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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998,
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.
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(Exact name of registrant as specified in its charter)
The Republic of France None
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(Jurisdiction of incorporation or organization) (I.R.S. Employer Identification
No.)
1 Square Chaptal, 92300 Levallois-Perret, France
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(Address of principal executive offices)
(408) 953-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which registered:
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American Depositary Shares, each representing Nasdaq National Market
one Ordinary Share
Ordinary Shares Nasdaq National Market*
* Ordinary Shares are not traded, rather, they are deposited with the Bank of
New York, as Depositary, and one American Depositary Share is issuable for every
one Ordinary Share deposited with the Depositary.
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of our common equity held by non-affiliates,
based upon the closing sale price of our American Depositary Shares on February
15, 1999 as reported on the Nasdaq National Market, was approximately $648
million. Ordinary Shares held by each of our officers and directors and by each
person owning 5% or more of our outstanding Ordinary Shares are excluded because
such persons may be deemed to be affiliates of Business Objects. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 15, 1999, the number of outstanding shares of each class of
our common equity was 17,400,899 Ordinary Shares of one French franc nominal
value, including 15,948,323 American Depositary Shares (as evidenced by American
Depositary Receipts), each corresponding to one Ordinary Share.
DOCUMENTS INCORPORATED BY REFERENCE
We have incorporated by reference into Part III of this Form 10-K portions
of our Proxy Statement for our Annual Meeting of Shareholders.
References in this Form 10-K to the "Company," "Business Objects," "we,"
"our," and "us" refer to Business Objects S.A. and our consolidated
subsidiaries.
TRADEMARKS
Business Objects, the Business Objects logo, BUSINESSQUERY, BUSINESSMINER,
BUSINESSANALYZER, Microcube, PowerReport, Rapid Deployment Template,
ReportScript, Semantically Dynamic, SmartSpace, Universe Repository, and
WEBINTELLIGENCE are trademarks or registered trademarks of Business Objects S.A.
All other trademarks or trade names referenced in this Form 10-K are the
property of their respective owners.
REPORTING CURRENCY
All financial information contained in this document is expressed in United
States dollars, unless otherwise stated.
AMERICAN DEPOSITARY SHARES
We have sponsored a program that provides for the trading of our Ordinary
Shares in the United States in the form of American Depositary Shares ("ADSs").
Each ADS represents one
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Ordinary Share placed on deposit with The Bank of New York, as depositary (the
"Depositary") and is issued and delivered by the Depositary through its
principal office in New York City at 101 Barclay Street, New York, New York,
10286. Under the terms of the Deposit Agreement (the "Deposit Agreement") dated
September 22, 1994, as amended on May 8, 1996 and December 30, 1998, Ordinary
Shares may be deposited with the Paris office of Banque Paribas, as custodian
(the "Custodian"), or any successor or successors to such Custodian. The
Depositary provides a variety of services to our investors. The form of the
Deposit Agreement as amended and restated on December 30, 1998 is being filed as
an exhibit to this Form 10-K.
Under the original Deposit Agreement, two Ordinary Shares converted into
one ADS. Following the amendment of the Deposit Agreement on May 8, 1996, one
Ordinary Share converts into one ADS. The 1996 amendment had the effect of
doubling the number of outstanding ADSs, and produced the same result as a
2-for-1 stock split. Except where otherwise indicated, all ADS and per ADS
information contained in this Form 10-K has been adjusted to give effect to this
amendment for all periods.
TABLE OF CONTENTS
Part I Item 1. Description of Business 4
Item 2. Description of Property 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 66
Part III Item 10. Directors and Executive Officers of Registrant 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and Management 66
Item 13. Certain Relationships and Related Transactions 67
Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 67
Item 14A. Index to Exhibits 69
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ITEM 1. DESCRIPTION OF BUSINESS
OUR COMPANY
Business Objects develops, markets, and supports integrated enterprise
decision support software. Decision support software allows users to access,
analyze, and share information derived from a variety of sources, and enhances
the decision making process of a business by providing key information and
analyses to those people within an organization who are responsible for making
decisions. Our software enables users to direct powerful queries to complex
databases using representations of information, or "objects," that are
understandable by non-technical end users. Data retrieved by these queries can
then be analyzed using various tools, and sophisticated reports can be produced
to present the results of the analysis. Our principal product,
BUSINESSOBJECTS(TM), together with an array of supporting software components
and modules, is an integrated query, reporting, and online analytical
processing, or "OLAP" tool that operates on Windows 95, Windows NT, and Unix
Motif client/server operating systems and is interoperable with most major
databases. WEBINTELLIGENCE(TM), our thin-client platform, allows users to
perform the same query, reporting, and analysis as BUSINESSOBJECTS over the
internet.
Our products are distributed worldwide through both direct and indirect
sales channels. We sell our products to a wide range of organizations and in a
wide variety of industries. Based on our internal estimates, as of December 31,
1998, we have licensed our software to over 7,600 customers representing an
estimated 1,080,000 licenses in over 60 countries.
Business Objects was organized in 1990 as a societe anonyme, or limited
liability company, under the laws of the Republic of France. Our principal
executive office is located at 1 Square Chaptal, 92300 Levallois-Perret, France.
We also have wholly owned subsidiaries in the United States, United Kingdom,
Germany, the Netherlands, Belgium, Spain, Australia, Sweden, Canada, Singapore,
Japan, and Switzerland and a majority interest in a subsidiary in Italy.
INDUSTRY BACKGROUND
Organizations around the globe collect ever increasing amounts of data
about their business resources, activities and processes, their customers and
suppliers, and the industries in which they operate. The true value of
accumulated data cannot, however, be realized unless users can effectively
access and analyze the data. Accomplishing these tasks in today's enterprises is
complicated by the dispersed nature in which data tends to be created and stored
throughout an enterprise. Moreover, data is frequently created by and stored in
often incompatible hardware and software environments, including:
. data warehouses and data marts;
. application systems such as enterprise resource planning, human
resources, and finance software systems; and
. custom software applications for specialized use.
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To take full advantage of accumulated information and provide for more
effective decision making, organizations need to find ways to enable
participants in the organization to access this information efficiently and
effectively. However, many organizations do not have the tools needed to provide
for easy and organized access to information located throughout the enterprise.
The decision support software industry was born out of this need to enable
participants in an organization to make faster, more accurate decisions by
accessing information located throughout the enterprise more efficiently and
effectively. By providing faster access to meaningful information, organizations
are able to push decision making down to the front lines of the organization,
thereby rendering the organization more efficient and ultimately more
competitive.
THE BUSINESS OBJECTS SOLUTION
Our software solutions are based on five fundamental principles that enable
end users to access, analyze, and share data stored in relational databases:
. User-Oriented Representation of Information. Our software eliminates
the need for end users to understand the technical details of database
structures and enables end users to work with their own terminology to execute
queries, generate reports, and analyze data. Our software accomplishes this
result by transforming the technical details of database structures into
representations, or universes of business "objects," that are meaningful to end
users. The universes of objects are predefined by an organization's information
systems staff and made available to end users in a shared repository. End users
can then combine objects such as "Sales Revenue," "Products," or "Customers"
dynamically to formulate a query. As a result, an organization's information
systems staff is no longer required to define queries for individual users.
Furthermore, by defining even a limited number of objects, the information
systems staff can provide end users with substantial query potential.
. Intuitive and Reliable Query Technique. Our software insulates end
users from the complexities of Structured Query Language (SQL) and provides a
query technique based on a logic that we believe is more intuitive to the end
user than traditional query techniques. We believe that this results in greater
ease of use and better accuracy of results. The end user need only specify, in a
query panel, the objects he or she desires to retrieve, any applicable
conditions on these objects, and the desired sorting order of the results. The
end user does not have to understand technical concepts such as the location of
data, the definition of information elements, or the relationship between
different database tables. Permitting end users to formulate queries using an
intuitive and readily understandable vocabulary, predefined by database experts,
reduces the time spent on improperly defined queries that may result in
erroneous or useless results.
. Comprehensive, Integrated Suite of End User Tools. Our comprehensive,
integrated suite of analysis and presentation tools permits end users, following
a single query of the database, to generate a wide variety of reports and graphs
and to perform various forms of analysis, including multidimensional analysis or
OLAP, and data mining.
. Repository-Based Information System for Efficient Set-up, Control, and
Security. Our software enables an organization's information systems staff to
efficiently deploy a data access solu-
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tion throughout an organization through the use of a central repository where
universes of objects are defined, maintained, and stored. Using our software, an
organization's information systems staff can also control the use of available
computer resources by preventing or deferring the execution of queries that will
consume excessive amounts of processing time or return large amounts of data,
which can overload an organization's system. Further, by assigning specific
universes of objects to particular end users, an organization's information
systems staff can maintain control over data access security throughout the
organization.
. Enterprisewide Interoperability. We have developed our software
products to provide enterprisewide interoperability. Our software is compatible
with a variety of leading platforms including Microsoft Windows (Windows 95 and
NT) and Unix Motif, and most major databases, including Oracle, Sybase, IBM DB2
and SQL/400, Informix, Microsoft SQL Server, DEC Rdb and Teradata, as well as a
number of legacy mainframe databases. We maintain this interoperability either
through the use of native middleware or through open interfaces, such as
Microsoft ODBC. Our software products also support multidimensional databases or
OLAP servers, such as Oracle Express, Hyperion Essbase, Microsoft SQL Server 7.0
OLAP Services, and Informix Metacube.
BUSINESS STRATEGY
Our objective is to continue to be a leading supplier of software products
for the worldwide enterprise decision support software market. To accomplish our
objective, we focus on the following strategies:
. Concentrate on Decision Support Solutions. We intend to continue to
focus on decision support software solutions that facilitate enterprisewide
access, analysis, and sharing of information stored in data warehouses, data
marts, and business application systems. We also expect to continue investing
significant resources in research and development to enhance our core
technology, data representation, and query capabilities, and to develop new or
enhanced analysis and reporting products.
. Maintain Enterprisewide Focus. We intend to ensure that our products
can be used throughout the enterprise with the major desktop computer operating
systems and databases being used in the software. To this end, we intend to
evolve our products in order to remain compatible with the major desktop
computer operating systems and databases as they evolve over time. Our objective
is to make "seamless" the access and sharing of information across heterogeneous
enterprisewide environments.
. Increase Commitment to Deployments on Enterprise Resource Planning
(ERP) Systems. We intend to increase our focus on delivering products that
complement ERP systems, such as those offered by SAP, Oracle, Baan, and
PeopleSoft, in order to leverage the decision support opportunities that ERP
deployments create. Today we offer several Rapid Deployment Templates (RDTs) for
various ERP systems, which allow our customers to quickly deploy our products in
conjunction with an existing or newly installed ERP system. In addition, we have
received certification from SAP for Business Information Warehouse.
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. Expand Products and Services for the internet. The internet already
represents strong opportunities for us in the areas of intranet deployments
(within organizations) as well as extranet deployments that enable our customers
to link their customers, partners, and suppliers using our internet product.
. Diversify Channels of Distribution. In order to accelerate worldwide
market penetration, we are broadening our sales strategy, which has historically
focused on the direct sales approach, by establishing indirect sales channels
consisting of Value Added Resellers (VARs), system integrators, consulting
partners, distributors, and resellers. This strategy is designed to reach
organizations that we could not otherwise reach effectively with our direct
sales staff.
. Maintain Global Orientation. From our earliest stages of development,
our strategy has been to develop a global organization. We have developed a
strong presence both in Europe and in the United States and are expanding
operations in the Asia/Pacific region. This approach enables us to provide the
international presence and support required by large multinational customers and
to develop product and business strategies that will permit us to be competitive
on a worldwide basis. We consider our global orientation to be an essential
component of our success and culture.
. Offer Quality Customer Service and Technical Support. We believe that
offering responsive and highly skilled customer service and technical support is
a key competitive factor. We have established and intend to continue to enhance
and expand our worldwide service and support organization. In particular, we
globalized our support operation and systems in 1998. Our customer service
offerings currently include software maintenance and support, customer education
and training, and post-sales consulting services.
TARGET MARKETS
We design our software for medium to large business organizations and
governmental institutions, and focus our marketing efforts on the following four
target markets:
. Users of Data Warehousing/Data Marts. Data warehousing has emerged
recently as a popular architecture for decision support functions. To implement
data warehousing, an organization installs one or more servers to supplement
existing mainframes or other systems on which mission-critical transactional
applications run. The organization then regularly downloads data from its
transactional applications to the "data warehouses" that are used as information
servers for end users. Data marts are smaller scale data warehouses that are
focused on a particular business unit or specific function. Both data
warehousing and data marts enable end users to access data without incurring the
risk of "corrupting" production databases or slowing down mission-critical
transactional applications. In addition, transactional applications usually only
contain six to twelve months of data, in contrast to data warehouses and data
marts which, over time, may contain years of information. Because decision
support is the main objective of data warehousing, we consider our software to
be a key component of the data warehousing architecture, as it provides the end
user with front-end query tools and decision support to access warehoused data.
. Users of ERP Software. Organizations implementing complex
client/server packaged business applications from vendors such as SAP, Oracle,
PeopleSoft, and Baan frequently require
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comprehensive end user data access and reporting functionality. Our software
provides significant value to these organizations by virtue of its ability to
handle the complexities of the underlying databases that support these
applications. In addition, our Rapid Deployment Templates (RDTs) can be used
with certain of these client/server packaged business applications. RDTs provide
a set of predefined objects to organizations using such applications to
facilitate the implementation of our decision support solution. We intend to
continue to develop, independently or in conjunction with others, RDTs for use
with specific applications.
. Users of Custom Developed Client/Server Business Applications
Software. Many organizations have a number of end users using information
systems or applications developed by third parties in a relational database
environment and have accumulated a large volume of data in their databases. We
believe that the exposure of end users to the benefits of the relational
database environment has stimulated demand for more efficient and effective
access to the data. By allowing end users to independently access data, generate
reports, and perform analyses, our software enables these organizations to take
better advantage of their substantial investments in relational database and
client/server technology.
. Organizations Sharing Data and Doing Business Over the internet. Many
organizations are providing their customers, partners, and suppliers with access
to information about their relationship over the internet. For example, a
medical supplies distributor plans to open its data warehouse to its 5,000
suppliers and 1,500 hospitals, thus providing its entire supply chain with self-
service access to inventory and sales information. Our software products enable
these organizations to provide controlled access to information to end users
outside the organization through internet connectivity. While this currently
represents an insignificant portion of our existing business, we believe that
this is a growing new market. However, we cannot assure you that this market
will develop or that we will be successful in this market if it does develop.
PRODUCTS
We offer a complete suite of decision support software tools that include
query, reporting, online analytical processing, and data mining features for the
end user, and administration tools that enable information systems professionals
to set up and deploy our products across the enterprise. Our core offerings are
BUSINESSOBJECTS, which operates in a client/server environment, and
WEBINTELLIGENCE, which operates on thin-client platforms over the internet.
Although BUSINESSOBJECTS and WEBINTELLIGENCE operate on different platforms,
they share the same core technology and technical infrastructure, and can be
deployed together in the enterprise.
At the center of the BUSINESSOBJECTS environment is the "semantic layer" a
meaningful, business representation of data between the users and the database.
This semantic layer is made up of "universes," or groups, of business "objects,"
which end users combine to run their queries. For example, the semantic layer
may organize information according to such enterprise-relevant topical areas as
"sales revenue" or "customers."
Using an intuitive, point-and-click interface, information systems
professionals within an enterprise create the objects by assigning a Structured
Query Language (SQL) equivalent to a particular business term, and specify data
dimensions and hierarchies for multidimensional analysis.
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The information systems staff then specify the relationships between the
different tables of the relational database. Once created, this semantic layer
is available to end users through a central repository and may be modified by
the information systems staff in response to the changing needs of the business,
or to changes in the database structure. Both the client/server and web
platforms can utilize the same semantic layer. In addition, the central
repository allows information systems staff to control access to information
contained in the database, by adding an additional security layer on top of the
security features supported by the different relational database systems.
Once the semantic layer is created, end users can access the information
stored in the database, run customized queries, build reports, and analyze the
data.
We also offer relational database management system (RDBMS) drivers that
enable end users to connect and retrieve data from each particular database. We
offer RDBMS drivers for all the major relational databases.
User Products. To provide greater flexibility to our customers, we
offer products that can be deployed on client/server or internet platforms.
Our client/server decision support software tool, BUSINESSOBJECTS,
provides ad hoc query, reporting, and analysis capabilities on each of the
operating systems supported by our software, including Windows 95, Windows NT,
and Unix Motif. Versions of our BUSINESSOBJECTS product designed for Microsoft
Windows currently represent the substantial majority of our installed customer
base. We are currently shipping BUSINESSOBJECTS 4.1, and have recently
announced BUSINESSOBJECTS 5.0. We expect to begin shipping BUSINESSOBJECTS 5.0
in mid-1999.
Our thin-client decision support software tool, WEBINTELLIGENCE, allows end
users to perform ad hoc query, reporting, and analysis capability over the
internet. WEBINTELLIGENCE operates on any client platform that has a Java-
enabled web browser. WEBINTELLIGENCE eliminates the need for client-side
installation and maintenance of both application software and database
middleware, thereby providing organizations with a cost-effective way to broadly
deploy decision support software capabilities, and extend decision support
software beyond the organization to reach suppliers, partners, and customers.
WEBINTELLIGENCE is currently available only on Windows NT, with a Unix version
expected in mid-1999. We are currently shipping WEBINTELLIGENCE 2.0, which was
introduced in September 1998.
BUSINESSOBJECTS and WEBINTELLIGENCE include a number of basic end user
components and add-on modules that operate to retrieve and organize information
and enable the user to conduct sophisticated analysis of such information.
. REPORTER. Reporter is our base level query and reporting tool that
enables end users to retrieve information and build reports by independently
formulating queries with selected universes of relevant terms, or "objects," in
a single query panel. Reporter is used in substantially all applications of
BUSINESSOBJECTS and WEBINTELLIGENCE. Once data has been retrieved, users can
employ Reporter to generate and edit sophisticated reports based upon predefined
relationships between selected universes of objects. Reporter is fully
"wysiwyg," meaning what you see is what you get, and allows the inclusion of
bitmap images and Microsoft Object Linking and Embedding
9
(OLE) documents. Reporter also includes a graph generator that enables end users
to produce a variety of different graph types and representations in two or
three dimensions.
