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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  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 March 31, 2004 or [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from:  to Commission File Number 0-24720 Business Objects S.A.  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 March 31, 2004, the number of issued ordinary shares was 95,250,241,
0.10 nominal value, (including 36,414,728 American depository shares, each
corresponding to one ordinary share, 1,067,675 treasury shares and 4,997,683
shares held by Business Objects Option LLC). As of March 31, 2004, we had
issued and outstanding 90,252,558 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 March 31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income for the three months ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 4.
    
    Controls and Procedures
    
    
    50PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    51Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    51SIGNATURES
    
    
    
    
    52EXHIBIT 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)
 March 31,
    
    December 31,2004
    
    2003 (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    245,870
    
    
    $
    235,380Restricted cash
    
    
    19,239
    
    
    
    19,243Accounts receivable, net
    
    
    181,038
    
    
    
    187,885Deferred tax assets
    
    
    5,491
    
    
    
    261Prepaid and other current assets
    
    
    44,622
    
    
    
    33,797Total current assets
    
    
    496,260
    
    
    
    476,566Goodwill
    
    
    1,051,466
    
    
    
    1,051,111Other intangible assets, net
    
    
    138,966
    
    
    
    149,143Property and equipment, net
    
    
    60,630
    
    
    
    61,187Long-term deferred tax assets
    
    
    28,699
    
    
    
    17,963Deposits and other assets
    
    
    35,407
    
    
    
    19,092Total assets
    
    $
    1,811,428
    
    
    $
    1,775,062LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    42,831
    
    
    $
    47,790Accrued payroll and related expenses
    
    
    62,172
    
    
    
    84,686Income taxes payable
    
    
    91,255
    
    
    
    75,727Deferred revenues
    
    
    165,074
    
    
    
    135,977Restructuring liability
    
    
    13,052
    
    
    
    21,331Other current liabilities
    
    
    53,071
    
    
    
    51,814Notes payable
    
    
    9,728
    
    
    
    9,728Total current liabilities
    
    
    437,183
    
    
    
    427,053Long-term accrued rent
    
    
    5,245
    
    
    
    4,950Total liabilities
    
    
    442,428
    
    
    
    432,003Commitments and contingenciesShareholders equity:Ordinary shares, 0.10 nominal value ($0.12 U.S.
as of March 31, 2004 and $0.13 U.S. as of December
31, 2003): authorized 114,657 and 114,809; issued
95,250 and 94,903; issued and outstanding  90,252
and 89,166; respectively at March 31, 2004 and
December 31, 2003
    
    
    10,063
    
    
    
    9,927Additional paid-in capital
    
    
    1,136,988
    
    
    
    1,121,910Treasury and Business Object Option LLC shares,
6,065 shares at March 31, 2004 and 6,805 shares at
December 31, 2003
    
    
    (13,104
    )
    
    
    (13,104
    )Retained earnings
    
    
    205,857
    
    
    
    202,597Unearned compensation
    
    
    (15,091
    )
    
    
    (18,353
    )Accumulated other comprehensive income
    
    
    44,287
    
    
    
    40,082Total shareholders equity
    
    
    1,369,000
    
    
    
    1,343,059Total liabilities and shareholders equity
    
    $
    1,811,428
    
    
    $
    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 endedMarch 31,2004
    
    2003(unaudited)Revenues:Net license fees
    
    $
    114,493
    
    
    $
    56,243Services
    
    
    102,742
    
    
    
    62,280Total revenues
    
    
    217,235
    
    
    
    118,523Cost of revenues:Net license fees
    
    
    7,682
    
    
    
    894Services
    
    
    41,630
    
    
    
    19,993Total cost of revenues
    
    
    49,312
    
    
    
    20,887Gross profit
    
    
    167,923
    
    
    
    97,636Operating expenses:Sales and marketing
    
    
    97,181
    
    
    
    56,433Research and development
    
    
    39,703
    
    
    
    22,579General and administrative
    
    
    21,712
    
    
    
    8,158Total operating expenses
    
    
    158,596
    
    
    
    87,170Income from operations
    
    
    9,327
    
    
    
    10,466Interest and other income (expense), net
    
    
    (4,068
    )
    
    
    3,747Income before provision for income taxes
    
    
    5,259
    
    
    
    14,213Provision for income taxes
    
    
    (1,999
    )
    
    
    (5,401
    )Net income
    
    $
    3,260
    
    
    $
    8,812Basic net income per ordinary share and ADS
    
    $
    0.04
    
    
    $
    0.14Diluted net income per ordinary share and ADS
    
    $
    0.04
    
    
    $
    0.14Ordinary shares and ADSs used in computing
basic net income per ordinary share and ADS
    
    
    88,632
    
    
    
    62,476Ordinary shares and ADSs and equivalents
used in computing diluted net income per
ordinary share and ADS
    
    
    92,305
    
    
    
    63,731
 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)
 Three Months EndedMarch 31,2004
    
    2003(unaudited)Operating activities:Net income
    
    $
    3,260
    
    
    $
    8,812Adjustment to reconcile net income to net cash provided by (used in
) operating activities:Depreciation and amortization of property and equipment
    
    
    8,349
    
    
    
    3,978Amortization of other intangible assets
    
    
    7,789
    
    
    
    737Stock-based compensation expense
    
    
    2,077
    
    
    
    Deferred income taxes
    
    
    (16,280
    )
    
    
    617Tax benefits from employee stock plans
    
    
    2,517
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    5,218
    
    
    
    29,751Prepaid and other current assets
    
    
    (11,321
    )
    
    
    (3,686
    )Deposits and other assets
    
    
    (16,243
    )
    
    
    Accounts payable
    
    
    (4,401
    )
    
    
    1,275Accrued payroll and related expenses
    
    
    (24,367
    )
    
    
    (11,589
    )Income taxes payable
    
    
    16,021
    
    
    
    (2,412
    )Deferred revenues
    
    
    29,709
    
    
    
    18,032Restructuring liability and other current liabilities
    
    
    (4,745
    )
    
    
    (6,216
    )Net cash provided by (used in) operating activities
    
    
    (2,417
    )
    
    
    39,299Investing activities:Purchases of property and equipment, net
    
    
    (7,666
    )
    
    
    (1,625
    )Sales of short-term investments
    
    
    
    
    
    
    9,404Net provided by (used in ) investing activities
    
    
    (7,666
    )
    
    
    7,779Financing activities:Issuance of shares
    
    
    13,882
    
    
    
    3,852Change in restricted cash
    
    
    5
    
    
    
    Net cash provided by financing activities
    
    
    13,887
    
    
    
    3,852Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    6,686
    
    
    
    5,677Net increase in cash and cash equivalents
    
    
    10,490
    
    
    
    56,607Cash and cash equivalents, beginning of the period
    
    
    235,380
    
    
    
    233,941Cash and cash equivalents, end of the period
    
    $
    245,870
    
    
    $
    290,548
 See accompanying notes to Condensed Consolidated Financial Statements 5




