<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
Date of Report: June 21, 1999
BAAN COMPANY N.V.
Baron van Nagellstraat 89
3770 AC Barneveld
The Netherlands
and
11911 Freedom Drive, Suite 300
Reston, Virginia USA 20190
(Addresses of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F
Form 20-F X Form 40-F
------- -------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes No X
------- -------
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
82- N.A.
-------
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BAAN COMPANY N.V.
FORM 6-K
Baan Company N.V., a Netherlands corporation ("Baan Company"), has sent the
following materials to shareholders in connection with its Annual General
Meeting of Shareholders to be held on June 23, 1999 in the Netherlands
("Shareholder Meeting Materials"):
- Invitation Letter dated June 8, 1999
- Agenda for Annual General Meeting of Shareholders
- Explanatory Notes to Agenda
- Statutory Accounts for 1998
The Shareholder Meeting Materials are attached as Exhibit 99.1 to this
Report on Form 6-K and are incorporated by reference herein.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------
<S> <C>
99.1 Shareholder Meeting Materials for Baan Company Annual General
Meeting of Shareholders to be held June 23, 1999.
</TABLE>
-2-
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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/ Robert Goudie
---------------------------------------
Robert Goudie
Senior Vice President, General Counsel
and Secretary to the Board of Directors
Date: June 21, 1999
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------------------------------------------------------
<S> <C>
99.1 Shareholder Meeting Materials for Baan Company Annual General
Meeting of Shareholders to be held June 23, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 99.1
Shareholder Meeting Materials
BAAN COMPANY N.V.
Barneveld, June 8, 1999
To the shareholders of Baan Company N.V.
You are hereby invited to attend the Annual General Meeting of Shareholders of
Baan Company N.V., a company with limited liability incorporated under the laws
of The Netherlands (the `Company'), to be held on Wednesday, June 23, 1999 at
02:00 p.m., local time, at Conference Center `Hart van Holland', located at
Berencamperweg 12, 3861 MC, Nijkerk, the Netherlands.
Included herewith are (i) the Agenda for the Annual General Meeting of
Shareholders and Explanatory Notes thereto, (ii) the Company's Annual Report and
Statutory Annual Accounts for the year ended December 31, 1998, each prepared as
required by Netherlands law, (iii) the Company's Annual Report on Form 20-F as
filed with the U.S. Securities and Exchange Commission, including audited
financial statements for the years ending December 31, 1996, 1997 and 1998
prepared in accordance with U.S. generally accepted accounting principles and
(iv) a proxy card for use in connection with the Annual General Meeting of
Shareholders.
Yours sincerely,
Baan Company N.V.
/s/ Pierre J. Everaert
----------------------------------------------
Pierre J. Everaert,
Chairman to the Board of Supervisory Directors
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BAAN COMPANY N.V.
AGENDA
ANNUAL GENERAL MEETING OF SHAREHOLDERS
Annual General Meeting of Shareholders (the `Meeting') of Baan Company N.V. (the
`Company') to be held at Conference Center `Hart van Holland', Berencamperweg
12, 3861 MC, Nijkerk, The Netherlands on Wednesday, June 23, 1999 at 02:00 p.m,
local time.
A. Opening
B. Items of business:
1. Annual Report of the Board of Managing Directors for the year
ended December 31, 1998.
2. a. Adoption of the Company's Statutory Annual Accounts
for the year ended December 31, 1998.
b. Discharge of the members of the Boards of Managing
and Supervisory Directors.
3. Appointment of the members of the Board of Managing Directors.
4. Ratification of amendment of the Company's 1993 Stock Option
Plan to increase the number of shares authorized for issuance
thereunder.
5. Questions
C. Closing
The foregoing items B.1 - B.4 are more fully described in the Explanatory Notes
to the Agenda.
<PAGE> 3
BAAN COMPANY N.V.
ANNUAL GENERAL MEETING OF SHAREHOLDERS
JUNE 23, 1999
--------------------------------------
EXPLANATORY NOTES TO AGENDA
I. GENERAL
The enclosed Proxy is solicited on behalf of Baan Company N.V., a
company with limited liability incorporated under the laws of the
Netherlands (the `Company'), for use at the Annual General Meeting of
Shareholders (the `Meeting') to be held on June 23, 1999 at 02:00 p.m.,
local time, or at any adjournment thereof, for the purposes set forth
herein, and in the accompanying Agenda. The Meeting will be held at
Conference Center `Hart van Holland', Berencamperweg 12, 3861 MC,
Nijkerk, the Netherlands. The Company's telephone number is
011-31-342-428888.
The proxy solicitation materials have been mailed on or about June 8,
1999, to all holders of registered shares of the Company as of May 27,
1999.
II. PROCEDURE FOR ATTENDANCE
In order to attend the Meeting and exercise their rights at the Meeting
(in person or by proxy) holders of bearer shares and registered shares
must do the following:
(i) Bearer shares: Holders of bearer shares, and usufructuaries
and pledgees that may exercise voting rights on bearer shares,
are required to deposit on or prior to June 16, 1999 (before
4.00 p.m. local time) until after closing of the Meeting their
share certificates or a deposit certificate issued in respect
of such shares by a banking institution, against issuance of a
receipt, at the offices of ABN AMRO Bank N.V., Herengracht
595, Amsterdam, The Netherlands, or at the offices of Morgan
Guaranty Trust Company of New York, Depository, P.O. Box 9184,
Boston, MA 02102-9906, The United States of America. Only such
receipt shall entitle the shareholder, usufructuary, or
pledgee with voting rights to attend the Meeting;
(ii) Registered shares: Holders of registered shares, and
usufructuaries and pledgees that may exercise voting rights on
registered shares, are required to notify the Company in
writing of their intention to attend the Meeting on or prior
to June 16, 1999 (before 4.00 p.m. local time) by delivering
such notification to the offices of the Company at Baron van
Nagellstraat 89, 3771 LK Barneveld, The Netherlands, or at
11911 Freedom Drive, Suite 300, Reston, Virginia 20190-5602,
United States of America, or to one of the above mentioned
offices of ABN AMRO Bank N.V. or Morgan Guaranty Trust Company
of New York, together with a specification of the numbers of
any share certificates which may have been issued in respect
of such shares. Upon timely
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receipt of such notification, the shareholder, usufructuary or
pledgee with voting rights, shall be provided with an
admission ticket for the Meeting. A shareholder, usufructuary
or pledgee with voting rights may only exercise his rights at
the Meeting in respect of the shares that are registered in
his/her name at both the time of notification and the date of
the Meeting. Notification will be deemed to have been properly
made if a duly completed proxy card is returned to the Company
in a timely manner, as provided below.
The Meeting shall decide whether any person other than those indicated
above can attend the Meeting. All holders of voting rights or their
representatives will be requested to sign an attendance list at the
Meeting.
III. VOTES REQUIRED FOR RESOLUTIONS
Each proposal requires the majority of the votes cast of the Meeting.
Each share is entitled to one vote.
IV. PROXIES
The right of a shareholder, usufructuary, or pledgee with voting rights
to attend and vote at the Meeting can be exercised on his behalf by a
person who is authorized in writing to do so. The written proxy must be
deposited no later than at the time, and at the place, indicated above
for bearer shares (or a deposit certificate). Holders of registered
shares have been sent a proxy card which can be used for such purpose;
proper completion and timely return of the proxy card by holders of
registered shares, together with a specification of the numbers of any
share certificates issued in respect of their shares (see above),
constitutes proper notice of intent to attend by proxy for the purposes
hereof.
The cost of soliciting proxies will be borne by the Company. The
Company has retained the services of Morgan Guaranty Trust Company of
New York, the Company's US transfer agent and registrar, to aid in the
solicitation of proxies from brokers, bank nominees and other
institutional owners, on terms customary for such services. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Proxies
may also be solicited by certain of the Company's directors, officers
and regular employees, without additional compensation, personally or
by telephone or telegram.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before its use by delivering to the
Secretary of the Company a written notice of revocation or a duly
executed proxy bearing a later date or by attending the Meeting and
voting in person.
V. EXPLANATORY NOTES TO AGENDA ITEMS
EXPLANATORY NOTE TO ITEM B.1 AND B.2 - ANNUAL REPORT, ADOPTION OF THE
COMPANY'S STATUTORY ANNUAL ACCOUNTS, DISCHARGE OF MEMBERS OF THE BOARD
OF MANAGING AND SUPERVISORY DIRECTORS.
After a presentation about the Company's Annual Report for the year
ended December 31, 1998, the shareholders will be asked (i) to adopt
the Company's Statutory Annual Accounts for the year ended December 31,
1998 (each of the Annual Report and the Statutory Annual Accounts
having been prepared in accordance with Netherlands law), and (ii)
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to discharge the members of the Boards of Managing and Supervisory
Directors.
The Annual Report and the Statutory Annual Accounts have been
previously drawn up by the Board of Managing Directors and approved by
the Board of Supervisory Directors of the Company. Copies of the Annual
Report and of the Statutory Annual Accounts have been deposited for
inspection by the shareholders at the Company's offices located at
Baron van Nagellstraat 89, 3771 LK Barneveld, The Netherlands and at
the offices of ABN AMRO Bank N.V., Herengracht 595, Amsterdam, The
Netherlands; they have also been made available on the Company's Web
site at baan.com on the Investor Relations page. Copies are also
attached; a version of the Statutory Annual Accounts in the Dutch
language will also be available from the Company's transfer agents or
at the Company's Netherlands headquarters. Included in the Statutory
Annual Accounts is the report of PricewaterhouseCoopers N.V., the
Company's independent auditors.
The shareholders are asked to discharge members of the Board of
Managing Directors in respect of their management and members of the
Board of Supervisory Directors in respect of their supervision during
the 1998 financial year insofar as such management and supervision,
respectively, is apparent from the Annual Report and the Statutory
Annual Accounts.
According to article 2:362 paragraph 7 of the Dutch Civil Code, the
Company's Statutory Annual Accounts (consisting of the balance sheet
and the profit and loss accounts) can be prepared in a non-Dutch
currency if the activities of the Company or the international
diversity of its group so justify. The Company has prepared its
Statutory Annual Accounts in US Dollars since 1994.
EXPLANATORY NOTE TO ITEM B.3 - APPOINTMENT OF MEMBERS OF THE BOARD OF
MANAGING DIRECTORS
According to the Articles of Association of the Company, the general
meeting of shareholders needs to appoint new members of the Board of
Managing Directors. At the Annual General Meeting of Shareholders held
last May 27, 1998, the shareholders appointed Tom Tinsley, Jan Baan,
and Amal Johnson as members of the Board of Managing Directors. On
November 1, 1998, Jan Baan resigned as a member of the Board of
Managing Directors. Amal Johnson resigned on January 31, 1999. On May
27, 1999, the Company announced that current Chairman of the Board of
Managing Directors and Chief Executive Officer Tom Tinsley would be
leaving the Company. The Board of Supervisory Directors is pleased to
recommend for appointment a new Board of Managing Directors consisting
of the individuals identified below. According to article 15 paragraph
2 of the recently amended Articles of Association of the Company, the
Board of Supervisory Directors is authorized to grant titles to the
members of the Board of Managing Directors, if so desired. Therefore,
the shareholders are being asked to appoint the following individuals
as members of the Board of Managing Directors (with their current
titles, as approved by the Board of Supervisory Directors, next to each
name in parenthesis):
(a) Ms. Mary Coleman (Chairman and Chief Executive Officer);
(b) Mr. Peter F. Aird (Executive Vice President, Global Support);
(c) Mr. James F. (Jim) Mooney (Executive Vice President, Chief
Financial Officer);
(d) Mr. Andrew Nash (Executive Vice President, Services);
(e) Mr. Laurens van der Tang (Executive Vice President Research,
and Development); and
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(f) Mr. N.M. (Klaas) Wagenaar (Executive Vice President,
Operational and Strategic Initiatives).
Certain information regarding the nominees is set forth below.
MARY COLEMAN
Mary Coleman (age 44) has served as President, Baan Company, since
October 1998. Prior to her role as Company President, Ms. Coleman
served as President and CEO of Baan subsidiary Aurum Software. Ms.
Coleman joined Aurum with 20 years of experience in the high-technology
industry, most recently from Radius, Inc., where she served as vice
president of marketing. She led Aurum through a highly successful
initial public offering in the fall of 1996. Baan Company acquired
Aurum in 1997. Through her continued leadership at Aurum following that
acquisition, Ms. Coleman positioned Baan Company as one of the top
customer relationship management software vendors in the world. Ms.
Coleman has received many industry awards, including "Silicon Valley
Entrepreneur of the Year" in 1997.
PETER AIRD - EXECUTIVE VICE PRESIDENT, GLOBAL SUPPORT
Peter Aird (age 48) plays a key role as Executive Vice President,
Global Support to deliver on Baan Company's continuing commitment to
customer satisfaction and fortifying its world-class customer support
operation. Mr. Aird oversees Baan Customer Initiatives, Baan Global
Support, Professional Support Services, System Optimization Services,
Migrations Services and Product Engineering. Aird has more than 25
years of experience in managing customer service functions in all
regions and globally. Prior to joining Baan Company, he was vice
president of worldwide sales and marketing for Customer Support for
IBM/Lotus Development and vice president of International Customer
Support. He has also held executive and senior services roles at
Burroughs, National Advanced Systems, and Unisys.
JIM MOONEY - EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER
Prior to joining Baan Company, Mr. Mooney (age 43) held the title of
Vice President and Chief Financial Officer, Americas for IBM
Corporation. During his 19-year career with IBM, Mooney played a
critical role in driving profitability and enhancing margins in key
operating areas throughout the company; and he was directly involved in
reengineering IBM's business over the last 5 years, with primary focus
on substantially growing IBM's strategic reseller network and growing
the services side of the business. He joined Baan Company in the spring
of this year.
ANDREW NASH - EXECUTIVE VICE PRESIDENT, SERVICES
Mr. Nash (age 36) has over 15 years experience in the enterprise
applications sector. He joined Baan Company in 1998 as President of
Baan Corporate Office Solutions, and then became Senior Vice President
of Consulting. Prior to joining the Company, he served as Global
Managing Director for Deloitte & Touche Consulting Group/ICS, where he
was responsible for the growth and globalization of the Baan service
line within the firm. Prior to that he had been Chief Executive Officer
& Managing Director Australia and New Zealand, where he established
Deloitte & Touche
<PAGE> 7
Consulting Group/CSI's operations in those countries. He has also
worked for Oracle Corporation and Arthur Andersen.
