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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 JUNE 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)
REPUBLIC OF FRANCE NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 July 31, 2000 was 40,038,976 including 383,000 treasury
shares of Ordinary Shares of Euro 0.10 nominal value, including 22,461,909
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. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 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 25
</TABLE>
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BUSINESS OBJECTS S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for per ordinary share amounts)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- ----------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 176,792 $ 176,233
Restricted cash 5,000 -
Accounts receivable, net 65,041 53,993
Other current assets 18,923 13,947
--------- ---------
Total current assets 265,756 244,173
Goodwill and other intangible assets, net 22,505 12,556
Property and equipment, net 15,895 13,831
Deposits and other assets 3,384 1,986
--------- ---------
Total assets $ 307,540 $ 272,546
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,881 $ 11,780
Accrued payroll and related expenses 25,497 23,994
Deferred revenue 38,129 31,849
Other current liabilities 42,056 37,946
--------- ---------
Total current liabilities 122,563 105,569
Notes payable - long term 4,304 2,924
Shareholders' equity
Ordinary shares, Euro 0.10 nominal value ($0.10 U.S.
as of June 30, 2000):
Authorized 59,580 at June 30, 2000 and 74,033 at
December 31, 1999;
Issued and outstanding - 40,005 at June 30, 2000
and 38,958 at December 31, 1999, respectively 4,558 3,522
Additional paid-in capital 133,346 126,026
Treasury stock, 383 shares at June 30, 2000
and December 31, 1999 (4,611) (4,611)
Retained earnings 68,373 52,174
Accumulated other comprehensive income (20,993) (13,058)
--------- ---------
Total shareholders' equity 180,673 164,053
--------- ---------
Total liabilities and shareholders' equity $ 307,540 $ 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, except per ADS and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 53,162 $ 35,533 $ 98,208 $ 67,067
Services 31,391 22,010 58,927 39,984
--------- --------- --------- ---------
Total revenues 84,553 57,543 157,135 107,051
Cost of revenues:
License fees 1,013 1,142 1,462 1,957
Services 13,643 8,850 25,441 17,126
--------- --------- --------- ---------
Total cost of revenues 14,656 9,992 26,903 19,083
--------- --------- --------- ---------
Gross margin 69,897 47,551 130,232 87,968
Operating expenses:
Sales and marketing 41,312 28,106 78,696 53,454
Research and development 10,115 6,426 18,294 12,422
General and administrative 5,793 4,954 11,384 9,152
--------- --------- --------- ---------
Total operating expenses 57,220 39,486 108,374 75,028
--------- --------- --------- ---------
Income from operations 12,677 8,065 21,858 12,940
Interest and other income, net 2,680 645 5,141 1,216
--------- --------- --------- ---------
Income before provision for income taxes 15,357 8,710 26,999 14,156
Provision for income taxes (6,143) (3,571) (10,800) (5,804)
========= ========= ========= =========
Net income $ 9,214 $ 5,139 $ 16,199 $ 8,352
========= ========= ========= =========
Net income per ADS and share - basic $ 0.23 $ 0.15 $ 0.41 $ 0.24
========= ========= ========= =========
ADS and shares used in computing net
income per ADS & per share - basic 39,846 35,242 39,531 35,050
========= ========= ========= =========
Net income per ADS and share - diluted $ 0.21 $ 0.14 $ 0.37 $ 0.22
========= ========= ========= =========
ADS and shares and common share
equivalents used in computing net income
per ADS & per share-diluted 43,668 38,034 43,746 38,102
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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BUSINESS OBJECTS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,199 $ 8,352
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,341 3,114
Amortization of goodwill 3,648 1,252
Deferred income taxes 7 134
Changes in operating assets and liabilities:
Accounts receivable (13,085) (797)
Current and other assets (1,532) (2,824)
Accounts payable 5,307 841
Accrued payroll and related expenses 2,503 505
Deferred revenue 7,341 6,071
Other current liabilities 5,044 4,535
--------- ---------
Net cash provided by operating activities 29,773 21,183
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,951) (3,685)
Business acquisitions, net of cash acquired (15,423) (4,427)
--------- ---------
Net cash used for investing activities (22,374) (8,112)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares 8,356 4,614
Purchase of treasury shares - (4,611)
Issuance of notes payable 5,000 -
Restricted cash (5,000) -
Repayment of notes payable (6,600) -
--------- ---------
Net cash provided by financing activities 1,756 3
Effect of foreign exchange rate changes on cash
and cash equivalents (8,596) (5,815)
--------- ---------
Net increase in cash and cash equivalents 559 7,259
Cash and cash equivalents at the beginning of the period 176,233 71,713
--------- ---------
Cash and cash equivalents at the end of the period $ 176,792 $ 78,972
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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BUSINESS OBJECTS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six month periods ended June
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 $1,785,000 at June 30, 2000 and $1,650,000 at
December 31, 1999.
