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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
THE REPUBLIC OF FRANCE NONE
(JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1 SQUARE CHAPTAL, 92300 LEVALLOIS-PERRET FRANCE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 953-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS: REGISTERED:
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American Depositary Shares,
each representing one Ordinary Share Nasdaq National Market
Ordinary Shares Nasdaq National Market*
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* Not for trading, but only in connection with the American Depositary Shares.
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Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
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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 the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the ADS on February 27, 1998
as reported on the National Market of The Nasdaq Stock Market, was
approximately $177,642,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of outstanding shares of each of the issuer's classes of capital
or common stock as of February 27, 1998 was 16,784,154 Ordinary Shares of FF1
nominal value, including 13,412,210 American Depositary Shares (as evidenced
by American Depositary Receipts), each corresponding to one Ordinary Share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held June 3, 1998.
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Unless otherwise stated, references herein to the "Company" or to "Business
Objects" are to Business Objects S.A. and its consolidated subsidiaries.
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TRADEMARKS
BusinessObjects, 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 to in this Annual Report
on form 10-K are the property of their respective owners.
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REPORTING CURRENCY
All financial information contained in this document is expressed in United
States dollars, unless otherwise stated.
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AMERICAN DEPOSITARY SHARES
Pursuant to a program sponsored by the Company, ordinary shares of the
Company (the "Shares") are traded in the United States in the form of American
Depositary Shares ("ADSs"), each ADS representing one Share placed on deposit
with The Bank of New York, as depositary (the "Depositary") and 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 and amended May
8, 1996, 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 investors, as more fully set
forth in the form of Deposit Agreement filed as an exhibit to the Company's
Registration Statement on Form F-6 filed with the Securities and Exchange
Commission on August 22, 1994.
Under the original Deposit Agreement two Shares converted into one ADS.
Following the amendment of the Deposit Agreement on May 8, 1996, one Share
converts into one ADS. This had the effect of doubling the number of
outstanding ADSs, producing the same result as a 2-for-1 stock split. Except
where otherwise indicated, all ADS and per ADS information contained herein
has been adjusted to give effect to this amendment for all periods.
2
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business........................................ 4
Item 2. Description of Property........................................ 14
Item 3. Legal Proceedings.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 15
Item 6. Selected Financial Data........................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 17
Item 8. Financial Statements and Supplementary Data.................... 30
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant............. 49
Item 11. Executive Compensation......................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management. 49
Item 13. Certain Relationships and Related Transactions................. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 50
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FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act, as amended.
The forward-looking statements contained herein are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those reflected in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Business Factors." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Business Objects undertakes
no obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange Commission, including
reports on form 10-Q to be filed by the Company in 1998.
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INDUSTRY BACKGROUND
Companies around the globe are looking for ways to further leverage business
information across the enterprise in order to become more competitive. Today,
this information exists in many places: application systems such as enterprise
resource planning, human resources, and finance; data warehouses and data
marts; and custom applications for specialized use.
In order to take full advantage of corporate data and gain a competitive
advantage, organizations need to empower end users with data access for more
effective decision making. However, many organizations do not have the tools
needed to fill this business requirement.
The decision support industry was born out of this need for companies to
deliver access to information to their employees, and enable them to make
faster, more accurate decisions. Faster access to information means companies
can be more competitive, take advantage of new markets, and push decision
making down to the front lines of the organization.
COMPANY
Business Objects was organized in 1990 as a societe anonyme, or limited
liability company, under the laws of the Republic of France to develop, market
and support integrated enterprise decision support software tools. The
Company's principal executive office is located at 1 Square Chaptal, 92300
Levallois-Perret, France. The Company has wholly-owned subsidiaries in the
United States, United Kingdom, Germany, the Netherlands, Belgium, Spain,
Australia, Sweden, Canada, Singapore, Japan and Switzerland. In addition, the
Company also has a majority interest in a subsidiary in Italy.
The Company's decision support tools are designed to allow non-technical end
users to access, report, and analyze information stored in corporate data
warehouses, data marts, and business applications. The Company's software
enables end users to perform powerful queries by using a "semantic layer," a
patented technology that maps complex databases to a business representation
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. The Company's products are distributed
worldwide through both direct and indirect sales channels to organizations in
a wide range of industries. As of December 31, 1997, Business Objects
estimates that it had licensed its software to over 5,800 customers,
representing approximately 700,000 licenses in over 60 countries.
