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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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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, 2002





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





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Business Objects S.A.


(Exact name of registrant as specified in its charter)





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Republic of France

None(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer 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, 2002 was 63,095,829 Ordinary Shares of
Euro 0.10 nominal value, including 20,917,948 American Depositary Shares (as evidenced by American Depositary Receipts), each corresponding to one Ordinary Share.





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Business Objects S.A.


Index





PagePART I. FINANCIAL INFORMATIONItem 1.

Unaudited Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001

3Condensed Consolidated Statements of Income for the three and six months ended June 30, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29PART II. OTHER INFORMATION

30SIGNATURES

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BUSINESS OBJECTS S.A.


CONSOLIDATED BALANCE SHEETS


(In thousands of US dollars)





June 30, 2002


December 31, 2001(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
324,845


$
240,421Restricted cash, current


8,103



8,103Accounts receivable, net


79,997



87,523Deferred taxes


9,981



9,900Other current assets


14,017



12,832Total current assets


436,943



358,779Goodwill, net


13,870



13,648Other intangible assets, net


5,734



6,973Property and equipment, net


37,548



36,046Restricted cashlong term


315



1,149Deposits and other assets


5,400



4,874Total assets

$
499,810


$
421,469LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
18,450


$
19,972Accrued payroll and related expenses


34,431



37,417Deferred revenue


73,798



59,741Other current liabilities


55,697



48,499Total current liabilities


182,376



165,629Long-term liabilities


2,913



3,174Shareholders equityOrdinary shares, Euro 0.10 nominal value ($0.10 U.S. as of June 30, 2002):Authorized 88,154 at June 30, 2002 and 86,011 at December 31, 2001;Issued and outstanding63,054 at June 30, 2002 and 61,928 at December 31, 2001.


6,689



6,589Additional paid-in capital


162,495



149,889Treasury stock, 818 shares at June 30, 2002 and December 31, 2001


(9,049
)


(9,049
)Retained earnings


162,354



139,455Accumulated other comprehensive income


(7,968
)


(34,218
)Total shareholders equity


314,521



252,666Total liabilities and shareholders equity

$
499,810


$
421,469





Note: The balance sheet at December 31, 2001 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.


CONSOLIDATED STATEMENTS OF INCOME


(In thousands of US dollars, except per ADS and per share data)





Three Months EndedJune 30


Six Months EndedJune 302002


2001


2002


2001Revenues:

(unaudited)License fees

$
60,939


$
61,012


$
124,090


$
121,613Services


50,257



40,493



94,644



78,170Total revenues


111,196



101,505



218,734



199,783Cost of revenues:License fees


519



464



1,062



1,066Services


17,632



15,728



34,687



31,156Total cost of revenues


18,151



16,192



35,749



32,222Gross margin


93,045



85,313



182,985



167,561Operating expenses:Sales and marketing


54,658



48,490



106,841



96,477Research and development


16,934



13,574



32,433



26,567General and administrative


7,183



7,053



13,345



12,826Restructuring charge


3,756







3,756



Intangible asset amortization


228







560



Goodwill amortization






1,115







2,247Total operating expenses


82,759



70,232



156,935



138,117Income from operations


10,286



15,081



26,050



29,444Interest and other income, net


8,871



2,950



10,883



5,793Income before provision for income taxes


19,157



18,031



36,933



35,237Provision for income taxes


(7,279
)


(7,032
)


(14,034
)


(13,742
)Net income

$
11,878


$
10,999


$
22,899


$
21,495Net income per ADS and sharebasic

$
0.19


$
0.18


$
0.37


$
0.35ADS and shares used in computing net income per ADS &per sharebasic


62,168



61,216



61,707



60,984Net income per ADS and sharediluted

$
0.18


$
0.17


$
0.35


$
0.33ADS and shares and common share equivalents used incomputing net income per ADS & per
sharediluted


64,605



64,686



64,686



64,802





See accompanying notes to Condensed Consolidated Financial Statements.




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BUSINESS OBJECTS S.A.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited, in thousands of US dollars)





Six Months Ended June 30,2002


2001Cash flows from operating activities:Net income

$
22,899


$
21,494Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


8,316



9,122Deferred income taxes


57



Changes in operating assets and liabilities:Accounts receivable, net


14,279



8,777Current and other assets


277



46Accounts payable


(3,268
)


(5,420
)Accrued payroll and related expenses


(5,989
)


(2,580
)Deferred revenue


9,628



5,836Other current liabilities


4,990



(2,439
)Net cash provided by operating activities


51,189



34,836Cash flows from investing activities:Purchases of property and equipment


(6,460
)


(21,218
)Business and minority interest acquisitions, net of cash acquired






(1,316
)Net cash used for investing activities


(6,460
)


(22,534
)Cash flows from financing activities:Issuance of shares


12,705



6,344Restricted cash


833



2,013Payments on notes payable


(833
)


(2,907
)Net cash provided by financing activities


12,705



5,450Effect of foreign exchange rate changes on cash and cash equivalents


26,990



(15,078
)Net increase in cash and cash equivalents


84,424



2,674Cash and cash equivalents at the beginning of the period


240,421



199,581Cash and cash equivalents at the end of the period

$
324,845


$
202,255








See accompanying notes to Condensed
Consolidated Financial Statements.




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Business Objects S.A.


Notes to Condensed Consolidated Financial Statements


June 30, 2002





1.    Basis of Presentation





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States, applied on a consistent basis. 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 month and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 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, 2001.





2.    Use of Estimates





The preparation of the
consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to allowances for uncollectible accounts receivable, product warranty, useful lives for property and equipment and intangibles,
employee benefits, taxes and accrued restructuring charges. Actual results could differ from those estimates.





3.    Accounts Receivable





Accounts receivable are stated net of allowances for doubtful
accounts of $2.9 million at June 30, 2002 and $3.9 million at December 31, 2001.





4.    Revenue Recognition





We enter into arrangements for the sale of 1) licenses of software products and related maintenance contracts; 2) bundled license,
maintenance, and services; and 3) services on a time and material basis. In instances where maintenance is bundled with a license of software products, such maintenance terms are typically one year.





For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is
probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. In software arrangements that include rights to multiple software products and/or services, we use the residual method,
under which revenue is allocated to the undelivered elements based on vendor specific objective evidence of fair value of such undelivered elements and the residual amount of revenue is allocated to the delivered elements.




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For those contracts that consist solely of license and maintenance we recognize license revenues based
upon the residual method after all licensed software product has been delivered as prescribed by the Statement of Position 98-9 Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions. We
recognize maintenance revenues over the term of the maintenance contract as vendor specific objective evidence of fair value for maintenance exists. There is no right of return or price protection for sales to domestic and international distributors
or value-added resellers (collectively, resellers). In situations where the reseller has a purchase order from the end-user that is immediately deliverable, we recognize revenue on shipment to the reseller, if other criteria in SOP 97-2
are met, since we have no risk of concessions.