LAURENS VAN DER TANG - EXECUTIVE VICE PRESIDENT, RESEARCH AND
DEVELOPMENT
An 11-year veteran of Baan Company, Mr. van der Tang's commitment to
research and development has resulted in products that uniquely meet
the needs of Baan's customers and the market. During his tenure as
leader of the Company's research and development efforts, industry
watchers have consistently cited Baan Company as a technology and
innovation leader in the enterprise applications sector. Mr. van der
Tang (age 34) serves as Chairman of the Baan Innovation Board, a
product and technical planning council, which coordinates and focuses
global development efforts on future products.
KLAAS WAGENAAR - EXECUTIVE VICE PRESIDENT, OPERATIONAL AND STRATEGIC
INITIATIVES.
In his current position, Mr. Wagenaar (age 40) coordinates the
continuing realignment of Baan Company along functional lines, and
serves as the link between the regional and country operations, and the
global functions. He also helps drive key strategic partnerships and
initiatives for the Company. Mr. Wagenaar joined the company in August
1997. Prior to joining Baan, Mr. Wagenaar held a variety of high-level
financial and operational management positions, including with Cap
Gemini, an international information technology consulting firm.
EXPLANATORY NOTE TO ITEM B.4 - RATIFICATION OF AMENDMENT TO THE
COMPANY'S 1993 STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES
AUTHORIZED FOR ISSUANCE THEREUNDER
The shareholders are being asked to ratify at the Meeting an increase
in the number of shares authorized for issuance under the Company's
1993 Stock Option Plan, from a total of 40,000,000 Common Shares to a
total of 47,000,000 Common Shares. This number reflects an increase of
about 3.5% of the total number of Common Shares outstanding. As of
December 31, 1998 options to purchase an aggregate of 18,757,531 Common
Shares were outstanding under the 1993 Stock Option Plan and an
aggregate of 3,071,071Common Shares remained available for future
grant. Such ratification is sought pursuant to NASDAQ rules, and also
to ensure that options issued under the plan to U.S. optionees may
qualify as "incentive stock options" entitled to favourable tax
treatment under U.S. tax laws.
The 1993 Stock Option Plan was initially adopted by the Board of
Managing Directors and approved by the shareholders of Baan Holding
B.V. as of December 1993, and subsequent amendments increasing the
aggregate number of shares reserved for issuance thereunder to
40,000,000 were approved in December 1994, May 1995, April 1996, May
1997 and May 1998. The 1993 Stock Option Plan will terminate in
December 2003 unless terminated earlier by the Board of Managing
Directors subject to prior approval by the Board of Supervisory
Directors. The 1993 Stock Option Plan provides for grants of options to
employees and consultants (including officers and Managing Directors)
of the Company and its affiliates. The 1993 Stock Option Plan may be
administered by the Board of Managing Directors or Board of Supervisory
Directors of the Company, or both, or by a committee appointed by
either or both such Boards in a manner that satisfies the legal
requirements relating to the administration of stock plans under all
applicable laws. The 1993 Stock Option Plan is currently administered
by the Board of Managing Directors of the
<PAGE> 8
Company, and by delegation a Plan Administrator (the CEO). To avoid any
conflict, the Supervisory Board must approve grants to the Plan
Administrator.
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BAAN COMPANY N.V.
STATUTORY ACCOUNTS 1998
<PAGE> 10
BAAN COMPANY N.V.
STATUTORY ACCOUNTS 1998
CONTENTS
MANAGING DIRECTOR'S REPORT
- - Managing Director's Report / 1
FINANCIAL STATEMENTS
- - Consolidated Balance Sheets / 12
- - Consolidated Statements of Operations / 14
- - Consolidated Statements of Cash Flows / 15
- - Notes to Consolidated Financial Statements / 16
- - Balance Sheets / 43
- - Statements of Operations / 45
- - Notes to Financial Statements / 46
OTHER INFORMATION
- - Report of the Auditors / 52
- - Appropriation of Net Result / 53
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BAAN COMPANY N.V.
MANAGING DIRECTOR'S REPORT
REVIEW OF OPERATIONS
Founded in the Netherlands in 1978, Baan Company N.V. is a leading
global provider of enterprise business software. Baan Company offers a
comprehensive portfolio of best-in-class, component-based applications that are
in use by more than 6,300 customers at over 12,000 sites worldwide. Applications
and related services offered by the Company help customers gain competitive
advantage through improvements to their corporate management, customer
management, and operations management processes. Baan Company products reduce
complexity, improve core business processes, and are flexible in adapting to
business changes to optimize the management of information throughout the entire
value chain.
In May 1998, the Company completed the acquisition of the outstanding
shares of CODA Group plc., a provider of financial software. Under the terms of
the share exchange, the Company issued approximately 1.9 million shares. In
September 1998, the Company acquired all of the outstanding shares of CAPS
Logistics, Inc., a provider of optimization software for logistics planning and
scheduling. The Company issued approximately 2.5 million shares to complete the
acquisition.
Total net revenues increased 8% ($56.0 million) to $735.6 million in
1998 from $679.6 million in 1997. The Company believes that the ERP 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 more pronounced upon the Company because,
as compared to certain of its competitors, license fees comprise 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's license revenues were adversely affected by
these factors beginning in the third quarter of 1998, as the Company experienced
a decline in the number of license seats from both direct sales and the indirect
channel. The Company expects these factors to continue to impact license
revenues and that these trends will continue into 1999 until global economic
conditions improve and Year 2000 compliance is complete.
During the fourth quarter of 1998, the Company completed key elements
of its restructuring program 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 of long-lived
1
<PAGE> 12
assets in connection with the reorganization. Approximately $31.3 million of
these non-recurring charges are accrued as of December 31, 1998.
OUTLOOK
GENERAL
The enterprise applications market as defined today by industry
analysts has come together through the consolidation of three primary markets
corporate management, customer management and operations management.
Operations management is the most established of the three markets with
its roots in the control automation market of the 1960s and 1970s and the
manufacturing planning software market of the 1980s. This evolved into the
Enterprise Resource Planning (ERP) of the 1990s and today includes primarily ERP
and supply chain areas.
The corporate management market evolved from accounting and contract
management systems in the early 1980s. Human resource and more comprehensive
financial planning and control systems were added to this segment in the 1990s.
The final market, customer management, developed in the 1990s out of
the sales force automation (SFA), product configuration, customer support, and
call center markets.
Like many enterprise application vendors, Baan Company's roots are in
the ERP/operations management arena. During the late-1990s, several factors
drove ERP industry growth rates in excess of 50% per year. Some of the key
drivers included:
- Requirement to continually drive down costs in a competitive
global economic environment,
- Conversion of legacy systems to a new generation of products
to support the Year 2000 (Y2K),
- The requirement to support multi-currency reporting due to
adoption of the Euro.
In early 1998, market analysts expected growth rates to moderate
somewhat but continue in excess of 35% per year through the year 2001. In fact,
based on publicly available information or analysts' estimates, the leading
vendors in the operations management space saw growth rates drop unexpectedly
from around 40% in the first quarter 1998 (compared to first quarter 1997) to
less than 5% growth in the fourth quarter 1998 (vs. fourth quarter 1997).
Expectations today among industry analysts are that the operations management
segment will continue to remain difficult and challenging through 1999 and that
the market is not expected to significantly improve until the year 2000. At that
point, when customers have solved the Y2K issues, analysts expect that customers
will begin looking for new ways to improve operational efficiencies.
In the meantime, market growth opportunities for enterprise application
vendors remain in three distinct areas:
- Customer Management - Industry analysts expect growth levels
in excess of 50% per year for this area, driven by new
Internet technology that is opening new distribution channels
and increasing revenue.
2
<PAGE> 13
- Supply chain area of operations management - Industry analysts
suggest that this area appears to be growing in excess of 50%
per year, driven by dramatic cost reductions in transportation
and inventory holding costs,
- Mid-market ERP - The cost and complexity of traditional ERP
and operations management products historically limited
adoption in this segment. As vendors like Baan Company
delivered solutions on industry standard platforms and reduced
deployment times from years to months, operations management
solutions became cost effective for the mid-market. Industry
analysts continue to believe that the mid-market represents
higher growth opportunities for the ERP vendors.
Entering 1998, growth rates for the ERP sector appeared healthy, but by
the third quarter 1998 market dynamics had changed and growth rates deteriorated
much more rapidly than expected. As reported above, market growth rates among
leading enterprise application vendors fell from 40% per year in the first
quarter to less than 5% per year in the fourth quarter.
In the final weeks of the third quarter, the slowdown in market growth
became apparent. ERP customers delayed or drastically downsized purchases in the
final days of the quarter as they reallocated funds away from Y2K replacement
business to fixing existing legacy systems. Global economic uncertainty also
contributed to this slowing of orders across other product areas. In mid-1998, a
significant portion of Baan Company revenue came from new license revenue. Other
enterprise application vendors have business models that rely more than 50% on
services and maintenance revenue. This difference contributed, the Company
believes, to the Company being one of the first to be impacted by these market
changes. The Company incurred a $39.7 million loss for the third quarter.
Subsequently, other vendors have reported drops in revenue growth.
The Company determined that these market changes were systemic to the
enterprise applications market and unlikely to reverse for at least a year. Baan
Company responded to this change immediately and decisively. During the fourth
quarter 1998, the Company looked for ways to reduce costs by 20%, to gain
efficiencies across all aspects of the organization, and to reinforce and
refocus its existing strategies. To accomplish this goal the Company instituted
a number of actions and strict cost controls:
- Announced a plan to reduce headcount by approximately 20%
(from a high of approximately 6,200 people worldwide) by
eliminating programs and reducing duplicate management, sales,
marketing, and finance functions.
- Disposed of certain non-core business entities.
- Closed 50 offices around the world.
- Cancelled certain marketing programs.
- Signed an equity financing agreement with Fletcher
International Limited that provided $75 million in cash with
the option to extend the agreement for an additional $150
million.
- Accelerated the absorption of Baan Midmarket Solutions B.V.
("BMS") into Baan Company.
As a result of these actions, the cost structure for the Company as it
exited the first quarter 1999 is approximately 20% less than the cost structure
at the end of the third quarter 1998.
Baan Company is focused on the following key strategies:
- Simplify the Complexity and Reduce the Risk of Traditional
Implementation.
3
<PAGE> 14
- Target Small to Medium Sized Enterprises ("SME") to Bring Big
Company Capabilities to the Mid-Market.
- Pursue Product Innovation.
- Leverage Third-Party Implementation Providers.
- Expand Global Distribution, Sales, Services and Support
Capabilities.
CAPITAL EXPENDITURES
Investing activities provided $27.5 million of cash in 1998. Proceeds
from the sale and maturities of marketable securities and investments of $313.2
million were partially offset by the net purchase of property and equipment of
$30.3 million, an increase of $29.6 million in capitalized software development
costs, purchases of marketable securities of $209.5 million and payments for
acquisitions and investments of $23.2 million. The Company expects capital
expenditures will remain relatively flat from 1998 to 1999. With the exception
of the semi-annual interest payments on the convertible debt of $4.3 million per
payment, the Company had no significant capital commitments in 1999.
FINANCING
Financing activities in 1998 provided cash of $113.3 million, primarily
due to proceeds from the issuance of common shares in the Company capital of
$39.5 million upon exercise of stock options and for the Employee Stock Option
Program and a $75.0 million equity investment from Fletcher International
Limited ("Fletcher"). Fletcher paid $75 million to the Company in exchange for
the right to subscribe for shares, which right can be exercised (in one or more
tranches) through December 31, 2001. The number of common shares and the price
per share will be based on future market price of the shares 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 future market price of the
Company shares at or around the time of issuance). For nine months commencing
October 1, 1999, the Company has the right to require Fletcher to subscribe for
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
subscribe for another $75 million in common shares.
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
$21.2 million, based on the exchange rate at December 31, 1998). There were no
outstanding borrowings under the credit facility at December 31, 1998. As of
December 31, 1998, one of the Company's subsidiaries has a $3 million line of
credit with its local bank (reduced to $1 million in January 1999). ABN AMRO has
guaranteed repayment on the line of credit to the local bank. Accordingly, the
Company's ability to borrow on its NLG 40 million credit facility is reduced by
the amount of the guarantee at December 31, 1998.
Under the terms of the credit facility with ABN AMRO Bank, the Company,
its Netherlands subsidiaries, and Baan USA, Inc. have pledged their accounts
receivable as collateral for the credit facility. Furthermore, these entities
may not transfer title to any of their assets outside the normal course of
business without the express written consent of the bank. There are no financial
4
<PAGE> 15
covenants associated with this facility. The Company is also working with a
consortium of international banks to further increase its line of credit.
As of December 31, 1998, the Company had outstanding long-term debt of
$191.0 million, consisting of the Company's convertible subordinated notes due
December 15, 2001. These notes bear interest at a rate of 4.5% per annum and are
payable on December 15, 2001 to the extent not converted into common shares at
the election of the holder prior to such maturity date. Interest under the notes
amounts to $8.6 million per year, payable semi-annually, and there is no sinking
fund requirement. The notes are convertible at the option of each holder at a
conversion price of $22 per share. Accordingly, if the trading price of the
Company's common shares at the maturity date exceeds such conversion price, the
notes will generally be converted into common shares prior to repayment. If the
price of the common shares does not, however, exceed the conversion price, the
Company will be required to repay the notes using existing cash balances and
other financing arrangements. There can be no assurances that the state of the
financial markets or the condition of the Company's business at the time of any
such repayment requirement will permit any such refinancing on reasonable terms.
The Company believes that existing cash, cash equivalents and
short-term marketable securities, cash generated by operations, and existing
credit facilities, will be sufficient to meet the Company's working capital
needs and currently planned capital expenditure requirements for the next twelve
months. The Company may from time to time consider acquisitions of complementary
businesses, products or technologies, which could require additional financing.
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.
STAFFING
As of December 31, 1998, the Company had 5,101 full-time employees, of
which 1,671 were engaged in research in development, 978 in sales and marketing,
2,001 in billable services, including product support, and 451 in finance and
general administration. Full-time employees in 1996 and 1997 were 2,568 and
4,254, respectively. The Company does not expect a significant increase in
employees in 1999.