Business Objects introduced its first products in 1990 in response to a
growing need for software tools that enabled end users to independently
access, analyze and report on data stored in relational databases. The Company
evolved its products over the following years in response to user needs and
built a strong market leadership position. The Company's current solution and
its core product, BusinessObjects version 4.1, is based on five fundamental
principles:
Business-Oriented Representation of Information. The Company's software
eliminates the necessity for end users to understand the details of
database structures and permits end users to work with their own business
terminology to execute queries, generate reports or analyze data. This
result is accomplished by transforming the technical details of database
structures into business representations, or universes of business
"objects" of information, that are meaningful to end users. The universes
of objects are pre-defined by the Information Systems (IS) staff and made
available to end users in a shared repository, who can then combine objects
such as "Sales Revenue", "Products", or "Customers" dynamically to
formulate a query. As a result, the IS department is no longer required to
define queries for individual users, and it can, by defining even a limited
number of objects, provide end users with substantial query potential.
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Intuitive and Reliable Query Technique. The Company's software insulates
users from the complexities of the Structured Query Language (SQL) and
provides a query technique based on a logic more intuitive to the end user
than traditional query techniques, resulting, the Company believes, in both
greater ease of use and better accuracy of results. The user need only
specify, in a query panel, the objects he desires to retrieve, any
applicable conditions on these objects and the sorting order of the
results. The user does not have to understand particular technical
concepts, such as location of data, definition of information elements, or
the relationship between different database tables. The use by end users of
a meaningful business vocabulary, predefined by database experts, reduces
the potential for improperly defined queries that may result in erroneous
results.
Comprehensive, Integrated Suite of End User Tools. The Company's
comprehensive, integrated suite of end user 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 online analytical processing (OLAP), and data
mining.
Repository-Based IS Staff Set-up, Control and Security. The IS staff can
efficiently administer the deployment of the data access solution within an
organization through the use of a central relational repository, where
universes of objects are centrally defined, maintained, and stored by the
IS staff. The IS staff can also control the use of available computer
resources by preventing or deferring the execution of queries that consume
excessive amounts of processing time or return large amounts of data,
thereby overloading the system. Further, by being able to assign specific
universes of objects to particular end users, the IS department can
maintain control over data access security throughout the enterprise.
Enterprise-wide Interoperability. The Company's software products have
been developed to provide enterprise-wide interoperability, for platforms
including Microsoft Windows (Windows 95, NT, and 3.1) and Unix Motif, and
most major databases, including Oracle, Sybase, IBM DB2 and SQL/400,
Informix, Microsoft SQL Server, DEC Rdb, and Teradata and a number of
legacy mainframe databases. This interoperability is effected either
through the use of native middleware or through open interfaces, such as
Microsoft ODBC. The product also supports multidimensional databases or
OLAP servers, such as Oracle Express, Arbor Essbase, and Informix Metacube.
BUSINESS STRATEGY
The Company's objective is to continue to be a leading supplier of software
products for the worldwide enterprise decision support tools market. The
Company's strategy is focused on the following elements:
Concentrate on Decision Support Tools. The Company continues to focus on
decision support tools designed to facilitate, on an enterprise-wide basis,
the access, analysis, and reporting by end users of information stored in
corporate data warehouses, data marts, and business applications. The
Company plans to continue investing significant resources in research and
development both to enhance its core, end user data representation and
query technology and to develop new or enhanced analysis and reporting
products. The Company may also license technology from third parties in
order to broaden its scope of products.
Maintain Enterprise-wide Focus. The Company intends to ensure that its
products can be used in conjunction with major desktop computer operating
systems and corporate databases and to adapt its products to the latest
developments of these different technologies. The Company's objective is to
make "seamless" the access and sharing of information across heterogeneous
enterprise-wide environments. In particular, the Company enables its
technology for use on intranets and for use in conjunction with leading
multidimensional databases.