. EXPLORER. Explorer is our base level analysis tool that enables end
users to conduct integrated multidimensional analysis of information and other
data retrieved or generated by Reporter. Explorer typically operates as an
integrated module to Reporter, and is also generally employed in most
implementations of our core products.
. BUSINESSQUERY for Excel. BusinessQuery for Excel is an add-on product
for people who use Microsoft Excel. BusinessQuery for Excel utilizes our query
engine to allow end users to retrieve data and generate sophisticated reports
directly within a Microsoft Excel spreadsheet.
. BUSINESSMINER. BusinessMiner is our desktop data mining tool used for
uncovering trends hidden in data retrieved or generated with Reporter and other
data sources. BusinessMiner displays this information in the form of a decision
tree to facilitate user analysis. BusinessMiner includes charts and graphs, to
easily visualize results, and wizards that guide users through the analysis
process. We license the object code for BusinessMiner from a third party under a
non-exclusive license agreement that expires in May 2001. The license agreement
automatically renews for an additional two years, however, unless either party
gives notice within 18 months of the expiration date of its intention to
terminate the agreement.
. READER/DRILLER. Reader and Driller are options that are available for
end users who require the functionality necessary to read reports but do not
require the ability to execute ad hoc queries. In this regard, Reader provides
read-only capabilities, while Driller enables end users to read and drill into
predefined reports. These products are particularly useful for large enterprises
that wish to make reports available to a wide audience throughout the
enterprise, but do not need to provide report generation functionality to all of
these end users.
Information Systems Department Tools. To assist information systems
professionals in setting up and maintaining decision support software solutions
using our software, we provide the following decision support software
administration tools and templates:
. DESIGNER. Designer enables an enterprise's information systems staff
to design and maintain universes of objects in the semantic layer, using a Quick
Design wizard, in just a few steps. Designer is a graphical tool that also
includes powerful routines for automatic design checking, including loop
detection and resolution.
. SUPERVISOR. Supervisor is our object-based security tool that allows
an enterprise's information systems staff to assign and modify the access rights
granted to end users and groups of end users. Using Supervisor, information
systems professionals can easily manage access to the resources available
through BusinessObjects and WebIntelligence, including documents, universes,
objects, and even menus. Supervisor can also control the ability of end users to
access centralized resources maintained on our BusinessObjects or the
WebIntelligence platforms.
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. DOCUMENT AGENT/SERVER. Document Agent is our production report and
distribution product that enables users to schedule the automatic execution and
distribution of queries and reports in order to save time and computing
resources. Document Agent processes requests in the background, and forwards
reports to the generating user and any other pre-specified end users. Document
Agent also enables the user to distribute reports over the internet using our
WebIntelligence platform.
We recently announced Broadcast Agent, an integrated reporting and
broadcast server, which is intended to replace Document Agent. Broadcast Agent
is a robust, multi-tier server that is designed to enable non-technical users to
quickly and easily publish, push, and broadcast pre-built or ad hoc reports via
e-mail, pager, and fax to other users throughout the enterprise. We expect to
begin shipping Broadcast Agent in mid-1999.
. Rapid Development Templates. We have also developed a series of rapid
development templates, or "RDTs," for organizations that wish to access data
stored in packaged applications from vendors such as SAP, Oracle, Baan, and
PeopleSoft. An RDT is a deployment "starter kit" that consists of predefined
"objects" of information which are organized according to commonly-used,
predefined terms such as "customers," "orders," and "materials." Related
objects are also grouped into "classes" and a set of classes belonging to a
functional area, such as finance or marketing, can be grouped together into a
universe of related objects. Use of RDTs enables our customers to rapidly
deploy our BusinessObjects and WebIntelligence platforms on top of packaged
applications, without the delay and expense associated with developing
universes, objects, and classes independently.
CUSTOMER SERVICE AND SUPPORT
We consider service and support to be an integral part of our customers'
satisfaction and success. In order to help our customers maximize their return
on investment, we provide the following services:
. Post-Sales Technical Support and Software Maintenance. Business
Objects' three regional customer support centers (Americas San Jose, California;
Europe Maidenhead, United Kingdom; and Asia/Pacific Tokyo, Japan) are staffed by
highly trained support engineers who answer customer inquiries by telephone. All
customer support centers use a common computerized call tracking and problem-
reporting system designed to enable engineers to share their knowledge, and
reduce the time it takes to resolve customer inquiries. Customer support is also
provided by our value-added resellers, systems integrators, consulting partners,
distributors, and resellers.
To help our customers become more self-sufficient, at the end of 1998 we
introduced an online technical support web site, available 24 hours a day and 7
days a week. This web site provides customers with access to up-to-date
technical information and helps customers independently resolve inquiries. We
intend to maintain and further enhance this technical support system.
Software maintenance releases and post-sales technical support are provided
to customers for an annual fee. As is customary in the software industry,
maintenance fees are charged in addition to the initial product license.
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. Customer Education and Training. We offer a comprehensive education
and training program to our customers, and to third-party consultants who
support our products. Courses range from entry level sessions for users, to more
advanced courses for information systems professionals. Every student is
guaranteed a complete hands-on experience to help reinforce learning with
practical exercises.
We offer training classes through in-house facilities at our offices in San
Jose, California and Chicago, Illinois in the United States, in the United
Kingdom, France, and other locations in Europe. These facilities are
complemented by a network of independent certified training centers in our
principal markets throughout the world. In addition, we also provide onsite
training services upon customer request. We intend to further develop our
training network for the BusinessObjects product line.
. After-Sales Consulting Services. We also provide consulting services
to our customers through our own staff and through certified consulting
partners. Our consulting services allow us to assist our customers in all stages
of their development life cycle, from initial analysis through delivery of
products. Our involvement can range from an advisory status to managing the
entire installation process. Typical consulting projects include: data
warehouses and data marts; project scoping, planning, and management;
prototyping and development; implementation planning and deployment;
applications integration (Oracle, SAP, PeopleSoft, Baan, Lawson); and ad-hoc and
production reporting. Our consultants have wide ranging industry, operational,
and technical knowledge of numerous database systems, and all have in-depth
knowledge of our product line.
SALES AND MARKETING
We market our software and services through a direct sales organization in
the United States, France, the United Kingdom, Germany, Belgium, Italy, Spain,
Canada, Australia, Sweden, the Netherlands, Japan, and Switzerland, and through
non-exclusive international distributors in a number of European, Asian and
Latin American countries and South Africa. Currently, we market products
directly and indirectly in over 60 countries.
Although we have traditionally employed a direct sales approach in
marketing our software and services, under our current sales and marketing
strategy we intend to expand our use of indirect sales channels such as VARs,
system integrators, consulting partners, distributors, and resellers. We are
pursuing this strategy to increase our market coverage and reach organizations
which we could not otherwise reach effectively with our direct sales staff. As
a part of this strategy, we are seeking to build and maintain relationships with
the following distribution partners in order to cover markets in which we have
only a limited presence:
. relational database management system VARs that sell application
software based on a relational database and whose typical customers
are business users in need of a decision support tool;
. hardware vendors, which offer hardware platforms, and, in many cases,
have comprehensive data warehouse programs in which they sell complete
solutions, including databases, middleware, and front-end decision
support tools; and
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. resellers, and, in particular, vertical application specialists and
regional resellers.
Our sales and marketing organization is comprised of sales teams, each
consisting of field sales, field technical support, telemarketing, and telesales
personnel. Each sales team is responsible for the coordination of both direct
and indirect sales within its assigned territory and works closely with third
party VARs, system integrators, consulting partners, distributors, and
resellers. In order to reduce conflict between our direct sales force and our
third party sales channels, our compensation structure rewards sales personnel
based on the total direct and indirect sales generated within the territory. We
believe that, with this compensation arrangement, sales teams leverage the
skills of their sales personnel, encourage cooperative sales efforts, and
maximize revenue generation and customer service.
We focus our initial sales efforts on the information systems staff of a
particular organization while also seeking to involve end users through
demonstrations and product trials. Typically, we perform one demonstration to
an organization's information system staff, which is then followed by a trial
period during which the information system staff develops a prototype with our
assistance. The information systems staff then use these prototypes to conduct
demonstrations for end users. Our sales cycle varies from customer to customer,
and generally requires from two to six months or longer, especially for larger
transactions.
To support our sales efforts, we conduct marketing programs, including
advertising, direct mail, public relations, seminars and demonstrations at
customer sites and at our offices, appearances at trade shows, and ongoing
customer communications programs.
We recently increased our sales through indirect channels; however,
revenues generated from such sales channels currently represent a smaller
portion of our total revenues than revenues generated from our direct sales
efforts. Our revenues from direct selling efforts increased by 39% from
approximately $74.3 million in 1997 to $103.5 million in 1998. Our revenues
from indirect channels increased 59% from approximately $40.0 million in 1997 to
$63.4 million in 1998. We do not expect any significant changes in these
revenue trends to occur in the future.
PRODUCT DEVELOPMENT
We believe that innovation, timeliness of product releases, and high
product quality are essential to maintain our competitive position.
Consequently, we dedicate considerable resources to research and development
efforts to enhance our existing products and to develop new products. To date,
we have relied primarily on internal development of our products, but have in
the past and may in the future continue to license or acquire technology or
products from third parties.
Our software is a decision support solution designed for use in both the
client/server and internet computing environments. The market for decision
support software tools is characterized by rapid technological advances, changes
in customer requirements, and frequent new product introductions and
enhancements. Existing products become obsolete and unmarketable when companies
introduce new products or enhancements to existing products that incorporate new
technologies, and when new industry standards emerge. For example, some
industry analysts believe that the recent emergence of the internet and
intranets, and in particular the world wide web, with its new mode of
13
user operation, could negatively impact the market for traditional client/server
tools. To be successful, we must develop new products and enhancements to our
existing products that keep pace with technological developments, emerging
industry standards, and the increasingly sophisticated requirements of our
customers. If we fail to anticipate or respond adequately to technological
developments and evolving customer requirements, our financial performance could
suffer. See "Business Factors--The software markets that we target are subject
to rapid technological change and new product introductions."
COMPETITION
We specifically design and target our products for the decision support
software tools market. We believe that the principal competitive factors that
impact this market include:
. ease of use;
. functionality;
. product architecture;
. price;
. product quality;
. breadth of distribution;
. customer support; and
. name recognition.
Within our target market, we offer products that compete in four
subsections:
. the query and reporting market;
. the multidimensional analysis or OLAP market;
. the emerging desktop data mining market; and
. the market for integrated products or product suites that provide query,
reporting, and analysis support on client/server or internet platforms.
In the query and reporting market, our main competitors include:
. Cognos, Incorporated;
. Brio Technology, Inc.;
. Oracle Corporation; and
14
. Seagate Technology, Inc.
In the multidimensional analysis or OLAP market, we face competition from:
. Cognos, Inc.;
. Hummingbird Communications, Ltd.;
. Oracle Corporation;
. Seagate Technology, Inc.;
. Microstrategy, Inc.;
. Hyperion Software Corporation; and
. Microsoft Corporation.
In the desktop data mining market, our main competitors include:
. Cognos, Inc.; and
. Angoss Software Corporation.
In the integrated query, analysis, and reporting market, our main
competitors include:
. Cognos, Inc.;
. Brio Technology, Inc.;
. Oracle Corporation;
. Seagate Technology, Inc.; and
. Microstrategy, Inc.
Some of our competitors have been in business longer than us and have
significantly greater financial, technical, sales, marketing, and other
resources than we do. In addition, some of our competitors enjoy greater name
recognition and a larger installed base than us. Moreover, some of our
competitors, particularly companies that offer relational database management
software systems and enterprise resource planning software systems, have well-
established relationships with some of our existing and targeted customers.
In the future, any of our competitors could introduce products with more
features and lower prices than our products. Some of these companies could also
bundle existing or new products with other more established products that they
offer in order to compete more effectively against our products. Because our
products are specifically designed and targeted to the decision support
15
software tools market, we may lose sales to competitors offering a broader range
of products. Furthermore, other companies larger than us could enter the market
with products that cost less than our products, or could acquire or enter into a
strategic relationship with certain of our small competitors and provide such
competitors with additional resources or cause them to lower the price of their
products to be more competitive with our products. We believe that the decision
support software tools market will continue to grow and develop and that more
and more large companies may find it a desirable market in which to compete. To
the extent that we are unable to effectively compete against our current and
future competitors, as a result of some or all of the factors stated above, our
financial condition and operating results would suffer.
MANUFACTURING
We rely upon third party suppliers to perform our CD duplication, print our
user manuals, package our products, and manufacture certain related materials
incorporated into our products. To date, we have not experienced any material
difficulties or delays in manufacture by our third party suppliers. However, if
we were to experience delays or difficulties with one or more of our third party
suppliers, we may be unable to ship our products on a timely basis, which could
severely harm our revenues, financial condition, and operating results. See
"Business Factors--We rely on third party suppliers for most of our
manufacturing needs."
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
We believe that we own or have licensed all proprietary rights relating to
our software products. Our success depends in part on our ability to protect
our property rights in our intellectual property. To protect our proprietary
rights, we use a combination of protections provided by:
. patent, copyright, and trademark laws;
. trade secret laws;
. confidentiality agreements; and
. licensing arrangements, including confidentiality provisions.
We cannot assure you that any of these methods of protection are adequate to
protect our technology from use or misappropriation by competitors. Despite our
precautions, it may be possible for unauthorized third parties to copy aspects
of our current or future products or to obtain and use information that we
regard as proprietary. In addition, competitors may independently develop
similar or superior technology, or patent technology that would harm our ability
to continue enhancing our products or to introduce new products. Policing
unauthorized use of software is difficult and some foreign laws do not protect
our proprietary rights to the same extent as in the United States. For example,
under French law we are unable to patent our proprietary rights in our software,
but we are able to protect these proprietary rights under copyright laws which
enable us to enjoin third party infringement.
16
We currently have one patent issued in the United States, number 5,555,403,
relating to a "Relational Database Access System Using Semantically Dynamic
Objects." We are currently engaged in litigation asserting that one of our
competitors, Brio Technology, Inc., is infringing upon our rights under this
patent. See "Item 3, Legal Proceedings" and "Business Factors--Our business may
suffer if we cannot protect our intellectual property and proprietary rights."
We cannot assure you that any current or future patents will provide us with
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on our ability to do business.
Furthermore, we cannot assure you that others will not independently develop
similar or competing technology or design around any of our issued patents.
Litigation may be necessary to protect our proprietary property. Litigating
any such claim can be very expensive in terms of management time and resources.
Utilizing our resources on such litigation could cause our financial condition
and operating results to suffer.
In addition, although our name, together with our logo, is registered as a
trademark in France, the United States, and a number of other countries, we may
have difficulty asserting our ownership rights in the name "Business Objects."
Similar to monitoring unauthorized use of our product by customers, we may be
unable to effectively police unauthorized use of our name or otherwise prevent
the name of our software from becoming a part of the public domain.
While our competitive position may be affected by our ability to protect
our proprietary information, we believe that factors such as the technical
expertise and innovation skills of our personnel, our name recognition, and
ongoing product support and enhancement may be more significant in maintaining
our competitive position.
We do not believe that our products infringe upon the proprietary rights of
any third parties, and we are not aware of any third party claims that our
products do so. However, we cannot be certain and we cannot assure you that
third parties will never make such claims. We believe that software products
offered in our target market increasingly will be subject to such claims as the
number of products and competitors in our industry segment grows and product
functionalities begin to overlap. If a third party were to bring an
infringement claim against us, we would be forced to commit management resources
to resolve the claim and may incur substantial litigation costs in defense of
the claim. We may also have to expend significant development resources to
redesign our product. Finally, we may be required to enter into royalty and
licensing agreements with a third party bringing an infringement claim against
us, and these agreements may not contain terms that are favorable to us.
We often license our software products to customers through a "shrink-wrap"
license which becomes effective upon the opening of the product by the customer.
A "shrink-wrap" license agreement is a printed license agreement included within
packaged software that sets forth the terms and conditions under which the
purchaser may use the product. For example, these license agreements typically
provide that the licensed product may be used solely for the customer's internal
operations for a specified number of named or concurrent users and are
nonexclusive and nontransferable. "Shrink-wrap" license agreements are
difficult to monitor. We cannot be certain, nor can we assure you, that our
customers will comply with all of the terms and conditions of the "shrink-wrap"
licenses under which they purchase our products. For example, a customer may
permit more end
17
users to use the product than the applicable "shrink-wrap" license allows
without paying for additional users. To the extent that our customers violate
the "shrink-wrap" licenses that apply to our products, we may be deprived of
revenues and our financial condition and operating results may suffer.
We also license a portion of our technology to third parties. Specifically
SPSS Inc., Alsoft, StatSoft, and ESRI have licensed the Business Objects query
technology and incorporated it into their products, BusinessQuery for SPSS from
SPSS Inc., BusinessQuery for GeoConcept from Alsoft, BusinessQuery for
Statistica, and BusinessQuery for ArcView GIS.
We license certain software from third parties, and sub-license this
software to our customers. In addition, we license certain software programs
from third parties and incorporate these programs into our software products.
Generally, the license agreements under which we license third party software
grant us non-exclusive, worldwide licenses to use the software for certain
limited purposes. By utilizing third party software in our business, however, we
are exposed to certain risks that are not associated with in-house software
development. For example, these third party providers may discontinue or alter
their operations, terminate their relationship with us, or generally become
unable to fulfill their obligations to us. If any of these circumstances were to
occur, we may be forced to seek alternative technology which may not be
available on commercially reasonable terms. In the future, we may be forced to
obtain additional third party software licenses to enhance our product offerings
and compete more effectively. We cannot be certain, nor can we assure you, that
we will be able to obtain and maintain licensing rights to desired or needed
technology, or similar technology, on commercially reasonable terms, or at all.