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Business Objects S.A. 
 Notes to Condensed
Consolidated Financial Statements
March 31, 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
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. The consolidated financial statements reflect, in the opinion of
management, 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 quarter ended
March 31, 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 management 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
taxes. Actual results could differ from those estimates. 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, current deferred tax liabilities and
other accruals, none of which individually account for more than five percent
of total current liabilities. 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 eventual dollar cash flows resulting from Canadian dollar expenses will be
adversely affected by changes in the exchange rates. As of March 31, 2004 and
December 31, 2003, respectively, the Company held Canadian dollar foreign
exchange forward contracts with a notional amount of $86.7 million and $40.3
million. The forward contracts have semi-monthly maturities from April 2, 2004
to September 17, 2004. These forward contracts do not qualify for hedge
accounting as the functional currency of the Canadian subsidiary is Canadian
dollars. At March 31, 2004 and December 31, 2003, a forward contract asset of
$2.1 million and $1.8 million, respectively, were recorded on the balance
sheet. 6




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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 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 strategic system
integrators, collectively 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, the revenue is
recognized as it is sold to the distributor net of reserves of an amount 7




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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. 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. No stock-based employee compensation cost is reflected
in net income for the quarter ended March 31, 2004 or 2003 related to options
granted under those plans for which the exercise price was equal to the market
value of the underlying common stock on the date of grant. The following table provides pro forma disclosures of the effect on net
income and earnings per ordinary share and American depository share (ADS) if
the fair-value based method had been applied in measuring compensation expense.
The fair-valued 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). For the three months ended March 31,2004
    
    2003(in thousands, except per shareamounts)Net income  as reported
    
    $
    3,260
    
    
    $
    8,812Add: Amortization of unearned compensation
included in reported net income, net of tax of
$789
    
    
    1,288
    
    
    
    Deduct: Stock-based employee compensation expense
determined under the fair value-based method for
all awards, net of tax related benefits of $3,339
and $3,104 for the three months ended March 31,
2004 and 2003
    
    
    (5,447
    )
    
    
    (5,065
    )Net income  pro forma
    
    $
    (899
    )
    
    $
    3,747Net income per ordinary share and ADS  as reportedBasic
    
    $
    0.04
    
    
    $
    0.14Diluted
    
    $
    0.04
    
    
    $
    0.14Net income per ordinary share and ADS  pro formaBasic
    
    $
    (0.01
    )
    
    $
    0.06Diluted
    
    $
    (0.01
    )
    
    $
    0.06
 The stock-based compensation expense included in reported net income for
the quarter ended March 31, 2004 represents amortization of unearned
compensation on unvested stock options that arose as a result of the
acquisition of Crystal Decisions (the Crystal
Decisions Acquisition). 8




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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 income (loss)
per share would have been $(0.05) and $0.01 for the quarter ended March 31,
2004 and 2003, respectively, and pro forma diluted income (loss) per share
would have been $(0.05) and $0.01 for the quarter ended March 31, 2004 and
2003, respectively. Pro forma information regarding net income and earnings per ordinary share
and 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 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 managements
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. 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 varies from period to period and the Black-Scholes fair value
of each grant depends on the assumptions at the grant date. For purposes of
the pro forma disclosures, the estimated fair value of the stock options was
amortized over the stock options vesting period. The weighted average assumptions used and the resulting estimates of
weighted average fair value of stock options granted under the Stock Option
Plans during the following periods were as follows: For the three months endedMarch 31,2004
    
    2003Expected life of employee stock options plans (in years)
    
    
    3.00
    
    
    
    3.00Volatility
    
    
    61
    %
    
    
    78
    %Risk-free interest rate
    
    
    2.3
    %
    
    
    2.0
    %Dividend yields
    
    
    0
    %
    
    
    0
    %Weighted average fair value of options under employee
stock option plans granted during the period
    
    $
    13.69
    
    
    $
    8.66
 The weighted average assumptions used and the resulting estimates of
weighted average fair value of stock options granted under the Employee Stock
Purchase Plans during the following periods were as follows: For the three months endedMarch 31,2004
    
    2003Expected life of employee stock purchase plans (in months)
    
    
    6.00
    
    
    
    6.00Volatility
    
    
    42
    %
    
    
    71
    %Risk-free interest rate
    
    
    1.0
    %
    
    
    2.0
    %Dividend yields
    
    
    0
    %
    
    
    0
    %Weighted average fair value of options under employee
stock purchase plans granted during the period
    
    $
    6.51
    
    
    $
    4.32
 9




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Recent Pronouncements 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 for
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 statement 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, with a
binomial or lattice model preferred to the Black-Scholes valuation model. The
comment period for the exposure draft ends 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. 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 $978.0 million in 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 quarter ended March
31, 2004, there was a $346,000 adjustment made to goodwill as the result of a
change in estimate of a liability that existed at the date of the purchase
related to the underaccrual of commissions payable. To date, there have been
no other charges related to the estimated direct transaction costs or
allocation of the purchase price. 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. 10




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3. Goodwill and Other Intangible Assets The change in the carrying amount of goodwill was as follows (in
thousands): March 31,
    
    December 31,2004
    
    2003Balance as of the beginning of the period
    
    $
    1,051,111
    
    
    $
    75,416Add: Goodwill acquired or adjusted during the period (note 2)
    
    
    346
    
    
    
    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
    
    
    9
    
    
    
    419Balance as of the end of the period
    
    $
    1,051,466
    
    
    $
    1,051,111
 Other intangible assets, at cost, consisted of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Employment contracts
    
    $
    7,434
    
    
    $
    7,434Developed technology
    
    
    99,750
    
    
    
    102,151Maintenance and support contracts
    
    
    46,440
    
    
    
    46,440Trade names
    
    
    6,211
    
    
    
    6,377Total other intangible assets
    
    $
    159,835
    
    
    $
    162,402Accumulated amortization
    
    
    (20,869
    )
    
    
    (13,259
    )Other intangible assets, net
    
    $
    138,966
    
    
    $
    149,143
 Certain intangible assets are held by our subsidiaries and are revalued at
each reporting period which may result in a higher or lower cost base than
originally recorded. There were no additions or impairment of long-lived
assets during the quarter ended March 31, 2004. The aggregate intangible
amortization expense was $7.8 million for the quarter ended March 31, 2004 and
$737,000 for the quarter ended March 31, 2003. Amortization of $5.2 million is
included in cost of net license fees for the quarter ended March 31, 2004,
compared to $1.9 million for the quarter ended March 31, 2003. Amortization of
$2.3 million is included in cost of service revenues for the quarter ended
March 31, 2004, compared to $513,000 for the quarter ended March 31, 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 impact expected on certain intangible assets. (in thousands)Remainder of 2004
    
    $
    23,8972005
    
    $
    30,8852006
    
    $
    30,8852007
    
    $
    29,4112008
    
    $
    26,905
 4. Accounts Receivable Accounts receivable are stated net of allowance of doubtful accounts and
distribution channel returns of $13.0 million at March 31, 2004 and $9.9
million at December 31, 2003. These allowances included bad debt reserves of
$7.5 million at March 31, 2004 and $6.2 million at December 31, 2003. 11




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5. Earnings per Ordinary Share and ADS The components of basic and diluted earnings per ordinary share and ADS
were as follows: For the three months endedMarch 31,2004
    
    2003(in thousands, except per ordinaryshare and ADS data)Basic net income per share:Numerator:Net income
    
