##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 or
 o
    
    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
  (408) 953-6000
  þ o
  þ o o
 o þ
  




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##### 



Business Objects S.A.
Index
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows  for the Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    36PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 6.
    
    Exhibits
    
    
    55SIGNATURES
    
    
    
    
    56EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited)
 BUSINESS OBJECTS S.A.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except nominal value per ordinary share)
 March 31,
    
    
    December 31,2006
    
    
    2005 (1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    425,749
    
    
    $
    332,777Restricted cash
    
    
    22,174
    
    
    
    22,157Short-term investments
    
    
    4,954
    
    
    
    4,651Accounts receivable, net
    
    
    247,462
    
    
    
    265,672Deferred tax assets
    
    
    13,559
    
    
    
    13,605Prepaid and other current assets
    
    
    67,266
    
    
    
    60,880Total current assets
    
    
    781,164
    
    
    
    699,742Goodwill
    
    
    1,166,400
    
    
    
    1,166,043Other intangible assets, net
    
    
    102,836
    
    
    
    110,512Property and equipment, net
    
    
    76,486
    
    
    
    74,116Deposits and other assets
    
    
    32,449
    
    
    
    34,945Long-term restricted cash
    
    
    21,033
    
    
    
    20,858Long-term deferred tax assets
    
    
    19,481
    
    
    
    17,142Total assets
    
    $
    2,199,849
    
    
    $
    2,123,358LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    48,550
    
    
    $
    45,777Accrued payroll and related expenses
    
    
    66,686
    
    
    
    83,332Income taxes payable
    
    
    83,759
    
    
    
    79,820Deferred revenues
    
    
    248,337
    
    
    
    201,788Other current liabilities
    
    
    70,565
    
    
    
    72,098Escrows payable
    
    
    21,742
    
    
    
    21,728Total current liabilities
    
    
    539,639
    
    
    
    504,543Long-term escrows payable
    
    
    11,079
    
    
    
    10,902Other long-term liabilities
    
    
    8,133
    
    
    
    8,871Long-term deferred tax liabilities
    
    
    2,493
    
    
    
    2,853Long-term deferred revenues
    
    
    8,118
    
    
    
    6,734Total liabilities
    
    
    569,462
    
    
    
    533,903Commitments and contingenciesShareholders equity:Ordinary
shares, 0.10 nominal value ($0.12
at March 31, 2006 and December 31, 2005): authorized
121,023 and 120,842; issued 95,755
and 95,304; issued and outstanding 92,910 and
92,262; respectively at March 31, 2006 and
December 31, 2005
    
    
    10,440
    
    
    
    10,359Additional paid-in capital
    
    
    1,232,473
    
    
    
    1,217,473Treasury, Business Objects Option LLC, and
Employee Benefit Sub-Plan Trust shares: 2,845
shares at March 31, 2006 and 3,041 shares at
December 31, 2005
    
    
    (4,214
    )
    
    
    (3,223
    )Retained earnings
    
    
    354,682
    
    
    
    342,345Unearned compensation
    
    
    
    
    
    
    (12,243
    )Accumulated other comprehensive income
    
    
    37,006
    
    
    
    34,744Total shareholders equity
    
    
    1,630,387
    
    
    
    1,589,455Total liabilities and shareholders equity
    
    $
    2,199,849
    
    
    $
    2,123,358
 
 (1)
    
    The balance sheet at December 31, 2005 has been derived from the audited consolidated financial
statements at that date.  3




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##### Table of Contents



BUSINESS OBJECTS S.A.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per ordinary share and ADS data)
 Three Months EndedMarch 31,2006 (1)
    
    
    2005(unaudited)Revenues:Net license fees
    
    $
    125,894
    
    
    $
    115,151Services
    
    
    152,377
    
    
    
    133,624Total revenues
    
    
    278,271
    
    
    
    248,775Cost of revenues:Net license fees
    
    
    7,976
    
    
    
    7,168Services
    
    
    60,767
    
    
    
    51,381Total cost of revenues
    
    
    68,743
    
    
    
    58,549Gross profit
    
    
    209,528
    
    
    
    190,226Operating expenses:Sales and marketing
    
    
    117,500
    
    
    
    103,722Research and development
    
    
    43,737
    
    
    
    40,274General and administrative
    
    
    30,363
    
    
    
    24,813Total operating expenses
    
    
    191,600
    
    
    
    168,809Income from operations
    
    
    17,928
    
    
    
    21,417Interest and other income, net
    
    
    2,855
    
    
    
    4,400Income before provision for income taxes
    
    
    20,783
    
    
    
    25,817Provision for income taxes
    
    
    (8,446
    )
    
    
    (10,811
    )Net income
    
    $
    12,337
    
    
    $
    15,006Basic net income per ordinary share and ADS
    
    $
    0.13
    
    
    $
    0.17Diluted net income per ordinary share and ADS
    
    $
    0.13
    
    
    $
    0.16Ordinary shares and ADSs used in computing
basic net income per ordinary share and ADS
    
    
    92,552
    
    
    
    89,424Ordinary shares and ADSs and equivalents
used in computing diluted net income per
ordinary share and ADS
    
    
    95,333
    
    
    
    91,184
 
 (1)
    
    Costs and expenses for the three months ended March 31, 2006 include stock-based compensation
expense recorded in accordance with FAS 123R. See Notes 1 and 4 to the Condensed Consolidated
Financial Statements for additional information.  4




