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UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA

___________________________________
                                   )
LAURE SALERNO,                     )
   345 East 73rd Street            )
   Penthouse C                     )
   New York, NY 10021              )
on behalf of herself and all       )    Civil Action No.
others similarly situated,         )
                                   )    CASE NUMBER 1:98CV02465
                    Plaintiff,     )    JUDGE: Joyce Hens Green
                                   )    DECK TYPE: Civil General
          v.                       )    DATE STAMP: 10/16/98
                                   )
BAAN COMPANY N.V.,                 )
   11911 Freedom Drive             )
   Reston, VA 20190                )
      (and)                        )
   Vanenburgerallee 13             )
   3882 RH Putten                  )
   The Netherlands                 )
JAN BAAN,                          )
   c/o Baan Company N.V.           )
   11911 Freedom Drive             )
   Reston, VA 20190                )
TOM C. TINSLEY,                    )
   c/o Baan Company N.V.           )
   11911 Freedom Drive             )
   Reston, VA 20190                )
N. M. (KLAAS) WAGENAAR,            )
   c/o Baan Company N.V.           )
   11911 Freedom Drive             )
   Reston, VA 20190                )
Z.G. PAUL BAAN,                    )
   c/o Baan Company N.V.           )
   11911 Freedom Drive             )
   Reston, VA 20190                )
WILLIAM O. GRABE,                  )
   General Atlantic Partners       )
   125 East 56th Street            )
   New York, NY 10022              )
DAVID C. HODGSON,                  )
   General Atlantic Partners       )
   125 East 56th Street            )
   New York, NY 10022              )    CLASS ACTION



AMAL M. JOHNSON, ) Baan USA, Inc. ) 2350 Mission College Blvd. ) Suite 1300 ) Santa Clara, CA 95054 ) -and- ) VANENBURG VENTURES, B.V., ) JURY TRIAL DEMANDED Vanenburgerallee 13 ) P.O. Box 231 ) The Netherlands ) ) Defendants. ) ___________________________________) COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 OVERVIEW OF ACTION 1. This is a class action on behalf of purchasers of Baan Corp. ("Baan" or the "Company") American Depository Receipts ("ADR's") between January 30, 1998 and October 12, 1998 (the "Class Period"). This action alleges that defendants made false and misleading statements about Baan's business, finances and future prospects. 2. Beginning prior to and continuing throughout the Class Period, defendants undertook a scheme and course of conduct intended to inflate Baan's results through various financial manipulations. For example, to increase quarterly reported revenues throughout 1997 and into 1998, so as to meet Wall Street estimates and expectations, Baan used off balance sheet transactions with affiliates to overstate the Company's earnings. For fiscal year 1997, Baan's earnings were inflated as much as - 2 -
24%. Controlled by Baan founder Jan Baan, and his brother defendant Paul Baan, these affiliates accepted massive shipments of software so that the Company could maintain the illusion of rapid growth and competitiveness sufficient to mislead investors to bid up the Company's securities prices and "earnings" multiple. Defendants herein used Baan's inflated securities price as currency to close several material acquisitions during the Class Period. 3. Through improper revenue recognition methods, facilitated by non arm's length agreements with its reseller affiliates, Baan was able to manipulate its revenue and earnings so as to report impressive growth throughout 1997 and the first half of 1998, and mislead the public to believe that Baan was able to effectively compete with its largest rival, SAP of Germany. 4. As Baan reported its 1997 results, and defendants made extremely bullish comments about Baan's prospects in 1998 and beyond, the Individual Defendants named herein took advantage of the inflated price of Baan's securities to sell more than 130,000 shares of the Baan securities they owned for proceeds of about $5,635,000. At the same time, entities controlled by two defendants sold 559,959 Baan shares for proceeds of $25,115,776. only a few weeks prior to the end of the Class Period, other senior Baan executives sold more than 224,000 Baan ADRs, - 3 -
pocketing greater than $6,800,000, while in possession of material, adverse inside information. 5. On October 12, 1998, Baan disclosed a material shortfall in revenues and a huge loss for the third quarter, well below analysts' expectations and the Company's forecasts, reflecting, contrary to the explanation given by the Company, the material effect on Baan's financial results of the improper practices that defendants could no longer freely utilize to manage its financial results. The Company revealed that, instead of earnings $0.15 per share as forecast, Baan would suffer a huge loss of as much as $0.16 per share for the third quarter of 1998. Baan also warned that the fourth quarter of 1998 would be disastrous as well. The price of Baan's ADR's reacted sharply to these revelations, dropping $4.375 per share, or 25%, to $13.50, on almost 15 time's Baan's average one-day NASDAQ trading volume. 6. The positive statements about Baan's business and financial projections and results during the Class Period were materially false and misleading when issued because defendants failed to disclose, inter alia, the following adverse information which was then known only to defendants due to their access to internal Baan data: (a) That Baan was factoring accounts receivable through an off balance sheet related party to mask the uncollectibility of receivables; - 4 -
(b) That Baan had recognized revenue throughout 1997 in violation of Generally Accepted Accounting Principles ("GAAP"), overstating 1997 earnings by as much as 24%; (c) That Baan was not gaining customers at the rate required to meet its publicly announced financial projections, but was maintaining the appearance of revenue and earnings growth by "selling" to related entities, courtesy of non-arm's length agreements, with minimal actual sell-through, thus materially inflating revenues in violation of GAAP; (d) That customer acceptance of Baan's Enterprise Resource Planning ("ERP") software was far less robust than defendants' bullish statements had led the investing public to believe; (e) That future direct demand for many of Baan's products would be constrained by the excess levels of product already held by distributors and other resellers; (f) That there was no basis for making positive representations about Baan's revenues and margins, as defendants knew that Baan was being forced to give discounts and special incentives to close sales and that Baan was shipping more product to the distributor/reseller channel than was being resold to end- users, and which would adversely affect Baan's sales and margins going forward; and - 5 -
(g) That absent Baan's improper revenue recognition and non arm's length transactions with affiliates, Baan was experiencing little if any growth, and its projections of future growth were false. JURISDICTION AND VENUE 7. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted herein arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b), and 78t(a), and Rule 10b-5. 8. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of occurred in this District. 9. In connection with the wrongs complained of, defendants used the instrumentalities of interstate commerce including the U.S. mails and the facilities of the national securities markets. THE PARTIES 10. Plaintiff Laure Salerno, who resides at 345 East 73rd Street, Penthouse C, New York, New York, purchased 100 shares of Baan ADRs on October 2, 1998 at $22 11/16 per share and has been damaged thereby. - 6 -
11. Defendant Baan was founded in The Netherlands in 1978. Baan shipped its first information systems in 1982. It now has dual headquarters in Putten, The Netherlands, and at 11911 Freedom Drive, Reston, Virginia 20190. Since May 19, 1995, Baan ADR's have traded in an efficient market on the NASDAQ National Market System under the symbol "BAANF." Since May 23, 1995, Baan securities have also traded on the Official Market of the Amsterdam Stock Exchange under the symbol "BAAN." Baan 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 more traditional back-office operations (such as order management and inventory control) associated with Enterprise Resource Planning ("ERP"). 12. Defendant Jan Baan founded the Company's business in May 1978 and was Managing Director and Chief Executive Officer ("CEO") until July 2, 1998 when he resigned as CEO. Prior to January 1, 1998, he was also a Managing Director of Baan Investment B.V. ("BIBV"), now known as Vanenburg Ventures B.V. ("VVBV"). 13. Defendant Tom C. Tinsley ("Tinsley") joined the Company in November 1995 as Managing Director, President and Chief Operating Officer ("COO"). His appointment as Managing - 7 -
Director was approved at the Annual General Meeting of Shareholders in April 1996. Defendant Tinsley became Chairman of the Board of Managing Directors in April 1998 and CEO in July 1998. 14. N. M. (Klaas) Wagenaar ("Wagenaar") joined the Company in August 1997 as Senior Vice President, Administration and Chief Financial Officer ("CFO"). Defendant Wagenaar has global responsibility for all finance, human resource and legal operations of the Company. In addition, defendant Wagenaar became COO in April 1998. Prior to joining the Company, Mr. Wagenaar was COO of VVBV. 15. Defendant J.G. Paul Baan ("Paul Baan") joined the Company in January 1982 and was named Managing Director of the Company's Netherlands operating subsidiary in January 1986. In January 1994 he was named COO, in January 1995 he was appointed Vice Chairman and Managing Director and in October 1995 he was appointed President. In April 1996, Paul Baan resigned as Vice Chairman, Managing Director and President of the Company, and served as Chairman of the Board of Supervisory Directors from April 1996 through December 1997. Since December 1994, Paul Baan has been President and Managing Director of VVBV, and effective January 1, 1998, he became Chairman of VVBV. 16. Defendant William O. Grabe ("Grabe") became a Supervisory Director of the Company in May 1995 and served as - 8 -
Chairman of the Board of Supervisory Directors until April 1996. On or about February 2, 1998, defendant Grabe sold 40,000 Baan shares at $45.30 per share, pocketing $1,812,000 while in possession of material inside information. Defendant Grabe has been a Managing Member of General Atlantic Partners ("General Atlantic") or a general partner of its predecessor partnership since April 1992. On or about February 25, 1998, General Atlantic sold 205,673 Baan shares at $45.60 per share, reaping $9,377,763, while defendant Grabe was in possession of material inside information. On or about February 26, 1998, General Atlantic sold 76,627 Baan shares at $45.29 per share, reaping $3,471,203, while defendant Grabe was in possession of material inside information. Also on or about February 26, 1998, General Atlantic sold 209,127 Baan shares at $44.10 per share, reaping $9,222,501, while defendant Grabe was in possession of material inside information. Defendant Grabe is also a general partner of GAP Coinvestment Partners, L.P ("GAP"). On or about February 26, 1998, GAP sold 50,159 Baan shares at $44.10 per share, reaping proceeds of $2,212,012 while in possession of material inside information. Also on February 26, 1998, GAP sold 18,373 Baan shares at $45.30, reaping proceeds of $832,297 while in possession of material inside information. 17. Defendant David C. Hodgson ("Hodgson") became a Supervisory Director of the Company in May 1995. On or about - 9 -