    $
    3,260
    
    
    $
    8,812Denominator:Weighted average ordinary shares and ADSs outstanding
    
    
    88,632
    
    
    
    62,476Net income per ordinary share and ADS  basic
    
    $
    0.04
    
    
    $
    0.14Diluted net income per share:Numerator:Net income
    
    $
    3,260
    
    
    $
    8,182Denominator:Weighted average ordinary shares and ADSs outstanding
    
    
    88,632
    
    
    
    62,476Incremental ordinary shares and ADSs attributable to
shares exercisable under employee stock plans and
warrants (treasury stock method)
    
    
    3,673
    
    
    
    1,255Weighted average ordinary shares and ADSs
outstanding on a diluted basis
    
    
    92,305
    
    
    
    63,731Net income per share  diluted
    
    $
    0.04
    
    
    $
    0.14
 In December 2003, the Company issued approximately 23.3 million ordinary
shares as partial consideration for the purchase of Crystal Decisions. For the
quarter ended March 31, 2004, approximately 1.1 million shares were issued on
the exercise of stock options under stock option and employee purchase plans.
For the quarter ended March 31, 2004 and 2003, respectively, 5.0 million and
5.5 million ordinary shares or ADSs were excluded from the calculation of
diluted earnings per share because the options exercise price was greater than
the average market price of ordinary shares or ADSs and such impact would not
be 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 quarter ended March 31,
2004, optionees exercised approximately 740,000 of these options. 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): For the three months endedMarch 31,2004
    
    2003Net income
    
    $
    3,260
    
    
    $
    8,812Foreign currency translation adjustments
    
    
    4,205
    
    
    
    6,493Comprehensive income
    
    $
    7,465
    
    
    $
    15,305
 12




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7. Business Segment Information The
Company has one reportable segment - business intelligence software
products. The Company recognizes its net license fees from three product
families: Business Intelligence Platform, Enterprise Analytic Applications and
Data Integration. The Company does not track services revenues by product
family as it is impracticable to do so. The following summarizes net license
fees recognized from each product family (in thousands): For the three months endedMarch 31,2004
    
    2003Business Intelligence Platform
    
    $
    102,090
    
    
    $
    47,598Enterprise Analytic Applications
    
    
    8,109
    
    
    
    7,088Data Integration
    
    
    4,294
    
    
    
    1,557Total net license fees
    
    $
    114,493
    
    
    $
    56,243
 The following is a summary of our revenues by geographic region (in
thousands): For the three months endedMarch 31,2004
    
    2003Europe
    
    $
    96,401
    
    
    $
    57,839Americas
    
    
    104,183
    
    
    
    51,871Asia Pacific and Japan
    
    
    16,651
    
    
    
    8,813Total revenues
    
    $
    217,235
    
    
    $
    118,523
 8. Business Restructuring Charge Acquisition-related Restructuring Liabilities Crystal Decisions 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. 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 353 employees and the
exit of certain facilities. 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. 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 quarter ended March 31, 2004,
and 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
anticipates that there will be additional charges related 13




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to exiting certain facilities previously leased by Business Objects prior
to the Crystal Decisions Acquisition. These costs, which are estimated at $5.5
million, 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
March 31, 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
    
    $
    7,752Net cash payments during first quarter of 2004
    
    
    (2,899
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    150Balance at March 31, 2004
    
    $
    5,003
 Restructuring Costs Included as a Cost of the Crystal Decisions Acquisition The charge of $13.5 million related to the Crystal Decisions Acquisition
consisted primarily of 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 quarter ended March 31, 2004. The
Company expects to pay the remaining restructuring liability during 2004.
There are no significant additional expected terminations associated with this
restructuring plan. 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 quarter ended March 31, 2004, relate to minimum lease
payments and settlement costs related to properties vacated at quarter end. The balances of accrued restructuring charges included as a cost of
acquisition related to Crystal Decisions were as follows at March 31, 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
    
    
    $
    12,389Net cash payments during first quarter of 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
    
    
    $
    6,961
 Acta Technology, Inc. Immediately prior to the Companys acquisition of Acta Technology, Inc.
(Acta), Actas 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 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. 14




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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 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 March 31, 2004 (in thousands): LeaseEmployee
    
    AbandonmentSeverance and
    
    and Write-offOther Related
    
    of 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 first quarter of 2004
    
    
    
    
    
    
    (140
    )
    
    
    (140
    )Impact of foreign currency exchange rates
on translation of accrual
    
    
    
    
    
    
    7
    
    
    
    7Balance at March 31, 2004
    
    $
    
    
    
    $
    544
    
    
    $
    544
 Upon
termination of Actas Mountain View lease, the remaining $2.7 million
accrual related to this property was reversed to goodwill. The remaining
accrual of $544,000 at March 31, 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 30, 2002, the Company implemented a
restructuring plan to eliminate approximately 50 positions in the Companys
European field operations in order to better align its revenues and costs
structure in Europe in response to the regions overall weak IT spending
environment. In addition, the Company eliminated excess office space in France,
Italy, Spain and Switzerland. Implementation of the plan resulted in
restructuring charges to earnings totaling $3.9 million for severance and other
employee termination benefits and costs associated with exiting facilities,
representing the excess of lease costs over anticipated sublease income. During the quarter ended December 31, 2002, the Company substantially
completed its restructuring plan, at which time the Company reversed $610,000
of previously-accrued expenses. The reversal was primarily due to savings from
planned termination costs resulting from normal employee attrition for three of
the 50 positions that were to be eliminated, lower than planned costs per
terminated employee and the utilization of certain facilities originally
scheduled for abandonment. In addition, during the quarter ended December 31,
2002, the Company adopted an additional restructuring plan to eliminate an
additional four positions as part of its ongoing efforts to better align
operating expenses with revenues. Implementation of this plan resulted in
restructuring charges to earnings totaling $725,000 for severance and other
employee termination benefits. 15




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The Company has completed the implementation of both restructuring plans.
The remaining $513,000 restructuring accrual 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
lawsuits before the fourth quarter of 2004. No amounts were paid during the
quarter ended March 31, 2004. The following table summarizes the Companys accrued restructuring costs
at March 31, 2004 (in thousands): Severance andOtherEmployee
    
    Estimated CostTermination
    
    of Excess OfficeBenefits
    
    Space
    
    TotalRestructuring charge at June 30, 2002
    
    $
    3,151
    
    
    $
    720
    
    
    $
    3,871Adjustments to the original plan
    
    
    (532
    )
    
    
    (78
    )
    
    
    (610
    )Additional restructuring charges
    
    
    725
    
    
    
    
    
    
    
    725Cash payments during 2002
    
    
    (2,268
    )
    
    
    (564
    )
    
    
    (2,832
    )Impact of foreign currency exchange
rates on translation of accrual
    
    
    144
    
    
    
    75
    
    
    
    219Balance at December 31, 2002
    
    $
    1,220
    
    
    $
    153
    
    
    $
    1,373Adjustments to the original plan
    
    
    (63
    )
    
    
    
    
    
    
    (63
    )Cash payments during 2003
    
    
    (815
    )
    
    
    (167
    )
    
    
    (982
    )Impact of foreign currency exchange
rates on translation of accrual
    
    
    171
    
    
    
    14
    
    
    