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BUSINESS OBJECTS S.A.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Three Months EndedMarch 31,2006
    
    
    2005(unaudited)Operating activities:Net income
    
    $
    12,337
    
    
    $
    15,006Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property and equipment
    
    
    7,881
    
    
    
    8,830Amortization of other intangible assets
    
    
    8,869
    
    
    
    8,133Stock-based compensation expense
    
    
    13,410
    
    
    
    1,217Excess tax benefits from stock-based compensation
    
    
    (2,422
    )
    
    
    Deferred income taxes
    
    
    (2,835
    )
    
    
    10Changes in operating assets and liabilities:Accounts receivable, net
    
    
    20,800
    
    
    
    61,048Prepaid and other current assets
    
    
    (5,826
    )
    
    
    (3,286
    )Deposits and other assets
    
    
    2,516
    
    
    
    3,736Accounts payable
    
    
    2,391
    
    
    
    4,583Accrued payroll and related expenses
    
    
    (17,607
    )
    
    
    (20,560
    )Income taxes payable
    
    
    6,163
    
    
    
    (6,140
    )Deferred revenues
    
    
    46,416
    
    
    
    12,513Other liabilities
    
    
    (3,824
    )
    
    
    (9,777
    )Short-term investments classified as trading
    
    
    (302
    )
    
    
    66Net cash provided by operating activities
    
    
    87,967
    
    
    
    75,379Investing activities:Purchases of property and equipment
    
    
    (10,018
    )
    
    
    (7,453
    )Net cash used in investing activities
    
    
    (10,018
    )
    
    
    (7,453
    )Financing activities:Issuance of shares
    
    
    11,820
    
    
    
    12,277Excess tax benefits from stock-based compensation
    
    
    2,422
    
    
    
    Net cash provided by financing activities
    
    
    14,242
    
    
    
    12,277Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    781
    
    
    
    842Net increase in cash and cash equivalents
    
    
    92,972
    
    
    
    81,045Cash and cash equivalents, beginning of the period
    
    
    332,777
    
    
    
    293,485Cash and cash equivalents, end of the period
    
    $
    425,749
    
    
    $
    374,530
  5




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##### Table of Contents



Business Objects S.A.
 
 Notes to Condensed Consolidated Financial Statements
 March 31, 2006
 1. Basis of Presentation and Significant Accounting Policies
 Basis of Presentation
    Use of Estimates
  Other Current Liabilities
  Ordinary Shares, Treasury Shares, Business Objects Option LLC Shares and Employee Benefit Sub Plan
Trust Shares
 Treasury, Business
Objects Option LLC and Employee Benefit Sub-Plan Trust Shares.
 6




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##### Table of Contents



Significant Accounting Policies
 Revenue Recognition
   Modification of SOP No. 97-2 with Respect
to Certain Transactions.
    7




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##### Table of Contents



Accounting for Stock-Based Compensation
     Net Income per Ordinary Share and ADS
 Earnings per Share
 Recent Pronouncements
 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards.
 8




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Accounting for Servicing of Financial Assets .
 Accounting for Certain Hybrid Financial Instruments .
 2. Derivative Financial Instruments
   Accounting for Derivative Instruments and Hedging Activities
 9




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##### Table of Contents



Notional Amount
    
    Fair Value(in millions)U.S. dollar equivalent of derivatives not designated as hedges
    
    $
    22.5
    
    
    $
    (0.2
    )U.S. dollar equivalent of derivatives designated as cash flow hedges
    
    $
    64.9
    
    
    $
    (0.8
    )
  3. Accounts Receivable
  4. Shareholders Equity
     10




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##### Table of Contents



For the three months endedMarch 31, 2006
    
    March 31, 2005Net income
 as reported for prior periods (1)
    
    
    N/A
    
    
    $
    15,006Add: Amortization of stock-based compensation
expense included in reported net income, net
of estimated tax related benefits
    
    
    N/A
    
    
    
    787Deduct: Stock-based compensation expense
determined under the fair-value based method
for all awards, net of estimated tax related
benefits $1,046 in 2005 (2)
    
    
    N/A
    
    
    
    (11,234
    )Net income, including the effect of
stock-based compensation expense  pro forma in 2005 (3)
    
    
    12,337
    
    
    
    4,559Net income
per ordinary share and ADS  as
reported Basic for prior periods (1)
    
    
    N/A
    
    
    
    0.17Net income
per ordinary share and ADS  as
reported Diluted for prior periods (1)
    
    
    N/A
    
    
    
    0.16Net income
per ordinary share and ADS 
Basic, including the effect of stock-based
compensation  pro forma in 2005 (3)
    
    
    0.13
    
    
    
    0.05Net income
per ordinary share and ADS 
Diluted, including the effect of stock-based
compensation  pro forma in 2005 (3)
    
    
    0.13
    
    
    
    0.05
 
 (1)
    
    Net income and net income per share prior to 2006 did not include
stock-based compensation expense under FAS 123 because the Company did not adopt the recognition
provisions of FAS 123.(2)
    
    Stock-based compensation expense prior to 2006 was calculated based on the pro
forma application of FAS 123.(3)
    
