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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 or [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission File Number 0-24720 Business Objects S.A.  Republic of France
(State or other jurisdiction of
incorporation or organization)
    
    98-0355777
(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 [    ]Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ]As of July 31, 2004, the number of issued ordinary shares was 95,398,825,
0.10 nominal value, (including 27,101,871 American depository shares, each
corresponding to one ordinary share, 2,067,675 treasury shares and 4,500,514
shares held by Business Objects Option LLC). As of July 31, 2004, we had
issued and outstanding 90,898,311 ordinary shares of 0.10 nominal value.




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Business Objects S.A.
Index PagePART 1.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income for the three and six months ended June  30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    58Item 4.
    
    Controls and Procedures
    
    
    59PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    60Item 2.
    
    Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    60Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    61Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    66SIGNATURES
    
    
    
    
    67EXHIBIT 3.1EXHIBIT 10.51EXHIBIT 10.51.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements (Unaudited) BUSINESS OBJECTS S.A. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 June 30,
    
    December 31,2004
    
    2003 (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    202,617
    
    
    $
    235,380Restricted cash
    
    
    49,280
    
    
    
    19,243Accounts receivable, net
    
    
    200,155
    
    
    
    187,885Deferred tax assets
    
    
    5,351
    
    
    
    261Prepaid and other current assets
    
    
    42,697
    
    
    
    33,797Total current assets
    
    
    500,100
    
    
    
    476,566Goodwill
    
    
    1,061,201
    
    
    
    1,051,111Other intangible assets, net
    
    
    131,193
    
    
    
    149,143Property and equipment, net
    
    
    61,105
    
    
    
    61,187Deposits and other assets
    
    
    32,853
    
    
    
    19,092Long-term deferred tax assets
    
    
    26,830
    
    
    
    17,963Total assets
    
    $
    1,813,282
    
    
    $
    1,775,062LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    38,181
    
    
    $
    47,790Accrued payroll and related expenses
    
    
    64,643
    
    
    
    84,686Income taxes payable
    
    
    90,554
    
    
    
    75,727Deferred revenues
    
    
    176,221
    
    
    
    135,977Restructuring liability
    
    
    8,958
    
    
    
    21,331Other current liabilities
    
    
    57,084
    
    
    
    51,814Notes payable
    
    
    6,636
    
    
    
    9,728Total current liabilities
    
    
    442,277
    
    
    
    427,053Long-term accrued rent
    
    
    5,298
    
    
    
    4,950Total liabilities
    
    
    447,575
    
    
    
    432,003Commitments and contingenciesShareholders equity:Ordinary
shares, 0.10 nominal value ($0.12 U.S.
as of June 30, 2004 and $0.13 U.S. as of December
31, 2003): authorized 123,266 and 114,809; issued
95,381 and 94,903; issued and outstanding 90,857
and 89,166; respectively at June 30, 2004 and
December 31, 2003
    
    
    10,136
    
    
    
    9,927Additional paid-in capital
    
    
    1,142,620
    
    
    
    1,121,910Treasury and Business Objects Option LLC shares,
6,591 shares at June 30, 2004 and 6,805 shares at
December 31, 2003
    
    
    (34,065
    )
    
    
    (13,104
    )Retained earnings
    
    
    217,345
    
    
    
    202,597Unearned compensation
    
    
    (12,222
    )
    
    
    (18,353
    )Accumulated other comprehensive income
    
    
    41,893
    
    
    
    40,082Total shareholders equity
    
    
    1,365,707
    
    
    
    1,343,059Total liabilities and shareholders equity
    
    $
    1,813,282
    
    
    $
    1,775,062
 See accompanying notes to Condensed Consolidated Financial Statements (1) The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date. 3




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BUSINESS OBJECTS S.A. 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per ordinary share and ADS data)
 Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)Revenues:Net license fees
    
    $
    117,182
    
    
    $
    62,695
    
    
    $
    231,675
    
    
    $
    118,938Services
    
    
    105,056
    
    
    
    66,292
    
    
    
    207,798
    
    
    
    128,573Total revenues
    
    
    222,238
    
    
    
    128,987
    
    
    
    439,473
    
    
    
    247,511Cost of revenues:Net license fees
    
    
    5,971
    
    
    
    863
    
    
    
    13,653
    
    
    
    1,757Services
    
    
    41,444
    
    
    
    20,701
    
    
    
    83,074
    
    
    
    40,695Total cost of revenues
    
    
    47,415
    
    
    
    21,564
    
    
    
    96,727
    
    
    
    42,452Gross profit
    
    
    174,823
    
    
    
    107,423
    
    
    
    342,746
    
    
    
    205,059Operating expenses:Sales and marketing
    
    
    99,271
    
    
    
    58,297
    
    
    
    196,452
    
    
    
    114,730Research and development
    
    
    36,541
    
    
    
    23,540
    
    
    
    76,244
    
    
    
    46,119General and administrative
    
    
    19,234
    
    
    
    10,602
    
    
    
    40,946
    
    
    
    18,760Restructuring costs
    
    
    1,492
    
    
    
    
    
    
    
    1,492
    
    
    
    Total operating expenses
    
    
    156,538
    
    
    
    92,439
    
    
    
    315,134
    
    
    
    179,609Income from operations
    
    
    18,285
    
    
    
    14,984
    
    
    
    27,612
    
    
    
    25,450Interest and other income (expense), net
    
    
    261
    
    
    
    3,608
    
    
    
    (3,807
    )
    
    
    7,356Income before provision for income taxes
    
    
    18,546
    
    
    
    18,592
    
    
    
    23,805
    
    
    
    32,806Provision for income taxes
    
    
    (7,058
    )
    
    
    (7,065
    )
    
    
    (9,057
    )
    
    
    (12,466
    )Net income
    
    $
    11,488
    
    
    $
    11,527
    
    
    $
    14,748
    
    
    $
    20,340Basic net income per ordinary share and ADS
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.17
    
    
    $
    0.32Diluted net income per ordinary share and ADS
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.32Ordinary shares and ADSs used in computing
basic net income per ordinary share and ADS
    
    
    89,095
    
    
    
    63,052
    

    
    
    88,864
    
    
    
    62,765Ordinary shares and ADSs and equivalents
used in computing diluted net income per
ordinary share and ADS
    
    
    91,061
    
    
    
    64,458
    
    
    
    91,730
    
    
    
    64,075
 See accompanying notes to Condensed Consolidated Financial Statements 4




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BUSINESS OBJECTS S.A. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Six Months endedJune 30,2004
    
    2003(unaudited)Operating activities:Net income
    
    $
    14,748
    
    
    $
    20,340Adjustment to reconcile net income to net cash provided by (used
in) operating activities:Depreciation and amortization of property and equipment
    
    
    16,113
    
    
    
    8,048Amortization of other intangible assets
    
    
    15,435
    
    
    
    1,405Stock-based compensation expense
    
    
    3,787
    
    
    
    Deferred income taxes
    
    
    (14,795
    )
    
    
    1,223Tax benefits from employee stock plans
    
    
    2,517
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (14,849
    )
    
    
    21,651Prepaid and other current assets
    
    
    (9,516
    )
    
    
    (3,321
    )Deposits and other assets
    
    
    (13,717
    )
    
    
    Accounts payable
    
    
    (8,808
    )
    
    
    (2,874
    )Accrued payroll and related expenses
    
    
    (21,503
    )
    
    
    (4,472
    )Income taxes payable
    
    
    6,501
    
    
    
    (2,454
    )Deferred revenues
    
    
    41,576
    
    
    
    23,279Restructuring liability and other current liabilities
    
    
    (4,991
    )
    
    
    (6,193
    )Net cash provided by operating activities
    
    
    12,498
    
    
    
    56,632Investing activities:Purchases of property and equipment, net
    
    
    (16,272
    )
    
    
    (4,673
    )Purchases of short-term investments, net
    
    
    
    
    
    
    (25,321
    )Net cash used in investing activities
    
    
    (16,272
    )
    
    
    (29,994
    )Financing activities:Issuance of shares
    
    
    20,746
    
    
    
    6,299Purchase of treasury shares
    
    
    (20,961
    )
    
    
    Transfer of cash to restricted cash accounts
    
    
    (33,300
    )
    
    
    Transfer of cash from restricted cash accounts
    
    
    3,263
    
    
    
    793Payments on notes and escrow payable
    
    
    (3,092
    )
    
    
    (793
    )Net cash provided by (used in) financing activities
    
    
    (33,344
    )
    
    
    6,299Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    4,355
    
    
    
    19,976Net increase (decrease) in cash and cash equivalents
    
    
    (32,763
    )
    
    
    52,913Cash and cash equivalents, beginning of period
    
    
    235,380
    
    
    
    233,941Cash and cash equivalents, end of period
    
    $
    202,617
    
    
    $
    286,854
 See accompanying notes to Condensed Consolidated Financial Statements 5




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Business Objects S.A. 
 Notes to Condensed Consolidated Financial Statements
June 30, 2004
  1.
    
    Basis of Presentation and Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements of
Business Objects S.A. (the Company or Business Objects) have been prepared
by the Company in accordance with United States (U.S.) generally accepted
accounting principles (GAAP) for interim financial information and in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with U.S. GAAP have been
condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). These unaudited interim financial statements
should be read in conjunction with the annual audited consolidated financial
statements and related notes of the Company in its Annual Report on Form 10-K
for the year ended December 31, 2003 as filed with the SEC on March 12, 2004,
as amended on Form 10-K/A as filed with the SEC on April 29, 2004. The consolidated financial statements reflect, in the opinion of the
Company, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation of the consolidated financial position,
results of operations, and cash flows. All significant intercompany accounts
and transactions have been eliminated. Operating results for the three and six
months ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004 or future operating
periods. All information is stated in U.S. dollars unless otherwise noted. Certain comparative period figures have been reclassified to conform to
the current basis of presentation. Such reclassifications had no effect on net
income as previously reported. Use of Estimates The preparation of the consolidated financial statements in conformity
with U.S. GAAP requires the Company to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Estimates are used for, but not limited to, revenue recognition, business
combinations, restructuring accruals, impairment of long-lived assets,
contingencies and litigation, allowances for doubtful accounts and income and
other taxes. Actual results could differ from those estimates. Revenue Recognition The Company enters 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, the Company determines 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, the Company uses the residual method, under which revenues are
allocated to the undelivered elements based on vendor specific objective
evidence of fair value of such undelivered elements and the residual amount of
revenues are allocated to the delivered elements. For those contracts that consist solely of license and maintenance the
Company recognizes net license revenues based upon the residual method after
all licensed software product has been delivered as 6




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prescribed by Statement of Position 98-9, Modification of SOP No. 97-2
with Respect to Certain Transactions. The Company recognizes maintenance
revenues over the term of the maintenance contract. The maintenance rates for
both license agreements with and without stated renewal rates are based upon
the Companys price list. Vendor specific objective evidence of the fair value
of maintenance for license agreements that do not include stated renewal rates
is determined by reference to the price paid by the Companys customers when
maintenance is sold separately (that is, the renewal rate). Past history has
shown that the rate the Company charges for maintenance on license agreements
with a stated renewal rate is similar to the rate the Company charges for
maintenance on license agreements without a stated renewal rate. Services can consist of maintenance, training and/or consulting services.
In all cases, the Company assesses 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 net license
and service revenues under the arrangement are recognized under the percentage
of completion method of contract accounting, based on input measures of hours.
For those arrangements for which the Company has concluded that the service
element is not essential to the other elements of the arrangement the Company
determines whether the services are available from other vendors, do not
involve a significant degree of risk or unique acceptance criteria and whether
the Company has sufficient experience in providing the service to be able to
separately account for the service. When the service qualifies for separate
accounting, the Company uses 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. Revenues allocable to services are recognized as the services
are performed. Vendor-specific objective evidence of fair value of consulting
services is based upon average daily rates. When the Company enters into
contracts to provide services only, revenues are recognized on a time and
material basis. For sales to resellers, value added resellers and system integrators,
(partners), there is no right of return or price protection. The Company does
not accept orders from these partners when the Company is aware that the
partner does not have a purchase order from an end-user. For sales to
distributors that have a right of return, revenues are recognized as the
products are sold to the distributor net of reserves of an amount equal to the
Companys estimate of all products subject to rights of return to approximate
net sell-through. Some of the factors that are considered in determining this
estimate include historical experience of returns received and level of
inventory in the distribution channels. The reserve reduces the revenues and
the related receivables. For sales to original equipment manufacturers
(OEMs), revenues are recognized when the OEM reports sales that have occurred
to an end user customer, provided that collection is probable. Some OEM
arrangements include the payment of an upfront arrangement fee which is
deferred and recognized either ratably over the contractual period or when the
OEM reports sales that have occurred to an end user customer, in accordance
with the contractual terms. Deferred revenues represent amounts under license and service arrangements
for which the earnings process has not been completed. These amounts relate
primarily to customer support services with future deliverables and
arrangements where specified customer acceptance has not yet occurred. Other Current Liabilities Other current liabilities include accruals for sales, use and value added
taxes, accrued rent, accrued professional fees, deferred compensation under the
Companys deferred compensation plan, payroll deductions from international
employee stock purchase plan participants, current deferred tax liabilities and
other accruals, none of which individually account for more than five percent
of total current liabilities. 7




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Derivative Financial Instruments The Company has entered into forward contracts to hedge certain forecasted
Canadian dollar expenses against U.S. and Canadian currency fluctuations. The
purchase of these forward contracts is to protect the Company from risk that
the dollar cash flows resulting from Canadian dollar (Cdn) expenses will be
adversely affected by changes in the exchange rates. As of June 30, 2004 and
December 31, 2003, respectively, the Company held Canadian dollar foreign
exchange forward contracts to purchase Cdn $70.1 million and Cdn $40.3 million
with U.S. dollars at a future date. The forward contracts held at June 30,
2004 have monthly maturities from July 2, 2004 to December 13, 2004. These
forward contracts do not qualify for hedge accounting; therefore, the change in
the fair value of the forward contracts at each period end is reflected in
other income (expense) and partially offsets the foreign exchange variation in
the corresponding Cdn dollar operating expense during the same period. At June
30, 2004 and December 31, 2003, forward contract assets of $1.1 million and
$2.2 million, respectively, were recorded in other current assets on the
balance sheet. During the six months ended June 30, 2004, the Company entered into
Euro-denominated foreign exchange forward contracts to purchase U.S. dollars,
Canadian dollars and British pounds at a future date to enable its Irish
subsidiary to settle intercompany loan obligations in those currencies. The
forward contracts held at June 30, 2004 have maturity dates that coincide with
the payment of intercompany loan obligations. At June 30, 2004, the Company
held forward contracts to purchase U.S. $151.0 million, Cdn $9.9 million and
£25.3 million against the euro to settle obligations under intercompany loans.
These forward contracts do not qualify for hedge accounting. At June 30, 2004,
a forward contract liability of $3.9 million was recorded in other current
liabilities on the balance sheet. Accounting for Stock-based Compensation The Company issues stock options or share warrants to its employees and
outside directors and provides employees the right to purchase its stock
pursuant to shareholder approved stock option and employee stock purchase
programs. The Company accounts for its stock-based compensation plans under the
intrinsic value method of accounting as defined by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25) and
related interpretations. The following table provides pro forma disclosures of the effect on net
income and net income per ordinary share and American depository share (ADS)
as if the fair-value based method had been applied in measuring compensation
expense. The fair-value based method is in accordance with FAS No. 123,
"Accounting for Stock-Based Compensation, (FAS 123) which was amended by FAS
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure
(FAS 148). 8




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For the Three Months
    
    For the Six Months endedended June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share amounts)Net income  as reported
    
    $
    11,488
    
    
    $
    11,527
    
    
    $
    14,748
    
    
    $
    20,340Add: Amortization of stock-based charges included
in reported net income, net of tax of $650 and
$1,439 for the three and six months ended June 30,
2004, respectively
    
    
    1,060
    
    
    
    
    
    
    
    2,348
    
    
    
    Deduct: Stock-based employee compensation expense
determined under the fair-value based method for
all awards, net of tax related benefits of $3,342
and $4,178 for the three months ended June 30,
2004 and 2003, respectively, and $6,681 and $7,282
for the six months ended June 30, 2004 and 2003,
respectively
    
    
    (5,453
    )
    
    
    (6,817
    )
    
    
    (10,900
    )
    
    
    (11,882
    )Net income  pro forma
    
    $
    7,095
    
    
    $
    4,710
    
    
    $
    6,196
    
    
    $
    8,458Net income per ordinary share and ADS  as reportedBasic
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.17
    
    
    $
    0.32Diluted
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.32Net income per ordinary share and ADS  pro formaBasic
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.13Diluted
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.13
 The stock-based compensation expense included in reported net income for
the three and six months ended June 30, 2004 represented amortization of
unearned compensation on unvested stock options that arose as a result of the
Crystal Decisions Acquisition and compensation expense on the modification of
terms of certain stock option agreements. The tax benefit for stock-based employee compensation was calculated on
the total pro forma stock-based employee compensation expense at an effective
tax rate of 38% for all periods presented. As this calculation is based on
certain assumptions about the deductibility of the expense, the timing of the
deduction and the ability to use it, the actual tax benefit could vary
materially from this estimate. If no amount of the tax benefit was available
on estimated stock-based employee compensation, pro forma basic net income per
share would have been $0.04 and $0.01 for the three months ended June 30, 2004
and 2003, respectively, and pro forma diluted net income per share would have
been $0.04 and $0.01 for the three months ended June 30, 2004 and 2003,
respectively. If no amount of the tax benefit was available on estimated
stock-based employee compensation, pro forma basic income (loss) per share
would have been $(0.01) and $0.02 for the six months ended June 30, 2004 and
2003, respectively, and pro forma diluted income (loss) per share would have
been $(0.01) and $0.02 for the six months ended June 30, 2004 and 2003,
respectively. Pro forma information regarding net income and net income per ordinary
share and American depository share (ADS) is required by FAS 123, as amended
by FAS 148, and has been determined as if the Company had accounted for its
employee stock options under the fair-value method. For purposes of the pro
forma disclosure, management estimates the fair value of stock options issued
to employees and warrants to outside directors using the Black-Scholes option
valuation model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions, are fully transferable and do not have employment or trading
restrictions. The model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Companys employee
stock options have characteristics significantly different from those of traded
options and because the changes in the subjective input assumptions can
materially affect the fair value estimate, in the Companys opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options. 9




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The pro forma effects of applying FAS 123 for the periods presented are
not likely to be representative of the pro forma effects of future periods as
stock options usually vest over a period of four years, the number of stock
options granted or warrants issued varies from period to period and the
Black-Scholes fair value of each grant depends on the assumptions at the grant
date. In addition, as the stock options and warrants are issued in euros the
conversion of the compensation costs amortized to each period fluctuates based
on the exchange rate used for the period reported. For purposes of the pro
forma disclosures, the estimated stock-based employee compensation was
amortized over the vesting periods. The weighted average assumptions used and the resulting estimates of
weighted average fair value of stock options granted under the Stock Option
Plans and warrants issued during the following periods were as follows: For the Three Months
    
    For the Three Monthsended March 31,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Expected
life of employee stock options and warrants (in years)
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00Volatility
    
    
    61
    %
    
    
    78
    %
    
    
    61
    %
    
    
    75
    %Risk-free interest rate
    
    
    2.3
    %
    
    
    2.0
    %
    
    
    3.2
    %
    
    
    1.8
    %Dividend yields
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average fair value of stock options
under employee stock option plans granted during
the period and warrants issued during the period
    
    $
    13.69
    
    
    $
    8.66
    
    
    $
    8.76
    
    
    $
    9.99
 There were no stock
options granted under the International or French Employee Stock Purchase Plans
during the three months ended June 30, 2004 or 2003. The weighted average fair
value of shares purchased under the employee stock purchase plans during the
three months ended June 30, 2004 and 2003, respectively, was $6.51 and $4.32,
respectively. Assumptions used include an expected life of 6 months,
volatility of 42% and a risk-free interest rate of 1.0% for the three months
ended March 31, 2004. For the three months ended March 31, 2003, assumptions
used in determining the fair value include an expected life of 6 months,
volatility of 71% and a risk-free interest rate of 2.0%. For pro forma
presentation purposes the resulting option expense will be amortized over the
expected life of these shares which is six months. Recent Pronouncements Share Based Payments.On March 31, 2004, the Financial Accounting
Standards Board published an Exposure Draft, Share-Based Payment, an Amendment
of FASB Statements No. 123 and 95.The proposed change in accounting would
replace the existing requirements under FAS 123 and APB 25. Under the
proposal, all forms of share-based payments to employees, including employee
stock options and employee stock purchase plans, would be treated the same as
other forms of compensation by recognizing the related cost in the statements
of income. This proposed Statement would eliminate the ability to account for
stock-based compensation transactions using APB 25 and generally would require
instead that such transactions be accounted for using a fair-value based
method. The FASB has concluded that a binomial model such as a lattice model
is preferred over the Black-Scholes valuation model in determining the fair
value of an option at grant date. The comment period for the exposure draft
ended on June 30, 2004. The Company is investigating what impact the adoption
of the exposure draft will have on its financial position and results of
operations. Disclosure Requirements Related to Pensions and Other Postretirement
Benefits.In December 2003, the FASB issued FAS No. 132 (Revised), Employers
Disclosures about Pensions and Other Postretirement Benefit  an amendment of
FASB Statements No. 87, 88, and 106(FAS 132R). A revision of the
pronouncement originally issued in 1998, FAS 132R expands employers disclosure
requirements for pension and postretirement benefits to enhance information
about plan assets, obligations, benefit payments, contributions, and net
benefit cost. The statement does not change the
measurement or recognition provisions for pensions and other
postretirement benefits. This statement was effective for fiscal
years ended after December 15, 2003, except in cases where a Company
only has a foreign plan, in which case the
statement is effective for interim periods beginning after
June 15, 2004. The Company currently only has a foreign plan. 10




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##### Table of Contents



2.
    