    185Balance at December 31, 2003
    
    $
    513
    
    
    $
    
    
    
    $
    513Impact of foreign currency exchange
rates on translation of accrual
    
    
    31
    
    
    
    
    
    
    
    31Balance at March 31, 2004
    
    $
    544
    
    
    $
    
    
    
    $
    544
 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 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,
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 originally set for April 12, 2004 has been continued by
the Court to June 16, 2004. The Company believes that it has valid defenses and
will continue 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. 16




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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 and has yet to rule. The
only relief which remains available under the Courts prior rulings is for an
injunction. 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. MicroStrategy also seeks an award of its attorneys fees in an
undisclosed amount, should they prevail on the injunction claim. The Company
does not believe that any attorneys fees awarded will be material. 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 is at a preliminary
stage and no discovery has been obtained. 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 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 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 in January 2004
to determine whether the injunction should be granted. The hearing was
continued, and concluded March 9, 2004. The court has not yet rendered its
decision. 17




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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 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. 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. Notes and Escrows Payable and Restricted Cash At December 31, 2003, the Company held an aggregate of $9.7 million in
notes payable related to its August 2002 purchase of Acta, which are secured by
restricted cash. These amounts were originally due in February 2004 subject to
indemnification obligations. As Informatica has filed an action for alleged
patent infringement against Acta, which is not yet resolved, the amounts held
in escrow were not available for release at March 31, 2004. The Company has
assessed that one-third of the escrow will be available to former Acta
employees to be distributed from escrow during the quarter ended June 30, 2004.
Restricted cash also includes $526,000 subject to withdrawal restrictions for
bonuses to be paid to Acta employees subject to employment related
contingencies, $2.0 million which secures 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 March 31, 2004 or at December 31, 2003. The agreement restricts
certain of the Companys activities including the extension of a mortgage, 18




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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. 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 have been recorded for these obligations on its balance sheet as of
March 31, 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 quarter
ended March 31, 2004, the Company recorded approximately $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 is not material at March 31, 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. The Companys effective tax rate was 38% for the quarter ended March 31,
2004 and 2003. The Company provides for income taxes for each interim period
based on the estimated annual effective tax rate for the year. 19




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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 Business Objects and our industry.
These forward-looking statements include, but are not limited to, statements
concerning risks and uncertainties. Business Objects actual results could
differ materially from those indicated in these forward-looking statements as a
result of certain factors, as more fully described in the 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. Business Objects undertakes no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future. Overview 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, or business objects, with
which they are familiar. We have one reportable segment  Business
Intelligence software products. Key Performance Indicators For the three months endedMarch 31,2004
    
    2003Revenues
    
    $
    217.2
    
    
    $
    118.5Revenue growth (compared to prior year comparative quarter)
    
    
    83
    %
    
    
    10
    %Income from operations
    
    $
    9.3
    
    
    $
    10.5Income from operations as a percentage of total revenues
    
    
    4
    %
    
    
    9
    %Diluted net income per ordinary share and ADS
    
    $
    0.04
    
    
    $
    0.14
 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 Crystal Decisions Acquisition did not result in
any new reportable segments, nor do we track the business operations from
legacy Crystal Decisions. The first quarter of 2004 included a complete
quarter of revenues and expenses of Crystal Decisions, and as a result our
historical results are not expected to be indicative of our future results. In
addition, we will incur certain acquisition related charges in the future, the
magnitude of which we have not experienced in the past. The following table
shows the estimated 2004 to 2008 acquisition related expenses resulting from
the Crystal Decisions Acquisition. (in millions)Estimated2004
    
    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 deferred compensation
    
    
    7.5
    
    
    
    6.2
    
    
    
    3.8
    
    
    
    0.9
    
    
    
    Restructuring expenses
    
    
    3.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other charges to exit duplicative facilities
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    41.5
    
    
    $
    34.7
    
    
    $
    32.3
    
    
    $
    29.4
    
    
    $
    27.1
 20




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##### Table of Contents



During the quarter ended March 31, 2004, we expensed $5.2 million of
amortization of developed technology, $2.6 million of amortization of other
intangible assets and $2.1 million of amortization of stock-based compensation.
At March 31, 2004, we had not completed the exit of any former Business
Objects facilities and thus had not incurred any additional restructuring
charges. These charges are expected to be incurred during the remainder of
2004. 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. Historically, we have generated a
significant portion of our revenues and incurred a significant portion of our
expenses in euro, British pound sterling and Japanese yen. As a result of the
Crystal Decisions Acquisition, we incur a significant portion of our expenses
in the Canadian dollar. The impact of fluctuations in foreign currency exchange rates on our net
operating income has been mitigated by the fact that the level of our foreign
currency denominated expenses has tended to be largely offset by the level of
our foreign currency denominated revenues. Because non-U.S. denominated
revenues and expenses were approximately equal, this exchange rate impact on
income from operations was a decrease of $784,000. This decrease represents
the decrease in income from operations assuming income from operations for the
first quarter of 2004 were measured at the same rates applicable for the first
quarter of 2003. This net decrease was comprised of: a $16.9 million increase
in total revenues offset by a $3.8 million increase in cost of revenues and a
$13.9 million increase in operating expenses. Our operating results may be adversely impacted by foreign currency
exchange rate fluctuations in the future. In addition, our results of
operations can be impacted by the effect of currency exchange rate fluctuations
where assets or liabilities, such as inter-company loans, are held in any of
our subsidiaries currencies other than their local statutory reporting
currency. At March 31, 2004, significant inter-company loans existed due to
currency transfers between consolidated entities associated with the Crystal
Decisions Acquisition. During the quarter ended March 31, 2004, a net foreign
currency loss of $6.8 million was recorded. A significant portion of this net
foreign currency loss relates to mark to market currency losses related to
inter-company loans that occurred as part of the Crystal Decisions Acquisition
and integration process. In order to mitigate the risk of these currency losses occurring in the
future, subsequent to the quarter ended March 31, 2004, the Company entered
into forward exchange contracts for the
purchase of U.S. dollars, Canadian dollars and pounds in exchange for euros at a future date. This future
date coincides with the expiration of the inter-company loans between two of
our subsidiaries. We believe we have contained the majority of the
exposure related to our most material inter-company loans using this strategy. In order to facilitate this strategy, we entered into a
pledge and security agreement on April 28, 2004 with a bank who will provide
foreign exchange services to us and our subsidiaries. As of March 31, 2004, we held forward exchange contracts in the nominal
amount of $86.7 million to mitigate some of our exposure to the risk of changes
in foreign currency exchange rates between the U.S. and Canadian dollar.
Subsequent to the quarter ended March 31, 2004, we entered into an additional
$32 million of forward exchange contracts. We cannot predict the effect of
exchange rate fluctuations upon our future results. Although we may hedge our
foreign exchange risk in the future, we cannot be sure that any hedging
techniques we may implement will be successful or that our business, results of
operations, financial condition or cash flows will not be adversely affected by
exchange rate fluctuations. 21




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##### Table of Contents



Results of Operations The
following table shows each line item on our condensed consolidated
statements of
income as a percent of total revenues: Three MonthsEnded March 31,2004
    