    Net income and net income per share for the three months ended March 31, 2006
included stock-based compensation expense of $12,091 net of tax benefits of $1,319. Net income
and net income per share prior to 2006 represent pro forma information based on FAS 123. The
reported pro forma net income for the three months ended March 31, 2005 was revised, resulting
in a decrease of $7.2 million from previously disclosed amounts to include stock-based
compensation expense related to options assumed in connection with the Crystal Decisions
acquisition, options exchanged under the stock option exchange programs, actual forfeitures, and
revised estimated tax benefits.    11




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2004Stock options
    
    RSUs
    
    IESPP
    
    ESPPExpected volatility
    
    
    47
    %
    
    
    N/A
    
    
    
    32
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    3.53
    %
    
    
    N/A
    
    
    
    2.38
    %
    
    
    N/ATurnover rateFrance
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AOfficers
    
    
    14
    %
    
    
    14
    %
    
    
    13
    %
    
    
    N/ARest of the world
    
    
    20
    %
    
    
    20
    %
    
    
    13
    %
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted
average fair value in $
    
    
    15.03
    
    
    
    40.88
    
    
    
    8.41
    
    
    
    1.66Expected life (years)
    
    
    4.57
    
    
    
    N/A
    
    
    
    0.5
    
    
    
    N/A
 
 (1)
    
    IBoxx Eurozone five to seven years rate for the options in euro, Euribor six
month rate for the 2004 IESPP    12




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Weighted-averageWeighted
    
    Aggregate
    
    remainingNumber of awards
    
    average
    
    intrinsic
    
    contractualStock
    
    
    
    
    
    exercise price
    
    value (in
    
    term (inWarrants
    
    options
    
    RSUs
    
    (in $) (1)
    
    $) (2)
    
    years)Outstanding at January 1,
2006
    
    
    435
    
    
    
    13,100
    
    
    
    389
    
    
    
    27.77
    
    
    
    200,684
    
    
    
    7.10Granted (3)
    
    
    
    
    
    
    719
    
    
    
    43
    
    
    
    35.85
    
    
    
    1,617Cancelled
    
    
    (15
    )
    
    
    (491
    )
    
    
    (25
    )
    
    
    29.19
    
    
    
    5,392Exercised
    
    
    (30
    )
    
    
    (545
    )
    
    
    (63
    )
    
    
    16.61
    
    
    
    14,056Outstanding at March 31, 2006
    
    
    390
    
    
    
    12,783
    
    
    
    344
    
    
    
    29.31
    
    
    
    132,803
    
    
    
    6.81Exercisable at March 31, 2006
    
    
    180
    
    
    
    7,050
    
    
    
    
    
    
    
    30.34
    
    
    
    79,246
    
    
    
    5.62Unvested at March 31, 2006
    
    
    210
    
    
    
    5,733
    
    
    
    344
 
 (1)
    
    translated in U.S. dollars based on the noon buying rate as published by the Federal
Reserve of Bank of New York for grants, exercises and cancellations and based on the closing rate
on March 31, 2006 for outstanding options.(2)
    
    computed based on the closing quote on the NASDAQ and the option exercise price translated in
U.S. dollars as per (1) above.(3)
    
    as stock options are granted with an exercise price equal to the closing price on Euronext on
the grant date, the intrinsic value of grants is limited to RSUs.   Weighted-Number of
    
    average grantawards (in
    
    date fair valuethousands)
    
    (in $)Unvested at January 1, 2006
    
    
    6,688
    
    
    
    14.93Granted
    
    
    762
    
    
    
    15.18Vested
    
    
    (659
    )
    
    
    15.98Forfeited
    
    
    (502
    )
    
    
    12.80Unvested at March 31, 2006
    
    
    6,289
    
    
    
    15.02
   Stock
    
    
    
    
    
    2004Warrants
    
    options
    
    RSUs
    
    IESPP
    
    ESPP
    
    TotalCost of license fees
    
    
    
    
    
    $
    11
    
    
    
    
    
    
    $
    1
    
    
    
    
    
    
    $
    12Cost of services
    
    
    
    
    
    
    1,166
    
    
    
    
    
    
    
    166
    
    
    $
    5
    
    
    
    1,337Sales and marketing
    
    
    
    
    
    
    2,969
    
    
    $
    35
    
    
    
    493
    
    
    
    16
    
    
    
    3,513Research and development
    
    
    
    
    
    
    1,649
    
    
    
    10
    
    
    
    146
    
    
    
    32
    
    
    
    1,837General and administrative
    
    $
    178
    
    
    
    3,288
    
    
    
    3,159
    
    
    
    76
    
    
    
    10
    
    
    
    6,711Total compensation expense
    
    
    178
    
    
    
    9,083
    
    
    
    3,204
    
    
    
    882
    
    
    
    63
    
    
    
    13,410Income tax benefit
    
    
    
    
    
    
    (1,290
    )
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    (1,319
    )Total compensation
expense, net of tax
    
    $
    178
    
    
    $
    7,793
    
    
    $
    3,175
    
    
    $
    882
    
    
    $
    63
    
    
    $
    12,091
 13




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5. Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
  Three Months
    
    
    YearEnded
    
    
    EndedMarch 31,
    
    
    December 31,2006
    
    
    2005Balance, beginning of the year
    
    $
    1,166,043
    
    
    $
    1,067,694Goodwill acquired during the period
    
    
    
    
    
    
    114,119Goodwill adjustments relating to prior year acquisitions
    
    
    145
    
    
    
