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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ________
COMMISSION FILE NUMBER 0-24720
BUSINESS OBJECTS S.A.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
REPUBLIC OF FRANCE NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
157/159 RUE ANATOLE FRANCE, 92300 LEVALLOIS-PERRET, FRANCE
(Address of principal executive offices)
(408) 953-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes____X___ No_________
The number of outstanding shares of each of the issuer's classes of capital or
common stock as of October 31, 2000 was 40,337,266 including 383,000 treasury
shares of Ordinary Shares of Euro 0.10 nominal value, including 20,137,502
American Depositary Shares (as evidenced by American Depositary Receipts), each
corresponding to one Ordinary Share.
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BUSINESS OBJECTS S.A.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION 22
SIGNATURES 23
</TABLE>
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BUSINESS OBJECTS S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars, except for share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited) (note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 183,762 $ 176,233
Restricted cash ............................... 12,496 --
Accounts receivable, net ...................... 59,532 53,993
Other current assets .......................... 17,575 13,947
--------- ---------
Total current assets ..................... 273,365 244,173
Goodwill and other intangible assets, net .......... 23,177 12,556
Property and equipment, net ........................ 18,735 13,831
Deposits and other assets .......................... 3,830 1,986
--------- ---------
Total assets ............................. $ 319,107 $ 272,546
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 20,157 $ 11,780
Accrued payroll and related expenses .......... 27,459 23,994
Deferred revenue .............................. 38,914 31,849
Other current liabilities ..................... 44,464 37,946
--------- ---------
Total current liabilities ................ 130,994 105,569
Notes payable-long term ............................ 4,303 2,924
Shareholders' equity
Ordinary shares, Euro 0.10 nominal value ($0.09
U.S. as of September 30, 2000): Authorized 59,464
at September 30, 2000 and 74,033 at December 31,
1999; Issued and outstanding- 40,294 at September
30, 2000 and 38,958 at December 31, 1999 .......... 4,583 3,522
Additional paid-in capital ......................... 137,601 126,026
Treasury stock, 383 shares at September 30, 2000
and December 31, 1999 .............................. (4,611) (4,611)
Retained earnings .................................. 78,524 52,174
Accumulated other comprehensive income ............. (32,287) (13,058)
--------- ---------
Total shareholders' equity ......................... 183,810 164,053
--------- ---------
Total liabilities and shareholders' equity $ 319,107 $ 272,546
========= =========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date.
See accompanying notes to Condensed Consolidated Financial Statements.
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BUSINESS OBJECTS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands of US dollars, except per ADS and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees ............................ $ 53,427 $ 37,302 $ 151,635 $ 104,369
Services ................................ 32,578 22,464 91,505 62,448
--------- --------- --------- ---------
Total revenues ..................... 86,005 59,766 243,140 166,817
Cost of revenues:
License fees ............................ 524 1,232 1,986 3,188
Services ................................ 13,097 8,995 38,538 26,122
--------- --------- --------- ---------
Total cost of revenues ............. 13,621 10,227 40,524 29,310
--------- --------- --------- ---------
Gross margin ................................. 72,384 49,539 202,616 137,507
Operating expenses:
Sales and marketing ..................... 41,091 28,668 119,787 82,122
Research and development ................ 11,507 6,500 29,801 18,922
General and administrative .............. 5,270 4,107 14,548 12,007
Goodwill ................................ 1,051 808 3,157 2,060
--------- --------- --------- ---------
Total operating expenses ........... 58,919 40,083 167,293 115,111
--------- --------- --------- ---------
Income from operations ....................... 13,465 9,456 35,323 22,396
Interest and other income, net ............... 3,173 533 8,314 1,749
--------- --------- --------- ---------
Income before provision for income taxes ..... 16,638 9,989 43,637 24,145
Provision for income taxes ................... (6,487) (4,096) (17,287) (9,900)
--------- --------- --------- ---------
Net income ................................... $ 10,151 $ 5,893 $ 26,350 $ 14,245
========= ========= ========= =========
Net income per ADS and share- basic .......... $ 0.25 $ 0.16 $ 0.66 $ 0.40
========= ========= ========= =========
ADS and shares used in computing net income
per ADS & per share- basic ................... 40,120 36,015 39,694 35,454
--------- --------- --------- ---------
Net income per ADS and share- diluted ........ $ 0.23 $ 0.15 $ 0.60 $ 0.37
========= ========= ========= =========
ADS and shares and common share equivalents
used in computing net income per ADS & per
share- diluted ............................... 43,799 39,439 43,712 38,610
</TABLE>
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BUSINESS OBJECTS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands of US dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 26,350 $ 14,245
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .......................... 5,754 5,213
Amortization of goodwill and intangible assets ......... 5,852 2,060
Changes in operating assets and liabilities:
Accounts receivable ................................... (11,017) 581
Current and other assets .............................. (4,982) (3,728)
Accounts payable ...................................... 9,676 1,045
Accrued payroll and related expenses .................. 5,697 2,742
Deferred revenue ...................................... 9,619 6,518
Other current liabilities ............................ 11,476 2,534
--------- ---------
Net cash provided by operating activities .................. 58,425 31,210
Cash flows from investing activities:
Purchases of property and equipment ........................ (12,029) (5,654)
Business acquisitions, net of cash acquired ................ (18,245) (4,627)
--------- ---------
Net cash used for investing activities ..................... (30,274) (10,281)
Cash flows from financing activities:
Issuance of shares ......................................... 12,636 8,428
Purchase of treasury shares ................................ -- (4,611)
Restricted cash ............................................ (12,496) --
Issuance of notes payable .................................. 5,000 --
Repayment of notes payable ................................. (6,600) --
--------- ---------
Net cash provided by (used for) financing activities ....... (1,460) 3,817
Effect of foreign exchange rate changes on cash,
cash equivalents and short-term investments ............. (19,162) (2,596)
--------- ---------
Net increase in cash and cash equivalents ................. 7,529 22,150
Cash and cash equivalents at the beginning of the period ... 176,233 71,713
--------- ---------
Cash and cash equivalents at the end of the period ......... $ 183,762 $ 93,863
========= =========
</TABLE>
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BUSINESS OBJECTS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
have been prepared in accordance with U.S. generally accepted accounting
principles. As permitted by Form 10-Q, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of our financial position, results of operations, and cash
flows for the interim periods presented have been made. Operating results
for the three and nine month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000. These financial statements should be read in
conjunction with our audited consolidated financial statements and
footnotes as included in our Annual Report or Form 10-K for the year ended
December 31, 1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying footnotes. Actual results could differ from those
estimates.
3. ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for sales returns and
doubtful accounts of $2,206,000 at September 30, 2000 and $1,650,000 at
December 31, 1999.
4. REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, as amended by SOP 98-4 and SOP 98-9. Revenue from product
license is recognized once persuasive evidence of an agreement exists,
delivery of the product has occurred, the fee is fixed or determinable,
collectibility is probable and the Company has no remaining obligations.
Service revenue from software maintenance agreements is recognized ratably
over the maintenance period, which in most instances is one year. Other
service revenues, primarily training and consulting, are generally
recognized at the time the service is performed.
5. NET INCOME PER ADS AND PER SHARE
The Company's shares are traded in France as ordinary shares and in the
United States in the form of American Depositary Shares ("ADSs"), with each
ADS representing one ordinary share. Basic net income per ADS and per share
is computed using the weighted-average number of ADSs and ordinary shares
outstanding. Diluted net income per ADS and per share is computed using the
weighted-average number of ADSs and ordinary shares outstanding and
dilutive options and warrants calculated under the treasury stock method.
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The following table sets forth the computation of basic and diluted net
income per ADS and per share (in thousands, except per ADS and per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income ........................................... $10,151 $ 5,893 $26,350 $14,245
======= ======= ======= =======
Basic - Weighted average ADSs and shares
outstanding .......................................... 40,120 36,015 39,694 35,454
------- ------- ------- -------
Incremental ordinary shares attributable to shares
issuable under employee stock plans
and warrants ......................................... 3,679 3,424 4,018 3,156
------- ------- ------- -------
Diluted - Weighted average ADSs and shares
outstanding .......................................... 43,799 39,439 43,712 38,610
======= ======= ======= =======
Net income per ADS and per share--basic .............. $ 0.25 $ 0.16 $ 0.66 $ 0.40
======= ======= ======= =======
Net income per ADS and per share--diluted ............ $ 0.23 $ 0.15 $ 0.60 $ 0.37
======= ======= ======= =======
</TABLE>
6. RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity" (FAS133).
In June 1999, the Board issued FAS 137, "Accounting for Derivative
Instruments and Hedging Activity- Deferral of the Effective Date of FAS
Statement No. 133", which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. FAS 133 requires the
recognition of all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted
to fair value through income. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not believe that FAS
133 will have a significant impact on its consolidated financial position,
results of operations, or cash flows.
7. COMPREHENSIVE INCOME/ LOSS
Comprehensive income includes foreign currency translation gains and losses
that have been previously excluded from net income and reflected instead in
stockholders' equity. The following table sets forth the calculation of
comprehensive income/ loss (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income ................................... $ 10,151 $ 5,893 $ 26,350 $ 14,245
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Change in cumulative translation
adjustment ................................. (11,294) 2,783 (19,229) (2,898)
-------- -------- -------- --------
Total comprehensive income (loss) ............ $ (1,143) $ 8,676 $ 7,121 $ 11,347
======== ======== ======== ========
</TABLE>
8. ACQUISITIONS AND RESTRICTED CASH
In April 2000, the Company acquired Olap@Work, Inc., a privately held
software company based in Ottawa, Canada, for $10 million in cash and $5
million in notes payable. Olap@Work, Inc. develops and markets high-end
online analytical processing (OLAP) reporting tools. The acquisition has
been accounted for under the purchase method of accounting. The notes are
due in three annual installments subject to employment related
contingencies, and are secured by $5 million of restricted cash that the
Company has placed into an escrow account. Approximately $13.7 million of
the purchase price has been allocated to goodwill and other intangible
assets, which is being amortized over useful lives ranging from 1 to 5
years.