    Acquisition of Crystal Decisions, Inc. On December 11, 2003, Business Objects, Crystal Decisions, Inc. (Crystal
Decisions), Seagate Software (Cayman) Holdings Corporation (SSCH) and three
wholly owned subsidiaries of Business Objects merged in accordance with an
Agreement and Plan of Merger, dated as of July 18, 2003, as amended August 29,
2003 (the Merger Agreement). Pursuant to the Merger Agreement, Crystal
Decisions and SSCH merged with and into wholly owned subsidiaries of Business
Objects and ceased to exist as separate entities on December 11, 2003 (the
Crystal Decisions Acquisition). The results of Crystal Decisions operations
were included in the consolidated financial statements after that date. The
Crystal Decisions Acquisition was accounted for under the purchase method of
accounting. The total purchase price of $1.2 billion for the Crystal Decisions
Acquisition consisted of $307.6 million in cash, approximately 23.3 million
newly issued ordinary shares or ADSs, the fair value of stock options assumed
in connection with the transaction and estimated transaction costs. The
allocation of the purchase price resulted in the recording of $978.0 million of
goodwill. The purchase price under the Merger Agreement was fixed and there
was no contingent consideration. At December 31, 2003, the Company had not
identified any pre-acquisition contingencies where the related asset, liability
or impairment was probable and the amount of asset, liability or impairment
could be reasonably estimated. The purchase price allocation is preliminary. The final amount of these
costs may change within the purchase price allocation period if information
becomes known that results in a change in estimate of the transaction costs or
liabilities assumed on the date of purchase. During the six months ended June
30, 2004, there was a $10.1 million adjustment made to increase goodwill. This
increase was the result of increases in estimates of liabilities that existed
at the date of the purchase consisting mainly of a $9.0 million increase in
income taxes payable and a $1.1 million increase for the under accrual of
various liabilities and certain restructuring costs (see note 8). The Company
expects, with the exception of items related to open tax years, that the
purchase price allocation period will end prior to the end of 2004. This note should be read in conjunction with the Crystal Decisions
Acquisition note in the Annual Report on Form 10-K for December 31, 2003.  3.
    
    Goodwill and Other Intangible Assets In
accordance with FAS No. 142, Goodwill and Other Intangible Assets (FAS
142), the Company tests for impairment whenever events or changes in
circumstances indicate that the carrying amount of goodwill or other intangible
assets may not be recoverable, or at least annually at June 30 of each year.
These tests are performed at the reporting unit level using a two-step,
fair-value based approach. Business Objects has determined that it has only one
reporting unit. The first step compares the fair value of the reporting unit
with its carrying amount, including goodwill. If the fair value of the
reporting unit is less than its carrying amount, a second step is performed to
measure the amount of impairment loss. The second step allocates the fair
value of the reporting unit to the Companys tangible and intangible assets and
liabilities. This derives an implied fair value for the reporting units
goodwill. If the carrying amount of the reporting units goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized equal to
that excess. The Company completed the annual impairment tests and concluded
that no impairment existed at June 30, 2004. 11




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##### Table of Contents



The change in the carrying amount of goodwill was as follows (in
thousands): June 30,
    
    December 31,2004
    
    2003Balance as of the beginning of the year
    
    $
    1,051,111
    
    
    $
    75,416Add: Goodwill acquired or adjusted during the period (note 2)
    
    
    10,154
    
    
    
    978,017Reduction in carrying value of Acta goodwill related to
savings from early termination of lease (note 8)
    
    
    
    
    
    
    (2,741
    )Impact of foreign currency fluctuations on goodwill
    
    
    (64
    )
    
    
    419Balance as of the end of the period
    
    $
    1,061,201
    
    
    $
    1,051,111
 Other intangible assets, at cost, consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Employment contracts
    
    $
    7,434
    
    
    $
    7,434Developed technology
    
    
    99,617
    
    
    
    102,151Maintenance and support contracts
    
    
    46,440
    
    
    
    46,440Trade names
    
    
    6,202
    
    
    
    6,377Total other intangible assets
    
    $
    159,693
    
    
    $
    162,402Accumulated amortization
    
    
    (28,500
    )
    
    
    (13,259
    )Other intangible assets, net
    
    $
    131,193
    
    
    $
    149,143
 Certain intangible assets are held by the Companys foreign subsidiaries
and are revalued at each reporting period which may result in a higher or lower
U.S. dollar cost base than originally recorded. There were no additions or
impairment of long-lived assets during the six months ended June 30, 2004. The
total intangible amortization expense was $7.6 million for the three months
ended June 30, 2004 and $668,000 for the three months ended June 30, 2003. The
total intangible amortization expense was $15.4 million for the six months
ended June 30, 2004 and $1.4 million for the six months ended June 30, 2003. Amortization of $5.0 million and $10.2 million is included in cost of net
license fees for the three and six months ended June 30, 2004, respectively,
compared to $469,000 and $938,000 for the three and six months ended June 30,
2003. Amortization of $2.3 million and $4.7 million is included in cost of
service revenues for the three and six months ended June 30, 2004, compared to
$199,000 and $398,000 for the three and six months ended June 30, 2003.
Intangible assets are amortized on a straight-line basis over their respective
estimated useful lives, which are generally 5 years. The estimated amortization expense for the next five fiscal years on
existing other intangible assets is as follows. The estimated amortization
expense is presented in U.S. dollars and does not take into account the foreign
exchange fluctuations in amortization expense of foreign owned intangible
assets. (in thousands)Remainder of 2004
    
    $
    15,5342005
    
    $
    30,8852006
    
    $
    30,8852007
    
    $
    29,4112008
    
    $
    26,905
 12




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##### Table of Contents



4.
    
    Accounts Receivable Accounts receivable are stated net of allowance of doubtful accounts and
distribution channel returns of $11.8 million at June 30, 2004 and $9.9 million
at December 31, 2003. These allowances included bad debt reserves of $8.1
million at June 30, 2004 and $6.2 million at December 31, 2003.  5.
    
    Net Income per Ordinary Share and ADS The components of basic and diluted net income per ordinary share and ADS
were as follows: For the Three Months
    
    For the Six Months endedended June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per ordinary share and ADS data)Basic net income per share:Numerator:Net income
    
    $
    11,488
    
    
    $
    11,527
    
    
    $
    14,748
    
    
    $
    20,340Denominator:Weighted average ordinary shares and
ADSs outstanding
    
    
    89,095
    
    
    
    63,052
    
    
    
    88,864
    
    
    
    62,765Net income per ordinary share and ADS  basic
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.17
    
    
    $
    0.32Diluted net income per share:Numerator:Net income
    
    $
    11,488
    
    
    $
    11,527
    
    
    $
    14,748
    
    
    $
    20,340Denominator:Weighted average ordinary shares and
ADSs outstanding
    
    
    89,095
    
    
    
    63,052
    
    
    
    88,864
    
    
    
    62,765Incremental ordinary shares and ADSs
attributable to shares exercisable
under employee stock plans and warrants
(treasury stock method)
    
    
    1,966
    
    
    
    1,406
    
    
    
    2,866
    
    
    
    1,310Weighted average ordinary shares and
ADSs outstanding on a diluted basis
    
    
    91,061
    
    
    
    64,458
    
    
    
    91,730
    
    
    
    64,075Net income per ordinary share and ADS  diluted
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.32
 In December 2003, the Company issued approximately 23.3 million ordinary
shares as partial consideration for the purchase of Crystal Decisions. For the
three and six months ended June 30, 2004, respectively, approximately 605,000
and 1.7 million shares were issued on the exercise of stock options under stock
option and employee purchase plans. For the three months ended June 30, 2004
and 2003, respectively, 8.8 million and 4.5 million ordinary shares or ADSs
were excluded from the calculation of diluted net income per share because they
were anti-dilutive. For the six months ended June 30, 2004 and 2003,
respectively, 8.0 million and 4.7 million ordinary shares or ADSs were excluded
from the calculation of diluted net income per share because they were
anti-dilutive. During December 2003, Business Objects assumed the as-converted
outstanding options of former Crystal Decisions optionees. An aggregate of 6.3
million ordinary shares were issued to Business Objects Option LLC, which are
issuable upon exercise of the options held at December 11, 2003 by former
Crystal Decisions optionees. As Business Objects Option LLC is an indirect
wholly owned subsidiary of Business Objects, the shares are not deemed to be
outstanding and will not be entitled to voting rights until such time as the
option holders exercise their options. During the six months ended June 30,
2004, optionees acquired approximately 1.2 million ADSs upon exercise of these
options. 13




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##### Table of Contents



Treasury Stock On May 14, 2004, the Companys Board of Directors decided to implement a
share repurchase of up to 3.5 million ordinary shares at or below 25.00 per share in
accordance with a share repurchase program authorized by shareholders on May
15, 2003. During May 2004, the Company repurchased 1 million ordinary shares
of its own stock which it has accounted for as treasury stock. The total U.S.
dollar equivalent purchase price was $21.0 million with the average share price
at purchase of 17.51. This purchase results in an increase in treasury
shares held by 1 million ordinary shares. The calculation of net income per
share for the three and six months ended June 30, 2004, excludes the weighted
average number of treasury shares repurchased in the three months
ended June 30, 2004.  6.
    
    Comprehensive Income Comprehensive income includes foreign currency translation gains and
losses that have been excluded from net income and reflected instead in
shareholders equity (in thousands): Three Months
    
    Six Months endedended June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    11,488
    
    
    $
    11,527
    
    
    $
    14,748
    
    
    $
    20,340Foreign currency translation adjustments
    
    
    (2,394
    )
    
    
    16,544
    
    
    
    1,811
    
    
    
    23,035Comprehensive income
    
    $
    9,094
    
    
    $
    28,071
    
    
    $
    16,559
    
    
    $
    43,375
  7.
    
    Business Segment and Geographic Information The Company has one reportable segment  business intelligence software
products. The following is a summary of the Companys revenues by geographic region
(in thousands): Three Months
    
    Six Months endedended June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003EMEA (*)
    
    $
    99,632
    
    
    $
    62,999
    
    
    $
    196,033
    
    
    $
    120,837Americas
    
    
    104,259
    
    
    
    56,559
    
    
    
    208,442
    
    
    
    108,431Asia Pacific including Japan
    
    
    18,347
    
    
    
    9,429
    
    
    
    34,998
    
    
    
    18,243Total revenues
    
    $
    222,238
    
    
    $
    128,987
    
    
    $
    439,473
    
    
    $
    247,511
 (*) Europe, Middle East and Africa 14




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##### Table of Contents



8.
    
    Business Restructuring Charge Acquisition-related Restructuring Liabilities Crystal Decisions Acquisition In December 2003, prior to the Crystal Decisions Acquisition, management
began to assess and formulate a plan to restructure the combined companys
operations to eliminate duplicative activities, focus on strategic products and
reduce the Companys cost structure. The Board of Directors and management
approved and committed the Company to the plan shortly after the completion of
the acquisition. The plan consisted primarily of the involuntary termination of
employees and the exit of certain facilities. Restructuring Costs Expensed in 2003 Accrued restructuring costs of $7.8 million related to the pre-acquisition
Business Objects organization were expensed in accordance with FAS No. 146,
"Cost Associated with Exit or Disposal Activities (FAS 146). The charge
consisted of severance and other related benefits for 159 employees across all
functions worldwide. The Company paid severance and other related benefits of
$2.9 million to 52 of these employees during the three months ended March 31,
2004, and $1.8 million to 34 of these employees during the six months ended
June 30, 2004. The Company expects to pay the remaining balance during the
remainder of 2004 in accordance with this restructuring plan. In addition to the $7.8 million of restructuring charges expensed in the
fourth quarter of 2003, the Company incurred approximately $782,000 of
additional charges in the three months ended June 30, 2004 related to the exit
of certain facilities. Approximately $712,000 of the $782,000 remains as a
restructuring accrual at June 30, 2004. The Company anticipates that there
will be additional charges related to exiting certain facilities previously
leased by Business Objects prior to the Crystal Decisions Acquisition, which
are estimated at approximately $2.6 million and will be recognized as the
facilities are vacated during 2004 as required under FAS 146. The balance of accrued restructuring charges associated with Business
Objects employees prior to the Crystal Decisions Acquisition was as follows at
June 30, 2004 (in thousands): EmployeeSeverance andOther RelatedBenefitsRestructuring charges at December 2003
    
    $
    7,782Non-cash charges
    
    
    (332
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    302Balance at December 31, 2003
    
    $
    7,752Cash payments during the three months ended March 31, 2004
    
    
    (2,899
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    150Balance at March 31, 2004
    
    $
    5,003Cash payments during the three months ended June 30, 2004
    
    
    (1,837
    )Additional restructuring charges accrued during the three months
ended June 30, 2004 included in operating expenses
    
    
    (157
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    (17
    )Balance at June 30, 2004
    
    $
    2,992
 15




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##### Table of Contents



Restructuring Costs Included as a Cost of the Crystal Decisions Acquisition Restructuring costs of $13.5 million related to Crystal Decisions were
accounted for under EITF Issue No. 95-3 Recognition of Liabilities in
Connection with Purchase Business Combinations (EITF 95-3). These costs
were recognized as a liability assumed in the purchase business combination and
included in the allocation of the cost to acquire Crystal Decisions. The charge
of $13.5 million related primarily to severance and other related benefits for
194 employees across all functions worldwide and duplicative facilities in the
Americas, Europe and Japan. The company paid benefits of approximately $4.7
million to 65 employees across all regions during the three months ended March
31, 2004, and $2.9 million to 63 employees across all regions during the three
months ended June 30, 2004. The Company expects to pay the remaining
restructuring liability during 2004. During the three months ended June 30,
2004, the Company accrued an additional $542,000 related to additional costs
for termination. This amount was recorded as an increase to goodwill. There
are no significant additional expected terminations associated with this
restructuring plan. At December 31, 2003, costs accrued to abandon 11 facilities primarily
include future minimum lease payments once the facilities are vacated, net of
estimated sublease income of $450,000, that are expected to remain through
2008. Cash payments during the three and six months ended June 30, 2004,
relate to minimum lease payments net of estimated sublease income of $268,000
and settlement costs related to properties vacated prior to quarter end. The balances of accrued restructuring charges included as a cost of
acquisition related to Crystal Decisions were as follows at June 30, 2004 (in
thousands): EmployeeSeverance and
    
    Cost toOther Related
    
    AbandonBenefits
    
    Facilities
    
    TotalRestructuring charge at December 2003
    
    $
    10,780
    
    
    $
    2,745
    
    
    $
    13,525Cash payments during 2003
    
    
    (1,136
    )
    
    
    
    
    
    
    (1,136
    )Balance at December 31, 2003
    
    $
    9,644
    
    
    $
    2,745
    
    
    $
    12,389Cash payments during the three months ended March 31, 2004
    
    
    (4,722
    )
    
    
    (222
    )
    
    
    (4,944
    )Impact of foreign currency exchange rates on translation
of accrual
    
    
    (497
    )
    
    
    13
    
    
    
    (484
    )Balance at March 31, 2004
    
    $
    4,425
    
    
    $
    2,536
    
    
    $
    6,961Cash payments during the three months ended June 30, 2004.
    
    
    (2,923
    )
    
    
    (143
    )
    
    
    (3,066
    )Adjustment to the original plan
    
    
    542
    
    
    
    
    
    
    
    542Additional restructuring charges accrued during the three
months ended June 30, 2004 included in operating expenses.
    
    
    
    
    
    
    (296
    )
    
    
    (296
    )Impact of foreign currency exchange rates on translation
of accrual
    
    
    81
    
    
    
    (2
    )
    
    
    79Balance at June 30, 2004
    
    $
    2,125
    
    
    $
    2,095
    
    
    $
    4,220
 Acta Technology, Inc. Acquisition In August 2002, Acta Technology, Inc. (Acta) management and Board of
Directors initiated and approved plans to restructure Actas operations
immediately prior to the Companys acquisition of Acta. The restructuring plan
reduced Actas cost structure and better aligned product and operating expenses
with then existing general economic conditions. Acta recorded approximately
$13.5 million of restructuring costs in connection with restructuring the
pre-acquisition Acta organization. Costs to restructure pre-acquisition Acta
were accounted for under EITF 95-3. These costs were recorded as liabilities
assumed as part of the purchase price allocation. This restructuring liability consisted primarily of severance and other
employee benefits and costs of vacating duplicate facilities. The severance and
other employee benefits related to the planned termination 16




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of approximately 50 employees worldwide. Other related restructuring
charges consisted primarily of the cost of vacating duplicate facilities and a
$1.2 million write-down of excess equipment. The charge for lease abandonment
was $7.9 million, representing total future minimum lease payments and
settlement costs due through 2007, net of projected sublease income of $4.2
million for Actas Mountain View, California headquarters and other smaller
European offices. The balance of accrued restructuring charges was capitalized as a cost of
acquisition and was as follows at June 30, 2004 (in thousands): LeaseEmployee
    
    AbandonmentSeverance and
    
    and Write-off ofOther Related
    
    Property andBenefits
    
    Equipment
    
    TotalRestructuring charge at August 2002
    
    $
    4,381
    
    
    $
    9,146
    
    
    $
    13,527Cash payments during 2002
    
    
    (4,381
    )
    
    
    (1,108
    )
    
    
    (5,489
    )Non-cash charges
    
    
    
    
    
    
    (1,220
    )
    
    
    (1,220
    )Balance at December 31, 2002
    
    $
    
    
    
    $
    6,818
    
    
    $
    6,818Net cash payments during 2003
    
    
    
    
    
    
    (3,400
    )
    
    
    (3,400
    )Reversal of excess U.S. facilities shutdown accrual
adjusted through goodwill
    
    
    
    
    
    
    (2,741
    )
    
    
    (2,741
    )Balance at December 31, 2003
    
    $
    
    
    
    $
    677
    
    
    $
    677Cash payments during the three months ended March 31, 2004
    
    
    
    
    
    
    (140
    )
    
    
    (140
    )Impact of foreign currency exchange rates on translation
of accrual
    
    
    
    
    
    
    7
    
    
    
    7Balance at March 31, 2004
    
    $
    
    
    
    $
    544
    
    
    $
    544Cash payments during the three months ended June 30, 2004
    
    
    
    
    
    
    (62
    )
    
    
    (62
    )Impact of foreign currency exchange rates on translation
of accrual
    
    
    
    
    
    
    8
    
    
    
    8Balance at June 30, 2004
    
    $
    
    
    
    $
    490
    
    
    $
    490
 Upon termination of Actas Mountain View lease, the remaining $2.8 million
accrual related to this property was reversed to goodwill. The remaining
accrual of $490,000 at June 30, 2004 and $677,000 at December 31, 2003,
represents the estimated future minimum lease payments for Actas U.K. facility
which includes payments until 2005. Non-Acquisition-related Restructuring Liabilities During the quarter ended June 2002, the Company implemented a
restructuring plan to eliminate certain positions and facilities related to its
European field operations. The Company has completed the implementation of
this restructuring plan and at June 30, 2004 $544,000 of the restructuring
liability remains. The $544,000 relates to estimated remaining legal costs or
payments to terminated employees who have initiated legal action against the
Company. The Company does not expect a resolution in these claims before at
least the fourth quarter of 2004. No amounts were paid during the three or six
months ended June 30, 2004. The change in the balance from December 31, 2003
of $31,000 is due solely to the translation of this foreign denominated
liability into U.S. dollars.  9.
    