February 26, 1998, defendant Hodgson sold 40,000 Baan shares at $45.30, pocketing $1,812,000 while in possession of material inside information. Defendant Hodgson has been a Managing Member of General Atlantic or a general partner of its predecessor partnership since its formation in 1989. On or about February 25, 1998, General Atlantic sold 205,673 Baan shares at $45.60 per share, reaping $9,377,763, while defendant Hodgson was in possession of material inside information. On or about February 26, 1998, General Atlantic sold 76,627 Baan shares at $45.29 per share, reaping $3,471,203, while defendant Hodgson was in possession of material inside information. Also on or about February 26, 1998, General Atlantic sold 209,127 Baan shares at $44.10 per share, reaping $9,222,501, while defendant Hodgson was in possession of material inside information. Defendant Hodgson is also a general partner of GAP. On or about February 26, 1998, GAP sold 50,159 Baan shares at $44.10 per share, reaping proceeds of $2,212,012 while in possession of material inside information. Also on or about February 26, 1998, GAP sold 18,373 Baan shares at $45.30, reaping proceeds of $832,297 while in possession of material inside information. 18. Defendant Amal M. Johnson ("Johnson") joined the Company as President of Baan U.S.A., Inc., a subsidiary of the Company, in October 1994. In February 1995, Ms. Johnson was additionally named Vice President, Americas Operations of the - 10 -
Company and in January 1996 she was promoted to Executive Vice President, Americas operations. In January 1997, Ms. Johnson was appointed acting Managing Director of the Company and Executive Vice President, Baan Affiliates & Marketing. Her appointment as Managing Director was approved at the Annual General Meeting of Shareholders of May 1997. In January 1998, Ms. Johnson took over responsibility for the Baan Supply Chain Division. In her current capacity, Ms. Johnson is responsible for market positioning, development, sales and marketing for the Company's supply chain products. On or about August 7, 1998, defendant Johnson sold 50,000 Baan ADR's, while in possession of material, adverse inside information, pocketing $2,010,945 in proceeds from the sale. 19. Defendant VVBV, formerly BIBV, together with its subsidiaries, is controlled by Jan Baan and Paul Baan, and owns approximately 39% of the outstanding Common Shares of the Company. In 1997, VVBV and Baan formed Baan Midmarket Solutions ("BMS"), 85% owned by VVBV and 15% owned by Baan. Jan Baan and Paul Baan, by virtue of their positions as managing directors of VVBV and the control they exercise over the entities that own and control the shares of VVBV, effectively have the power to vote the Common Shares of the Company owned by VVBV. Jan Baan and Paul Baan will therefore also have the effective power to influence significantly the outcome of matters submitted for - 11 -
shareholder action, including the appointment of members of the Company's Management and Supervisory Boards, and may be deemed to have control over the management and affairs of the Company. This significant equity interest in the Company may have the effect of making certain transactions more difficult absent the support of Jan Baan and Paul Baan. Included in the Company's channel partners are approximately 15 companies which are owned by BBS Holding B.V., a majority-owned subsidiary of VVBV. These BBS- related entities are commonly referred to as the Baan Business Systems network ("BBS"). 20. The individuals named as defendants in ¶¶ 12 - 18 above are referred to herein as the "Individual Defendants." Because of the Individual Defendants, positions as officers and/or directors of the Company, they knew the adverse non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to them in connection therewith. 21. Defendants Jan Baan, Tinsley and Wagenaar, by reason of their positions as CEO and Chairman of Baan's Board of - 12 -
Directors, President, COO and CFO were controlling persons of Baan and had the power and influence, and exercised the same, to cause Baan to engage in the conduct complained of herein. 22. During the Class Period, each individual Defendant occupied a position that made him or her privy to non-public information concerning Baan. Because of this access, each of these defendants knew that the adverse facts specified herein were being concealed. Notwithstanding their duty to refrain from. selling Baan securities while in the possession of material, non- public information concerning Baan, the defendants, or entities that they controlled, sold nearly 560,000 shares of the Company's stock, profiting by more than $25 million from their fraudulent scheme. 23. Each defendant had the opportunity to commit and participate in the fraud. The Individual Defendants were the top officers of Baan and they controlled its press releases, corporate reports, SEC filings and its communications with analysts. Thus, they controlled the public dissemination of, and could falsify, the information about Baan's business, products, financial results and future prospects that reached the public and impacted the price of its securities. 24. Each of the Individual Defendants also had the motive to commit and participate in the fraud. In recent years, Baan's stock traded at a price earnings multiple reserved for - 13 -
premier growth companies with track records of meeting the investment community's expectations for high profit growth. This stock performance enabled Baan's corporate executives to exercise stock options and to sell stock at large profits and enabled Baan to grow by using its stock to make acquisitions of other companies. The executives wanted to maintain their positions with Baan which would have been threatened had Baan's actual poor results been exposed. For all these reasons, maintaining Baan's image of strong growth and its high stock price was extremely important to Baan's top executives. Defendants also wanted to cover up the problems with and deterioration in Baan's business to make it appear that Baan's business was succeeding and achieving the 50% (or more) growth they had forecasted, so that its stock would trade at artificially inflated levels, high enough so that they, or entities that they controlled, could insider trade by selling significant amounts of their Baan stock, pocketing large sums for themselves. Also, the defendants were motivated to conceal the serious problems Baan was having with customers in an attempt to maintain Baan's competitive position with respect to competitors such as SAP, PeopleSoft, J.D. Edwards, SSA and Oracle, which was increasingly impaired by the success of these competitors, and would have been even more seriously damaged if Baan admitted the truth about its business. - 14 -
25. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Baan ADR's, including false and misleading statements and/or concealed material, adverse facts. The scheme: W deceived the investing public regarding Baan's business; (ii) artificially inflated the price of Baan ADR's; (iii) caused plaintiff and other members of the Class to purchase Baan ADR's at inflated prices; and (iv) permitted the Individual Defendants, or entities under their direct control, to sell approximately 560,000 shares of Baan stock at as high as $45.60 per share, pocketing more than $25 million. FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 26. On January 29, 1998, PR Newswire carried Baan's announcement of "record revenues and earnings for the fourth quarter and year ended December 31, 1997." The Individual Defendants caused the Company to report: Net revenues in 1997 rose 65% to $684.0 million, compared with net revenues of $415.5 million for 1996 .... Strong demand in 1997 for the Company's software resulted in license revenue growth of 82% to $437.8 million, compared with $240.7 million in 1996. Pro forma net income for the year(excluding restructuring and other charges related to acquisitions) increased 133% to $85.4 million, or $0.41 per diluted share, compared with net income of $36.6 million, or $0.19 per diluted share, for the 1996 year. As reported, net income for 1997 was $77.2 million, or $0.37 per diluted share. Excluding restructuring and other - 15 -
charges, gross margin and operating margin for 1997 improved to 68% and 18%, respectively, compared with 62% and 14% for 1996. Total net revenues for the fourth quarter were $220.0 million, up 65% over net revenues of $133.2 million for the fourth quarter of 1996 .... License revenues in the quarter grew 72% to $145.6 million, compared with license revenues of $84.9 million for the 1996 fourth quarter. Pro forma net income for the quarter (excluding restructuring and other charges related to acquisitions) increased 86!k to $30~8 million, or $0.15 per diluted share, compared with net income of $16.6 million, or $0.08 per diluted share for the fourth quarter of 1996. As reported, net income for the quarter was $29.1 million, or $0.14 per diluted share. The Company experienced strong growth across all geographies in 1997. Europe, Middle East and Africa represented 45% of total revenues and grew 58% during the year. Germany surged 87% to surpass The Netherlands as the Company's leading European market. Revenues in North America increased 74% in 1997 to comprise 42% of total revenues. Japan and the Asia/Pacific region accounted for 8% of total revenues, with combined growth of 94%. Collections of receivables improved further in the fourth quarter, and days sales outstanding dropped 11 days to 104 days. Product Offering Extended "Our strategic goal in 1997 was to expand our footprint into and beyond the ERP space, and we have been very successful," said Tom Tinsley, President and Chief operating Officer. "Through buying, building and partnering, we broadened our capabilities and reach beyond traditional ERP and now provide integrated solutions across the extended value chain, from the front office to the supply chain. Revenues from Customer - 16 -
Interaction Software and Supply Chain Management products have exceeded our original expectations and the integration process is on track." Throughout 1997, the Company made significant progress in broadening the scope of its product offerings through acquisitions, core development work and strategic partnerships. 27. On January 30, 1998, the start of the Class Period, AFX News reported that defendant Jan Baan said it was possible that company's sales would reach $1 billion in 1998. Speaking at a news conference after the company's 1997 results, defendant Jan Baan said, "Analysts expect us to report sales of 1 billion dollars this year, and there is indeed a chance we will.' There is also a chance that ratios will improve." Defendant Jan Baan noted that analysts expect Baan's sales growth in 1998 to be greater than the 33% forecast for German rival SAP AG. Turning to long-term growth prospects, Jan Baan said U.S. research institutes expect the world software market to be worth $34 billion in 2001. He added that other studies suggested Baan will be the world number one and the U.S. number two in the field of ERP software by 2002. Defendant Wagenaar said Baan has so far experienced "little impact" from the crisis in Asia, where the Company is active in Japan, China and South Korea. "We are relatively small in Korea. We have adopted a wait-and-see policy regarding Korea and will continue to do so for the time being," Wagenaar said. - 17 -