4. REVENUE RECOGNITION
In accordance with SOP 97-2, as amended by SOP 98-4 and SOP 98-9,
revenue from product licensing fees is recognized when the product is
delivered, all significant contractual obligations have been satisfied
and the resulting receivable is deemed collectible by management.
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income ................................................. $ 9,214 $ 5,139 $16,199 $ 8,352
======= ======= ======= =======
Basic - Weighted average ADSs and shares outstanding ....... 39,846 35,242 39,531 35,050
------- ------- ------- -------
Incremental ordinary shares attributable to shares
issuable under employee stock plans and warrants ........... 3,822 2,793 4,215 3,052
------- ------- ------- -------
Diluted - Weighted average ADSs and shares outstanding ..... 43,668 38,034 43,746 38,102
======= ======= ======= =======
Net income per ADS and per share - basic .................... $ 0.23 $ 0.15 $ 0.41 $ 0.24
======= ======= ======= =======
Net income per ADS and per share - diluted .................. $ 0.21 $ 0.14 $ 0.37 $ 0.22
======= ======= ======= =======
</TABLE>
6. COMPREHENSIVE INCOME/LOSS
The Company had total comprehensive income of $7,992,000 and $8,264,000
for the three and six month periods ended June 30, 2000, respectively,
and total comprehensive income of $3,269,000 and $2,671,000 for the
three and six month periods ended June 30, 1999, respectively. Total
comprehensive income/loss is calculated by adding net income and the
change in the cumulative translation adjustment account for the period
presented.
7. 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.
8. 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
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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. Revenues from software license fees are generally recognized upon
delivery of the software product to the end user. 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.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
License fees ................................. 62.9% 61.8% 62.5% 62.6%
Services ..................................... 37.1 38.2 37.5 37.4
------ ------ ------ ------
Total revenues ............................. 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Cost of revenues:
License fees ................................. 1.2 2.0 0.9 1.8
Services ..................................... 16.1 15.4 16.2 16.0
------ ------ ------ ------
Total cost of revenues ..................... 17.3 17.4 17.1 17.8
------ ------ ------ ------
Gross margin .................................... 82.7 82.6 82.9 82.2
Operating expenses:
Sales and marketing .......................... 48.9 48.8 50.1 49.9
Research and development ..................... 12.0 11.2 11.6 11.6
General and administrative ................... 6.8 8.6 7.2 8.6
------ ------ ------ ------
Total operating expenses ................... 67.7 68.6 69.0 70.1
------ ------ ------ ------
Income from operations .......................... 15.0 14.0 13.9 12.1
Interest and other income, net .................. 3.2 1.1 3.3 1.1
------ ------ ------ ------
Income before provision for income taxes and
minority interest ............................ 18.2 15.1 17.2 13.2
Provision for income taxes ...................... (7.3) (6.2) (6.9) (5.4)
------ ------ ------ ------
Net income ...................................... 10.9% 8.9% 10.3% 7.8%
====== ====== ====== ======
Gross margin (as a percentage of related revenues):
License fees ................................. 98.1% 96.8% 98.5% 97.1%
Services ..................................... 56.5% 59.8% 56.8% 57.2%
</TABLE>
The following table sets forth the geographic source of our revenues as
a percent of total worldwide revenues:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Europe ............. 59.6% 64.7% 60.8% 64.2%
North America ...... 32.9% 28.5% 31.1% 27.2%
Rest of World ...... 7.5% 6.8% 8.1% 8.6%
------ ------ ------ ------
Total .............. 100% 100% 100% 100%
====== ====== ====== ======
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 30, 2000
LICENSE FEES. Revenues from license fees were $53.2 million and $35.5
million for the three months ended June 30, 2000 and 1999, respectively,
representing an increase of $17.7 million or 49.8%. Revenues from license fees
were $98.2 million for the six months ended June 30, 2000 and $67.1 million for
the prior year period, representing a period-to-period increase of $31.1 million
or 46.4%. The increase in license fees was primarily due to increased license
sales of
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WEBINTELLIGENCE, the Company's platform for intranet and extranet installations,
and to a lesser extent, increases in BUSINESSOBJECTS and related software
products.