    (15,617
    )Impact of foreign currency fluctuations on goodwill
    
    
    212
    
    
    
    (153
    )Balance, end of the period
    
    $
    1,166,400
    
    
    $
    1,166,043
   March 31,
    
    
    December 31,2006
    
    
    2005Developed technology
    
    $
    123,024
    
    
    $
    120,972Maintenance and support contracts
    
    
    50,837
    
    
    
    50,837Trade names
    
    
    6,182
    
    
    
    6,043Total other intangible assets, at cost
    
    
    180,043
    
    
    
    177,852Accumulated amortization on other intangible assets
    
    
    (77,207
    )
    
    
    (67,340
    )Other intangible assets, net
    
    $
    102,836
    
    
    $
    110,512
  14




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Amortization of:Developed technology (included in cost of net license fees)
    
    $
    6,029
    
    
    $
    5,472Maintenance and support contracts (included in cost of services revenues)
    
    
    2,538
    
    
    
    2,315Trade names (included in operating expenses)
    
    
    302
    
    
    
    346Total other intangibles amortization expense
    
    $
    8,869
    
    
    $
    8,133
  Remainder of 2006
    
    $
    26,9422007
    
    
    34,4372008
    
    
    31,9132009
    
    
    5,3302010
    
    
    3,867Thereafter
    
    
    347Total
    
    $
    102,836
 6. Net Income per Share
  Three Months EndedMarch 31,2006
    
    
    2005(in thousands, except per share data)Basic net income per share:Numerator:Net income
    
    $
    12,337
    
    
    $
    15,006Denominator:Weighted average shares outstanding
    
    
    92,552
    
    
    
    89,424Net income
per share  basic
    
    $
    0.13
    
    
    $
    0.17Diluted net income per share:Numerator:Net income
    
    $
    12,337
    
    
    $
    15,006Denominator:Weighted average shares outstanding
    
    
    92,552
    
    
    
    89,424Incremental shares attributable to shares under employee
stock option plans, warrants and RSUs (treasury stock
method)
    
    
    2,781
    
    
    
    1,760Weighted average shares outstanding plus incremental shares
    
    
    95,333
    
    
    
    91,184Net income
per share  diluted
    
    $
    0.13
    
    
    $
    0.16
   15




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7. Comprehensive Income
  Three Months EndedMarch 31,2006
    
    
    2005(in thousands)Net income
    
    $
    12,337
    
    
    $
    15,006Other comprehensive income:Foreign currency translation adjustments
    
    
    3,027
    
    
    
    (136
    )Unrealized net gains (losses) on cash flow hedges, net of tax
    
    
    (634
    )
    
    
    357Realized net gain on cash flow hedges, net of tax, reclassified into earnings
    
    
    (131
    )
    
    
    Total comprehensive income
    
    $
    14,599
    
    
    $
    15,227
 8. Business Segment Information
  Three Months EndedMarch 31,2006
    
    
    2005Net license fees (1):Business Intelligence Platform
    
    $
    104,838
    
    
    $
    100,909Enterprise Performance Management Applications
    
    
    14,212
    
    
    
    8,241Data Integration
    
    
    6,844
    
    
    
    6,001Total net license fees
    
    $
    125,894
    
    
    $
    115,151Total services revenues
    
    
    152,377
    
    
    
    133,624Total revenues
    
    $
    278,271
    
    
    $
    248,775
 
 (1)

The Company does not have vendor specific objective evidence for its licensed products.
Accordingly, these amounts represent the residual values of contracts and, to the extent that more
than one product was sold in a transaction, the allocation of value between products is based
purely upon the proportionate value ascribed to each product in the
arrangement.
  Three Months EndedMarch 31,2006
    
    
    2005United States
    
    $
    136,508
    
    
    $
    108,117Europe, Middle East and Africa (EMEA), excluding France
    
    
    87,586
    
    
    
    89,656France
    
    
    24,388
    
    
    
    21,563Americas, excluding the United States
    
    
    10,724
    
    
    
    9,907Asia Pacific
    
    
    19,065
    
    
    
    19,532Total revenues
    
    $
    278,271
    
    
    $
    248,775
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9. Commitments and Contingencies
 Legal matters
  17




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18




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19




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Commitments
  20




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10.
    
    Escrows Payable and Restricted Cash
       11. Credit Agreement
   
  
 21




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12. Accounting for and Disclosure of Guarantees
 Guarantors Accounting for Guarantees
   22




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Product Warranties.
 Environmental Liabilities. Accounting for Asset Retirement Obligations
 Other Liabilities and Other Claims.
 13. Income Taxes
   14. Subsequent Events
 Acquisition of Firstlogic, Inc.
   23




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read together with our Condensed Consolidated
Financial Statements and the notes to those statements included elsewhere in this 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. Our actual results could differ materially from those indicated in these
forward-looking statements as a result of certain factors, as more fully described in the Factors
Affecting Future Operating Results section of this Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q.
We undertake no obligation to update publicly any forward-looking statements for any reason, even
if new information becomes available or other events occur.
 Overview
  24




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Key Performance Indicators
 Three Months EndedMarch 31,(In millions, except for percentages and diluted net income per share)
    
    2006
    
    2005Revenues
    
    $
    278.3
    
    
    $
    248.8Growth in revenues (compared to prior year comparative period)
    