We have entered into source code escrow agreements with a limited number of
our distributors and end users that require us, under certain circumstances, to
release some of our source code to these distributors and end users. For
example, generally these agreements provide that these parties will have a
limited, non-exclusive right to use our source code if we become engaged in a
bankruptcy proceeding, if we cease to do business, or if we fail to meet our
contractual obligations. Using source code escrow agreements may increase the
likelihood that third parties will misappropriate our source code contained in
the escrow.
EMPLOYEES
As of December 31, 1998, we had 977 full-time employees, including:
. 155 in research and development;
. 607 in sales and marketing;
. 95 in customer service and support; and
. 120 in finance and administration.
Our employees are not represented by any collective bargaining
organization, and we have never experienced a work stoppage.
18
Our success depends to a significant extent upon a number of key management
and technical personnel, including Bernard Liautaud, our chief executive officer
and co-founder, the loss of whom could adversely affect our business. We
maintain a key person life insurance policy on the life of Mr. Liautaud with the
proceeds payable to Business Objects. The loss of the services of key personnel
could have a material adverse effect on Business Objects. In addition, we
believe that our future success will also depend in a large part on our ability
to attract and retain highly skilled technical, management, sales, and marketing
personnel. Competition for such personnel in the computer software industry is
intense, and we may be unable to successfully attract and retain such personnel.
Under French law, management is required to hold monthly meetings with a
delegation of elected employee representatives to discuss, in particular,
employment matters and the economic condition of Business Objects and to provide
appropriate information and documents relating to such matters. As required
under French law, one employee representative is entitled to be present at
meetings of the Board of Directors of Business Objects, but does not have any
voting rights.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters are located in Levallois-Perret, France, a
suburb of Paris, in a leased facility consisting of approximately 37,000 square
feet. The lease term expires in 2005; however, we have the option to cancel the
lease without penalty in 2002. In addition, we lease approximately 58,000
square feet in San Jose, California, for our U.S. headquarters under a lease
that expires in 2001. We lease additional facilities and offices in Puteaux,
France; Maidenhead, England; Koln, Germany; Nieuwegein, the Netherlands; Sydney,
Australia; Tokyo, Japan; Madrid, Spain; Stockholm, Sweden; Zaventem, Belgium;
Rome and Milan, Italy; Geneva and Zurich, Switzerland; Toronto, Canada; and in
the United States in California, Texas, Illinois, Massachusetts, New Jersey,
Georgia, Maryland, Michigan, Minnesota, Colorado, New York, Pennsylvania, and
Connecticut.
ITEM 3. LEGAL PROCEEDINGS
During January 1997, we filed a lawsuit in United States District Court for
the Northern District of California against Brio Technology, Inc. for alleged
patent infringement. The lawsuit alleges that Brio Technology, Inc. infringes
our United States Patent No. 5,555,403 by making, using, and selling its product
known as BrioQuery Enterprise. Our complaint requests that the defendant be
enjoined from further infringing the patent. See "Business Factors--Our
business may suffer if we cannot protect our intellectual property and
proprietary rights."
In addition, the Company is involved in various legal proceedings arising
in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The ADSs are quoted on the Nasdaq National Market under the symbol "BOBJ."
Neither the ADSs nor the Ordinary Shares are listed or quoted on any other
quotation system or securities exchange. The following table sets forth the
range of quarterly high and low closing bid prices of the ADSs (each ADS
representing one Ordinary Share) on the Nasdaq National Market for each full
quarterly period within the two most recent fiscal years.
HIGH LOW
-------- -------
1998:
Fourth Quarter.................... $32.50 $ 7.88
Third Quarter..................... $18.75 $ 8.88
Second Quarter.................... $19.88 $13.00
First Quarter..................... $16.63 $ 9.50
1997:
Fourth Quarter.................... $14.00 $ 9.75
Third Quarter..................... $10.88 $ 6.75
Second Quarter.................... $11.75 $ 7.38
First Quarter..................... $16.00 $ 9.38
The depositary in respect of the ADSs is The Bank of New York. Each ADS
registered on the books of the Depositary corresponds to one Ordinary Share. As
of February 15, 1999, there were 48 record holders of American Depositary
Receipts evidencing 15,948,323 ADSs. As of February 15, 1999, there were
approximately 76 holders of record of Ordinary Shares. We have not, since the
formation of Business Objects, declared or paid any dividends on the Ordinary
Shares. We intend to employ all available funds for the development of our
business and, accordingly, do not intend to declare or pay any cash dividends in
the foreseeable future.
20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto appearing
elsewhere in this Form 10-K. The selected statement of operations data for each
of the five years in the period ended December 31, 1998 and the balance sheet
data at December 31, 1998, 1997, 1996, 1995, and 1994, respectively, have been
derived from the Consolidated Financial Statements of the Company, which have
been prepared in accordance with U.S. GAAP.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share and per ADS data)
Revenues:
License fees....................... $108,761 $ 78,478 $64,451 $48,782 $24,306
Services........................... 58,133 35,775 20,686 11,824 5,881
-------- -------- ------- ------- -------
Total revenues.................... 166,894 114,253 85,137 60,606 30,187
Cost of revenues:
License fees....................... 3,272 3,773 3,235 2,107 1,466
Services........................... 23,899 13,107 6,780 4,044 1,619
-------- -------- ------- ------- -------
Total cost of revenues............ 27,171 16,880 10,015 6,151 3,085
-------- -------- ------- ------- -------
Gross margin........................ 139,723 97,373 75,122 54,455 27,102
Operating expenses:
Sales and marketing................ 89,118 68,115 50,038 30,666 16,154
Research and development........... 19,434 14,050 10,634 8,071 4,299
General and administrative......... 15,394 11,076 7,402 5,706 3,447
-------- -------- ------- ------- -------
Total operating expenses.......... 123,946 93,241 68,074 44,443 23,900
-------- -------- ------- ------- -------
Income from operations.............. 15,777 4,132 7,048 10,012 3,202
Net interest income and other....... 2,078 1,673 1,849 1,999 383
-------- -------- ------- ------- -------
Income before minority interest 17,855 5,805 8,897 12,011 3,585
and provision for income taxes.....
Provision for income taxes.......... (7,316) (3,184) (3,737) (3,963) (1,208)
Minority interest................... (252) 256 -- -- --
-------- -------- ------- ------- -------
Net income.......................... $ 10,287 $ 2,877 $ 5,160 $ 8,048 $ 2,377
======== ======== ======= ======= =======
Net income per share and ADS--basic. $ 0.61 $ 0.17 $ 0.32 $ 0.51 $ 0.18
Net income per share and
ADS--diluted....................... $ 0.58 $ 0.17 $ 0.30 $ 0.49 $ 0.17
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA: (Dollars in Thousands)
Cash and cash equivalents and
short term investments............. $ 71,713 $ 39,013 $42,171 $46,702 $30,849
Total current assets................ 121,942 80,020 70,057 66,669 40,915
Total assets........................ 138,085 94,340 80,770 71,013 45,237
Total current liabilities........... 70,838 43,541 28,915 24,431 10,435
Long term obligations............... -- -- 19 121 93
Shareholders' equity................ 67,247 50,799 51,836 46,461 34,709
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis together with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and the notes to those statements included elsewhere in this Form 10-K. This
discussion contains forward-looking statements based on our current
expectations, assumptions, estimates, and projections about Business Objects and
our industry. These forward-looking statements involve risks and uncertainties.
Business Objects' actual results could differ materially from those indicated in
these forward-looking statements as a result of certain factors, as more fully
described in the "Business Factors" section and elsewhere in this Form 10-K.
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 develops, markets, and supports decision support software
for the client/server and internet market. We derive our revenues from license
fees and charges for services, consisting of post-sale customer support,
consulting and training services.
Beginning in January 1, 1998, we adopted Statement of Position No. 97-2
"Software Revenue Recognition" as amended by Statement of Position No. 98-4.
The effect of adoption did not have a material impact on our results of
operations. Under the requirements of these accounting standards, we generally
recognize revenues from product licensing upon delivery of the software product
to the end user, unless the fee is not fixed or determinable or collectibility
is not probable. We consider all arrangements with payment terms extending
beyond twelve months and other arrangements with payment terms longer than
normal not to be fixed or determinable. If the fee is not fixed or
determinable, we recognize revenues as payments become due from the customer.
If collectibility is not considered probable, we recognize revenues when the fee
is collected.
Our post-contract customer support includes telephone support, bug fixes,
and rights to upgrades on a when-and-if available basis. We recognize revenues
from our post-contract customer support services on a straight-line basis over
the period during which we provide the support services. We recognize
consulting and training service revenues as the services are provided. In
software arrangements that include rights to multiple software products, post-
contract customer support, and/or other services, we allocate the total
arrangement fee among each deliverable based on the relative fair value of each
of the deliverables determined based on vendor-specific objective evidence.
Sales in our various markets are subject to risks inherent in international
business activities, including:
. general economic conditions in each country in which we operate;
. difficulties in staffing and managing international operations;
22
. overlapping of differing tax structures;
. unexpected changes in regulatory requirements;
. complying with a variety of foreign laws and regulations;
. longer accounts receivables payment cycles in Europe;
. import and export licensing requirements;
. trade restrictions; and
. changes in tariff and freight rates.
In addition, we conduct a significant portion of our business in currencies
other than the U.S. dollar, the currency in which we report our financial
statements. Historically, we have generated a substantial majority of our
revenues in U.S. dollars, French francs, and British pounds sterling, but we
have incurred a majority of our corporate-related expenses in French francs,
particularly research and development expenses. In the past, we have
experienced fluctuations in the value of other currencies relative to the U.S.
dollar. These fluctuations have caused certain dollar-translated amounts
reported in our financial statements to change in comparison with previous
periods. We expect this pattern to continue. Due to the number of currencies
in which we conduct our business, and the substantial volatility of currency
exchange rates, we cannot predict the effect of exchange rate fluctuations upon
our future operating results. We have not undertaken hedging transactions to
cover our currency transaction exposure. See "Business Factors--There are a
number of factors associated with international operations that could adversely
affect our business" and "--We have multinational operations that are subject to
currency exchange rate fluctuations."
During April 1997, we exercised our option to acquire 51% of the
outstanding shares of a division of Datamat Ingegneria dei Sistemi S.p.A., our
Italian distributor, in exchange for $1,300,000 in cash. During April 1998, we
exercised our option to acquire an additional 29% of the outstanding shares of
our Italian distributor in exchange for $982,000, increasing our ownership
interest to 80%. The cost of the originally purchased shares and the additional
shares have been fully allocated to goodwill, and is being amortized over a
three-year period that began in April 1997. The purchase agreement provides for
a call/put option that gives us the right to purchase, and the minority
shareholder the right to require us to purchase, the remaining 20% of the shares
in 1999 for an amount to be determined using a net asset and revenue based
formula.
The effect of inflation on our financial position has not been significant.
In view of our significant growth in recent years, we believe that period-
to-period comparisons of our financial results are not necessarily meaningful
and you should not rely upon them as an indication of future performance. In
addition, our revenues and operating results can vary, sometimes substantially,
from quarter to quarter as a result of various factors. See "Business Factors."
23
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated
statements of income as a percentage of total revenues for the periods
indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
-------------- ----------- -------------
Revenues:
License fees............................................... 65% 69% 76%
Services................................................... 35 31 24
--- ---- ----
Total revenues............................................ 100 100 100
=== ==== ====
Cost of revenues:
License fees............................................... 2 3 4
Services................................................... 14 11 8
--- ---- ----
Total cost of revenues.................................... 16 14 12
--- ---- ----
Gross margin................................................ 84 86 88
Operating expenses:
Sales and marketing........................................ 53 60 59
Research and development................................... 12 12 12
General and administrative................................. 9 10 9
--- ---- ----
Total operating expenses.................................. 74 82 80
--- ---- ----
Income from operations...................................... 9 4 8
Net interest income and other............................... 1 1 2
--- ---- ----
Income before minority interest and provision for income 11 5 10
taxes......................................................
Provision for income taxes.................................. (4) (2) (4)
Minority interest........................................... -- -- --
--- ---- ----
Net income.................................................. 6% 3% 6%
=== ==== ====
Gross margin:
License fees............................................... 97% 95% 95%
Services................................................... 59% 63% 67%
24
REVENUES
The following table sets forth information regarding the composition of our
revenues and period-to-period changes:
PERCENT PERCENT
1998 CHANGE 1997 CHANGE 1996
------------- ------------- ------------ ------------ -----------
(Dollars in Thousands)
License fees..................... $108,761 39% $ 78,478 22% $ 64,451
s Percentage of total revenues.... 65% 69% 76%
Services......................... $ 58,133 62% $ 35,775 73% $ 20,686
Percentage of total revenues.... 35% 31% 24%
Total revenues................... $166,894 46% $114,253 34% $ 85,137
Total revenues increased to $166.9 million in 1998, up from $114.3 million
in 1997 and $85.1 million in 1996, representing increases of 46% from 1997 to
1998 and 34% from 1996 to 1997. In each year presented, a majority of our total
revenues was derived from license fees for BusinessObjects and related products.
Our service revenues were comprised of revenues from maintenance, consulting
services, and training activities related to licenses of BusinessObjects. Any
factor that adversely affects our ability to license BusinessObjects would
severely impact our financial condition and operating results.
. License Fees. Revenues from license fees increased approximately $30.3
million or 39% in 1998 over the level achieved in 1997. This compares to an
increase of $14.0 million or 22% during 1997 over the level achieved in 1996.
These increases in license fees reflected increased unit licenses of
BusinessObjects and related software products in all geographic areas into which
we sell. Revenues from the sale of WebIntelligence, our thin-client platform
for internet-based installations, represented approximately 12% of our total
license revenues during 1998. The revenues recognized from the sale of
WebIntelligence during 1997 was less than 1% of the total license revenue.
License revenues from our main geographic markets increased as follows:
European sales increased 44% from 1997 to 1998 as compared to a 25% increase
from 1996 to 1997. Sales in the Americas increased 31% from 1997 to 1998 as
compared to 11% from 1996 to 1997. License fees in the Asia Pacific region
increased 39% from 1997 to 1998 as compared to 57% from 1996 to 1997. The
decrease in the rate of growth in the Asia Pacific region during 1998 reflects
the economic weaknesses recently experienced by a number of countries in that
region. See "Business Factors--Weaknesses in the economies of countries in the
Asia Pacific region could negatively impact our revenues."
We plan to continue to enhance our current software and develop new
products. As a result, we anticipate that license fees, which represented
approximately 65% of our total revenues in 1998, will continue to represent a
substantial majority of our revenues for the foreseeable future. However, it is
expected that the percentage of license revenues to total revenues will decrease
in the future as the growth in service revenues exceeds the growth in license
revenues. We expect that the market penetration by, and number of, our
competitors will increase and, as a result, the growth rate in our license fees
in the future may not be as high as the growth rate in such license fees
achieved in the past.
25
. Services. Revenues from services consist of consulting revenues,
training revenues, and maintenance revenues. Revenues from services increased
approximately $22.4 million or 62% in 1998 over the level achieved in 1997. This
compares to an increase of $15.1 million or 73% during 1997 over the level
achieved in 1996. The increase in revenues from services during both years was
due primarily to increases in maintenance revenues related to increases in our
installed base and increases in consulting and training revenues associated with
the increased level of licenses of BusinessObjects and related products. We
intend to increase our efforts to sell maintenance, training, and consulting
services, and expect that service revenues continue to represent a significant
portion of our total revenues.
COST OF REVENUES
The following table sets forth information regarding our cost of revenues and
period-to-period changes:
PERCENT PERCENT
1998 CHANGE 1997 CHANGE 1996
-------------- ------------- ------------ ------------- -------------
(Dollars in thousands)
Cost of license fees................... $ 3,272 (13%) $ 3,773 17% $ 3,235
Percentage of license fees revenues... 3% 5% 5%
Cost of services....................... $23,899 82% $13,107 93% $ 6,780
Percentage of services revenues....... 41% 37% 33%
Total cost of revenues................. $27,171 61% $16,880 69% $10,015
Percentage of total revenues.......... 16% 14% 12%
. License Fees. Cost of license fees, which consist primarily of
materials, packaging, and freight, decreased approximately $500,000 or 13% in
1998 over the level experienced in 1997. This compares to an increase of
$500,000 or 17% during in 1997 over the level experienced in 1996. Cost of
license fees as a percentage of license fee revenues decreased slightly from 5%
during 1996 and 1997 to 3% during 1998. This decrease was primarily due to the
improved management of inventory levels and freight costs. We expect the cost
of license fees to remain at the 1998 percent of revenue level for the near
future.
. Services. Cost of services, which consist of the cost of providing
consulting, training, and maintenance, increased approximately $10.8 million or
82% in 1998 over the level experienced in 1997. This compares to an increase of
$6.3 million or 93% in 1997 over the level experienced in 1996. The increases in
such costs in absolute amount during both years were primarily due to increases
in the number of personnel involved in our consulting, training, and maintenance
activities and, to a lesser extent, to costs associated with subcontracting of
some training activities. Cost of services as a percentage of service revenues
increased from 33% in 1996 to 37% in 1997 and 41% in 1998. The increase in cost
of services as a percent of service revenues was due to increased investment in
the consulting services segment and a faster growth rate in consulting services,
which is a lower gross margin as compared to the other services.
26
OPERATING EXPENSES
The following table sets forth information regarding the composition of our
operating expenses and period-to-period changes:
PERCENT PERCENT
1998 CHANGE 1997 CHANGE 1996
--------------- ------------ ------------- ------------- -------------
(Dollars in thousands)
Sales and marketing................ $ 89,118 31% $68,115 36% $50,038
Percentage of total revenues...... 53% 60% 59%
Research and development........... $ 19,434 38% $14,050 32% $10,634
Percentage of total revenues...... 12% 12% 12%
General and administrative......... $ 15,394 39% $11,076 50% $ 7,402
Percentage of total revenues...... 9% 10% 9%
Total operating expenses........... $123,946 33% $93,241 37% $68,074
Percentage of total revenues...... 74% 82% 80%
. Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions for our sales and marketing personnel, together with
amounts paid for advertising and product promotion activities. Sales and
marketing expenses were $89.1 million, or 53% of total revenues, in 1998 as
compared to $68.1 million, or 60% of total revenues, in 1997, and $50.0 million,
or 59% of total revenues, in 1996. Sales and marketing expenses increased in
absolute amount in each period as we expanded our sales and marketing
organization. This organization grew from 298 people at December 31, 1996 to 401
people at December 31, 1997 and to 601 people at December 31, 1998. The increase
in sales and marketing personnel was due to expansion of personnel in existing
offices. Sales and marketing expenses as a percentage of total revenues
decreased in 1998 as we experienced better productivity in our sales and
marketing organization. Sales and marketing expenses are expected to continue to
increase in absolute dollars in the future but may vary as a percent of
revenues.