We anticipate that license fees, which represented approximately 63% and
62% of our total revenues for the three month periods ended June 30, 2000 and
1999, respectively, and approximately 62% and 63% of our total revenues for the
six month periods ended June 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 $31.4 million for the three
months ended June 30, 2000, and $22.0 million for the prior year period,
representing a period-over-period increase of approximately $9.4 million, or
42.6%. Revenues from services totaled $58.9 million for the six months ended
June 30, 2000, and $40.0 million for the prior year period, representing a
period-over-period increase of approximately $18.9 million, or 47.4%. 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 to a lesser extent,
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 $1.0 million for the three months ended June 30, 2000 compared to $1.1
million in the prior year period, and $1.5 million for the six months ended June
30, 1999 compared to $2.0 million in the prior year period. Cost of license fees
as a percent of license fee revenues decreased from approximately 3.2% for the
three months ended June 30, 1999 to 1.9% for the three months ended June 30,
2000, and from approximately 2.9% for the six months ended June 30, 1999 to
approximately 1.5% for the six months ended June 30, 2000. The decrease in cost
for the three and six month periods ended June 30, 2000 was primarily due to
cost savings related to freight and documentation production. The six month
period ended June 30, 2000 also benefited from lower royalty expense as a result
of reduced license fees from third party licensed products, in the first quarter
of the year.
COST OF SERVICES. Cost of services consists of the cost of providing
consulting, training and maintenance. Cost of services totaled $13.6 million for
the three months ended June 30, 2000 compared to $8.9 million in the prior year
period, and totaled $25.4 million for the six months ended June 30, 2000
compared to $17.1 million in the prior year period. Cost of services as a
percent of service revenues increased to 43.5% for the three months ended June
30, 2000 from 40.2% for the prior year period, and increased to 43.2% as a
percent of service revenues for the six months ended June 30, 2000 from 42.8%
for the prior year period. 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, offset by improved productivity in providing 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.
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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 $41.3 million and $28.1 million for the three months ended June 30, 2000
and 1999, respectively, and $78.7 million and $53.5 million for the six months
ended June 30, 2000 and 1999, respectively. Sales and marketing expenses as a
percent of total revenues remained relatively flat at 48.9% and 48.8% for the
quarters ended June 30, 2000 and 1999, respectively, and 50.1% and 49.9% for the
six months ended June 30, 2000 and 1999, respectively. 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 $10.1 million and $6.4 million for the three months
ended June 30, 2000 and 1999, respectively, and $18.3 million and $12.4 million
for the six months ended June 30, 2000 and 1999. Research and development
expenses as a percent of revenues were 12.0% and 11.2% for the three month
periods ended June 30, 2000 and 1999, respectively, and 11.6% for the six month
periods ended June 30, 2000 and 1999. The increase in research and development
expenses as a percent of revenue for the three months ended June 30, 2000 is
primarily due to the amortization of intangible assets allocated to employment
contingencies resulting from the acquisitions of Olap@Work, Inc. and Next Action
Technology, Ltd. The increase in absolute dollars in research and development
expenses for the three and six months ended June 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.