28. On January 30, 1998, Computergram International reported that excluding one time restructuring charges of $2.5 million and $12.1 million for the quarter and year, respectively, "earnings per share came in at $0.15 for the quarter which is exactly what the First Call consensus was looking for and $0.41 for the year, a penny better than estimates." 29. On January 30, 1998, AFX News reported that, according to defendant Jan Baan, the Company had sales of over $100 million in both Germany and the U.S. in 1997, and there were four or five countries in which the Company had sales of $50 to $100 million dollars. Defendant Jan Baan added, "If we had placed 300 [R&D] employees elsewhere, sales would have been 50 - 60 million dollars higher. But this proves that we are not just thinking short-term." 30. On February 2, 1998, as Baan's insiders began dumping their shares, the London Financial Times reported, "Jan Baan, chairman, said the company had increased its market share ,to some 13 per cent last year at the expense of its leading competitor, SAP of Germany. In the coming years Baan should continue to outpace the growth of the market, even though this is expected to expand by an annual 45 to 50 per cent, he added.,' 31. On February 9, 1998, AFX News reported that Jan Baan stated that the Company plans to treble its sales to $2 billion by 2000. "[Jan] Baan said that technological advantages - 18 -
will enable the Company to win market share from current leader SAP AG. Within the next three years, the [Baan] group will be able to command a 10% share on the global market for business software for small and medium-sized companies, the chairman said... While SAP's share of the global market has fallen to 61% from 73% since 1994, Baan has been able to expand its share to 15%, Baan said." 32. On February 24, 1998, Computergram International announced that Baan had agreed to acquire UK financial software house Coda Group Plc for an anticipated $86.6 million. Baan stated that it would integrate Coda's financial software, enabling it to improve its standalone position in the financial marketplace, as well as improve the capabilities of its ERP offering. Baan stated that it would buy all of Coda's shares, and would issue 0.0695 new Baan common shares for each outstanding Coda share. 33. On March 17, 1998, the Singapore Business Times reported that Baan's revenue from the Asia, Pacific grew 94%. "For this year, in Asia-Pacific, we will still hit at least double digit growth but maybe not double," Baan Asia Pacific president, Christopher Chung stated. Asia Pacific accounts for 8% of Baan's revenue. Chung said Baan will not be seriously affected by the Asia currency crisis, because it does not have a strong presence in the countries that are badly hit. Baan's business in Japan, - 19 -
which accounts for half of its Asia Pacific revenue, is growing well, Chung said. The other Asian countries Baan focuses on are Singapore and Malaysia. 34. Defendants' statements in ¶¶ 27, 29, 30, 31 and 33 were materially false and misleading when made because, inter alia: a. Baan was having great difficulty competing in the ERP marketplace with its rivals SAP, J.D. Edwards, Oracle, SSA and PeopleSoft; b. SOP 97-2 governed financial results starting in the first quarter of 1998, making it more difficult for Baan. to report revenue; c. Baan was having little success obtaining Value Added Resellers ("VARs") beyond its "captive" affiliated resellers; d. Baan's VARs and affiliated resellers were having very limited channel sell-through to actual Baan software end-users; and e. Worldwide economic turmoil was already causing Baan's limited sell-through to end-users to diminish even further. 35. On April 14, 1998, AFX News reported that Baan had formed a U.S. executive office in Reston, Virginia and appointed several key executives in a bid to expand its U.S. presence. - 20 -
Defendant Tinsley became the new office's chairman and defendant Wagenaar became its CFO. Jan Baan, founder and CEO of the Company, was also slated to work at the Reston office. The office operates in conjunction with U.S. operations in Menlo Park, California. 36. On April 20, 1998, AFX News reported that analysts expected Baan to report a net profit for the first quarter 1998 of $24.2 million - $25.4 million, up from $12.8 million in the first quarter of 1997. Earnings per share were forecasted to rise to $0.12 - $0.13 per share from $0.07 for the first quarter of 1997. AFX News reported that ING Barings analyst Cornelis Bos expected profit of $25.4 million and total revenues up 57% to $209 million for the first quarter of 1998. AFX News also reported that Friesland Bank Securities analyst Jorn van Breukelen had forecasted $24.2 million for first quarter 1998 earnings, and a Bank Labouchere analyst was looking for first quarter 1998 net income of $25 million. 37. On April 21, 1998, the Individual Defendants caused Baan to release its first quarter 1998 results. PR Newswire carried Baan's report: Total net revenues for the first quarter of 1998 were $176 million, up 32% over net revenues of $133 million for the same period in 1997. License revenue in the quarter grew 8% to $90 million, compared with license revenue of $83 million for the first quarter of 1997. Maintenance and service revenue for the quarter increased 74% to $86 million as - 21 -
compared to $49 million for the first quarter of 1997. Net income for the quarter decreased 81% to $2.4 million, or $0.01 per diluted share, compared with net income or $12.8 million, or $0.06 per diluted share for the first quarter of 1997. The Company's first quarter results reflect an increase in deferred revenues of $71 million in the quarter. Approximately $43 million of the increase is due principally to the uncertainty in the implementation of the new accounting pronouncement, Statement of Position (SOP) 97-2, "Software Revenue Recognition." Detailed implementation guidelines for this standard have not yet been issued. Because of this uncertainty, the Audit Committee and management have determined to defer revenue from licensed software that has been delivered to the customer under certain signed contracts even though they may have been paid in full. Amounts due under such contracts generally would have been recognized as revenue under the preceding accounting standard, SOP 91-1. Management, acting under the guidance of the Audit Committee, will continue to monitor and evaluate the impact of SOP 97-2 in future quarters. Including the $43 million impact of implementing SOP 97-2, revenues would have been $219 million. Revenue growth, as adjusted, would have been 59% and 64% for license revenue and total revenue, respectively. "Our first quarter was in many ways the best quarter that we had since going public in 1995. However, due to uncertainty in the new American guidelines for revenue recognition, we have decided, in consultation with the Audit Committee to take the position that we should defer several contracts that we initially felt would be in line with SOP 97-2. Accordingly, our reported revenue and profitability for the quarter will appear disappointing and will likely overshadow the fact that our deferred revenues increased from $30 million at the end of the fourth quarter of 1997 to over $100 million at the end of the first quarter of 1998. - 22 -
38. On April 21, 1998, citing the newspaper Het Financieele Dagblad, AFX News reported that Baan had revised its gross margin forecast for the period from 1998 - 2000 to between 19% and 22% from its previous estimate of 21% in 1998, 23% in 1999 and 26% in 2000. Het Financieele Dagblad also reported that Baan was aiming to be bigger in ERP software than Oracle and PeopleSoft after the year 2000. Later that day, AFX News reported that defendant Wagenaar claimed that Baan had not lowered growth estimates as reported by Het Financieele Bagblad and that these revised estimates were the paper's own figures and not Baan's. 39. On April 23, 1998, Computergram International reported that Baan's first quarter 1998 net income of $0.01 per share had fallen well short of First Call estimates of $0.11 per share. 40. On April 23, 1998, AFX News reported that Morgan Stanley Dean Witter analysts said though they lowered their Baan earnings per share forecast to $0.24 from $0.63 for 1998, and to $0.51 from $0.91 for 1999, citing the company's lower-than- expected first quarter results, they reiterated their "accumulate" rating for the stock. 41. On April 27, 1998, Computer Reseller News quoted defendant Tinsley: With respect to changes in SOP 97-2, we hit a gray area in this new revenue standard - 23 -
relating to deals that had been leased. The leasing arrangements we did in the first quarter were identical to the leasing deals we did in 1997. We were, therefore, surprised by action in the last three days. 42. Defendant Tinsley's statements in ¶41 were false and misleading when made because: a. SOP 97-2 had been in final form since October 1997; b. Baan and the individual Defendants were not "surprised" with the required accounting treatment for the Company's leasing arrangements, which was unchanged from 1997; and c. Baan's primary competitors, SAP, Oracle, J.D. Edwards, SSA and PeopleSoft were all in compliance with SOP 97-2 by the first quarter of 1998. 43. On April 29, 1998, Computergram International reported: Jan Baan, the Calvinist CEO of Dutch software company Baan, is known for his modest management style. So the brazen ambition he displayed at the announcement of the company's 1997 annual results must have surprised many. Baan, he said, would assume the number one spot in the US business application software market by 2001. Certainly, the company's strong results must have buoyed his confidence. For the fourth quarter, net profits were up 76% to $29.1m, on revenue that rose 65% to $220m. For the year, profits soared 111% to $77.2m on revenue up 65% to $684m. And certainly, the enterprise resource planning (ERP) software market is booming at present. Investment bank - 24 -
Lehman Brothers describes it as "an exceptional environment", and analysts at Banc-America Robertson Stephens have forecast that sales of client/server business applications software will reach $21.4bn by 2001, from $5.8bn in 1997.... Klaas Waagener, the company's chief financial officer, insists that Baan is closing the gap on SAP. In 1995, he says, license revenues from SAP's R/3 outstripped Baan's license revenues by a ratio of 10:1. In 1996, the ratio had narrowed to 7:1. Last year, it was just 4.3:1. 44. On April 30, 1998 the Malaysian New Straits Times reported: BAAN Asia-Pacific is remarkably bullish about its market prospects in the region this year and has targeted total revenues to hit a minimum of US$80 million (RM304 million), up from US$50 million last year. The company is also confident that revenues will more than double next year, with figures ringing to the tune of US$200 million. Baan Asia- Pacific's president Christopher Chung said the company's rapid growth is partly due to the fact that it is a fairly new player in the region's enterprise resource planning (ERP) market as its local operations started barely five years ago. "Speed is very important in today's competitive marketplace. Growth with speed is the fundamental differentiator between competitors," he told reporters in Denver, Colorado, in conjunction with Baan World 198 which ended last week. 45. On April 30, 1998, Computergram International reported that "a senior Baan executive said yesterday that the company does not expect to experience any slowdown in the ERP market until at least 2002." - 25 -