. Research and Development. Research and development $14.1 million in
1997 and $10.6 million in 1996. expenses in 1998 consist primarily of salaries,
Research and development expenses have related benefits, third party consultant
fees, and represented 12% of total revenues in each period other costs
associated with our research and presented. The increase in research and
development activities. Research and development development expenses in
absolute amount is due expenses were $19.4 million in 1998, to increased
staffing and associated support for software engineers required to expand and
enhance our product line. From December 31, 1997 to December 31, 1998, our
research and development organization grew from 116 to 155 people. As of
December 31, 1998, we have not capitalized any software development costs and
all research and development costs have been expensed as incurred. See Note 1 of
Notes to Consolidated Financial Statements. Research and development expenses
are expected to continue to increase in absolute dollars in the future but may
vary as a percent of revenues.
. General and Administrative. General and administrative expenses
consist primarily of salaries, related benefits, fees for professional services
including legal and accounting services, and amortization of goodwill. General
and administrative expenses were $15.4 million, or 9% of
27
total revenues, in 1998 as compared to $11.1 million, or 10% of total revenues,
in 1997 and $7.4 million, or 9% of total revenues, in 1996. General and
administrative expenses increased in absolute amounts in each period as we
increased our staffing to support our growth, and experienced higher
expenditures for legal and accounting services associated with operating a
larger company. In addition, general and administrative expenses included the
amortization of goodwill related to the acquisition of certain distributors in
1997 and 1998. Goodwill amortization expense totaled $1.3 million in 1998 and
$600,000 in 1997. No goodwill amortization expense was recorded in 1996. General
and administrative expenses are expected to continue to increase in absolute
dollars in the future but may vary as a percent of revenues.
NET INTEREST INCOME AND OTHER
The following table sets forth information regarding the composition of our
net interest and other income and period-to-period changes:
PERCENT PERCENT
1998 CHANGE 1997 CHANGE 1996
------------ ------------- -------------- ------------- -----------
(Dollars in thousands)
Net interest income................ $1,931 77% $1,088 (30)% $1,556
Net exchange gain.................. $ 147 (75)% $ 585 100% $ 293
Net interest income and other income represents net interest income and
expense, and net gains and losses resulting from foreign currency exchange rate
changes. Net interest income and other totaled $2.1 million in 1998, $1.7
million in 1997, and $1.8 million in 1996. The increase in net interest income
in 1998 was primarily due to an increase in our cash available for short-term
investing. The decrease in interest income in 1997 compared to 1996 was
predominantly due to lower cash balances for investment purposes and lower
interest rates. The decrease in net exchange gains in 1998 was predominantly
due to losses on U.S. dollar denominated intercompany receivables caused by the
general weakening of the U.S. dollar against the French franc.
INCOME TAXES
The following table sets forth information regarding our income taxes:
PERCENT PERCENT
1998 CHANGE 1997 CHANGE 1996
------------- ------------- ------------- -------------- ------------
(Dollars in thousands)
Provision for income taxes......... $7,316 130% $3,184 (15)% $3,737
Effective tax rate................. 41% 55% 42%
Income taxes totaled $7.3 million in 1998, $3.2 million in 1997, and $3.7
million in 1996. This represented an effective income tax rate of 41% in 1998,
55% in 1997, and 42% in 1996. The increase in the effective tax rate in 1997
was primarily due to limitations on our ability to offset net losses for tax
purposes in certain jurisdictions against taxable income in other jurisdictions,
as well as the increase in the French statutory tax rate from 36.7% to 41.7%
effective January 1, 1997. The decrease in our effective tax rate in 1998
reflects a return to our standard effective income tax rate.
28
LIQUIDITY AND CAPITAL RESOURCES
PERCENT
1998 CHANGE 1997
------------- ------------- ------------
(Dollars in thousands)
Working capital............................................................ $ 51,104 40% $36,479
Cash, cash equivalents, and short-term investments......................... $ 71,713 84% $39,013
Net cash provided by operating activities.................................. $ 34,314 285% $ 8,919
Net cash provided by (used for) investing activities....................... $(27,648) (513)% $ 6,701
Net cash provided by financing activities.................................. $ 4,484 271% $ 1,208
As of December 31, 1998, we had cash, cash equivalents, and short-term
investments of $71.7 million, an increase of $32.7 million from December 31,
1997. Net cash provided by operating activities was $34.3 million in 1998, as
compared to $8.9 million in 1997. Net cash provided by operating activities in
1998 primarily resulted from net income and non-cash charges for depreciation
and amortization expense, and increases in accounts payable, accrued payroll,
deferred revenue and value added taxes payable, and other current liabilities,
partially offset by increases in accounts receivable.
Accounts receivable increased to $42.2 million at December 31, 1998, from
$35.1 million at the end of 1997. The increases in accounts receivable resulted
primarily from the growth in revenues. Accounts receivable days' sales
outstanding (DSO) was 79 days at December 31, 1998, and 88 days at December 31,
1997. In general, due to the level of European sales which tend to have longer
collection cycles, and the historical pattern of revenue generation towards the
end of each quarter, we anticipate that accounts receivable and DSO will
continue to be substantial in the future.
Our investing activities consisted primarily of the purchase and sale of
short-term investments totaling $2.5 million of net proceeds in 1998 and $15.6
million in 1997, the acquisition of increased interests in distributors totaling
$1.0 million in 1998 and $2.6 million in 1997, and expenditures for fixed assets
totaling $6.8 million in 1998 and $6.3 million in 1997. We have no significant
capital commitments and we currently anticipate that additions to property and
equipment for the next year will be comparable to recent past years.
In 1998, our financing activities provided $4.5 million from the issuance
of shares upon the exercise of employee stock options and the sale of shares
under employee stock purchase plans. In 1997, our financing activities provided
$1.3 million from the issuance of shares upon the exercise of employee stock
options and the sale of shares under employee stock purchase plans.
We believe that cash from operations together with existing cash and cash
equivalents and short-term investments will be sufficient to meet our cash
requirements for at least the next 12 months.
BUSINESS FACTORS
Statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-K
include forward-looking statements that
29
involve a number of risks and uncertainties. Among the factors that could cause
actual results to differ materially are the following:
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER.
In the past, our revenues and operating results have varied, sometimes
substantially, from quarter to quarter. We expect our revenues and operating
results to continue to fluctuate from quarter to quarter in the future and we
may even experience losses in any particular quarter. Accordingly, 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. In
general, because license fees comprise a substantial majority of our revenues,
fluctuations in the amount of license fees generated in any one quarter can
cause variations in our quarterly revenues and operating results. Our license
fees tend to fluctuate as a result of a number of factors, including:
. the variability of our sales cycle;
. the size and timing of individual license transactions;
. the timing of our new product or product enhancement releases and of
competitors' new product or product enhancement releases;
. customer delays in purchases of our products in anticipation of new
releases or enhancements to our existing products;
. customer delays in purchases of our products because of our customers'
own budgeting decisions;
. the ability of our competitors to offer new products that successfully
compete with our products; and
. reductions in the prices of our products, or the prices of our
competitors' products relative to the prices of our products.
Our license fees may vary substantially from one quarter to the next if we
experience significant delays in customer orders at the end of a quarter. We
typically ship our products upon receipt of customer orders, and recognize
license revenues in the quarter such products are shipped to the customer. In
the past, we have often shipped the most product, and recognized the largest
amount of our licensing revenues, in the last weeks of the last month of each
quarter. However, each quarter we incur operating expenses based in part on
anticipated revenue levels, and a high percentage of our expenses are relatively
fixed. As a result, if a significant number of our customers delay their product
orders at the end of any particular quarter until the following quarter, we may
experience significant fluctuations in our revenues and operating results from
one quarter to the next and we may even experience losses in the preceding
quarter.
In addition, we currently plan to continue to increase our expenditures to
fund:
. greater levels of research and development;
30
. an increase in our direct sales and marketing staff;
. the development of new distribution and resale channels;
. broader customer support capabilities; and
. additional general and administrative staffing necessary to support
these functions.
We anticipate that such expenses will be relatively fixed and consistent from
quarter to quarter. As a result, these expense increases could result in more
significant quarter to quarter fluctuations in our operating results if revenues
earned in any particular quarter fall short because a significant number of our
customers delay their product orders from one quarter to the next, or because we
are unable to ship additional product to our customers consistently throughout
each quarter during which we make these expenditures.
Our revenues and operating results may also fluctuate from quarter to
quarter due to various seasonality factors. In other words, our revenue growth
generally slows, and our revenues may even decline, in the first quarter of each
calendar year as compared to the immediately preceding quarter. Seasonality like
this is typical in the computer software industry. We believe that this
seasonality is a result of two principal factors:
. due to spending and budgeting considerations, many of our customers
make their larger capital purchases in the fourth quarter of each
calendar year, and their lower capital purchases during the following
quarter;
. because there is typically lower economic activity throughout Europe
during the summer months, relative to other times during the year,
many European customers do not place orders during the third quarter
of the calendar year.
These two factors typically result in a higher level of revenues for the
fourth quarter of the calendar year, relative to other fiscal quarters. We
anticipate that this pattern of revenue seasonality will continue.
WE DEPEND ON SALES OF ONE PRODUCT FOR A MAJORITY OF OUR REVENUES.
We generate a substantial majority of our total revenues from licensing
fees generated from the sale of the BusinessObjects product. We expect that for
the foreseeable future we will continue to derive a substantial majority of our
revenues from the sale of the BusinessObjects product. We derive our remaining
revenues from the sale of our other licensed products and services which are
related to the BusinessObjects product. As a result, if our sales of
BusinessObjects decrease for any reason, our financial condition and operating
results would be severely impacted. Our future revenues and profits also depend
significantly on our ability to successfully develop and introduce new and
enhanced versions of our BusinessObjects product, and on customer acceptance of
these new and enhanced versions of our BusinessObjects product. Moreover, if we
are required to reduce the prices for our products, including BusinessObjects,
due to competitive pressures, or if
31
any other factors significantly erode the price that we are able to charge for
our BusinessObjects product, our financial condition and operating results could
suffer.
WE FACE SUBSTANTIAL COMPETITION FROM MANY COMPANIES THAT ARE LARGER THAN
US.
We specifically design and target our products for the decision support
software tools market. We believe that the principal competitive factors that
impact this market include:
. ease of use;
. functionality;
. product architecture;
. price;
. product quality;
. breadth of distribution;
. customer support; and
. name recognition.
Although we believe that we compete effectively with respect to these factors,
we may be unable to continue to do so in the future.
Within our target market, we offer products that compete in four
subsectors:
. the query and reporting market;
. the multidimensional analysis or OLAP market;
. the emerging desktop data mining market; and
. the market for integrated products or product suites that provide
query, reporting, and analysis support on client/server and internet
platforms.
Some of our competitors have been in business longer than us and have
significantly greater financial, technical, sales, marketing, and other
resources than we do. In addition, some of our competitors enjoy greater name
recognition and a larger installed customer base than we do. Moreover, some of
our competitors, particularly companies that offer relational database
management software systems and enterprise resource planning software systems,
have well-established relationships with some of our existing and targeted
customers.
In the future, any of our competitors could introduce products with more
features at lower prices. Some of these companies could also bundle existing or
new products with other more established products that they offer and compete
more effectively against our products. Because our products are specifically
designed and targeted to the decision support software tools market, we
32
may lose sales to competitors offering a broader range of products. Furthermore,
other companies larger than us could enter the market with products that cost
less than our products. Such companies could also acquire or enter into a
strategic relationship with certain of our smaller competitors and provide such
competitors with additional resources or cause them to lower the price of their
product to be more competitive with our products. We believe that the decision
support software tools market will continue to grow and develop, and that more
and more larger companies may find it a desirable market in which to compete. To
the extent that we are unable to effectively compete against our current and
future competitors, as a result of some or all of the factors stated above, our
financial condition and operating results would suffer.
THE SOFTWARE MARKETS THAT WE TARGET ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE AND NEW PRODUCT INTRODUCTIONS.
The market for decision support software tools is characterized by:
. rapid technological advances;
. changes in customer requirements; and
. frequent new product introductions and enhancements.
As a result, existing products become obsolete and unmarketable when companies
introduce new products or enhancements to existing products that incorporate new
technologies and when new industry standards emerge. For example, some industry
analysts believe that the recent emergence of the internet and intranets, and in
particular the world wide web, with its new mode of user operation, could
negatively impact the market for traditional client/server tools. To be
successful, we must develop new products and enhancements to our existing
products that keep pace with technological developments, emerging industry
standards, and the increasingly sophisticated requirements of our customers.
However, in the future we may be unable to successfully develop new products or
enhancements to our existing products in a timely manner that adequately respond
to technological changes, evolving industry standards, or the requirements of
our customers. In addition, even if we are able to develop new products or
enhancements to our existing products, these products and product enhancements
may not be accepted in the marketplace. Moreover, our customers may defer or
forego purchases of our existing products if we do not adequately time the
introduction or the announcement of new products or enhancement to our existing
products, or if our competitors introduce or announce new products and product
enhancements. Any of these factors could severely harm our financial condition
and operating results.
OUR PRODUCTS MAY HAVE SOFTWARE DEFECTS AND ERRORS.
Our BusinessObjects product and WebIntelligence platform are internally
complex and frequently contain defects or errors, especially when first
introduced or when new versions or enhancements are released. For example, when
BusinessObjects 4.0 was first introduced in 1996, it would not run on Windows
3.1, and we had to rework a portion of the product to enable it to do so. The
revised product then took a significantly longer period than expected to achieve
operational stability, and contained a number of "bugs" resulting from the
significant rewriting and rearchitect-
33
ing of the product. We resolved these problems by the end of 1996, but our
operating results for the second quarter of 1996 were severely impacted.
In contrast to our previous products that are client-based, WebIntelligence
is server-based. We have limited experience and technical expertise in
developing server software. In addition, the success of WebIntelligence depends
on its availability on Unix, with which we have limited experience, and the
ability for the architecture to scale to large customer deployments. In the
future, there can be no assurances that we will be successful in meeting these
requirements.
Despite extensive testing, our new products and product enhancements may
contain defects and errors which we may not detect until after we have commenced
commercial shipments. If defects and errors are discovered in our products and
product enhancements after commercial release:
. potential customers may delay or forego purchases of these products
and product enhancements;
. our reputation in the marketplace may be damaged;
. we may incur additional service and warranty costs; and
. we may have to divert additional development resources to correct the
defects and errors.
If any or all of the foregoing occur, we may lose revenues or incur higher
operating expenses, either of which could severely harm our financial condition
and operating results.
WE RELY ON THIRD PARTY SUPPLIERS FOR MOST OF OUR MANUFACTURING NEEDS.
We rely upon third party suppliers to perform our CD duplication, print our
user manuals, package our products, and manufacture certain related materials
incorporated in our products. If we were to experience delays or difficulties
with one or more of our third party suppliers, we may be unable to ship our
products on a timely basis, which could severely harm our revenues, financial
condition, and operating results.
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS.
Our success depends in part on our ability to protect our proprietary
rights in our intellectual property. To protect our proprietary rights, we use a
combination of protections provided by:
. patent, copyright, and trademark laws;
. trade secret laws;
. confidentiality agreements; and
. licensing arrangements, including confidentiality provisions.
34
We cannot assure you that any of these methods of protection are adequate to
protect our technology from use or misappropriation by our competitors. Despite
our precautions, it may be possible for unauthorized third parties to copy
aspects of our current or future products or to obtain and use information that
we regard as proprietary. Policing unauthorized use of software is difficult and
some foreign laws do not protect our proprietary rights to the same extent as in
the United States. For example, under French law we are unable to patent our
proprietary rights in our software, but we are able to protect these proprietary
rights under copyright laws which enable us to enjoin third party infringement.
Litigation may be necessary to protect our proprietary rights in our
intellectual property. For example, we currently have one patent issued in the
United States relating to a "Relational Database Access System Using
Semantically Dynamic Objects." We believe that one of our competitors, Brio
Technology, Inc., is infringing upon our rights under this patent, and we are
currently litigating this claim against Brio Technology. During January 1997, we
filed a lawsuit in the United States District Court for the Northern District of
California against Brio Technology alleging that it is infringing our patent by
making, using, and selling one of its products known as BrioQuery Enterprise. We
have requested that the court enjoin Brio Technology from further infringing on
our patent. We cannot assure you that we will receive a favorable outcome in
this litigation. Litigating this claim, or other claims we may believe are
necessary in the future to protect our proprietary rights, can be very expensive
in terms of management time and resources. Utilizing our resources on such
litigation could cause our financial condition and operating results to suffer.
In addition, although our name, together with our logo, is registered as a
trademark in France, the United States, and a number of other countries, we may
have difficulty asserting our ownership rights in the name "Business Objects."
Similar to monitoring unauthorized use of our product by customers, we may be
unable to effectively police unauthorized use of our name or otherwise prevent
the name of our software from becoming a part of the public domain.
THIRD PARTIES COULD ASSERT THAT OUR TECHNOLOGY INFRINGES ON THEIR
PROPRIETARY RIGHTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO DISTRIBUTE OUR
PRODUCTS AND RESULT IN COSTLY LITIGATION.