PRODUCT DEVELOPMENT
The Company's research and development ("R&D") comprised a research
group of 70 employees and a development group of 1,601 employees at December 31,
1998. The research group evaluates new and emerging technologies and
methodologies. The organization develops prototypes to test the practical use of
new concepts and helps determine how these concepts might be introduced into the
Company's products. Research areas include intelligent resource planning,
object-oriented technologies and functionality, money requirements planning,
logistics tools, performance tools, and extensions to Orgware to more closely
integrate software to the customer's organization.
The development group's activity is structured around multiple small
teams. The Company employs concurrent engineering principles to ensure various
product elements are kept in line with the whole product strategy and
architecture. Development activities occur 24 hours-a-day among the Company's
development sites across 11 countries. This distributed approach to development
5
<PAGE> 16
allows Baan to leverage the best software development talent and expertise
around the world. Based on industrial production principles, each team focuses
on the development of independent software components within a disciplined set
of protocols that enable the components to work together as a final product.
This enables the Company to manage the overall process in incremental elements
and to track performance, identify problem areas, and add additional resources
where necessary.
The Company also maintains detailed release planning procedures to
ensure integration, testing, and version control among different teams
developing a single release. This team approach also allows development activity
to be decentralized in order to take advantage of skill sets available in
different parts of the world and to enable local requirements to be addressed
near the markets where they are best understood. Development activities are
performed primarily in The Netherlands, India, Denmark, United Kingdom, and the
United States, with additional teams in six other countries around the world.
The Company's development organization is focusing on enhancements and
customary error corrections to existing product versions, and development of
future versions of the Company's software. Development activities are currently
focused principally on the Company's next generation product line, which
utilizes a new, adaptable component architecture designed to ease integration of
disparate application components, from Baan and other vendors, and to make it
easier for customers to gradually migrate to new release versions rather than
having to migrate a full application suite across the entire company.
CORPORATE GOVERNANCE
The supervisory and managing directors of the Company attach great
importance to corporate governance.
The Company is committed to developing and sustaining long-term
relationships with all stakeholders, including customers, employees, business
partners, and shareholders. The Company aspires to lead the global software
market in areas such as customer satisfaction, employee retention and
development, product quality and shareholder-return, and fosters a basic set of
guiding principles.
The core Company values include (i) Innovation: recruiting and
developing employees and partners committed to innovation in an environment free
of departmental and geographical boundaries, (ii) Integrity: the expectation of
honest, open and ethical dealings at all times with all stakeholders, and (iii)
Initiative: personal responsibility and willingness to take calculated risks
with may improve product of service offerings. The Company believes that its
adherence to these values has enabled it to build strong relationships with
employees, as evidenced by its historically low rate of employee turnover. In
addition, the Company has enjoyed close working relationships with customers and
implementation providers who, the Company believes, have developed significant
confidence in Baan's performance and commitment.
The Company has followed with interest the public debate in the
Netherlands with respect to corporate governance. The Company in general
supports, in line with its above mentioned Company values, many of the
recommendations included in the Corporate Governance Report prepared in June
1997.
In this respect it is noted that the Company has no anti-takeover
devices. Moreover, the Company complies with the extensive disclosure
requirements of the Securities and Exchange
6
<PAGE> 17
Commission in the United States, including the voluntary quarterly filing of
Form 6-K and the annual filing of Form 20-F.
With respect to certain specific recommendations of the Corporate
Governance Committee, the Company qualifies for an exemption under Article 2:153
of the Dutch Civil Code that would otherwise require the Company to adopt the
so-called "structuurregime" for large companies (which would remove certain
powers from the shareholders and place them with the Supervisory Board). In
addition, the Company has not voluntarily adopted the "structuurregime."
Accordingly, the power of the General Meeting of Shareholders is not diminished
(one share, one vote), and the shareholders retain the power to appoint both the
Supervisory and Management Boards.
Equity investors in the Company obtain voting shares, and not as is
often the case in the Netherlands, non-vesting certificates, and thereby retain
their voting rights. Accordingly, the Company feels that the influence of
shareholders is appropriate and balanced and that there is no need for change in
this regard.
The Company regards it as neither necessary nor appropriate to request
the external auditor of the Company to verify compliance with the
recommendations of the Corporate Governance committee, as corporate governance
includes a multitude of topics, including legal issues. It is not appropriate to
submit such issues to the judgement of the auditor, because such would extend
beyond the audit function of the auditor and would require legal and other
non-audit judgements.
In accordance with the requirements of Dutch law, the Articles of
Association of the Company provide that shareholders together holding at least
10% of the issued capital of the Company may be authorized by the competent
court in the Netherlands to convene a General Meeting of Shareholders. The
Corporate Governance Committee has recommended to substantially expand the
rights of Shareholders to place items on the agenda of the General Meeting of
Shareholders. According to the Articles of Association of the Company, the
Management Board convenes General Meetings, and the agenda of such meetings
shall inter alia, contain proposals by the Management Board or the Supervisory
Board. In view of the foregoing recommendation, the Company hereby agrees to
consider for inclusion in the agenda of General Meetings of Shareholders
proposals which have been submitted to the Management Board and the Supervisory
Board by shareholders together holding at least 1% of the issued capital of the
Company, provided that such proposals have been received 60 days prior to the
General Meeting of Shareholders, and to include items properly submitted in
accordance with the foregoing in the agenda of the next General Meeting of
Shareholders if both the Management Board and the Supervisory Board are of the
opinion that such is not contrary to (i) the interests of the Company and its
stakeholders and (ii) the appropriate course of affairs and company order
(venootschappelijke orde).
Among the recommendations of the Corporate Governance Committee which
the Company supports, the Company in particular believes that the recommendation
to introduce an efficient system of proxy solicitation in the Netherlands and
the recommendation that the repurchase of shares should be possible in the
Netherlands without adverse tax consequences deserve swift and favorable
attention.
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
7
<PAGE> 18
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."
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 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 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. In its mailing to customers, and on its Web site, the
Company also 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. Finally, 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 (though the Company, of
course, has limited or no control over the actions of these third-party
suppliers).
The Company does not believe it is possible to determine with certainty
that all Year 2000 issues associated with the products it sells can be
identified or corrected. In addition, 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.
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
8
<PAGE> 19
Company is not aware of any material operational issues or costs associated with
preparing its internal systems for the Year 2000, there can be no assurance that
the Company will not experience unanticipated negative consequences and/or
material costs caused by undetected errors or defects in the technology used in
its internal systems.
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 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.
Internal Accounting and Invoicing Systems. The Company is not aware of
any material operational 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
9
<PAGE> 20
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.
Barneveld, March 1, 1999
Tom C. Tinsley
Managing Director
10
<PAGE> 21
NOTE TO SHAREHOLDERS
In submitting these Accounts for shareholder approval, the Company is
closing one chapter of its history, but opens another as it repositions itself
for new success in the enterprise application market. Subsequent to year end, we
have come through a significant restructuring (described in the Managing
Director's Report) that we believe better aligns the business with the current
market opportunities. In addition, Baan's shareholders approved a new
Supervisory Board at the Extraordinary General Meeting of shareholders held on
March 19, 1999. Pierre Everaert, the new Supervisory Board Chairman, is joined
by newly elected members Henk van den Breemen, Joop Janssen, John Barter, and
Koichi Nishimura, in addition to David Hodgson, William Grabe, and Hans Wortmann
(each of whom was reappointed).
And at the upcoming Annual General Meeting of shareholders to be held
on June 23, the shareholders will be asked to ratify a new Management Board,
consisting of Mary Coleman, Chairman and Chief Executive Officer; Laurens van
der Tang, Executive Vice President Research and Development; Jim Mooney,
Executive Vice President Chief Financial Officer; Peter Aird, Executive Vice
President Global Support; and Klaas Wagenaar, Executive Vice President
Operational and Strategic Initiatives.
Baan has enjoyed success and generated substantial shareholder value
since going public in 1995. While 1998 closed on a challenging note for the
Company due to changing market dynamics and other factors, we believe we have
repositioned the Company for new successes, and that this new leadership team is
the right mix to take Baan to that next level of success.
11
<PAGE> 22
BAAN COMPANY N.V.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(After proposed appropriation of net results)
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
FIXED ASSETS
Intangible fixed assets $ 41,085 $ 52,644
Tangible fixed assets 101,430 141,017
Financial fixed assets 30,212 26,214
-------- --------
TOTAL FIXED ASSETS 172,727 219,875
CURRENT ASSETS
Trade debtors 240,422 277,761
Due from related parties 42,765 6,297
Income tax receivable -- 45,045
Deferred tax asset 10,788 --
Other current assets 39,443 67,342
Marketable securities 104,847 1,080
Cash and cash equivalents 111,417 205,751
-------- --------
TOTAL CURRENT ASSETS 549,682 603,276
-------- --------
TOTAL ASSETS $722,409 $823,151
======== ========
</TABLE>
12
<PAGE> 23
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
GROUP EQUITY
Shareholders' equity $290,465 $156,760
LONG-TERM DEBT
Convertible subordinated notes 200,000 190,103
Credit institutions 718 910
Other 4,650 21,915
-------- --------
TOTAL LONG-TERM DEBT 205,368 212,928
CURRENT LIABILITIES
Credit institutions and current portion of long-term debt 1,730 523
Accounts payable 59,729 74,508
Accrued liabilities 63,823 162,771
Payroll taxes payable 10,641 16,758
Income tax payable 52,468 43,441
Other current liabilities 8,313 7,529
Deferred revenue 29,872 147,933
-------- --------
TOTAL CURRENT LIABILITIES 226,576 453,463
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $722,409 $823,151
======== ========
</TABLE>
13
<PAGE> 24
BAAN COMPANY N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
NET REVENUES:
License revenue $ 226,135 $ 367,101 $ 285,778
License revenue from related parties 14,532 66,325 50,600
--------- --------- ---------
Total license revenue 240,667 433,426 336,378
Maintenance and service revenue 174,875 246,170 399,271
--------- --------- ---------
TOTAL NET REVENUES 415,542 679,596 735,649
COST OF REVENUES:
Cost of license revenue 14,442 31,212 30,741
Cost of maintenance and service revenue 143,746 189,871 302,063
--------- --------- ---------
TOTAL COST OF REVENUES 158,188 221,083 332,804
--------- --------- ---------
GROSS MARGIN 257,354 458,513 402,845
--------- --------- ---------
OPERATING AND NON-RECURRING EXPENSES:
Sales and marketing 102,191 171,572 272,497
Research and development 45,843 90,849 151,369
General and administrative 49,136 72,489 156,148
Asset write-downs -- 3,393 36,899
Loss on disposal of assets -- -- 58,030
Restructuring and other non-recurring expenses -- 8,675 59,972
--------- --------- ---------
TOTAL OPERATING AND NON-RECURRING EXPENSES 197,170 346,978 734,915
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 60,184 111,535 (332,070)
Interest income 1,137 14,408 8,668
Interest expense (12,338) (11,750)
(1,889)
Other income (expense), net 435 (95) (40)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 59,867 113,510 (335,192)
Provision (benefit) for income taxes 23,255 36,354 (20,000)
--------- --------- ---------
NET INCOME (LOSS) $ 36,612 $ 77,156 $(315,192)
========= ========= =========
Net income (loss) per share
Basic $ 0.20 $ 0.40 $ (1.59)
Diluted $ 0.19 $ 0.37 $ (1.59)
Shares used in computing per share amounts
Basic 179,512 190,842 198,519
Diluted 196,496 206,071 198,519
</TABLE>
Prior period amounts have been reclassified for the merger with Aurum Software
Inc. and some other items to conform to the current period presentation.
14
<PAGE> 25
BAAN COMPANY N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 36,612 $ 77,156 $(315,192)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 19,782 29,104 51,511
Provision for doubtful accounts 1,635 12,415 55,304
Provision (benefit) for deferred income taxes (7,187) (10,592) 10,788
Asset write-downs -- 3,393 36,899
Loss on disposal of assets -- -- 45,988
Restructuring and other expenses -- -- 14,693
Foreign currency transaction (gains) losses 170 (6,452) 3,648
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (91,155) (97,592) (84,921)
Due to/from related parties -- (42,765) 36,817
Other current assets (6,026) (39,356) (53,077)
Accounts payable 12,312 19,599 (12,408)
Accrued liabilities 14,367 42,727 49,685
Payroll taxes payable 2,899 5,125 1,533
Income taxes payable 14,023 33,909 (7,923)
Other current liabilities 746 (3,256) 2,198
Deferred revenue 1,923 17,924 123,465
--------- --------- ---------
Net cash provided by (used in) operating activities 101 41,339 (40,992)
--------- --------- ---------
Investing activities:
Property and equipment purchased (23,856) (42,457) (38,674)
Property and equipment sold 3,893 7,604 8,377
Increase in capitalized software development costs (10,705) (29,518) (29,581)
Payment for acquisitions and investments, net of cash acquired (3,806) (59,922) (23,240)
Proceeds from sale of investments and subsidiaries -- -- 18,689
Purchases of marketable securities (14,286) (539,233) (209,451)
Proceeds from maturities of marketable securities 33,982 438,253 313,218
Other 1,095 (2,231) (11,856)
--------- --------- ---------
Net cash (used in) provided by investing activities (13,683) (227,504) 27,482
--------- --------- ---------
Financing activities:
Payments under short-term credit facilities (3,249) (742) (917)
Payments of long-term borrowings (414) (1,108) (266)
Issuance costs of convertible subordinated notes (4,375) (875) --
Proceeds from sale of accounts receivable 17,000 17,500 --
Proceeds from issuance of convertible subordinated notes 175,000 25,000 --
Proceeds from issuance of mandatorily redeemable convertible preferred stock 882 -- --
Proceeds from issuance and subscription of common shares 51,147 18,002 114,466
--------- --------- ---------
Net cash provided by financing activities 235,991 57,777 113,283
Effect of foreign currency exchange rates on cash and cash equivalents (383) 2,819 (5,439)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 222,026 (125,569) 94,334
Cash and cash equivalents at beginning of year 14,960 236,986 111,417
--------- --------- ---------
Cash and cash equivalents at end of year $ 236,986 $ 111,417 $ 205,751
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 657 $ 10,924 $ 11,732
Taxes $ 12,869 $ 6,561 $ 17,204
Tax benefit related to issuance of common shares $ 797 $ -- $ --
Conversion of convertible notes to common shares $ -- $ -- $ 9,896
Issuance of common shares for business acquisitions $ 459 $ 2,059 $ 52,111
</TABLE>
Prior period amounts have been reclassified for the merger with Aurum Software
Inc. and some other items to conform to the current period presentation.