    
    12
    %
    
    
    15
    %Income from operations
    
    $
    17.9
    
    
    $
    21.4Income from operations as percentage of total revenues
    
    
    6
    %
    
    
    9
    %Diluted net income per share
    
    $
    0.13
    
    
    $
    0.16
  Results of Operations
  Three Months EndedMarch 31,2006
    
    2005Net license fees:Business Intelligence Platform
    
    
    38
    %
    
    
    41
    %Enterprise Performance Management Applications
    
    
    5
    
    
    
    3Data Integration
    
    
    2
    
    
    
    2Total net license fees
    
    
    45
    
    
    
    46Services revenues:Maintenance and technical support
    
    
    39
    
    
    
    40Professional services
    
    
    16
    
    
    
    14Total services fees
    
    
    55
    
    
    
    54Total revenues
    
    
    100
    
    
    
    100Cost of net license fees
    
    
    3
    
    
    
    3Cost of services
    
    
    22
    
    
    
    21Total cost of revenues
    
    
    25
    
    
    
    24Gross margin
    
    
    75
    
    
    
    76Operating expenses:Sales and marketing
    
    
    42
    
    
    
    42Research and development
    
    
    16
    
    
    
    16General and administrative
    
    
    11
    
    
    
    10Total operating expenses
    
    
    69
    
    
    
    68Income from operations (operating margin)
    
    
    6
    
    
    
    9Interest and other income (expense), net
    
    
    1
    
    
    
    2Income before provision for income taxes
    
    
    7
    
    
    
    10Provision for income taxes
    
    
    (3
    )
    
    
    (4
    )Net income
    
    
    4
    %
    
    
    6
    %
 Seasonality
  25




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Impact of Foreign Currency Exchange Rate Fluctuations on Results of Operations
    Three Months Ended March 31,2006
    
    2005Total revenues
    
    $
    (13.9
    )
    
    $
    7.4Total cost of revenues
    
    
    (3.2
    )
    
    
    2.1Sales and marketing expenses
    
    
    (3.0
    )
    
    
    4.3Research and development expenses
    
    
    (1.5
    )
    
    
    2.1General and administrative expenses
    
    
    (0.6
    )
    
    
    0.7
   Revenues
 Three Months EndedMarch 31,2006
    
    
    2005(in millions)Net license fees (1):Business Intelligence Platform
    
    $
    104.8
    
    
    $
    101.0Enterprise Performance Management Applications
    
    
    14.2
    
    
    
    8.2Data Integration
    
    
    6.9
    
    
    
    6.0Total net license fees
    
    $
    125.9
    
    
    $
    115.2Services revenues:Maintenance and technical support
    
    $
    108.6
    
    
    $
    100.1Professional services
    
    
    43.8
    
    
    
    33.5Total services revenues
    
    
    152.4
    
    
    
    133.6Total revenues
    
    $
    278.3
    
    
    $
    248.8
 
 (1)

We do not have vendor specific objective evidence for our licensed products. Accordingly, these
amounts represent the residual values of contracts and, to the extent that more than one product
was sold in a transaction, the allocation of value between products is based purely upon the
proportionate value ascribed to each product in the arrangement.
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Net License Fees .
    Services Revenues .
   Geographic Revenues Mix
  Three Months EndedMarch 31,2006
    
    
    2005(in millions)Americas (1)
    
    $
    147.2
    
    
    $
    118.0Europe, Middle East and Africa (EMEA) (2)
    
    
    112.0
    
    
    
    111.3Asia Pacific
    
    
    19.1
    
    
    
    19.5Total revenues
    
    $
    278.3
    
    
    $
    248.8
 
 (1)
    
    Includes revenues in the United States of $136.5 million and $108.1 million for the
three months ended March 31, 2006 and 2005, respectively.(2)
    
    Includes revenues in France of $24.4 million and $21.6 million for the three months
ended March 31, 2006 and 2005, respectively.  27




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Cost of Revenues
 Three Months EndedMarch 31,2006
    
    
    2005(in millions)Cost of revenues:Net license fees
    
    $
    8.0
    
    
    $
    7.2Services
    
    
    60.7
    
    
    
    51.4Total cost of revenues
    
    $
    68.7
    
    
    $
    58.6
  Cost of net license fees .
 Cost of services revenues .
  Operating Expenses
 Three Months EndedMarch 31,2006
    
    
    2005(in millions)Sales and marketing
    
    $
    117.5
    
    
    $
    103.7Research and development
    
    
    43.7
    
    
    
    40.3General and administrative
    
    
    30.4
    
    
    
    24.8Total operating expenses
    
    $
    191.6
    
    
    $
    168.8
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Sales and Marketing Expenses .
 Research and Development Expenses .
 General and Administrative Expenses .
 Interest and Other Income, Net
  Three Months EndedMarch 31,2006
    
    
    2005(in millions)Net interest income
    
    $
    3.0
    
    
    $
    1.8Net foreign exchange gains (losses)
    
    
    (0.4
    )
    
    
    2.6Other income
    
    
    0.3
    
    
    
    Interest and other income, net
    
    $
    2.9
    
    
    $
    4.4
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Net interest income
 Net foreign exchange gains (losses)
   Income Taxes
  30




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Liquidity and Capital Resources
  Three Months EndedMarch 31,2006
    