We do not believe that our products infringe upon the proprietary rights of
any third parties, and we are not aware of any third party claims that our
products do so. However, we cannot be certain and we cannot assure you that
third parties will never make such claims. We believe that software products
offered in our target market increasingly will be subject to such claims as the
number of products and competitors in our industry segment grows and product
functionalities begin to overlap. If a third party were to bring an infringement
claim against us, we would be forced to commit management resources to resolve
the claim and may incur substantial litigation costs in defense of the claim. We
may also have to expend significant development resources to redesign our
product as a result of such claims. Finally, we may be required to enter into
royalty and licensing agreements with a third party bringing an infringement
claim against us, and these agreements may not contain terms that are favorable
to us.
35
WE USE "SHRINK WRAP" LICENSES IN CONNECTION WITH THE SALE OF OUR PRODUCTS.
We often license our software products to customers through a "shrink-wrap"
license which becomes effective upon the opening of the product by the customer.
A "shrink-wrap" license agreement is a printed license agreement included within
packaged software that sets forth the terms and conditions under which the
purchaser may use the product. For example, these license agreements typically
provide that the licensed product may be used solely for the customer's internal
operations for a specified number of named or concurrent users and are
nonexclusive and nontransferable. "Shrink-wrap" license agreements are difficult
to monitor. We cannot be certain, nor can we assure you, that our customers will
comply with all of the terms and conditions of the "shrink-wrap" licenses under
which they purchase our products. For example, a customer may permit more end
users to use the product than the applicable "shrink-wrap" license allows
without paying for additional users. To the extent that our customers violate
the "shrink-wrap" licenses that apply to our products, we may be deprived of
revenues and our financial condition and operating results may suffer.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES.
We license certain software from third parties, and sub-license this
software to our customers. In addition, we license certain software programs
from third parties and incorporate these programs into our own software
products. Generally, the license agreements under which we license third party
software grant us a non-exclusive, worldwide license to use the software for
certain limited purposes. By utilizing third party software in our business,
however, we incur certain risks that are not associated with developing software
in-house. For example, these third party providers may discontinue or alter
their operations, terminate their relationship with us, or generally become
unable to fulfill their obligations to us. If any of these circumstances were to
occur, we may be forced to seek alternative technology which may not be
available on commercially reasonable terms. In the future, we may be forced to
obtain additional third party software licenses to enhance our product offerings
and compete more effectively. We cannot be certain, nor can we assure you, that
we will be able to obtain and maintain licensing rights to desired or needed
technology or similar technology on commercially reasonable terms, or at all.
OUR SOURCE CODE ARRANGEMENTS MAY MAKE IT EASIER FOR A THIRD PARTY TO
MISAPPROPRIATE OUR TECHNOLOGY.
We have entered into source code escrow arrangements with a limited number
of our distributors and end users that require us to release some of our source
code to these distributors and end users under certain circumstances. For
example, generally these agreements provide that these parties will obtain a
limited, non-exclusive right to use our source code if we become engaged in a
bankruptcy proceeding, if we cease to do business, or if we fail to meet our
contractual obligations to these distributors and end users. Using source code
escrow arrangements may increase the likelihood that third parties will
misappropriate our source code contained in the escrow.
36
THERE ARE A NUMBER OF FACTORS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT
COULD ADVERSELY AFFECT OUR BUSINESS.
We conduct a significant portion of our business outside of North America
and France. For example, in 1998, sales in France accounted for 18.3% of total
revenues, sales in North America accounted for 29.6% of total revenues, sales in
the United Kingdom accounted for 22.7% of total revenues, and sales in other
European countries and in the Asia Pacific region collectively accounted for
29.4% of total revenues. We currently have offices in over 15 countries
throughout the world. Sales in these various markets subject us to a number of
risks inherent in international business activities which could severely harm
our operations, financial condition and operating results, including:
. general economic conditions in each such country;
. difficulties in staffing and managing international operations;
. overlap of inconsistent tax structures;
. managing an organization spread over various jurisdictions;
. unexpected changes in regulatory requirements;
. compliance with a variety of foreign laws and regulations;
. longer accounts receivables payment cycles in Europe;
. import and export licensing requirements;
. trade restrictions; and
. changes in tariff and freight rates.
WE HAVE MULTINATIONAL OPERATIONS THAT ARE SUBJECT TO CURRENCY EXCHANGE RATE
FLUCTUATIONS.
We conduct a significant portion of our business in currencies other than
the U.S. dollar, the currency in which we report our financial statements.
Assets and liabilities of these subsidiaries are translated into U.S. dollars at
exchange rates in effect as of the applicable balance sheet date, and any
resulting translation adjustments are included as an adjustment to retained
earnings. Revenues and expenses generated from these subsidiaries are translated
at average exchange rates during the month the transactions occur. Gains and
losses from these currency transactions are included in net earnings.
Historically, we have generated a significant portion of our revenues and
incurred a significant portion of our expenses in French francs, British pounds
sterling, and Italian lira. As a result, the Company's operating results may be
adversely impacted by currency exchange rate fluctuations on the U.S. dollar
value of foreign currency-denominated revenues and expenses. In the past, we
have experienced fluctuations in the value of these and other currencies
relative to the U.S. dollar, and we expect this pattern to continue. These
fluctuations have caused certain U.S. dollar-translated amounts reported in our
financial statements to change in comparison with previous periods, and resulted
in currency transaction gains and losses which have been included in net
earnings. Due to the number of currencies in which we conduct our business and
the substantial volatility of
37
currency exchange rates, we cannot predict the effect of exchange rate
fluctuations upon our future operating results. As of December 31, 1998, we were
not engaged in a foreign currency hedging program to cover our currency
transaction exposure.
WEAKNESSES IN THE ECONOMIES OF COUNTRIES IN THE ASIA PACIFIC REGION COULD
NEGATIVELY IMPACT OUR REVENUES.
Countries in the Asia Pacific region, including Japan, have recently
experienced weaknesses in their currency, banking, and equity markets. Although
we generated only approximately 6.0% of our consolidated revenues for the year
ended December 31, 1998 in this region, weaknesses in the Asia Pacific region
could adversely affect demand for our products. Moreover, weaknesses in this
region could adversely affect the U.S. dollar value of our foreign currency-
denominated sales in the Asia Pacific region and ultimately our consolidated
results of operations.
WE FACE RISKS RELATED TO THE EUROPEAN MONETARY CONVERSION.
On January 1, 1999, 11 of the 15 member countries of the European Union
established a fixed conversion rate between their sovereign currencies and the
Euro and adopted the Euro as their common legal currency. As a result, the Euro
now trades on currency exchanges and will be available for non-cash
transactions. We expended resources, reviewed and modified pricing policies in
the new economic environment, analyzed the legal and contractual implications
for contracts, evaluated system capabilities, and ensured that banking vendors
support our operations in Euro-related transactions. We expect to modify our
business operations and systems to accommodate the Euro conversion on a timely
basis, but we do not believe that the cost of these modifications will
significantly affect our operating results. We cannot be certain nor can we
assure you that we will be able to successfully complete these modifications in
a manner that complies with Euro requirements. In addition, the costs of
completing these modifications could be higher than we currently anticipate,
which could negatively impact our financial condition and operating results. For
example, we have not yet completed our evaluation of the impact of the Euro
conversion upon our functional currency designations. In addition, our vendors
and suppliers may be unable to make appropriate modifications to their business
operations and systems to support Euro-related transactions. While we cannot
predict what effect these various factors may have on our financial condition
and operating results, we believe that factors relating to the Euro conversion
could cause significant volatility in our future financial performance and stock
price.
WE CURRENTLY RELY PRIMARILY ON DIRECT SALES, BUT MAY BECOME MORE DEPENDENT
UPON PRODUCT DISTRIBUTION AND SUPPORT FROM THIRD PARTIES.
We currently rely primarily upon our direct sales efforts to distribute and
market our products, but we have been increasing our sales through indirect
channels. We expect to continue to increase our sales through indirect channels,
such as VARs, system integrators, consulting partners, distributors, and
resellers. However, we may be unable to successfully establish indirect sales
channels that are capable of marketing and supporting our products effectively.
Moreover, any VARs, system integrators, consulting partners, distributors or
resellers who market and support our products may discontinue their relationship
with us at any time. If we are unable to recruit or retain a significant number
of VARs, system integrators, consulting partners, distributors, or resellers to
effectively
38
market and support our products, our operating results may suffer. Additionally,
our financial performance and operating results may suffer if we are unable to:
. expand our own sales and marketing organization;
. implement new indirect sales channels to penetrate different and
broader markets than those addressed by our existing direct sales
force and international distributors; or
. expand our support organization commensurate with our base of
installed products.
WE ARE SUSCEPTIBLE TO PROBLEMS ASSOCIATED WITH THE YEAR 2000.
Many computer programs define references to applicable years by using two
digits rather than four. As a result, many computer programs or hardware that
have date-sensitive software or embedded chips may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations that disrupt our operations. For example, computer
systems failures resulting from improper date references may temporarily disrupt
our ability to process transactions, send invoices, or engage in similar normal
business activities.
We have developed our current core product and platforms, BusinessObjects
4.1 and WebIntelligence 2.0, to comply with the Year 2K Conformity Requirements
developed by the British Standards Institute. We believe that it is essential
that we continue to design and test our products and platforms in compliance
with these standards. Based on our testing against the Y2K standards, we believe
BusinessObjects 4.1 is compliant with such standards. We have also conducted
testing on our WebIntelligence 2.0 platform. Although we believe this platform
to be compliant under most customer environments, we have identified a
limitation which, for a specific customer operation (importing and exporting
data in certain file formats) would result in non-compliance with the Y2K
standards. We believe this limitation is applicable to a limited number of
customer environments. We have developed a workaround for this limitation that
can easily be implemented by the customer. We are in the process of developing a
patch to correct this issue, which we expect will be available in mid-1999.
Because our product and platforms are used in conjunction with underlying
operating systems, and other database, middleware, and other software programs,
they are necessarily subject to the limitations, including year 2000 related
limitations, of such third party software. In order to minimize potential year
2000 compliance issues, we recommend to our customers that they use our current
products and platforms in conjunction with the most current releases of any
third party software. As new versions of the third party software used by our
customers become available, we intend to continue to design and test our
products and platforms as used with such third party software against the
British Standards Institute definition of Year 2K Conformity Requirements.
However, because we are dependent upon our customers' use of third party
software in connection with their use of our products and platforms, we cannot
assure you that the implementation of our products and platforms will not be
affected in the future by year 2000 issues related to modification or revisions
in any such third party software.
39
Furthermore, some of our customers continue to operate older versions of
our products that may experience problems associated with the year 2000 issues.
We have been encouraging these customers to migrate to current versions of our
software, but some of them may not do so prior to January 1, 2000.
We are currently using a four step process to address the year 2000 issues
associated with our internal management information systems: assessment,
remediation, testing, and implementation. We have completed the assessment
phase for our IT systems. The assessment phase of our IT systems indicated that
some of our critical IT systems may not be year 2000 compliant. We are
reviewing corrective actions and contingency plans to these critical IT systems,
and have retained external consultants to assist in this process.
We are still in the process of completing the assessment phase of our non-
IT systems, which is expected to be completed by the end of our first calendar
quarter. Some of the suppliers and vendors that provide us with products,
services, and systems, and others with whom we transact business on a worldwide
basis, continue to operate business systems or offer products that will
experience problems associated with the year 2000. If any of these third
parties cannot timely provide us with products, services, or systems that have
been modified to operate in the year 2000 and beyond, our business may be
disrupted and our operations may suffer. We are currently assessing the year
2000 compliance plans of our major suppliers and vendors.
We are in the process of evaluating the need for contingency plans with
respect to problems associated with the year 2000. We believe that the need for
contingency plans must be evaluated on a case-by-case basis, and will vary
considerably in nature depending on the year 2000 issue involved.
We expect to complete our year 2000 remediation, testing, and
implementation processes for both our IT and non-IT systems by the end of 1999,
and to incur no more than $300,000 in connection with the entire process.
However, if we are unable to successfully complete this process before the end
of 1999, both our day-to-day business operations and operating results could be
significantly adversely affected. Furthermore, other factors relating to the
year 2000, including litigation, may materially and adversely affect our
business, financial condition, and operating results.
OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS; WE
MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED.
Our success depends to a significant extent upon a number of key management
and technical personnel, including Bernard Liautaud, our chief executive officer
and co-founder, the loss of whom could adversely affect our business. We
maintain a key person life insurance policy on the life of Mr. Liautaud with
proceeds payable to Business Objects. The loss of the services of key personnel
could have a material adverse effect on Business Objects. In addition, we
believe that our future success will also depend in a large part on our ability
to attract and retain highly skilled technical, management, sales, and marketing
personnel. Competition for such personnel in the computer software industry is
intense, and we may be unable to successfully attract and retain such personnel.
40
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Our business has grown rapidly in recent years. If we continue to grow at
the same pace, this growth may place a significant strain on our management and
operations. Our future operating results depend in part on the ability of our
officers and key employees to continue to implement and improve our operational
and financial control systems and to hire, expand, train, and manage our
employees. If we are unable to manage our growth effectively, our financial
condition and operating results could suffer.
WE ARE CURRENTLY ENGAGED IN LEGAL PROCEEDINGS WITH THIRD PARTIES.
We are involved in various legal proceedings that have arisen in the
ordinary course of our business, including the patent infringement lawsuit
described earlier. We believe that the ultimate resolution of these matters
will not have a material adverse effect on our financial condition, operating
results, or cash flows. However, we may become involved in a significant
lawsuit in the future which could drain important resources and could materially
and adversely harm our financial condition and operating results.
41
QUARTERLY INFORMATION
The following tables set forth statements of income data for each of the
eight quarters in the period ended December 31, 1998 in dollars and as a
percentage of total revenues. This unaudited quarterly information has been
prepared on the same basis as the annual information presented elsewhere herein
and, in management's opinion, includes all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the information
for the quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future period.
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1998 1998 1998 1998 1997 1997 1997 1997
---------- --------- --------- --------- -------- --------- --------- ---------
Revenues: (in thousands, except per share and ADS data)
License fees............... $33,950 $26,232 $25,157 $23,422 $24,265 $19,442 $18,032 $16,739
Services................... 17,570 15,025 14,395 11,143 11,769 9,060 8,296 6,650
------- ------- ------- ------- ------- ------- ------- -------
Total revenues............ 51,520 41,257 39,552 34,565 36,034 28,502 26,328 23,389
Cost of revenues:
License fees............... 915 781 889 687 1,388 826 739 820
Services................... 7,297 6,253 5,562 4,787 4,377 3,505 2,859 2,366
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues.... 8,212 7,034 6,451 5,474 5,765 4,331 3,598 3,186
------- ------- ------- ------- ------- ------- ------- -------
Gross margin................ 43,308 34,223 33,101 29,091 30,269 24,171 22,730 20,203
Operating expenses:
Sales and marketing........ 25,340 22,214 21,768 19,796 19,744 17,095 17,135 14,141
Research and
development................ 5,647 4,956 4,697 4,134 4,132 3,503 3,279 3,136
General and
administrative............. 4,934 3,692 3,552 3,216 3,456 2,874 2,660 2,086
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................. 35,921 30,862 30,017 27,146 27,332 23,472 23,074 19,363
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............... 7,387 3,361 3,084 1,945 2,937 699 (344) 840
Net interest income and
other.................... 675 618 398 387 195 178 388 912
------- ------- ------- ------- ------- ------- ------- -------
Income before minority
interest and provision for
income taxes............... 8,062 3,979 3,482 2,332 3,132 877 44 1,752
Provision for income taxes (3,305) (1,631) (1,428) (952) (1,713) (716) (19) (736)
Minority interest........... (138) (40) (74) -- 223 35 (2) --
------- ------- ------- ------- ------- ------- ------- -------
Net income.................. $ 4,619 $ 2,308 $ 1,980 $ 1,380 $ 1,642 $ 196 $ 23 $ 1,016
======= ======= ======= ======= ======= ======= ======= =======
Net income per ADS and per
share--basic............... $ 0.27 $ 0.14 $ 0.12 $ 0.08 $ 0.10 $ 0.01 $ 0.00 $ 0.06
ADS and shares used in ======= ======= ======= ======= ======= ======= ======= =======
computing net income
per ADS and per
share--basic............... 17,153 16,975 16,942 16,782 16,770 16,689 16,614 16,417
Net income per ADS and
per share--diluted......... $ 0.26 $ 0.13 $ 0.11 $ 0.08 $ 0.10 $ 0.01 $ 0.00 $ 0.06
======= ======= ======= ======= ======= ======= ======= =======
ADS and shares used in
computing net income
per ADS and per
share--diluted.............. 18,030 17,624 17,950 17,439 17,280 16,798 16,760 16,672
42
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1998 1998 1998 1998 1997 1997 1997 1997
---------- --------- --------- --------- -------- --------- --------- ---------
Revenues:
License fees.............. 65.9% 63.6% 63.6% 67.8% 67.3% 68.2% 68.5% 71.6%
Services.................. 34.1 36.4 36.4 32.2 32.7 31.8 31.5 28.4
---------- --------- --------- --------- -------- --------- --------- ---------
Total revenues........... 100% 100% 100% 100% 100% 100% 100% 100%
========== ========= ========= ======== ======== ========= ========= =========
Cost of revenues:
License fees.............. 1.8 1.9 2.2 2.0 3.9 2.9 2.8 3.5
Services.................. 14.2 15.2 14.1 13.8 12.1 12.3 10.9 10.1
---------- --------- --------- --------- -------- --------- --------- ---------
Total cost of revenues... 15.9 17.1 16.3 15.8 16.0 15.2 13.7 13.6
---------- --------- --------- --------- -------- --------- --------- ---------
Gross margin............... 84.1 82.9 83.7 84.2 84.0 84.8 86.3 86.4
Operating expenses:
Sales and marketing....... 49.2 53.8 55.0 57.3 54.8 60.0 65.1 60.5
Research and
development.............. 11.0 12.0 11.9 12.0 11.5 12.3 12.4 13.4
General and
administrative........... 9.6 8.9 9.0 9.3 9.6 10.1 10.1 8.9
---------- --------- --------- --------- -------- --------- --------- ---------
Total operating
Expenses............... 69.7 74.7 75.9 78.5 75.9 82.4 87.6 82.8
---------- --------- --------- --------- -------- --------- --------- ---------
Income (loss) from
operations.............. 14.3 8.2 7.8 5.6 8.2 2.4 (1.3) 3.6
Net interest income and
other................... 1.3 1.5 1.0 1.1 0.5 0.6 1.5 3.9
---------- --------- --------- --------- -------- --------- --------- ---------
Income before minority
interest and provision for
income taxes............ 15.6 9.7 8.8 6.7 8.7 3.0 0.2 7.5
Provision for income
taxes................... (6.4) (4.0) (3.6) (2.8) (4.8) (2.5) (0.1) (3.1)
Minority interest.......... (0.3) (0.1) (0.2) (0.0) 0.6 0.1 (0.0) --
---------- --------- --------- --------- -------- --------- --------- ---------
Net income................. 9.0% 5.6% 5.0% 4.0% 4.6% 0.6% 0.1% 4.3%
========== ========= ========= ======== ======== ========= ========= =========
Earnings per ADS and per share amounts for the first three quarters of 1997
have been restated to comply with Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (FAS 128). For further discussion of earnings per
ADS and per share and the impact of FAS 128, see the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.