In August 2000, the Company acquired a division of Executive Computing
Group, the Company's Australian distributor, for approximately $2.5 million
in cash and $500,000 in notes payable fully secured by a restricted cash
escrow account. The acquisition has been accounted for under the purchase
method of accounting. The purchase price has been allocated to goodwill and
other intangible assets and is being amortized over 5 years from the date
of acquisition.
9. LEGAL MATTERS
On May 5, 2000, the Company filed a lawsuit in United States District Court
for the Northern District of California against Cognos, Inc. and Cognos
Corporation for alleged patent infringement. The lawsuit alleges that
Cognos, Inc. and Cognos Corporation infringe the Company's United States
Patent No. 5,555,403 by making, using, offering to sell and selling its
product known as Impromptu. The Company's complaint requests that the
defendants be enjoined from further infringing the patent and seeks an as
yet undetermined amount of damages. In addition, the Company filed a notice
of related case referring to a case previously pending before the district
court, namely Business Objects S.A. v. Brio Technology, Inc. Case No.
C97-0354.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result of
certain factors including those described in the line item discussion of our
financial statements set forth below and in the section titled "Risk Factors".
The Company assumes no obligation to update the forward-looking information or
such factors.
OVERVIEW
Business Objects develops, markets and supports e-business intelligence software
for client/server environments, intranets, extranets, and the internet. Using
e-business intelligence, organizations can access, analyze, and share corporate
data for better decision making. Business intelligence software tools are
designed to help companies turn data into useful business information, thereby
leading to increased competitive advantage, new business opportunities, improved
customer service, corporate agility and ultimately, increased revenues and
profit.
The Company derives its revenues from license fees and from charges for
services, consisting of post-sale customer support, consulting and training
services. Revenue from product license is recognized once persuasive evidence of
an agreement exists, delivery of the product has occurred, the fee is fixed or
determinable, collectibility is probable and the Company has no remaining
obligations. Revenues from customer support services are recognized on a
straight-line basis over the period during which the support services are
provided. Consulting and training service revenues are recognized as the
services are provided. In software arrangements that include rights to multiple
software products, post-sale customer support, and/or other services, the total
arrangement fee is allocated among each deliverable based on the relative fair
value of each of the deliverables determined based on vendor-specific objective
evidence.
The Company generates a significant portion of its revenue and incurs a
significant portion of its expenses in foreign currencies, primarily French
francs, British pounds sterling, Japanese yen, Italian lira, and other European
currencies. Accordingly, the Company's results of operations are affected by
year-over-year exchange rate fluctuations of the United States dollar relative
to these currencies. Foreign exchange rate fluctuations reduced the Company's
overall increase in revenue by approximately 9% for the quarter and nine months
ended September 30, 2000. However, the net impact on operating income for the
three and nine months ended September 30, 2000 was immaterial as the reduction
in translated revenue was primarily offset by a reduction in translated foreign
operating expenses.
In view of the Company's significant growth in recent years, we believe that
period-to-period comparisons of our financial results are not necessarily
meaningful and you should not rely upon them as an indication of future
performance.
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RESULTS OF OPERATIONS
The following table sets forth certain items from our condensed consolidated
statements of income as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
License fees...................................... 62.1% 62.4% 62.4% 62.6%
Services.......................................... 37.9 37.6 37.6 37.4
----- ----- ----- -----
Total revenues................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of revenues:
License fees...................................... 0.6 2.1 0.8 1.9
Services.......................................... 15.2 15.0 15.9 15.7
----- ----- ----- -----
Total cost of revenues......................... 15.8 17.1 16.7 17.6
----- ----- ----- -----
Gross margin......................................... 84.2 82.9 83.3 82.4
Operating expenses:
Sales and marketing............................... 47.8 48.0 49.3 49.2
Research and development.......................... 13.4 10.9 12.2 11.4
General and administrative........................ 6.1 6.9 6.0 7.2
Goodwill.......................................... 1.2 1.3 1.3 1.2
----- ----- ----- -----
Total operating expenses....................... 68.5 67.1 68.8 69.0
----- ----- ----- -----
Income from operations............................... 15.7 15.8 14.5 13.4
Interest and other income, net....................... 3.6 0.9 3.4 1.0
----- ----- ----- -----
Income before provision for income taxes............. 19.3 16.7 17.9 14.4
Provision for income taxes........................... (7.5) (6.9) (7.1) (5.9)
----- ----- ----- -----
Net income........................................... 11.8% 9.8% 10.8% 8.5%
===== ===== ===== =====
Gross margin (as a percentage of related revenues):
License fees...................................... 99.0% 96.7% 98.7% 96.9%
Services.......................................... 59.8% 60.0% 57.9% 58.2%
</TABLE>
The following table sets forth the geographic source of our revenues as a
percent of total worldwide revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Europe .................. 53.5% 59.4% 57.7% 62.7%
North America ........... 36.7% 32.4% 33.1% 30.1%
Rest of World ........... 9.8% 8.2% 9.2% 7.2%
----- ----- ----- -----
Total ................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
LICENSE FEES. Revenues from license fees were $53.4 million and $37.3 million
for the three months ended September 30, 2000 and 1999, respectively,
representing an increase of $16.1 million or 43.2%. Revenues from license fees
were $151.6 million for the nine months ended September 30, 2000 and $104.4
million for the prior year period, representing a period-to-period increase of
$47.2 million or 45.3%. The increase in license fees was primarily due to
increased license sales of WEBINTELLIGENCE(R), the Company's platform for
intranet and extranet
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installations, and to a lesser extent, increases in license sales of
BUSINESSOBJECTS(TM) and related software products.