46. On May 6, 1998, AFX News reported: Baan['s] use of accounting methods to boost income was criticized by U.S. brokerage Prudential Bache, Algemeen Dagblad, reported, citing the broker's analyst Douglas Cook. The paper said Baan's annual report deposited with the U.S. SEC showed the group sold receivables to its affiliate Baan Business Systems (BBS) to boost income by $50 million in 1997 or 11% of its total license income, according to the Prudential Bache analyst. The figure included $18 million in potential future license income, it said. Prudential Bache also said Baan booked profits on unsold BBS inventories in its results last year, it reported. 47. On May 7, 1998, PR Newswire carried the following Baan press release regarding Baan's Annual Report on Form 20-F, filed with the SEC and signed by defendant Wagenaar: The relationship between Baan Company and BI is a key ingredient in the company's accelerated growth strategy, as has been disclosed on several previous occasions. In addition to several press releases, in February and March of this year Baan Company discussed at some length its relationship with BI in open meetings in Reston, Putten, and Paris with over 300 analysts and representatives of the media. Form 20-F is an official document required to be filed with the United States Securities Exchange Commission and it contains Baan Company's audited 1997 year-end financials. in connection with the Form 20-F filing and consistent with the company's policy of open disclosure of its accounting practices, Baan Company made further disclosures about the nature of its relationships with BI. Those disclosures were broader than is ordinarily necessary, as Baan Company deemed it appropriate because BI is effectively controlled by Jan Baan, the founder of Baan - 26 -
Company, and his brother Paul. BI owns approximately 39% of Baan Company's outstanding shares. BI in turn is 100% owned by a charitable foundation (Oikonomos) established by Jan and Paul Baan. Baan Company has no equity interest in BI. The relationship between Baan Company and BI is designed to make available to Baan users a comprehensive set of offerings to meet their broader needs around the enterprise software provided by Baan Company. Since 1996, Baan Company has had an ongoing reseller relationship with BI and certain BI subsidiaries under which BI is licensed to be a Baan Company reseller in what is popularly known as the mid-market (companies with revenues of between US dollars 50 million - dlrs 350 million). The mid-market is projected by many analysts and industry watchers as a potentially lucrative for ERP vendors. Baan's products have proved to be well suited to this market, but companies in this market have unique needs and demands that require a different go-to-market strategy compared to large companies. Baan Company, therefore, working with BI, designed a mid-market strategy establishing a focused indirect channel to maximize Baan's potential for realizing leadership in the mid-market. -- In 1997, Baan Company managed 150 mid- market partners; of those, approximately 15 were BI subsidiaries (under the umbrella of Baan Business Solutions, or BBS) and the remainder were other third-party distributors. To seize the expanding market opportunity and achieve increased economies of scale and faster time to market, BI in 1997 created Baan Midmarket Solutions ("BMS") to coordinate all of its mid-market reselling activities. Baan Company, which has a minority 15% interest in BMS, entered into an agreement with BMS under which it (BMS) will be Baan Company's primary reseller in the mid-market, and henceforth most revenues from - 27 -
the indirect channel to Baan Company will flow through BMS. -- Baan Company accounts for its reseller agreements with BI (and now, going forward, with BMS specifically) -- both in terms of recognizing revenue and costs -- in the same way in which it accounts for its reseller agreements with other third parties. -- Its indirect channel strategy is meeting Baan Company's expectations. Mid-market license revenue is growing as a percentage of our overall license revenue portfolio. As reflected in Baan Company's earnings releases, revenues Baan Company generated in 1997 in the mid-market accounted for 26% of total license revenue, up from 11% in 1996. Baan Company will continue its ongoing efforts to improve the way it communicates the relationship between Baan Company and BI as an integral part of the company's policy of open disclosure for all accounting practices. 48. On May 7, 1998, Computergram International reported that Baan, s annual report, filed with the SEC: shows that Baan put $11.6 million worth of software licenses through its books in 1997, but that these licenses hadn't actually been sold by the end of the year.... The filing also suggests that Baan recognized $13 million in revenue in 1997 from an arrangement it has with Baan Midmarket Solutions, a distributer in which Baan Co NV holds a 15% stake.... The company's shares have now fallen by a total 25% since the first quarter [1998] results were published, closing Wednesday at $43.50, and prompting chief executive Klaas Wagenaar to call the reaction "overblown." The company said that it will release a statement addressing the matters raised by the filing. - 28 -
49. On May 7, 1998, AFX News cited defendant Wagenaar as stating that Baan would explain its problems with its first quarter 1998 financials "within a week. ... Wagenaar said the company considered releasing an interim statement yesterday, following a sharp fall in the company's share price in Amsterdam and New York, but eventually decided not to: 'It's not worth reacting that way to panic.'" 50. On May 11, 1998, Information Week reported: As a financial analyst, it helps to understand the arcane rules of U.S. GAAP (generally accepted accounting principals). In fact, if you don't understand them, it's difficult to analyze whether a significant accounting change is really material to the fortunes of a company. For example, effective Dec. 15, 1997, the Accounting Standards Executive Committee's SOP (Statement of Position) 97-2 superseded SOP 91-1. Before you turn the page on me, you should know that these guidelines address the major issue of revenue recognition for software sales.... You can imagine multiyear software contracts with extended payment terms being recognized as revenue on day one. The end result was high earnings but poor cash flow. For accountants, this mismatch increased business risk and therefore needed to be adjusted. The new SOP made it clear that revenue must be allocated according to the fair value of each element of the bundled software and services sale. Any revenue that's associated with undelivered portions of the bundle must be deferred until the service or product is delivered. One of the most important provisions is the separation of service revenue from software - 29 -
revenue. Service revenue must be recognized ratably over the life of the contract. For implementation firms, revenue related to software that requires significant modification will be accounted for on a percentage-completion basis. These accounting guidelines will tend to depress short-term revenue and earnings. Many software companies have already adopted the new SOP and will therefore see minimal impact on their financial statements. But companies that sell bundled software products requiring major implementation services will find this may have a material impact on short-term earnings. Just ask Baan NV, with U.S. headquarters in Menlo Park, Calif. In its fiscal 1998 first quarter, $43 million in sales were deferred to the balance sheet instead of the income statement. Sales were $176.2 million for the whole quarter, so this had a significant impact. According to Baan, the long-term impact of the new policy has not yet been defined, so accurate forecasting is unclear. Interestingly, the change resulted in revenue growth of 32% instead of 64% year-over-year if the deferred sales were included. Earnings were even more dramatically affected earnings per share dropped to 1 cent from 6 cents in the first quarter of 1997. The hard part to understand is why the policy seems to have hit Baan harder than companies such as rival SAP. In Baan's most recently released 1997 disclosure filing with the Securities and Exchange Commission, other accounting issues that caused some alarm were raised. Baan Business Systems (BBS), a related party and subsidiary of Baan Midmarket Solutions (85% owned by Baan Investments and controlled by the principals of Baan NV), are resellers and distributors for Baan NV. According to the disclosure, about $11.6 million of licensing revenue recognized by related parties remained in their inventory. The inventory was sold in the ensuing quarter, but it looks like they - 30 -
recognized the sale a quarter early. This implies Baan may be factoring accounts receivables through their subsidiaries in order to mask rising receivables. In 1997, Baan acknowledged $32.3 million in revenue from BBS. But part of the revenue total may have been recognition of future license revenues for licenses transferred to BBS. These are all disturbing accounting practices. They may have rational reasons behind them, but combined, they look suspicious. 51. On May 14, 1998, AFX News reported that Baan's auditors, Ernst & Young, had resigned and that Baan had engaged Coopers & Lybrand to begin as the Company's auditors starting on May 13, 1998. 52. On May 14, 1998, AFX News reported that Baan's "newly implemented accounting standards will include immediate recognition of revenue from license agreements financed by outside lending institutions. It said the new business practices will facilitate its ability to recognize revenue fully and immediately on most if not all financed transactions.'" 53. On May 15, 1998, the Wall Street Journal reported, "Baan Co, the Dutch software company under fire for aggressive accounting practices, says it will change some of its sales- financing methods; says its financial auditor has resigned due to potential conflict of interest." 54. On May 15, 1998, M2 Presswire reported that Baan would no longer be a party to financing agreements with its - 31 -