    Legal Matters On October 17, 2001, the Company filed a lawsuit in the United States
District Court for the Northern District of California against MicroStrategy
Incorporated (MicroStrategy) for alleged patent infringement. The lawsuit
alleges that MicroStrategy infringes on the Companys U.S. Patent No. 5,555,403
by making, using, offering to sell and selling its product currently known as
MicroStrategy Version 7.0. The Companys complaint requested that MicroStrategy
be enjoined from further infringing the patent and seeks an as-yet undetermined
amount of damages. On June 27, 2003, MicroStrategy filed a motion for summary
judgment that its products do not infringe the Companys patent. On August 29, 17




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2003, the Court ruled that the Companys patent is not literally infringed
and that the Company was estopped from asserting the doctrine of equivalents
and dismissed the case. The Company has appealed the Courts judgment to the
Court of Appeals for the Federal Circuit and anticipates a ruling on the appeal
in early 2005. The Company cannot reasonably estimate at this time whether a
monetary settlement will be reached. On October 30, 2001, MicroStrategy filed an action for alleged patent
infringement in the United States District Court for the Eastern District of
Virginia against the Company and its subsidiary, Business Objects Americas. The
complaint alleges that the Companys software products, BusinessObjects
Broadcast Agent Publisher, BusinessObjects Broadcast Agent Scheduler and
BusinessObjects Infoview, infringe MicroStrategys U.S. Patent Nos. 6,279,033
and 6,260,050. In December 2003, the Court dismissed MicroStrategys claim of
infringement on U.S. Patent No. 6,279,033 without prejudice. Trial on U.S.
Patent No. 6,260,050 was scheduled to begin on June 14, 2004. On June 7, 2004,
the Court sent a letter to all counsel informing the parties that the Court was
of the opinion that summary judgment should be granted in the Companys favor
as to infringement. As a consequence, the Court canceled the trial.
On August 6, 2004, the Court
entered a formal opinion and order formalizing this decision. In April 2002, MicroStrategy obtained leave to amend its patent claims
against the Company to include claims for misappropriation of trade secrets,
violation of the Computer Fraud and Abuse Act, tortuous interference with
contractual relations and conspiracy in violation of the Virginia Code, seeking
injunctive relief and damages. On December 30, 2002, the Court granted the
Companys motion for summary judgment and rejected MicroStrategys claims for
damages as to the causes of action for misappropriation of trade secrets,
Computer Fraud and Abuse Act and conspiracy in violation of the Virginia Code.
Trial of the trade secret claim for injunctive relief and the sole remaining
damages claim for tortious interference with contractual relations started on
October 20, 2003. On October 28, 2003, the Court granted judgment as a matter
of law in favor of the Company and dismissed the jury trial on MicroStrategys
allegations that the Company tortiously interfered with certain employment
agreements between MicroStrategy and its former employees. The Court took
MicroStrategys claim for misappropriation of trade secrets under submission. On August 6, 2004, the Court issued a formal opinion and order rejecting all of
MicroStrategys claims for misappropropriation of trade secrets except for a
finding that a former employee of the Company had misappropriated two
documents. The Court issued a very limited injunction requiring the Company
not to possess, use or disclose the two documents as to which it found
misappropriation. The Court also denied MicroStrategys request for attorney
fees. The Courts finding and injunction as to the two documents will not
affect in any manner the Companys ability to sell or support its products. On December 10, 2003, MicroStrategy filed an action for patent
infringement against Crystal Decisions in the United States District Court for
the District of Delaware. The Company became a party to this action when it
acquired Crystal Decisions on December 11, 2003. The complaint alleges that the
Crystal Decisions software products, Crystal Enterprise, Crystal Reports,
Crystal Analysis and Crystal Applications, infringe MicroStrategys U.S. Patent
Nos. 6,279,033, 6,567,796 and 6,658,432. The complaint seeks relief in the form
of an injunction, unspecified damages, an award of treble damages and
attorneys fees. The Companys investigation of this matter and discovery are
at a preliminary stage. The Company intends vigorously to defend this action.
Should an unfavorable outcome arise, there can be no assurance that such
outcome would not have a material adverse affect on Business Objects
liquidity, financial position or results of operations. The Company became party to the following action when it acquired Crystal
Decisions in December 2003. In November 1997, Vedatech Corporation (Vedatech)
commenced an action in the Chancery Division of the High Court of Justice in
the United Kingdom against Crystal Decisions (UK) Limited, now a wholly owned
subsidiary of Business Objects Americas. The liability phase of the trial was
completed in March 2002, and Crystal Decisions prevailed on all claims except
for the quantum meruit claim. The court ordered the parties to mediate the
amount of that claim and, in August 2002, the parties came to a mediated
settlement. The mediated settlement was not material to Crystal Decisions
operations and contained no continuing obligations. In September 2002, however,
Crystal Decisions received a notice that Vedatech was seeking to set aside the
settlement. The mediated settlement and related costs 18




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##### Table of Contents



were accrued in the consolidated financial statements. In April 2003,
Crystal Decisions filed an action in the High Court of Justice seeking a
declaration that the mediated settlement agreement is valid and binding. In
connection with this request for declaratory relief Crystal Decisions paid the
agreed settlement amount into court. In October 2003, Vedatech and Mani Subramanian filed an action against
Crystal Decisions, Crystal Decisions (UK) Limited and Susan J. Wolfe, then Vice
President, General Counsel and Secretary of Crystal Decisions, in the United
States District Court, Northern District of California, San Jose Division,
alleging that the August 2002 mediated settlement was induced by fraud and that
the defendants engaged in negligent misrepresentation and unfair competition.
In July 2004, the United States District Court, Northern District of
California, San Jose Division granted the defendants motion to stay any
proceedings before such court pending resolution of the matters currently
submitted to the English Court. In October 2003, Crystal Decisions (UK) Limited, Crystal Decisions (Japan) K.K.
and Crystal Decisions filed an application with the High Court of Justice
claiming the proceedings in the United States District Court, Northern District
of California, San Jose Division were commenced in breach of an exclusive
jurisdiction clause in the settlement agreement and requesting injunctive
relief to restrain Vedatech from pursuing the United States District Court
proceedings. A hearing in the High Court of Justice took place on
various dates between January 29, 2004 and March 9, 2004.
On August 3, 2004, the U.K. High Court of Justice granted the anti-suit injunction but
provided that the United States District Court, Northern District of California, San Jose
Division could complete its determination of any matter that may be pending. Although Business Objects believes that Vedatechs basis for seeking to
set aside the mediated settlement and its claims in the October 2003 complaint
is meritless, the outcome cannot be determined at this time. If the mediated
settlement were to be set aside such an outcome could adversely affect Business
Objects financial position, liquidity and results of operations. On July 15, 2002, Informatica Corporation (Informatica) filed an action
for alleged patent infringement in the United States District Court for the
Northern District of California against Acta. The Company became a party to
this action when it acquired Acta in August 2002. The complaint alleges that
the Acta software products infringe Informaticas U.S. Patent Nos. 6,014,670,
6,339,775 and 6,208,990. On July 17, 2002, Informatica filed an amended
complaint alleging that the Acta software products also infringe U.S. Patent
No. 6,044,374. The complaint seeks relief in the form of an injunction,
unspecified damages, an award of treble damages and attorneys fees. The
Company has answered the suit, denying infringement, and asserting that the
patents are invalid, and other defenses. The parties are currently engaged in
discovery and are awaiting a claim construction order to be issued by the
Court. The August 16, 2004 trial date previously set has been vacated by the
Court and a trial date will probably not be set again until the Court issues
its claim construction order. The Company intends vigorously to defend the
action. Should an unfavorable outcome arise, there can be no assurance that
such outcome would not have a material adverse affect on Business Objects
liquidity, financial position or results of operations. Between June 2 and July 1, 2004, several purported class action complaints
were filed in the United States District Courts for the Northern District of
California, the Southern District of California, and the Southern District of
New York against the Company and certain of its officers. The complaints
allege violations of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder. The plaintiffs seek to represent a putative
class of investors in the Companys American depository receipts (ADRs) who
purchased the ADRs between April 23, 2003 and May 5, 2004 (the Class Period).
The complaints generally allege that, during that Class Period, the Company
and the individual defendants made false or misleading statements in press
releases and SEC filings regarding, among other things, the Companys
acquisition of Crystal Decisions, its Enterprise 6 product and the Companys forecasts and financial
results for the three months ended March 31, 2004. The complaints have all
been transferred to United States District Court for the Northern District of
California. The actions are in the early stages, and the Companys time to
respond to the various complaints has not yet expired. The Company advises
that it intends to contest these actions vigorously. The Company is unable to
predict the outcome of these actions. 19




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##### Table of Contents



On July 23, 2004, two purported shareholder derivative actions were filed
in Santa Clara County Superior Court against certain of the Companys current
officers and directors, styled Bryan Aronoff, et al. v. Bernard Liautaud, et
al.and Ken Dahms v. Bernard Liautaud, et al.The derivative complaints allege
violations of California Corporations Code Sections 25402 and 25502.5, breaches
of fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets and unjust enrichment. The derivative complaints are based on the same
facts and events alleged in the purported class action complaints. The
derivative plaintiffs seek damages, disgorgement of profits, equitable,
injunctive, restitutionary and other relief. The actions are in the very early
stages. The Company intends to contest these actions vigorously, but is unable
to predict the outcome of these actions. The Company is also involved in various other legal proceedings in the
ordinary course of business and none is believed to be material to its
financial condition and results of operations. Where the Company believes a
loss is probable and can be reasonably estimated, the estimated loss is accrued
in the consolidated financial statements. Where the outcome of these matters is
not determinable, no provision is made in the financial statements until the
loss, if any, is probable and can be reasonably estimated or the outcome
becomes known.  10.
    
    Escrows Payable and Restricted Cash At December 31, 2003, the Company held an aggregate of $9.7 million in
escrows payable related to its August 2002 purchase of Acta, which were secured
by restricted cash. These amounts which are subject to indemnification
obligations were originally due in February 2004. In July 2002, Informatica
filed an action for alleged patent infringement against Acta, which was not
resolved at June 30, 2004. In accordance with the escrow
agreement, one-third
($3.3 million) of the total amount in escrow available to former Acta
shareholders and employees was paid during the three months ended June 30,
2004. The remaining balance will be distributed once all indemnification
obligations have been released. The escrow agreement provides that the
remaining two-thirds in the escrow account may be used by the Company to offset
costs incurred in defending itself against this suit. During April 2004, the Company entered into a Pledge and Security
Agreement pursuant to which a bank will provide foreign exchange contract
services to the Company. At June 30, 2004, a $33.3 million deposit was
required to be maintained at the bank as collateral. The required amount was
held on account with the bank at June 30, 2004 and was classified as restricted
cash. Restricted cash also includes $355,000 subject to withdrawal
restrictions for bonuses to be paid to Acta employees subject to employment
related contingencies, $2.0 million which secured an overdraft credit facility
and $7.0 million related to a deposit held to secure the leased space in San
Jose, California.  11.
    
    Credit Line In November 2003, Business Objects executed a line of credit for one year
ending November 25, 2004. The line provides up to 60 million which can be
drawn in euros, U.S. dollars or Canadian dollars for general working capital
requirements. The available amount is reduced by the aggregate of all
outstanding drawings against the line of credit. Drawings are limited to
advances in duration of ten days to twelve months and must be at least equal to
1 million or the converted currency equivalent in U.S. dollars or Canadian
dollars or a whole-number multiple of these amounts. All drawings and interest
amounts are due on the agreed upon credit repayment date determined at the time
of the drawing. Interest is calculated dependent on the currency in which the
draw originally occurs. The line is subject to a commitment fee on the
available funds, payable on the first day of each quarter. The terms of the
agreement do not allow for the prepayment of any drawings without the prior
approval of the bank. The Company has the option to reduce the credit available
in multiples of 5 million, without penalty. No drawings were made by the
Company at June 30, 2004 or at December 31, 2003. The agreement restricts
certain of the Companys activities including the extension of a mortgage,
lien, pledge, security interest or
other rights related to all or part of its existing or future assets or
revenues, as security for any existing or future debt for money borrowed. 20




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12.
    
    Accounting for and Disclosure of Guarantees Guarantors Accounting for Guarantees. The Company from time-to-time
enters into certain types of contracts that contingently require the Company to
indemnify parties against third party claims. These contracts primarily relate
to: (i) certain real estate leases, under which the Company may be required to
indemnify property owners for environmental and other liabilities, and other
claims arising from the Companys use of the applicable premises; (ii) certain
agreements with the Companys officers, directors and employees and third
parties, under which the Company may be required to indemnify such persons for
liabilities arising out of their duties to the Company, and (iii) agreements
under which the Company indemnifies customers and partners for claims arising
from intellectual property infringement. The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been
obligated to make significant payments for these obligations, and no
liabilities were recorded for these obligations on its balance sheet as of June
30, 2004 and December 31, 2003. The Company warrants to its customers that its software products will
operate substantially in conformity with product documentation and that the
physical media will be free from defect. The specific terms and conditions of
the warranties are generally 30 days but may vary depending upon the country in
which the product is sold. The Company accrues for known warranty issues if a
loss is probable and can be reasonably estimated, and accrues for estimated
incurred but unidentified warranty claims. Due to extensive product testing,
the short time between product shipments and the detection and correction of
product failures, no history of material warranty claims, and the fact that no
significant warranty issues have been identified, the Company has not recorded
a warranty accrual to date. Environmental Liabilities. The Company only engages in the development,
marketing and distribution of software, and it has never had any environment
related claim. Therefore, the likelihood of incurring a loss related to these
environmental indemnifications is remote and thus the Company is unable to
reasonably estimate the amount. As a result, the Company has not recorded a
related liability in accordance with the recognition and measurement provisions
of FAS No. 143, Accounting for Asset Retirement Obligations(FAS 143). Other Liabilities and Other Claims. The Company is responsible for certain
costs of restoring leased premises to their original condition in accordance
with the recognition and measurement provisions of FAS 143. During the six
months ended June 30, 2004, the Company recorded a $200,000 accrual and related
expense for dilapidation costs to return a leased property to its original
state. This liability was not related to the acquisition and accordingly is
recorded as other current liabilities and a charge to general and
administrative expense. Aside from this amount, the fair value of these
obligations was not material at June 30, 2004.  13.
    
    Income Taxes The Company is subject to income taxes in numerous jurisdictions and the
use of estimates is required in determining the Companys provision for income
taxes. Although the Company believes its tax estimates are reasonable, the
ultimate tax determination involves significant judgment that could become
subject to audit by tax authorities in the ordinary course of business. Due to
the Companys size it contemplates it will regularly be audited by tax
authorities in most jurisdictions. 21




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##### Table of Contents



The Companys effective tax rate was 38% for the three and six months
ended June 30, 2004 and 2003. The Company provides for income taxes for each
interim period based on the estimated annual effective tax rate for the year.  14.
    
    Subsequent Event On July 28, 2004, the Company entered into the First Amendment to the
Pledge and Security Agreement with a bank that required the Company to hold
$33.3 million at June 30, 2004 in restricted cash as collateral against the
forward contracts held with the bank. At July 28, 2004 and thereafter the
agreement requires the Company to hold a balance equal to 10% of the aggregate
amount of all foreign exchange transactions entered into with the bank. Based
on the Companys outstanding forward contracts with the bank at July 31, 2004,
restricted cash will be reduced to $22.9 million. 22




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##### Table of Contents



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 Quarterly Report on Form 10-Q. This discussion
contains forward-looking statements based on our current expectations,
assumptions, estimates and projections about us and our industry. These
forward-looking statements include, but are not limited to, statements
concerning risks and uncertainties. Our 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 Factors Affecting Future Operating
Results section of this Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Quarterly
Report on      
Form 10-Q. We undertake 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 Business Objects
is a leading worldwide provider of business intelligence
solutions. We develop, market and distribute software that enables
organizations to track, understand and manage enterprise performance within and
beyond the enterprise. This allows organizations to make better, more informed
business decisions. Users can view and interact with key performance indicators
in a dashboard, create queries or reports, access catalogs of reports and do
simple or complex analysis of the data. Users generally interact with data
using business representations of information with which they are familiar. We
have one reportable segment  business intelligence software products. Key Performance Indicators Three Months
    
    Six Monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in millions,
except
per share data)Revenues
    
    $
    222.2
    
    
    $
    129.0
    
    
    $
    439.5
    
    
    $
    247.5Revenue growth (compared to prior year comparative period)
    
    
    72
    %
    
    
    16
    %
    
    
    78
    %
    
    
    13
    %Income from operations
    
    $
    18.3
    
    
    $
    15.0
    
    
    $
    27.6
    
    
    $
    25.5Income from operations as a percentage of total revenues
    
    
    8
    %
    
    
    12
    %
    
    
    6
    %
    
    
    10
    %Diluted net income per ordinary share and ADS
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.32
 On December 11, 2003,
we acquired Crystal Decisions for its complementary
geographical strengths, products, services and solutions that allow us to
provide a more complete suite of business intelligence products to a broader
range of business users. The acquisition of Crystal Decisions did not result in
any new reportable segments, nor do we track the business operations from the
former Crystal Decisions or the former Business Objects. We will incur certain
acquisition related charges in the future, the magnitude of which we have not
experienced in the past. 23




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##### Table of Contents



We estimated the following Crystal Decisions acquisition related expenses
for 2004 to 2008 at December 31, 2003 (in millions): 2004
    
    2005
    
    2006
    
    2007
    
    2008Amortization of developed technology
    
    $
    18.5
    
    
    $
    18.5
    
    
    $
    18.5
    
    
    $
    18.5
    
    
    $
    17.6Amortization of other intangible
assets, including maintenance and support contracts
    
    
    10.0
    
    
    
    10.0
    
    
    
    10.0
    
    
    
    10.0
    
    
    
    9.5Amortization of unearned compensation
    
    
    7.5
    
    
    
    6.2
    
    
    
    3.8
    
    
    
    0.9
    
    
    
    Restructuring expenses
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    41.5
    