Amortization expense totaled $1.2 million and $1.5 million for the three and six
month periods ended June 30, 2000, and $0 for the comparable periods in 1999. As
of June 30, 2000 and 1999, the Company has not capitalized any software
development costs and all research and development costs have been expensed as
incurred. 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, bad debt expense, and amortization of
goodwill. General and administrative expenses totaled $5.8 million and $5.0
million for the three months ended June 30, 2000 and 1999, respectively, and
$11.4 million and $9.2 million for the six months ended June 30, 2000 and 1999,
respectively. General and administrative expenses, including goodwill, decreased
as a percent of total revenues from 8.6% for the quarter and six months ended
June 30, 1999 to 6.8 % and 7.2% for the three and six month periods ended June
30, 2000, respectively. Goodwill amortization expense as a percent of revenues
remained flat at 1.3% for the quarters ended June 30, 2000 and 1999, and 1.3 %
and 1.2% for the six month periods ended June 30, 2000 and 1999, respectively.
Goodwill amortization expense totaled $1.1 million and $770,000 for the three
months ended June 30, 2000 and 1999, respectively, and $2.1 million and $1.3
million for the six months ended June 30, 2000 and 1999, respectively. The
decrease in general and administrative expenses as a
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percent of total revenues is primarily 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 higher goodwill amortization expense, and higher
allocated 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.
INTEREST AND OTHER INCOME, NET
Interest and other income, net was composed of the following (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net interest income $1,638 $ 689 $3,010 $1,191
Other income 1,000 - 2,000 -
Net exchange gain/(loss) 42 (44) 131 26
------ ------ ------ ------
Total interest and other income, net $2,680 $ 645 $5,141 $1,216
====== ------ ====== ======
</TABLE>
Net interest income increased during the three and six months ended June
30, 2000 due to an increase in cash available for investment
Other income for the three and six month periods ended June 30, 2000
represents payments received from Brio Technology, Inc. (Brio) in settlement of
patent litigation. As part of the settlement, Brio 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 $4.0 million under the
settlement.
INCOME TAXES
The provision for income taxes totaled $6.1 million for the three months
ended June 30, 2000 compared to $3.6 million in the prior year period, and
totaled $10.8 million for the six months ended June 30, 2000 compared to $5.8
million in the prior year period. The Company's effective tax rate was 40% for
the three and six months ended June 30, 2000 and 41% for the three and six
months ended June 30, 1999. The 2000 effective rate is lower due primarily to
the reduction in the French statutory rate. The Company provides for income
taxes for each interim period based on the estimated annual effective tax rate
for the year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash, cash equivalents and
restricted cash of $181.8 million, an increase of $5.6 million from December 31,
1999. Cash generated from operations totaled $29.8 million for the six months
ended June 30, 2000, as compared to $21.2 million for the comparable period in
1999. Net cash generated in 2000 resulted primarily from increases in net income
and non-cash charges for depreciation and amortization, increases in deferred
revenue, accounts payable, other current liabilities and accrued payroll and
related expenses, offset by increases in accounts receivable and other current
assets. Investing activities in 2000
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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 an escrow account, and $7.0 million of property and equipment
additions. Financing activities in 2000 consisted of the issuance of $8.4
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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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 vary materially as a result of a number of
factors including those set forth in the Risk Factors section.
As of June 30, 2000, all of our cash and cash equivalents, and
restricted cash were classified as available-for-sale. The principal portion of
our investments are 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 June 30, 2000, we were not engaged in a foreign
currency hedging program to cover our currency transaction exposure.
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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:
- 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.
- 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.
- 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.
- 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
- 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:
- potential customers may delay or forego purchases;
- our reputation in the marketplace may be damaged;
- we may incur additional service and warranty costs; and
- 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 favor of the Company 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:
- we could be forced to cease selling our products;
- we would be forced to commit management resources to resolve the
claim;
- we may incur substantial litigation costs in defense of the claim;
- we may be required to indemnify our customers;
- we may have to expend significant development resources to redesign
our products as a result of these claims; and
- 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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<PAGE> 19
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. For example, effective February 1,
2000, the standard work week in France was reduced from 39 hours to 35 hours.
The majority of our development group (which is responsible for the design,
development and release of product enhancements, updates and new products) is
based in Levallois-Perret, France. This mandated reduction in work hours may
result in a decrease in employee productivity per man-hour and an increase in
the cost of our France-based operations. In an effort to reduce any negative
impact this new regulation may have on our financial condition and results of
operations, we have developed various plans to improve employee productivity,
including an increase in employee training programs. However, we cannot assure
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<PAGE> 20
you that our efforts to minimize the effects of this new regulation will be
successful, and, if we are not successful in this regard, our financial
condition and operating results may suffer.