    2003Total revenues
    
    
    100
    %
    
    
    100
    %Cost of net license fees
    
    
    4
    %
    
    
    1
    %Cost of services
    
    
    19
    %
    
    
    17
    %Total cost of services
    
    
    23
    %
    
    
    18
    %Gross margin
    
    
    77
    %
    
    
    82
    %Operating expenses:Sales and marketing
    
    
    45
    %
    
    
    48
    %Research and development
    
    
    18
    %
    
    
    19
    %General and administrative
    
    
    10
    %
    
    
    6
    %Total operating expenses
    
    
    73
    %
    
    
    73
    %Income from operations (operating margin)
    
    
    4
    %
    
    
    9
    %Interest and other income (expense), net
    
    
    (2
    )%
    
    
    3
    %Income before provision for income taxes
    
    
    2
    %
    
    
    12
    %Provision for income taxes
    
    
    (1
    )%
    
    
    (5
    )%Net income
    
    
    1
    %
    
    
    7
    %Amortization of developed technology include
in cost of net license fees
    
    
    2
    %
    
    
    
    %Amortization of customer support contracts
include in cost of services revenues
    
    
    1
    %
    
    
    
    %
 Revenues Three Months
    
    Percentage
    
    Three Months
    
    PercentageEnded March
31,
    
    of Total
    
    Ended March 31,
    
    of Total2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)Net license fees:Business Intelligence Platform
    
    $
    102.1
    
    
    
    47
    %
    
    $
    47.6
    
    
    
    40
    %Enterprise Analytic Applications
    
    
    8.1
    
    
    
    4
    %
    
    
    7.1
    
    
    
    6
    %Data Integration
    
    
    4.3
    
    
    
    2
    %
    
    
    1.5
    
    
    
    1
    %Total net license fees
    
    
    114.5
    
    
    
    53
    %
    
    
    56.2
    
    
    
    47
    %Service revenues:Software license updates and support
    
    
    73.8
    
    
    
    34
    %
    
    
    46.0
    
    
    
    39
    %Professional services and other
    
    
    28.9
    
    
    
    13
    %
    
    
    16.3
    
    
    
    14
    %Total service revenues
    
    
    102.7
    
    
    
    47
    %
    
    
    62.3
    
    
    
    53
    %Total revenues
    
    $
    217.2
    
    
    
    100
    %
    
    $
    118.5
    
    
    
    100
    %
 Net License Fees.Net license fees increased by $58.3 million, or 104%,
in the first quarter of 2004 from the first quarter of 2003. On a constant
currency basis net license fees increased 88% year-over-year. Revenues from
our Business Intelligence platform products, which include all current versions
of Crystal Decisions product suites in 2004, increased by 114% year-over-year.
This increase 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 second quarter of 2003. The increase was to a lesser extent the result
of an increase of 176% in Data Integration license revenues. 22




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##### Table of Contents



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. To date, we have generated the majority of our net license
fees through our direct sales force. The 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 channel partners comprised 38%
of total net license fees in the first quarter of 2004 compared to 41% in the
first quarter of 2003. Net license fees from indirect channels increased by
$20.0 million to $43.1 million for the first quarter of 2004 from $21.8 million
for the first quarter of 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. No single customer or channel partner represented more than 10% of
total revenues during the periods presented. Service Revenues.Service revenues increased by $40.4 million, or 65%, in
the first quarter of 2004 from the first quarter of 2003, which was comprised
of a 60% increase in maintenance and support revenues and a 77% increase in
professional services revenues including consulting and training. The increases
in maintenance and support revenues in the first quarter of 2004 were primarily
attributable to our acquisition of Crystal Decisions and, and to a lesser
extent year-over-year growth in sales to our installed customer base. The
increases in consulting and training services revenue in the first quarter of
2004 were principally due to our acquisition of Crystal Decisions, plus
increased uptake in our on-line and on-site training services. As a percentage of total revenues, services revenues have decreased to 47%
of total revenues for the first quarter of 2004 from 53% for the first quarter
of 2003, while net license fees increased from 47% to 53% of total revenues.
This change is primarily attributable to the proportion of Crystal Decisions
total revenues which were historically split between license and services
revenues at the ratio of 60-65% for net license fees and 35-40% for services
revenues. Geographic Revenues Mix The following shows the geographic mix of our total revenues: Three Months
    
    Percentage
    
    Three Months
    
    PercentageEnded March 31,
    
    of Total
    
    Ended March 31,
    
    of Total2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)Europe
    
    $
    96.4
    
    
    
    44
    %
    
    $
    57.2
    
    
    
    48
    %Americas
    
    
    104.1
    
    
    
    48
    %
    
    
    52.5
    
    
    
    44
    %Asia Pacific and Japan
    
    
    16.7
    
    
    
    8
    %
    
    
    8.8
    
    
    
    8
    %Total revenues
    
    $
    217.2
    
    
    
    100
    %
    
    $
    118.5
    
    
    
    100
    %
 European revenues increased 68% in the first quarter of 2004 over the
first quarter of 2003 (year-over-year), decreasing as a percentage of total
revenues in the first quarter of 2004 to 44% from 48% in the first quarter of
2003. Americas revenues increased 99% year-over-year increasing as a
percentage of total revenues in the first quarter of 2004 to 48% from 44% in
the first quarter of 2003. The mix shift from 44% Americas / 48% Europe to 48%
Americas / 44% Europe is primarily due to the former Crystal Decisions earning a
greater proportion of revenues from the Americas, with the region historically
representing approximately 70% of total revenues for Crystal Decisions The
percentage of total revenues for Asia Pacific and Japan remained constant at 8%
of total revenues, with revenues from Japan and Asia Pacific increasing by 20%
and 203%, respectively, year-over-year. While smaller than our sales in Europe
and the Americas our revenues in Asia Pacific and Japan regions have continued
to increase significantly as we continue to penetrate this market. License
revenue in the Americas increased by 135% year-over-year, with European
revenues increasing by 75% year-over-year primarily due to the acquisition of
Crystal Decisions. 23




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##### Table of Contents



Cost of Revenues Three Months
    
    Percentage
    
    Three Months
    
    PercentageEnded March 31,
    
    of Related
    
    Ended March 31,
    
    of Related2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)Cost of revenues:Net license fees
    
    $
    7.7
    
    
    
    7
    %
    
    $
    0.9
    
    
    
    2
    %Services
    
    
    41.6
    
    
    
    41
    %
    
    
    20.0
    
    
    
    32
    %Total cost of revenues
    
    $
    49.3
    
    
    
    23
    %
    
    $
    20.9
    
    
    