    
    $
    34.7
    
    
    $
    32.3
    
    
    $
    29.4
    
    
    $
    27.1
 During the three and six months ended June 30, 2004, respectively, we
expensed $5.0 million and $10.2 million of amortization of developed
technology, $2.6 million and $5.3 million of amortization of other intangible
assets and $1.7 million and $3.8 million of amortization of
unearned stock-based
compensation. During the three months ended June 30, 2004, we incurred $1.5
million of restructuring costs of the $5.5 million originally estimated. Any
remaining charges, which are currently expected to be approximately $2.6
million, will be incurred during the remainder of 2004. For 2004, our results as reported under generally accepted accounting
principles in the United States, or U.S. GAAP, are not comparable to 2003 as a
result of our acquisition of Crystal Decisions. The corresponding periods of the
prior year do not reflect revenues and expenses related to Crystal Decisions.
Our historical results before 2004 are not expected to be indicative of our
future results for the combined company. While we have presented the required
comparison of the three and six months ended June 30, 2004 to the three and six
months ended June 30, 2003, the majority of the changes from the comparative
periods are as the result of the addition of revenues and expenses in 2004 from
the former Crystal Decisions. Our operating results for the three months ended
June 30, 2004 compared to the three months ended June 30, 2003 appear in our
condensed consolidated statements of income. We have not reproduced these
statements here as the periods are not comparable and provide no further
insight into our operations. Instead, in order to provide more meaningful
analysis to readers, we have presented financial information comparing the
three months ended June 30, 2004 to the three months ended March 31, 2004 and
provided analysis on the change between these periods. Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations The translated U.S. dollar value of our revenues and expenses are impacted
by changes in foreign currency exchange rates because 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 generate a significant portion
of our revenues and incur a significant portion of our expenses in euro,
British pounds and Japanese yen. Historically, this has resulted in a natural
hedge of our foreign exchange exposure. As a result of our
acquisition of Crystal Decisions, we incur a significant portion of our expenses
in Canadian dollars
without offsetting amounts of Canadian dollar revenues. As we conduct a significant number of transactions in currencies other
than the U.S. dollar, we have presented constant currency information where
meaningful to provide information for assessing how our underlying business
performed excluding the effect of foreign currency rate fluctuations. As
currency rates change from quarter to quarter and year-over-year, our results
of operations may be impacted largely as a result of these changes. For

example, our results may show an increase in costs for a period; however, when
the portion of those costs denominated in foreign currencies are translated
into U.S. dollars at the same rate as the previous quarter or comparative
period, the result may be a decrease in cost, with the change being principally
the result of fluctuations in the foreign currency rates. 24




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##### Table of Contents



Results excluding the effect of foreign currency translation (also referred to
constant currency) may be calculated by translating current period results at
prior quarter or prior year average exchange rates. On a constant currency basis against the rates for the three and six
months ended June 30, 2003, total operating income for the six months ended
June 30, 2004 would have been higher by approximately $1.2 million than
reported results. Results of Operations The following table shows each line item on our condensed consolidated
statements of income as a percent of total revenues: Three Months
    
    Six Monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of net license fees
    
    
    3
    %
    
    
    1
    %
    
    
    3
    %
    
    
    1
    %Cost of services
    
    
    19
    %
    
    
    16
    %
    
    
    19
    %
    
    
    16
    %Total cost of revenues
    
    
    21
    %
    
    
    17
    %
    
    
    22
    %
    
    
    17
    %Gross profit
    
    
    79
    %
    
    
    83
    %
    
    
    78
    %
    
    
    83
    %Operating expenses:Sales and marketing
    
    
    45
    %
    
    
    45
    %
    
    
    45
    %
    
    
    46
    %Research and development
    
    
    16
    %
    
    
    18
    %
    
    
    17
    %
    
    
    19
    %General and administrative
    
    
    9
    %
    
    
    8
    %
    
    
    9
    %
    
    
    8
    %Restructuring costs
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Total operating expenses
    
    
    71
    %
    
    
    71
    %
    
    
    72
    %
    
    
    73
    %Income from operations (operating margin)
    
    
    8
    %
    
    
    12
    %
    
    
    6
    %
    
    
    10
    %Interest and other income (expense), net
    
    
    0
    %
    
    
    2
    %
    
    
    (1
    )%
    
    
    3
    %Income before provision for income taxes
    
    
    8
    %
    
    
    14
    %
    
    
    5
    %
    
    
    13
    %Provision for income taxes
    
    
    (3
    )%
    
    
    (5
    )%
    
    
    (2
    )%
    
    
    (5
    )%Net income
    
    
    5
    %
    
    
    9
    %
    
    
    3
    %
    
    
    8
    %
 * Certain percentages rounded for presentation. 25




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##### Table of Contents



Revenues Six Months ended
    
    Percentage
    
    Six Months ended
    
    PercentageJune 30,
    
    of Total
    
    June 30,
    
    of Total2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)Total net license fees
    
    $
    231.7
    
    
    
    53
    %
    
    $
    118.9
    
    
    
    48
    %Service revenues:Software license updates and support
    
    
    149.4
    
    
    
    34
    %
    
    
    94.5
    
    
    
    38
    %Professional services and other
    
    
    58.4
    
    
    
    13
    %
    
    
    34.1
    
    
    
    14
    %Total service revenues
    
    
    207.8
    
    
    
    47
    %
    
    
    128.6
    
    
    
    52
    %Total revenues
    
    $
    439.5
    
    
    
    100
    %
    
    $
    247.5
    
    
    
    100
    %
 Net License Fees.Net
license fees increased by $112.8 million, or 95%, to $231.7
million for the six months ended June 30, 2004 from $118.9 million for the six
months ended June 30, 2003. Net license fees increased by $54.5 million, or
87%, to $117.2 million for the three months ended June 30, 2004 from $62.7
million for the three months ended June 30, 2003. Net license fees increased by $2.7 million, or 2%, to $117.2 million in
the three months ended June 30, 2004 from $114.5 million in three months ended
March 31, 2004. On a constant currency basis against the three months ended
March 31, 2004, we would have recorded an additional $2.8 million in net
license fees to those reported for the three months ended June 30, 2004. We
derive the largest portion of our license revenues from our business
intelligence platform products, which include all current versions of the
Crystal Decisions product suites. We continue to see growth in our license
revenues which was attributable to the addition of the Crystal Decisions
product suite, and to increased sales of our Enterprise 6 product, which was
released in the three months ended June 30, 2003. Approximately
9% of our net license fees were derived from our analytic
applications and data integration license fees in the three months ended June
30, 2004, a decrease of $2.4 million from the three months ended
March 31, 2004. During the first half of 2004 we focused
our cross-selling efforts mainly on business intelligence platform products
which we believe resulted in the decrease of non-business intelligence
products, such as analytic applications and data integration
applications. We generate net license fees from the sale of licenses to use our software
products. We market our products through our direct sales force and through
channel partners. Historically, we have generated the majority of our
consolidated net license fees through our direct sales force. Our acquisition
of Crystal Decisions strengthened our strong base of channel partner
relationships, including original equipment manufacturers, value added
resellers, system integrators and independent distributors. Net license fees
from partners comprised 45% of total net license fees in the three months ended
June 30, 2004 compared to 40% in the three months ended June 30, 2003. Net
license fees from partners comprised 46% of total net license fees in the six
months ended June 30, 2004 compared to 40% in the six months ended June 30,
2003. The percentage of our net license fees can fluctuate between periods, as
this revenue channel is sensitive to individual large transactions that are
neither predictable nor consistent in size or timing. For example, during the
three months ended March 31, 2004, 25% of our license deals over $1 million
were indirect sales when only 18% of our license deals over $1 million were
indirect sales during the three months ended June 30, 2004. No single customer
or single channel partner represented more than 10% of total revenues during
any of the periods presented. Service Revenues.Service revenues increased by $79.2 million, or 62%,
for the six months ended June 30, 2004 from $128.6 million for the six months
ended June 30, 2003. Services revenues increased by $38.8 million, or 58%, for
the three months ended June 30, 2004 from $66.3 million for the three months
ended June 30, 2003. Service revenues increased by $2.3 million, or 2%, in the
three months ended June 30, 2004 from the three months ended March 31, 2004,
with $1.9 million of this increase attributable to maintenance and support
revenues. On a constant currency basis against the three months 26




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ended March 31, 2004, we would have recorded an additional $2.2 million of
services revenues to those reported for the three months ended June 30, 2004.
We expect our services revenues to increase in absolute dollars as we continue
to support a large installed customer base and continue to gain new customers. As a percentage of total revenues, services revenues have decreased to 47%
of total revenues for the six months ended June 30, 2004 from 52% for the six
months ended June 30, 2003, while net license fees increased from 48% to 53% of
total revenues for the same period. This change was primarily attributable to
the addition of Crystal Decisions product and services revenues which had a
historical split between license and services revenues at the ratio of 60-65%
for net license fees and 35-40% for services revenues. The historical trend
for Crystal Decisions was the result of the large percentage of revenue sold
through distributors for which no consulting or training was sold. Geographic Revenues Mix The following shows the geographic mix of our total revenues: Six Months ended
    
    Percentage
    
    Six Months ended
    
    PercentageJune 30,
    
    of Total
    
    June 30,
    
    of Total2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)EMEA (*)
    
    $
    196.1
    
    
    
    45
    %
    
    $
    120.8
    
    
    
    49
    %Americas
    
    
    208.4
    
    
    
    47
    %
    
    
    108.5
    
    
    
    44
    %Asia Pacific including Japan
    
    
    35.0
    
    
    
    8
    %
    
    
    18.2
    
    
    
    7
    %Total revenues
    
    $
    439.5
    
    
    
    100
    %
    
    $
    247.5
    
    
    
    100
    %
 * Europe, Middle East and Africa The changes in revenue by geography in the three and six months ended June
30, 2004 over the three and six months ended June 30, 2003 were the result of
the strength of Crystal Decisions product sales in geographies previously not
strongly served by Business Objects. Total revenues from the Americas increased
84% and 92% in the three and six months ended June 30, 2004, respectively, over
the three and six months ended June 30, 2003, and increased as a percentage of
total revenues to 47% from 44%. Crystal Decisions historically earned
approximately 70% of its revenues from the Americas region. Because of the
overlap of sales forces in the Americas, this has been the most difficult
geography to integrate. This is evidenced by the decrease in Americas net
license fees to $55.5 million in the three months ended June 30, 2004 from
$58.6 million in the three months ended March 31, 2004. We believe that the
decrease in net license fees during the three months ended June 30, 2004, is in
part due to weaker IT spending experienced in the Americas in the second
quarter of 2004 compared to the rest of world. Total revenues for the Americas
increased by less than $0.1 million in the three months ended June 30, 2004
from the three months ended March 31, 2004, as the result of increased
maintenance revenues offset by decreased net license fees. Increased revenues in
EMEA, were driven
by large transactions in Europe and the overall strength of the European
operations. Total revenues from EMEA increased 58% and 62% in the three and
six months ended June 30, 2004, respectively, over the three and six months
ended June 30, 2003, and decreased as a percentage of total revenues to 45%
from 49%. The EMEA region was historically the strongest region for Business
Objects and we anticipate that revenues from EMEA will continue to grow and in
absolute dollars may exceed revenues from the Americas in future periods. In
euros, total revenues from EMEA increased by 8% in the three months ended June
30, 2004 from the three months ended March 31, 2004 as compared to the 3%
increase in these revenues 27




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when translated to U.S. dollars. The loss of 5% in total revenues
evidences the overall unfavorable impact of foreign exchange fluctuations on
these revenues. Total revenues from Asia Pacific including Japan increased 95% and 92% in
the three and six months ended June 30, 2004, respectively, over the three and
six months ended June 30, 2003, and increased as a percentage of total revenues
to 8% from 7%. We have continued to record strong results in this region with
our acquisition of Crystal Decisions providing us with a greater proportion of
revenues from this region. Revenues from this region increased by 10% for the
three months ended June 30, 2004 from the three months ended March 31, 2004
with the largest growth in the Asia Pacific countries, offset by a decrease in
revenues from our Japan operations. Cost of Revenues Six Months ended
    
    Percentage
    
    Six Months ended
    
    PercentageJune 30,
    
    of Related
    
    June 30,
    
    of Related2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)Cost of revenues:Net license fees
    
    $
    13.7
    
    
    
    6
    %
    
    $
    1.8
    
    
    
    1
    %Services
    
    
    83.0
    
    
    
    40
    %
    
    
    40.7
    
    
    
    32
    %Total cost of revenues
    
    $
    96.7
    
    
    
    22
    %
    
    $
    42.5
    
    
    
    17
    %
 Cost of revenues as
a percentage of total revenues increased to 22% in the
six months ended June 30, 2004 from 17% in the six months ended June 30, 2003.
Cost of revenues as a percentage of total revenues increased to 21% in the
three months ended June 30, 2004 from 17% in the three months ended June 30,
2003. Approximately two-thirds of the increase for the three and six months
ended June 30, 2004 was attributable to the amortization of intangible assets
including developed technology and maintenance and support contracts acquired
in our acquisition of Crystal Decisions. The majority of the remaining increase
in cost of revenues was the result of the addition of costs associated with
revenues for Crystal Decisions products and services which had lower services
margins than historical Business Objects products. Total costs of revenues
decreased by $1.9 million to $47.4 million for the three months ended June 30,
2004 from $49.3 million for the three months ended March 31, 2004. On a
constant currency basis against the three months ended March 31, 2004, we would
have recorded an additional $0.8 million of cost of revenues to those reported
for the three months ended June 30, 2004. Cost of net license fees.Gross margins on net license fees were 94% for
the six months ended June 30, 2004 compared to 99% for the six months ended
June 30, 2003. Cost of net license fees increased $11.9 million in the six
months ended June 30, 2004, primarily due to $9.2 million in amortization of
developed technology from our acquisition of Crystal Decisions in December 2003.
The remaining increase is the result of the costs associated with higher
license revenues and additional costs related to the release of new versions of
our products, offset by savings in third party royalty costs as a result in
changes in relationships. Cost of net license fees decreased by $1.7 million
to $6.0 million for the three months ended June 30, 2004 from $7.7 million for
the three months ended March 31, 2004. The decrease is in part associated with
the release of the Crystal 10 suite in January 2004 with no comparable expense
in the three months ended June 30, 2004 and fewer third party royalty costs. Cost of services revenues.Cost of services revenues consisted largely of
compensation and benefits for technical support, consulting and training
personnel. Cost of service revenues increased $42.3 million, or 104%, to 40%
of services revenues in the six months ended June 30, 2004 from 32% of services
revenues in the six months ended June 30, 2003. Cost of services revenues
increased $20.7 million, or 100%, to $41.4 million for the three months ended
June 30, 2004 from $20.7 million for the three months ended June 30, 2003. The
majority of the increase from the three and six months ended June 30, 2003 to
the three and six months ended June 30, 2004 was the result of increased
headcount costs. Approximately $2.2 million and $4.4 million of the absolute
dollar increase related to amortization 28




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of maintenance and support contracts acquired through the acquisition of
Crystal Decisions for the three and six months ended June 30, 2004,
respectively. In addition, as part of our acquisition of Crystal Decisions and
under purchase accounting, we were unable to recognize approximately $21.3
million of deferred revenues from Crystal Decisions which would have been
earned in the six months ended June 30, 2004. As there are related costs to
performing the services associated with the deferred revenues, costs of
services revenues as a percentage of services revenues have increased as
anticipated. Cost of services revenues decreased by $0.2 million for the three
months ended June 30, 2004 from the three months ended March 31, 2004
with no one factor in isolation being material. Gross margin on services revenues were 60% for the six months ended June
30, 2004 compared to 68% for the six months ended June 30, 2003. The decrease
in gross margin is primarily due to the $21.3 million of customer support
revenues that would have been earned in the six months ended June 30, 2004, the
mix of required outsourcing for our consulting and training group, and to a
lesser extent, to an increase in the level of amortization expense due to the
acquisition of Crystal Decisions. Gross margin on services revenues were 61% for
the three months ended June 30, 2004 compared to 59% for the three months ended
March 31, 2004 as the result of additional revenues without additional
corresponding costs. OPERATING EXPENSES Six Months ended
    
    Percentage
    
    Six Months ended
    
    PercentageJune 30,
    
    of Total
    
    June 30,
    
    of Total2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)Sales and marketing
    
    $
    196.5
    
    
    
    45
    %
    
    $
    114.7
    
    
    
    46
    %Research and development
    
    
    76.2
    
    
    
    17
    %
    
    
    46.1
    
    
    
    19
    %General and administrative
    
    
    40.9
    
    
    
    9
    %
    
    
    18.8
    
    
    
    8
    %Restructuring costs
    
    
    1.5
    
    
    
    1
    %
    
    
    0.0
    
    
    
    0
    %Total operating expenses
    
    $
    315.1
    
    
    
    72
    %
    
    $
    179.6
    
    
    
    73
    %
 For the three and
six months ended June 30, 2004, respectively, total operating expenses
included $1.4 million and $3.1 million of the
$1.7 million and $3.8 million of
amortization of unearned stock-based compensation cost related to the
assumption of options on the acquisition of Crystal Decisions. The total
expense represented the realization of the benefit by the employee on vesting
of a portion of these stock options, and was expensed by operating expense line
associated with the employees department. There was no comparable expense
during the three or six months ended June 30, 2003. Total operating expenses
decreased as a percentage of total revenues by 1% in the six months ended June
30, 2004 compared to the six months ended June 30, 2003 despite the additional
costs associated with the integration. Total operating costs decreased by $2.1
million to $156.5 million for the three months ended June 30, 2004 from $158.6
million for the three months ended March 31, 2004. On a constant currency
basis against the three months ended March 31, 2004, total operating expenses
would have been approximately $3.0 million higher than reported results for the
three months ended June 30, 2004. Sales and Marketing Expenses Sales and marketing expenses increased $81.8 million, or 71%, and
decreased by 1% of total revenues in the six months ended June 30, 2004 as
compared to the six months ended June 30, 2003. Sales and marketing expenses
increased $41.0 million, or 70%, and remained constant at 45% of total revenues
for the three months ended June 30, 2004 as compared to the three months ended
June 30, 2003. The increase in absolute dollars for the three and six months
ended June 30, 2004 compared to the three and six months ended June 30, 2003
was primarily due to increased employee expenses, including commissions,
resulting from the acquisition of Crystal Decisions and the resultant addition
of approximately 650 sales and marketing employees. 29




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Sales and marketing expenses increased by $2.1 million, or 2%, in the
three months ended June 30, 2004 from the three months ended March 31, 2004.
On a constant currency basis against the three months ended March 31, 2004, we
would have recorded an additional $1.7 million of expenses to those results
reported for the three months ended June 30, 2004. For the three months ended
June 30, 2004, sales and marketing costs increased as the result of additional
headcount and travel expenses compared to the three months ended March 31,
2004. During the three months ended March 31, 2004, we incurred costs
associated with the 2004 sales kickoff event and the marketing of our integrated product
road map which did not recur in the three months ended
June 30, 2004. Research and Development Expenses Research
and development expenses increased by $30.1 million, or 65%, and
decreased by 2% of total revenues in the six months ended June 30, 2004
compared to the six months ended June 30, 2003. Research and development
expenses increased by $13.0 million, or 55%, and decreased by 2% of total
revenues in the three months ended June 30, 2004 compared to the three months
ended June 30, 2003. As the majority of research and development expenses
relate to compensation, the majority of the increase was the resultant addition
of approximately 450 research and development employees. Research
and development expenses decreased by $3.2 million, or 8%, and
decreased by 2% of total revenues in the three months ended June 30, 2004 from
the three months ended March 31, 2004. The decrease in absolute dollars for
the sequential quarter was the result of additional headcount reductions and
related compensation savings in this group throughout the six months ended June
30, 2004. These reductions are in line with the restructuring plan set by
management. We expect to gain further synergies as we develop one integrated
product line and complete the remainder of the planned terminations. A large
portion of our research and development activities are situated in Canada and
France. As a result, we may experience either favorable or unfavorable impacts
as the result of foreign exchange movements related to this expense. On a
constant currency basis against the three months ended March 31, 2004, we would
have recorded an additional $1.1 million of expenses to those results reported
for the three months ended June 30, 2004. General and Administrative Expenses General
and administrative expenses increased by $22.2 million, or 118%,
and increased by 1% as a percentage of total revenues in the six months ended June 30,
2004 from the six months ended June 30, 2003. General and
administrative expenses increased by $8.6 million, or 81%, and increased by 1%
as a percentage of total revenues in the three months ended June 30,
2004 from the three months ended June 30, 2003. These increases resulted from increased
employee related costs, integration expenses, professional fees, consulting and
the defense of legal proceedings, and an increase in bad debt expense for
accounts receivable identified as doubtful, all primarily associated with our
acquisition of Crystal Decisions. General
and administrative expenses decreased by $2.5 million, or 11%, and
decreased by 1% as a percentage of total revenues in the three months ended
June 30, 2004 from the three months ended March 31, 2004. The decrease
was the result of decreased headcount associated costs in the three months
ended June 30, 2004, reduced bad debt expense, offset by additional legal fees
in conjunction with the MicroStrategy suit and accounting fees related to
various regulatory filings related to our annual general meeting. For
both quarters in 2004, general and
administrative expenses included amortization expense of approximately $0.3
million related to trade names acquired. 30