15
<PAGE> 26
BAAN COMPANY N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The consolidated financial statements are stated in United States
dollars and are prepared under the historical cost convention. Assets and
liabilities are stated at their nominal value except in those cases where a
different basis of valuation is disclosed in the notes. The financial statements
have been prepared in accordance with generally accepted accounting principles
in The Netherlands. The Company has used the pooling method of accounting for
certain of its business combinations due to the Company's United States
orientation.
As permitted by Section 402, Book 2 of the Netherlands Civil Code, a
condensed statement of operations is presented for the Company itself.
BUSINESS
Baan Company N.V. (the "Company" or "Baan") is incorporated in The
Netherlands. The Company provides enterprise business management software for an
open systems, client/server computing environment. The Company's products
address an organization's entire value chain, from front office functions (such
as interaction with customers and sales) to the more traditional back-office
operations (such as order management and inventory control) associated with
Enterprise Resource Planning ("ERP"). The Company sells and supports its
products through corporate headquarters in Barneveld, The Netherlands and
Reston, Virginia, USA; Business Support Centers in three main locations located
in The Netherlands, the United States and India; and direct and indirect
distribution channels.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements consolidate the accounts of the
Company and its Group Companies. 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.
FOREIGN EXCHANGE
Assets and liabilities of the Company's foreign subsidiaries are
translated from their respective functional currencies to United States dollars
at year-end exchange rates. Income and expense items are translated on a
quarterly basis at the average rates of exchange prevailing during the quarter.
The adjustment resulting from translating the financial statements of the
Company's foreign subsidiaries is reflected as an accumulated translation
adjustment in shareholders' equity. Also, included in shareholder's equity are
the effects of exchange rate changes on intercompany transactions of a long-term
nature. Foreign currency transaction gains and losses are included in sales and
marketing expenses in the accompanying statements of operations.
16
<PAGE> 27
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its foreign currency exposures. Realized and unrealized gains and
losses on foreign currency forward contracts are marked to market and recognized
in results of operations. Any realized and unrealized gains and losses on
contracts used to hedge intracompany transactions of a long-term nature are
included in the accumulated translation adjustment in shareholders' equity.
REVENUE RECOGNITION
License revenue is derived from software licensing fees. Maintenance
and service revenue is derived from maintenance support services, training and
consulting. License and hardware revenue is recognized upon delivery if the
Company has a signed agreement in place, the license fee is fixed and
determinable, and collection of the resulting receivable is deemed probable.
Sales to third party and related party indirect channel partners are recorded
upon product shipment subject to the conditions noted above, and reported sales
by such partners to end-users. Delivery is further defined in certain contracts
as delivery of the product master or first copy for noncancelable product
licensing arrangements under which the customer has certain software
reproduction rights. Returns and allowances are estimated and provided for at
the time of sale. Service revenue from customer maintenance fees for ongoing
customer support and product updates is recognized ratably over the term of the
maintenance period, which is typically twelve months. Payments for maintenance
fees are generally made in advance and are nonrefundable. Service revenue from
consulting and training is billed separately and is recognized as the services
are performed. Revenues under software contracts requiring product customization
or service contracts containing fixed-price arrangements are recorded under
contract accounting on a percent-of-completion basis.
SOFTWARE DEVELOPMENT COSTS
Costs related to research, design and development of computer software
are expensed as incurred. Certain software development costs related to
completion of internally developed products are capitalized at the point that
technological feasibility is established, normally at the completion of a detail
program design. Capitalized amounts are reported at the lower of unamortized
cost or net realizable value. These costs are amortized on a product-by-product
basis. The annual amortization expense is the greater of the amount computed
using the ratio of current revenue to the total anticipated revenue for the
product or the straight line method over the estimated life of the product
(generally three years), starting when the product is available for general
release to customers. Estimated lives are revised when new projects or product
enhancements which affect product lives are completed. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
capitalized amounts require a significant amount of judgment by management in
assessing such factors as future revenues, product lives and economic changes in
the Company's marketplace. Amortization of software development costs was
approximately $2,464,000, $5,947,000 and $14,828,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. Such amortization is included in
cost of license revenue.
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 the effect is dilutive. The computation for net loss per share
excludes any anti-dilutive common equivalent shares.
17
<PAGE> 28
The following table sets forth the computation of basic and diluted net
income (loss) per share for the years ended December 31, (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 36,612 $ 77,156 $ (315,192)
=========== =========== ===========
Denominator:
Denominator for basic income (loss) per share -
Weighted average shares 179,512 190,842 198,519
Common equivalent shares 16,984 15,229 --
----------- ----------- -----------
Denominator for diluted income (loss) per share -
Adjusted weighted average shares and assumed conversions 196,496 206,071 198,519
=========== =========== ===========
Basic income (loss) per share $ 0.20 $ 0.40 $ (1.59)
Diluted income (loss) per share $ 0.19 $ 0.37 $ (1.59)
</TABLE>
At December 31, 1996, 1997 and 1998, 7,955,000, 9,091,000 and
8,641,000, respectively, 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 anti-dilutive. At December 31, 1998,
7,425,000 common equivalent shares were excluded from the computation of diluted
earnings per share because the effect was anti-dilutive. See Note 7 to Notes to
Consolidated Financial Statements.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly-liquid debt instruments
with insignificant interest rate risk and maturities of 90 days or less at the
date of purchase to be cash equivalents. The carrying amount reported in the
balance sheets for cash and cash equivalents approximates their fair value based
on quoted market prices.
Cash equivalents consist principally of investments in certificates of
deposit with approved financial institutions, commercial paper and other
specific money market instruments of similar liquidity and credit quality. The
Company has not experienced any significant losses related to these investments.
The Consolidated Statements of Cash Flows were prepared using the
indirect method.
MARKETABLE SECURITIES
Debt securities that the Company has both the positive intent and
ability to hold to maturity are carried at amortized cost. Debt securities that
the Company does not have the positive intent and ability to hold to maturity
and all marketable equity securities are classified as securities
available-for-sale and are carried at fair value.
Management determines the proper classifications of debt and marketable
equity securities at the time of purchase and reevaluates such designations as
of each balance sheet date. By policy, the Company's investments are primarily
in short-term notes.
18
<PAGE> 29
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2 INTANGIBLE FIXED ASSETS
Intangible fixed assets represent the excess of purchase price and
related costs over the value assigned to the net tangible assets of businesses
acquired.
Amortization of such assets is provided on the straight-line method
over the following estimated useful lives. In some cases, estimated useful lives
are over 5 years:
<TABLE>
<S> <C>
- Goodwill 8 years
- Customer lists 5 years
- Assembled workforce 7 years
</TABLE>
Intangible fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
CUSTOMER ASSEMBLED
GOODWILL LISTS WORKFORCE TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Book value at December 31, 1997 $ 25,213 $ 9,226 $ 6,646 $ 41,085
Purchases and additions 42,999 3,249 7,065 53,313
Disposals and write-downs (17,988) (6,732) (7,331) (32,051)
Amortization (4,718) (2,743) (1,298) (8,759)
Foreign exchange difference (575) (77) (292) (944)
-------- -------- -------- --------
Book value at December 31, 1998 $ 44,931 $ 2,923 $ 4,790 $ 52,644
======== ======== ======== ========
Total accumulated amortization $ 15,504 $ 13,194 $ 3,638 $ 32,336
======== ======== ======== ========
</TABLE>
3 TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at cost. Depreciation and amortization
of such assets is provided on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
- Computer equipment 3 - 5 years
- Other property and equipment 5 - 7 years
</TABLE>
19
<PAGE> 30
Tangible fixed assets consist of the following (at cost in thousands):
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Leasehold improvements $ 7,137 $ 19,161
Computer equipment $ 60,445 $ 73,859
Furniture and other 23,561 36,247
-------- --------
84,006 110,106
Software development costs 62,820 100,579
-------- --------
Total $153,963 $229,846
======== ========
</TABLE>
Tangible fixed assets consists of the following (in thousands):
<TABLE>
<CAPTION>
Buildings and Other Software
leasehold operating development
improvements assets costs Total
------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Book value at December 31, 1997 $ 5,660 $ 46,346 $ 49,424 $ 101,430
Purchases and investments 14,859 42,158 46,790 103,807
Disposals and write-downs (2,126) (17,561) (22,919) (42,606)
Capitalization -- -- 19,210 19,210
Depreciation (3,194) (24,605) (14,828) (42,627)
Foreign exchange difference 50 1,111 642 1,803
--------- --------- --------- ---------
Book value at December 31, 1998 $ 15,249 $ 47,449 $ 78,319 $ 141,017
========= ========= ========= =========
Total accumulated depreciation $ 3,912 $ 62,657 $ 22,260 $ 88,829
========= ========= ========= =========
</TABLE>
4 FINANCIAL FIXED ASSETS
Financial fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
OTHER
INVESTMENTS OTHER TOTAL
----------- -------- --------
<S> <C> <C> <C>
Book value at December 31, 1997 $ 27,236 $ 2,976 $ 30,212
Purchases and additions 2,625 -- 2,625
Disposals (1,500) -- (1,500)
Amortization (5,536) (1,000) (6,536)
Foreign exchange difference 1,413 -- 1,413
-------- -------- --------
Book value at December 31, 1998 $ 24,238 $ 1,976 26,214
======== ======== ========
</TABLE>
The other investments relate to companies in which the Company does not
have significant influence and are carried at cost or estimated realizable
value, if less.
The other financial fixed assets of $1,976,000 relate to the long-term
portion of the commission from the convertible subordinated notes. This
commission is being amortized on a straight-line basis over the term of the
Notes. The amount is reflected in interest expense in the accompanying
consolidated statements of operations.
20
<PAGE> 31
5 MARKETABLE SECURITIES
The following is a summary of available-for-sale debt and equity
securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Corporate notes $135,624 $ --
US government agency notes 20,951 --
Other 337 1,080
-------- --------
$156,912 $ 1,080
======== ========
Amounts included in cash equivalents $ 52,065 $ --
Amounts included in marketable securities 104,847 1,080
-------- --------
$156,912 $ 1,080
======== ========
</TABLE>
All securities held as of December 31, 1998 are due within one year. As
of December 31, 1997 and 1998, all securities were designated as available for
sale. Accordingly, these securities are carried at fair value. Since the
difference between the cost and fair values at such dates was immaterial, no
adjustments have been made to the historical carrying value of the investments
and no unrealized gains or losses have been recorded as a separate component of
shareholders' equity. The cost of securities sold is based on specific
identification.
6 SHAREHOLDERS' EQUITY
COMMON SHARES
The Company is able to declare or pay dividends in any currency or
multiple currencies as deemed appropriate by management, although the Company
has no present intent to declare any dividend. Each holder of common shares is
entitled to one vote per share on all matters presented to a vote of the
Company's Shareholders.
In December 1998, the Company received a $75 million equity investment
from Fletcher International Limited ("Fletcher"). 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.
COMPANY STOCK PLAN
In December 1993, shareholders approved the 1993 Stock Plan (the
"Company Plan"). Through this Plan and subsequent amendments, the Company has
reserved a total of 40,000,000 common shares for grant thereunder to eligible
participants. The shares may be authorized but unissued, or reacquired common
stock. The number of common shares covered under the Plan shall be
proportionately adjusted for any increase or decrease in the number of shares
issued for which the
21
<PAGE> 32
Company receives no consideration. As of December 31, 1997 and 1998, 2,222,000
and 3,071,000 common shares, respectively, remain available for grant.
Should granted options expire or become unexercisable for any reason,
the unpurchased shares which were subject thereto shall become available for
future grant under the Plan. The term of each option shall not exceed a period
of five years from the grant date and each option generally vests over five
years. The Plan expires in 2003. The exercise price is determined by the Plan's
administrator.
ASSUMED STOCK PLANS
As a result of the Company's acquisition of Berclain Group, Inc.
("Berclain") in May 1996, the Company assumed the outstanding options under The
Berclain Stock Option Plan (the "Berclain Plan"). The Berclain Plan provided for
grants of non-qualified stock options to employees and eligible participants of
Berclain. The term of each option was not to exceed a period of five years from
the grant date and each option generally vested over one year. At December 31,
1998, the Company had reserved 6,926 of its common shares for issuance under the
Berclain Plan. No additional grants will be made under the Berclain Plan.
As a result of the Company's acquisition of Aurum Software, Inc.
("Aurum") in 1997, the Company assumed the outstanding options under Aurum's
Stock Option Plans (the "Aurum Plans"). The Aurum Plans provided for grants of
incentive and repurchaseable stock options to employees and non-qualified
options to eligible participants of Aurum. The term of each option was not to
exceed a period of ten years from the grant date and each option generally
vested over four years. At December 31, 1998, the Company had reserved 1,567,952
of its common shares for issuance under the Aurum Plans. No additional grants
will be made under the Aurum Plans.
As a result of the Company's acquisition of Beologic A/S ("Beologic")
in November 1997, the Company assumed the outstanding options under The Beologic
Warrant Scheme (the "Beologic Plan"). The Beologic Plan provided for grants of
non-qualified stock options to employees and eligible participants of Beologic.
The term of each option was not to exceed a period of 32 months and 31 days from
the grant date and each option generally vested over 2.6 years. At December 31,
1998, the Company had reserved 122,796 of its common shares for issuance under
the Beologic Plan. No additional grants will be made under the Beologic Plan.
As a result of the Company's acquisition of CODA ("Coda") in May 1998,
the Company assumed the outstanding options under Coda's three stock options
plans: the Coda Worldwide Scheme, Coda Incorporated Scheme (U.S.), and Coda
Executive Scheme (U.K.) (the "Coda Plans"). The Coda Plans provided for grants
of incentive stock options to employees and non-qualified options to eligible
participants of Coda. The term of each option was not to exceed a period of ten
years from the grant date and each option generally vested over three years. At
December 31, 1998, the Company had reserved 97,207 of its common shares for
issuance under the Coda Plans. No additional grants will be made under the Coda
Plans.