    
    2005(in millions)Cash flow provided by operating activities
    
    $
    88.0
    
    
    $
    75.4Cash flow used in investing activities
    
    
    (10.0
    )
    
    
    (7.5
    )Cash flow provided by financing activities
    
    
    14.2
    
    
    
    12.3Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    0.8
    
    
    
    0.8Net increase in cash and cash equivalents
    
    $
    93.0
    
    
    $
    81.0
   Operating Activities .
   Investing Activities .
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Financing Activities
 Future Liquidity Requirements
   
   Contractual Obligations
  32




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Guarantees
 Guarantors Accounting for Guarantees
   Product Warranties
 Environmental Liabilities Accounting for Asset Retirement Obligations
 Other Liabilities and Other Claims
 Off-Balance Sheet Arrangements
 Employers Accounting for Pensions Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 Employers Disclosures about Pensions and Other Postretirement benefit  an amendment of FASB
Statements No. 87, 88, and 106
 Critical Accounting Policies
  33




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
    
    Recognition of revenues
    
    Business combinations
    
    Impairment of goodwill, intangible assets and long-lived assets
    
    Contingencies and litigation
    
    Accounting for income taxes
    
    Stock-based compensation
 Managements Discussion and Analysis of
Financial Condition and Results of Operations
     2004Stock options
    
    RSUs
    
    IESPP
    
    ESPPExpected volatility
    
    
    47
    %
    
    
    N/A
    
    
    
    32
    %
    
    
    N/ARisk-free interest rate (1)
    
    
    3.53
    %
    
    
    N/A
    
    
    
    2.38
    %
    
    
    N/ATurnover rateFrance
    
    
    12
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AOfficers
    
    
    14
    %
    
    
    14
    %
    
    
    13
    %
    
    
    N/A
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2004Stock options
    
    RSUs
    
    IESPP
    
    ESPPRest of the world
    
    
    20
    %
    
    
    20
    %
    
    
    13
    %
    
    
    N/ADividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted
average fair value in $
    
    
    15.03
    
    
    
    40.88
    
    
    
    8.41
    
    
    
    1.66Expected life (years)
    
    
    4.57
    
    
    
    N/A
    
    
    
    0.5
    
    
    
    N/A
 
 (1)
    
    IBoxx Eurozone five to seven years rate for the options in euro, Euribor six
month rate for the 2004 IESPP      Recent Pronouncements
 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards.
 Accounting for Servicing of Financial Assets .
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Accounting for Certain Hybrid Financial Instruments .
 Factors Affecting Future Operating Results
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Quantitative and
Qualitative Disclosures About Market Risk
 
 Item 4. Controls and Procedures
   
 Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors.
 Factors Affecting Future Operating Results
 We operate in a rapidly changing environment that involves numerous uncertainties and risks. The
following section describes some, but not all, of these risks and uncertainties that may adversely
affect our business, financial condition or results of operations. This section should be read in
conjunction with the unaudited condensed consolidated financial statements and the accompanying
notes
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thereto, and the other parts of Managements Discussion and Analysis of Financial Condition and
Results of Operations included in this Report on Form 10-Q . Additional factors and uncertainties
not currently known to us or that we currently consider immaterial could also harm our business,
operating results and financial condition.
 Risks Related to Our Business
 Our quarterly operating results have been and will continue to be subject to fluctuation.
  
    
    we typically record 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 their fourth quarter, the end of their annual budget
cycle, before deciding whether to purchase new software;
    
    economic activity in Europe and certain other countries generally slows during the summer
months;
    
    customers may delay purchase decisions in anticipation of (i) changes to our product
line, (ii) new products or platforms, (iii) product enhancements or (iv) in response to
announced pricing changes by us or our competitors;
    
    our revenues typically vary based on the mix of products and services and the amount of
consulting services that our customers order, and we expect this trend to continue for the
foreseeable future;
    
    we depend, in part, on large orders and any delay in closing a large order may result in
the realization of potentially significant net license fees being postponed from one quarter
to the next; and
    
    we experience longer payment cycles for sales in certain foreign countries.
   Investors may be unable to compare our results after January 1, 2006 with our results in prior
periods due to stock-based compensation expense which may cause our stock price to fall.
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Our revenues may be unpredictable due to the release of our BusinessObjects XI product, which
integrates our existing Business Objects and Crystal Decisions product lines, and the expected end
of life of our separate, existing Business Objects and Crystal Decisions products.
    If we overestimate revenues, and are unable to sufficiently reduce our expenses in any quarter,
this could have a negative impact on our quarterly results of operations.
   Since we are required to report our consolidated financial results under both the U.S. GAAP and
IFRS rules, we may incur increased operating expenses, we may not fulfill the reporting
requirements of one or both of these reporting regimes, we may be subject to inconsistent
determinations with respect to our accounting policies under these regimes and investors may
perceive our operating results to be drastically different under these regimes.
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Authorité des Marchés Financiers Document de Référence .
  Changes to current accounting policies could have a significant effect on our reported financial
results or the way in which we conduct our business.
  