customers. The Company stated that the new business practice would not impact Baan's previously released results. Baan stated that it had an established practice of submitting all transactions with affiliates to its outside auditors on a quarterly basis, and that all such transactions would continue to require the review and approval of disinterested members of the Baan Company Supervisory Board. "We believe these clarifications address the uncertainties surrounding the implementation of [SOP 97-2] and reinforce our business practices," said defendant Wagenaar. 55. Defendants' statements in ¶¶ 43, 44, 45, 47, 48, 49, 52 and 54 were materially false and misleading when made because, inter alia: a. Baan was having great difficulty competing in the ERP marketplace with its rivals SAP, J.D. Edwards, Oracle, SSA and PeopleSoft; b. SOP 97-2 governed financial results starting in the first quarter of 1998, making it more difficult for Baan to report revenue; c. Baan was having little success obtaining Value Added Resellers ("VARs") beyond its "captive" affiliated resellers; - 32 -
d. Baan's VARs and affiliated resellers were having very limited channel sell-through to actual Baan software end-users; and e. Worldwide economic turmoil was already causing Baan's limited sell-through to end-users to diminish even further. 56. On May 15, 1998, Computergram International reported that Baan shares rose 8.3% on news that Baan had sacked its independent auditors, Moret, Ernst & Young, the timing of which shows exactly who Baan is blaming for the bungled financial releases of the last fortnight. The optimism stems from the news that Baan is extricating itself from any financing transactions used by its customers to facilitate the purchase of Baan software.... But despite this move, Baan is still unable to bring the $43 [million] of revenues onto its books which it was forced to defer from its first quarter [1998] results.... The $43 [million] of deferred income will be gradually added back over the coming quarter, taking up to two years to recognize, according to comments made to Reuters by Klaas Wagenaar, Baan's chief operating officer. In other words, these amounts are still not yet in compliance with the new SOP.... SOP 97-2 has been available since October [1997], and in draft format for several months before that. 57. On May 15, 1998, AFX News reported that Baan had cleared much of the uncertainty surrounding the stock and that "analysts said they plan to raise their 1998 and 1999 EPS estimates by 'roughly 5 to 10 percent.'" - 33 -
58. On May 18, 1998, Computer Reseller News reported that: In January, Baan reported its total revenue grew to $684 million in 1997. But a recent Baan Form 20-F filing with the U.S. Securities and Exchange Commission shows part of Baan's revenue came from selling software to companies related to itself. Baan also appears to have shifted costs it should have incurred itself onto the related companies, said Neil Herman, analyst with Salomon Smith Barney, a New York investment firm. The 20-F is the form foreign companies use to explain their annual financial results to the SEC. From Baan's filing, Herman concluded the company may have overstated its 1997 earnings by as much as 24 percent. At the very least, Baan seems to have been doing some fancy footwork to maintain the appearance of rapid growth, Herman said. "My fear is that Baan is losing customers, and meanwhile is under pressure to maintain its existing growth rate, and all of this junk with selling to related parties reflects that problem," Herman said. Officials at The Baan Co. declined to be interviewed for this story. Herman is not the only one voicing concern. Baan's own auditors recently forced the company to disqualify $4.4 million that Baan previously recognized as revenue for 1997. The auditors-a Dutch subsidiary of Ernst & Young-have dropped Baan as a client, The New York Times reported on May 10. Much of Ban's revenue shuffling involves a set of companies that Baan formed in order to sell through to the channel. Those companies include Baan Investment B.V., BBS Holdings - 34 -
and Baan Midmarket Solutions (BMS). Here is how they are connected: - Baan Investment is a private company owned by Jan and Paul Baan, the brothers who founded The Baan Co. Baan Investment owns 39 percent of the stock of The Baan Co. - BBS Holdings is controlled by Baan Investment. BBS Holdings owns 15 Baan resellers. - Baan Midmarket Solutions (BMS) is a subsidiary of Baan Investment. Baan founded BMS last year to manage its reseller program. Baan Investment owns 85 percent of BMS; the remaining 15 percent is owned by The Baan Co. Baan Investment, BBS Holdings and BMS have reseller relationships with Baan. Herman said he fears The Baan Co. boosted its revenue by stuffing software licenses into its own home-made channel. Baan said the software is all sold through to customers. But in North America, at least, sell-through appears to have been modest. For example, Baan's largest North American reseller, Crowe Chizek LLP, Grand Rapids, Mich., did $10 million in Baan-related business last year. But that $10 million figure includes not just software, but services and consulting, said Stephen Nagengast, managing executive at Crowe Chizek. Baan's three North American distributors last year-Keylink Systems, a division of Pioneer- Standard Electronics Inc., Integration Alliance Corp. and Gates/Arrow Distributing- all said in recent interviews they did not sell much Baan products last year. Gates/Arrow, for example, did not realize any revenue from Baan software until the fourth quarter, said Eric Williams, vice president of marketing at Gates/Arrow, Greenville, S.C. Baan has been aggressively courting the channel, hoping to recruit resellers. But - 35 -
the company has met with mixed results, recruiting only 30 VARs in more than a year. Resellers have reason to be concerned about Baan, Herman said. "At the very least, resellers should be wondering why Baan owns all of these other companies who are resellers of Baan product. If I'm a reseller, where do I stand in relation to them? Am I going to be treated the same as them? Are they going to have a competitive advantage?" he said. Herman's analysis of Baan's 20-F also came up with the following revelations about Baan's 1997 financial results: - The Baan Co. boosted revenue by selling accounts receivable to related reseller partners. - The Baan Co. sold long-term customer contracts to its related reseller companies, enabling Baan to recognize revenue from those contracts now rather than waiting until the contracts were fulfilled. - The Baan Co. raised $8.6- million by providing services to Baan Investment. Those services included such things as the use of computers and marketing activities. But The Baan Co. and Baan Investment had no formal agreement regarding the cost of such services. - Companies under the Baan Investment umbrella "have made expenditures and incurred substantial costs that are not included in Baan's consolidated financial statements," according to Herman's report. Doug Sallen, vice president of business development at BMS, said part of the reason The Baan Co. spun out BMS last year was to avoid having to incur expenses related to setting up a reseller channel. - 36 -
"Baan Investment has provided funding for BMS to take an expense line that we're sure to see over the next two years. We're an off- balance-sheet company, a privately funded activity," Sallen said. Baan's shuffling of revenue and expenses among a set of related companies makes it difficult for investors to get a true picture of the company's operating finances, analysts said. "This is the kind of thing that makes the' hair on the back of your neck stand up," said Jeff Matthews, general partner at RAM Partners Ltd., an investment firm in Greenwich, Conn. At a recent price of $42, Baan's stock is trading at about 100 times its earnings per share. That is an extraordinary price- earnings multiple-about double the multiple Microsoft Corp. carries. "I wouldn't touch a company that trades at 100 times earnings and has questionable revenue recognition practices," said Matthews. "The related party transactions are a natural cause for concern, and cast a shadow over the quality of the company's earnings," said Charles Phillips, analyst with Morgan Stanley Dean Witter & Co., an investment firm based in New York. 59. On June 1, 1998, the London Financial Times reported that Baan had agreed to bring on more outside directors after institutional shareholders at its annual meeting attacked the Company for a lack of openness. "ABP, one of the largest domestic pension funds, voted against the reappointment to the supervisory board of two directors including Paul Baan, brother of Jan Baan, the company's founder and chief executive." - 37 -
60. On June 4, 1998, AFX News reported that Merrill Lynch analysts Christopher Shilakes and Julie Tylman said that they raised their 1998 EPS estimate for Baan to $0.59 per share from $0.44 per share to reflect the Company's new accounting principles. They also adjusted their full year 1998 revenue estimates to $1 billion from $929.8 million. 61. On June 30, 1998, the Wall Street Journal and Milwaukee Journal Sentinal reported that Baan customer Snap-on Tools had lost sales of $50 million in the prior six months because of glitches in its ERP software. The Baan ERP system, installed in December 1997, was blamed for much of Snap-on's restructuring and lost sales revenue. The Milwaukee Journal quoted Alexander Paris, Sr., analyst with Barrington Research of Chicago, "[C]omputer woes have caused [Snap-on] to lose $40 million to $50 million in sales since March [19981.0 62. On July 2, 1998, PR Newswire carried the following Baan press release: The Baan Company announced that Jan Baan, founder of the Company and current chief executive officer, will become Chairman of its Management Board subject to ratification by shareholders, and that Tom Tinsley will be appointed as president and chief executive officer. "After twenty years of building The Baan Company and guiding its growth, I feel -- and the Supervisory and Management Boards agree - - that my move to the Chairman's role will give me the opportunity to provide continued - 38 -
stewardship in the development of the organization," said Jan Baan, who is 52.... Since he joined the company in November 1995, Tom Tinsley has led the development and expansion of The Baan Company's growth strategy. He has been the architect of The Baan Company's move to a multi-product enterprise applications company and to a high-volume software provider. Additionally, Tinsley has played a key role in expanding the company's relationship with Microsoft Corporation. "I am pleased to take part in the leadership of the company as it progresses to the next phase of its global growth. Product extension and sales channel expansion will continue to be important elements of The Baan Company's growth strategy," said Tom Tinsley.... He and Jan Baan continue as members of The Baan Company's Executive Office, along with Klaas Wagenaar, chief operating officer and chief financial officer. Graham Sharman also announced that, effective July 7, 1998, he will be resigning as a member of The Baan Company's Supervisory Board. Mr. Sharman, a board member since 1995, was recently named president of Vanenburg Ventures (formerly Baan Investment) and plans to give full attention to his responsibilities in that position. The Baan Company has initiated the search for one or more new Supervisory Board members. 63. On July 6, 1998, TechWeb News reported that Baan Investment B.V., the venture-capital firm that owns a 39% stake in Baan changed its name to Vanenburg Ventures B.V. ("VVBV") . TechWeb added that VVBV planned to sell off Baan Business Systems ("BBS") and Baan Midmarket Solutions ("BMS") , and had retained Goldman Sachs to advise it on the sales. - 39 -