EMPLOYEE STOCK PURCHASE PLANS
In February 1995, the Company adopted the 1995 Employee Stock Purchase
Plans (U.S. ESPP and Non-U.S. ESPP). The U.S. ESPP permits eligible employees of
Baan USA to purchase common shares through payroll deductions of up to the
lesser of 10% of their compensation, or $25,000 in any year. The price of common
shares purchased under the U.S. ESPP will be 85% of the lower of the fair market
value of the Company's common shares on the first or last day of each
22
<PAGE> 33
offering period. The Non-U.S. ESPP terms are modified for local rules governing
such plans. A total of 4,000,000 common shares are available for grant under the
two Employee Stock Purchase Plans. Approximately 2,185,750 common shares were
issued under these plans through December 31, 1998.
DIRECTOR STOCK OPTION PLAN
In March 1995, the Company adopted the 1995 Director Stock Option Plan
("Director Plan"). Under the terms of the Director Plan, each person who becomes
a Supervisory Director after July 1, 1995 shall automatically be granted an
option to purchase 32,000 common shares of the Company ("Initial Options").
Initial Option grants vest in four equal annual installments. All options have a
term of five years and are to be granted at fair market value at the date of
grant. In the event of a merger or sale of the Company, all options granted
become exercisable immediately. The Company has reserved a total of 1,600,000
common shares for grant under the Director Plan. As of December 31, 1998, the
Company's directors and executive officers had outstanding options to purchase
an aggregate of approximately 4,521,000 Common Shares.
Option activity under the Company Plans, excluding employee stock purchase
plans, was as follows:
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED
NUMBER OF AVERAGE PRICE
OPTIONS PER OPTION
----------- -------------
<S> <C> <C>
Balance at December 31, 1995 18,432,000 $ 1.74
Granted 5,752,000 $ 14.16
Canceled or expired (1,461,000) $ 2.94
Exercised (3,779,000) $ 1.28
----------- -----------
Balance at December 31, 1996 18,944,000 $ 7.74
Granted 7,901,000 $ 31.66
Canceled or expired (616,000) $ 15.39
Exercised (4,185,000) $ 4.69
----------- -----------
Balance at December 31, 1997 22,044,000 $ 18.62
Granted 11,706,000 $ 16.18
Canceled or expired (8,629,000) $ 23.86
Exercised (5,575,000) $ 4.68
----------- -----------
Balance at December 31, 1998 19,546,000 $ 11.42
=========== ===========
</TABLE>
As of December 31, 1997 and 1998, stock options were exercisable for
6,189,000 and 7,425,000 common shares, respectively.
In November 1998, the Company's Supervisory Board of Directors approved
an option repricing program. Under the repricing program, current employees
(other than designated members of senior management) holding outstanding options
with exercise prices at or above $11.13 per share could elect to amend such
options to change the exercise price to $11.13 per share, the average of the
fair market value on three consecutive trading days. All other terms of such
options remained unchanged, except that the repriced options are not exercisable
for a period of six months after the effective date of the repricing. If an
employee voluntarily terminates his or her employment prior to the end of the
six-month non-exercise period, the amended options will be forfeited and the
unexercised shares returned to the 1993 Stock Plan.
The following table summarizes information about stock options
outstanding at December 31, 1998:
23
<PAGE> 34
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING NUMBER AVERAGE PRICE NUMBER AVERAGE PRICE
EXERCISE PRICES CONTRACTUAL LIFE OUTSTANDING PER OPTION EXERCISABLE PER OPTION
--------------- ---------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 5.68 1.0 year 3,511,000 $ 1.27 2,611,000 $ 1.15
$ 5.69 - $11.36 2.4 years 9,918,000 $ 10.72 3,825,000 $ 10.41
$11.37 - $17.03 3.9 years 3,352,000 $ 12.21 204,000 $ 13.72
$17.04 - $22.71 2.7 years 1,289,000 $ 18.20 285,000 $ 18.77
$22.72 - $28.39 5.5 years 11,000 $ 27.27 8,000 $ 27.74
$28.40 - $34.07 3.1 years 1,217,000 $ 31.25 400,000 $ 31.08
$34.08 - $39.75 3.3 years 181,000 $ 36.59 75,000 $ 36.82
$39.76 - $45.42 3.1 years 43,000 $ 43.62 3,000 $ 44.63
$45.43 - $51.10 6.7 years 13,000 $ 49.69 6,000 $ 49.69
$51.11 - $56.78 0.5 years 11,000 $ 55.85 8,000 $ 56.60
---------- ---------
19,546,000 7,425,000
========== =========
</TABLE>
STOCK-BASED COMPENSATION
The Company generally recognizes no compensation expense with respect
to such awards since the exercise price of the stock options granted are equal
to the fair market value of the underlying security on the grant date.
The fair value of the Company's stock-based awards to employees was
estimated as of the date of grant using a Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
--------------------------- ----------------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (months) 56 56 59 6 6 6
Expected volatility 50% 50% 75% 50% 50% 75%
Risk-free interest rate 6.1% 5.7% 5.1% 6.2% 5.4% 5.1%
</TABLE>
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma net income and net
24
<PAGE> 35
income per share for 1996, 1997 and 1998 is as follows (in thousands except for
net income per share):
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported $ 36,612 $ 77,156 $ (315,192)
Pro forma $ 28,616 $ 50,479 $ (383,920)
Basic income (loss) per share
As reported $ 0.20 $ 0.40 $ (1.59)
Pro forma $ 0.16 $ 0.26 $ (1.93)
Diluted income (loss) per share
As reported $ 0.19 $ 0.37 $ (1.59)
Pro forma $ 0.15 $ 0.25 $ (1.93)
</TABLE>
The weighted-average fair value of options granted during 1996, 1997
and 1998 was $5.30, $11.25 and $14.73 respectively. The weighted average fair
value of employee stock purchase rights granted under the U.S. ESPP and Non-U.S.
ESPP during 1996, 1997 and 1998 was $3.61, $6.28 and $11.57, respectively.
MOVEMENT OF SHAREHOLDERS' EQUITY
The following information does not reflect the effects of any stock
splits. The statutory share capital consists of 700,000,000 shares with a par
value of NLG 0.06 at both December 31, 1997 and 1998. The actual number of
shares issued amounts to 187,817,546, 193,698,784 and 204,886,317 at December
31, 1996, 1997, and 1998, respectively. As of December 31, 1997, the par value
of issued shares in Dutch guilders was NLG 11,621,927 which translated at the
year-end exchange rate of NLG 2.02 = $1 is $ 5,753,000. As of December 31, 1998,
the par value of issued shares in Dutch guilders was NLG 12,293,179 which
translated at the year-end exchange rate of NLG 1.89 = $1 is $ 6,504,000.
The movements in the shareholders' equity can be broken down as follows
(in thousands):
<TABLE>
<CAPTION>
Additional Accumulated
Common paid-in Retained translation
shares capital earnings adjustment Total
$ $ $ $ $
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 5,939 $ 174,994 $ 116,224 $ (6,692) $ 290,465
Issuance of common shares 241 127,629 (36,293) -- 91,577
Net Result 1998 -- -- (315,192) -- (315,192)
Common shares subscribed, net of issuance costs -- 74,900 -- -- 74,900
Conversion of convertible notes to common shares 13 9,883 -- -- 9,896
Currency translation adjustment -- -- -- 5,114 5,114
--------- --------- --------- --------- ---------
Balance at December 31, 1998 $ 6,193 $ 387,406 $(235,261) $ (1,578) $ 156,760
========= ========= ========= ========= =========
</TABLE>
25
<PAGE> 36
7 BORROWING ARRANGEMENTS
CREDIT AGREEMENTS
The Company has a credit facility with a Dutch bank which allows the
Company to borrow up to NLG 40,000,000 ($21,208,800 based on the exchange rate
at December 31, 1998). Interest on borrowings under the credit facility accrues
at the Dutch Central Bank's promissory note discount rate plus 1.5% (a total of
4.75% at December 31, 1998) with a minimum interest rate of 4% and is payable
quarterly. There were no outstanding borrowings under the credit facility at
December 31, 1997 and 1998.
The Company, its Netherlands subsidiaries, and Baan USA, Inc. have
pledged their accounts receivable as collateral for the credit facility.
Furthermore, these entities may not transfer title to any of their assets
outside the normal course of business without the express written consent of the
bank.
As of December 31, 1998, one of the Company's subsidiaries has a $3
million line of credit with its local bank (reduced to $1 million in January
1999). The Dutch Bank has guaranteed repayment on the line of credit to the
local bank. Accordingly, the Company's ability to borrow on its NLG 40 million
credit facility is reduced by the amount of the guarantee. At December 31, 1998,
the local subsidiary had borrowings of $101,000 on its line of credit.
Certain of the Company's subsidiaries have agreements with their credit
institutions which allow them to carry deficit balances in their demand deposit
accounts. Borrowings under such agreements amounted to $877,000 and $20,000 at
December 31, 1997 and 1998, respectively.
The weighted average interest rates on the short-term borrowings were
11.33% and 6.87% as of December 31, 1997 and 1998, respectively.
LONG-TERM DEBT
The Company's long-term debt obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- --------
<S> <C> <C>
Convertible subordinated notes, 4.50%, due
December 15, 2001 $200,000 $190,103
Long Term Deferred Revenue 2,855 17,831
Credit Institutions 721 910
Other 2,645 4,486
-------- --------
206,221 213,330
Less current portion 853 402
-------- --------
$205,368 $212,928
======== ========
</TABLE>
In December 1996, the Company issued $175,000,000 of 4.5% unsecured
convertible subordinated notes ("Notes") pursuant to an indenture dated as of
December 15, 1996 ("Indenture"). The Notes are convertible into the Company's
common shares at any time after the 90th day following the last original issue
date of the Notes at a conversion price of $22.00 per share. The Notes are
redeemable by the Company under certain conditions after December 16, 1998 and
at any time after December 16, 1999. Until the Notes are converted or redeemed,
the Company will pay interest semi-annually, commencing June 15, 1997. In
January 1997, the Company issued another $25,000,000 of Notes under the same
terms and conditions. The Notes are subordinated in right of payment to all
existing and future Senior Indebtedness (as defined in the Indenture) of the
Company. As of December 31, 1998, $9.9 million of notes had been converted to
common shares.
26
<PAGE> 37
Costs of $5,000,000 incurred in connection with issuing the Notes have
been capitalized and are being amortized on a straight-line basis to interest
expense over the term of the Notes. A total of $875,000 and $1,000,000 were
amortized in the years ended December 31, 1997 and 1998, respectively. Remaining
unamortized costs are included in Financial Fixed Assets in the accompanying
Consolidated Balance Sheets.
The aggregate amount of maturities subsequent to December 31, 1998 for
all long-term debt based on the exchange rates at December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999 $ 402
2000 778
2001 190,235
--------
$191,415
========
</TABLE>
8 INCOME TAXES
Deferred income taxes are provided, using the liability method, for all
temporary differences between tax and financial reporting.
Income (loss) before taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
The Netherlands $ 49,229 $ 81,629 $(119,744)
Rest of the world 10,638 31,881 (215,448)
--------- --------- ---------
Income (loss) before income taxes $ 59,867 $ 113,510 $(335,192)
========= ========= =========
</TABLE>
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
The Netherlands $ 22,184 $ 31,316 $(31,088)
Germany 4,393 4,536 (6,000)
United States 3,168 7,579 1,300
Other countries 697 3,515 5,000
-------- -------- --------
Total current 30,442 46,946 (30,788)
Deferred:
The Netherlands (7,410) (11,741) 13,708
Germany 223 415 (4,629)
United States -- 734 1,709
-------- -------- --------
Total deferred (7,187) (10,592) 10,788
-------- -------- --------
Provision (benefit) for income taxes $ 23,255 $ 36,354 $(20,000)
======== ======== ========
</TABLE>
In 1996, the Company recognized tax benefits related to stock option
plans of $797,000. Such benefits were recorded as an increase to additional
paid-in capital.
27
<PAGE> 38
The Company's effective income tax rate differs from The Netherlands'
standard rate of 35% due to the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected tax at standard rate $ 20,953 $ 39,729 $(117,317)
Amortization of goodwill 661 2,106 8,341
Foreign earnings taxed at higher rates 1,881 239 --
Dutch qualifying income tax reduction -- (4,382) --
Increase in valuation allowance -- -- 116,404
Rate differential on subsidiary write-downs -- -- (50,600)
Other, net (240) (1,338) 23,172
--------- --------- ---------
Provision (benefit) for income taxes $ 23,255 $ 36,354 $ (20,000)
========= ========= =========
Effective tax rate 39% 32% 6%
========= ========= =========
</TABLE>
The components of the deferred tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Expenses not currently deductible $ 1,709 $ 13,210
Net operating losses 13,708 137,349
Deferred revenue -- 7,760
Credits -- 3,348
--------- ---------
Total deferred tax assets 15,417 161,667
Less valuation allowance -- (116,404)
--------- ---------
Total deferred tax assets 15,417 45,263
--------- ---------
Deferred tax liabilities:
Software development costs -- 2,663
Reduction in value of subsidiaries -- 42,600
Intangible assets 4,629 --
--------- ---------
Total deferred tax liabilities 4,629 45,263
Total net deferred tax asset $ 10,788 $ --
========= =========
</TABLE>
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.
Approximately $29,100,000 of the net operating losses generated in the United
States relate to disqualifying dispositions of qualified incentive stock options
and will not result in a tax rate benefit when these losses are utilized. The
benefit of the net operating losses generated in 1996 and 1997 was recorded as a
reduction of the provision for Dutch income taxes in 1996 and 1997. As of
December 31, 1998, the Company has established a valuation allowance for all net
operating losses.
No deferred income taxes have been provided for the income tax
liability which may be incurred on repatriation of the undistributed earnings of
the Company's consolidated foreign subsidiaries because the Company intends to
reinvest such benefits indefinitely. A determination of that liability is not
practicable.
During 1997, the Company was notified by the Dutch authorities that it
qualified for a reduced tax rate on certain part of its qualifying income which
included net interest income from intercompany loans, and for money held on the
convertible debt, and on royalties from the direct
28
<PAGE> 39
license revenue. The reduced tax rate on certain qualifying income may be
subject to review by the European commission.
9 FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's use of derivative financial instruments are limited to
short-term foreign currency forward contracts and the purchase of foreign
exchange put and call options. The Company uses these contracts primarily to
offset the effects of exchange rate changes on intercompany cash flow exposures
denominated in foreign currencies. These exposures include trade accounts
receivable, royalties, service fees and loans. The primary exposures are
denominated in European and Asian currencies. The Company does not hold these
derivative financial instruments for trading purposes.