Services can consist of maintenance, training and/or consulting services. In all cases,
we assess whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. When software services are considered essential or the arrangement involves customization or modification of the
software, both the license and service revenue under the arrangement are recognized under the percentage of completion method of contract accounting. For those arrangements for which we have concluded that the service element is not essential to the
other elements of the arrangement we determine whether the services are available from other vendors, do not involve a significant degree of risk or unique acceptance criteria, and whether we have sufficient experience in providing the service to be
able to separately account for the service. When the service qualifies for separate accounting, we use vendor specific objective evidence of fair value for the services and the maintenance to account for the arrangement using the residual method,
regardless of any separate prices stated within the contract for each element. Revenue allocable to services is recognized as the services are performed.





Vendor-specific objective evidence of fair value of services is based upon hourly rates. As previously noted, we enter into contracts for services alone and such contracts are based upon time and material basis. Such hourly
rates are used to assess the vendor specific objective evidence of fair value in multiple element arrangements.





5.    Comprehensive Income





Comprehensive income includes foreign currency translation gains
and losses that have been excluded from net income and reflected instead in stockholders equity. The following table sets forth the calculation of comprehensive income (in thousands):





Three Months Ended June 30,


Six Months Ended June 30,2002

2001


2002

2001Net income

$
11,878

$
10,999


$
22,899

$
21,495Change in cumulative translation adjustment


28,348


(5,557
)


26,250


(14,626
)Total comprehensive income

$
40,226

$
5,442


$
49,149

$
6,869




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6.    Net Income per ADS and per Share





The following table sets forth the computation of basic and diluted net income per American Depositary Share (ADS) and per share (in thousands, except per ADS
and per share amounts):





Three Months Ended June 30,

Six Months EndedJune 30,2002

2001

2002

2001Numerator:Net income

$
11,878

$
10,999

$
22,899

$
21,495Denominator:Basic weighted average ADSs and shares outstanding


62,168


61,216


61,707


60,984Incremental ordinary shares attributable to shares issuable under employee stock plans and warrants


2,437


3,470


2,979


3,818Diluted weighted average ADS and shares outstanding


64,605


64,686


64,686


64,802Net income per ADS and per sharebasic

$
0.19

$
0.18

$
0.37

$
0.35Net income per ADS and per sharediluted

$
0.18

$
0.17

$
0.35

$
0.33




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7.    Adjusted Net Income per ADS and per Share





The following table sets forth net income per share and per ADS adjusted to exclude goodwill amortization recognized prior to the adoption of FAS 142 on January
1, 2002 (in thousands, except for per ADS and per share amounts):





Three Months Ended June 30,

Six Months EndedJune 30,2002

2001

2002

2001Reported net income

$
11,878

$
10,999

$
22,899

$
21,495Add back: goodwill amortization, net of tax benefit of $435 and $876 for the three and six months ended June 30,
2001





680





1,371Adjusted net income

$
11,878


11,679

$
22,899


22,866Net income per share and per ADSbasic:Reported net income per share and per ADS

$
0.19

$
0.18

$
0.37

$
0.35Add back: goodwill amortization, net of tax benefit per share and per ADS




$
0.01




$
0.02Adjusted net income per share and per ADS

$
0.19

$
0.19

$
0.37

$
0.37Net income per share and per ADSdiluted:Reported net income

$
0.18

$
0.17

$
0.35

$
0.33Add back: goodwill amortization, net of tax benefit per share and per ADS




$
0.01




$
0.02Adjusted net income per share and per ADS

$
0.18

$
0.18

$
0.35

$
0.35





8.    Segment Information





The Company has one reportable segmentbusiness intelligence software products.





9.    Legal Proceedings





During May, 2002, we entered into an
agreement in settlement of our patent infringement lawsuit with Cognos, Inc. and Cognos Corporation (collectively Cognos). Under the terms of the agreement, Cognos will license the rights to our technology under United States patent number 5,555,403
in exchange for payments totaling $24.0 million. The license will cover both past and future use of our technology. A $10.0 million first installment, which we estimate was attributable to past use of our technology, was received during June, 2002,
and is included, net of $3.1 million of related legal expense, in interest and other income, net on the Consolidated Statements of Income. The remaining balance, which we estimate is attributable to future use of our technology, is due in eight
quarterly installments of $1.75 million commencing on July 1, 2002. We will recognize these payments as they come due to match the timing of the recognition with the use of the licensed technology.





On October 30, 2001, an action for alleged patent infringement was filed in the United States District Court for the Eastern District of Virginia against us and
our subsidiary, Business Objects Americas Inc., by MicroStrategy Incorporated (MicroStrategy). The complaint




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alleges that our software products, BUSINESS OBJECTS BROADCAST AGENT TM , BUSINESS OBJECTS INFOVIEW TM and BUSINESS OBJECTS BROADCAST AGENT
PUBLISHER TM , infringe MicroStrategys United States Patent No. 6,279,033 entitled System and
Method for Asynchronous Control of Report Generation Using a Network Interface and United States Patent No. 6,260,050 entitled System and Method of Adapting Automatic Output of Service Related OLAP Reports to Disparate Output
Devices. On February 21, 2002, MicroStrategy amended its complaint to add claims for violations of the Computer Fraud and Abuse Act, misappropriation of trade secrets, tortious interference with contractual relations with employees and
conspiracy in violation of the Virginia Code. The complaint seeks relief in the form of an injunction against us and monetary damages. Our current assessment is that our products do not infringe and that we have not committed any of the alleged
wrongful acts. If successful, a claim of infringement against us and our inability to license the infringed or similar technology on commercially reasonable terms could have a material adverse effect on our business, operating results, and financial
condition. On April 5, 2002 and March 27, 2002 the United States Patent and Trademark Office (USPTO) granted our requests for reexamination of MicroStrategys United States Patent No. 6,279,033 and United States Patent No.
6,260,050, respectively. On June 13, 2002, the Court of Virginia granted our motion to stay the patent claims pending the reexamination of MicroStrategys two patents by the USPTO. The trial on the non-patent related claims is currently
expected to proceed on October 8, 2002.





On October 17, 2001, we filed a lawsuit in the United States District Court for the Northern
District of California against MicroStrategy for alleged patent infringement. The lawsuit alleges that MicroStrategy infringes on our United States Patent No. 5,555,403 and 6,247,008 by making, using, offering to sell and selling its product
currently known as MicroStrategy Version 7.0. Our complaint requests that the defendant be enjoined from further infringing the patent and seeks an as yet undetermined amount of damages.