Our growth in revenues and income from operations in recent quarters is not
necessarily indicative of future results. In view of the significant growth of
our operations in recent years, we believe that period to period comparisons of
our financial results should not be relied upon as an indication of future
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
foreign currency exchange rates. This discussion contains forward-looking
statements that are subject to risks and uncertainties. Actual results could
vary materially as a result of a number of factors including those set forth
under the captions "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Business Factors--We have multinational operations
that are subject to
43
currency exchange rate fluctuations" and "--We face risks related to the
European monetary conversion."
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. Our
assets and liabilities are translated into U.S. dollars at exchange rates in
effect as of the applicable balance sheet date, and any resulting translation
adjustments are included as an adjustment to retained earnings. Our revenues
and expenses are translated at average exchange rates during the month the
transactions occur. Gains and losses from these currency transactions are
included in net earnings. Historically, we have generated a significant portion
of our revenues and incurred a significant portion of our expenses in French
francs, British pounds sterling, and Italian lira. As a result, our operating
results may be adversely impacted by currency exchange rate fluctuations on the
U.S. dollar value of foreign currency-denominated revenues and expenses. In the
past, we have experienced fluctuations in the value of these and other
currencies relative to the U.S. dollar, and we expect this pattern to continue.
These fluctuations have caused certain U.S. dollar-translated amounts reported
in our financial statements to change in comparison with previous periods, and
resulted in currency transaction gains and losses which have been included in
net earnings. Due to the number of currencies in which we conduct our business
and the substantial volatility of currency exchange rates, we cannot predict the
effect of exchange rate fluctuations upon our future operating results. As of
December 31, 1998, we were not engaged in a foreign currency hedging program to
cover our currency transaction exposure.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Business Objects S.A.
We have audited the accompanying consolidated balance sheets of Business
Objects S.A. as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Business Objects S.A. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
January 29, 1999
45
CONSOLIDATED BALANCE SHEETS
(In thousands, except for per ordinary share amounts)
DECEMBER 31,
-------------------------
1998 1997
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 71,713 $36,508
Short term investments....................................................... -- 2,505
Accounts receivable, net of allowances of $1,672 and $1,568 at December 31,
1998 and 1997, respectively................................................. 42,236 35,113
Inventories.................................................................. 393 344
Deferred tax assets, net..................................................... 3,958 1,185
Prepaid and other current assets............................................. 3,642 4,365
-------- -------
Total current assets....................................................... 121,942 80,020
Goodwill, net................................................................ 1,460 1,626
Property and equipment, net.................................................. 13,804 12,020
Deposits and other assets.................................................... 879 674
-------- -------
Total assets............................................................... $138,085 $94,340
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 10,439 $ 8,089
Accrued payroll and related expenses......................................... 16,597 9,944
Investment grant............................................................. -- 668
Income taxes payable......................................................... 7,337 1,269
Deferred revenue............................................................. 21,684 16,825
Value added taxes payable.................................................... 4,450 2,901
Other current liabilities.................................................... 10,331 3,829
Current portion of capital lease obligations................................. -- 16
-------- -------
Total current liabilities.................................................. 70,838 43,541
Commitments and contingencies
Shareholders' equity:
Ordinary shares, FF 1 nominal value ($0.18 U.S. as of December 31, 1998):
Authorized 36,243; Issued and outstanding--17,255 and 16,778
at December 31, 1998 and 1997, respectively................................. 3,166 3,084
Additional paid-in capital................................................... 38,705 34,270
Retained earnings............................................................ 28,394 18,107
Accumulated other comprehensive income....................................... (3,018) (4,662)
-------- -------
Total shareholders' equity................................................. 67,247 50,799
-------- -------
Total liabilities and shareholders' equity................................. $138,085 $94,340
======== =======
See accompanying notes.
46
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per ADS and per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
-------------- ------------ ------------
Revenues:
License fees..................................................... $108,761 $ 78,478 $64,451
Services......................................................... 58,133 35,775 20,686
-------- -------- -------
Total revenues................................................. 166,894 114,253 85,137
Cost of revenues:
License fees..................................................... 3,272 3,773 3,235
Services......................................................... 23,899 13,107 6,780
-------- -------- -------
Total cost of revenues......................................... 27,171 16,880 10,015
-------- -------- -------
Gross margin........................................................ 139,723 97,373 75,122
Operating expenses:
Sales and marketing.............................................. 89,118 68,115 50,038
Research and development......................................... 19,434 14,050 10,634
General and administrative....................................... 15,394 11,076 7,402
-------- -------- -------
Total operating expenses....................................... 123,946 93,241 68,074
-------- -------- -------
Income from operations.............................................. 15,777 4,132 7,048
Interest and other income, net...................................... 1,931 1,088 1,556
Net foreign currency exchange gain.................................. 147 585 293
-------- -------- -------
Income before minority interest and provision for income taxes...... 17,855 5,805 8,897
Provision for income taxes.......................................... (7,316) (3,184) (3,737)
Minority interest................................................... (252) 256 --
-------- -------- -------
Net income.......................................................... $ 10,287 $ 2,877 $ 5,160
======== ======== =======
Net income per ADS and share--basic................................. $0.61 $0.17 $ 0.32
======== ======== =======
ADS and shares used in computing net income per ADS and
per share--basic.................................................. 16,966 16,624 16,265
======== ======== =======
Net income per ADS and per share--diluted........................... $ 0.58 $ 0.17 $ 0.30
======== ======== =======
ADS and shares and common share equivalents used in computing net
income per ADS and per share--diluted.............................. 17,741 16,876 16,924
======== ======== =======
See accompanying notes.
47
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN RETAINED UNEARNED COMPREHENSIVE SHAREHOLDERS'
----------------------
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION INCOME EQUITY
---------- ----------- --------- ---------- -------------- -------------- --------------
Balance at December 31, 1995........ 16,082,752 $2,957 $30,870 $10,070 $(259) $ 2,823 $46,461
Issuance of stock pursuant to
employee stock option plans..... 211,511 42 1,003 -- -- -- 1,045
Common stock issued............... 90,761 18 1,129 -- -- -- 1,147
Compensation related to stock
option plans........................ -- -- 35 -- 71 -- 106
Amortization of unearned
compensation related to stock
options........................... -- -- -- -- 125 -- 125
Cancellation of options............. -- -- (1) -- 1 -- --
Components of comprehensive income..
Translation adjustment......... -- -- -- -- -- (2,208) (2,208)
Net income..................... -- -- -- 5,160 -- -- 5,160
---------
Total comprehensive income.......... -- -- -- -- -- -- 2,952
----------- ------- -------- --------- ----------- --------- ---------
Balance at December 31, 1996........ 16,385,024 3,017 33,036 15,230 (62) 615 51,836
Issuance of stock pursuant to
employee stock option plans..... 285,366 49 406 -- -- -- 455
Common stock issued............... 107,273 18 828 -- -- -- 846
Amortization of unearned
compensation related to stock
options............................. -- -- -- -- 62 -- 62
Components of comprehensive
income (loss).....................
Translation adjustment......... -- -- -- -- -- (5,277) (5,277)
Net income..................... -- -- -- 2,877 -- -- 2,877
---------
Total comprehensive income (loss) -- -- -- -- -- -- (2,400)
----------- ------- -------- --------- ----------- --------- ---------
Balance at December 31, 1997........ 16,777,663 3,084 34,270 18,107 -- (4,662) 50,799
Issuance of stock pursuant to
employee stock option plan........ 319,014 56 2,719 -- -- -- 2,775
Common stock issued................ 158,764 26 1,316 -- -- -- 1,342
Tax Benefit of Nonqualified
Stock Options..................... -- -- 400 -- -- -- 400
Components of comprehensive income..
Translation adjustment......... -- -- -- -- -- 1,644 1,644
Net income..................... -- -- -- 10,287 -- -- 10,287
---------
Total comprehensive income......... -- -- -- -- -- -- 11,931
----------- ------- -------- --------- ----------- --------- ---------
Balance at December 31, 1998........ 17,255,441 $3,166 $38,705 $28,394 $ -- $(3,018) $67,247
=========== ======= ======== ========= =========== ========= =========
See accompanying notes.
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $10,287 $ 2,877 $ 5,160
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 5,385 4,179 2,075
Recognition of investment grant........................................... (712) -- --
Amortization of goodwill.................................................. 1,254 598 --
Compensation expense...................................................... -- 62 197
Deferred income taxes..................................................... (2,768) (257) 135
Changes in operating assets and liabilities:
Accounts receivable, net................................................ (6,056) (12,914) (7,178)
Inventories............................................................. (28) 131 (259)
Prepaid and other current assets........................................ (475) (2,326) (653)
Deposits and other assets............................................... (162) (151) (250)
Accounts payable........................................................ 2,043 4,017 1,221
Accrued payroll and related expenses.................................... 9,673 3,089 1,130
Income taxes payable.................................................... 6,160 1,310 (3,918)
Deferred revenue........................................................ 4,323 7,007 4,407
Value added taxes and other current liabilities......................... 5,390 1,297 2,028
------- -------- ---------
Net cash provided by operating activities.................................... 34,314 8,919 4,095
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................... (6,787) (6,332) (8,260)
Acquisition of distributors................................................. (972) (2,640) --
Purchases of short term investments......................................... -- (70,374) (175,408)
Proceeds from sales of short term investments............................... 2,505 86,047 185,279
Long term investment........................................................ 17 -- --
------- -------- ---------
Net cash provided by (used for) investing activities......................... (5,237) 6,701 1,611
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations............................. (16) (93) (170)
Issuance of shares.......................................................... 4,500 1,301 2,195
------- -------- ---------
Net cash provided by financing activities................................... 4,484 1,208 2,025
Effect of foreign exchange rate changes on cash and
cash equivalents........................................................... 1,643 (2,182) (514)
------- -------- ---------
Net increase in cash and cash equivalents................................... 35,205 14,646 7,217
Cash and cash equivalents at the beginning of the year...................... 36,508 21,862 14,645
------- -------- ---------
Cash and cash equivalents at end of the year................................ $71,713 $ 36,508 $ 21,862
======= ======== =========
Supplemental disclosures of non-cash activities:
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................................. $ 6,903 $ 1,837 $ 7,510
See accompanying notes.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- BUSINESS OBJECTS S.A.
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
. Organization and Basis of Presentation. Business Objects S.A. (the
Company) was organized in 1990 as a societe anonyme, or limited liability
company, under the laws of the Republic of France. The Company develops,
markets, and supports enterprisewide decision support software tools.
During 1998, the Company acquired an additional 29% of the outstanding
shares of its Italian distributor, increasing its ownership to 80%. The
transaction has been recorded using the purchase method.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned and majority controlled subsidiaries, after
elimination of intercompany transactions and balances.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States, applied on a
consistent basis. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying footnotes. Actual results could differ from those
estimates.
. Translation of Financial Statements of Foreign Entities. The functional
currency of the Company and its subsidiaries is the applicable local currency in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," while the Company's reporting currency is the U.S.
dollar. Assets and liabilities of the Company and its subsidiaries with
functional currencies other than the U.S. dollar are translated into U.S. dollar
equivalents at the rate of exchange in effect on the balance sheet date. Income
and expenses are translated at the weighted average exchange rates for the year.
Translation gains or losses are recorded as a separate component of
shareholders' equity, and transaction gains and losses are reflected in net
income.
Due to the number of currencies involved, the constant change in currency
exposures, and the substantial volatility of currency exchange rates, the effect
of exchange rate fluctuations upon future operating results could be
significant. To date, the Company has not undertaken hedging transactions to
cover any currency exposure.
. Revenue Recognition. Beginning in January 1, 1998, the Company adopted
Statement of Position 97-2 "Software Revenue Recognition" as amended by
Statement of Position 98-4. The effect of adoption did not have a material
impact on the Company's results of operations.
The Company develops, markets, and supports decision support software tools
for the client/server and intranet market. The Company's revenue is derived
from license fees and charges for services, consisting of post-contract customer
support (PCS), consulting, and training services. Revenue from product
licensing is generally recognized upon delivery of the software product to the
end user, unless the fee is not fixed or determinable or collectibility is not
probable. The Company
50
considers all arrangements with payment terms extending beyond twelve months and
other arrangements with payment terms longer than normal not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
PCS includes telephone support, bug fixes, and rights to upgrades on a
when-and-if available basis. PCS revenue is recognized on a straight-line basis
over the period the PCS is provided. Consulting and training service revenue is
recognized as the services are provided. In software arrangements that include
rights to multiple software products, PCS, and/or other services, the Company
allocates the total arrangement fee among each deliverable based on the relative
fair value of each of the deliverables determined based on vendor-specific
objective evidence.
. Sales Returns and Warranties. The Company's distributors do not have
the right to return merchandise for credit or refund. Any other potential sales
returns are covered by the Company's allowance for sales returns and doubtful
accounts. The Company provides for the costs of warranty when specific problems
are identified. The Company has not experienced any significant warranty claims
to date.
. Net Income Per ADS and Per Share. The Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128),
beginning with the Company's fourth quarter of 1997. FAS 128 replaced the
calculation of primary and fully diluted earnings per ADS and per share with
basic and diluted earnings per ADS and per share. Unlike primary earnings per
ADS and per share, basic earnings per ADS and per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
ADS and per share are very similar to the previously reported fully diluted
earnings per ADS and per share.
Net income per share and per ADS reflect the adjustment in May of 1996 of
the conversion ratio between Ordinary Shares and American Depositary Shares
(ADSs) from two-Ordinary-Shares-to-one-ADS to one-Ordinary-Share-to-one-ADS,
producing the same results as a two-for-one stock split.
. Cash, Cash Equivalents, and Short-Term Investments. The Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Investments with maturity dates of
greater than three months and less than one year are considered to be short-term
investments. Cash equivalents and short-term investments include marketable
securities that are principally money market funds, certificates of deposit,
term deposits, and commercial paper.
Management classifies investments as held-to-maturity or available-for-sale
at the time of purchase and periodically reevaluates such designation under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (FAS 115). Debt
securities not classified as held-to-maturity are classified as available-for-
sale and are reported at fair value. Unrecognized gains or losses on available-
for-sale securities are included, net of tax, in equity until their disposition.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in net interest income.
The cost of securities sold is based on the specific identification method.
51
All the Company's cash equivalents and short-term investments are
classified as available-for-sale at December 31, 1998 and 1997, and are carried
at amortized cost, which approximates estimated fair value based on quoted
market prices.
. Inventories. Inventories consist principally of software media and
related documentation stated at the lower of cost (first-in, first-out) or
market.
. Software Development Costs. The Company capitalizes eligible software
development costs upon achievement of technological feasibility subject to net
realizable value considerations. Based on the Company's development process,
technological feasibility is generally established upon completion of a working
model. Research and development costs prior to the establishment of
technological feasibility are expensed as incurred. Because the period between
achievement of technological feasibility and the general release of the
Company's products has been of relatively short duration, costs qualifying for
capitalization were insignificant during the years ended December 31, 1998 and
1997. There were no capitalized software development costs at December 31, 1998
and 1997.
. Property and Equipment. Property and equipment are stated at cost.
Office and computer equipment is depreciated using the straight-line method over
estimated useful lives ranging from three to five years. Assets under capital
leases are amortized over the shorter of the asset life or the lease term.
Leasehold improvements are depreciated over the shorter of the asset life or the
remaining lease term.
. American Depositary Shares. On May 10, 1996, the Company amended its
Deposit Agreement with the Bank of New York, changing the ratio at which the
Company's Ordinary Shares are converted into ADSs. Under the original Deposit
Agreement, two Ordinary Shares converted into one ADS. Following the amendment,
one Ordinary Share converts into one ADS. All ADS and per ADS amounts have been
restated to reflect this change.
. Concentration of Credit Risk. The Company sells its products to
various companies across several industries throughout the world. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential credit losses. Such losses have been within management's expectations.
The Company generally requires no collateral from its customers. Substantially
all revenues of the Company have been derived from the successive releases of
one product and, as a consequence, any factor adversely affecting any release of
this product would have a material adverse effect on the Company.
. Employee Stock Option Plans. The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations in accounting for its employee
stock options because the alternative fair market value accounting provided for
under Statement of Financial Accounting Standards Statement No. 123, "Accounting
for Stock-Based Compensation" (FAS 123), requires the use of option valuation
models that were not developed for use in valuing employee stock options, and
has provided for additional disclosures required by FAS 123. The Company
generally grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair market value of the shares at the date of
grant, and no compensation expense is recorded. When the exercise
52
price of the Company's employee stock options is less than the market price of
the underlying shares of the date of the grant, compensation expense is
recognized.
. Advertising Costs. The Company expenses advertising expenses as
incurred. Advertising expenses totaled $1,189,000, $1,672,000, and $1,492,000
for the years ended December 31, 1998, 1997, and 1996, respectively.