Diversify Channels of Distribution. In order to accelerate worldwide
market penetration, the Company is broadening its sales strategy, which has
historically focused on the direct sales approach, by furthering its
telesales organization and the development of indirect sales channels
consisting of VARs, system integrators, consulting partners, distributors,
and resellers. This strategy is designed to reach organizations that could
not otherwise have been effectively reached by the Company's direct sales
staff.
5
Maintain Global Orientation. From its earliest stages of development, the
Company's strategy has been to develop a global organization. The Company
has developed a strong presence both in Europe and in the United States and
is expanding operations in the Asia/Pacific region. This approach enables
the Company to provide the international presence and support required by
large multinational customers and to develop product and business
strategies that will permit it to be competitive on a worldwide basis. The
Company considers its global orientation to be an essential component of
its success and culture.
Offer Quality Customer Service and Support. The Company believes that
offering responsive and highly skilled customer service and support is a
key competitive factor. The Company has established and intends to enhance
and expand its worldwide customer service and customer support
organization. In particular, the Company hired a Vice President of
Worldwide Customer Support in early 1997 and reorganized its customer
support organization to be centrally managed. Customer services currently
offered include software maintenance and support, customer education and
training, and post-sales consulting services.
TARGET MARKETS
The Company's software is designed for medium to large business
organizations and governmental institutions. The Company's marketing strategy
is focused on the following four target markets:
Users of Data Warehousing/Data Marts. Data warehousing, which has emerged
recently as a popular architecture for decision support functions, is an
information system whereby organizations install one or more servers to
supplement existing mainframes or other systems on which mission-critical
transactional applications run. These organizations regularly download data
from their 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. These approaches enable end users to access data without
incurring the risk of "corrupting" production databases, or slowing down
the running of the mission-critical transactional applications. In
addition, transactional applications usually only contain six to twelve
months of data, whereas data warehouses and data marts, over time, will
contain years of information. Because decision support is the main
objective of data warehousing, the Company considers its software to be a
key component of the data warehousing project, as it provides the end user
decision support at the front-end to the downloaded data.
Users of Packaged Client/Server Business Applications
Software. Organizations implementing complex client/server packaged
business applications from vendors such as SAP AG, Oracle Corp.,
PeopleSoft, Inc., and The Baan Company frequently require comprehensive end
user data access and reporting functionality. The Company's software
provides significant value to these organizations in its ability to handle
the complexities of the underlying databases of these applications. In
addition, the Company has developed a series of predefined objects, called
Rapid Deployment Templates (RDTs), for use with certain of these
client/server packaged business applications, thereby providing to
organizations using such applications a set of predefined universes which
facilitate the implementation of the Company's decision support solution.
The Company intends to continue to develop, independently or in conjunction
with others, RDTs for use with specific applications. The foregoing
expectation is a forward looking statement subject to a number of risks and
uncertainties including those set forth under the caption "Business
Factors--Rapid Technological Change and New Products".
Users of Custom Developed Client/Server Business Applications
Software. These organizations have a number of end users using IS or third
party developed applications in a relational environment and have
accumulated a large volume of data in their databases. The Company believes
that the exposure of end users to the benefits of relational databases has
stimulated the demand for access to the data. By allowing end users to
independently access data, generate reports, and perform analyses, the
Company's software enables these organizations to take better advantage of
their substantial investments in relational database and client/server
technology.
6
Companies Sharing Data Over the Internet. These organizations want to
provide their customers, partners, and suppliers with access to information
about their relationship over the internet. For example, a medical
equipment distributor could provide their suppliers with self-service
access to inventory and sales information. While this currently represents
an insignificant portion of the Company's current business, this is a
potentially large new market for the Company. There can be no assurance
that this market will develop or that the Company will be successful in
penetrating this market.
PRODUCTS
The Company provides a complete suite of decision support tools including
query, reporting, online analytical processing, data mining, and decision
support software (DSS) administration for both client/server and internet
environments.
The client/server product line is called BusinessObjects. It consists of an
end user toolset and an IS toolset, both of which are provided in different
versions for each of the operating systems supported by the Company's software
(Windows 95, Windows NT, Windows 3.1, and Unix Motif). Versions for Microsoft
Windows currently represent the substantial majority of the Company's
installed customer base.
