The market price of Baan's Common Shares may be significantly affected by
a number of factors, including quarterly variations in operating results,
changes in earnings estimates by market analysts, the announcement of new
products by Baan or our competitors, and general market conditions. In addition,
the stock prices for many companies in the technology and emerging growth sector
have experienced wide fluctuations which have often been unrelated to the
operating performance of such companies. Such fluctuations may adversely affect
the market price of Baan's Common Shares.
UNITED STATES JUDGMENTS AGAINST NETHERLANDS CORPORATIONS, DIRECTORS AND OFFICERS
ARE NOT DIRECTLY ENFORCEABLE IN THE NETHERLANDS.
Judgments of United States courts, including judgments against Baan, our
directors or our officers predicated on the civil liability provisions of the
federal securities laws of the United States, are not directly enforceable in
The Netherlands.
OTHER MATTERS RELATED TO DUTCH COMPANIES.
As a Netherlands "naamloze vennootschap" (N.V.), Baan is subject to certain
requirements not generally applicable to corporations organized in United States
jurisdictions. Among other things, the issuance of shares by Baan must be
submitted for resolution of the general meeting of shareholders, except to the
extent such authority to issue shares has been delegated by the general meeting
of shareholders to another corporate body. The issuance of shares by Baan is
generally subject to shareholder preemptive rights, except to the extent that
such preemptive rights have been excluded or limited by the general meeting of
shareholders (subject to a qualified majority of two-thirds of the votes if less
than 50% of the outstanding share capital is present or represented) or, in case
the authority to issue shares has been delegated to another corporate body that
has also been empowered by the general meeting of shareholders to exclude or
limit such preemptive rights, by such corporate body. In this regard, the
general meeting of shareholders has authorized the Management Board of Baan,
upon approval by the Supervisory Board, to issue any authorized and unissued
shares of Baan at any time up to and including April 30, 2000, and has
authorized the Management Board, upon approval by the Supervisory Board, to
exclude or limit shareholder preemptive rights with respect to any issuance of
such shares up to and including such date. Such authorizations may be renewed by
the general meeting of shareholders from time to time, or by Baan's Articles of
Association pursuant to an amendment to that effect, for up to five years at a
time. This authorization would also permit the issuance of shares in an
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acquisition, provided that shareholder approval is required in connection with a
statutory merger (except that, in certain limited circumstances, the board of
management of a surviving company may resolve to legally merge Baan).
Shareholders do not have preemptive rights with respect to shares which are
issued against payment other than in cash, shares which are issued to employees
of Baan or of a group company or shares which are issued to someone exercising a
previously acquired right to subscribe for shares. In addition, certain major
corporate decisions are subject to prior approval or advice by the Works Council
established at Baan Development B.V. and Baan Nederland B.V., two Dutch
subsidiaries of Baan.
In April 1999, a new law became effective in the Netherlands that could
significantly restrict a company's ability to grant stock options in or from the
Netherlands. The new law also imposes certain additional disclosure obligations
on Baan and certain of its employees in connection with their involvement in
securities transactions in or from the Netherlands. Baan is currently discussing
possible alternatives with the Dutch authorities. Depending on the outcome of
those discussions, the new Dutch securities laws could have a material impact on
Baan's competitiveness in terms of impairing our ability to recruit and retain
directors and employees.
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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/ James F. Mooney
----------------------------------
James F. Mooney
Chief Financial Officer
Date: August 30, 1999
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