. Recent Pronouncements. In March 1998, the Accounting Standards Board
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is
effective for years beginning after December 15, 1998. SOP 98-1 will require
the capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The Company
currently expenses such costs as incurred. The Company does not believe that
SOP 98-1 will have a significant impact on its consolidated financial position,
results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity" (FAS 133),
which is required to be adopted in years beginning after June 15, 1999. FAS 133
permits early adoption as of the beginning of any fiscal quarter. FAS 133
requires the recognition of all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be adjusted to
fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not believe that FAS 133 will have a significant impact on its
consolidated financial position, results of operations, or cash flows.
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" (SOP 98-9) was issued in
December 1998 and addresses software revenue recognition as it applies to
certain multiple-element arrangements. SOP 98-9 also amends Statement of
Position 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2," to
extend the deferral of application of certain passages of Statement of Position
97-2 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. The Company will comply with the
requirements of SOP 98-9 as they become effective and this is not expected to
have a significant effect on the Company's revenues and earnings.
. Reclassifications. Certain prior year amounts have been reclassified
to conform with current year presentation.
53
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company's cash and cash equivalents and short-term investments as of
December 31, 1998 and 1997, are as follows (in thousands):
1998 1997
------- -------
Cash and cash equivalents:
Cash.................................... $48,631 $29,739
Money market funds...................... 23,082 6,769
------- -------
Total cash and cash equivalents....... $71,713 $36,508
======= =======
Short-term investments:
Certificates of deposit................. -- $ 2,505
------- -------
Total short-term investments.......... -- $ 2,505
------- -------
Total............................... $71,713 $39,013
======= =======
Unrealized holding gains and losses on available-for-sale securities at
December 31, 1998 and 1997, and gross realized gains and losses on sales of
available-for-sale securities during 1998, 1997, and 1996 were insignificant.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997, are as follows (in
thousands):
1998 1997
-------- --------
Office and computer equipment................ $ 22,287 $ 16,552
Leasehold improvements....................... 4,421 2,900
-------- --------
Total property and equipment.............. 26,708 19,452
Accumulated depreciation and amortization.... (12,904) (7,432)
-------- --------
Property and equipment, net............... $ 13,804 $ 12,020
======== ========
Depreciation and amortization expense on property and equipment totaled
$5,385,000, $4,179,000, and $2,075,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
4. COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" (FAS 130), which
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's results of operations or stockholders' equity. FAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
the foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of FAS 130.
The components of accumulated other comprehensive income (loss), net of
related tax, at December 31 were as follows (in thousands):
54
INCOME
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
Cumulative Translation Adjustment at
December 31, 1996........................... $ (3,807) $ 1,599 $(2,208)
Cumulative Translation Adjustment at
December 31, 1997........................... (11,727) 6,450 (5,277)
Cumulative Translation Adjustment at
December 31, 1998........................... $ 2,786 $(1,142) $ 1,644
5. INVESTMENT GRANT
In May 1992, the Company was awarded a grant from the French Ministry of
the Economy, Finance, and the Budget. The Company received FF 2,500,000 in
August 1992 and FF 1,500,000 in December 1993 from this grant. Due to the
achievement of certain milestones, this grant was recognized as income and
booked as other income during 1998. Using the end of period exchange rate at
December 31, 1998, the dollar equivalent of the grant recognized was $711,478.
6. CAPITAL LEASE OBLIGATIONS
The Company leases certain of its equipment under capital leases.
Capitalized costs of approximately $523,000 and $491,000 are included in
property and equipment at December 31, 1998 and 1997, respectively. These leased
assets were fully amortized as of December 31, 1998.
7. ACQUISITIONS
During April 1997, the Company exercised its option to acquire 51% of the
outstanding shares of a division of Datamat Ingegneria dei Sistemi S.p.A., its
Italian distributor, in exchange for $1,300,000 in cash. During April 1998, the
Company exercised its option to acquire an additional 29% of the outstanding
shares of its Italian distributor in exchange for $982,000, increasing the
Company's ownership interest to 80%. The cost of the originally purchased
shares and the additional shares has been fully allocated to goodwill, and is
being amortized over a three-year period beginning in April 1997. The purchase
agreement provides for a call/put option that gives the Company the right to
purchase and the minority shareholder the right to require the Company to
purchase the remaining 20% of the shares in 1999 for an amount to be determined
using a net asset and revenue based formula.
During May 1997, the Company acquired all the outstanding shares of Delphi
Software A.G., its Swiss distributor, in exchange for approximately $900,000 in
cash. Goodwill of approximately $1,058,000 was recorded as a result of the
purchase, and is being amortized over three years.
The Company has accounted for both acquisitions using the purchase method.
The operating results of the acquired companies have been included in the
accompanying consolidated financial statements from their dates of acquisition.
Accumulated amortization of goodwill totaled $1,852,000 at December 31, 1998 and
$598,000 at December 31, 1997.
55
8. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
leases that expire through 2004. Future minimum lease payments under operating
leases due for the fiscal years ending December 31 are as follows (in
thousands):
1999............. $ 7,338
2000............. 5,779
2001............. 4,001
2002............. 1,207
2003............. 174
Thereafter....... 70
-------
Total.......... $18,569
=======
Rent expense under all operating leases was approximately $7,000,000,
$5,800,000, and $3,900,000, for the years ended December 31, 1998, 1997, and
1996, respectively.
The Company leases certain facilities under operating leases that contain
free rent periods. Rent expense under these leases has been recorded on a
straight-line basis over the lease term. The difference between amounts paid
and rent expense is recorded as deferred rent and is included in other current
liabilities. The deferred rent liability under these leases was $618,000 and
$382,000 at December 31, 1998 and 1997, respectively.
The Company is involved in various legal proceedings arising in the
ordinary course of business. The Company believes that the ultimate resolution
of these matters will not have a material effect on the Company's financial
position, results of operations, or cash flows.
9. SHAREHOLDERS' EQUITY
. Dividend Rights. Net income in each fiscal year after deduction for
legal reserves is available for distribution to shareholders of the Company as
dividends, subject to the requirements of French law and the Company's
"statuts," or articles of association. Dividends may also be distributed from
reserves of the Company, subject to approval by the shareholders and certain
limitations. Dividend distributions, if any, will be made in French francs.
Payment of dividends is fixed by the ordinary general meeting of shareholders at
which the annual accounts are approved following recommendations of the Board of
Directors. If net income is sufficient, the Board of Directors has the
authority, subject to French law and regulation and without the approval of
shareholders, to distribute interim dividends. The Company has not distributed
any dividends since its inception.
The Company is required to maintain a legal reserve equal to 10% of the
aggregate nominal value of its share capital, funded by a transfer of at least
5% of the Company's net income per year to such legal reserve. The legal
reserve balance requirement was $317,000 and $308,000 as of December 31, 1998
and 1997, respectively. The legal reserve is distributable only upon the
liquidation of the Company. The Company's "statuts" also provide that
distributable profits, after deduction of any amounts required to be allocated
to the legal reserve, can be allocated to one or more special purpose reserves
or distributed as dividends as may be determined by the general meeting of
shareholders.
56
. Liquidation Rights. In the event that the Company is liquidated, the
assets of the Company remaining after payment of debts, liquidation expenses,
and all remaining obligations will be distributed first to repay in full the
capital of any outstanding shares. The surplus, if any, will then be
distributed pro rata among the shareholders in proportion to the nominal value
of their share holdings and subject to special rights granted to holders of
priority shares, if any.
. Preemptive Subscription Rights. Shareholders have preemptive rights to
subscribe for additional shares issued by the Company for cash on a pro rata
basis. Shareholders may waive such preemptive subscription rights at an
extraordinary general meeting of shareholders under certain circumstances.
Preemptive subscription rights, if not previously waived, are transferable
during the subscription period relating to a particular offer of shares.
. Repurchase of Shares. Pursuant to French company law, the Company may
not make open market repurchases of its shares or otherwise acquire shares
except (a) to reduce its share capital by subscription and cancellation of such
shares under certain circumstances with approval of the shareholders at an
extraordinary general meeting, (b) to obtain shares for distribution to
employees under an approved profit-sharing or stock option plan, and (c) for the
purpose authorized by shareholders, such as the stabilization of a quotation on
a securities exchange, the use of excess cash balances, or as a consideration in
the context of an acquisition, after obtaining approval from the shareholders at
an extraordinary general meeting. Purchases under (c) may only be effected by
companies listed on a French Stock exchange ("marche reglenente"). The amounts
repurchased under (b) and (c) may not, in either case, result in the Company
holding more than 10% of the then outstanding shares.
. Stock Option Plans. The Company's 1991 and 1993 Stock Option Plans
(the 1991 and 1993 Plans) provide for the grant of stock options to certain
employees and executive officers of the Company. Under these plans, the Board of
Directors determines the vesting and exercise of the option grants. Generally
options granted under the 1991 and 1993 Plan vested at a rate of 25% per year
subject to a minimum of one year of continued service with the Company. The
exercise price per share, which was fixed at the date of grant, was determined
by a formula which was based on the share price applicable with respect to the
last subscription of the capital of the Company prior to the particular grant
date of the options granted to the employee. The share price formula also took
into consideration the number of days intervening between such subscription date
and the particular grant date and the revenues generated by the Company in the
four quarters preceding such grant date. No additional grants have been made
under the 1991 and 1993 Plans since the adoption of the 1994 Plan, and all
options available for grant under these plans have expired as of December 31,
1998.
On August 17, 1994, the shareholders of the Company authorized the creation
of a new stock option plan (the 1994 Plan) pursuant to which the Board of
Directors was authorized to issue options to subscribe for 1,000,000 shares. On
June 13, 1996, the shareholders of the Company authorized an additional
1,000,000 shares reserved for issuance under the 1994 Plan. On June 19, 1997,
the shareholders of the Company authorized an additional 1,000,000 shares
reserved for issuance under the 1994 Plan. On June 18, 1998, the shareholders
of the Company authorized an additional 750,000 shares reserved for issuance
under the 1994 Plan. The 1994 Plan was approved by the Company's shareholders
at the 1995 Annual Meeting and is intended to qualify as an incentive stock
option plan within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended. The Board of
57
Directors determines the vesting and exercise of the option grants. Generally
options granted under the plan vest at a rate of 25% per year subject to a
minimum of one year of continued service with the Company. The 1994 Plan
provides that the exercise price of options granted will be based on the closing
price of the ADSs on the Nasdaq National Market, after converting the dollar
closing price into French francs at the Noon Buying Rate on the date prior to
such grant. The options granted under the 1994 Plan are exercisable up to ten
years from the date of grant (other than options granted to employees in the
United Kingdom, which have a term of seven years less one day).
Due to a decline in the market price of the Company's shares, the Board of
Directors implemented an Option Exchange Program in November 1996 (the 1996
Program), under which optionees were offered the opportunity to exchange their
outstanding options for new options at a lower exercise price. The 1996 Program
was restricted to outstanding options with an exercise price above 103 French
francs per share (equivalent to approximately $18 per share based on the
exchange rate at December 31, 1998). Members of the senior management of the
Company were not eligible to participate in the 1996 Program. In addition, in
consideration for the new lower exercise price, participating employees were
required to relinquish their rights to 10% of the number of underlying shares.
Approximately 144,000 options were cancelled and 130,000 options were granted as
a result of the 1996 Exchange Program.
The Board of Directors approved a second Option Exchange Program on July
28, 1997. The exchange period ended on September 2, 1997 (the 1997 Program).
All employees, including executive officers and officers, were eligible to
participate in the 1997 Program, with the exception, however, of the Chief
Executive Officer, Chief Operating Officer, and Chief Financial Officer. Under
the 1997 Program, participating employees were permitted to exchange one or more
of their outstanding options with an exercise price above 50 French francs per
share (equivalent to approximately $8 per share based on the exchange rate at
September 2, 1997, and equal to the fair market value of the stock as of that
date), on a one-for-one basis for new options. In consideration for the new
exercise price, the number of shares vested under the new option for the entire
twelve months following the exchange date was determined to be equal to only 50%
of the shares vested under the old option as of the exchange date. As of
September 2, 1998, the new options became exercisable to the same extent as the
old option would have been, had no exchange taken place. Specific
exercisability features of new options granted to French employees were provided
in order to eliminate any potential social security costs arising from the
exercise of the new options and disposition of underlying shares prior to the
expiration of a five-year period from the date of the exchange. For these
optionees, it was provided that no repriced option may be exercised prior to
September 2, 1999. After September 2, 1999, the new options shall be
exercisable to the same extent as the old options would have been had no
exchange taken place. Approximately 1,141,000 options were cancelled and
granted as a result of the 1997 Exchange Program.
In December 1996, the French parliament adopted a law that requires French
companies to pay French social contributions and certain salary-based taxes of
up to 45% for France-based employees on the difference between the exercise
price of a stock option and the fair market value of the underlying shares on
the exercise date, if the beneficiary disposes of the shares before a five-year
period following the grant of the option. The law, amended in July 1998,
applies to all options granted on or after January 1, 1997.
58
The Company has not recorded a liability for social charges on options
granted prior to January 1, 1997 due to the legislation passed in July 1998,
which legislation removed the retroactivity of social charges on options granted
prior to such date. Therefore, all options granted prior to January 1, 1997
have no social charges due.
Options granted on or after January 1, 1997 are subject to social charges
on an exercise gain if the shares are sold or disposed of within five years from
the date of grant. Currently, for options issued after January 1, 1997, holders
of such options are not permitted to sell or dispose their options within five
years from the date of grant and, therefore, no social charges are due on these
options.
. Employee Stock Purchase Plans. The Company has an Employee Stock
Purchase Plan intended to qualify under the provisions of sections 421 and 423
of the 1986 Internal Revenue Code of the United States under which an additional
165,000 shares were authorized for issuance by the Board in June 1998. Under
the terms of this plan, employees may contribute via payroll deductions up to
10% of their compensation to purchase shares at a price equal to 85% of the
lower of the fair market value as of the beginning or end of the six-month
offering period. The Company issued 90,952 shares under this plan during 1998.
In addition, the Company also has an Employee Stock Purchase Plan available
to the Company's French employees as part of the Employee Savings Plan, which is
qualified under the provisions of French tax regulations. Under this plan,
135,000 shares have been authorized for issuance. Stock purchases are limited
under this plan to 10% of an employee's compensation received during the
offering period. The Company issued 67,812 shares under the Employee Savings
Plan during 1998.
. Stock Based Compensation. Pro forma information regarding net income
and net income per share is required by FAS 123, and has been determined as if
the Company had accounted for its employee stock options under the fair value
method of FAS 123. The fair value for these options for 1998, 1997, and 1996
was estimated at the date of grant using a Black-Scholes option pricing model
assuming no dividends, risk-free weighted average interest rates of 5%, 6%, and
6% for 1998, 1997, and 1996, respectively, and a weighted average expected
option life of six months and three years for options granted under Employee
Stock Purchase Plans and Stock Options Plans, respectively. The volatility
factor of the expected market price of the Company's ordinary shares was assumed
to be 77%, 70%, and 60% for 1998, 1997, and 1996, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. The Black-Scholes 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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for net income and pro
forma net income per share information):
59
1998 1997 1996
-------- ------- -------
Net income as reported...................... $ 10,287 $ 2,877 $ 5,160
Pro forma net income........................ $ 3,689 $ 291 $ 836
Net income per share as reported--basic..... $ 0.61 $ 0.17 $ 0.32
Pro forma net income per share--basic....... $ 0.22 $ 0.02 $ 0.05
Net income per share as reported--diluted... $ 0.58 $ 0.17 $ 0.30
Pro forma net income per share--diluted..... $ 0.21 $ 0.02 $ 0.05
The effects on pro forma disclosure of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because FAS 123 is applicable only to options granted after December 31, 1994,
the pro forma effect will not be fully reflected until approximately 1999.
60
A summary of the Company's stock option activity under the 1991 and 1993
Plans, and the 1994 Plan, and related information for the years ended December
31 are as follows:
OPTIONS OUTSTANDING
------------------------------
WEIGHTED
AVERAGE PRICE
OPTIONS NUMBER PER SHARE
AVAILABLE OF SHARES (IN FF)
----------- ----------- ---------------
Balance at December 31, 1995................. 721,151 1,378,131 54.93
Shares reserved............................. 1,000,000 -- --
Granted..................................... (1,097,326) 1,097,326 108.84
Canceled.................................... 501,856 (501,856) 129.63
Exercised................................... -- (211,511) 25.12
----------- -----------
Balance at December 31, 1996................. 1,125,681 1,762,090 70.80
Shares reserved............................. 1,000,000 -- --
Granted..................................... (2,176,576) 2,176,576 54.17
Canceled.................................... 1,464,038 (1,464,038) 82.54
Exercised................................... -- (285,366) 9.20
----------- -----------
Balance at December 31, 1997................. 1,413,143 2,189,262 54.32
Shares reserved............................. 750,000 -- --
Granted..................................... (1,487,725) 1,487,725 84.89
Canceled.................................... 635,204 (635,204) 67.85
Exercised................................... -- (319,014) 49.31
Expired (1991 and 1993 Option Plans)........ (527,174) -- --
----------- ----------- -----------
Balance at December 31, 1998................. 783,448 2,722,769 68.49
=========== =========== ===========
Options to purchase approximately 778,000 shares were exercisable at
December 31, 1998.
The following table summarizes the status of the Company stock options
outstanding and exercisable at December 31, 1998:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES IN YEARS PRICE OF SHARES PRICE
- -------------------------- ----------- ------------------ ---------- ------------- -------------
FF 1.78-FF 11.60 62,577 4.2 FF 7.52 62,577 FF 7.52
FF 24.56-FF 55.33 1,070,054 8.0 FF 47.54 547,403 FF 47.30
FF 67.75-FF 98.59 1,562,437 8.9 FF 84.29 146,695 FF 83.64
FF 110.02-FF 114.49 27,701 6.3 FF 13.33 20,943 FF 113.34
--------- --- ------- ------
All options 2,722,769 8.4 FF 68.49 777,618 FF 52.74
========= === ===== ======= =====
For certain options granted under the 1991 and 1993 Plans, the Company
recognized as compensation the excess of the fair value of the common stock
issuable upon exercise of such options over the aggregate exercise prices of
such options. The compensation expense was amortized rata-
61
bly over the vesting period of the options. The compensation expense related to
options granted was $0, $62,000, and $125,000 for the years ended December 31,
1998, 1997, and 1996, respectively.