    
    accounting for business combinations;
    
    accounting for goodwill and other intangible assets;
    
    accounting for uncertain tax positions;
    
    earnings per share; and
    
    software revenue recognition.
  As a result of our adoption of FAS 123R, which requires us to expense all share-based
payments awards in our income statement, our net income and earnings per share will be materially
adversely affected.
   Changes in our stock-based compensation policy could adversely affect our ability to attract and
retain employees.
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Our market is highly competitive, which could harm our ability to sell products and services and
reduce our market share.
   Some of our competitors may have greater financial, technical, sales, marketing and other
resources than we do. In addition, acquisitions of or other strategic transactions by our
competitors could weaken our competitive position or reduce our revenues.
   We may pursue strategic acquisitions and investments that could have an adverse effect on our
business if they are unsuccessful.
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We have strategic relationships with Microsoft, IBM and Oracle over which we have limited
control and which, if terminated, could reduce our revenues and harm our operating results.
   We depend on strategic relationships and business alliances for continued growth of our business.
   We sell products only in the business intelligence software market; if sales of our products in
this market decline, our operating results will be harmed.
  If the market in which we sell business intelligence software does not grow as anticipated, our
future profitability could be negatively affected.
  
    
    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;
 41




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
    
    decide to use other technologies, such as search engines, to obtain the required business intelligence for their users.
  Our new software as a service offering, crystalreports.com, carries a number of risks, some of
which may be harmful to our business.
  §
    
    We have no experience in the on-demand services market;§
    
    We may not be able to deliver this product in the manner we have conveyed to customers;§
    
    Customers may question the viability or security of our on demand services offering;§
    
    We may not be able to provide sufficient, continuous customer support for crystalreports.com;§
    
    We may incur higher than anticipated costs as we enter into the on demand services market;§
    
    We could experience service interruptions with respect to this on demand service
offering, which could potentially impact our revenues;§
    
    We may not be able to comply in a timely or cost effective manner with privacy and other
regulatory requirements that apply to this product;§
    
    We may not realize anticipated market demand and acceptance of this on demand offering;
and§
    
    Sales of the on-demand sharing platform bundled with license sales may delay the timing
of revenue recognition for arrangements that would otherwise have been recorded at the time
of sale.
  Our software may have defects and errors that could lead to a loss of revenues or product
liability claims.
  
    
    potential customers may delay purchases;
    
    customers may react negatively, which could reduce future sales;
    
    our reputation in the marketplace may be damaged;
    
    we may have to defend product liability claims;
    
    we may be required to indemnify our customers, distributors, original equipment manufacturers or other resellers;
    
    we may incur additional service and warranty costs; and
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
    
    we may have to divert additional development resources to correct the defects and errors,
which may result in the delay of new product releases or upgrades.
  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.
   Business disruptions could seriously harm our operations and financial condition and increase our
costs and expenses.
      While we believe that we currently have adequate internal control over financial reporting, we are
exposed to risks from recent legislation requiring companies to evaluate internal control over
financial reporting.
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We cannot be certain that our internal control over financial reporting will be effective or
sufficient in the future.
    The software market in which we operate is subject to rapid technological change and new product
introductions, which could negatively affect our product sales.
  
    
    adapting third party technology, including open source software;
    
    successful education and training of sales, marketing and consulting personnel;
    
    effective marketing and market acceptance;
    
    proper positioning and pricing; and
    
    product quality, including possible defects.
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We are currently a party to several lawsuits with MicroStrategy. The prosecution of these lawsuits
could have a 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.
     45




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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.
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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, either of which
could adversely affect our financial position and results of operations.
   We are a party to litigation with Decision Warehouse. The prosecution of this lawsuit could have a
substantial negative impact on our business. Should Decision Warehouse prevail, we may be required
to pay substantial monetary damages.
 Decision Warehouse Consultoria E Importacao Ltda. Business Objects Do Brasil, Ltda.
 Business Objects Do Brasil, Ltda. Decision
Warehouse Consultoria E Importacao Ltda.
 We have committed to undertake certain internal practices in connection with handling of employee
information.
  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.
  
    
    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
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
    
    our shrink-wrap licenses may be unenforceable under the laws of certain jurisdictions.
      Third parties have asserted that our technology infringes upon their proprietary rights, and
others may do so in the future, which has resulted, and may in the future result, in costly
litigation and could adversely affect our ability to distribute our products.
   
    
    we would need 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;
    
    we may be required to enter into royalty and licensing agreements with such third party under unfavorable terms; and
    
    we could be forced to cease selling or delay shipping our products should an adverse judgment be rendered against us.
  48




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Our loss of rights to use software licensed from third parties could harm our business.
  Our executive officers and key employees are crucial to our business, and we may not be able to
recruit, integrate and retain the personnel we need to succeed.
  We have multinational operations that are subject to risks inherent in international operations.
  
    
    technical difficulties and costs associated with product localization;
    
    challenges associated with coordinating product development efforts among geographically dispersed development centers;
    
    potential loss of proprietary information due to piracy, misappropriation or laws that
may be less protective of our intellectual property rights;
    
    lack of experience in certain geographic markets;
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
    
    the significant presence of some of our competitors in some international markets;
    
    potentially adverse tax consequences;
    
    import and export restrictions and tariffs;
    
    foreign laws and other government controls, such as trade and employment restrictions;
    
    management, staffing, legal and other costs of operating an enterprise spread over various countries;
    
    political instability in the countries where we are doing business;
    
    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; and
    
    different business practices and regulations, which may lead to the need for increased
employee education and supervision.
  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.
   Our effective tax rate may increase or fluctuate, which could increase our income tax expense and
reduce our net income.
  