The Company also has a new, thin-client platform, called WebIntelligence,
that allows end users to perform ad hoc query, reporting, and analysis over
the web. WebIntelligence began production in December 1997. WebIntelligence
works with any client platform that has a Java enabled web browser. On the
server side, WebIntelligence is initially available on Windows NT.
Both the client/server and web platforms utilize the BusinessObjects IS
toolset that allows IS professionals to set up and maintain the environment
for deploying the platforms. At the center of the Business Objects 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 of
business "objects" which end users combine to run their queries. Through the
use of an intuitive, point-and-click interface, the IS staff defines objects
by assigning a Structured Query Language (SQL) equivalent to a particular
business term, and specifies data dimensions and hierarchies for
multidimensional analysis. The IS staff then specifies 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 IS staff in response to the changing needs of the end users
or to changes in the database structure. Both the client/server and web
platforms can utilize the same semantic layer.
After selecting the appropriate universe of business objects, an end user
performing a query specifies in a query panel the objects he desires to
retrieve, any applicable conditions on these objects, and the sorting order of
the results. Once the query is formulated by the end user, a powerful engine
incorporated in the Company's software determines the SQL equivalent of the
query and sends it to the host database. The engine determines the appropriate
database fields and tables required, the relationships between the different
tables, the "group" functions and other query specifications. An important
feature of the engine is its ability to redefine dynamically the meaning of an
object, based on how it is combined with other objects within a query. For
example, the object "Sales Revenue" has one meaning when combined in a query
with the object "Customer", i.e. sales revenue by customer, and a different
meaning when combined with the object "Product", i.e. sales revenue by
product. Once a query has been executed, the results are returned to the end
user in the form of a microcube, allowing for the use of other desktop
computer tools to present or further analyze the data.
The IS staff is able to manage corporate data access from a central point
through the use of a "universe repository". The universe repository is a set
of relational tables where the IS staff stores universe definitions, such as
objects and table relationships, and user authorizations. Once a universe is
stored or modified in the repository, it becomes automatically available to
all authorized users, which significantly reduces maintenance and simplifies
administration. The centralized design also allows database administrators to
control access to data by adding an additional layer of security on top of
security features supported by different relational database management
systems.
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BusinessObjects, the client/server platform, is made up of several End User
components, including the following:
Reporter. Reporter includes a query engine that permits the selection of
universes of business objects and the independent formulation of queries by
combining objects in a query panel. Once data is returned by the system,
users employ a report generator that enables them to create and edit
sophisticated reports. The report generator is fully "wysiwyg" ("what you
see is what you get"), is directly linked to the database, utilizes
templates to accelerate report preparation, and allows the inclusion of
bitmap images and Microsoft Object Linking and Embedding (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. The U.S. suggested list price for Reporter is $595 per user,
subject to volume discounts.
Explorer. Explorer is an analysis tool that operates as an integrated
add-on to Reporter. Explorer provides users with integrated
multidimensional analysis functionality to "slice and dice" their
information and "drill" into levels of detail, while still using the report
as a base document. The U.S. suggested list price of Explorer is $695 per
user, subject to volume discounts, and requires that the user has licensed
the Reporter module.
Reader/Driller. BusinessObjects Reader and BusinessObjects Driller are
new product modules available for users who need to read reports but do not
require the ability to do ad hoc query. BusinessObjects Reader provides
read-only capabilities. BusinessObjects Driller enables end users to read
and drill into pre-defined reports. The U.S. suggested list price is $195
for Reader and $350 for Driller, with a minimum quantity of 200 users.
WebIntelligence is the Company's new, thin-client platform.
WebIntelligence allows users to perform ad-hoc query, reporting, and
analysis over the world wide web. Through its distributed architecture and
100% Java query applet, WebIntelligence eliminates the need for client-side
installation and maintenance of both application software and database
middleware, providing organizations with a cost-effective way to broadly
deploy DSS capabilities, and extend DSS beyond the organization to reach
suppliers, partners, and customers. WebIntelligence was first shipped in
December 1997, and on the server side, is initially available on Windows
NT. The U.S. suggested list price is $595 per user, subject to volume
discounts.