The counterparties to the agreements relating to the Company's foreign
exchange instruments consist of a number of major high credit-quality
international financial institutions. The Company, by policy, limits the
financial exposure and the amount of agreements entered into with any one
financial institution. While the notional amounts of financial instruments are
often used to express the volume of these transactions, the potential accounting
loss on these transactions if all counterparties failed to perform is limited to
the amounts, if any, by which the counterparties' obligations under the
contracts exceed the obligations of the Company to the counterparties.
The Company's foreign currency forward contracts all have maturities of
less than one year. These forward contracts are summarized below at contract
value (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- -------
<S> <C> <C>
European currencies $45,124 $ 2,811
Asian currencies 29,584 --
Other currencies 1,210 --
------- -------
Total $75,918 $ 2,811
======= =======
</TABLE>
The amounts represent the U.S. dollar equivalent of commitments to sell
foreign currencies.
While the contract amounts provide a measure of the volume of these
transactions, they do not represent the amount of the Company's exposure to
credit risk. The Company controls credit risk through credit approvals, limits
and subsequent monitoring procedures.
29
<PAGE> 40
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's
financial instruments were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $111,417 $111,417 $205,751 $205,751
Marketable securities 104,847 104,847 1,080 1,080
Financial liabilities
Short-term borrowings 877 877 121 121
Convertible subordinated notes 200,000 316,060 190,103 143,053
Other long-term borrowings
(including current portion) 1,571 1,571 1,312 1,312
Off-balance sheet instruments
Foreign currency forward contracts -- 75,014 -- 2,972
</TABLE>
The estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies as discussed below.
However, considerable judgment is required in interpreting market data to
develop the fair value estimates. Accordingly, the estimates presented above are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange.
Cash equivalents and marketable securities -- The carrying
amount approximates fair value because of the short maturity of these
instruments.
Short-term borrowings -- The carrying amount approximates fair
value because of the short maturity of these instruments. Convertible
subordinated notes -- The fair value of the Notes was based on quoted
market prices and reflects the decrease in share price of the Company's
common stock since the Notes were issued.
Other long-term borrowings -- The fair value of these
financial instruments is estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Foreign currency forward contracts -- The fair value of the contracts is based
on the estimated amount at which they could be settled based on quoted exchange
rates. Foreign currency contracts are usually three months in duration and
typically are due at the end of each quarter. There were no material differences
between contract value and fair value at December 31, 1998.
10 CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, marketable
securities, accounts receivable, and financial instruments used in hedging
activities.
The Company places its cash equivalents and marketable securities with
high quality financial institutions and, by policy, limits the amount of credit
exposure with any one financial institution.
30
<PAGE> 41
Credit risk associated with accounts receivable is limited due to the
large number of customers comprising the Company's customer base and their
dispersion among many different industries and geographical regions. The Company
does not require collateral to support customer receivables. The Company also
maintains reserves for potential losses, and all credit losses to date have been
within management's expectations. For the year ended December 31, 1996, the
Company charged $8.3 million to bad debt expense. Bad debt write-offs in 1996
were $1.6 million. For the year ended December 31, 1997 the Company charged
$12.4 million to bad debt expense and recorded bad debt write-offs of $3.0
million. For the year ended December 31, 1998, the Company charged $55.3 million
to bad debt expense and recorded bad debt write-offs of $23.8 million.
11 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 Ventures B.V. ("VV," formerly Baan Investment B.V.). As
of April 9, 1999, VV owns approximately 20% of the Company's outstanding Common
Shares. All of the shares of VV are in turn held by a share administration
foundation of which Messrs. Baan and Baan are directors, thereby providing them
with effective voting control of VV's shares in the Company. The economic
interest in VV's shares is held by the Oikonomos Foundation, a foundation the
Baan brothers established under Netherlands law in 1994 to carry out charitable
activities throughout the world.
VV was created in 1994 as a venture capital company that invests in the
form of corporations, joint ventures, or partnerships in various new
technologies, educational programs, research projects and sales, consulting, and
support activities principally in the ERP and other technology markets. As
described further below, the Company has entered into various agreements with
entities owned or controlled by VV 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. During
1998, it has been Company policy to have all material agreements with VV
approved by the independent directors of the Company's Supervisory Board, and
information on material VV relationships has also been provided to the Company's
Audit Committee.
As reported in the Company's Financial Statements for 1997, VV owned
approximately 39% of the Company's outstanding shares as of April 1998. In
October 1998, however, VV publicly disclosed that it had secured $500 million in
loans to help fund certain of its operations and investments, with VV's shares
in the Company serving as collateral on those loans. When the publicly traded
share price in the Company's stock declined over the summer and into the fall of
1998, VV reported that its lenders began selling the VV collateral shares to pay
down the VV debt obligations. As a consequence of these actions, VV's holdings
of the Company's shares had declined to 20.12% as of April 9, 1999. VV also
indicated that it would undertake a review of its operations/investments, with
an eye toward reorganizing and/or selling certain of its assets.
Revenues from VV during 1996, 1997 and 1998, were $14.5 million, $66.3
million and $50.6 million, respectively. As of December 31, 1997 and 1998, the
outstanding balances with VV (reflected in amounts (due to) and due from related
parties) consisted of the following (in thousands):
31
<PAGE> 42
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
------- -------
<S> <C> <C>
Baan Midmarket Solutions (BMS) $19,396 $ 2,648
Vanenburg Business Systems (VBS) 9,935 1,142
Vanenburg Ventures 9,079 (1,463)
Other 4,355 3,970
------- -------
$42,765 $ 6,297
======= =======
</TABLE>
The Company's Indirect Channel. Since 1996, one of the principal
relationships between VV and the Company has been VV's involvement as both a
reseller and manager of the Company's indirect channel. As indicated above, the
Company began building an indirect channel in 1996 as part of its strategy to
penetrate the SME market (or so-called midmarket). Because the go-to-market
strategy and demands of the midmarket differ significantly from those of the
high-end ERP sector, the Company believed then (and continues to believe) that
the midmarket could likely best be served through creation of an indirect
channel. Commencing in 1996, therefore, the Company embarked on a strategy of
signing resellers as part of this midmarket strategy.
1. The BBS relationship. Consistent with its venture capital
philosophy, and in an effort to participate in the indirect channel the Company
was creating, VV and a third party in 1996 created a joint venture known as BBS
Holding B.V. (now owned 100% by VV). That company in turn owns a series of
approximately fifteen companies operating as resellers in the midmarket space.
These companies were commonly referred to throughout 1996-1998 as the Baan
Business Systems network, or "BBS." In April 1999, BBS changed its name to the
Vanenburg Business Systems network, or "VBS."
Commencing in 1996 and continuing through 1997, the Company entered
into a reseller relationship with VBS. Prior to 1997, VBS, like each of the
Company's resellers, paid a fee to the Company for licenses resold based on a
percentage of the resale price. In 1997, when the Company amended its reseller
license fee terms to provide for a straight per-seat license fee, VBS negotiated
a volume discount fee structure reflecting the greater volume of its purchases
(at that time VBS comprised greater than 50% of sales of the Company's products
in the indirect channel; that number today is approximately 30% of channel
sales) as well as its willingness to pay for the seats up front in cash in
exchange for the lower rate. In all other respects, VBS's terms have been
materially the same as those provided other resellers; it has not been given
special payment, return, or exchange terms.
The Company recognized revenues of approximately $4.5 million and $32.3
million from VBS during 1996 and 1997, respectively, from sales of licenses
pursuant to the VBS reseller agreement. In addition, during 1996 and 1997, the
Company assigned to VBS a number of customer contracts that the Company believed
could best be served by VBS. In connection with assigning those contracts: (i)
the Company assigned the related outstanding accounts receivable balances in the
aggregate amount of $4.6 million and $0.3 million, respectively, and VBS paid
for such outstanding receivables; and (ii) VBS paid the Company for these
contracts $10.0 million, $18.0 million and $2.9 million in 1996, 1997 and 1998,
respectively, representing the value of certain potential future license revenue
forgone by the Company as a result of pricing differences between customary
terms in direct sales versus indirect channel, third-party contracts. Finally,
during 1997 the Company recognized $8.7 million from the VBS holding company for
the non-recourse assignment of the remaining rights and obligations under a
license agreement with an unrelated third-party. All revenue recognized from VBS
is included in "License revenue from related parties" in the accompanying
Consolidated Statements of Operations.
32
<PAGE> 43
The Company recorded no license revenues from VBS in 1998 because it
and the Company's other resellers began buying directly from a newly formed
company, Baan Midmarket Solutions B.V. ("BMS"), a joint venture between the
Company and VV created in late 1997 as wholesaler and manager of the indirect
channel.
2. Creation of BMS. Over the course of 1997, the Company's indirect
channel grew to approximately 110 resellers, including approximately 15 VBS
companies. Given that growth, and the potential for future growth of the
channel, the Company determined that a stronger infrastructure to manage and
support the channel was needed. To provide that "backbone," the Company and VV
entered into a joint venture agreement in the fourth quarter of 1997 under which
BMS was created (85% owned by VV, 15% by the Company). As envisioned, 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. With the creation of BMS, the Company ceased to sell
directly to VBS and its other resellers (with the exception of minor direct
sales to independent third-party resellers in the first quarter of 1998 in the
amount of $5.3 million, $1.3 million of which was recorded as deferred revenue).
In connection with creating BMS in 1997, the Company entered into a
software distribution agreement under which it: (i) provided BMS with
distribution rights to the Company's products; and (ii) assigned a majority of
the Company's existing VAR (value added reseller) agreements to BMS. In
consideration for that assignment, BMS paid the Company $13 million,
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. In addition, the Company
recognized revenues of approximately $3.0 million and $47.7 million during 1997
and 1998, respectively, from sales of licenses to BMS pursuant to the
distribution agreement. All revenue recognized from BMS is included in "License
revenue from related parties" in the accompanying Consolidated Statements of
Operations.
In addition, the Company outsourced to BMS certain of its (the
Company's) employees and provided to BMS certain billing, collection, and other
back office services pursuant to a separate services agreement. Under that
agreement, BMS reimbursed the Company for the actual costs of the personnel
assigned as well as other direct expenditures made by the Company on BMS's
behalf. It also paid an additional 15% of these reimbursed costs as a surcharge
for the administrative and back office services the Company provided. That
amount was approximately $7.5 million in 1998. Such amounts are recognized as a
reduction in "General and administrative expenses" in the accompanying
Consolidated Statements of Operations.
The Company's distribution agreement with BMS at no time permitted
stock balancing, returns, or exchanges (since there were no extended payment or
return provisions in that contract), and there has never been any stock
balancing, returns, or exchanges from BMS to the Company. The Company likewise
is not aware that BMS had any such arrangements with any of the VARs or
distributors it managed. In January 1999, BMS sold its remaining stock of
inventory at a discount to an independent third-party distributor. In connection
with the Company's purchase of BMS's core assets in January 1999 (described in
detail below), the Company paid VV $2 million on execution of that purchase
agreement representing approximately one-half the discount negotiated by the
independent third-party purchaser of BMS's inventory.
Prior to 1998, with the indirect channel still ramping up and providing
modest contribution to the Company's overall revenue generation, the Company
recognized revenue on a sell-in model into the channel. Consistent with industry
practice, the Company adopted the sell-in model of placing
33
<PAGE> 44
inventory in the channel to ensure the VARs were investing in the business plan
to resell the Company's products.
Over the course of 1998, however, BMS better than doubled the number of
channel partners selling the Company's products into the midmarket - ending 1998
with approximately 215 independent, third-party VARs and approximately 15 VBS
resellers. With a related party acting as the sole distributor for indirect
sales, and with indirect sales in early 1998 showing the potential to grow
significantly as a percentage of the Company's total sales, the Company
announced in the second quarter of 1998 that it would change to the sell-through
model for channel revenue recognition. With this change, sales to BMS were made
based on BMS's reports of the VAR's sell-through to end-users.
With the exception of the limited sales the Company made directly to
resellers in the first quarter of 1998, all of the 230 or so VARs bought
licenses from BMS. As a result, virtually all of the Company's indirect channel
revenue in 1998 was reported under the "License revenue from related parties"
item in the accompanying Consolidated Statement of Operations. During the course
of 1998, sales to BMS, recognized by the Company as related party revenue, were
$15.3 million in the first quarter, $32.6 million in the second quarter, and
$23.2 million in the third quarter. With respect to the fourth quarter of that
year, BMS advised the Company that $17 million in licenses had been sold through
to end-users during that quarter. As described in the next subsection, however,
the Company did not sell new licenses to BMS in the fourth quarter as part of a
strategy to address inventory levels in the channel in light of declining ERP
demand.
3. Channel inventory. BMS's records provided to the Company indicate
there was approximately $56 million in total inventory in the indirect channel
at the start of 1998. The Company reported in its 1997 Financial Statements
that, based on estimates BMS confirmed, the Company understood that $11 million
of this total channel inventory was with related parties ($3 million with BMS,
and approximately $8 million with VBS). Subsequent review of VBS's records in
late 1998 indicate that apparently approximately $23 million of the $56 million
in total channel inventory at the start of 1998 was actually in related party
hands (the $12 million difference being attributable to additional inventory
that apparently was with VBS at the commencement of 1998). Thus, according to
VBS's and BMS's records, the Company began 1998 with $56 million in total
channel inventory, of which $23 million was with related parties and the
remainder was with independent, third-party VARs.
The BMS records also reflect that total channel inventory did not
increase during 1998; inventory as of September 30, 1998 was at the same $56
million total. The mix of related party and third-party inventory levels did
change, however, consistent with BMS's role as channel manager. At the end of
the third quarter of 1998, total BMS inventory had increased to $40 million of
the $56 million total, as channel inventory was aggregated over the year within
BMS. According to BMS's figures, BMS inventory levels were approximately $13
million at end of the first quarter of 1998; $30 million at end of the second
quarter; and $40 million at end of the third quarter. Again, total inventory in
the channel had not grown during this time, meaning that third-party inventory
levels had been reduced to approximately $16 million over the course of the
year.