    18
    %
 Cost of revenues as a percentage of total revenues increased to 23% in the
first quarter of 2004 from 18% in the first quarter of 2003. Two-thirds of
this five percent increase was attributable to the amortization of intangible
assets including developed technology and maintenance and support contracts
acquired in the Crystal Decisions Acquisition. The additional increase was the
result of the addition of Crystal Decisions costs associated with the previous
Crystal Decisions revenues which had lower margins than historically obtained
by Business Objects. Cost of net license fees.Gross margins on net license fees were 93% for
the first quarter of 2004 compared to 98% for the first quarter of 2003. Cost
of net license fees increased $6.8 million, or 5%, of net license fees in the
first quarter of 2004, primarily due to $4.7 million in amortization of
developed technology acquired through the acquisition of Crystal Decisions in
December 2003. The remaining increase is the result of the costs associated
with selling license fees and additional costs related to the release of
version 10 of the Crystal Decisions product in January 2004. 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 $21.6 million, or 108%, to 41%
of service revenues in the first quarter of 2004 from 32% in the first quarter
of 2003. Approximately 10% of this increase relates to $2.2 million of
amortization of maintenance and support contracts acquired through the
acquisition of Crystal Decisions. In addition, as a result of the application
of purchase accounting, we were unable to recognize approximately $12.6 million
of deferred revenues in the first quarter of 2004. The $12.6 million
represents a portion of the total deferred revenues that were recorded on
Crystal Decisions balance sheet on the date of acquisition. As there are
related costs to performing the services associated with the deferred revenue,
costs of services revenues as a percentage of services revenues have increased
as anticipated. The majority of the increase was the result of increased
headcount costs. Maintenance and services headcount grew to 975 employees at
March 31, 2004 from 489 employees at March 31, 2003, primarily due to the
addition of Crystal Decisions employees. Gross margin on services revenues were 59% for the first quarter of 2004
compared to 68% for the first quarter of 2003. The decrease in gross margin is
primarily due to the accounting loss of the aforementioned $12.6 million of
customer support revenues, additional outsourcing which is generally more
costly than the use of internal employees, and to a lesser extent, to an
increase in the level of amortization expense due to the acquisition of Crystal
Decisions. 24




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##### Table of Contents



OPERATING EXPENSES Three Months
    
    Percentage
    
    Three Months
    
    PercentageEnded March 31,
    
    of Total
    
    Ended March 31,
    
    of Total2004
    
    Revenues
    
    2003
    
    Revenues(in millions)
    
    
    
    
    
    (in millions)Sales and marketing
    
    $
    97.2
    
    
    
    45
    %
    
    $
    56.4
    
    
    
    48
    %Research and development
    
    $
    39.7
    
    
    
    18
    %
    
    $
    22.6
    
    
    
    19
    %General and administrative
    
    $
    21.7
    
    
    
    10
    %
    
    $
    8.2
    
    
    
    6
    %Total operating expenses
    
    $
    158.6
    
    
    
    73
    %
    
    $
    87.2
    
    
    
    73
    %
 For the quarter ended March 31, 2004, total operating expenses included
$1.8 million of the $2.1 million of amortization of unearned stock-based
compensation cost related to the assumption of options on the acquisition of
Crystal Decisions. The total expense represents the realization of the benefit
by the employee on vesting of a portion of these stock options, and is expensed
by operating expense line associated with the employee department. There was
no comparable expense during the first quarter of 2003. Even including the
charges, total operating expenses remained constant at 73% of total
revenues. Sales and Marketing Expenses Sales and marketing expenses increased by $40.8 million, or 72%, in the
first quarter of 2004 from the first quarter of 2003. The increase in absolute
dollars was primarily due to increased employee expenses, including
commissions, resulting from the acquisition of Crystal Decisions and the
addition of approximately 650 sales and marketing employees. This represents
an approximate 50% increase in total sales and marketing headcount. Sales and
marketing expenses decreased by 3% of revenues due to a overall change in
commission structure and a lower average cost structure per employee. Sales
and marketing expenses also increased in conjunction with the 2004 sales
kickoff and the costs associated with marketing and advertising of the
acquisition of Crystal Decisions and our integrated product road map, which
took place in January 2004, with no comparable prior expense in the first
quarter. In addition, approximately $7.4 million of this
increase resulted from unfavorable foreign exchange movements if the
first quarter of 2004 expense had been calculated at exchange rates
for the first quarter of 2003. Research and Development Expenses Research and development expense increased by $17.1 million, or 76%, and
decreased by 1% of total revenues. The increase in absolute dollars was the
result of ongoing research and development for both product groups and new
costs associated with developing our integrated product suite, including
increased headcount. Approximately $4.8 million of this increase resulted from
unfavorable foreign exchange movements on this expense for the first quarter of
2004 compared to the first quarter of 2003. The decrease as a percentage of
total revenues reflects higher research and development costs incurred in the
first quarter of 2003 associated with the integration of Actas product lines.
As we continue to invest in our integrated product suite, we expect research
and development costs to increase in absolute dollars and fluctuate as a
percentage of total revenues in future periods. General and Administrative Expenses General and administrative expense increased by $13.5 million, or 165%,
and increased by 4% as a percentage of total revenues in the first quarter of
2004 compared to the first quarter of 2003. This increase resulted from
increased employee related costs, integration expenses, professional fees
related to information technology, consulting and the defense of legal
proceedings, and an increase in bad debt expense for accounts receivable
identified as doubtful of approximately $2.0 million, all primarily associated
with our acquisition of Crystal Decisions. General and administrative expense
includes amortization expense related to trade names acquired in the Crystal
Decisions Acquisition. Amortization is expected to be approximately $310,000
for each quarter over the next five years, subject to foreign currency
fluctuations. 25




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##### Table of Contents



Interest and Other Income (Expense), Net Interest and other income (expense), net were comprised of the following: For the three months endedMarch 31,2004
    
    2003(in millions)Net interest income
    
    $
    0.9
    
    
    $
    1.8Patent infringement settlement income
    
    
    1.8
    
    
    
    1.8Net foreign exchange gains (losses)
    
    
    (6.8
    )
    
    
    0.1Interest and other income, net
    
    $
    (4.1
    )
    
    $
    3.7
 Interest and other income (expense), net represented (2%) of total
revenues in the first quarter of 2004 and 3% in the first quarter of 2003. Net
interest income decreased during the quarter ended March 31, 2004 compared to
the same period in 2003, as the average balance of invested cash and short-term
investments for the first quarter of 2004 was on average lower than the average
balance in the first quarter of 2003. The patent infringement settlement
income results 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 quarter ended June 30, 2004. The net foreign exchange loss for the first quarter of 2004 represented
non-operating net currency exchange losses which were primarily caused by the
effect of a stronger U.S. dollar on our euro-denominated intercompany U.S.
dollar loans, which occurred as part of the Crystal Decisions Acquisition and
integration process. These intercompany loans and the interest thereon is
eliminated on consolidation, however, we incurred a mark to market loss on
the translation of these loans from U.S. dollars to euros on the
euro-denominated statutory books. These currency translation losses are
recorded in other income (expense). Income Taxes Our effective tax rate was 38% for the first quarters of 2004 and 2003.
We provide for income taxes for each interim period based on the estimated
annual effective tax rate for the year. 26




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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 three months endedMarch 31,2004
    
    2003(in millions)Cash flow provided by (used in) operations
    
    $
    (2.4
    )
    
    $
    39.3Cash flow provided by (used in) investing activities
    
    
    (7.7
    )
    
    
    7.8Cash flow provided by financing activities
    
    
    13.9
    
    
    
    3.9Effects of changes in foreign currency exchange rates on cash and equivalents
    
    
    6.7
    
    
    
    5.7Increase (decrease) in short-term investments
    
    
    
    
    
    
    (8.7
    )Net increase (decrease) in cash, cash equivalents and short-term investments
    