The following add-on products are available for end users of BusinessObjects
in addition to the Company's core products:
BusinessQuery for Excel. BusinessQuery for Excel is a query tool based on
the BusinessObjects query technology that has been specifically designed
for Microsoft Excel users. It is fully integrated with Excel and allows end
users to retrieve data directly within an Excel spreadsheet. As in the case
of Reporter, the universes and objects provided to end users are designed
by the IS staff using the IS toolset. BusinessQuery for Excel is licensed
as an add-on to Reporter for a US suggested list price of $150 per user,
subject to volume discounts, and as a standalone product, without a need
for Reporter, for a US suggested list price of $350 per user, subject to
volume discounts.
BusinessMiner. BusinessMiner is a data-mining tool that lets end users
discover trends hidden in their business data and then display the trends
for easy analysis in the form of a decision tree. The product includes
charts and graphs to easily visualize results and wizards that guide users
through the mining process. BusinessMiner works with data retrieved by
Reporter or directly with other data sources. BusinessMiner is licensed as
an add-on to Reporter for a US suggested list price of $495 per user,
subject to volume discounts, and as a standalone product, without a need
for Reporter, for a US suggested list price of $995 per user, subject to
volume discounts. The object code for BusinessMiner software is in-licensed
from a third party pursuant to a non-exclusive license agreement expiring
May 2001. The agreement is automatically renewable for an additional two
years, unless either party gives notice within 18 months of the expiration
date.
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In order to set up and maintain the Business Objects environment, the
Company provides the following tools designed for IS professionals:
Designer. Designer allows the IS staff to design and maintain universes
of objects. It includes a Quick Design wizard that lets IS staffs create
universes in just a few steps. Designer is a graphical tool that also
includes powerful routines for automatic design checking, including loop
detection and resolution. The US suggested list price for Designer is
$1,995 per IS staff, subject to volume discounts.
Supervisor. Supervisor is an object-based security module that allows the
IS staff to assign and modify the rights granted to users and groups of
users. Supervisor lets IS staff easily manage access to BusinessObjects
resources including documents, universes, objects, and even menus, as well
as control end users' utilization of centralized resources. The US
suggested list price for Supervisor is $1,995 per IS staff, subject to
volume discounts.
Document Agent Server. Document Agent is a production reporting server
that allows users to schedule the execution and distribution of queries and
reports to save time and computing resources. Document Agent processes
requests in the background and forwards reports to the user and others as
specified, including publishing to the web. The US suggested list price of
Document Agent is $4,995 per server, subject to volume discounts.
Data Access Drivers. Each end user module and IS toolset includes a
relational database management system (RDBMS) driver that enables users to
connect and retrieve data from a particular database. The Company offers
RDBMS drivers for the major relational databases, and customers can
purchase additional RDBMS drivers for different databases. The US suggested
list price for an additional RDBMS driver is $100 per user, subject to
volume discounts.
Rapid Deployment Templates. The Company has developed a series of RDTs
for organizations needing to access data stored in packaged applications
from vendors such as SAP, Oracle and PeopleSoft. An RDT is a deployment
"starter kit" which consists of predefined "objects" that map underlying
data structures in the application to business terms such as "Customers",
"Orders" and "Materials" meaningful to end users. Related objects are
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".
SALES AND MARKETING
The Company markets its software and services through its direct sales
organization in the United States, France, the United Kingdom, Germany,
Belgium, Italy, Spain, Canada, Australia, Sweden, the Netherlands, Japan,
Switzerland and through non-exclusive international distributors in a number
of European, Asian, and Latin American countries, and South Africa. Currently,
the Company's products are marketed in over 60 countries, with the United
States, France, and the United Kingdom being the Company's main markets.
Although the Company has traditionally employed a direct sales approach in
marketing its software and services, an important aspect of its current sales
and marketing strategy is to expand its use of indirect sales channels such as
VARs, system integrators, consulting partners, distributors, and resellers.
This strategy is designed to enable the Company to increase its market
coverage and reach organizations which could not otherwise have been
effectively reached by the Company's direct sales staff. The Company is
seeking to build and maintain relationships with RDBMS VARs that sell
application software based on a relational database and whose typical
customers are business users in need of a decision support tool, and with
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.