64. On July 8, 1998, The Wall Street Journal Europe reported that: a. Baan's dealings with affiliated entities controlled by defendants Jan Baan and Paul Baan made it "hard for investors to be sure just how healthy or unhealthy Baan is;" b. VVBV claimed that it would "realize the value of" two of VVBV's reseller subsidiaries causing Baan investors the largest confusion and concern by selling them; c. "Jan Baan offered [AlliedSignal] a fixed- price [software] deal without knowing how large and complex the installation would be, explaining that Baan needed a high-profile client to boost its stock price;" d. "Affiliated companies also have taken over some support functions Baan once performed, relieving the public company of million of dollars in costs;" and e. "Jan Baan says the public company is aiming for $2 billion in revenue by the year 2000, more than triple last Year's [revenue]." 65. On July 13, 1998, Information Week noted that Baan: has been under a cloud since it revealed earlier this year that it had sold products and services worth $66.3 million to companies controlled by Baan Investment, a private holding company for the Baan brothers' interests. The arrangement gave the appearance that Baan Co. was bolstering its financial results by selling products to - 40 -
affiliated companies and counting the transactions as revenue before the products had been resold to customers. * * * "There are still additionally questions," says Steven Kahl, a financial analyst at Piper Jaffray Inc. For instance, Baan Co. still has a 15% interest in an affiliate of Vannenburg. How will that revenue be recognized? 66. On July 13, 1998, Computer Reseller News reported that Jan Baan, co-founder of Baan, relinquished his CEO post to Tom Tinsley, president. Jan Baan and Tinsley both continued as members of the Company's executive office, along with Klaas Wagenaar, COO and CFO. 67. On July 17, 1998, TechWeb News reported that Baan revised its first quarter 1998 net profit down to $2.136 million from $2.4 million. Baan acknowledged, "Certain reclassifications and adjustments have been made to the financial statements." 68. Similarly, on July 20, 1998, the Wall Street Journal reported, "Baan Co NV, the Dutch software company, under fire for its aggressive accounting practices, revises its first- quarter profit figure downward by 12.5% to $2.1 million." 69. On July 28, 1998, regarding expected results for Baan's second quarter of 1998, AFX News wrote: Baan Co NV is expected to report at tomorrow second quarter net profit of 24.9-33.1 mln usd, compared with 16.4 mln usd a year earlier, according to analysts' forecasts. ING Barings analyst Cornelis Bos said he expects Baan to report net profit of 27 mln usd on total sales of 249 mln usd, up 58 pct - 41 -
from a year earlier. Operating profit is seen at 38.7 mln usd, Bos said. He said this includes an estimated 3 mln usd in pre-tax costs related to the acquisition of Coda and added that it is still not clear what the total costs of the acquisition, integration and restructuring will be .... The ING Barings analyst said he estimates second- quarter EPS at 0.13 usd, up 48 pct from a comparable 0.09 usd a year earlier, adding that this is based on Baan's average 1997 tax rate of 32 pct. He also affirmed his full year 1998 and 1999 EPS estimates of 0.56 usd and 0.89 usd respectively. Bos said he rates Baan a "hold", adding that he sees today's announcement that Jan Baan is to step down as chairman of Baan Co's board directors as a positive move. "This should clear up some of the confusion surrounding the relationship between Baan Investments, now called I Vanenburg, and Baan Company," Bos said. He added that although the announcement of Jan Baan's departure was not entirely unexpected, what was not clear was what his future role in Baan would be. Edwin Flick of MeesPierson said he estimates second-quarter net profit at 33.1 mln usd before non-recurring charges related to the integration of Coda, which he estimates at 12 mln usd before tax. This brings the bottom line figure for the second quarter to 24.9 mln usd, he said. Second-quarter sales are estimated at 238 mln usd including Coda, compared with an adjusted 157.5 mln usd in 1997, Flick said, with operating income put at 35.6 mln usd. He said he expects maintenance and service revenues to have grown at a slightly higher rate than license revenues. Flick noted that Baan's withdrawal as a party to the financing arrangements between customers and external financing organizations means the company will be able to book sales and profits on transactions with a financing arrangement upon the completion of the transaction. The additional deferred revenues of 43 mln usd from the first quarter will be "realized - 42 -
gradually over the next two years," with an estimated 13 mln usd "falling free" in 1998, according to Flick. The MeesPierson analyst said the sale by Vanenburg Ventures - formerly Baan Investments -- of its stakes in BBS and BMS, both major Baan resellers and service providers, should remove potential conflicts of interests between the Baan brothers and Baan Company. It should also clear up a great deal of the confusion concerning related party transactions, he said. The inclusion of Coda -- expected to have a "neutral bottom line effect" in the full year 1998 -- plus the "free fall" of deferred income, should bring the operating margin before non-recurring charges to around 20 pct, Flick said. Flick noted that Baan is expanding its position in the fast-growing segment of small to medium-sized companies. He said he rates the share a "buy" and estimates full year EPS for 1998, 1999 and 2000 at 0.60 usd, 1.03 usd and 1.48 usd respectively. Oyens & Van Eeghen analyst Harry Luchtenveld said he sees Baan reporting second quarter net profit before one-off charges of 31.6 mln usd, up 92 pct on the second quarter of 1997. Total second quarter sales are estimated at 253.3 mln usd, with operating result seen at 47.4 mln usd, he said. He said license revenues are expected to increase by 83 pct, with 70 pct of this organic, Coda accounting for 8 pct and the release of deferred income for the remaining 5 pct. Luchtenveld noted, however, that his net profit estimate does not include a one-off reorganization charge for the integration of Coda, as "nobody really knows how much this will be yet". Operating margin is expected to have improved slightly to 18.3 pct from IS pct in the second quarter of 1998, with the higher margins of existing activities offset by the first time inclusion of Coda, Luchtenveld said. He said he estimates second quarter EPS at 0.16 usd, adding that he rates the stock "outperformer." Turning to the full year results, Luchtenveld said he sees full - 43 -
year net profit at 133 mln usd on sales of 1.03 bln usd, with operating result at 193 mln usd. Full year EPS is seen at 0.76 usd, he said. On today's news that Jan Baan is to step down from the Baan Co board, he said that while it remains difficult to predict what the share price will do, he is confident it will continue to outperform the market. 70. On July 29, 1998, PR Newswire carried the following Baan press release: Baan ... reported net income for the second quarter ended June 30, 1998 of $17.1 million, or $0.08 per diluted share, compared with net income of $16.9 million or $0.08 per diluted share in the 1997 second quarter. The 1998 net income includes a non-recurring $14.4 million restructuring expense related to Baan Company's May 1998 acquisition of CODA Group plc (CODA), which lowered EPS by $0.05. Excluding this charge and related tax benefits, pro forma EPS for the 1998 second quarter increased by 63%, to $0.13 per diluted share or $26.9 million. "Baan Company's business performance continues to develop according to our plan to be the technology product company that defines the new growth market for high- volume, packaged enterprise applications. The results validate the success of our strategy to provide the broadest portfolio of enterprise applications to address the core business processes common to companies of all sizes and industries, and deliver these products through both direct and indirect distribution channels," said Tom Tinsley, President, CEO and Chairman, Baan Company. Total revenues grew 46% year over year to reach $230 million for the 1998 second quarter. Excluding the effect of currency translations, 1998 second quarter revenue growth would have been 53%. - 44 -
71. Defendants, statements in ¶ 70 were materially false and misleading when made because, inter alia: a. Baan was having great difficulty competing in the ERP marketplace with its rivals SAP, J.D. Edwards, Oracle, SSA and PeopleSoft; b. SOP 97-2 governed financial results starting in the first quarter of 1998, making it more difficult for Baan to report revenue; c. Baan was having little success obtaining Value Added Resellers ("VARs") beyond its "captive" affiliated resellers; d. Baan's VARs and affiliated resellers were having very limited channel sell-through to actual Baan software end-users; and e. Worldwide economic turmoil was already causing Baan's limited sell-through to end-users to diminish even further. 72. On July 29, 1998, following the announcement of Baan's second quarter 1998 results, AFX News reported that Baan shares were down 6.5% because investors had been led to expect second quarter net income of $24.9 million to $33.1 million, instead of the $17.1 million that the Company actually reported. 73. In an August 31, 1998 Baan press release, carried by PR Newswire, Baan announced that BMS was "building channel - 45 -
momentum with significant reseller relationships and customer successes resulting in market share gains for Baan Company's enterprise applications." 74. The statement by Baan in 1 73 was materially false and misleading when made because, inter alia: a. BMS and other VVBV subsidiaries were holding millions of dollars of Baan software in inventory; ' b. Such unsold inventory accounted for as much as half of Baan's 1997 profits; c. BMS and other VVBV subsidiaries were merely of f balance sheet tools for Baan to hide costs and channel uncollectible receivables; and d. VVBV was unable to find a buyer for BMS (as well as BBS), other than Baan, because of the improper, non arm's length arrangements between these entities and Baan. 75. On September 28, 1998, an article in Barron's noted the "complex and ambiguous relationship between Baan, Vannenburg Ventures and a handful of other interlocking Baan family-run companies." Barron's noted, "Among other irregularities, it booked sales for which it had not yet been paid and reported income derived from its sister companies." 76. On October 12, 1998, in a Baan press release carried on PR Newswire, Baan revealed that it would not meet First Call's consensus analyst third quarter 1998 earnings - 46 -