    $
    10.5
    
    
    $
    47.9
 Operating Activities.Our principal source of liquidity has been our
operating cash flow and funds provided by stock option exercises. During the
quarter ended March 31, 2004 we used greater cash resources than we generated.
The decrease in cash provided by operations was attributable to: cash payments
of restructuring charges; a net decrease of
$24.4 million in accrued payroll and related expenses which included severance
payments to former Crystal Decisions employees, offset by normal course
accruals; and slower collection of accounts receivable which is reflected in
the increase in days sales outstanding from 53 days at March 31, 2003 to 75
days at March 31, 2004, and resulted in $24.5 million less cash from operations
in the first quarter of 2004 compared to 2003. These uses of cash were offset
by cash received from deferred revenues, which will be recognized over the next
year. Investing Activities.The decrease in net cash provided by investing
activities resulted from $7.7 million of capital purchases in the first quarter
of 2004 and the absence of any sales of short-term investments, which were $9.4
million during the quarter ended March 31, 2003. Capital expenditures for the
first quarter of 2004 included costs related to the continued implementation of
financial systems and information technology infrastructures. Financing Activities. The increase in net cash provided by financing
activities was attributable to cash received of $13.9 million from the issuance
of ordinary shares or ADSs under our stock option and employee stock option
plans. Exercises by former Crystal Decisions optionees, including certain
former executive officers, account for the majority of the increase in
activity. We cannot predict when our employees will exercise their stock
options and as such, this source of cash is expected to vary. Cash, cash equivalents and short-term investments totaled $245.9 million
at March 31, 2004, an increase of $10.5 million from December 31, 2003. On
December 11, 2003, we completed the acquisition of Crystal Decisions and paid
as partial consideration approximately $307.6 million in cash. At March 31,
2004, approximately 42% of our cash and cash equivalents were denominated in
currencies other than the U.S. dollar. 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 availability on a short-term basis,
we obtained a 60 million line of credit in 27




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the fourth quarter of 2003 which can be drawn in euros, U.S. dollars or
Canadian dollars to support our cash management practices. At March 31, 2004
and December 31, 2003, no amount was outstanding under this line of credit. On April 28, 2004, we entered into a Pledge and Security Agreement
pursuant to which a bank will provide foreign exchange services to us. In
order to secure this agreement we are required to maintain at least $33.3 million with the bank as
collateral, which is to be held in a money market fund. 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. Our contractual obligations have not changed materially from those
presented at December 31, 2003. 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 March 31, 2004 or at
December 31, 2003. Additionally, 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 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 $200,000 of
expenses related to one lease which we expect to vacate in the second quarter
of 2004. No other amounts were determined to be material at March 31, 2004 and
at December 31, 2003. 28




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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 quarter ended March 31, 2004, an adjustment was made to the net
tangible assets acquired to reflect an under accrual of commissions due at the
date of purchase. This adjustment of $346,000
resulted in a decrease to net tangible assets acquired and an increase to
goodwill. 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. Restructuring.Prior to the Crystal Decisions Acquisition, 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 the completion of 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, 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,
our liability would be adjusted as an increase or decrease to expense in the
period that we change the estimate. 29




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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 first quarter of 2004, we paid
$4.7 million in severance and other related benefits to 65 employees, and
$222,000 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. The balance of accrued
restructuring charges related to Crystal Decisions was as follows at March 31,
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
    
    
    $
    12.4Net cash payments during first quarter of 2004
    
    
    (4.7
    )
    
    
    (0.2
    )
    
    
    (4.9
    )Impact of foreign currency exchange rates on
translation of accrual
    
    
    (0.5
    )
    
    
    0.0
    
    
    
    (0.5
    )Balance at March 31, 2004
    
    $
    4.5
    
    
    $
    2.5
    
    
    $
    7.0
 Restructuring Costs Expensed Under FAS 146 As a result of the acquisition of Crystal Decisions, we accrued
approximately $7.8 million to expense related to restructuring costs for
severance and other related benefits for 159 Business Objects employees across
all functions worldwide. During the first quarter of 2004, the accrual was
reduced by $2.9 million in cash payments related to the termination of 52 of
these employees. We anticipate approximately $5.5 million of additional costs
related to the exit of Business Object facilities that we occupied prior to the
Crystal Decisions Acquisition. As these leased facilities have not as yet been
exited, the restructuring or other expense related to these events has not been
recorded in accordance with FAS 146, Cost Associated with Exit or Disposal
Activities. We expect these costs to be incurred during 2004. The balance of accrued restructuring associated with Business Objects
employees prior to the Crystal Decisions Acquisition was as follows at March
31, 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
    
    $
    7.8Net cash payments during first quarter 2004
    
    
    (2.9
    )Impact of foreign currency exchange rates on translation of accrual
    
    
    0.1Balance at March 31, 2004
    
    $
    5.0
 30




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Acquisition of Acta Technology, Inc. (Acta) 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
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 March 31, 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 first quarter of 2004
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Impact of foreign currency exchange rates
on translation of accrual
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2004
    
    $
    
    
    
    $
    0.6
    
    
    $
    0.6
 The remaining accrual of $0.6 million at March 31, 2004 represents
estimated future minimum lease payments for Actas U.K. facility, which
includes payments until 2005. 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 March 31, 2004 represented estimated remaining legal
costs or payments to terminated employees who have initiated legal action
against us. There have been no changes in this balance since December 31,
2003. 31




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Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements at March 31, 2004 or
December 31, 2003. Recent Pronouncements See Note 1 in Item 1 of this Quarterly Report on Form 10-Q. Critical Accounting Policies We believe there have been no significant changes in our critical
accounting policies during the quarter ended March 31, 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. 32




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Factors Affecting Future Operating Results Risks Related to the Crystal Decisions Acquisition We may not realize the benefits that we anticipate from the Crystal Decisions
Acquisition within the time periods that we expect, or at all, because of
integration and other challenges. On December 11, 2003, we acquired Crystal Decisions for total
consideration of $307.6 million in cash and approximately 23.3 million of our
ADSs. 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, if at all. 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 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, our ability to market our products and our revenues and operating
results could be seriously harmed. 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;
    
    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; 33




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
    
    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 which 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 the Crystal Decisions
Acquisition.  A number of factors could cause the market price of our shares to decline
as a result of the Crystal Decisions Acquisition, including if:  
    
    our integration effort is not completed in a timely and efficient
manner;
    
    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 Crystal
Decisions Acquisition are not consistent with their expectations. Charges to earnings resulting from the Crystal Decisions Acquisition may
adversely affect the market value of our shares. In accordance with U.S. GAAP, we have accounted for the Crystal Decisions
Acquisition using the purchase method of accounting. The impact of one-time and
future charges associated with this acquisition, including any charges for
impairment of goodwill, could have a material adverse effect on the market
value of our shares. Under purchase accounting, we recorded as the cost of the
transaction the market value of the acquisition consideration and the amount of
direct transaction costs. We have allocated the cost of the transaction to our
net tangible assets, amortizable intangible assets, intangible assets with
indefinite lives and in-process research and development, based on their fair
values as of the date of completion of the transaction, and recorded the excess
of the purchase price over those fair values as goodwill. 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 of the
net tangible and 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 Crystal Decisions Acquisition.
If this goodwill, other intangible assets with indefinite lives or other assets
acquired in the Crystal Decisions 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. In addition, we expect to incur restructuring expenses and other charges
to exit duplicative facilities during 2004, which we currently estimate to be
approximately $5.5 million. We cannot be sure that these expenses and charges
will not be higher than we currently anticipate. Our results of operations
could be adversely affected by these and any additional restructuring or
operating expenses and charges. 34