Hardware vendors represent an important point of entry into the data
warehousing market. See "Target Markets". The Company also uses resellers,
mainly vertical application specialists and regional resellers, to cover
markets in which the Company has only a limited presence.
The Company's 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
9
of both direct and indirect sales within the territory and works closely with
third party VARs, system integrators, consulting partners, distributors and
resellers. In order to reduce conflict between its direct sales force and its
third-party sales channels, the Company's compensation structure rewards sales
personnel based on the total sales generated within that territory, both
direct and indirect. The Company believes that sales teams leverage the skills
of its sales personnel, encourage cooperative sales efforts and maximize
revenue generation and customer service.
The Company focuses its initial sales efforts on the IS department of a
particular organization while also seeking to involve end users through
demonstrations and product trials. Typically, the Company will perform one
demonstration to the IS department which will be followed by a trial period
during which the IS department, assisted by the Company, will develop a
prototype. Such prototype will then be the subject of a demonstration to end
users. The sales cycle varies from customer to customer, and generally
requires from two to six months or longer, especially in larger transactions.
To support its sales effort, the Company conducts marketing programs,
including advertising, direct mail, public relations, seminars, demonstrations
at customer sites and at the Company's offices, appearances at trade shows,
and ongoing customer communications programs.
CUSTOMER SERVICE AND SUPPORT
The Company believes that providing a high level of customer service and
technical support is essential to customer satisfaction and the Company's
success. To achieve this goal, the Company provides post-sales technical
support, customer education and training, and after-sales consulting services.
Post-Sales Technical Support and Software Maintenance. The Company provides
a hotline telephone support service, which is staffed by technical personnel
and which is supported by a computerized call tracking and problem reporting
system. In addition, customers have access to a technical web site providing
technical and product information. The Company's VARs, system integrators,
consulting partners, distributors, and resellers provide additional customer
support. Initial product license fees do not cover software maintenance.
Customers are entitled to receive new software enhancements and maintenance
releases and post-sales technical support for an annual fee.
Customer Education and Training. The Company offers a comprehensive
education and training program to customers, including IS staff and end users,
and third-party consultants. Training classes are offered through in-house
facilities at the Company's offices in San Jose, California and Chicago,
Illinois in the United States, in the United Kingdom, France, and other
locations. These facilities are complemented by a network of independent
certified training centers in the Company's principal markets throughout the
world. The Company intends to further the development of this network. The
foregoing statement is a forward looking statement subject to a number of
risks and uncertainties including those set forth under "Business Factors--
Product Distribution and Support". The Company also provides onsite training
services upon request by customers.
After-Sales Consulting Services. The Company provides consulting services to
its customers through its own staff or through certified consulting partners
with recognized expertise in the implementation of client/server products.
These consulting services generally consist of assisting customers in
developing universes of objects and deploying the Business Objects software
throughout the customer's end user community.
PRODUCT DEVELOPMENT
The Company believes that innovation, timeliness of product releases, and
high product quality is essential to maintain its competitive position in the
market. Consequently, the Company dedicates considerable resources to research
and development efforts to enhance its existing products and to develop new
products. To date, the Company has relied primarily on internal development of
its products, but has in the past and may in the future continue to license or
acquire technology or products from third parties.
10
The Company's software is a decision support tool designed for use in both
the client/server and web computing environments. The software industry is
characterized by rapid technological advances, changes in customer
requirements, and frequent new product introductions and enhancements. In
particular, some industry analysts believe that the recent emergence of the
internet/intranets, and in particular the worldwide web, with its new mode of
user operation, could negatively impact the market for traditional
client/server tools. The Company believes that its future success will largely
depend upon its ability to enhance its current products and to develop and
introduce new products that keep pace with technological developments such as
the world wide web, respond to evolving customer requirements and achieve
market acceptance. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, including
advances in RDBMS or other database technology and desktop computer operating
systems and environments, any significant delays in product development or
introduction, or any incompatibility of new products with the most up-to-date
operating systems and environments then available to the Company's customers,
could result in a loss of competitiveness and could have a material adverse
effect on the Company's financial performance.