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Restructuring Costs As disclosed in the section Acquisitions and Restructuring Charges 
Crystal Decisions Acquisition Restructuring Costs Expensed
under FAS 146
restructuring costs of $1.5 million were incurred during the three months ended
June 30, 2004 related to additional expenses identified during the quarter
associated with the integration. These charges were associated with the planned
facility abandonment or closure of specific office locations occupied by
Business Objects prior to the acquisition of Crystal Decisions. We currently
anticipate that all planned closures will be completed by the end of 2004 at an
additional cost of approximately $2.6 million. Interest and Other Income (Expense), Net Interest and other income (expense), net was comprised of the following: Three Months
    
    Six Months endedended June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in millions)
    
    (in millions)Net interest income
    
    $
    0.8
    
    
    $
    2.2
    
    
    $
    1.7
    
    
    $
    4.2Patent infringement settlement income
    
    
    1.8
    
    
    
    1.7
    
    
    
    3.6
    
    
    
    3.5Net foreign exchange gains (losses)
    
    
    (2.3
    )
    
    
    (0.3
    )
    
    
    (9.1
    )
    
    
    (0.3
    )Interest and other income, net
    
    $
    0.3
    
    
    $
    3.6
    
    
    $
    (3.8
    )
    
    $
    7.4
 Net interest income decreased during the three and six months ended June
30, 2004 compared to the same periods in 2003, as the result of the combination
of lower average balances of invested cash and short-term investments and lower
interest rates over the comparative period. Net interest income remained
consistent from the three months ended March 31, 2004 to the three months ended
June 30, 2004. The patent infringement
settlement income resulted from payments received
on the settlement of our patent infringement lawsuit against Cognos for Cognos
future use of our patented technology under U.S. Patent No. 5,555,403. The
payment terms included the payment of $1.8 million each quarter commencing in
the quarter ended September 30, 2002 up to and including the three months ended
June 30, 2004. We do not expect any further income from this source. Foreign Exchange Gains (Losses) The section Impact of Foreign Currency Exchange Rate Fluctuations on
Results of Operations describes the change in our operations related to
foreign currency as a result of the acquisition of Crystal Decisions. For the
three and six months ended June 30, 2003, net foreign exchange gains (losses)
were minimized by the natural hedge of our revenues and expenses. During the six months ended June 30, 2004, we recognized $9.1 million of
net foreign exchange losses, $6.8 million which were recognized in the three
months ended March 31, 2004. The majority of this loss related to the
translation of the U.S. dollar denominated intercompany loans into the local
currencies of our subsidiaries. In order to mitigate the risk of these foreign
exchange losses occurring in the future, in April 2004, we entered into forward
contracts for the purchase of U.S. dollars, Canadian dollars and British pounds
in exchange for euros at a future date to settle various intercompany loans.
This future date coincides with the maturity of these intercompany loans. The
majority of the net foreign exchange loss for the three months ended June 30,
2004 was attributable to the reversal of the March 31, 2004 unrealized gain of
$3.4 million. This foreign exchange loss was partially offset by a gain on
these forward contracts of $0.3 million in April 2004. At June 30, 2004, we
held forward contracts to purchase U.S. $151.0 million, Cdn $9.9 million and
£25.3 million against the euro to settle obligations under 31




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intercompany loans. Since the implementation of our forward contract
strategy in May 2004, we do not anticipate material exchange gains or losses
from intercompany loans. As our Canadian operations continue to incur more expenses than earn
revenues, we hold forward contracts for the purchase of Canadian dollars. At
June 30, 2004, we held forward contracts to purchase Canadian $70.1 million using
U.S. dollars at various dates to December 13, 2004. Since the acquisition of
Crystal Decisions, we have and expect to continue to recognize either foreign
exchange gains or losses on a combination of events including forward exchange
contract gains or losses settled during and outstanding at period end and other
transactions involving the purchase of currencies. Income Taxes Our effective tax rate was 38% for the three and six months ended June 30,
2004 and 2003. We provide for income taxes for each interim period based on
the estimated annual effective tax rate for the year. 32




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##### Table of Contents



Liquidity and Capital Resources The following table shows our cash flow and changes in cash, cash
equivalents and short-term investments: For the Six Months endedJune 30,2004
    
    2003(in millions)Cash flow provided by operations
    
    $
    12.5
    
    
    $
    56.6Cash flow used in investing activities
    
    
    (16.3
    )
    
    
    (30.0
    )Cash flow provided by (used in) financing activities
    
    
    (33.3
    )
    
    
    6.3Effects of changes in foreign currency exchange rates on cash and equivalents
    
    
    4.3
    
    
    
    20.0Increase (decrease) in short-term investments
    
    
    
    
    
    
    29.5Net increase (decrease) in cash, cash equivalents and short-term investments
    
    $
    (32.8
    )
    
    $
    82.4
 Operating Activities.Our principal source of liquidity has been our
operating cash flow and funds provided by stock option exercises. During the
six months ended June 30, 2004 we generated greater cash resources than we used
from operations. The major uses of cash in the six months ended June 30, 2004
include: cash payments of approximately $13.0 million for restructuring
charges; a net cash payment of $21.5 million in accrued payroll and related
expense accruals which included severance payments to former employees, and
cash payments of approximately $11.9 million for normal course tax liabilities. As a result of the integration of the two companies and the consolidation
of certain portions of our collections team in the three months ended June 30,
2004, we collected less cash in the six months ended June 30, 2004 compared to
the six months ended June 30, 2003 which was reflected in the increase in days
sales outstanding to 81 days at June 30, 2004, from 75 days at March 31, 2004
and 57 days at June 30, 2003. Our deferred revenue balance increased by $41.6
million from December 31, 2003 which comprises a large portion of the overall
increase in cash provided by operations. Investing Activities.The decrease in net cash used in investing
activities resulted from the absence of any net purchases of short-term
investments in the six months ended June 30, 2004, which resulted in an
increase in cash used of $25.3 million during the six months ended June 30,
2003. This decrease in net cash used for the six months ended June 30, 2004
was offset by greater capital expenditures during the six months ended June 30,
2004 compared to the six months ended June 30, 2003. Capital expenditures of
$16.3 million for the six months ended June 30, 2004 included costs related to
the continued implementation of financial systems and information technology
infrastructure and the continued expansion of our facilities. Financing Activities. During the six months ended June 30, 2004, the net
use in cash from financing activities related to the transfer of $33.3 million
of cash to a restricted account in accordance with a pledge and security
agreement to collateralize forward contracts, the repurchase of 1 million of our shares
for $21.0 million, offset by cash received of $20.7 million from the exercise
of options under our stock option plans and the issuance of shares under our employee stock purchase plans. Our board of directors authorized the share repurchase of 3.5 million ordinary
shares at prices not to exceed 25.00 per share on May 14, 2004, pursuant to
the share repurchase program authorized by shareholders on May 15, 2003. These
shares have been appropriately accounted for as treasury stock. 33




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During the six months ended June 30, 2003, we received cash of $6.3
million from the exercise of options under our stock option plans and the issuance of shares under our employee stock
purchase plans. The majority of the increase in cash provided by stock option
exercises and stock purchases under our employee stock purchase plans for the six months ended June 30, 2004 results from exercises by
former Crystal Decisions optionees. We expect this source of
cash to vary because we cannot predict when our employees will
exercise their stock options. Cash, cash equivalents and short-term investments totaled $202.6 million
at June 30, 2004, a decrease of $32.8 million from December 31, 2003.
Excluding the movement of the $33.3 million collateralized under the pledge and
security agreement, cash and cash equivalents increased by $0.5 million from
December 31, 2003 and decreased $10.0 million from March 31, 2004. Future Liquidity Requirements Changes in the demand for our products and services could impact our
operating cash flow. However, based on our forecasts, we believe that our
existing cash and cash equivalents will be sufficient to meet our consolidated
cash requirements (for working capital, capital expenditures and lease
commitments) for the foreseeable future. Although we expect to continue to
generate cash from operations, we may seek additional financing from debt or
equity issuances which we believe would be available on reasonable terms. In
order to provide flexibility to obtain cash on a short-term basis, we obtained
a 60 million line of credit in the three months ended December 31, 2003
which can be drawn in euros, U.S. dollars or Canadian dollars to support our
cash management practices. At June 30, 2004 and December 31, 2003, no balance
was outstanding under this line of credit. On
April 28, 2004, we entered into a pledge and security agreement
covering certain forward contract services. In order to secure this agreement
we were required to maintain $33.3 million at June 30, 2004 in a money market
fund with the bank as collateral. This agreement grants the bank a security
interest in the collateral as security for the prompt performance of all
obligations with respect to, or arising out of, the foreign exchange
agreements. On July 28, 2004, we signed a first amendment to this agreement
that changes the requirement to hold the $33.3 million. On July 28, 2004 and
thereafter the agreement requires us to hold a balance equal to 10% of the
aggregate amount of all foreign exchange transactions entered into with the
bank. Based on our outstanding forward contracts at July 31, 2004 with the
bank, our restricted cash will be reduced to $22.9 million. Our contractual obligations have not changed materially from those
presented as of December 31, 2003 in our Annual Report on
Form      10-K. Guarantees From time to time, we enter into certain types of contracts that require
us to indemnify parties contingently against third party claims. These
contracts primarily relate to: (i) certain real estate leases, under which we
may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from our use of the applicable premises;
(ii) certain agreements with our officers, directors and employees and third
parties, under which we may be required to indemnify such persons for
liabilities arising out of their duties to us; and (iii) agreements under which
we indemnify customers and partners for claims arising from intellectual
property infringement.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, we have not been obligated to
make significant payments for these obligations, and no liabilities have been
recorded for these obligations on our balance sheets as of June 30, 2004 or at
December 31, 2003. We warrant that our software products will
operate substantially in conformity with product documentation and that the
physical media will be free from defect. The specific terms and conditions of
the warranties 34




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are generally 30 days but may vary depending upon the country in which the
software is sold. We accrue for known warranty issues if a loss is probable and
can be reasonably estimated, and accrue for estimated incurred but unidentified
warranty issues based on historical activity. To date we have had no material
warranty claims. Due to extensive product testing, the short time between
product shipments and the detection and correction of product failures, no
history of material warranty claims, and the fact that no significant warranty
issues have been identified, we have not recorded a warranty accrual to date. Environmental Liabilities. We only engage in the development, marketing
and distribution of software, and we have never had any environment related
claim. Therefore, the likelihood of incurring a loss related to these
environmental indemnifications is remote and thus we are unable to reasonably
estimate the amount. As a result, we have not recorded a related liability in
accordance with the recognition and measurement provisions of FAS No. 143,
Accounting for Asset Retirement Obligations (FAS 143). Other Liabilities and Other Claims. We are responsible for certain costs
of restoring leased premises to their original condition, and in accordance
with the recognition and measurement provisions of FAS 143, we measured the
fair value of these obligations at period end. We recorded approximately $0.2
million of expenses related to one lease which we vacated in the three months
ended June 30, 2004. No other amounts were determined to be material at June
30, 2004 and at December 31, 2003. 35




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Acquisitions and Restructuring Charges Crystal Decisions Acquisition Transaction.The total purchase price of $1.229 billion consisted of
$307.6 million in cash, $768.6 million in newly issued shares, $139.1 million
in stock options assumed and $13.9 million in estimated direct transaction
costs. The total purchase price was allocated to the following fair values of
Crystal Decisions assets and liabilities as of December 11, 2003 (in
millions): Net tangible assets acquired
    
    $
    60.8Amortizable intangible assets acquired
    
    
    142.7Deferred compensation on unvested stock options
    
    
    19.8In-process research and development
    
    
    28.0Goodwill
    
    
    978.0Total purchase price
    
    $
    1,229.3
 During the six months
ended June 30, 2004, an adjustment was made to the
net tangible assets acquired to increase goodwill. This increase was the
result of increases in estimates of liabilities that existed at the date of
purchase consisting mainly of a $9.0 million increase in income taxes payable
and $1.1 million for the under accrual of various liabilities and certain
restructuring costs. The purchase price allocation is preliminary and the final
amounts of net tangible assets and estimated transaction costs may change based
on new information during the purchase price allocation period. We expect,
with the exception of items related to open tax years, that the purchase price
allocation period will end prior to the end of 2004. Restructuring.Prior
to the acquisition of Crystal Decisions, we began to
assess and formulate a plan to restructure the combined companys operations to
eliminate duplicative activities, focus on strategic products and reduce the
companys cost structure. Our board of directors approved and committed to the
plan shortly after we completed the acquisition. The restructuring charge
is discussed in detail in Note 8 to the Condensed Consolidated Financial
Statements in Item 1 of this Form 10-Q. The restructuring accruals were based on our best estimates. However, if
actual amounts paid for Crystal Decisions restructuring activities differ from
those we estimated, then the purchase price allocation may be adjusted in future
periods. If actual amounts paid for the restructuring related to the
pre-acquisition Business Objects organization differ from those we estimated,
then our liability would be adjusted as an increase or decrease to expense in the
period that we change the estimate. Restructuring Costs Included as a Cost of the Crystal Decisions
Acquisition In December 2003, we accrued severance and other related benefits in
connection with the involuntary termination of 194 Crystal
Decisions employees
and other restructuring costs in connection with the abandonment of facilities.
Qualifying restructuring costs related to Crystal Decisions were accounted for
in the purchase price allocation. During the three months ended March 31,
2004, we paid approximately $4.7 million in severance and other related
benefits to 65 employees, and $0.2 million in net minimum lease payment and
settlement costs related to properties vacated. During the three months ended
June 30, 2004, we paid approximately $2.9 million to 63 employees across all
regions, and $0.1 million in net minimum lease payment and settlement costs
related to properties vacated. We expect to pay the remaining liability during
2004 as employees are terminated and facilities are vacated. 36




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The balance of accrued restructuring charges included as a cost of
acquisition related to Crystal Decisions were as follows at June 30, 2004 (in
millions): LeaseEmployee
    
    AbandonmentSeverance and
    
    and Write-offOther Related
    
    of Property andBenefits
    
    Equipment
    
    TotalRestructuring charge at December 2003
    
    $
    10.8
    
    
    $
    2.7
    
    
    $
    13.5Cash payments during 2003
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Balance at December 31, 2003
    
    $
    9.7
    
    
    $
    2.7
    
    
    $
    12.4Cash payments during period
    
    
    (4.7
    )
    
    
    (0.2
    )
    
    
    (4.9
    )Impact of foreign currency exchange
rates on translation of accrual
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Balance at March 31, 2004
    
    $
    4.5
    
    
    $
    2.5
    
    
    $
    7.0Cash payments during period
    
    
    (2.9
    )
    
    
    (0.1
    )
    
    
    (3.0
    )Adjustment to the original plan
    
    
    0.5
    
    
    
    
    
    
    
    0.5Additional restructuring charges
accrued during three months ended
June 30, 2004 included in operating
expenses
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.3
    )Balance at June 30, 2004
    
    $
    2.1
    
    
    $
    2.1
    
    
    $
    4.2
 Restructuring Costs Expensed Under FAS 146 As a result of the acquisition of Crystal Decisions, we accrued
approximately $7.8 million of expenses related to restructuring costs for
severance and other related benefits for 159 Business Objects employees across
all functions worldwide. During the three months ended March 31, 2004, the
accrual was reduced by $2.9 million in cash payments related to the termination
of 52 of these employees. During the three months ended June 30, 2004, we paid
cash of $1.8 million related to the termination of 34 employees. We anticipate
paying the remaining balance during the remainder of the year. These costs
will be recognized as the facilities are vacated during 2004 as required by FAS
146. The
balance of accrued restructuring costs associated with Business Objects
employees prior to our acquisition of Crystal Decisions  was as follows at June 30,
2004 (in millions): EmployeeSeverance andOther RelatedBenefitsRestructuring costs
    
    $
    7.8Less: non-cash stock based compensation expense
    
    
    (0.3
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    0.3Balance of December 31, 2003
    
    $
    7.8Cash payments during the period
    
    
    (2.9
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    0.1Balance at March 31, 2004
    
    $
    5.0Cash payments during the period
    
    
    (1.8
    )Additional restructuring charges accrued during the three months
ended June 30, 2004 included in operating expenses
    
    
    (0.2
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    Balance at June 30, 2004
    
    $
    3.0
 37




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Acta Technology, Inc. (Acta) Acquisition Transaction.On August 23, 2002, we acquired Acta, a privately held data
integration software vendor. The acquisition provided us with a comprehensive
enterprise analytic platform for the delivery of custom-developed and
pre-packaged analytic applications. The purchase price of $65.5 million in cash
was allocated to the following fair values of Actas net tangible and
intangible assets as of the date of the acquisition (in millions): Net tangible assets acquired
    
    $
    (5.3
    )In-process research and development
    
    
    2.0Other intangible assets
    
    
    7.2Goodwill
    
    
    61.6Total purchase price
    
    $
    65.5
 Restructuring.Immediately prior to our acquisition of Acta, Actas board
of directors and management initiated and approved plans to restructure Actas
operations. The restructuring plan reduced Actas cost structure and better
aligned product and operating expenses with existing general economic
conditions. Acta capitalized approximately $13.5 million of restructuring costs
which were recorded as liabilities as part of the purchase price allocation.
The restructuring liability consisted primarily of severance and other employee
benefits and the costs of vacating duplicate facilities. During 2003 the lease for Actas Mountain View, California facility was
terminated through an action to take the property by eminent domain by the
Santa Clara Valley Transportation Authority. Upon termination of the lease, the
remaining $2.7 million accrual related to this facility was reversed as an
adjustment to goodwill. The balance of the accrued restructuring charges was
capitalized as a cost of acquisition and was as follows to June 30, 2004 was
(in millions): LeaseEmployee
    
    AbandonmentSeverance and
    
    and Write-offother related
    
    of Property andbenefits
    
    Equipment
    
    TotalRestructuring charge at August 2002
    
    $
    4.4
    
    
    $
    9.1
    
    
    $
    13.5Cash payments during 2002
    
    
    (4.4
    )
    
    
    (1.1
    )
    
    
    (5.5
    )Non-cash charges
    
    
    
    
    
    
    (1.2
    )
    
    
    (1.2
    )Balance at December 31, 2002
    
    $
    
    
    
    $
    6.8
    
    
    $
    6.8Net cash payments during 2003
    
    
    
    
    
    
    (3.4
    )
    
    
    (3.4
    )Reversal of excess U.S. facilities
shutdown accrual adjusted through
goodwill
    
    
    
    
    
    
    (2.7
    )
    
    
    (2.7
    )Balance at December 31, 2003
    
    $
    
    
    
    $
    0.7
    
    
    $
    0.7Cash payments during period
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Impact of foreign currency
exchange rates on translation of
accrual
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2004
    
    $
    
    
    