. Warrants. On April 25, 1995, the Board of Directors approved the
issuance of warrants to purchase 12,000 shares to a Director with an exercise
price of FF 72.79 per share, vesting at a rate of 33.33% per year from June 22,
1995. The warrants were issued in June 1995 after formal shareholder approval.
The difference between the exercise price and the estimated fair value of such
warrants was immaterial. As of December 31, 1998, all of such warrants were
outstanding.
On April 28, 1997, the Board of Directors approved the issuance of warrants
to purchase 12,000 shares to four Directors, representing 48,000 shares in
total, with an exercise price of FF 55.33 per share. These warrants vest monthly
over three years commencing January 1, 1997. The warrants were issued in June
1997 after formal shareholder approval. The difference between the exercise
price and the estimated fair value of such warrants was immaterial. As of
December 31, 1998, all of such warrants were outstanding.
On April 28, 1998, the Board of Directors approved the issuance of warrants
to purchase 70,000 shares to five directors. The warrants were issued on June
18, 1998 after formal shareholder approval and have an exercise price of FF
96.66 per share, representing the French francs equivalent of the closing price
of one American Depositary Share of the Company as quoted on the Nasdaq National
Market on June 17, 1998. These warrants vest annually over the remaining term of
office of the recipient. As of December 31, 1998, all such warrants were
outstanding.
10. EMPLOYEE SAVINGS PLANS
During 1991, we established an Employee Savings Plan that allows voluntary
tax contributions by all full-time employees who are employed by our French
entity and have completed at least six months of service with us. In 1995, the
Employee Savings Plan was amended to allow these employees to purchase Ordinary
Shares of the Company. Eligible employees may contribute up to 25% of pretax
earnings to the Employee Savings Plan, of which a maximum of 10% of pre-tax
earnings may be used to purchase shares of the Company. See Note 9.
Shareholders' Equity Employee Stock Purchase Plans. The Company does not match
employee contributions.
The Company is subject to a Statutory Profit Sharing Plan (Statutory Plan)
for substantially all of the employees of its French entity. Contributions
under the Statutory Plan are based on a formula prescribed by French law. In
addition, employees of the Company's French entity may receive contributions
from a separate profit sharing plan sponsored by the Company (Company Plan).
Contributions under the Company Plan are based on the achievement of certain
goals established by the Board of Directors. Contributions under the Company
Plan are reduced by contributions required to be made under the Statutory Plan.
The Company has accrued for all contributions required by the Company for the
Plans as of December 31, 1997 and December 31, 1998.
The Company's subsidiary in the United States has a defined contribution
401(k) plan covering substantially all of its employees. In 1998 and 1997,
participants could elect to contribute up to 15% of their compensation to this
plan up to the statutory maximum amount. The Company
62
could make discretionary contributions to this plan determined solely by the
Board of Directors. The Company has not made any contributions to this plan
through December 31, 1998.
Effective January 1999, the U.S. 401(k) plan was amended whereby the
Company will match employee payroll contributions at a rate of $0.50 for each
U.S. dollar contributed by a participant up to an annual employer matching
contribution of $1,500 per participant per year. The employer contributions
vest over three (3) years based on a participant working a minimum of 1,000
hours during each plan year. Employees receive retroactive vesting credit based
on their date of hire. In addition, the maximum deferral percentage allowed
under the 401(k) plan has increased from 15% to 20% subject to the statutory
maximum amount of $10,000.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income per ADS and per share (in thousands, except per ADS and per share
amounts):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Numerator:
Net income.......................................................... $ 10,287 $ 2,877 $ 5,160
-------- -------- --------
Denominator:
Weighted average ADSs and shares outstanding........................ 16,966 16,624 16,265
-------- -------- --------
Denominator for basic earnings per ADS and per share................ 16,966 16,624 16,265
Incremental common shares attributable to shares exercisable
under employee stock plans and warrants.............................. 775 252 659
-------- -------- --------
Denominator for diluted earnings per ADS and per share................ 17,741 16,876 16,924
======== ======== ========
Net income per ADS and per share--basic............................... $ 0.61 $ 0.17 $ 0.32
======== ======== ========
Net income per ADS and per share--diluted............................. $ 0.58 $ 0.17 $ 0.30
======== ======== ========
12. INCOME TAXES
Income before provision for income taxes consists of the following (in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
France................. $ 5,039 $ 2,589 $ 5,582
Rest of world.......... 12,816 3,216 3,315
-------- -------- --------
Total................ $ 17,855 $ 5,805 $ 8,897
======== ======== ========
63
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---------- -------- --------
Current:
France........................................ $ 1,913 $1,288 $1,973
Rest of world................................. 8,172 2,300 1,756
------- ------ ------
Total current................................ 10,085 3,588 3,729
Deferred:
France........................................ 204 (254) 292
Rest of world................................. (2,973) (150) (284)
------- ------ ------
Total deferred............................... (2,769) (404) 8
------- ------ ------
$ 7,316 $3,184 $3,737
======= ====== ======
Tax benefits resulting from the exercise of nonqualified stock options and
the disqualifying disposition of shares acquired under the Company's incentive
stock option plan reduced taxes currently payable as shown above by
approximately $400,000 in 1998. Such benefits were credited to capital in excess
of par value when realized.
A reconciliation of income taxes computed at the French statutory rate
(36.7% in 1996 and 41.7% in 1997 and 1998) to the provision for income taxes is
as follows (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------ ------- ------
Income tax provision computed at the French statutory rate................ $7,439 $2,420 $3,261
Operating losses not utilized............................................. 9 779 228
Non-deductible provisions................................................. 165 149 340
Income at lower tax rates................................................. (598) -- --
Other individually immaterial items....................................... 301 (164) (92)
------ ------ ------
$7,316 $3,184 $3,737
====== ====== ======
Deferred taxes reflect the net tax effects of loss carryforwards and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred taxes consist of the following
(in thousands):
DECEMBER 31,
-----------------------------
1998 1997
------- -------
Deferred tax assets:
Net operating loss carryforwards............................... $ 3,557 $ 4,283
Deferred revenue............................................... 2,054 986
Accrued bonuses and compensation............................... 396 363
Allowance for doubtful accounts................................ 293 415
Deferred rent.................................................. 251 --
Other reserves and accruals not currently deductible........... 1,986 800
Other.......................................................... 631 229
------- -------
Total deferred tax assets.................................... 9,168 7,076
Valuation allowance.......................................... (4,892) (5,649)
------- -------
4,276 1,427
Deferred tax liabilities:
Individually immaterial items.................................. (318) (242)
------- -------
Net deferred tax assets...................................... $ 3,958 $ 1,185
======= =======
64
Approximately $3.1 million of the valuation allowance is attributed to
stock options, the benefit of which will be credited to additional paid-in
capital when realized.
As of December 31, 1998, the Company has U.S. federal and state net
operating loss carryforwards of approximately $6.0 million and $1.6 million,
respectively. These net operating loss carryforwards will expire in the years
1999 through 2019, if not utilized. The Company also has German, Singaporean,
and Canadian net operating loss carryforwards of approximately $2.5 million,
$0.6 million, and $0.3 million respectively. Tax losses in Singapore and Germany
may be carried forward indefinitely. Tax losses in Canada may be carried forward
for seven years.
13. SEGMENT AND GEOGRAPHIC INFORMATION
. Segment. The Company and its subsidiaries operate in one reportable
industry segment, the development, marketing, and support of enterprisewide
decision support tools. The Company makes key decisions and evaluates
performance of the Company based on this single industry segment.
. Geography. Operations outside of France consist principally of sales,
marketing, finance, customer support, and to a lesser extent, research and
development activities. Transfers between geographic areas are accounted for at
amounts that are generally above cost and consistent with the rules and
regulations of governing tax authorities. Such transfers are eliminated in the
consolidated financial statements. Identifiable assets are those assets that can
be directly associated with a particular geographic area. The following is a
summary of operations within geographic area:
TRANSFERS
REVENUES FROM BETWEEN
UNAFFILIATED GEOGRAPHIC TOTAL IDENTIFIABLE
CUSTOMERS AREAS REVENUES ASSETS
------------- ---------- -------- ------------
1998:
France $ 30,472 $ 28,967 $ 59,439 $ 79,360
United Kingdom 37,858 -- 37,858 30,171
Rest of Europe 39,109 -- 39,109 33,447
North America 49,453 -- 49,453 28,048
Asia Pacific 10,002 -- 10,002 6,080
Eliminations -- (28,967) (28,967) (39,021)
-------- -------- -------- --------
$166,894 $ -- $166,894 $138,085
======== ======== ======== ========
1997:
France $ 27,492 $ 17,744 $ 45,236 $ 63,395
United Kingdom 23,394 -- 23,394 16,728
Rest of Europe 21,633 -- 21,633 25,093
North America 34,905 -- 34,905 24,641
Asia Pacific 6,829 -- 6,829 5,593
Eliminations -- (17,744) (17,744) (41,110)
-------- -------- -------- --------
$114,253 $ -- $114,253 $ 94,340
======== ======== ======== ========
65
TRANSFERS
REVENUES FROM BETWEEN
UNAFFILIATED GEOGRAPHIC TOTAL IDENTIFIABLE
CUSTOMERS AREAS REVENUES ASSETS
------------- ---------- -------- ------------
1996:
France $ 24,987 $ 16,098 $ 41,085 $ 60,661
United Kingdom 17,198 -- 17,198 12,151
Rest of Europe 10,274 -- 10,274 7,140
North America 28,429 -- 28,429 18,450
Asia Pacific 4,249 -- 4,249 3,315
Eliminations -- (16,098) (16,098) (20,947)
--------- --------- -------- --------
$ 85,137 $ -- $ 85,137 $ 80,770
========= ========= ======== ========
14. RELATED PARTY TRANSACTIONS
During June 1997, the Company loaned $200,000 to one of its executive
officers. The loan was secured by a deed of trust, and bore interest at the rate
of 6.23% per annum. Principal and interest were initially due on July 1, 1999.
The loan was repaid to the Company in 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Compliance with Section 16(a) of the Exchange Act" in
the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Item 8 of this Form 10-K.
2. Financial Statement Schedules
The following financial statement schedule of the Company for each of the
years ended December 31, 1998, 1997, and 1996 is filed as part of this Form 10-K
and should be read in conjunction with the Consolidated Financial Statements,
and related notes thereto, of the Company.
PAGE NUMBER
-----------
Schedule II-Valuation and Qualifying Accounts 71
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information is otherwise included.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed as part
of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
67
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 17, 1999 BUSINESS OBJECTS S.A.
By: /s/ Bernard Liautaud
------------------------------------------
Bernard Liautaud
Chairman of the Board, President,
and Chief Executive Officer
Know all Person by These Presents, that each person whose signature appears
below constitutes and appoints Bernard Liautaud and Clifton T. Weatherford,
jointly and severally, his attorneys-in fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------------------- --------------
/s/ Bernard Liautaud Chairman of the Board, President and Chief March 17, 1999
- ------------------------------------- Executive Officer (Principal Executive Officer)
Bernard Liautaud
/s/ Clifton T. Weatherford Chief Financial Officer and Senior Group Vice March 17, 1999
- ------------------------------------- President (Principal Financial and Accounting
Clifton T. Weatherford Officer)
/s/ Bernard Charles Director March 17, 1999
- -------------------------------------
Bernard Charles
/s/ Arnold Silverman Director March 17, 1999
- -------------------------------------
Arnold Silverman
/s/ Philippe Claude Director March 17, 1999
- -------------------------------------
Philippe Claude
/s/ Vincent Worms Director March 17, 1999
- -------------------------------------
Vincent Worms
/s/ Albert Eisenstat Director March 17, 1999
- -------------------------------------
Albert Eisenstat
68
INDEX TO EXHIBITS
Item 14(a). Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.0* Status or Charter of the Company (English translation), is incorporated herein by reference to
Exhibit 3.1 filed with the Company's Registration Statement on Form S-8 filed with the SEC on
December 11, 1997 (File No. 333-42063).
3.1* Bylaws of the Company, as amended, dated February 10, 1998, is incorporated herein by reference
to Exhibit 3.1 filed with the Company's 1997 Form 10-K filed with the SEC.
4.0 Form of Deposit Agreement, as amended and restated as of December 30, 1998, among Business
Objects S.A., the Bank of New York as Depositary, and holder from time to time of American
Depositary Shares issued thereunder, and Exhibit A to Deposit Agreement.
10.0* Lincoln Park Lease Agreement by and between Metropolitan Life Insurance Company and the Company
dated January 18, 1996, as amended, and assignment of interest to Speiker Properties, L.P., is
incorporated herein by reference to Exhibit 10.0 filed with the Company's 1997 Form 10-K filed
with the SEC.
10.1* Office Building Lease by and between Nabarro Nathanson, D.J. Downing, J.M. Jones Properties
Limited and the Company dated March 6, 1996 is incorporated herein by reference to Exhibit 10.1
filed with the Company's 1997 Form 10-K filed with the SEC.
10.2* Commercial Lease by and between Foncierne Chaptal and the Company dated June 4, 1996 is
incorporated herein by reference to Exhibit 10.2 filed with the Company's 1997 Form 10-K filed
with the SEC.
10.3* 1991 Stock Option Plan is incorporated herein by reference to Exhibit 10.2 filed with the
Company's Registration Statement on Form F-1 filed with the SEC on September 20, 1994 (File No.
33-83052).
10.4* 1993 Stock Option Plan is incorporated herein by reference to Exhibit 10.3 filed with the
Company's Registration Statement on Form F-1 filed with the SEC on September 20, 1994 (File No.
33-83052).
10.5* 1994 Stock Option Plan is incorporated herein by reference to Exhibit 4.2 filed with the
Company's Registration Statement on Form F-1 filed with the SEC on September 20, 1994 (File No.
33-83052).
10.6* 1995 International Employee Stock Purchase Plan, amended, is incorporated herein by reference
to Exhibit 4.2 filed with the Company's Registration Statement on Form S-8 filed with the SEC
on December 11, 1997 (File No. 333-42063).
10.7* French Employee Savings Plan is incorporated herein by reference to Exhibit 4.3 filed with the
Company's Registration Statement on Form S-8 filed with the SEC on December 11, 1997 (File No.
333-42063).
10.8* Summary: in English of 1992 Grant by the French Ministry of the Economy, Finance and the Budget
is incorporated herein by reference to Exhibit 10.4 filed with the Company's Registration
Statement on Form F-1 filed with the SEC on September 20, 1994 (File No. 33-83052).
10.9* Stock subscription warrant for Albert Eisenstat is incorporated herein by reference to Exhibit
4.2 filed with the Company's Registration Statement on Form S-8 filed with the SEC on September
5, 1995 (File No. 333-96598).
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.10* Stock subscription warrant for Arnold Silverman is incorporated herein by reference to Exhibit
4.3 filed with the Company's Registration Statement on Form S-8 filed with the SEC on September
5, 1995 (File No. 333-96598).
10.11* Stock subscription warrant for Philippe Claude dated June 19, 1997, is incorporated herein by
reference to Exhibit 4.2 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on December 11, 1997 (File No. 333-42059).
10.12* Stock subscription warrant for Albert Eisenstat dated June 19, 1997, is incorporated herein by
reference to Exhibit 4.3 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on December 11, 1995 (File No. 333-42059).
10.13* Stock subscription warrant for Arnold Silverman dated June 19, 1997, is incorporated herein by
reference to Exhibit 4.4 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on December 11, 1995 (File No. 333-42059).
10.14* Stock subscription warrant for Vincent Worms dated June 19, 1997, is incorporated herein by
reference to Exhibit 4.5 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on December 11, 1995 (File No. 333-42059).
10.15* Value Added Reseller Agreement for Visigenics Products with Reseller Rights dated March 27,
1997, by and between the Company is incorporated herein by reference to Exhibit 10.16 with the
Company's 1997 Form 10-K filed with the SEC.
10.16* Stock subscription warrant for Bernard Charles dated June 18, 1998, is incorporated herein by
reference to Exhibit 4.2 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on October 9, 1998 (File No. 333-65549).
10.17* Stock subscription warrant for Philippe Claude dated June 18, 1998, is incorporated herein by
reference to Exhibit 4.3 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on October 9, 1998 (File No. 333-65549).
10.18* Stock subscription warrant for Albert Eisenstat dated June 18, 1998, is incorporated herein by
reference to Exhibit 4.4 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on October 9, 1998 (File No. 333-65549).
10.19* Stock subscription warrant for Arnold Silverman dated June 18, 1998, is incorporated herein by
reference to Exhibit 4.5 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on October 9, 1998 (File No. 333-65549).
10.20* Stock subscription warrant for Vincent Worms dated June 18, 1998, is incorporated herein by
reference to Exhibit 4.6 filed with the Company's Registration Statement on Form S-8 filed with
the SEC on October 9, 1998 (File No. 333-65549).
10.21+ License, Distribution, and Marketing Agreement by and between the Company and Microsoft
Corporation, dated June 23, 1998.
21.0 List of Subsidiaries of the Company.
23.0 Consent of Ernst & Young, LLP, Independent Auditors.
24.0 Power of Attorney is herein referenced to the signature page of this Annual Report on Form 10K.
27.0 Financial Data Schedule.
- ---------------------------
* Previously filed.
+ Confidential treatment for portions of this exhibit has been requested.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS--BUSINESS OBJECTS S.A.
BALANCE CHARGED BALANCE
AT BEGINNING TO COSTS AT END
OF PERIOD AND EXPENSES WRITE-OFFS OF PERIOD
------------ ------------ ---------- ---------
(IN THOUSANDS)
Allowance for doubtful accounts:
Year ending December 31, 1995 $ 440 $419 -- $ 859
Year ending December 31, 1996 $ 859 $201 -- $1,060
Year ending December 31, 1997 $1,060 $626 $118 $1,568
Year ending December 31, 1998 $1,568 $585 $481 $1,672