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. Although we expect this
pattern to continue, the acceptance of the Euro and its use as the primary
European currency is expected to reduce these fluctuations with respect to our
European activities. However, we cannot assure you that these fluctuations will
not continue and will not be significant. As of June 30, 2000, we were not
engaged in a foreign currency hedging program to cover our currency transaction
exposure.
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 tools 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 tools is characterized by:
- rapid technological advances;
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<PAGE> 21
- changes in customer requirements; and
- 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 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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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a) An ordinary and extraordinary general meeting was held on June 5,
2000.
b) Directors elected at the meeting: Bernard Liautaud, Philippe
Claude.
Directors whose term of office as a director continued after the
meeting:
Bernard Charles, Albert Eisenstat, Arnold Silverman, Vincent
Worms.
c) Matters voted upon at the meeting:
1) To approve the financial statements of Business Objects
S.A. for the year ended December 31, 1999;
For: 27,115,327
Against: 1,752
Abstained: 0
2) To allocate the profits of the year ended December 31,
1999;
For: 25,299,147
Against: 1,817,932
Abstained: 0
3) To renew the term of office of Mr. Bernard Liautaud as
Director;
For: 27,107,098
Against: 9,981
Abstained: 0
4) To renew the term of office of Mr. Philippe Claude as
Director;
For: 27,096,198
Against: 20,881
Abstained: 0
5) To ratify the transaction by which Business Objects S.A
agreed to be jointly and severally liable for the
obligations of its wholly owned subsidiary, Business
Objects (U.K.) Ltd. under a lease agreement ("the Lease
Agreement") for the offices of said subsidiary;
For: 27,066,342
Against: 50,737
Abstained: 0
6) To approve alterations to the Lease Agreement for
miscellaneous works;
For: 27,065,944
Against: 51,135
Abstained: 0
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7) To authorize the Board of Directors to repurchase the
shares of the Company;
For: 27,114,067
Against: 3,012
Abstained: 0
8) To re-affirm the price setting conditions of shares
reserved for issuance under the Employee Savings Plan;
For: 27,035,007
Against: 82,072
Abstained: 0
9) To reserve 75,000 shares for issuance under the Employee
Savings Plan;
For: 26,452,838
Against: 664,241
Abstained: 0
10) To re-affirm the price setting conditions of shares
reserved for issuance under the 1995 International
Employee Stock Purchase Plan;
For: 27,031,670
Against: 85,409
Abstained: 0
11) To reserve 200,000 shares for issuance under the 1995
International Employee Stock Purchase Plan;
For: 26,968,908
Against: 148,171
Abstained: 0
12) To increase the number of shares reserved for issuance
under the 1999 Stock Option Plan by 3,000,000 shares;
For: 20,036,482
Against: 7,080,597
Abstained: 0
13) To authorize the issuance of securities giving immediate
or deferred access to the share capital, with preferential
subscription rights;
For: 25,775,906
Against: 1,341,173
Abstained: 0
14) To authorize the issuance of securities having immediate
or deferred participation in the share capital, without
preferential subscription rights;
For: 20,391,529
Against: 6,725,450
Abstained: 100
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<PAGE> 24
15) To authorize the issuance of shares of the Company in
connection with securities issuances by subsidiaries of
the Company;
For: 19,851,142
Against: 7,265,937
Abstained: 0
16) To authorize capital increases in the event of a tender or
exchange offer for securities of the Company;
For: 19,453,276
Against: 7,663,703
Abstained: 100
d) Not applicable.
Item 6. Exhibits and Current Reports on Form 8-K
a) Exhibits
10.0 Material Contracts.
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: August 9, 2000 By: /s/ Bernard Liautaud
-----------------------------------------
Bernard Liautaud
Chairman of the Board, President,
and Chief Executive Officer
Date: August 9, 2000 By: /s/ Clifton T. Weatherford
----------------------------------------
Clifton T. Weatherford
Chief Financial Officer and
Senior Group Vice President
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Index to Exhibits
Number Description
------ -----------
10.0 Material Contracts
27.1 Financial Data Schedule