The Company entered 1998 in what appeared to be an expanding ERP
market. Based on a review of the public filings and analyst estimates of 20
leading enterprise application vendors, the data suggests that license revenues
for these companies grew overall 58% in 1997. That growth rate continued strong
at 47% in the first quarter of 1998 (year over year), and softened some to 35%
in the second quarter; but in the third quarter the license revenue growth rate
for these companies had declined to 20%, and it dropped even further to just 4%
in the fourth quarter.
34
<PAGE> 45
As it became clear following the third quarter of 1998 that license
revenue growth rates industry-wide were declining, and in connection with the
Company's determination to undertake a comprehensive reorganization plan in the
fourth quarter, the Company acted to address the issue of indirect channel
inventory. To eliminate the approximate $56 million in indirect channel
inventory existing at the end of the third quarter: (i) approximately $17
million in inventory was sold by the Company's indirect channel to end-users
during the fourth quarter, thus reducing the inventory number by that amount;
and (ii) as to the remaining channel inventory of approximately $39 million, the
Company reversed that amount from fourth quarter revenue and recorded it as
deferred revenue in the quarter. The Company undertook this latter reversal even
though product had been delivered, approximately $34 million for such licenses
had been paid, and there were no cancellation or return provisions. The
practical effect of these actions was to eliminate inventory from the channel,
since remaining levels that were now recorded as deferred revenue will only be
recognized as revenue as it is sold through to end-users.
The $23 million in BMS inventory that existed at the end of the fourth
quarter (which comprised all remaining related party inventory) was purchased at
a discount by an independent third-party distributor pursuant to an agreement
between it and BMS in January 1999. As a result of that transaction, there was
no related party channel inventory as of January 1999. All channel inventory
(approximately $39 million) is in the hands of independent distributors and
VARs, and the Company will recognize revenue from the sale of such inventory
only as it is sold to end-users.
4. The Company's acquisition of core BMS assets. In connection with its
October 1998 announcement that VV's lenders were selling the Company shares VV
owned and had pledged as collateral to pay down VV's debt obligations, VV also
announced that it would reorganize its business, and potentially liquidate or
substantially restructure certain of its assets.
One of the assets immediately and significantly put at risk by these
events was the BMS joint venture with the Company. Given the importance of the
indirect channel to the Company's strategy going forward, the Company decided to
purchase the core BMS assets. In January 1999, the Company entered into an
agreement with VV 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
the 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 a 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 VV 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.
The surviving entity of what had been BMS is now owned 100% by VV. The
principal remaining assets of that entity are outstanding accounts receivables;
it is expected the surviving entity will be liquidated once those accounts
receivables are collected. The Company was advised on the transaction by outside
U.S. and Dutch legal counsel. Credit Suisse First Boston issued a fairness
opinion as to the fairness from a financial point of view to the Company of the
consideration being paid for BMS.
35
<PAGE> 46
As a result of this transaction, management of the Company's
approximately 230 channel partners is now under the Company's direct control.
Included in that number are the approximately 15 VBS resellers, but the current
VBS agreement (assumed by the Company as part of the acquisition) requires VBS
to purchase licenses of the Company's products for resale from an independent
third-party distributor. The net result is that, commencing in the first quarter
of 1999, it is the Company's intention that it will no longer have related party
software license revenue associated with the indirect channel.
In addition, as part of the BMS agreement, VV has agreed to eliminate
the "Baan" name from any and all of its operations, and VV has recognized the
Company's ownership of all right, title, and interest in and to the "Baan" name
for commercial purposes. Any use of the "Baan" name by VV going forward must be
based on written agreement with the Company; but it is the intention of the
Company, except in isolated cases to aid in a particular VV entity's transition
to another name, that it will not grant permission to such use by VV.
Other Company-VV relationships during 1998. During early 1998, the
Company sold to or acquired from VV (or VV-related entities) the following
assets/entities:
- - Pursuant to a decision to eliminate its two remaining joint investments
with VV (other than BMS), the Company sold its minority interests in
two software companies (Top Tier and B.A. Intelligence Networks, in
which VV also had an interest) to VV for approximately $9.7 million.
The proceeds approximated the Company's carrying value in such
investments; therefore, the Company did not realize a gain or loss on
these transactions;
- - Having concluded that certain of its Latin American subsidiaries were
operating in countries in which the midmarket presented the most
attractive market opportunity, and thus should more appropriately be
part of the Company's indirect channel, the Company sold those
subsidiaries to VV for approximately $5.2 million. The Company
recognized a loss of approximately $7.2 million from the sale of such
subsidiaries. Such loss is included in "Loss on disposals of assets" in
the accompanying Consolidated Statements of Operations; and
- - The Company also acquired ownership in certain work flow engine
technology from LEY GmBH ("LEY"), a company in which VV had a 58%
equity interest at that time. The Company paid $5.5 million to acquire
this technology, based on an independent valuation, which is recorded
in "Software development costs" on the accompanying Balance Sheet. The
agreement also provides LEY with the right to sell the product on a
stand-alone, royalty basis (the Company has need to sell this engine
only as a bundled product). LEY did not have stand-alone sales in 1998
according to its reports to the Company, so no royalties were recorded.
During 1997 and 1998, the Company also charged VV the following amounts
for certain IT and marketing services:
- - $5.0 million and $16.5 million, respectively, pursuant to an IT
services agreement between the parties under which the Company provides
VV 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. VV
has indicated it expects that at some point during 1999 it will no
longer require these services and this agreement will be terminated;
and
- - $3.6 million and $5.3 million, respectively, for marketing costs
(including without limitation for its use of the "Baan" name). Due to
VV's election in late 1998 to close or sell a substantial number of its
investments, and its agreement to cease use of the "Baan" name
(described above), the Company will not be charging VV any such
marketing costs in 1999.
36
<PAGE> 47
Such amounts have been reflected as reductions in operating expenses in
the accompanying Consolidated Statements of Operations.
During 1998, the Company entered into OEM agreements with certain
software companies owned or controlled by VV. The Company recognized royalties
and development expenses in connection with such agreements during 1998 of
approximately $1.4 million and $2.5 million, respectively. Such royalties and
development expenses are included in "Cost of license revenue" and "Research and
development expense," respectively, in the accompanying Consolidated Statements
of Operations.
In addition, the Company has entered into several agreements with VV
entities under which the Company paid VV certain product, services, or lease
fees during 1997 and 1998. These agreements include royalty agreements under
which the Company is authorized to resell instructional or other materials
created by certain companies owned or controlled by VV; subcontracting
agreements whereby the Company retains the services of certain VV entities to
assist in fulfilling customer commitments; and lease agreements for certain of
the Company's Netherlands facilities that are properties owned by VV entities.
The total costs and expenses incurred by the Company in 1997 and 1998 associated
to these agreements were not material.
VV has indicated that it intends to continue the process of closing or
selling certain of its investments. Certain of the assets VV is prepared to sell
may fit within the Company's strategy going forward and may add value to its
product offerings or ability to better serve its customers. The Company will
evaluate any such opportunities with the advice and approval of its independent
directors and independent valuations as appropriate.
12 ACQUISITIONS
In May 1996, the shareholders of Berclain Group Inc. ("Berclain")
agreed to exchange their shares in Berclain for approximately 1.1 million shares
of the Company's common shares. Berclain is a Canadian software company and a
provider of manufacturing synchronization and scheduling solutions. The business
combination was effective May 31, 1996 and was accounted for as a pooling of
interests. In November 1996, the shareholders of Antalys, Inc. ("Antalys")
agreed to exchange their shares in Antalys for approximately 1.8 million shares
of the Company's common shares. Antalys is an American software company and a
provider of configuration management software that automates the configuration
and pricing for products and services. The business combination was effective
November 30, 1996 and was accounted for as a pooling of interests. Because
Berclain's and Antalys' financial statements were not material to the
consolidated financial statements of the Company, the Company did not restate
any of its consolidated financial statements prior to the combinations.
Consolidation of Berclain and Antalys reduced the Company's retained earnings by
approximately $548,000.
In August 1997, the Company acquired all of the outstanding shares of
Aurum Software Inc. ("Aurum") for approximately 8.3 million 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.
37
<PAGE> 48
Combined and separate results of the Company and Aurum for the periods
prior to the acquisition were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, 1996 AUGUST 31, 1997
----------------- ------------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
Net Revenues:
Aurum Software, Inc. $ 27,584 $ 24,232
Baan Company 387,958 319,098
--------- ---------
$ 415,542 $ 343,330
========= =========
Net Income (Loss):
Aurum Software, Inc. $ 279 $ (3,538)
Baan Company 36,333 2,537
--------- ---------
$ 36,612 $ (1,001)
========= =========
</TABLE>
In November 1997, the Company acquired all of the outstanding shares of
Beologic A/S ("Beologic") for approximately 1.3 million 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. Consolidation of Beologic reduced the
Company's retained earnings by approximately $6.1 million.
During the year ended December 31, 1997, the Company recognized $12.1
million of non-recurring charges related to direct transaction and integration
costs as a result of the combinations with Aurum and Beologic. Such costs
included asset write-downs of $3.4 million for capitalized software, goodwill
and other intangible assets, professional fees of $4.6 million, and
restructuring charges of $4.1 million. The restructuring charges consisted of
$2.3 million of software discontinuation costs and migration costs related to
the Antalys product, and $1.8 million for contractual software upgrades and
commitments, and for other miscellaneous charges related to the mergers. The
Company completed the actions associated with the restructuring as of December
31, 1998.
In 1997, the Company acquired the assets and liabilities of several
small companies for approximately $27.1 million in cash, which included the
acquisition of Matrix Holding B.V. ("Matrix"), a related party. Matrix was a
wholly owned subsidiary of Baan Investment B.V. and was acquired for $8.0
million in cash based on an independent appraisal and assumed net liabilities of
approximately $5.2 million. All of these acquisitions were accounted for under
the purchase method and the assets and liabilities were recorded at their fair
values on the acquisition dates. After allocating a portion of the purchase
price for these acquisitions to tangible assets and liabilities, $1.5 million
was allocated to customer lists, $7.2 million to assembled workforce and $21.3
million to goodwill.
In May 1998, the Company completed the acquisition of the outstanding
shares of CODA Group plc. ("CODA"). CODA is a provider of financial software.
Under the terms of the share exchange, the Company issued approximately 0.0695
Baan common shares for each outstanding share of CODA, representing an aggregate
of approximately 1.9 million Baan common shares. Outstanding options to purchase
CODA stock were assumed and converted into Baan options at the same exchange
ratio. The business combination was accounted for as a pooling of interests.
CODA's historical financial statements are not material to the consolidated
historical financial
38
<PAGE> 49
statements of the Company. The Company did not restate any of its consolidated
financial statements prior to the combination. In connection with the
acquisition of CODA, the Company recognized 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. None of the $1.8 million restructuring charge
remains unpaid as of December 31, 1998.
In September 1998, the Company acquired all of the outstanding shares
of CAPS Logistics, Inc. ("CAPS"), a provider of optimization software for
logistics planning and scheduling. The Company issued 2.5 million of the
Company's common shares, with an aggregate fair value on the acquisition date of
approximately $68 million and incurred other acquisition costs of approximately
$3 million, resulting in a total purchase price of approximately $71 million.
The purchase price was allocated as follows: capitalized software of $31
million, goodwill of $37 million, assembled workforce of $2 million, and net
tangible assets of $1 million.
13 COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases for substantially all of its offices
globally, certain data-processing equipment, telephone equipment, and other
office equipment. Rental expense for operating leases for the years ended
December 31, 1996, 1997, and 1998 was approximately $8,075,000, $14,701,000, and
$24,827,000, respectively.
39
<PAGE> 50
Minimum annual rental commitments under noncancelable operating leases
for periods subsequent to December 31, 1998, (based upon the exchange rates at
December 31, 1998), are as follows (in thousands):
<TABLE>
<S> <C>
1999 $28,027
2000 20,266
2001 16,496
2002 11,596
2003 4,856
Thereafter 3,355
-------
Total minimum rental commitments $84,596
=======
</TABLE>
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.
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. Six 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 1998 through mid-October 1998.
On February 16, 1999, the Court consolidated the actions and, as a
consequence, plaintiffs' leave to file a consolidated amended complaint has been
granted. Plaintiffs' motion for appointment of lead plaintiffs and lead counsel
remains pending. The Company has retained outside counsel and intends to
vigorously defend. Management, with the advice of outside legal counsel, expects
that the outcome of the actions will not have a materially adverse impact on the
Company's consolidated financial position.
14 GEOGRAPHIC AND OTHER INFORMATION
The following table presents revenues and certain long-lived assets by
geographic region for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
The Netherlands $ 82,622 $ 78,695 $ 79,475
Germany 54,073 90,122 95,167
United States 157,441 250,343 256,804
Other international 106,874 194,111 253,603
-------- -------- --------
Total net revenues from unaffiliated customers 401,010 613,271 685,049
Related-party revenue 14,532 66,325 50,600
-------- -------- --------
Total net revenues $415,542 $679,596 $735,649
======== ======== ========
</TABLE>
40
<PAGE> 51
No customer accounted for 10% or more of consolidated net revenues in
1996, 1997 or 1998. Related party revenue for all such parties as a group
accounted for 10% of the Company's total net revenue for 1997.
WAGES AND SALARY INFORMATION
Wages and salary information is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998
-------- --------
<S> <C> <C>
Wages and salaries $192,582 $315,331
Social security costs 23,902 36,224
Pension costs 3,314 6,265
-------- --------
Total $219,798 $357,820
======== ========
</TABLE>
AVERAGE NUMBER OF PERSONNEL
The average number of personnel employed during the year was:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1998
----- -----
<S> <C> <C>
Research and development 1,000 1,710
Sales and marketing 778 1,074
Billable services 1,291 2,017
Finance and general administration 343 497
----- -----
Total 3,412 5,298
===== =====
</TABLE>
15 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.
Approximately $58.0 million of the non-recurring charge related to the disposal
of certain non-strategic business entities and recognized losses on disposal of
those assets. Approximately $27.3 million related to the write-down of certain
long-lived assets in connection with the reorganization.
Restructuring costs were approximately $55.2 million and consisted of
(i) severance-related costs for over 1,000 employees affected by the
reduction-in-force, (ii) costs related to the consolidation and closure of
approximately 50 offices where the Company had redundant operations as a result
of acquisitions, and (iii) costs associated with the cancellation of certain
marketing and sales programs, including Expo 2000 and Baan World 1999. The
reduction-in-force affected employees in sales and marketing, services and
support, research and development, and general and administrative departments.