    
    changes in forecasted annual operating income;
    
    changes in relative proportions of revenues and income before taxes in the various jurisdictions in which we operate;
    
    changes to the valuation allowance on net deferred tax assets;
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
    
    changes to actual or forecasted permanent differences between book and tax reporting,
including the tax effects of purchase accounting for acquisitions and non-recurring charges
which may cause fluctuations between reporting periods;
    
    impacts from any future tax settlements with state, federal or foreign tax authorities;
    
    impacts from changes in tax laws, regulations and interpretations in the jurisdictions in
which we operate, as well as the requirements of certain tax rulings;
    
    impacts from acquisitions and related integration activities; or
    
    impacts from new FASB or IFRS requirements.
  We are subject to frequent tax audits, where the ultimate resolution may result in additional
taxes.
   Risks Related to Ownership of Our Ordinary Shares or ADSs
 Provisions of our articles of association 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.
 1/3 2/3
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
    Holders of our shares have limited rights to call shareholders meetings or submit shareholder
proposals, which could adversely affect their ability to participate in governance of our company.
  Interests of our shareholders will be diluted if they are not able to exercise preferential
subscription rights for our shares.
 droits préférentiels de
souscription
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It may be difficult for holders of our ADSs rather than our ordinary shares to exercise some of
their rights as shareholders.
  Fluctuation in the value of the U.S. dollar relative to the euro may cause the price of our
ordinary shares to deviate from the price of our ADSs.
  53




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We have not declared or paid cash dividends to our shareholders and do not anticipate doing so in
the near future.
  The market price of our shares is susceptible to changes in our operating results and to stock
market fluctuations.
  
    
    announcements of our quarterly operating results and expected results of the future periods;
    
    our failure to achieve the operating results anticipated by analysts or investors;
    
    announcements of technological innovations or new products by us, our customers or competitors;
    
    releases or reports by or changes in security and industry analysts recommendations;
    
    announcements of our competitors or customers quarterly operating results, and expected results of future periods;
    
    addition of significant new customers or loss of current customers;
    
    sales or the perception in the market of possible sales of a large number of our shares
by our directors, officers, employees or principal stockholders; and
    
    developments or disputes concerning patents or proprietary rights or other events.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
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Item 6. Exhibits
 ExhibitNo.
    
    Description3.1(1)
    
    Amended and Restated Bylaws of Business Objects S.A., as amended April 20, 2006 (English translation).10.22.1(2)
    
    Amendment to Lease Agreement dated February 1, 2006 by and between 475 Java Drive Associates, L.P.
and Business Objects Americas, effective as of March 28, 2006.10.35.3(3)
    
    Agreement between Societe Generale and Business Objects S.A., effective March 1, 2006.10.70(4)
    
    Contract of Employment between
Business Objects (U.K.) Ltd. and Bernard Liautaud dated March 7, 2006.10.71(5)
    
    Employment Agreement between
Business Objects Americas and Bernard Liautaud dated March 13, 2006.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.32.1
    
    Certification of Chief Executive Officer and 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).
 
 1
    
    Incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K
filed with the SEC on April 26, 2006.2
    
    Incorporated by reference to Exhibit 10.22.1 filed with our Current Report on Form 8-K
filed with the SEC on March 31, 2006.3
    
    Incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K
filed with the SEC on March 7, 2006.4
    
    Incorporated by reference to Exhibit 10.70 filed with our
Current Report on Form 8-K filed with the SEC on May 10, 2006.5
    
    Incorporated by reference to Exhibit 10.71 filed with our
Current Report on Form 8-K filed with the SEC on May 10, 2006. 55




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SIGNATURES
  Business Objects S.A.
(Registrant)Date: May 9, 2006
    By:
    /s/ John G. SchwarzJohn G. SchwarzChief Executive OfficerDate: May 9, 2006
    By:
    /s/ James R. TolonenJames R. TolonenChief Financial Officer and Senior Group Vice
President 56




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1(1)
    
    Amended and Restated Bylaws of Business Objects S.A., as amended April 20, 2006 (English translation).10.22.1(2)
    
    Amendment to Lease Agreement dated February 1, 2006 by and between 475 Java Drive Associates, L.P.
and Business Objects Americas, effective as of March 28, 2006.10.35.3(3)
    
    Agreement between Societe Generale and Business Objects S.A., effective March 1, 2006.10.70(4)
    
    Contract of Employment between
Business Objects (U.K.) Ltd. and Bernard Liautaud dated March 7, 2006.10.71(5)
    
    Employment Agreement between
Business Objects Americas and Bernard Liautaud dated March 13, 2006.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.32.1
    
    Certification of Chief Executive Officer and 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).
 
 1
    
    Incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K
filed with the SEC on April 26, 2006.2
    
    Incorporated by reference to Exhibit 10.22.1 filed with our Current Report on Form 8-K
filed with the SEC on March 31, 2006.3
    
    Incorporated by reference to Exhibit 3.1 filed with our Current Report on Form 8-K
filed with the SEC on March 7, 2006.4
    
    Incorporated by reference to Exhibit 10.70 filed with our
Current Report on Form 8-K filed with the SEC on May 10, 2006.5
    
    Incorporated by reference to Exhibit 10.71 filed with our
Current Report on Form 8-K filed with the SEC on May 10, 2006. 57