10.    Business Restructuring Charge





During the
quarter ended June 30, 2002 we implemented a restructuring plan to eliminate approximately 50 positions and related facilities from our European field operations in order to better align our revenues and costs structure in Europe in response to the
regions overall weak IT spending environment. Implementation of the plan resulted in restructuring charges to earnings totaling $3.8 million. The restructuring charges include $3.1 million of severance and fringe benefits and $720,000 for the
net costs of abandoning leases. Four employees had been terminated as of June 30, 2002. No severance or lease abandonment costs had been paid as of June 30, 2002.





11.    Recent Pronouncements





In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142). Under FAS 142, goodwill and indefinite lived intangible assets are no longer being amortized but are
instead reviewed annually for impairment (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives. FAS 142 is effective for
fiscal years beginning after December 15, 2001, and we adopted FAS 142 on January 1, 2002 when our new fiscal year began. We performed an initial impairment analysis of our goodwill as of January 1, 2002 and found no impairment. Net goodwill was
$13.9 million at June 30, 2002 and $13.6 million at December 31, 2001. The change in goodwill between periods is as a result of translating




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foreign denominated goodwill into U.S. dollars at varying exchange rates in effect at each balance sheet date.





In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Impairment of Long-Lived Assets (FAS
144). FAS 144 supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (FAS 121). FAS 144 retains the requirements of FAS 121 to
(a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and the fair value of the asset.
FAS 144 removes goodwill from its scope. FAS 144 is applicable to financial statements issued for fiscal years beginning after December 15, 2001, and we adopted FAS 144 on January 1, 2002 when our new fiscal year began. Our adoption of FAS 144 did
not have a material adverse impact on our financial position or results of operations.





12.    Subsequent Event





On July 9, 2002, we signed a definitive agreement to acquire Acta Technology, Inc. (Acta) of Mountain View, California. Acta is a
privately held data integration vendor. The acquisition is expected to provide Business Objects with a comprehensive enterprise analytic platform for the delivery of custom-developed and pre-packaged analytic applications.





The purchase price is $65.0 million in cash in exchange for all shares of Acta. The transaction will be accounted for under the purchase method of accounting.
Business Objects expects the acquisition to be completed during the third quarter of 2002. The acquisition has been approved by the board of directors of each company and is subject to regulatory approval and customary closing conditions.





On July 16, 2002, Informatica Corporation (Informatica) announced that it had filed a patent infringement action in U.S. District Court
in Northern California against Acta, asserting that certain Acta products infringe on three of Informaticas patents. In the suit, Informatica is seeking an injunction against future sales of the infringing Acta products, as well as damages for
past sales of the infringing products. Informatica has asserted that Actas infringement of the Informatica patents was willful and deliberate, entitling Informatica to an award of treble damages, costs and reasonable attorneys fees. Our
current assessment is that Actas products do not infringe on the Informatica patents, and we intend to defend Acta from this action once the acquisition closes.




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Item
 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations





The following discussion and analysis should be read together with our Condensed Consolidated Financial Statements and the Notes to those statements included elsewhere in this Form 10-Q. This discussion contains
forward-looking statements based on our current expectations, assumptions, estimates, and projections about Business Objects and our industry. These forward-looking statements involve risks and uncertainties. Business Objects actual results
could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in the Risk Factors section and elsewhere in this Form 10-Q. Business Objects undertakes no
obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.





Overview





General





Business Objects develops, markets, and supports business intelligence software for client/server environments, intranets, extranets, and the internet. Business
intelligence lets organizations access, analyze, and share information internally with employees and externally with customers, suppliers, and partners, helping organizations improve operational efficiency, build customer relationships, and develop
differentiated product offerings.





In view of our 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.





Recent Developments





During July, 2002, we signed a definitive agreement to acquire Acta Technology, Inc.
(Acta) of Mountain View, California. Acta is a privately held data integration vendor. The acquisition is expected to provide Business Objects with a comprehensive enterprise analytic platform for the delivery of custom-developed and pre-packaged
analytic applications.





The purchase price is $65.0 million in cash in exchange for all shares of Acta. The transaction will be accounted
for under the purchase method of accounting. Business Objects expects the acquisition to be completed during the third quarter of 2002. The acquisition has been approved by the board of directors of each company and is subject to regulatory approval
and customary closing conditions.





On July 16, 2002, Informatica Corporation (Informatica) announced that it had filed a patent
infringement action in U.S. District Court in Northern California against Acta, asserting that certain Acta products infringe on three of Informaticas patents. In the suit, Informatica is seeking an injunction against future sales of the
infringing Acta products, as well as damages for past sales of the infringing products. Informatica has asserted that Actas infringement of the Informatica patents was willful and deliberate, entitling Informatica to an award of treble
damages, costs and reasonable attorneys fees. Our




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current assessment is that Actas products do not infringe on the Informatica patents, and we intend to defend Acta from this action once the acquisition closes.





Based upon a preliminary independent valuation of Actas intangible assets, we expect that a significant portion of the purchase price will be allocated to
goodwill. Goodwill recorded as a result of this transaction will not be amortized in accordance with FAS 142 but will be tested for impairment annually. We also anticipate that a portion of the purchase price will be assigned to in-process research
and development for technology which has not yet reached technological feasibility and which has no alternative future use. We plan on taking a special charge to write off the in-process technology during the third quarter of 2002. In addition, we
expect to incur other non-recurring transition costs for salaries, relocation expenses and marketing costs. We expect that our cash and cash equivalents as of September 30, 2002 will be lower than at June 30, 2002 due to payment of the purchase
price, which in turn may also have a negative impact on interest income for the quarter ended September 30, 2002.





Critical
Accounting Policies





The preparation of financial statements in conformity with generally accepted accounting principles requires
us to utilize accounting policies and make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses. We believe the following accounting policies and estimates are the most critical to our business
operations and understanding our results of operations. The following should be read in conjunction with our consolidated financial statements.





We record provisions for allowances for doubtful accounts against general and administrative expenses. The provisions, which are netted against our accounts receivable on our consolidated balance sheets, totaled $2.9 million and $3.9
million at June 30, 2002 and December 31, 2001, respectively. These estimates are based on bad debt write-offs, analysis of credit memo data, specific identification of probable bad debts based on collection efforts, aging of accounts receivable and
other known factors. Actual results could differ from those estimates.





We evaluate long-lived assets, including goodwill and acquired
intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is
measured as the difference between the carrying value and the fair value of the impaired asset.





We record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event that
we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is
more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed. Our current valuation allowance covers the tax benefit from the exercise of employee stock options. When
these tax benefits are realized the valuation allowance will be reversed and credited to capital in excess of par value.





We enter into
arrangements for the sale of 1) licenses of software products and related maintenance contracts; 2) bundled license, maintenance, and services; and 3) services on a




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time and material basis. In instances where maintenance is bundled with a license of software products, such maintenance terms are typically one year.