    $
    0.6
    
    
    $
    0.6Cash payments during period
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Impact of foreign currency
exchange rates on translation of
accrual
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2004
    
    $
    
    
    
    $
    0.5
    
    
    $
    0.5
 The remaining accrual of $0.5 million at June 30, 2004 represents
estimated future minimum lease payments for Actas U.K. facility, which
includes payments until 2005. 38




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Other Restructuring Costs In 2002, we implemented a restructuring plan to eliminate approximately 50
positions in our European field operations to better align the revenue and cost
structure in Europe in response to the regions overall weak IT spending
environment. In addition, we eliminated excess office space in France, Italy,
Spain and Switzerland. The total expense related to the involuntary termination
of employees and the exit of facilities was $3.9 million. The remaining $0.5
million accrual as of June 30, 2004 represented estimated remaining legal costs
or payments to terminated employees who have initiated claims against us. We
do not anticipate that there will be a resolution to these claims until at
least the fourth quarter of 2004. The change in the balance from December 31,
2003 is due solely to the foreign currency revaluation of this amount. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements at June 30, 2004 or at
December 31, 2003. Critical Accounting Policies We believe there have been no significant changes in our critical
accounting policies during the six months ended June 30, 2004 to what was
previously disclosed in Managements Discussion and Analysis of Financial
Condition and Results of Operationsincluded in our Annual Report on Form 10-K
for the year ended December 31, 2003. Recent Pronouncements Share Based Payments.On March 31, 2004, the Financial Accounting
Standards Board published an Exposure Draft, Share-Based Payment, an Amendment
of FASB Statements No. 123 and 95.The proposed change in accounting would
replace the existing requirements under FAS 123 and APB 25. Under the
proposal, all forms of share-based payments to employees, including employee
stock options and employee stock purchase plans, would be treated the same as
other forms of compensation by recognizing the related cost in the statements
of income. This proposed Statement would eliminate the ability to account for
stock-based compensation transactions using APB 25 and generally would require
instead that such transactions be accounted for using a fair-value based
method. The FASB has concluded that a binomial model such as a lattice model
is preferred over the Black-Scholes valuation model in determining the fair
value of an option at grant date. The comment period for the exposure draft
ended on June 30, 2004. We are investigating what impact the adoption of the
exposure draft will have on our financial position and results of operations. Disclosure Requirements Related to Pensions and Other Postretirement
Benefits.In December 2003, the FASB issued FAS No. 132 (Revised), Employers
Disclosures about Pensions and Other Postretirement Benefit  an amendment of
FASB Statements No. 87, 88, and 106(FAS 132R). A revision of the
pronouncement originally issued in 1998, FAS 132R expands employers disclosure
requirements for pension and postretirement benefits to enhance information
about plan assets, obligations, benefit payments, contributions, and net
benefit cost. The statement does not change the measurement or recognition
provisions for pensions and other postretirement benefits. This
statement was effective for fiscal years ended after December 15,
2003, except in cases where a company only has a foreign plan, in
which case the statement is effective for interim periods
beginning after June 15, 2004. We currently only have a foreign
plan. 39




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Factors Affecting Future Operating Results Risks Related to the Crystal Decisions Acquisition We
may not realize the benefits that we anticipated from our acquisition
of Crystal Decisions within the time periods or to the extent that we expected because
of integration and other challenges. On December 11, 2003, we acquired Crystal Decisions. If we fail to
successfully integrate Crystal Decisions into our operations or fail to realize
any of the anticipated benefits of the acquisition, our business and results of
operations severely could be harmed. Realizing the benefits of the acquisition
will depend in part on the integration of our operations, people and
technology. This integration effort is a complex, time-consuming and expensive
process that could significantly disrupt our business. We may be unable to
integrate the two companies successfully in a timely manner or to the extent we
expected. Combining our product offerings is a complex and lengthy process involving
a number of intermediate steps in which we will seek to achieve increasing
degrees of integration of our products. We have informed our customers of our
expected timing for various key milestones in our product integration efforts.
Technical or other challenges in integrating our future products could delay or
prevent the successful integration of our products or cause us to incur
unanticipated costs. If we fail to achieve one or more of these milestones as
planned, then our ability to market our products and our revenues and operating
results could be seriously harmed. Our customers can elect to continue to use
stand-alone products for some time and we may not be able to convince them to
adopt our combined product. As a result, we may have to continue to support
multiple products. To market our products effectively, we are training our sales and
marketing employees, who have historically marketed either Business Objects or
Crystal Decisions products and services, to market our combined product and
service offerings. While we are devoting significant efforts to training our
employees to market our combined products, we cannot be sure that these efforts
will be successful. If we do not successfully integrate and train our sales
and marketing force, our ability to market our products and services and our
revenues could suffer. The challenges involved in this integration effort also include the
following:  
    
    demonstrating to our customers that the acquisition will not result
in adverse changes in our client service standards or business focus;
    
    consolidating and rationalizing information technology, enterprise
resource planning and administrative infrastructures while avoiding
significant errors, delays or other breakdowns in our business
processes such as order processing or technical support; and
    
    managing a more complex corporate structure that requires
additional resources for such responsibilities as tax planning, foreign
currency management, financial reporting and risk management. The
market price of our shares may decline as a result of our acquisition
of Crystal Decisions. A number of factors could cause the market price of our shares to decline
as a result of our acquisition of Crystal Decisions, including if:  
    
    our integration effort is not completed in a timely and efficient
manner; 40




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
    
    preserving distribution, marketing or other important relationships
of both companies and resolving potential conflicts that may arise;
    
    coordinating and rationalizing research and development efforts to
integrate our overlapping products and technologies successfully;
    
    integrating the research and development teams, which is made more
difficult because they are located in disparate geographies;
    
    aligning the business cultures of the two companies while
maintaining employee morale and retaining key employees;
    
    dedicating significant management attention and financial resources
needed to integrate the two companies without harming existing
businesses;
    
    our assumptions about the business model and operations of Crystal
Decisions were incorrect, or its role in our business does not develop
as we planned;
    
    the effect of the Crystal Decisions acquisition on our financial
results is not consistent with the expectations of financial or
industry analysts; or
    
    shareholders that hold relatively large interests in our company
decide to dispose of their shares because the results of the acquisition are not consistent with their expectations. Charges
to earnings resulting from our acquisition of Crystal Decisions may
adversely affect the market value of our shares. We have accounted for our acquisition of Crystal Decisions using the purchase
method of accounting in accordance with U.S. GAAP. The portion of the estimated
purchase price allocated to in-process research and development was expensed in
the quarter ended December 31, 2003. We expect to incur additional depreciation
and amortization expense over the useful lives of certain intangible assets
acquired in connection with the acquisition, which will reduce our operating
results through 2008. In addition, we recorded goodwill of $978 million in
connection with the acquisition. If this goodwill, other
intangible assets with indefinite lives or other assets acquired in the acquisition become impaired, we may be required to incur material
charges relating to the impairment of those assets. Any significant impairment
charges will have a negative effect on our operating results and could reduce
the market price of our shares. We have incurred and expect to incur additional restructuring expenses
during 2004, which we currently estimate to be $2.6 million. We cannot be sure
that these expenses and charges will not be higher than we currently
anticipate. These and any additional restructuring or operating expenses and
charges could adversely affect our results of operations. Our acquisition of Crystal Decisions could have an adverse effect on our revenues
and profitability in the near term if customers delay, defer or cancel
purchases as a result of the transaction. In response to our acquisition of Crystal Decisions and our product
transition announcements, customers may seek to cancel existing purchases or
delay or defer purchasing decisions which could have an adverse effect on our
business. Prospective customers could decide not to purchase our products or
services until we release one or more future products that integrate
capabilities and features of both Business Objects and Crystal Decisions
products. Although we anticipate releasing an integrated product line in late
2004, some customers may elect to continue using the old Business Objects or
Crystal Decisions stand alone products for sometime or may never adopt our
integrated product line. In addition, 41




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prospective customers could be reluctant to purchase licenses for our
products or services if the customers are uncertain about our strategic
direction, the continuation of specific product offerings or our willingness to
support and maintain existing products. These factors could cause a significant
customer or a significant number of customers not to purchase or to delay
purchase decisions, which could have an adverse effect on our results of
operations and quarterly revenues such that they could be substantially below
the expectations of market analysts, which could reduce the market price of our
shares. Uncertainty regarding the effects of our acquisition of Crystal Decisions could
cause our strategic partners or key employees to make decisions that could
adversely affect our business and operations. Some of our original equipment manufacturers, distributors and other
strategic partners could decide to terminate their existing arrangements, or
fail to renew those arrangements, as a result of our acquisition of Crystal Decisions. In addition, our key employees may decide to terminate their
employment due to the acquisition and other employees may
experience uncertainty about their future with us, which could adversely affect
our ability to retain key management, sales, technical and marketing personnel. Risks Related to Our Business Our quarterly operating results will be subject to fluctuations. Historically, both our quarterly operating results and Crystal Decisions
quarterly operating results have varied substantially from quarter to quarter,
and we anticipate that this will continue as we operate as a combined company.
The fluctuation occurred principally because our net license fees vary from
quarter to quarter, while a high percentage of our operating expenses are
relatively fixed and are based on anticipated levels of revenues. While the
variability of our net 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 expect to receive a substantial amount of our revenues in the
last weeks of the last month of a quarter, rather than evenly
throughout the quarter;
    
    our customers typically wait until the fourth quarter, the end of
their annual budget cycle, before deciding whether to purchase new
software;
    
    economic activity in Europe generally slows during the summer
months;
    
    customers may delay purchasing decisions in anticipation of our
integrated product line, which reflects both Business Objects and
Crystal Decisions products, other new products, product enhancements
or platforms or in response to announced pricing changes by us or our
competitors;
    
    we expect our revenues may vary based on the mix of products and
services of, and the amount of consulting services, our customers
order;
    
    we depend in part on large orders and any delay in closing a large
order may result in the realization of potentially significant net
license fees being postponed from one quarter to the next; and
    
    we expect our revenues to be sensitive to the timing of offers of
new products that successfully compete with our products on the basis
of functionality, price or otherwise. 42




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General market conditions and other domestic or international
macroeconomic and geopolitical factors unrelated to our performance also affect
our quarterly revenues and operating results. For these reasons,
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. The market price of our shares will be susceptible to changes in our operating
results and to stock market fluctuations. Our operating results may be below the expectations of public market
analysts and investors; and therefore, the market price of our shares may fall.
In addition, the stock markets in the United States and France have experienced
significant price and volume fluctuations in recent periods, which have
particularly affected the market prices of many software companies and which
have often been unrelated to the operating performance of these companies. The
market fluctuations have affected our stock price in the past and could
continue to affect our stock price in the future. The market price of our
common stock may be affected by the following factors:  
    
    announcements of our quarterly operating results and expected
results of the future periods;
    
    announcements of our competitors or customers quarterly operating
results, and expected results of future periods;
    
    changes in revenues and earnings estimates by securities analysts; and
    
    addition of significant new customers or loss of current customers. We may be unable to sustain or increase our profitability. While we were profitable in our most recent quarter, our ability to
sustain or increase profitability on a quarterly or annual basis will be
affected by changes in our business. We expect our operating expenses to
increase as our business grows, and we anticipate that we will make investments
in our business. In addition, our ability to achieve synergies as a result of
our acquisition of Crystal Decisions will affect our profitability. Therefore,
our results of operations will be harmed if our revenues do not increase at a
rate equal to or greater than increases in our expenses or are insufficient for
us to sustain profitability. If we overestimate revenues, we may be unable to reduce our expenses to avoid
or minimize a negative impact on our quarterly results of operations. Our revenues will be difficult to forecast and are likely to fluctuate
significantly from quarter to quarter. Our estimates of sales trends may not
correlate with actual revenues in a particular quarter or over a longer period
of time. Variations in the rate and timing of conversion of our sales prospects
into actual licensing revenues could cause us to plan or budget inaccurately
and those variations could adversely affect our financial results. In
particular, delays, reductions in amount or cancellation of customers
purchases would adversely affect the overall level and timing of our revenues,
which could then harm our business, results of operations and financial
condition. In addition, because our costs will be relatively fixed in the short term,
we may be unable to reduce our expenses to avoid or minimize the negative
impact on our quarterly results of operations if anticipated revenues are not
realized. As a result, our quarterly results of operations could be worse than
anticipated. 43




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Changes to current accounting policies could have a significant effect on our
reported financial results or the way in which we conduct our business. We
prepare our financial statements in conformity with U.S. GAAP, which is a
body of guidance that is subject to interpretation by the American Institute of
Certified Public Accountants, the Public Company Accounting Oversight Board,
the SEC and various bodies formed to interpret and create appropriate
accounting policies. A change in these policies could have a significant
effect on our reported results and may even retroactively affect previously
reported transactions. Our accounting policies that recently have been or may
in the future be affected by the changes in the accounting rules are as
follows:  
    
    software revenue recognition;
    
    accounting for stock-based compensation;
    
    accounting for variable interest entities; and
    
    accounting for goodwill and other intangible assets. Changes in these or other rules, or the questioning of current practices,
may have a significant adverse effect on our reported operating results or in
the way in which we conduct our business. Our market is highly competitive and competition could harm our ability to sell
products and services and reduce our market share. The market in which we compete is intensely competitive, highly fragmented
and characterized by changing technology and evolving standards. Our
competitors may announce new products, services or enhancements that better
meet the needs of customers. Increased competition may cause price reductions
or a loss of market share, either of which could have a material adverse effect
on our business, results of operations and financial condition. Additionally, we may face competition from many companies with whom we
have strategic relationships, including Hyperion Solutions Corporation,
International Business Machines Corporation, Lawson Software, Inc., Microsoft
Corporation, PeopleSoft, Inc. and SAP AG, all of whom offer business
intelligence products that compete with our products. For example, Microsoft
has extended its SQL server business intelligence platform to include reporting
capabilities which compete with our enterprise reporting solutions. These
companies could bundle their business intelligence software with their other
products at little or no cost, giving them a potential competitive advantage
over us. Because our products will be specifically designed and targeted to the
business intelligence software market, we may lose sales to competitors
offering a broader range of products. Acquisitions of, or other strategic transactions by, our competitors could
weaken our competitive position or reduce our revenues. Some of our competitors may have greater financial, technical, sales,
marketing and other resources than we do. In addition, some of these
competitors may enjoy greater name recognition and a larger installed customer
base than we do. These competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion, sale and support of their products. In
addition, some of our competitors may be more successful than we are in
attracting and retaining customers. Moreover, some of our competitors,
particularly companies that offer relational database management software
systems, enterprise resource planning software systems and customer
relationship management systems may have well-established relationships with
some of our existing and targeted customers. This competition could harm our
ability 44




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to sell products and services, which may lead to lower prices for our
products, reduced revenues, reduced gross margins and, ultimately, reduced
market share. If one or more of our competitors were to merge or partner with another of
our competitors, the change in the competitive landscape could adversely affect
our ability to compete effectively. For example, in October 2003, Hyperion
acquired Brio Software. Furthermore, companies larger than ours could enter the
market through internal expansion or by strategically aligning themselves with
one of our competitors and providing products that cost less than our products.
Our competitors may also establish or strengthen cooperative relationships with
our current or future distributors, resellers, original equipment manufacturers
or other parties with whom we have relationships, thereby limiting our ability
to sell through these channels and reducing promotion of our products. We have strategic relationships with Microsoft and SAP which, if terminated,
could reduce our revenues and harm our operating results. We have strategic relationships with Microsoft and SAP that enable us to
bundle our products with those of Microsoft and SAP, and we are also developing
certain utilities and products to be a part of Microsofts and SAPs products.
We will have limited control, if any, as to whether Microsoft or SAP will
devote adequate resources to promoting and selling our products. Microsoft and
SAP have designed their own business intelligence software. If either Microsoft
or SAP reduces its efforts on our behalf or discontinues its relationship with
us and instead develops a relationship with one of our competitors or increases
its selling efforts of its own business intelligence software, our revenues and
operating results may be reduced. For example, recently Microsoft began
actively marketing its reporting product for its SQL server business
intelligence platform. We
sell products only in the business intelligence software market; if
sales of our products in this market decline, our operating results will be
harmed. We generate substantially all of our revenues from licensing, support and
services in conjunction with the sale of our products in the business
intelligence software market. 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 other reasons, our operating results would suffer. If the market in which we sell business intelligence software does not grow as
anticipated, our future profitability could be negatively affected. The business intelligence software market is still emerging, and our
success depends upon the growth of this market. Our potential customers may:  
    
    not fully value the benefits of using business intelligence products;
    
    not achieve favorable results using business intelligence products;
    
    experience technical difficulty in implementing business intelligence products; or
    
    use alternative methods to solve the problems addressed by business intelligence software. These factors may cause the market for business intelligence software not
to grow as quickly or become as large as we anticipate, which may adversely
affect our revenues. 45




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If the current economic uncertainty continues, our customers may reduce, delay
or cancel purchases of our products and services, in which case our results of
operations will be harmed. We cannot predict what impact the current economic uncertainty will have
on the business intelligence software market or our business, but it may result
in fewer purchases of licenses of our software, extended sales cycles, downward
pricing pressures or lengthening of payment terms. Our customers may also
discontinue their renewals of our maintenance and technical support services
due to shrinking budgets. If our customers reduce, delay or cancel purchases of
our products and services, our results of operations will be harmed. Our software may have defects and errors that may lead to a loss of revenues or
product liability claims. Our products and platforms are internally complex and may 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 after
commercial release of either new versions or enhancements of our products and
platforms:  
    
    potential customers may delay purchases;
    
    customers may react negatively, which could reduce further sales;
    
    our reputation in the marketplace may be damaged;
    
    we may have to defend product liability claims;
    
    we may be required to indemnify our customers, distributors,
original equipment manufacturers or other resellers;
    
    we may incur additional service and warranty costs; and
    
    we may have to divert additional development resources to correct
the defects and errors, which may result in delay of new product
releases or upgrades. If any or all of the foregoing occur, we may lose revenues, 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 large-scale deployments, which
could cause a decline or delay in recognition of our revenues and an increase
in our expenses. We may have difficulty managing the timeliness of our large-scale
deployments and our internal allocation of personnel and resources. Any
difficulty could cause us to lose existing customers, face potential customer
disputes or limit the number of new customers who purchase our products or
services, which could cause a decline in or delay in recognition of revenues,
and could cause us to increase our research and development and technical
support costs, either of which could adversely affect our operating results. 46




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In addition, we generally have long sales cycles for our large-scale
deployments. During a long sales cycle, events may occur that could affect the
size, timing or completion of the order. For example, the potential customers
budget and purchasing priorities may change, the economy may experience a
downturn or new competing technology may enter the marketplace, any of which
could reduce our revenues. The software market in which we operate is subject to rapid technological
change and new product introductions, which could negatively affect our product
sales. The market for business intelligence software is characterized by rapid
technological advances, evolving industry standards, changes in customer
requirements and frequent new product introductions and enhancements. The
emergence of new industry standards in related fields may adversely affect the
demand for our products. 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. Further, 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, our customers may
defer or forego purchases of our existing products. We are currently a party to several lawsuits with MicroStrategy. The
prosecution of these lawsuits could have a substantial negative impact on our
business. Should MicroStrategy prevail, we may be required to pay substantial
monetary damages or be prevented from selling some of our products. 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
U.S. Patent No. 5,555,403 by making, using, offering to sell and selling its
product currently known as MicroStrategy Version 7.0. Our complaint requests
that MicroStrategy be enjoined from further infringing the patent and seeks an
as-yet undetermined amount of damages. On June 27, 2003, MicroStrategy filed a
motion for summary judgment that its products do not infringe our patent. On
August 29, 2003, the Court ruled that our patent was not literally infringed
and that we were estopped from asserting the doctrine of equivalents and
dismissed the case. We have appealed the Courts judgment to the Court of
Appeals for the Federal Circuit and anticipate a ruling on the appeal in early
2005. We cannot reasonably estimate at this time whether a monetary settlement
will be reached. On October 30, 2001, MicroStrategy filed an action for alleged patent
infringement in the United States District Court for the Eastern District of
Virginia against us and our subsidiary, Business Objects Americas. The
complaint alleges that our software products, BusinessObjects Broadcast Agent
Publisher, BusinessObjects Broadcast Agent Scheduler and BusinessObjects
Infoview, infringe MicroStrategys U.S. Patent Nos. 6,279,033 and 6,260,050. In
December 2003, the Court dismissed MicroStrategys claim of infringement on
U.S. Patent No. 6,279,033 without prejudice. Trial on U.S. Patent No.
6,260,050 was scheduled to begin June 14, 2004. On June 7, 2004, the Court
sent a letter to all counsel informing the parties that the Court was of the
opinion that summary judgment should be granted in our favor as to
infringement. As a consequence, the Court canceled the trial. On
August 6, 2004, the Court entered a formal opinion and order formalizing this decision. In April 2002, MicroStrategy obtained leave to amend its patent claims
against us to include claims for misappropriation of trade secrets, violation
of the Computer Fraud and Abuse Act, tortuous interference with contractual
relations and conspiracy in violation of the Virginia Code seeking injunctive
relief and damages. On December 30, 2002 the Court granted our motion for
summary judgment and 47