We anticipate that license fees, which represented approximately 62% of our
total revenues for the three month periods ended September 30, 2000 and 1999,
and approximately 62% and 63% of our total revenues for the nine month periods
ended September 30, 2000 and 1999, respectively, will continue to represent a
majority of our revenue for the foreseeable future. We expect that the market
penetration by, and number of, our competitors will increase, and as a result,
the growth rate in our license fees in the future may not be as high as the
growth rate in such license fees achieved in the past.
SERVICES. Revenues from services consist of maintenance, consulting and training
revenues. Revenues from services totaled $32.6 million for the three months
ended September 30, 2000, and $22.5 million for the prior year period,
representing a period-over-period increase of approximately $10.1 million, or
45.0%. Revenues from services totaled $91.5 million for the nine months ended
September 30, 2000, and $62.4 million for the prior year period, representing a
period-over-period increase of approximately $29.1 million, or 46.5%. The
increase in revenues from services was primarily due to increases in maintenance
revenues related to increases in our installed customer base and the renewal of
support contracts, increases in consulting revenues, and increases in training
revenues. As market penetration by, and the number of, competitors increase, the
growth rate of our installed base and, consequently, the growth rate of our
services revenues may not be as high as growth rates achieved in the past. We
anticipate increasing our efforts in selling maintenance, consulting, and
training services, and expect that service revenues should continue to represent
a significant portion of our total revenues.
COST OF LICENSE FEES. Cost of license fees consists primarily of costs incurred
for materials, packaging, freight and royalties. Cost of license fees totaled
$524,000 for the three months ended September 30, 2000 compared to $1.2 million
in the prior year period, and $2.0 million for the nine months ended September
30, 1999 compared to $3.2 million in the prior year period. Cost of license fees
as a percent of license fee revenues decreased from approximately 3.3% for the
three months ended September 30, 1999 to 1.0% for the three months ended
September 30, 2000, and from approximately 3.1% for the nine months ended
September 30, 1999 to approximately 1.3% for the nine months ended September 30,
2000. The decrease in cost for the three and nine month periods ended September
30, 2000 was primarily due to cost savings related to freight and documentation
production and lower royalty expense as a result of reduced license fees from
third party licensed products.
COST OF SERVICES. Cost of services consists of the cost of providing consulting,
training and maintenance. Cost of services totaled $13.1 million for the three
months ended September 30, 2000 compared to $9.0 million in the prior year
period, and totaled $38.5 million for the nine months ended September 30, 2000
compared to $26.1 million in the prior year period. Cost of services as a
percent of service revenues remained relatively constant at 40.2% and 40.0% of
service revenue for the three month periods ending September 30, 2000 and 1999,
respectively. Costs increased slightly to 42.1% for the nine month period ending
September 30, 2000 from 41.8% for the nine month period ending September 30,
1999. The increase in cost of services as a percent of the related revenues was
primarily due to higher costs of providing consulting and training services
associated with increased staffing, offset by improved productivity in providing
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maintenance support. The increase in expenses in absolute dollars resulted from
increased headcount necessary to support our service activities and increased
subcontracting of consulting and training activities.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and commissions, together with amounts paid for advertising and product
promotion activities, and related facilities costs. Sales and marketing expenses
totaled $41.1 million and $28.7 million for the three months ended September 30,
2000 and 1999, respectively, and $119.8 million and $82.1 million for the nine
months ended September 30, 2000 and 1999, respectively. Sales and marketing
expenses as a percent of total revenues remained relatively constant at 47.8% of
revenues for the quarter ended September 30, 2000 from 48.0% for the quarter
ended September 30, 1999, and at 49.3% for the nine months ended September 30,
2000 from 49.2% for the nine months ended September 30, 1999. The increase in
sales and marketing expenses in absolute dollars was attributable to the
expansion of our sales and marketing organization. Sales and marketing expenses
are expected to continue to increase in absolute dollars but may vary as a
percent of revenues in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries, related benefits, third party consultant fees and related facilities
expenses, and amortization of intangible assets resulting from the purchase of
Olap@Work, Inc. and Next Action Technology, Ltd. Research and development
expenses totaled $11.5 million and $6.5 million for the three months ended
September 30, 2000 and 1999, respectively, and $29.8 million and $18.9 million
for the nine months ended September 30, 2000 and 1999. Research and development
expenses as a percent of revenues were 13.4% and 10.9% for the three month
periods ended September 30, 2000 and 1999, respectively, and 12.2 % and 11.4%
for the nine month periods ended September 30, 2000 and 1999, respectively. The
increase in research and development expenses as a percent of revenue for the