For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is
probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. In software arrangements that include rights to multiple software products and/or services, we use the residual method,
under which revenue is allocated to the undelivered elements based on vendor specific objective evidence of fair value of such undelivered elements and the residual amount of revenue is allocated to the delivered elements.





For those contracts that consist solely of license and maintenance we recognize license revenues based upon the residual method after all licensed software
product has been delivered as prescribed by the Statement of Position 98-9 Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions. We recognize maintenance revenues over the term of the
maintenance contract as vendor specific objective evidence of fair value for maintenance exists. There is no right of return or price protection for sales to domestic and international distributors or value-added resellers (collectively,
resellers). In situations where the reseller has a purchase order from the end-user that is immediately deliverable, we recognize revenue on shipment to the reseller, if other criteria in SOP 97-2 are met, since we have no risk of
concessions.





Services can consist of maintenance, training and/or consulting services. In all cases, we assess whether the service
element of the arrangement is essential to the functionality of the other elements of the arrangement. When software services are considered essential or the arrangement involves customization or modification of the software, both the license and
service revenue under the arrangement are recognized under the percentage of completion method of contract accounting. For those arrangements for which we have concluded that the service element is not essential to the other elements of the
arrangement we determine whether the services are available from other vendors, do not involve a significant degree of risk or unique acceptance criteria, and whether we have sufficient experience in providing the service to be able to separately
account for the service. When the service qualifies for separate accounting, we use vendor specific objective evidence of fair value for the services and the maintenance to account for the arrangement using the residual method, regardless of any
separate prices stated within the contract for each element. Revenue allocable to services is recognized as the services are performed.





Vendor-specific objective evidence of fair value of services is based upon hourly rates. As previously noted, we enter into contracts for services alone and such contracts are based upon time and material basis. Such hourly rates are
used to assess the vendor specific objective evidence of fair value in multiple element arrangements.




14




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##### Table of Contents




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:





Three Months Ended June 30


Six Months Ended June 302002


2001


2002


2001Revenues:License fees

55
%

60
%

57
%

61
%Services

45
%

40
%

43
%

39
%Total revenues

100
%

100
%

100
%

100
%Cost of revenues:License fees

0
%

1
%

0
%

0
%Services

16
%

15
%

16
%

16
%Total cost of revenues

16
%

16
%

16
%

16
%Gross margin

84
%

84
%

84
%

84
%Operating expenses:Sales and marketing

49
%

48
%

49
%

48
%Research and development

15
%

13
%

15
%

13
%General and administrative

7
%

7
%

6
%

7
%Restructuring charge

4
%

0
%

2
%

0
%Intangible asset amortization

0
%

0
%

0
%

0
%Goodwill amortization

0
%

1
%

0
%

1
%Total operating expenses

75
%

69
%

72
%

69
%Income from operations

9
%

15
%

12
%

15
%Interest and other income, net

8
%

3
%

5
%

3
%Income before provision for income taxes

17
%

18
%

17
%

18
%Provision for income taxes

(7
%)

(7
%)

(7
%)

(7
%)Net income

11
%

11
%

10
%

11
%Gross margin license

99
%

99
%

99
%

99
%Gross margin services

65
%

61
%

63
%

60
%




15




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##### Table of Contents




The following table sets forth the geographic source of our revenues:





Three Months Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Americas

52
%

40
%

50
%

38
%Europe

42


54


44


55Rest of World

6


6


6


7Total

100
%

100
%

100
%

100
%





Prior year amounts have been reclassified to conform to current year presentation.





Total Revenue.    Total revenues increased $9.7 million, or 10% during the three month period ended June 30,
2002 to $111.2 million from $101.5 million for the three month period ended June 30, 2001. Total revenues increased $18.9 million, or 9% during the six month period ended June 30, 2002 to $218.7 million from $199.8 million for the six month period
ended June 30, 2001. A majority of our total revenues for all periods presented was derived from license fees, primarily for the BUSINESSOBJECTS product line. Our services revenues were comprised of revenues from
maintenance, consulting and training activities.





The growth in total revenues was due to increases in services revenues, while license
revenues remained relatively flat from the prior year. Extranet revenues and allocated related service revenues decreased by 10% to $19.6 million for the three month period ended June 30, 2002 from $21.7 million for the same prior year period.
Extranet revenues and allocated related service revenues increased by 12% to $43.1 million for the six month period ended June 30, 2002 from $38.6 million for the same prior year period due a strong 39% growth rate in the first quarter of 2002 over
the same prior year period. Geographically, extranet revenues grew in the


Americas for the three and six month periods ended June 30, 2002 vs. the same periods in the prior
year, but declined in Europe during the same periods vs. the same periods in the prior year due to an overall weak information technology (IT) spending environment.





Geographically, we experienced strong revenue growth in the Americas with period over period increases of 40% and 44% for the three and six month periods ended June 30, 2002, respectively, and 25% and
0% growth in the rest of world for the three and six month periods ended June 30, 2002, respectively. In Europe, total revenues decreased 10% for the three and six month periods ended June 30, 2002, compared to the same prior year periods as the
overall IT spending environment continues to remain weak.





We operate internationally, with a substantial portion of our business
conducted in foreign currencies. As such, our results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to the euro, the British pound sterling and to a lesser extent, the Japanese yen and other foreign
currencies.





License Fees.    Revenues from license fees decreased $0.1 million, or 0% during the three month
period ended June 30, 2002 to $60.9 million from $61.0 million for the three months ended June 30, 2001. Geographically, the change in revenues from license fees was attributable to growth in the Americas and Japan offset by a decline in revenues
from license fees in Europe due to a weak IT spending environment. Revenues from license fees increased $2.5 million, or 2% during the six month period ended June 30, 2002 to $124.1 million from $121.6 million for the six months ended June 30, 2001.
Geographically, the




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increase in revenues from license fees for the six month period ended June 30, 2002 was attributable to growth in the Americas partially offset by declines in revenues from license fees in Europe
and the rest of the world for the first half of 2002 as compared to the same period in 2001. We expect IT spending within Europe to remain weak at least through the quarter ending September 30, 2002, which may have a negative impact on our revenue
growth during that quarter.





Revenues from the sale of our analytic applications increased 128% to $4.5 million for the quarter ended
June 30, 2002, from $2.0 million for the quarter ended June 30, 2001 and 143% to $8.0 million for the six months ended June 30, 2002, from $3.3 million for the same period in the prior year.





Services.    Revenues from services consist of maintenance, consulting, and training revenues. Revenues from services increased $9.8 million, or 24% during the
three month period ended June 30, 2002 to $50.3 million from $40.5 million for the three month period ended June 30, 2001. Revenues from services increased $16.5 million, or 21% during the six month period ended June 30, 2002 to $94.6 million from
$78.2 million for the six month period ended June 30, 2001. The increase in revenues from services was primarily due to increases in maintenance revenues resulting from the expansion of our installed customer base and concentration on the renewal of
existing support contracts partially offset by declines in consulting and education revenues in Europe. As the number of our competitors and the market penetration by our competitors increases, or if regional economic environments worsen, the growth
rate of our services revenues may not be as high as the growth rate achieved in the past.