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The Crystal Decisions Acquisition 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 the Crystal Decisions Acquisition 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 determine not to purchase our products or
services until we have demonstrated our ability to integrate our products with
Crystal Decisions or until we release one or more future products that
integrate capabilities and features of both Business Objects and Crystal
Decisions products. In addition, 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 the Crystal Decisions Acquisition could
cause our strategic partners or key employees to make decisions which 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 the Crystal Decisions
Acquisition. In addition, our key employees may decide to terminate their
employment due to the Crystal Decisions 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 new
pricing structure and 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
orders; 35




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
    
    we partly depend 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. 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 affect
our stock price in the future. 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. 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
and our business, results of operations and financial condition could be
harmed. 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. 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 or changing industry standards. Increased
competition 36




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may cause price reductions and loss of market share, any of which could
have a material adverse effect on our business, results of operations and
financial condition. Some of our competitors may have greater financial, technical, sales,
marketing and other resources. 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 to sell products and
services, which may lead to lower prices for our products, reduced revenues and
reduced gross margins. 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. If
one or more of our competitors were to acquire, 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. As a result of the Crystal Decisions Acquisition, we have additional
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. 37




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We target our products solely to the Business Intelligence software market and,
if sales of our products in this market decline, our operating results will be
seriously harmed. We generate substantially all of our revenues from licensing, support and
service fees 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. 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 which 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; 38




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
    
    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. 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 generally depend on large-scale deployments of our products for a
substantial portion of our revenues. We may have difficulty managing the
timeliness of these 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. 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, 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 39




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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 originally set for April 12, 2004 has been continued by the Court to
June 16, 2004. We believe we have valid defenses and will continue 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. The outcome of this
matter and amount of related claims are not determinable at this time. 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 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 and has yet to rule. The only relief which
remains available under the Courts prior rulings is for an injunction.
MicroStrategy also seeks an award of its attorneys fees in an undisclosed
amount, should they prevail on the injunction claim. We do not believe that any
attorneys fees awarded will be material. We believe that MicroStrategys
claims are meritless and will continue to defend the lawsuits vigorously. 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 is at a preliminary stage and no discovery has
been obtained. 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 to defend
ourselves vigorously. 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 40




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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. We became a party to the following action when we acquired Crystal
Decisions in December 2003. 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. 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 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 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 in January 2004
to determine whether the injunction should be granted. The hearing was
continued, and concluded on March 9, 2004. The court has not yet rendered its
decision, and we cannot assure you that the outcome will be favorable to us. 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 41




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Court. The August 16, 2004 trail date previously set has been vacated by
the Court and will probably not be set again until the Court issues its claim
construction order. We intend to vigorously 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:  
    
    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 began doing business in the Peoples Republic of China recently,
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 as
some jurisdictions consider the name Business Objects to be generic or
descriptive in nature. As a result, we may be unable to effectively police 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 other 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. 42




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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 our products;
    
    we are 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 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
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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, such as Ingram Micro, Inc., that
formerly purchased products from Crystal Decisions were to materially reduce
their purchases from us. Business Objects had no customers who accounted for
10% or more of our sales in the first quarters of 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. 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 in the past 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. Our executive officers and key employees are crucial to our business, and we
may not be able to recruit and retain the personnel we need to succeed. Our success depends upon a number of key management and technical
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 and retain highly skilled technical, management, sales
and marketing personnel could also harm our business. Competition for such
personnel in the computer software industry is intense, and we may be unable to
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We have multinational operations that are subject to risks inherent in
international operations. We have significant international operations including development
facilities, sales personnel and customer support operations. Our international
operations are subject to certain inherent risks including:  
    
    technical difficulties associated with product localization;
    
    challenges associated with coordinating product development efforts
among geographically dispersed development centers;
    
    lack of experience in certain geographic markets;
    
    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;
    
    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 generate
expenses in the Canadian dollar 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 have partially hedged
these exposures as of March 31, 2004 with the use of Canadian dollar forward
contracts in the nominal amount of $86.7 million. In addition, we have balance
sheet items such as inter-company obligations outstanding between our parent
and subsidiary companies that are, in some cases, held in currencies different
than the currency in which they report their results. During the quarter ended
March 31, 2004, a significant portion of the $6.8 million net foreign exchange
loss resulted from mark to market currency losses on these intercompany
loans. Subsequent to March 31, 2004, we entered into forward contracts to
hedge various currencies against the euro to mitigate this risk. Failure to hedge
successfully or otherwise manage foreign currency risks properly could
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Business disruptions could seriously harm our future revenues and financial
condition and increase our costs and expenses. A number of factors, including natural disasters, computer viruses or
failure to successfully evolve 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 has contacted us regarding an informal inquiry. The Securities and Exchange Commission has initiated an informal inquiry
which we believe relates to our practices with respect to backlog. We are
cooperating fully with the Securities and Exchange Commission. While we
believe our practices are proper and in accordance with generally
accepted accounting principles in the United States, we can give no assurance
as to the outcome of this inquiry. 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 the Crystal Decisions Acquisition, and their interests
could conflict with those of our other shareholders. As a result of Crystal
Decisions Acquisition, New SAC and certain of its affiliates beneficially owned
approximately 24% of our shares as of March 31, 2004. 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 46




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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. Such provision of the
depositary agreement could deter or delay hostile takeovers, proxy contests and
changes in control or management of our company. 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 2,190,002 ordinary shares
based on our share capital as of March 31, 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
1,783,698 ordinary shares based on our companys voting rights as of March 31,
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
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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. Fluctuation in the value of the US 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 any cash 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. 48




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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 the year ended December 31, 2003. We believe there have been no
significant changes in our market risk during the quarter ended March 31, 2004
as compared to what was previously disclosed in our Annual Report for the year
ended December 31, 2003. Further information on the impact of
foreign currency exchange rate fluctuations 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. 49




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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 quarter ended March 31, 2004
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. 50




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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 6. Exhibits and Reports on Form 8-K (a) Exhibits ExhibitNo.
    
    Description31.1
    
    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 ReportFebruary 5, 2004
    
    Items 7 and 12
    
    The Company announced its
fourth quarter and fiscal 2003
earnings results for the year
ended December 31, 2003.February 6, 2004
    
    Items 7 and 12
    
    The Company filed its earnings
conference call slides related
to its fourth quarter and
fiscal year ended December 31,
2003.February 23, 2004
    
    Items 2 and 7
    
    The Company filed the pro forma
financial information related
to its acquisition of Crystal
Decisions, Inc.
 51




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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: May 4, 2004
    
    By:
    
    /s/ Bernard LiautaudBernard LiautaudChairman of the Board andChief Executive OfficerDate: May 4, 2004
    
    By:
    
    /s/ James R. TolonenJames R. TolonenChief Financial Officer andSenior Group Vice President
 52




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EXHIBIT INDEX ExhibitNo.
    
    Description31.1
    
    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).