three and nine months ended September 30, 2000 is due to the amortization of
intangible assets allocated to employment contingencies resulting from the
acquisitions of Olap@Work, Inc. and Next Action Technology, Ltd., and other
related costs associated with the continued operations of these acquisitions,
including staffing and facilities. This amortization expense totaled $1.0
million and $2.3 million for the three and nine month periods ended September
30, 2000, and $0 for the comparable periods in 1999. The increase in absolute
dollars in research and development expenses for the three and nine months ended
September 30, 2000 from the comparable prior year periods is due to increased
staffing and associated support required to expand and enhance our product line
and to amortization of intangible assets. Research and development expenses are
expected to continue to increase in absolute dollars but may vary as a percent
of revenues in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, related benefits, fees for professional services,
including legal and accounting services and bad debt expense. General and
administrative expenses totaled $5.3 million and $4.1 million for the three
months ended September 30, 2000 and 1999, respectively, and $14.5 million and
$12.0 million for the nine months ended September 30, 2000 and 1999,
respectively. General and administrative expenses decreased as a percent of
total revenues from 6.9% for the quarter ended September 30, 1999 to 6.1% for
the quarter ended September 30, 2000 and from 7.2% for the nine months ended
September 30, 1999 to 6.0% for the nine months ended September 30, 2000. The
decrease in general and administrative expenses as a percent of total revenues
is primarily
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due to revenues growing at a faster rate than spending on general and
administrative expenses. The increase in general and administrative expenses in
absolute dollars on both a quarter and year to date basis is primarily due to
increased professional fees and higher facilities costs resulting from increases
in depreciation and other miscellaneous office expenses. General and
administrative expenses are expected to continue to increase in absolute dollars
but may vary as a percent of revenues in the future.
AMORTIZATION OF GOODWILL. Amortization of goodwill in the quarter ended
September 30, 2000 relates to the purchase of a division of Executive Computing
Group, the Company's Australian distributor, in August 2000, the purchase of
Olap@Work, Inc. in April 2000, the purchase of Next Action Technology in October
1999, and the purchase of Prophecy Holding B.V. in April 1999. Amortization of
goodwill for all other periods presented also includes expense related to the
purchase of Delphi Software A.G. in May 1997 and a division of Datamat
Ingegneria dei Sistemi S.p.A. in April 1997. Goodwill is amortized on a
straight-line basis over a period of five years from the date of acquisition.
Amortization expense totaled $1.1 million and $808,000 for the three months
ended September 30, 2000 and 1999, respectively, and $3.2 million and $2.1
million for the nine months ended September 30, 2000 and 1999, respectively.
INTEREST AND OTHER INCOME, NET. Interest and other income, net was composed of
the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
2000 1999 2000 1999
------ ----- ------ -------
<S> <C> <C> <C> <C>
Net interest income ......................... $1,794 $ 614 $4,804 $ 1,806
Other income ................................ 1,000 -- 3,000 --
Net exchange gain/ (loss) ................... 379 (81) 510 (57)
------ ----- ------ -------
Total interest and other income, net .. $3,173 $ 533 $8,314 $ 1,749
====== ===== ====== =======
</TABLE>
Net interest income increased during the three and nine months ended September
30, 2000 due to an increase in cash available for investment.
Other income for the three and nine month periods ended September 30, 2000
represents payments received from Brio Technology, Inc. in settlement of patent
litigation. As part of the settlement, Brio Technology, Inc. agreed to pay the
Company $10.0 million, payable quarterly in $1.0 million payments beginning
September 30, 1999. To date, the Company has received a total of $5.0 million
under the settlement.
INCOME TAXES. The provision for income taxes totaled $6.5 million for the three
months ended September 30, 2000 compared to $4.1 million in the prior year
period, and totaled $17.3 million for the nine months ended September 30, 2000
compared to $9.9 million in the prior year period. The Company's effective tax
rate was 39.0% and 41.0% for the three month periods ended September 30, 2000
and 1999, respectively, and 39.6% and 41.0% for the nine months ended September
30, 2000 and 1999, respectively. The 2000 effective rate is lower than the 1999
rate due primarily to the reduction in the French statutory rate in December
1999. The Company provides for income taxes for each interim period based on the
estimated annual effective tax rate for the year.
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<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash, cash equivalents and restricted
cash of $196.3 million, an increase of $20.0 million from December 31, 1999.
Cash generated from operations totaled $58.4 million for the nine months ended
September 30, 2000, as compared to $31.2 million for the comparable period in
1999. Net cash generated for the nine months ended September 30, 2000 resulted
primarily from increases in net income and non-cash charges for depreciation and
amortization, increases in accounts payable, other current liabilities, deferred
revenue and accrued payroll and related expenses, offset by increases in
accounts receivable and current and other assets.