Cost of License
Fees.    Cost of license fees consists primarily of materials, packaging, freight and third-party royalties. Cost of license fees remained constant at approximately 1% of license fee revenues for the three and six month
periods ending June 30, 2002 and 2001.





Cost of Services.    Cost of services, which consists of the cost of
providing consulting, training and maintenance, increased $1.9 million, or 12% during the three month period ended June 30, 2002 to $17.6 million from $15.7 million for three month period ended June 30, 2001. Cost of services increased $3.5 million,
or 11% during the six month period ended June 30, 2002 to $34.7 million from $31.2 million for six month period ended June 30, 2001. Cost of services as a percentage of service revenue was 35% and 37% for the three and six month periods ended June
30, 2002 and 39% and 40% for the three and six month periods ended June 30, 2001, respectively. The decrease as a percentage of service revenues was primarily due to improved productivity in providing maintenance support. This was partially offset
by higher costs of providing consulting and education services relative to the percentage of revenues derived from these services as costs increased while revenues remained relatively flat compared to the same period last year. The increase in
expenses in absolute dollars resulted primarily from an increase in average salaries due to changes in the management structure of our customer support group in order to better support our customers by tier. To a lesser extent, year to date costs
were higher compared to the same six month period in 2001 due to increased facilities costs related to the relocation to our new facility in San Jose in April, 2001.




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##### Table of Contents




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 increased $6.2 million, or 13% to $54.7 million during the three month period ended June 30, 2002 from $48.5 million for the three month period ended June 30, 2001. Sales and
marketing expenses increased $10.4 million, or 11% to $106.8 million during the six month period ended June 30, 2002 from $96.5 million for the six month period ended June 30, 2001. Sales and marketing expenses as a percentage of total revenues were
49% for the three and six month periods ended June 30, 2002 and 48% for the three and six month periods ended June 30, 2001. The increase in sales and marketing expenses in absolute dollars and as a percentage of revenues for the three months ended
June 30, 2002 was due to other severance costs totaling $1.6 million for the involuntary separation of approximately 30 employees which were in addition to severance costs included in part of the restructuring charge (see Business
Restructuring Charge below), an increase in the average cost per employee, increased travel and entertainment expenses, and solution selling training expenses for our sales force, partially offset by a reduction in marketing expenses. Year to
date expenses were also impacted to a lesser extent by increased facilities expenses related to the relocation to our new facility in San Jose in April, 2001. Sales and marketing expenses are expected to continue to increase in absolute dollars but
may vary as a percentage of revenues in the future.





Research and Development.    Research and development
expenses consist primarily of salaries, related benefits, third party consultant fees, related facilities expenses and amortization of intangible assets allocated to employment contingencies resulting from the acquisitions of Blue Edge Software in
December 2001, Olap@Work, Inc. in April 2000 and Next Action Technology, Ltd. in October 1999. Research and development expenses increased $3.4 million, or 25% during the three month period ended June 30, 2002 to $16.9 million from $13.6 million for
the three month period ended June 30, 2001. Research and development expenses increased $5.9 million, or 22% during the six month period ended June 30, 2002 to $32.4 million from $26.6 million for the six month period ended June 30, 2001. Research
and development expenses as a percentage of total revenues were 15% and 13% for the three and six month periods ended June 30, 2002 and 2001 respectively. The increase in research and development expenses both as a percentage of total revenues and
in absolute dollars is due to an increase in the average number of employees for the three months and six months ended June 30, 2002 as part of our ongoing operations and our continued expansion of the analytical applications product line offset
partially by lower amortization of intangible assets. As of June 30, 2002 and 2001, we have 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 percentage 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 allowances for doubtful accounts. General and
administrative expenses increased $0.1 million, or 2% during the three month period ended June 30, 2002 to $7.2 million from $7.1 million for the three month period ended June 30, 2001. General and administrative expenses increased $0.5 million, or
4% during the six month period ended June 30, 2002 to $13.3 million from $12.8 million for the six month period ended June 30, 2001. General and administrative expenses were 7% of total revenues for the three months




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ended June 30, 2002 and 2001 and 6% and 7% for the six months ended June 30, 2002 and 2001, respectively. General and administrative expenses, while relatively flat in absolute dollars for all
periods presented as compared to the same periods in the prior year had increases in salary expenses due to increased staffing to support our growth and higher legal expenses related to patent litigation, offset by reductions in allowances for
doubtful accounts resulting from better collections. General and administrative expenses are expected to continue to increase in absolute dollars but may vary as a percentage of revenues in the future.





Business Restructuring Charge





During the
quarter ended June 30, 2002 we implemented a restructuring plan to eliminate approximately 50 positions in our European field operations in order to better align our revenues and costs structure in Europe in response to the regions overall
weak IT spending environment. Implementation of the plan resulted in restructuring charges to earnings totaling $3.8 million. The restructuring charges include $3.1 million of severance and fringe benefits and $720,000 for the net costs of
abandoning leases. Four employees had been terminated as of June 30, 2002. No severance or lease abandonment costs had been paid as of June 30, 2002.





Goodwill Amortization and Other Intangible Asset Amortization





Goodwill amortization and other intangible asset
amortization was comprised of the following (in thousands):





Three months ended June 30,

Six months ended June 30,2002

2001

2002

2001Goodwill amortization

$


$
1,115

$


$
2,247Other intangible asset amortization

$
228

$


$
560

$






The decrease in goodwill amortization was due to our adoption of FAS 142 on January 1,
2002 whereby we no longer amortize goodwill. The increase in other intangible asset amortization was from the amortization of developed technology acquired in the purchase of Blue Edge Software in December 2001. Of the purchase price, $5.1 million
was allocated to developed technology and is being amortized over the greater of ratable revenues or its five year estimated useful life.




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Interest and Other Income, Net





Interest and other income, net was comprised of the following (in thousands):





Three months ended June 30,

Six months ended June 30,2002


2001

2002


2001Net interest income

$
2,006


$
2,112

$
3,661


$
4,343Exchange (losses) gains


(556
)


472


(699
)


72Other income


7,421



365


7,921



1,378Total interest and other income, net

$
8,871


$
2,949

$
10,883


$
5,793





Interest and other income, net primarily represents net interest income, net gains and
losses resulting from foreign currency exchange rate changes, and other income net of litigation expenses from the settlement of patent infringement actions.