In connection with the reorganization, the Company evaluated the net
carrying value of certain intangible assets and determined that the net carrying
values had been impaired. Accordingly, the Company recognized a charge of
approximately $27.3 million to write-down these assets to their net realizable
value.
41
<PAGE> 52
In connection with the acquisition of CODA in May 1998, the Company
recognized approximately $1.8 million of restructuring charge related the
closing of certain offices. None of the $1.8 million restructuring charge
remains unpaid as of December 31, 1998.
The following table, expressed in thousands, summarizes the Company's
non-recurring expenses and activity for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Total Cash Asset Accrual Balance at
Costs Paid Write-offs December 31, 1998
------- ------ ---------- ------------------
<S> <C> <C> <C> <C>
Reorganization:
Asset write-downs $ 27,299 $ -- $ 27,299 $ --
Loss on disposal of assets 58,030 -- 45,988 12,042
Severance-related costs 22,204 13,897 -- 8,307
Sales and marketing programs 21,694 -- 14,693 7,001
Closure of offices 9,849 6,754 -- 3,095
Other non-recurring charges 1,425 538 -- 887
-------- -------- -------- --------
140,501 21,189 87,980 31,332
-------- -------- -------- --------
Coda acquisition:
Software development costs 9,600 -- 9,600 --
Closure of offices 1,800 1,800 -- --
Professional fees 3,000 3,000 -- --
-------- -------- -------- --------
14,400 4,800 9,600 --
-------- -------- -------- --------
Total non-recurring expenses $154,901 $ 25,989 $ 97,580 $ 31,332
======== ======== ======== ========
</TABLE>
The accrual for non-recurring expenses is reflected in accrued liabilities in
the accompanying consolidated balance sheets.
42
<PAGE> 53
BAAN COMPANY N.V.
BALANCE SHEETS
(IN THOUSANDS)
(After proposed appropriation of net results)
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
FIXED ASSETS
Intangible fixed assets $ 28,023 $ 50,883
Tangible fixed assets 12,461 34,138
Financial fixed assets 404,144 323,944
-------- --------
TOTAL FIXED ASSETS 444,628 408,965
CURRENT ASSETS
Other current assets 32,234 53,477
Marketable securities 156,910 --
Cash and cash equivalents 11,236 135,161
-------- --------
TOTAL CURRENT ASSETS 200,380 188,638
-------- --------
TOTAL ASSETS $645,008 $597,603
======== ========
</TABLE>
43
<PAGE> 54
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
SHAREHOLDERS' EQUITY
Share capital $ 5,939 $ 6,193
Additional paid-in capital 174,994 387,406
Accumulated translation adjustment (6,692) (1,578)
Retained earnings 116,224 (235,261)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 290,465 156,760
LONG-TERM DEBT
Convertible subordinated notes 200,000 190,103
Credit institutions and other long-term debt 766 1,290
--------- ---------
TOTAL LONG-TERM DEBT 200,766 191,393
CURRENT LIABILITIES
Credit institutions 322 --
Payable to subsidiaries 124,578 119,878
Income tax payable 19,239 2,349
Other current liabilities 9,638 127,223
--------- ---------
TOTAL CURRENT LIABILITIES 153,777 249,450
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 645,008 $ 597,603
========= =========
</TABLE>
44
<PAGE> 55
BAAN COMPANY N.V.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net income from group companies and participating interests
after taxes $ 35,805 $ 70,941 $(257,402)
Other income after taxes 807 6,215 (57,790)
--------- --------- ---------
NET INCOME $ 36,612 $ 77,156 $(315,192)
========= ========= =========
</TABLE>
Prior period amounts have been reclassified for the merger with Aurum Software
Inc. and some other items to conform to the current period presentation.
45
<PAGE> 56
BAAN COMPANY N.V.
NOTES TO FINANCIAL STATEMENTS
1 SIGNIFICANT ACCOUNTING POLICIES
The accounting policies are the same as those described in Notes to the
Consolidated Financial Statements. Investments in group companies and
participating interests are stated at the Company's share in their net asset
value. All amounts are stated in United States dollars.
2 INTANGIBLE FIXED ASSETS
Intangible fixed assets are disclosed in note 2 to the consolidated
financial statements. For 1998 the movement in intangible fixed assets can be
broken down as follows (in thousands):
<TABLE>
<S> <C>
Book value at December 31, 1997 $ 28,023
Purchases and additions 29,674
Amortization (8,090)
Foreign exchange difference 1,276
--------
Book value at December 31, 1998 $ 50,883
========
Total accumulated amortization $ 24,498
========
</TABLE>
3 TANGIBLE FIXED ASSETS
The tangible fixed assets consist of computer equipment and software
development costs. The movement in tangible fixed assets is as follows (in
thousands):
<TABLE>
<CAPTION>
Other Software
operating development
assets costs Total
--------- ----------- --------
<S> <C> <C> <C>
Book value at December 31, 1997 $ 12,430 $ 31 $ 12,461
Purchases and investments -- 31,000 31,000
Disposals (757) -- (757)
Depreciation (5,957) (2,614) (8,571)
Foreign exchange difference -- 5 5
-------- -------- --------
Book value at December 31, 1998 $ 5,716 $ 28,422 $ 34,138
======== ======== ========
Total accumulated depreciation $ 20,351 $ 2,664 $ 23,015
======== ======== ========
</TABLE>
46
<PAGE> 57
4 FINANCIAL FIXED ASSETS
Financial fixed assets relate to investments in group companies and
participating interests. The movement can be broken down as follows (in
thousands):
<TABLE>
<CAPTION>
Group
companies Other
Investments Loans investments Other Total
----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 171,062 $ 203,201 $ 26,905 $ 2,976 $ 404,144
Additions/acquisitions (6,817) 278,496 2,413 -- 274,092
Dividends/repayments -- (74,160) -- --
(74,160)
Disposals/amortization (587) (12,550) (6,662) (1,000) (20,799)
Share of net result (257,402) -- -- -- (257,402)
Foreign exchange (165) (3,179) 1,413 -- (1,931)
--------- --------- --------- --------- ---------
Balance at December 31, 1998 $ (93,909) $ 391,808 $ 24,069 $ 1,976 $ 323,944
========= ========= ========= ========= =========
</TABLE>
Investments in companies in which the Company does not have significant
influence are carried at cost or estimated realizable value, if less.
The other financial fixed asset of $1,976,000 is the long-term portion
of costs incurred in connection with the issuance of the convertible
subordinated notes (Notes). These debt issuance costs are being amortized on a
straight-line basis to interest expense over the term of the Notes.
5 SHAREHOLDERS' EQUITY
The movement in shareholders' equity and its components is disclosed in
note 6 to the consolidated financial statements.
6 LONG-TERM DEBT
The long-term liabilities relate principally to the convertible
subordinated notes disclosed in note 7 to the consolidated financial statements.
Principal payments due within one year are $402,000; no amounts are due after
five years. During 1998, the average interest rate on long-term debt was 4.5%.
7 CURRENT LIABILITIES
Borrowing arrangements and related guarantees are disclosed in note 7
to the consolidated financial statements.
Amounts payable to group companies bear interest of approximately 5%
and generally have no specific repayment terms.
8 ACQUISITIONS
Acquisitions are disclosed in footnote 12 to the consolidated financial
statements.
47
<PAGE> 58
9 EMPLOYEE INFORMATION
The Company has no employees.
10 OTHER INFORMATION
Remuneration of the Managing Directors was $926,000 and $776,000 in
1997 and 1998, respectively.
Remuneration of the Supervisory Directors was $33,000 and $16,000 in
1997 and 1998, respectively.
The Company has given guarantees in respect of the following Dutch
subsidiaries under the provision of section 403, Book 2 of the Netherlands Civil
Code:
- - Baan Nederland B.V., Barneveld, the Netherlands
- - Baan International B.V., Barneveld, the Netherlands
- - Baan Development B.V., Barneveld, the Netherlands
- - Baan Software B.V., Barneveld, the Netherlands.
- - Matrix Holding B.V., Nijmegen, the Netherlands
The Company is a foreign registrant at Nasdaq and is required by the SEC to file
an annual report (Form 20-F) with the SEC. The Form 20-F has been filed at the
Securities and Exchange Commission in the United States. A copy of this document
is free of charge available at the Company's office in Barneveld.
11 CONSOLIDATED SUBSIDIARIES AND PARTICIPATING INTERESTS
<TABLE>
<S> <C>
Consolidated subsidiaries:
- - Baan Nederland B.V., Barneveld, the Netherlands 100%
- - Baan Belgium N.V., Antwerp, Belgium 100%
- - Baan International B.V., Barneveld, the Netherlands 100%
- - Baan Development B.V., Barneveld, the Netherlands 100%
- - Baan Software B.V., Barneveld, the Netherlands 100%
- - Baan (Schweiz) A.G., Otelfingen, Switzerland 100%
- - Baan Austria GmbH, Vienna, Austria 100%
- - Baan Italia S.r.l., Milan, Italy 100%
- - Baan Iberica I.S. S.A., Sant Just Desvern, Spain 100%
- - Baan South Africa Pty. Ltd., Midrand, South Africa 100%
- - Baan UK Ltd., Harlow, United Kingdom 100%
- - Baan France S.A., Courbevoie, France 100%
- - Baan Nordic AB, Stockholm, Sweden 100%
- - Baan Holding Central Europe Hannover, Germany 100%
with participating interest in:
- Matrix Information Systeme GmbH, Moers, Germany 100%
- Berclain (Deutschland) GmbH 100%
- Coda GmbH, Germany
- Baan Deutschland GmbH, Hannover, Germany 100%
</TABLE>
48
<PAGE> 59
<TABLE>
<S> <C>
with participating interest in:
- Schuler GmbH 100%
- - Compact 3000 Ltd., Dudley, United Kingdom 100%
- - CODA Plc., Harrogate, United Kingdom 100%
with participating interest in:
- Coda Limited, Harrogate, United Kingdom 100%
- Coda Overseas Holding Ltd., Harrogate, United Kingdom 100%
- Coda International Products Ltd., Harrogate, United Kingdom 100%
- Coda International Services Ltd., Harrogate, United Kingdom 100%
- Coda, Inc., Manchester, New Hampshire, USA 100%
- Coda Canada, Inc., Toronto, Canada 100%
- Coda Iceland Chf, Kopavogur, Iceland 100%
- Coda B.V., Utrecht, the Netherlands 100%
- Coda Software S.A., Boulogne Cedex, France 20%
- Coda Singapore (Pty.) Ltd., Singapore, Singapore 100%
- Coda Malaysia Bhd., Malaysia 100%
- Coda Scandinavia AB, Stockholm, Sweden 100%
- Coda Hong Kong Ltd., Hong Kong, Hong Kong 100%
- Coda Pty. Ltd., Chatswood, Australia 100%
- Coda Limited, New Zealand 100%
- - Matrix Holding B.V., Nijmegen, the Netherlands 100%
with participating interest in:
- Matrix Reseach and Development B.V., Nijmegen, the Netherlands 100%
- Matrix Informatie Systemen B.V., Nijmegen, the Netherlands 100%
- Matrix International B.V., Nijmegen, the Netherlands 100%
- Matrix Information Systems B.V.B.A., Nijmegen, Belgium 100%
- Matrix Workstations Ltd., Berkshire, United Kingdom 100%
- - Baan Canada Inc., Toronto, Canada 100%
- - Baan U.S.A. Inc., New Castle, Delaware, USA 100%
- - CAPS Logistics, Inc., Atlanta, USA 100%
- - Antalys Inc., Golden, Colorado, USA 100%
- - Beologic A/S, Herlev, Denmark 100%
- - Baan Argentina Ltda., Buenos Aires, Argentina 100%
- - Baan Brasil Sistemas de Informatica Ltda., Sao Paolo, Brazil 100%
- - Baan Infosystems India Private Ltd., Bombay, India 100%
- - Baan Software India Private Ltd., New Delhi, India 100%
- - Baan China Ltd., Hong Kong, Hong Kong 100%
- - Baan Japan Co. Ltd., Tokyo, Japan 100%
- - Baan (Malaysia) Sdn. Bhd., Selangor, Malaysia 100%
</TABLE>
49
<PAGE> 60
<TABLE>
<S> <C>
with participating interest in:
- Baan Singapore Pte. Ltd., Singapore, Singapore 100%
- - Baan Education Asia Pacific Sdn. Bhd., Kuala Lumpur, Malaysia 100%
- - Baan Asia Pacific Pte. Ltd., Singapore, Singapore 100%
- - Baan Australia Pty Limited, Sydney, Australia 100%
- - Baan Korea Co. Ltd., Seoul, Republic of Korea 100%
Participating interest:
- - Tech@Spree Software Technology GmbH, Berlin, Germany 19%
- - TAS Tele Anwender Service GmbH, Karlsruhe, Germany (held by
Baan Deutschland GmbH, Hannover, Germany) 20%
- - Meta 4 Software M.S., S.A., Spain 10%
- - Top Tier Software Inc., USA 14%
</TABLE>
50
<PAGE> 61
MANAGING DIRECTOR SUPERVISORY DIRECTORS
Tom C. Tinsley William O. Grabe
David C. Hodgson
J.C. (Hans) Wortmann
51
<PAGE> 62
REPORT OF THE AUDITORS
Introduction
We have audited the accompanying financial statements of Baan Company
N.V., Barneveld for the year 1998. These financial statements are the
responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
Scope
We conducted our audit in accordance with auditing standards generally
accepted in the Netherlands. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
Opinion
In our opinion, the financial statements give a true and fair view of
the financial position of the company as at December 31, 1998 and of
the result for the year then ended in accordance with accounting
principles generally accepted in the Netherlands and comply with the
financial reporting requirements included in Part 9, Book 2 of the
Netherlands Civil Code.
Amsterdam, March 1, 1999
PricewaterhouseCoopers N.V.
52
<PAGE> 63
APPROPRIATION OF RESULTS
According to Article 30 of the Company's articles of association, the Management
Board with the approval of the Supervisory Board determines those amounts out of
the profits that will be allocated to the company`s reserves. The remaining part
of the profits shall be at the free disposal of the general meeting of
shareholders. The Managing Board proposes that the net losses will be deducted
from retained earnings. This proposal has been included in the financial
statements.
53