Investing activities for the nine months ended September 30, 2000 consisted
primarily of the purchase of Olap@Work Inc., a privately held software company
based in Ottawa, Canada, for $10 million in cash and $5 million in notes payable
secured by a restricted cash escrow account, and $12.0 million of property and
equipment additions. Business Objects Americas, a wholly owned subsidiary of
Business Objects S.A., issued a standby letter of credit in August, 2000 for
$7.0 million as security for its new San Jose facilities lease. The letter of
credit was secured with a $7.0 million interest bearing deposit that is
restricted as to withdrawal. Also during August 2000, the Company acquired a
division of Executive Computing Group, the Company's Australian distributor, for
approximately $2.5 million in cash and $500,000 in notes payable fully secured
by a restricted cash escrow account.
Financing activities for the nine months ended September 30, 2000 consisted of
the issuance of $12.6 million of ordinary shares under employee stock plans and
repayment of $6.6 million of notes issued in relation to prior acquisitions.
We believe that cash from operations together with existing cash and cash
equivalents will be sufficient to meet our cash requirements for the next 12
months.
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<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially as a result of a number of
factors including those set forth in the Risk Factors section.
As of September 30, 2000, all of our cash and cash equivalents, and restricted
cash were classified as available-for-sale. The principal portion of our
investments is not subject to interest rate risk; however, declines in interest
rates over time will reduce our interest income. We do not have any investments
in equity or debt securities traded in the public markets. Therefore, we do not
currently have any direct equity price risk.
We conduct a significant portion of our business in currencies other than the
U.S. dollar, the currency in which we report our financial statements. Assets
and liabilities of our subsidiaries are translated into U.S. dollars at exchange
rates in effect as of the applicable balance sheet date, and any resulting
translation adjustments are included as an adjustment to shareholders' equity.
Revenues and expenses generated from these subsidiaries are translated at
average exchange rates during the quarter the transactions occur. Gains and
losses from these currency transactions are included in net earnings.
Historically, we have generated a significant portion of our revenues and
incurred a significant portion of our expenses in French francs, British pounds
sterling, Japanese yen and Italian lira and we expect to generate a significant
portion of our revenues and expenses in the Euro in the future. As a result, our
operating results have been in the past, and may be in the future, adversely
impacted by currency exchange rate fluctuations on the U.S. dollar value of
foreign currency-denominated revenues and expenses. However, we cannot assure
you that these fluctuations will not continue and will not be significant. We
cannot predict the effect of exchange rate fluctuations upon our future
operating results. As of September 30, 2000, we were not engaged in a foreign
currency hedging program to cover our currency transaction exposure.
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<PAGE> 16
RISK FACTORS
You should carefully consider the risks and uncertainties described below before
making an investment decision. Additional risks and uncertainties that we are
unaware of or that we currently deem immaterial also may become important
factors that may adversely affect our Company.
RISKS RELATED TO OUR BUSINESS
WE TARGET OUR PRODUCTS PRIMARILY TO A LIMITED NUMBER OF MARKETS AND IF SALES OF
OUR PRODUCTS IN THESE MARKETS DECLINE, OUR OPERATING RESULTS WILL BE SERIOUSLY
HARMED.
We generate substantially all of our revenues from licensing and service fees
generated from the sale of our products in the e-business intelligence software
intranet and extranet markets, and we expect to continue to do so in the future.
Accordingly, our future revenues and profits will depend significantly on our
ability to further penetrate the e-business intelligence software markets. If we
are not successful in selling our products in our targeted markets due to
competitive pressures, technological advances by others or otherwise, our
operating results would suffer.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH MAY AFFECT
OUR STOCK PRICE.
Historically, our quarterly operating results have varied substantially from
quarter to quarter, and we anticipate this pattern to continue. This is
principally because our license fees are variable from quarter to quarter, while
a high percentage of our operating expenses are relatively fixed, and are based
on anticipated levels of revenues. In addition, we expect our expenses to
increase as our business grows. If revenues earned in any particular quarter
fall short of anticipated revenue levels, our quarterly operating results would
be significantly harmed.
While the variability of our license fees is partially due to factors that would
influence the quarterly results of any company, our business is particularly
susceptible to quarterly variations because:
o We typically receive a substantial amount of our revenues in the last
weeks of the last month of a quarter, rather then evenly throughout
the quarter.
o Our strongest quarter each year is typically our fourth quarter, as
our customers often wait for the end of their annual budget cycle
before deciding whether to purchase new software. Consequently, our
revenues are generally lower in our first quarter. In addition, our
third quarter is a relatively slow quarter due to lower economic
activity throughout Europe during the summer months.
o Customers may delay purchasing decisions in anticipation of our new
products or product enhancements or platforms or announced pricing
changes by us or our competitors.
o We partly depend on large orders which may take several months to
finalize. A delay in finalizing a large order may result in the
realization of license fees being postponed from one quarter to the
next.
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<PAGE> 17
o Our revenues are also sensitive to the timing of our competitors'
offers of new products that successfully compete with ours on the
basis of functionality, price or otherwise.
As a result of the above, quarter-to-quarter comparisons of our revenues and
operating results may not be meaningful and you should not rely on them as
indicative of our future performance.
OUR STOCK PRICE IS SUSCEPTIBLE TO OUR OPERATING RESULTS AND TO STOCK MARKET
FLUCTUATIONS.