During May, 2002, we entered into an agreement in settlement of our patent infringement lawsuit with Cognos, Inc. and Cognos Corporation (collectively Cognos). Under the terms of the agreement, Cognos will license the rights
to our technology under patent number 5,555,403 in exchange for payments totaling $24.0 million. The license will cover both past and future use of our technology. The payments are due in installments of one $10.0 million payment due and paid during
June, 2002, which we estimate is attributable to past use of our technology, and eight quarterly payments of $1.75 million due quarterly beginning the quarter ending September 30, 2002, which we estimate is attributable to future use of our
technology. We recognized in other income $6.9 million in the quarter ended June 30, 2002 comprised of the $10 million payment net of legal fees of $3.1 million. We will recognize the remaining payments as they come due to match the timing of the
recognition with the use of the licensed technology.





During September 1999, we executed a Memorandum of Understanding with Brio Software
Inc. (Brio) in settlement of pending patent litigation. As part of the settlement, we dismissed our pending lawsuit against Brio involving our United States patent number 5,555,403 and Brio dismissed its pending lawsuit against us involving United
States patent number 5,915,257 and agreed to pay us $10.0 million payable quarterly in $1.0 million payments beginning September 30, 1999. We received and recognized in other income $500,000 and $1.0 million from Brio under the settlement during the
three and six month periods ended June 30, 2002 respectively compared to $1.0 million and $2.0 million received and recognized during the three and six month periods ended June 30, 2001. As at June 30, 2002, $500,000 remained due under the
settlement and will be recognized when received.





Net interest income decreased during the three and six month periods ended June 30,
2002 due to a decrease in average interest rates compared to the same periods in 2001 partially offset by an increase in invested cash at June 30, 2002 as compared to June 30, 2001. Cash and cash equivalents totaled $324.8 million at June 30, 2002.





Income Taxes





Our
effective tax rate was 38% for the three and six months ended June 30, 2002 and 39% for the three and six months ended June 30, 2001. The lower effective rate for the three and




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six months ended June 30, 2002 was primarily due to a reduction in the French statutory rate. We provide 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, 2002, we had cash and cash equivalents of $324.8 million, an increase of $84.4 million from December 31, 2001. Cash generated from operations totaled $51.2 million for the six month
period ended June 30, 2002, as compared to $34.8 million for the same period in 2001. Net cash provided by operating activities for the six months ended June 30, 2002 was generated primarily by an increase in net income plus non cash charges for
depreciation and amortization, a decrease in accounts receivable and an increase in deferred revenue and other current liabilities, partially offset by decreases in accounts payable and accrued payroll and related expenses.





Investing activities for the six month period ended June 30, 2002 consisted of the purchase of $6.5 million of property and equipment. Financing activities for
the three and six month periods ended June 30, 2002 consisted of the issuance of ordinary shares for $12.7 million under employee stock plans, the release of $833,000 of restricted cash and the payment of $833,000 from escrow accounts due under
notes payable.





Foreign exchange rate changes contributed $27.0 million in cash and cash equivalents due to the strengthening of the Euro
and other currencies against the US dollar. A significant portion of our cash and cash equivalents is denominated in Euros, and to a lesser extent US dollars, the British pound sterling, the Japanese yen and other foreign currencies.





Our principal source of liquidity is our operating cash flow. There is a risk that a decrease in demand for our products could reduce the availability
of operating cash flow; however, we believe that cash from operations together with existing cash and cash equivalents will be sufficient to meet our cash requirements for at least the next twelve months.





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 to one market and if sales of our products in this market 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 business intelligence software
market, 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 business intelligence software market. If we are not successful in selling our
products in our targeted market due to competitive pressures, technological advances by others or otherwise, our operating results would suffer. The United States and Europe are two of the largest geographic markets for our products and services. A
softening of demand for business intelligence software caused by a weak




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economy in Europe has resulted in decreased revenues and has resulted in lower revenue growth rates and operating margins during the quarter ended June 30, 2002, and we expect this trend will
continue through at least the quarter ending September 30, 2002.





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 and our stock price 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 closing a large order may result in the realization of license fees being
postponed from one quarter to the next; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | 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




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have often been unrelated to the operating performance of these companies. These market fluctuations have affected our stock price and could affect our stock price in the future.





Our software may have defects and errors, which may lead to a loss of revenue or product liability claims.





Our products and platforms are internally complex and occasionally contain defects or errors, especially when first introduced or when new versions or
enhancements are released. Despite extensive testing, we may not detect errors in our new products, platforms or product enhancements 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.





We may have difficulties providing and managing the increased technical stability,
performance and support requirements of an evolving market, which could cause a decline in our revenues and an increase in our expenses.





We are increasingly focusing our selling efforts on larger, enterprise-wide deployments of our products. We may have difficulty providing and managing these increased technical requirements. These potential difficulties could cause
us to lose existing customers, limit us to smaller deployments and cause us to expand our research and development and technical support costs which could cause a decline in our revenues and an increase in our expenses.





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.





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.




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To protect our proprietary rights, we may become involved in litigation, which could be costly and
negatively impact our operating results. For example, we successfully settled patent infringement claims against Brio in 1999, and Cognos in May of 2002, and are currently involved with a patent infringement claim against MicroStrategy 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.





On October 30, 2001, an action for alleged patent infringement was filed in the United States District Court for the Eastern
District of Virginia against us and our subsidiary, Business Objects Americas Inc., by MicroStrategy. The complaint alleges that our software products, BUSINESS OBJECTS BROADCAST
AGENT TM , BUSINESS OBJECTS
INFOVIEW TM and BUSINESS OBJECTS
BROADCAST AGENT PUBLISHER TM ,
infringe MicroStrategys United States Patent No. 6,279,033 entitled System and Method for Asynchronous Control of Report Generation Using a Network Interface and United States Patent No. 6,260,050 entitled System and Method
of Adapting Automatic Output of Service Related OLAP Reports to Disparate Output Devices. MicroStrategy amended its complaint to add claims for violations of the Computer Fraud and Abuse Act, misappropriation of trade secrets, tortious
interference with contractual relations with employees and conspiracy in violation of the Virginia Code. The complaint seeks relief in the form of an injunction against us and monetary damages. Our current assessment is that our products do not
infringe and that we have not committed any of the alleged wrongful acts. If successful, a claim of infringement against us and our inability to license the infringed or similar technology on commercially reasonable terms could have a material
adverse effect on our business, operating results, and financial condition. On April 5, 2002 and March 27, 2002 the United States Patent and Trademark Office (USPTO) granted our requests for reexamination of MicroStrategys United
States Patent No. 6,279,033 and United States Patent No. 6,260,050, respectively. On June 13, 2002, the Court of Virginia granted our motion to stay the patent claims pending the reexamination of MicroStrategys two patents by the USPTO. The
trial on the non-patent related claims is currently expected to proceed on October 8, 2002. Also, in July 1999, Brio filed an action alleging that we infringed upon one of its patents by selling our reporting functionality. Brio dismissed this
lawsuit as part of a settlement announced in September 1999. In addition, on July 16, 2002 Informatica Corporation filed a patent infringement action in U.S. District Court in Northern California against Acta Technology, Inc. (Acta). If
the proposed acquisition of Acta is consummated, Acta will become a wholly-owned subsidiary of Business Objects and Acta will continue to be a party in this suit. The complaint alleges that certain Acta products infringe on three of
Informaticas patents. Informatica has asserted that Actas infringement of the Informatica patents was willful and deliberate, entitling Informatica to an award of treble damages, costs and reasonable attorneys fees. Informatica is
seeking an injunction against future sales of the infringing Acta products, as well as damages for past sales of the infringing products. 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:




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| |  |  | 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 expand 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We depend on strategic relationships and business alliances for continued
growth of our business





Our development, marketing, and distribution strategies rely increasingly on our ability to form
long-term strategic relationships with major vendors, many of who are substantially larger than Business Objects. These business relationships often consist of joint marketing programs or partnerships with original end manufacturer or value added
resellers. Although certain aspects of some of these relationships are contractual in nature, many important aspects of these relationships depend on the continued cooperation of each party with us. Divergence in strategy, change in focus,
competitive product offerings or contract defaults by any of these companies may interfere with our ability to develop, market, sell, or support our products, which in turn could harm our business. In addition, one or more of these companies may use
the information they gain from their relationship with us to develop or market competing products.





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.




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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 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 their economies, 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. As of June 30, 2002, we were not engaged in a foreign currency hedging program to cover our currency transaction or translation 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, enterprise resource planning software systems and customer relationship management 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




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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;
| | - |  | -----------------------------




| |  |  | 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.





Risks related to our pending acquisition of Acta Technology, Inc.





If the proposed acquisition of Acta Technology, Inc. is consummated, integrating business operations may be difficult and may have a negative impact on the operating results and
financial condition of the combined businesses, including employee morale and retention, customer and supplier retention, marketing operations, and all pending patent litigation.





If we complete the proposed merger, we will integrate two companies that have previously operated independently. The successful integration of Acta Technology, Inc. (Acta) with
Business Objects will require, among other things, integration of Actas and our products, sales and marketing operations, information, software systems, the coordination of employee retention, hiring and training operations and coordination of
future research and development efforts. Integrating Actas operations and personnel with ours will be a complex process. We may not be able to integrate the operations of Acta with our operations rapidly or without encountering difficulties,
which, if they occur, may cause us to fail to realize the benefits we currently expect to result from integration and may cause material adverse short- and long-term effects on our operating results and financial condition. Among the difficulties
may be negative employee morale, our inability to retain key Acta employees or personnel, loss of key customers and disruption of manufacturing and marketing operations.





On July 16, 2002 Informatica Corporation filed a patent infringement action in U.S. District Court in Northern California against Acta. If the proposed acquisition of Acta is consummated, Acta will
become a wholly-owned subsidiary of Business Objects and Acta will continue to be a party in this suit. The complaint alleges that certain Acta products infringe on three of Informaticas patents. Informatica has asserted that Actas
infringement of the Informatica patents was willful and deliberate, entitling Informatica to an award of treble damages, costs and reasonable attorneys fees. Informatica is seeking an injunction against future sales of the infringing products,
as well as damages for past sales of the infringing products. See the Risk Factor Third parties could assert that our technology infringes their proprietary rights for the potential effects on our business operations.





We may be required to recognize additional non-cash charges against earnings if our management were to determine in the future that the
remaining balance of goodwill was impaired.




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Based upon a preliminary independent valuation of Actas intangible assets, we expect that a significant portion of the purchase price will
be allocated to goodwill. Goodwill recorded as a result of this transaction will not be amortized in accordance with FAS 142 but will be tested for impairment annually. If our management were to determine in the future that the goodwill was
impaired, we would be required to recognize a non-cash charge to write down the value of this goodwill and which would reduce our earnings.





We may be required in the future to expense stock options against earnings, which would adversely affect our reported earning.





The International Accounting Standards Board (IASB) has recently announced plans to require companies using IASB standards to recognize the fair value of employee stock options granted as an expense against reported
earnings, Since we are listed on the Premier Marche Euronext Paris, we may be required to adopt IASB standards in the future. We do not currently expense stock options against earnings, but disclose pro forma information regarding net income and net
income per share in the footnotes to our consolidated financial statements as included in our Annual Report or Form 10-K as required by U.S. Financial Accounting Standards Board (FASB) under Statement of Financial Accounting Standard 123. If we are
required to expense stock options against earnings under FASB standards or if other similar standards are adopted by the FASB, our reported earnings in future periods would periods would be adversely affected, perhaps materially.




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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, 2002, all of our
cash and cash equivalents 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. A hypothetical 10% move
in interest rates would have an insignificant effect on our financial position, results of operations and cash flows. We do not have any investments in equity or debt securities traded in the public markets, nor do we currently use derivative
financial instruments. 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 Euro, British pounds sterling, and the
Japanese yen. 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. We cannot
predict the effect of exchange rate fluctuations upon our future operating results. As of June 30, 2002, we were not engaged in a foreign currency hedging program to cover our currency transaction or translation exposure.




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Part
 II.    OTHER INFORMATION





Item 1.    Legal Proceedings





During May, 2002, we entered into an agreement in settlement of our patent infringement lawsuit with Cognos, Inc. and Cognos
Corporation (collectively Cognos). Under the terms of the agreement, Cognos will license the rights to our technology under United States patent number 5,555,403 in exchange for payments totaling $24.0 million. The license will cover both past and
future use of our technology. A $10.0 million first installment, which we estimate was attributable to past use of our technology, was received during June, 2002, and is included, net of $3.1 million of related legal expense, in interest and other
income, net on the Consolidated Statements of Income. The remaining balance, which we estimate is attributable to future use of our technology, is due in eight quarterly installments of $1.75 million commencing on July 1, 2002. We will recognize
these payments as they come due to match the timing of the recognition with the use of the licensed technology.