estimates, as reported by Reuters, of $0.15 per share. Instead, the Company announced a stunning loss of $0.13 to $0.16 per share on third quarter 1998 revenues of $190 million to $195 million. Baan stated: that preliminary results for the first nine months of 1998 show a 3096 increase in revenues to approximately $600 million over the comparable period in 1997. For the third quarter ended September 30, 1998, the Company expects to report revenues in the range of $190 million to $195 million and a loss of $0.13 to $0.16 per share. These anticipated results are preliminary and are based on partial information and management assumptions. The Company plans to announce its final results for the quarter on October 28, 1998. The Company believes license revenue growth was affected by a combination of the following factors: global economic conditions and market volatility, which produced uncertainty among customers in making IT purchasing decisions, and reallocation of customers, IT budgets to fix the Year 2000 problems of their existing systems. As a result, potential customers deferred or delayed IT projects and those that signed deals, decreased their software expenditures, particularly in the U.S. market. Baan expects these trends to continue into future periods until economic conditions improve and companies complete the correction of their Year 2000 problems. In light of these uncertain economic conditions the Company is reevaluating its business outlook and reassessing the impact on its future operating plans.... The Baan Company has been transitioning to a high-volume, low-cost distribution model through the expansion of its indirect channel to more than 220 resellers.... - 47 -
77. On October 12, 1998, CBS MarketWatch reported that Baan's preliminary revenue estimates were about $80 million less than Goldman Sachs analysts Charles Elliott and Rick Sherlund had expected. 78. On October 12, 1998, Reuters reported that Baan was trading down 27.62%, to $12 15116 per share, on five times normal early morning trading volume. 79. On October 12, 1998, AFX Newsreported that, during a conference call with analysts, defendant Tinsley attributed the huge third quarter loss to 30 large orders, worth a combined $60 million, that did not come through in third quarter 1998. Defendant Tinsley lamented that September was usually a strong month for Baan but volatility in the financial markets and a deteriorating economy caused a number of U.S. customers, particularly in the production sector, to postpone their orders. Tinsley added that only one order was lost to a competitor, adding that Baan was hardest hit in the top segment of the market. Tinsley refused to make any more "concrete" announcements until Baan releases its formal third quarter results on October 28, 1998 because the Company is currently in discussions with several customers that may postpone additional orders. 80. On October 12, 1998, just as Baan shares plunged 28% on the Amsterdam Stock Exchange to a two year low, Agence - 48 -
France Presse reported an otherwise strong rally in the Dutch stock exchange. Specifically, the AEX index of leading Dutch shares shot up 5.7% for the day. 81. After the close of NASDAQ trading on October 12, 1998, AP Online and the Wall Street Journal Interactive Edition reported that 10,151,400 Baan ADRs traded on the NASDAQ, almost 15 times Baan's normal trading volume! Baan's NASDAQ share price closed down $4 3/8 per share, or 24%, to $13 1/2. Baan's plunge is all the more dramatic in light of the day's approximately 4% increases in both the NASDAQ Composite Index and the Morgan Stanley High-Tech Index. 82. On October 12, 1998, just as Baan's share price collapsed under the burden of the Company's huge third quarter loss, the Wall Street Journal reported that SAP saw a 43% increase in sales for the same period. Also on October 12, 1998, the London Financial Times reported that SAP stuck to its forecasted 30% to 35% increase in pre-tax profits for 1998. SAP also expects to meet its target of 40% annual year-over-year sales growth for 1998. SAP's shares soared on the news. 83. On October 13, 1998, the Wall Street Journal Interactive Edition quoted defendant Tinsley as stating, "A significant part of our revenue gets done at the end of a quarter, and the last 10 days of September [1998] were not a wonderful time to do significant transactions," Defendant - 49 -
Tinsley claimed that the shortfall wasn't apparent as recently as two weeks earlier. The Wall Street Journal emphasized, however, that "analysts dismissed Baan's explanation of events, blaming strategic missteps by the Company. Baan's attempt to concentrate on the lower-cost but higher-volume midmarket through a cadre of third-party resellers hasn't been implemented quickly enough to compensate for the loss of multinational customers," some analysts said. 'I would argue the issue with Baan is one of internal problems, rather than with market movements,' said George O'Connor, an analyst with United Kingdom investment bank Granville PLC." 84. On October 13, 1998, Agence France Press quoted Dutch analyst Jan Koen Balt, "The announcement came as a total surprise, and nobody expected Baan to wind up in the red. Baan has always announced 35 percent growth. When it comes in with a drop, not to mention a loss, that has a bombshell effect." 85. Also on October 13, 1998, The Wall Street Journal Interactive Edition reported that Baan extended its sharp losses following Monday's profit warning. By mid-afternoon in Amsterdam on October 13, 1998, Baan had shed another 8.5% after plunging 29% on Monday. At the close of NASDAQ trading on October 13, 1998, Bloomberg News Service showed Baan down 15.28%, to 11 7/16. 86. On October 13, 1998, The Wall Street Journal Europe reported that Baan's stunning shortfall: - 50 -
sent a shudder through the Amsterdam Stock Exchange. More than 25 million shares were traded Monday [October 1-2], 10 times the daily average and the most Baan shares ever traded in a single day, according to the exchange. "In my trading history I can't remember a share in Holland that has been hit this hard in one day's time," said a trader who makes a market in Dutch shares at a U.S. bank in London. Investors also voiced concern over a series of transactions between Baan and companies controlled by the Baan brothers, which some analysts have said could have contributed up to 30% of Baan's pretax profit [in the first quarter of 1998].... In the summer, Baan, while saying it had done nothing wrong, said it would take steps to address investor concern, including the sale or partial sale of its stakes in two of the affiliated companies, Baan Business Systems and Baan Midmarket Solutions. Neither has been sold yet. FALSE FINANCIAL STATEMENTS 87. In order to overstate its revenues, net income and earnings per share during 1997 and 1998, the defendants caused Baan to enter into non-arm's length transactions with affiliated resellers and improperly report revenue from software license sales to these affiliated resellers. Baan recognized revenue from non-arm's length transactions causing 1997 full year through the first two quarters of 1998 results to be presented in violation of GAAP. - 51 -
88. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at the particular time. Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. 89. The Company's reported results for the year ended December 31, 1997 and the three fiscal quarters of 1998, and statements regarding those results, were false and misleading when made because the Company failed to comply with GAAP by improperly recognizing revenue from software licenses with affiliates. 90. FASB Statement No. 48 (revenue recognition where the right of return exists) specifies criteria for recognizing revenue on a sale in which a product may be returned, whether as a matter of contract or as a matter of existing practice, either ,by the ultimate customer or by a party who resells the product to others and requires that the amount of future returns can be reasonably estimated in order to recognize revenue. FASB Statement No.- 48 also states: The ability to make a reasonable estimate of the amount of future returns depends on many factors and circumstances that will vary from one case to the next. However, the following factors may impair the ability to make a reasonable estimate: - 52 -
a. The susceptibility of the product to significant external factors, such as technological obsolescence or changes in demand b. Relatively long periods in which a particular product may be returned c. Absence of historical experience with similar types of sales of similar products, or inability to apply such experience because of changing circumstances, for example, changes in the selling enteprises marketing policies or relationships with its customers d. Absence of a large volume of relatively homogeneous transactions The existence of one or more of the above factors, in light of the significance of other factors, may not be sufficient to prevent making a reasonable estimate; likewise, other factors may preclude a reasonable estimate. 91. Statement of Position ("SOP") 97-2, issued by the AICPA's Accounting Standards Executive Committee, became effective for software arrangements entered into in fiscal years beginning after December 15, 1997. Baan's first quarter 1998 financial statements were required to include the effects of SOP 97-2 on its revenue recognition. The basic revenue recognition criteria restated by SOP 97-2 are as follows: - Persuasive evidence of an arrangement must exist; - Delivery must have occurred; - The vendor's fee must be fixed or determinable; and - Collectibility must be probable. - 53 -
92. SOP 97-2 provides that if an arrangement includes multiple elements, the fee should be allocated to the various elements based on objective evidence of fair value. Vendors such as Baan may not tally sales of software to a related party as recognized revenue until sell-through is guaranteed. 93. Due to its financial improprieties, the Company presented its financial results during the Class Period (and prior thereto) in a manner which violated GAAP. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed. 94. Authoritative accounting literature (APB Opinion No. 28) provides that: There is a presumption that users of summarized interim financial data will have read the latest published annual report, including the financial disclosures required by generally accepted accounting principles and management's commentary concerning the annual financial results, and that the summarized interim data will be viewed in that context. In this connection, the management is encouraged to provide commentary relating to the effects of significant events upon the interim financial results. - 54 -
During the Class Period, defendants failed to comply with GAAP in that interim financial statements which were disseminated to the investing public failed "to provide commentary relating to the effects of significant events upon the interim financial results." 95. According to GAAP (Statement Of Financial Accounting Standards No. 57, Related Party Disclosures -- "FASB No. 57"): Reliability of financial information involves "assurance that accounting measures represent what they purport to represent." Without disclosure to the contrary, there is a general presumption that transactions reflected in financial statements have been consummated on an arms-length basis between independent parties. However, that presumption is not justified when related party transactions exist because the requisite conditions of competitive, free- market dealings may not exist. Because it is possible for related party transactions to be arranged to obtain certain results desired by the related parties, the resulting accounting measures may not represent what they usually would be expected to represent. Because of this ("FASB No. 57") states that: Information about transactions with related parties is useful to users of financial statements in attempting to compare an enterprise's results of operations and financial position with those of prior periods and with those of other enterprises. It helps them to detect and explain possible differences. Therefore, information about transactions with related parties that would make a difference in decision making should be disclosed so that users of the financial statements can evaluate their significance. - 55 -