In future quarters, our operating results may be below the expectations of
public market analysts and investors, and the price of our shares may fall. In
addition, the stock markets in the United States and France have experienced
significant price and volume fluctuations, which have particularly affected the
market prices of many software companies and which have often been unrelated to
the operating performance of these companies. These market fluctuations could
affect our stock price.
OUR SOFTWARE MAY HAVE DEFECTS AND ERRORS, WHICH MAY LEAD TO A LOSS OF REVENUE OR
PRODUCT LIABILITY CLAIMS.
BUSINESSOBJECTS and its platform for internet-based installations,
WEBINTELLIGENCE, are internally complex and occasionally contain defects or
errors, especially when first introduced or when new versions or enhancements
are released. For example, when BUSINESSOBJECTS 4.0 was first introduced in
1996, it would not run on Windows 3.1, and we had to rework a portion of the
product to enable it to do so. The revised version then took significantly
longer than expected to achieve operational stability, and contained a number of
"bugs" resulting from the significant rewriting and rearchitecting of the
product. We resolved these problems by the end of 1996, but our operating
results for 1996 were severely affected.
Despite extensive testing, we may not detect errors in our new products,
platforms or product enhancements, including BUSINESSOBJECTS 5.i and
WEBINTELLIGENCE 2.6, which were recently launched, until after we have commenced
commercial shipments. If defects and errors are discovered in our products,
platforms or product enhancements after commercial release:
o potential customers may delay or forego purchases;
o our reputation in the marketplace may be damaged;
o we may incur additional service and warranty costs; and
o we may have to divert additional development resources to correct the
defects and errors.
If any or all of the foregoing occur, we may lose revenues or incur higher
operating expenses and lose market share, any of which could severely harm our
financial condition and operating results.
THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS CRUCIAL TO OUR BUSINESS, AND IF
THIRD PARTIES USE OUR INTELLECTUAL PROPERTY WITHOUT OUR CONSENT, IT COULD DAMAGE
OUR BUSINESS.
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<PAGE> 18
Our success depends in part on our ability to protect our proprietary rights in
our intellectual property. Despite precautions we take to protect these rights,
unauthorized third parties could copy aspects of our current or future software
and platforms or obtain and use information that we regard as proprietary.
Policing unauthorized use of software is difficult and some foreign laws do not
protect our proprietary rights to the same extent as in the United States or
France.
In addition, although our name, together with our logo, is registered as a
trademark in France, the United States, and a number of other countries, we may
have difficulty asserting our ownership rights in the name "Business Objects" as
some jurisdictions consider the name "Business Objects" to be generic or
descriptive in nature. As a result, we may be unable to effectively police
unauthorized use of our name or otherwise prevent the name of our software
products from becoming a part of the public domain.
To protect our proprietary rights, we may become involved in litigation, which
could be costly and negatively impact our operating results. For example, we are
currently in the process of litigating a patent infringement claim against
Cognos, Inc. and Cognos Corporation and have settled a patent infringement claim
in September 1999 in our favor against Brio Technology, Inc. Litigating claims
related to our proprietary rights can be very expensive in terms of management
time and resources, which could cause our financial condition and operating
results to suffer.
Third parties could assert that our technology infringes their proprietary
rights, which could adversely affect our ability to distribute our products and
result in costly litigation.
We do not believe that our products infringe the proprietary rights of any third
parties. However, in July 1999, Brio Technology, Inc. filed an action alleging
that we infringe one of its patents by selling our reporting functionality.
Although Brio Technology dismissed this lawsuit as part of a settlement
announced in September 1999, other third parties may in the future make claims
that our product infringes their technology. We cannot assure you that third
parties will never make these types of claims. We believe that software products
offered in our target markets increasingly will be subject to infringement
claims as the number of products and competitors in our industry segment grows
and product functionalities begin to overlap.
The potential effects on our business operations resulting from any third party
infringement claim that may be filed against us in the future include the
following:
o we could be forced to cease selling our products;
o we would be forced to commit management resources to resolve the
claim;
o we may incur substantial litigation costs in defense of the claim;
o we may be required to indemnify our customers;
o we may have to expend significant development resources to redesign
our products as a result of these claims; and
o we may be required to enter into royalty and licensing agreements with
a third party bringing an infringement claim against us, and these
agreements may contain terms that are unfavorable to us.
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THE LOSS OF OUR RIGHTS TO USE SOFTWARE LICENSED TO US BY THIRD PARTIES COULD
HARM OUR BUSINESS.
In order to provide a complete product suite, we occasionally license software
from third parties, and sub-license this software to our customers. In addition,
we license software programs from third parties and incorporate these programs
into our own software products. By utilizing third party software in our
business, we incur risks that are not associated with developing software
in-house. For example, these third party providers may discontinue or alter
their operations, terminate their relationship with us, or generally become
unable to fulfill their obligations to us. If any of these circumstances were to
occur, we may be forced to seek alternative technology which may not be
available on commercially reasonable terms. In the future, we may be forced to
obtain additional third party software licenses to enhance our product offerings
and compete more effectively. We may not be able to obtain and maintain
licensing rights to needed technology on commercially reasonable terms, which
would harm our business and operating results.
OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS; WE MAY
NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED.
Our success depends to a significant extent upon a number of key management and
technical personnel, including Bernard Liautaud, our chief executive officer and
co-founder, the loss of whom could adversely affect our business. The loss of
the services of other key personnel or our inability to attract and retain
highly skilled technical, management, sales and marketing personnel could also
harm our business. Competition for such personnel in the computer software
industry is intense, and we may be unable to successfully attract and retain
such personnel.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Our business has grown rapidly in recent years. If we continue to grow at the
same pace, this growth may place a significant strain on our management and
operations. Our future operating results depend in part on the ability of our
officers and key employees to continue to implement and improve our operational
and financial control systems and to hire, expand, train and manage our
employees. If we are unable to manage our growth effectively, our financial
condition and operating results could suffer.
WE HAVE MULTINATIONAL OPERATIONS THAT ARE SUBJECT TO RISKS INHERENT IN
INTERNATIONAL OPERATIONS, INCLUDING CURRENCY EXCHANGE RATE FLUCTUATIONS.
Because we conduct our business throughout the world, we are subject to a number
of risks inherent in international operations, including compliance with various
foreign laws, regulations and tax structures, and longer accounts receivable
payment cycles outside of the United States.
In addition, we conduct a significant portion of our business in currencies
other than the U.S. dollar, the currency in which we report our financial
statements. We expect to generate a significant portion of our revenues and
expenses in the Euro in the future. As a result, our operating results expressed
in U.S. dollars have been in the past, and may be in the future, adversely
impacted by currency exchange rate fluctuations on the U.S. dollar value of
foreign currency-denominated revenues and expenses. We cannot assure you that
these fluctuations will not continue and will not be significant. As of
September 30, 2000, we were not engaged in a foreign currency hedging program to
cover our currency transaction exposure.
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RISKS RELATED TO OUR INDUSTRY
OUR MARKETS ARE HIGHLY COMPETITIVE AND COMPETITION COULD HARM OUR ABILITY TO
SELL PRODUCTS AND SERVICES AND REDUCE OUR MARKET SHARE.
Competition could seriously harm our ability to sell software and services at
prices and terms favorable to us. If we cannot compete effectively, we may lose
market share. Some of our competitors have been in business longer than us and
have significantly greater financial, technical, sales, marketing and other
resources than we do. In addition, some of our competitors enjoy greater name
recognition and a larger installed customer base than we do. Moreover, some of
our competitors, particularly companies that offer relational database
management software systems and enterprise resource planning software systems,
have well-established relationships with some of our existing and targeted
customers.
In the future, any of our competitors could introduce products with more
features at lower prices. Some of these companies could also bundle existing or
new products, with other more established products that they offer, and compete
more effectively against our products. Some of these competitors have already,
or may in the future, provide their products or components of their products to
customers at no cost to the customer to gain market share. Because our products
are specifically designed and targeted to the business intelligence software
market, we may lose sales to competitors offering a broader range of products.
Furthermore, other companies larger than us could enter the market through
internal expansion or by strategically aligning themselves with one of our
current competitors and provide products that cost less than our products. We
believe that the business intelligence software market will continue to grow and
develop, and that more and more large companies may find it a desirable market
in which to compete. To the extent that we are unable to effectively compete
against our current and future competitors, as a result of some or all of the
factors stated above, our financial condition and operating results would
suffer.
THE SOFTWARE MARKETS THAT WE TARGET ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE
AND NEW PRODUCT INTRODUCTIONS.
The market for business intelligence software is characterized by:
o rapid technological advances;
o changes in customer requirements; and
o frequent new product introductions and enhancements.
To be successful, we must develop new products, platforms and enhancements to
our existing products that keep pace with technological developments, changing
industry standards and the increasingly sophisticated requirements of our
customers. If we are unable to respond quickly and successfully to these
developments and changes, we may lose our competitive position. In addition,
even if we are able to develop new products, platforms or enhancements to our
existing products, these products, platforms and product enhancements may not be
accepted in the marketplace. Our customers may defer or forego purchases of our
existing products if we do not adequately time the introduction or the
announcement of new products or enhancement to our existing products, or if
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<PAGE> 21
our competitors introduce or announce new products, platforms and product
enhancements. Any of these factors could severely harm our business, financial
condition and operating results.
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<PAGE> 22
PART II. OTHER INFORMATION
Item 5. Other Information
On October 25, 2000, the Company's Board of Directors appointed John Olsen
as Director of the Company subject to ratification at the next general
meeting of shareholders. This nomination was made to fill the vacancy
created by the resignation of Philippe Claude effective July 11, 2000.
Item 6. Exhibits and Current Reports on Form 8-K
a) Exhibits 27.1
Financial Data Schedule
b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BUSINESS OBJECTS S.A.
Date: November 9, 2000 By: /s/ Bernard Liautaud
----------------------------------
Bernard Liautaud
Chairman of the Board, President,
and Chief Executive Officer
Date: November 9, 2000 By: /s/ Clifton T. Weatherford
----------------------------------
Clifton T. Weatherford
Chief Financial Officer and
Senior Group Vice President
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