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rejected MicroStrategys claims for damages as to the causes of action for
misappropriation of trade secrets, Computer Fraud and Abuse Act and conspiracy
in violation of the Virginia Code. Trial of the trade secret claim for
injunctive relief and the sole remaining damages claim for tortious
interference with contractual relations started on October 20, 2003. On
October 28, 2003, the Court granted judgment as a matter of law in our favor
and dismissed the jury trial on MicroStrategys allegations that we tortiously
interfered with certain employment agreements between MicroStrategy and its
former employees. The Court took MicroStrategys claim for misappropriation of
trade secrets under submission. On August 6, 2004, the Court issued a formal opinion and order rejecting all of
MicroStrategys claims for misappropropriation of trade secrets except for a
finding that a former employee of the company had misappropriated two
documents. The Court issued a very limited injunction requiring us not to
possess, use or disclose the two documents as to which it found
misappropriation. The Court also denied MicroStrategys request for attorney
fees. The Courts finding and injunction as to the two documents will not
affect in any manner our ability to sell or support our products. On December 10, 2003, MicroStrategy filed an action for patent
infringement against Crystal Decisions in the United States District Court for
the District of Delaware. We became a party to this action when we acquired
Crystal Decisions. The complaint alleges that the Crystal
Decisions software
products: Crystal Enterprise, Crystal Reports, Crystal Analysis and Crystal
Applications, infringe MicroStrategys U.S. Patent Nos. 6,279,033, 6,567,796
and 6,658,432. The complaint seeks relief in the form of an injunction,
unspecified damages, an award of treble damages and attorneys fees. Our
investigation of this matter and discovery are at a preliminary stage. We
intend vigorously to defend this action. Were an unfavorable outcome to arise,
there can be no assurance that such outcome would not have a material adverse
affect on our liquidity, financial position or results of operations. We believe that we have meritorious defenses to MicroStrategys various
allegations and claims in each of the suits and we intend to continue vigorously to defend
the actions. However, because of the inherent uncertainty of
litigation in general, and the fact that the discovery related to certain of
these suits is ongoing, we cannot assure you that we will ultimately prevail.
Should MicroStrategy ultimately succeed in the prosecution of its claims, we
could be permanently enjoined from selling some of our products and deriving
related maintenance revenues. In addition, we could be required to pay
substantial monetary damages to MicroStrategy. Litigation such as the suits
MicroStrategy has brought against us can take years to resolve and can be
expensive to defend. An adverse judgment, if entered in favor of any
MicroStrategy claim, could seriously harm our business, financial position and
results of operations and cause our stock price to decline substantially. In
addition, the MicroStrategy litigation, even if ultimately determined to be
without merit, will be time consuming to defend, divert our managements
attention and resources and could cause product shipment delays or require us
to enter into royalty or license agreements. These royalty or license
agreements may not be available on terms acceptable to us, if at all, and the
prosecution of the MicroStrategy allegations and claims could significantly
harm our business, financial position and results of operations and cause our
stock price to decline substantially. We are a party to litigation with Vedatech Corporation and, in the event of an
adverse judgment against us, we may have to pay damages, which could adversely
affect our financial position and results of operations. In November 1997, Vedatech commenced an action in
the Chancery Division of the High Court of Justice in the United Kingdom
against Crystal Decisions (UK) Limited, now a wholly owned subsidiary of
Business Objects Americas. We became a party to the following action when we acquired Crystal
Decisions in December 2003. The liability phase of the trial was completed in
March 2002, and Crystal Decisions prevailed on all claims except for the
quantum meruit claim. The court ordered the parties to mediate the amount of
that claim and, in August 2002, the parties came to a mediated settlement. The
mediated settlement was not material to Crystal Decisions operations and
contained no continuing obligations. In September 2002, however, Crystal
Decisions received a notice that Vedatech was seeking to set aside the
settlement. The mediated settlement and related costs were accrued in the
consolidated financial statements. In April 2003, Crystal Decisions filed an
action in the High Court of Justice seeking a 48




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declaration that the mediated settlement agreement is valid and binding.
In connection with this request for declaratory relief Crystal Decisions paid
the agreed settlement amount into court. In October 2003, Vedatech and Mani Subramanian filed an action against
Crystal Decisions, Crystal Decisions (UK) Limited and Susan J. Wolfe, Vice
President, General Counsel and Secretary of Crystal Decisions, in the United
States District Court, Northern District of California, San Jose Division,
alleging that the August 2002 mediated settlement was induced by fraud and that
the defendants engaged in negligent misrepresentation and unfair competition.
In July 2004, the United States District Court, Northern District of
California, San Jose Division granted the defendants motion to stay any
proceedings before such court pending resolution of the matters currently
submitted to the English Court. In October 2003, Crystal Decisions (UK), Crystal Decisions (Japan) K.K. and
Crystal Decisions, Inc. filed an application with the High Court of Justice
claiming the proceedings in United States District Court, Northern District of
California, San Jose Division were commenced in breach of an exclusive
jurisdiction clause in the settlement agreement and requesting injunctive
relief to restrain Vedatech from pursuing the United States District Court
proceedings. A hearing in the High Court of Justice took place on various dates
between January 29 and March 9, 2004. On August 3, 2004, the U.K. High Court of Justice granted the
anti-suit injunction but provided that the United States District Court, Northern District of California, San Jose
Division could complete its determination of any matter that may be pending. Although we believe that Vedatechs basis for seeking to set aside the
mediated settlement and its claims in the October 2003 complaint is meritless,
the outcome cannot be determined at this time. If the mediated settlement were
to be set aside, an ultimate damage award could adversely affect our financial
position, liquidity and results of operations. We are a party to litigation with Informatica and, in the event of an adverse
judgment against us, we may have to pay damages or be prevented from selling
some of our products, which could adversely affect our financial position and
results of operations. On July 15, 2002, Informatica filed an action for alleged patent
infringement in the United States District Court for the Northern District of
California against Acta. We became a party to this action when we acquired Acta
in August 2002. The complaint alleges that the Acta software products infringe
Informaticas U.S. Patents Nos. 6,014,670, 6,339,775 and 6,208,990. On July 17,
2002, Informatica filed an amended complaint alleging that the Acta software
products also infringe U.S. Patent No. 6,044,374. The complaint seeks relief in
the form of an injunction, unspecified damages, an award of treble damages and
attorneys fees. We have answered the suit, denying infringement and asserting
that the patents are invalid and other defenses. The parties are currently
engaged in discovery and are awaiting a claim construction order to be issued
by the Court. The Court has vacated the August 16, 2004 trail date previously
set and a trial date will probably not be set again until the Court issues its
claim construction order. We intend vigorously to  defend the action. Were an
unfavorable outcome to arise, there can be no assurance that such outcome would
not have a material adverse affect on our liquidity, financial position or
results of operations. Although we believe that Informaticas basis for its suit is meritless,
the outcome cannot be determined at this time. Because of the inherent
uncertainty of litigation in general and that fact that this litigation is
ongoing, we cannot assure you that we will prevail. Should Informatica
ultimately succeed in the prosecution of its claims, we could be permanently
enjoined from selling some of our products and be required to pay damages. The protection of our intellectual property rights is crucial to our
business and, if third parties use our intellectual property without our
consent, our business could be damaged. Our success is heavily dependent on protecting intellectual property
rights in our proprietary technology, which is primarily our software. It is
difficult for us to protect and enforce our intellectual property rights for a
number of reasons, including: 49




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
    
    policing unauthorized copying or use of our products is difficult and expensive;
    
    software piracy is a persistent problem in the software industry;
    
    our patents may be challenged, invalidated or circumvented; and
    
    our shrink-wrap licenses may be unenforceable under the laws of certain jurisdictions. In addition, the laws of many countries do not protect intellectual
property rights to as great an extent as those of the United States and France.
We believe that effective protection of intellectual property rights is
unavailable or limited in certain foreign countries, creating an increased risk
of potential loss of proprietary technology due to piracy and misappropriation.
For example, we recently began doing business in the Peoples Republic of China
where the status of intellectual property law is unclear and we may expand our
presence there in the future. 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 trademark rights in the name Business Objects
because some jurisdictions consider the name Business Objects to be generic
or descriptive in nature. As a result, we may be unable to effectively police
the unauthorized use of our name or otherwise prevent our name from becoming a
part of the public domain. We are involved in litigation to protect our intellectual property rights,
and we may become involved in further litigation in the future. This type of
litigation is costly and could negatively impact our operating results. For
example, we are currently involved in a patent infringement action against
MicroStrategy. Third parties have asserted that our technology infringes upon their
proprietary rights, and others may do so in the future, which has resulted in
costly litigation and could adversely affect our ability to distribute our
products. From time to time, companies in the industry in which we compete receive
claims that they are infringing upon the intellectual property rights of third
parties. We believe that software products that are offered in our target
markets will increasingly be subject to infringement claims as the number of
products and competitors in the industry segment grows and product
functionalities begin to overlap. For example, we are defending one patent
infringement suit brought by Informatica, one brought by MicroStrategy against
us and one brought by MicroStrategy against Crystal Decisions. The potential effects on our business operations resulting from third
party infringement claims that have been filed against and may be filed against
us in the future include the following:  
    
    we could be forced to cease selling or delay shipping our products;
    
    we would be forced to commit management resources in defense of the claim;
    
    we may incur substantial litigation costs in defense of the claim;
    
    we may have to expend significant development resources to redesign our products; and
    
    we may be required to enter into royalty and licensing agreements
with such third party under unfavorable terms. We may also be required to indemnify customers, distributors, original
equipment manufacturers and other resellers for third-party products
incorporated in our products if such third partys products infringe 50




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upon the intellectual property rights of others. Although many of these
third parties will be obligated to indemnify us if their products infringe the
intellectual property rights of others, the indemnification may not be
adequate. In addition, from time to time, there have been claims challenging the
ownership of open source software against companies that incorporate open
source software into their products. We use a limited amount of open source
software in our products and may use more open source software in the future.
As a result, we could be subject to suits by parties challenging ownership of
what we believe to be our proprietary software. Any of this litigation could be
costly for us to defend, have a negative effect on our results of operations
and financial condition or require us to devote additional research and
development resources to redesign our products. Our loss of rights to use software licensed from third parties could harm our
business. We license software from third parties and sub-license this software to
our customers. In addition, we license software from third parties and
incorporate it into our products. In the future, we may be forced to obtain
additional third party software licenses to enhance our product offerings and
compete more effectively. By utilizing third party software in our business, we
incur risks that are not associated with developing software internally. For
example, third party licensors may discontinue or modify their operations,
terminate their relationships with us, or generally become unable to fulfill
their obligations to us. If any of these circumstances were to occur, we might
be forced to seek alternative technology of inferior quality, which has lower
performance standards or which might not be available on commercially
reasonable terms. If we are unable to maintain our existing licenses or obtain
alternate third party software licenses on commercially reasonably terms, our
revenues could be reduced, our costs could increase and our business could
suffer. We depend on strategic relationships and business alliances for continued
growth of our business. Our development, marketing and distribution strategies depend on our
success to create and maintain long-term strategic relationships with major
vendors, many of whom are substantially larger than us. These business
relationships often consist of joint marketing programs or partnerships with
original equipment manufacturers or value added resellers. Although certain
aspects of these relationships are contractual in nature, many important
aspects of these relationships depend on the continued cooperation of each
party. Divergence in strategy, change in focus, competitive product offerings
or contract defaults by any of these companies might interfere with our ability
to develop, market, sell or support our products, which in turn could harm our
business. Although no one of our resellers currently accounts for a material
percentage of our total revenues, if one or more of our other large resellers
were to terminate their co-marketing agreements with us it could have an
adverse effect on our business, financial condition and results of operations.
In addition, our business, financial condition and results of operations could
be adversely affected if major distributors were to materially reduce their
purchases from us. We had no customers who accounted for 10% or
more of our sales in the three or six months ended June 30, 2004 or 2003. Our distributors and other resellers generally carry and sell product
lines that are competitive with ours. Because distributors and other resellers
generally are not required to make a specified level of purchases from us, we
cannot be sure that they will prioritize selling our products. We rely on our
distributors and other resellers to sell our products, report the results of
these sales to us and to provide services to certain of the end user customers
of our products. If the distributors and other resellers do not sell our
products, report sales accurately and in a timely manner and adequately service
those end user customers, our revenues and the adoption rates of our products
could be harmed. 51




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We may pursue strategic acquisitions and investments that could have an adverse
effect on our business if they are unsuccessful. As part of our business strategy, we have acquired companies, technologies
and product lines to complement our internally developed products. We expect
that we will have a similar business strategy going forward. Critical to the
success of this strategy in the future and, ultimately, our business as a
whole, is the orderly, effective integration of acquired businesses,
technologies and product lines into our organization. If our integration of
future acquisitions is unsuccessful, our business will suffer. Furthermore,
there is the risk that our valuation assumptions and models for an acquired
product or business may be overly optimistic or incorrect if customers do not
demand the acquired companys products to the extent we expect, the technology
does not function as we expect or the technology we acquire is the subject of
infringement or trade secret claims by third parties. Our executive officers and key employees are crucial to our business, and we
may not be able to recruit, integrate and retain the personnel we need to
succeed. Our success depends upon a number of key management, sales, technical and
other critical personnel, including our co-founder, Bernard Liautaud, who is
our chairman of the board of directors and chief executive officer, the loss of
whom could adversely affect our business. The loss of the services of any key
personnel or the inability to attract, integrate and retain highly skilled
technical, management, sales and marketing personnel could result in
significant disruption to our operations, including affecting the timeliness of
new product introductions, the successful completion of company initiatives and
the results of our operations. For example, we recently announced that John
Olsen, our Chief Operating Officer, will be leaving the company at the end of
the third quarter and we cannot be certain we will be able to find a
qualified replacement for him in a timely manner. Competition for such personnel in the computer software
industry is intense, and we may be unable to attract, integrate and retain such
personnel successfully. In addition, historically we have provided stock-based compensation, such
as stock option grants and the availability of discounted shares in our
Employee Stock Purchase Plan, as an important incentive for our employees.
Reductions in our stock-based compensation practices due to unfavorable
accounting rules may make it more difficult for us to attract and retain
employees, which may negatively affect our ability to manage and operate our
business. In addition, the volatility of our stock price may from time to time
adversely affect our ability to retain or attract key employees. We have multinational operations that are subject to risks inherent in
international operations. We have significant operations outside of France and the United States
including development facilities, sales personnel and customer support
operations. Our international operations are subject to certain inherent risks
including:  
    
    technical difficulties and costs associated with product
localization;
    
    challenges associated with coordinating product development efforts
among geographically dispersed development centers;
    
    potential loss of proprietary information due to piracy,
misappropriation, or laws that may be less protective of our
intellectual property rights;
    
    lack of experience in certain geographic markets; 52




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
    
    longer payment cycles for sales in certain foreign countries;
    
    seasonal reductions in business activity in the summer months in
Europe and certain other countries;
    
    the significant presence of some of our competitors in some international markets;
    
    potentially adverse tax consequences;
    
    import and export restrictions and tariffs;
    
    foreign laws and other government controls, such as trade and employment restrictions;
    
    management, staffing, legal and other costs of operating an
enterprise spread over various countries;
    
    political instability in the countries where we are doing business;
and
    
    fears concerning travel or health risks that may adversely affect
our ability to sell our products and services in any country in which
the business sales culture encourages face-to-face interactions. These factors could have an adverse effect on our business, results of
operations and financial condition. Fluctuations in exchange rates between the euro, the U.S. dollar and the
Canadian dollar, as well as other currencies in which we do business, may
adversely affect our operating results. We may experience substantial foreign exchange gains or losses due to the
volatility of other currencies compared to the U.S. dollar. We incur Canadian
dollar expenses that are substantially larger than our Canadian dollar
revenues, and we generate a substantial portion of our revenues and expenses in
currencies other than the U.S. dollar. We may experience foreign exchange
gains and losses on a combination of events including translation of foreign
denominated amounts to the local currencies, forward exchange contract gains or
losses settled during and outstanding at period end and other transactions
involving the purchase of currencies. During the six months ended June 30, 2004, we recognized $9.1 million in
net foreign exchange losses, $6.8 million which were recognized in the three
months ended March 31, 2004. While we believe we have put into place a
strategy to mitigate these risks in the future, we cannot ensure that we will
not recognize gains or losses from other transactions. Failure to hedge
successfully or otherwise manage foreign currency risks properly could
adversely affect our operating results. We cannot predict the change in
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Business disruptions could seriously harm our operations and financial
condition and increase our costs and expenses. A number of factors, including natural disasters, computer viruses or
failure to successfully upgrade and improve operational systems to meet
evolving business conditions, could disrupt our business, which could seriously
harm our revenues or financial condition and increase our costs and expenses.
For example, some of our offices are located in potential earthquake or flood
zones that could subject these offices, product development facilities and
associated computer systems to disruption. We currently have proprietary applications running key pieces of our
manufacturing systems. These technologies were developed internally and we
have only a small number of people that know and understand them. Should we
lose those individuals before these systems can be replaced with
non-proprietary solutions, we may experience business disruption resulting from
an inability to manufacture and ship product. In addition, experienced computer programmers and hackers may be able to
penetrate our network security and misappropriate our confidential information
or temporarily disrupt our operations. As a result, we could incur significant
expenses in addressing problems created by security breaches of our own
network. The costs to eliminate computer viruses and alleviate other security
problems could be significant. The efforts to address these problems could
result in interruptions, delays or cessation of our operations. Further, we
work continually to upgrade and enhance our computer systems and anticipate
implementing several system upgrades during the coming years. Failure to
smoothly migrate existing systems to newer systems could cause business
disruptions. Even short-term disruptions from any of the above mentioned causes or
other causes could result in revenue disruptions, delayed product deliveries or
customer service disruptions, which could result in decreases in revenues or
increases in costs of operations. The SEC inquiry has required, and may continue to require, management time and
legal expense. On August 3, 2004, we received a letter from the Staff of the Securities
and Exchange Commission, commonly referred to as a Wells letter, notifying us
that it intends to recommend that an action be brought against us for
violations of periodic reporting provisions of the securities laws including,
Section 13(a) of the Securities and Exchange Act of 1934 and Exchange Act Rules
12b-20, 13a-1, 13a-13, and    13b2-1. The Staff has indicated to us that
it does not intend to pursue an action
based on the anti-fraud provisions of the securities laws, nor does
the Staff
intend to recommend an action be brought against any of our officers or
directors. We previously disclosed the existence of an informal SEC
inquiry concerning our backlog practices and we believe the proposed action
relates to our disclosure practices concerning our backlog of unshipped orders.
We will be given an opportunity to respond to this notice and intend vigorously
to defend the action. While we believe our practices are proper and in
accordance with U.S. GAAP and the securities laws, we can give no assurance as to
the outcome of this inquiry. We have been named as a party to several class action lawsuits and shareholder
derivative actions which could result in significant management time and
attention, result in significant legal expenses and have a material adverse
effect on our business, financial condition, results of operations and cash
flows. We have received numerous class action complaints alleging that we and
some of our officers and directors violated provisions of the Securities
Exchange Act of 1934. In addition, two purported shareholder derivative actions
have been filed against certain of our officers and directors. Defending any
such litigation is costly and may divert managements attention from the
day-to-day operations of our business, which could adversely affect our
business, results of operations and cash flows. In addition, an unfavorable
outcome could have a material adverse affect on our liquidity, financial
position or results of operations. 54