96. As noted in FASB No. 57, "as part of Accounting Series Release No. 280, General Revisions of Regulation S-X, the Securities and Exchange Commission integrated the disclosure requirements . . . pertaining to related party transactions into Regulation S-X. In addition, FASB No. 57 mandates that "financial statements shall include disclosures of material related party transactions" and that disclosures "shall" include" A description of the transactions, including transactions in which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements. (Emphasis added.) 97. In contravention of the provisions of FASB No. 57, the Company's financial statements which were disseminated to the investing public during the Class Period failed to comply with the foregoing GAAP. 98. Such disclosure is intended to clarify the investment communities understanding of the operations of the Company. As stated by the SEC in its Accounting Series Release 173: "it is important that the overall impression created by the financial statements be consistent with the business realities of the company's financial position and operations..." 99. As discussed herein, transactions between the Company and its affiliates (related party transactions) were arranged to obtain certain results desired by the related - 56 -
parties. In accounting for these transactions, the resulting accounting measures did not represent what the investing public reasonably expected them to represent because the economic substance of the transactions were ignored for financial accounting purposes. Consequently, the overall impression created by the financial statements was inconsistent with the business realities of the company's financial position and operations. In so doing, defendants violated Statement of Financial Accounting Concepts No. 2 which states (in paragraph 160) that: The principle that the quality of reliability and, in particular, of representational faithfulness leaves no room for accounting representations that subordinate substance to form. 100. Defendants not only failed to bring this fact to the attention of the investing public, but falsely stated that Baan's consolidated, interim and year-end financial statements were prepared under United States generally accepted accounting principles. 101. Baan had the responsibility to maintain sufficient accounting controls to accurately report its financial results. it is well settled that the representations made by a company in its financial statements and in other financial disclosures to the public are the representations of that company's management. indeed, even, as in Baan's case, when a company issues audited - 57 -
financial statements together with the report of that company's independent auditors, that report always expressly provides that "the financial statements are the responsibility of the company's management." DEFENDANTS' INSIDER SELLING 102. While Baan's insiders were issuing false and misleading statements about Baan's business and finances, the defendants sold 130,000 shares of the Baan stock they owned for proceeds of about $5,635,000 to profit from the artificial inflation in Baan's stock price their false statements had created. At the same time, entities controlled by the defendants sold 559,959 Baan shares for proceeds of $25,115,776. Additionally, on or about September 8, 1998, Baan's senior vice president of Central European Operations, Karl Heinz Voss, sold 224,000 Baan ADRs, at $30.69, pocketing $6,874,000. Notwithstanding their access to non-public information as a result of their positions with the Company, the Individual ,Defendants, entities under their control and other insiders, sold Baan shares at artificially inflated prices throughout the Class Period while in possession of material, non-public information. 103. During the Class Period other top Baan executives sold many thousands of shares of their Baan stock based on inside information about the problems with Baan's business. - 58 -
104. Sophisticated members of the investment community closely monitor the stock transactions of corporate insiders in an effort to ascertain insiders, sentiment regarding their company's prospects. The Wall Street Journal and Barron's carry a weekly column and other data on significant insider trading and several services exist which publish information about stock sales by corporate insiders. CLAIM FOR RELIEF I Section 10(b) Of The Exchange Act And Rule 10b-5 Against All Defendants 105. Plaintiffs incorporate by reference 1-104. 106. Each of the defendants: (a) knew or had access to the material, adverse non-public information about Baan's financial results and then existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about Baan. 107. During the Class Period, with knowledge of or reckless disregard for the truth, defendants disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. - 59 -
108. Defendants have violated §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices and a course of business that operated as a fraud or deceit upon the purchasers of Baan, ADR's during the Class Period. 109. Plaintiffs and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for Baan ADR's. Plaintiffs and the Class would not have purchased Baan ADR's at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants false and misleading statements. CLAIM FOR RELIEF II Section 20(a) Of The Exchange Act Against Defendants Baan, Jan Baan, Wagenaar And Tinsley 110. Plaintiffs incorporate by reference ¶¶ 1-109. 111. Jan Baan, Wagenaar and Tinsley acted as controlling persons of Baan within the meaning of §20 of the Exchange Act. By reason of their respective positions as Chairman of the Board and CEO, President, CFO and COO of Baan, Jan Baan, and Tinsley Wagenaar had the power and authority to - 60 -
cause Baan to engage in the wrongful conduct complained of herein. Baan controlled each of the Individual Defendants and all of its employees. 112. By reason of such wrongful conduct, Baan, Jan Baan, Wagenaar and Tinsley are liable pursuant to 920(a) of the Exchange Act. As a direct and proximate result of these defendants, wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of Baan ADR's during the Class Period. CLASS ALLEGATIONS 113. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil Procedure 23(a) and 23(b) (3) on behalf of all persons who purchased the ADR's of Baan during the Class Period (the "Class"), except defendants, members of their immediate families and any entity in which a defendant has a controlling interest. 114. The members of the Class are so numerous that joinder of all members is impracticable. Baan has more than 193 million shares of stock outstanding. During the Class Period, millions of shares of Baan ADR's were purchased by thousands of persons who were damaged thereby. 115. Plaintiff's claims are typical of the claims of the Class because plaintiff and the Class members sustained damages from defendants, wrongful conduct. - 61 -
116. Plaintiff will adequately protect the interests of the Class. Plaintiff has retained counsel who are experienced and competent in class action securities litigation. Plaintiffs have no interests which are in conflict with those of the Class. 117. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. 118. Common questions of law and fact predominate over questions which affect only individual members. Among the questions of law and fact common to the Class are: (a) Whether the federal securities laws were violated by defendants' acts; (b) Whether Baan's statements during the Class Period misrepresented and/or omitted material facts; (c) Whether defendants pursued the fraudulent scheme and course of business complained of; (d) Whether defendants acted intentionally or recklessly; (e) Whether the market price of Baan's ADR's was artificially inflated due to the activities complained of; and (f) The extent and measure of damage sustained by the Class. - 62 -
BASIS OF ALLEGATIONS 119. Plaintiff has alleged the foregoing based upon the investigation of her counsel, which included a review of Baan's SEC filings, securities analysts reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants, and believes that substantial evidentiary support will exist for the allegations set forth in this complaint after a reasonable opportunity for discovery. PRAYER FOR RELIEF WHEREFORE, plaintiff prays for judgment as follows: 1. Declaring this action to be a proper class action pursuant to Rules 23 (a) and 23 (b) (3) of the Federal Rules o~ Civil Procedure on behalf of the Class defined herein; 2. Awarding plaintiff and the members of the Class compensatory damages; 3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as reasonable. attorneys, fees, expert witness fees and other costs; 4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64, 65 and any appropriate state law remedies; and - 63 -
5. Awarding such other relief as this Court may deem just and proper. JURY DEMAND Plaintiff demands a trial by jury. DATED: October 16, 1998 Respectfully submitted, /s/ __________________________________ ANDREW N. FRIEDMAN (DC Bar No. 375595) COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, D.C. 20005 Telephone: (202) 408-4600 NEIL ZOLA BETSY MANIFOLD WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP 270 Madison Avenue New York, New York 10016 Telephone: (212) 545-4600 STEPHEN T. RODD JAMES JAY SEIRMARCO ABBEY, GARDY & SQUITIERI, LLP 212 East 39th Street New York, New York 10016 Telephone: (212) 889-3700 Attorneys for Plaintiff S:\WP51\Baan\COMPLAIN.wp5(JJS:sab) - 64 -

SWORN CERTIFICATION

I, Laure Salerno, certify that:

1. I have reviewed the complaint and authorized its filing.

2. I did not purchase the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in any private action arising under this title.

3. I am willing to serve as a representative party on behalf of a class and will testify at deposition and trial, if necessary.

4. My transactions in the security Baan Company N.V. that is the subject of this litigation during the class period set forth in the complaint are as follows:

Date of Transaction Number of Shares
Stating Whether
Purchased or Sold
Price Per Share
10/2/98 100 - Purchased $22 11/16

5. I have not served as or sought to serve as a representative party on behalf of a Class under this title during the last three years.

6. I will not accept any payment for serving as a representative party, except to receive my pro rata share of any recovery or as ordered or approved by the court including the award to a representative of reasonable costs and expenses (including lost wages) directly relating to the representation of the class.

The foregoing are, to the best of my knowledge and belief, true and correct statements.

/s/
_______________________________
Laure Salerno