On October 30, 2001, an
action for alleged patent infringement was filed in the United States District Court for the Eastern District of Virginia against us and our subsidiary, Business Objects Americas Inc., by MicroStrategy Incorporated (MicroStrategy). The complaint
alleges that our software products, BUSINESS OBJECTS BROADCAST AGENT TM , BUSINESS OBJECTS INFOVIEW TM and BUSINESS OBJECTS BROADCAST AGENT PUBLISHER TM , infringe MicroStrategys United States Patent No. 6,279,033 entitled System and Method for Asynchronous
Control of Report Generation Using a Network Interface and United States Patent No. 6,260,050 entitled System and Method of Adapting Automatic Output of Service Related OLAP Reports to Disparate Output Devices. On February 21,
2002, MicroStrategy amended its complaint to add claims for violations of the Computer Fraud and Abuse Act, misappropriation of trade secrets, tortious interference with contractual relations with employees and conspiracy in violation of the
Virginia Code. The complaint seeks relief in the form of an injunction against us and monetary damages. Our current assessment is that our products do not infringe and that we have not committed any of the alleged wrongful acts. If successful, a
claim of infringement against us and our inability to license the infringed or similar technology on commercially reasonable terms could have a material adverse effect on our business, operating results, and financial condition. On April 5, 2002 and
March 27, 2002 the United States Patent and Trademark Office (USPTO) granted our requests for reexamination of MicroStrategys United States Patent No. 6,279,033 and United States Patent No. 6,260,050, respectively. On June 13,
2002, the Court of Virginia granted our motion to stay the patent claims pending the reexamination of MicroStrategys two patents by the USPTO. The trial on the non-patent related claims is currently expected to proceed on October 8, 2002.





On October 17, 2001, we filed a lawsuit in the United States District Court for the Northern District of California against
MicroStrategy for alleged patent infringement. The lawsuit alleges that MicroStrategy infringes on our United States Patent No. 5,555,403 and 6,247,008 by making, using, offering to sell and selling its product currently known as MicroStrategy
Version 7.0. Our complaint requests that the defendant be enjoined from further infringing the patent and seeks an as yet undetermined amount of damages.




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Item 4.    Submission of Matters to a Vote of Security Holders





a) The Annual Ordinary and Extraordinary General Meeting of Shareholders was held on June 5, 2002.





b) Bernard Bourigeaud was elected Director of the Company.





Other Directors whose term of office continued after the meeting were:





Bernard Liautaud


Bernard Charlès


Albert Eisenstat


Arnold
Silverman


John Olsen





c)
The following proposals were adopted at the Annual Meeting of Shareholders by the margins indicated:





|1. |  | To approve the unconsolidated financial statements of Business Objects S.A for the year ended December 31, 2001.
|-- |  | ----------------------------------------------------------------------------------------------------------------




For

30,057,626Against

237,023





|2. |  | To approve the consolidated financial statements of Business Objects S.A for the year ended December 31, 2001.
|-- |  | --------------------------------------------------------------------------------------------------------------




For

30,156,315Against

138,289





|3. |  | To allocate the profits of the year ended December 31, 2001.
|-- |  | ------------------------------------------------------------




For

30,256,952Against

34,816





|4. |  | To ratify the appointment of Mr. Bernard Bourigeaud as a Director of the Company.
|-- |  | ---------------------------------------------------------------------------------




For

29,642,879Against

652,498




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|5. |  | To elect Mr. Bernard Bourigeaud as a Director of the Company.
|-- |  | -------------------------------------------------------------




For

29,747,893Against

547,353





|6. |  | To authorize the Board of Directors to repurchase shares of the Company.
|-- |  | ------------------------------------------------------------------------




For

30,077,922Against

214,521





|7. |  | To issue 15,000 warrants to Mr. Bernard Bourigeaud.
|-- |  | ---------------------------------------------------




For

28,551,039Against

1,740,769





|8. |  | To reserve 260,000 shares for issuance under the Companys French Employee Savings Plan.
|-- |  | ----------------------------------------------------------------------------------------




For

29,283,469Against

1,008,929





|9. |  | To re-affirm the price setting conditions of shares reserved for issuance under the 1995 International Employee Stock Purchase Plan.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------




For

30,242,436Against

49,270





|10. |  | To reserve 240,000 shares for issuance under the 1995 International Employee Stock Purchase Plan.
|--- |  | -------------------------------------------------------------------------------------------------




For

29,662,533Against

629,833





|11. |  | To authorize capital reductions by cancellation of treasury shares.
|--- |  | -------------------------------------------------------------------




For

30,280,958Against

14,329





|12. |  | To delegate to the Board of Directors powers to issue securities of the Company giving immediate or deferred access to the share capital of the Company with
preferential subscription rights.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

30,273,172Against

21,114





|13. |  | To delegate to the Board of Directors powers to issue securities of the Company giving immediate or deferred access to the share capital of the Company without
preferential subscription rights.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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For

28,768,403Against

1,492,193





|14. |  | To authorize the Board of Directors to increase the share capital of the Company by incorporation of premiums, reserves or profits.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------




For

29,903,811Against

391,733





|15. |  | To confirm the waiver of the shareholders preferential subscription rights to the shares underlying share warrants issued to certain Directors at the
shareholders meeting of June 12, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

26,111,740Against

4,180,377





|16. |  | To amend article 12 of the Companys articles of association relating to the powers of the Board of Directors in accordance with the French Commercial
Code, as amended.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

30,273,190Against

21,643





|17. |  | To amend article 13 of the Companys articles of association relating to the powers of the Chairman of the Board, in accordance with the French Commercial
Code, as amended.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

30,288,128Against

6,893





|18. |  | To amend article 14 of the Companys articles of association to allow for the separation of the offices of the Chairman of the Board and the Chief
Executive Officer, in accordance with the French Commercial Code, as amended.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

30,281,477Against

12,437





|19. |  | To amend article 15 of the Companys articles of association to broaden its scope relating to the agreements subject to prior authorization or
disclosure, in accordance with the French Commercial Code, as amended.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

30,293,775Against

1,548





|20. |  | To amend article 11.2 of the Companys articles of association in order to allow Directors representing a third of the members of the Board or the Chief
Executive Officer to request the Chairman to call a Board of Directors meeting on a specific agenda, in accordance with the French Commercial Code, as amended.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

30,288,594Against

6,582




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|21. |  | To amend article 7.2 of the Companys articles of association in order to apply certain notification obligations to the intermediaries holding shares on
behalf of shareholders which are not resident of France, in accordance with the French Commercial Code, as amended.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

28,281,235Against

2,015,041





|22. |  | To amend the form but not the content of articles 1, 7, 8, 11, 16, 18 and 21 of the Companys articles of association in order to reflect the terminology
of the law n.2001-420 of May 15, 2001 and the renumbering of law n.66-537 of July 24, 1966, due to the consolidation of this law into the French Commercial Code.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For

30,288,507Against

6,577





For each of the above, abstentions are included as votes against, consistent with French
law.





|d) |  | Not applicable.
|-- |  | ---------------




Item
6.    Exhibits and Current Reports on Form 8-K





| | a) |  | Exhibit 3(ii) By Laws
| | -- |  | ---------------------

Exhibit
99.1 Certification of CEO and CFO





| | 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 14, 2002



By:

/s/    BERNARD LIAUTAUDBernard LiautaudChairman of the Board andChief Executive Officer


Date: August 14, 2002



By:

/s/    CLIFTON T. WEATHERFORDClifton T. WeatherfordChief Financial Officer andExecutive Vice President, Finance and
Administration




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