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Risks Related to Ownership of Our Ordinary Shares or ADSs New SAC and certain of its affiliates own a substantial percentage of our
shares and their interests could conflict with those of our other shareholders.
In addition, if New SAC and these other parties were to sell significant
amounts of these shares in the future it could adversely affect the market
price of our shares. New SAC and certain of its affiliates own a significant percentage of our
company as a result of our aquisition of Crystal Decisions. As of
August 4, 2004, New SAC and certain of its affiliates beneficially owned
approximately 17% of our shares. The interests of these shareholders could
conflict with those of our other shareholders. As a result of their ownership
position, New SAC and these other parties collectively are able to
significantly influence all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may also have the effect of delaying or
preventing a change in control of our company. In addition, sales of
significant amounts of shares held by New SAC and these other parties, or the
prospect of these sales, could adversely affect the market price of our shares. Provisions of our organizational documents and French law could have
anti-takeover effects and could deprive shareholders who do not comply with
such provisions of some or all of their voting rights. Provisions of our organizational documents and French law may impede the
accumulation of our shares by third parties seeking to gain a measure of
control over our company. For example, French law provides that any individual
or entity directly or indirectly holding more than 5%, 10%, 20%, 33 1/3%, 50%
or 66 2/3% of the share capital or voting rights of our company or that
increases or decreases our shareholding or voting rights by any of the
percentage thresholds, is required to notify us and the AMF, within five
trading days of crossing any of the applicable percentage thresholds, of the
number of shares and voting rights held by it. Additionally, any person
acquiring more than 10% or 20% of the share capital or voting rights of our
company must notify us and the AMF within 10 trading days of crossing any of
these thresholds, and file a statement of their intentions relating to future
acquisitions or participation in the management of our company for the
following 12-month period. Any shareholder who fails to comply with these
requirements will have voting rights for all shares in excess of the relevant
threshold suspended for two years following the completion of the required
notification and may have all or part of its voting rights within our company
suspended for up to five years by the relevant commercial court at the request
of our chairman, any of our shareholders or the AMF. In addition, such
shareholders may be subject to a fine of 18,000 for violation of the share
ownership notification requirement and up to 1,500,000 for violation of the
notification requirement regarding the statement of intentions. Furthermore, our articles of association provide that the notification
obligation will apply each time the percentage reaches 5% of the share capital
or voting rights of our company, or any multiple thereof. In the event any
shareholder fails to notify us within 15 days of crossing any of the applicable
thresholds, such shareholder may, at the request of one or more shareholders
holding together at least 5% of the share capital or voting rights of our
company, be deprived of voting rights for all shares in excess of the relevant
notification threshold for two years. Under the terms of the deposit agreement relating to our ADSs, if a holder
of ADSs fails to instruct the depositary in a timely and valid manner how to
vote such holders ADSs with respect to a particular matter, the depositary
will deem that such holder has given a proxy to the chairman of the meeting to
vote in favor of each proposal recommended by our board of directors and
against each proposal opposed by our board of directors and will vote the
ordinary shares underlying the ADSs accordingly. This provision of the
depositary agreement could deter or delay hostile takeovers, proxy contests and
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Holders of our shares have limited rights to call shareholders meetings or
submit shareholder proposals, which could adversely affect their ability to
participate in governance of our company. In general, our board of directors may call a meeting of our shareholders.
A shareholders meeting may also be called by a court-appointed agent, in
limited circumstances, such as at the request of the holders of 5% or more of
our outstanding shares held in the form of ordinary shares. In addition, only
shareholders holding a defined number of shares held in the form of ordinary
shares or groups of shareholders holding a defined number of voting rights
underlying their ordinary shares may submit proposed resolutions for meetings
of shareholders. The minimum number of shares required depends on the amount of
the share capital of our company and is equal to 2,191,308 ordinary shares
based on our share capital as of June 30, 2004. Similarly, a duly qualified
association, registered with the AMF and us, of shareholders who have held
their ordinary shares in registered form for at least two years and together
hold at least a defined percentage of our voting rights, equivalent to
1,775,787 ordinary shares based on our companys voting rights as of June 30,
2004, may submit proposed resolutions for meetings of shareholders. As a
result, the ability of our shareholders to participate in and influence the
governance of our company will be limited. Interests of our shareholders will be diluted if they are not able to exercise
preferential subscription rights for our shares. Under French law, shareholders have preferential subscription rights
(droits preferentiels de souscription) to subscribe for cash for issuances of
new shares or other securities giving preferential subscription rights,
directly or indirectly, to acquire additional shares on a pro rata basis.
Shareholders may waive their rights specifically in respect of any offering,
either individually or collectively, at an extraordinary general meeting.
Preferential subscription rights, if not previously waived, are transferable
during the subscription period relating to a particular offering of shares and
may be quoted on the exchange for such securities in Paris. Holders of our ADSs
may not be able to exercise preferred subscription rights for these shares
unless a registration statement under the Securities Act is effective with
respect to such rights or an exemption from the registration requirements is
available. If these preferential subscription rights cannot be exercised by holders
of ADSs, we will make arrangements to have the preferential subscription rights
sold and the net proceeds of the sale paid to such holders. If such rights
cannot be sold for any reason, we may allow such rights to lapse. In either
case, the interest of holders of ADSs in our company will be diluted, and, if
the rights lapse, such holders will not realize any value from the granting of
preferential subscription rights. It may be difficult for holders of our ADSs rather than our ordinary shares to
exercise some of their rights as shareholders. It may be more difficult for holders of our ADSs to exercise their rights
as shareholders than it would be if they directly held our ordinary shares. For
example, if we offer new ordinary shares and a holder of our ADSs has the right
to subscribe for a portion of them, the depositary is allowed, in its own
discretion, to sell for such ADS holders benefit that right to subscribe for
new ordinary shares of our company instead of making it available to such
holder. Also, to exercise their voting rights, holders of our ADSs must
instruct the depositary how to vote their shares. Because of this extra
procedural step involving the depositary, the process for exercising voting
rights will take longer for a holder of our ADSs than it would for holders of
our ordinary shares. 56




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Fluctuation
in the value of the U.S. dollar relative to the euro may cause the
price of our ordinary shares to deviate from the price of our ADSs. Our ADSs trade in U.S. dollars and our ordinary shares trade in euros.
Fluctuations in the exchange rates between the U.S. dollar and the euro may
result in temporary differences between the value of our ADSs and the value of
our ordinary shares, which may result in heavy trading by investors seeking to
exploit such differences. We have not distributed dividends to our shareholders and do not anticipate
doing so in the near future. We currently intend to use all of our operating cash flow to finance our business for the
foreseeable future. We have never distributed cash dividends to our shareholders, and we do
not anticipate distributing cash dividends in the near term. Although we may in the future
distribute a portion of our earnings as dividends to shareholders, the determination of
whether to declare dividends and, if so, the amount of such dividends will be based on facts
and circumstances existing at the time of determination. We may not distribute dividends in
the near future, or at all. 57




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Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact our financial
position due to adverse changes in financial market prices and rates. Our
market risk exposure is primarily a result of fluctuations in interest rates
and foreign currency exchange rates. We do not hold or issue financial
instruments for trading purposes. For interest rate sensitivity and foreign
currency exchange risk, reference is made to Part II, Item 7A, Quantitative
and Qualitative Disclosures About Market Risk", in our Annual Report on Form
10-K for 2003. Aside from the change in foreign exchange risk as a
result of our obligation to settle intercompany loans, we believe there have been no
significant changes in our market risk during the three months ended June 30,
2004 as compared to what was previously disclosed in our Annual Report for
2003. In addition, further information on the impact of foreign currency
exchange rate fluctuation is further described in Item 2, Management
Discussion and Analysis of Financial Condition and Results of Operations 
Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations
to this Form 10-Q. 58




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Item 4. Controls and Procedures Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f)) during the three months ended June 30,
2004 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 59




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Part II. OTHER INFORMATION 
 Item 1. Legal Proceedings Information regarding this Item may be found in Note 9 to the Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q. This
information is incorporated by reference to this Item. Item 2.
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities The following table provides information with respect to purchases we made
of our ordinary shares during the three months ended June 30, 2004: ISSUER PURCHASES OF EQUITY SECURITIES Total Number of Shares
    
    Maximum Number ofPurchased as Part of
    
    Shares that May YetTotal Number of
    
    Average Price Paid
    
    Publicly Announced
    
    Be Purchased UnderShares Purchased
    
    per Share (A)
    
    Program (B)
    
    the Program (B)Balance at March 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    5,000,000April 1 to April 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000,000May 1 to May 31, 2004
    
    
    1,000,000
    
    
    
    20.95
    
    
    
    1,000,000
    
    
    
    4,000,000June 1 to June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,400,000Total
    
    
    1,000,000
    
    
    $
    20.95
    
    
    
    1,000,000
    
    
    
    8,400,000
   (A)
    
    Average price paid per share of 17.51 per ordinary share or U.S. dollar
equivalent of $20.95 per ordinary share.(B)
    
    At our ordinary and extraordinary general meeting of shareholders on May 15, 2003, our shareholders approved a share repurchase program for
the repurchase of up to 5.0 million ordinary shares at a purchase price of
at or below 25.00 per share. The authorization for this program was
valid for a period of 18 months and was to expire on November 15, 2004.
On June 10, 2004, our shareholders approved a renewal of this
authorization in order to authorize the Board to repurchase a maximum of
8.4 million ordinary shares, at a maximum purchase price of 35.00 per
share (excluding costs) or its U.S. dollar equivalent. The shareholders
approved this proposal which voids and replaces the
authorization approved by our shareholders on May 15, 2003. This
new authorization is valid for 18 months and will expire on December 10,
2005.
 60




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##### Table of Contents



Item 4. Submissions of Matters to a Vote of Security Holders An ordinary and extraordinary annual general meeting of shareholders of
Business Objects was held on June 10, 2004 at 2:00 p.m., Paris time, at which
meeting our shareholders took the following actions. Within the authority of the Ordinary Shareholders Meeting, the following items
were voted on:  1.
    
    Approval of the statutory financial statements for the fiscal year ended
December 31, 2003. For
    
    
    44,258,225Against
    
    
    52,112Abstain
    
    
    9,518
  2.
    
    Approval of the consolidated financial statements for the fiscal year
ended December 31, 2003. For
    
    
    44,130,791Against
    
    
    24,984Abstain
    
    
    164,080
  3.
    
    Allocation of earnings for the fiscal year ended December 31, 2003. For
    
    
    44,125,233Against
    
    
    33,042Abstain
    
    
    161,580
  4.
    
    Renewal of the term of office of Mr. Arnold Silverman as Director. For
    
    
    44,120,424Against
    
    
    34,804Abstain
    
    
    164,627
  5.
    
    Renewal of the term of office of Mr. Albert Eisenstat as Director. For
    
    
    43,714,007Against
    
    
    440,579Abstain
    
    
    165,269
  6.
    
    Renewal of the term of office of Mr. Bernard Charlès as Director. For
    
    
    44,285,459Against
    
    
    28,473Abstain
    
    
    5,923
 61




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7.
    
    Appointment of Mr. Kurt Lauk as Director. For
    
    
    44,148,180Against
    
    
    162,382Abstain
    
    
    9,293
  8.
    
    Ratification of regulated agreements. For
    
    
    43,534,035Against
    
    
    28,433Abstain
    
    
    9,917
  9.
    
    Approval of a regulated agreement. For
    
    
    40,296,949Against
    
    
    3,265,911Abstain
    
    
    9,525
  10.
    
    Authorization granted to the Board of Directors to repurchase Ordinary
Shares of the Company. For
    
    
    42,253,869Against
    
    
    1,904,996Abstain
    
    
    160,990
 Within
the authority of the Extraordinary Shareholders Meeting, the following
items were voted on:  11.
    
    Authorization granted to the Board of Directors to reduce the share
capital by cancellation of treasury shares. For
    
    
    44,121,420Against
    
    
    36,969Abstain
    
    
    161,466
  12.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 45,000 Ordinary Shares reserved for Mr. Arnold Silverman. For
    
    
    39,072,536Against
    
    
    5,238,292Abstain
    
    
    9,024
  13.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 45,000 Ordinary Shares reserved for Mr. Albert Eisenstat. For
    
    
    38,917,419Against
    
    
    5,240,633Abstain
    
    
    161,800
  14.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 45,000 Ordinary Shares reserved for Mr. Bernard Charlès. For
    
    
    38,921,465Against
    
    
    5,390,579Abstain
    
    
    7,808
 62




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15.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 45,000 Ordinary Shares reserved for Mr. Kurt Lauk. For
    
    
    39,405,429Against
    
    
    4,906,331Abstain
    
    
    8,095
  16.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 30,000 Ordinary Shares reserved for Mr. Gerald Held. For
    
    
    39,400,053Against
    
    
    4,757,835Abstain
    
    
    161,967
  17.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 30,000 Ordinary Shares reserved for Mr. Jean-François
Heitz. For
    
    
    38,917,882Against
    
    
    5,240,188Abstain
    
    
    161,785
  18.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 30,000 Ordinary Shares reserved for Mr. David
Peterschmidt. For
    
    
    39,074,353Against
    
    
    5,238,788Abstain
    
    
    6,714
  19.
    
    Authorization granted to the Board of Directors to issue warrants to
subscribe up to 30,000 Ordinary Shares reserved for Mr. David J. Roux. For
    
    
    39,003,508Against
    
    
    5,153,755Abstain
    
    
    162,592
  20.
    
    Authorization granted to the Board of Directors to increase the share
capital through the issuance of up to 100,000 Ordinary Shares reserved to
the members of the Business Objects Employee French Savings Plan. For
    
    
    43,894,201Against
    
    
    263,620Abstain
    
    
    162,034
  21.
    
    Re-affirmation of the price-setting conditions of Ordinary Shares
reserved for issuance under the 1995 International Employee Stock Purchase
Plan, as authorized by the combined shareholders meeting of May 15, 2003
and December 11, 2003. For
    
    
    42,753,059Against
    
    
    1,404,323Abstain
    
    
    162,473
 63




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22.
    
    Authorization granted to the Board of Directors to increase the share
capital through the issuance of up to 325,000 Ordinary Shares, the
subscription to which is reserved to the Business Objects S.A. Employee
Benefits Trust under the 1995 International Employee Stock Purchase Plan. For
    
    
    42,903,815Against
    
    
    1,409,146Abstain
    
    
    6,894
  23.
    
    Authorization granted to the Board of Directors to increase the share
capital through the issuance of up to 475,000 Ordinary Shares, the
subscription to which is reserved to the 2004 Business Objects S.A.
Employee Benefits Trust under the 2004 International Employee Stock
Purchase Plan. For
    
    
    42,901,117Against
    
    
    1,410,649Abstain
    
    
    8,089
  24.
    
    Authorization granted to the Board of Directors to increase the share
capital by issuance of 2,500,000 Ordinary Shares, the subscription to
which is reserved to Business Objects Employee Benefit Sub-Plan Trust
under the 2001 Stock Option Plan. For
    
    
    40,762,808Against
    
    
    3,392,655Abstain
    
    
    164,392
  25.
    
    Authorization granted to the Board of Directors to amend the 2001 Stock
Option Plan to rename it the 2001 Stock Incentive Plan and to approve
the adoption of the Subsidiary Stock Incentive Sub-Plan under the 2001
Stock Incentive Plan. For
    
    
    39,199,410Against
    
    
    4,958,196Abstain
    
    
    162,249
  26.
    
    Authorization granted to the Board of Directors to issue Ordinary Shares
or other securities giving immediate or deferred access to the Companys
share capital, with preferential subscription rights. For
    
    
    44,277,385Against
    
    
    36,102Abstain
    
    
    6,368
  27.
    
    Authorization granted to the Board of Directors to issue Ordinary Shares
or other securities giving immediate or deferred access to the Companys
share capital, without preferential subscription rights. For
    
    
    42,453,194Against
    
    
    1,859,926Abstain
    
    
    6,735
  28.
    
    Authorization granted to the Board of Directors to increase the share
capital of the Company by incorporation or reserves, profits and premiums. For
    
    
    44,038,396Against
    
    
    118,070Abstain
    
    
    163,389
 64




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##### Table of Contents



29.
    
    Authorization granted to the Board of Directors to increase share capital
reserved for subscription by qualified institutional buyers. For
    
    
    39,722,577Against
    
    
    4,434,858Abstain
    
    
    162,420
  30.
    
    Authorization granted to the Board of Directors to increase share capital
reserved for subscription by present and future members of the Board of
Directors of the Company. For
    
    
    40,813,633Against
    
    
    3,496,580Abstain
    
    
    9,642
  31.
    
    Approval of the amendment of the articles of association of the Company
such that they are in conformity with the new provisions of the French
Commercial Code, as amended by the French Law 2003-706 of August 1, 2003
on Financial Security. For
    
    
    40,457,670Against
    
    
    3,856,190Abstain
    
    
    5,995
  32.
    
    Approval of the amendment of the nineteenth paragraph of article 6 of the
articles of association relating to the cancellation of warrants. For
    
    
    40,870,922Against
    
    
    3,437,783Abstain
    
    
    11,150
 Within
the authority of the Ordinary Shareholders Meeting, the following items
were voted on:  33.
    
    To grant full powers of attorney to carry out registrations and
formalities. For
    
    
    44,282,475Against
    
    
    28,493Abstain
    
    
    8,887
 65




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Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits ExhibitNo.
    
    Description3.1
    
    Bylaws of the Company, as amended June 15, 2004 (English translation)10.51
    
    Pledge and Security Agreement dated April 28, 2004 between Business
Objects Americas and Comerica Bank10.51.1
    
    First Amendment to Pledge and Security Agreement dated July 28, 2004
between Business Objects Americas and Comerica Bank31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer furnished pursuant to Rule
13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. 1350).32.2
    
    Certification of Chief Financial Officer furnished pursuant to Rule
13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. 1350).
  (b)
    
    Reports on Form 8-K Date Filed orFurnished
    
    Item No.
    
    Description of Form 8-K ReportApril 29, 2004
    
    Items 7 and 12
    
    The Company announced its
results for three months ended
March 31, 2004.May 18, 2004
    
    Items 7 and 9
    
    The Company filed a press
release announcing the
authorization of a share
repurchase by the Companys
Board of Directors.
 66




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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.(Registrant)Date: August 9, 2004
    
    By:
    
    /s/ Bernard LiautaudBernard LiautaudChairman of the Board andChief Executive OfficerDate: August 9, 2004
    
    By:
    
    /s/ James R. TolonenJames R. TolonenChief Financial Officer andSenior Group Vice President
 67




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    Description3.1
    
    Bylaws of the Company, as amended June 15, 2004 (English translation)10.51
    
    Pledge and Security Agreement dated April 28, 2004 between Business
Objects Americas and Comerica Bank10.51.1
    
    First Amendment to Pledge and Security Agreement dated July 28, 2004
between Business Objects Americas and Comerica Bank31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer furnished pursuant to Rule
13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. 1350).32.2
    
    Certification of Chief Financial Officer furnished pursuant to Rule
13a-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. 1350).