The Company believes that current customers and future potential customers
will require decision support products like BusinessObjects version 4.1 which
can be utilized over an intranet. The Company has recently released
WebIntelligence, which is deployable in an intranet environment, and utilizes
world wide web technology. The first release of WebIntelligence allows users
to execute queries and prepare reports directly from a Java-enabled web
browser.
COMPETITION
The Company's products are specifically targeted at the decision support
software tools market. The principal competitive factors affecting the market
for the Company's products are ease of use, functionality, product
architecture, price, product quality, breadth of distribution, customer
support, and name recognition. The Company's products compete in four main
market sectors, 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.
In the query and reporting market, the Company's main direct competitors
include Cognos Incorporated, Brio Technology Inc., Oracle Corp., and Seagate
Technology, Inc. In the multidimensional analysis or OLAP market, the Company
faces direct competition from Cognos and Andyne Computing Ltd., as well as
indirect competition from Oracle, Seagate Technology, Inc., Microstrategy,
Inc., Arbor Software Corp., and Microsoft Corp. Many of the Company's
competitors have longer operating histories and significantly greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and a larger installed base, than the Company. In addition,
many competitors, particularly relational database management system vendors,
have well-established relationships with customers of the Company. The
Company's competitors could in the future introduce products with more
features and lower prices than the Company's products. These companies could
also bundle existing or new products with other more established products in
order to compete with the Company. The Company's focus on decision support
tools may be a disadvantage in competing with vendors who offer a broader
range of products. Furthermore, as the decision support market develops, a
number of companies with significantly greater resources than the Company
could attempt to increase their presence in this market by acquiring or
forming strategic alliances with competitors of the Company.
During 1997, the Company generated approximately 31% of its revenues from
its operations in North America. This market is highly competitive. The
Company believes that its continued success is partly dependent on its ability
to operate successfully in this geographic region. Marketing activities and
purchasing decisions made by companies in this region influence purchasing
decisions made by companies on a worldwide basis. The inability of the Company
to compete successfully in this region, or the ineffectiveness of its
marketing activities, could have a material adverse affect on the Company's
results of operations and financial condition.
Although the Company has recently been increasing its sales through indirect
channels, revenues from such sales channels currently represent a smaller
portion of the Company's total revenues than direct sales and there
11
can be no assurance that the Company will be able to continue to attract
indirect channels that will be able to market and support the Company's
software effectively. For the year ended December 31, 1997, the Company
realized 58% of its licensing revenues directly and 42% through indirect sales
channels, compared to 66% and 34%, respectively, for the year ended December
31, 1996.
MANUFACTURING
Substantially all of the Company's CD duplication, printing of user manuals,
packaging and manufacture of related materials are performed to the Company's
specifications by outside sources. To date, the Company has not experienced
any material difficulties or delays in manufacture by third party suppliers.
However, an interruption in production by a supplier or suppliers could result
in a delay in shipments of the Company's products and adversely affect the
Company's results of operations.
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The Company currently has one patent issued in the United States, number
5,555,403 relating to a "Relational Database Access System Using Semantically
Dynamic Objects". The Company is currently engaged in litigation asserting
that one of its competitors infringes this patent. See Item 3, Legal
Proceedings. There can be no assurance that any current or future patents will
provide the Company with competitive advantages or will not be challenged by
third parties, or that the patents of others will not have an adverse effect
on the Company's ability to do business. Furthermore, there can be no
assurance that others will not independently develop similar or competing
technology or design around any patents that may be issued to the Company. The
Company believes that it owns or has licensed all proprietary rights relating
to its software. The Company relies on a combination of the protections
provided by applicable copyright, trademark and trade secret laws, as well as
on confidentiality procedures and licensing arrangements, to establish and
protect its rights in its software. Despite the Company's efforts, it may be
possible for unauthorized third parties to copy certain portions of the
Company's products or reverse engineer or obtain and use information that the
Company regards as proprietary. In addition, although the Company's name
together with its logo is registered as a trademark in France, the United
States, and a number of other countries, it may be difficult for the Company
to assert ownership rights in the name "Business Objects". Policing
unauthorized use of the Company's products by customers or preventing the name
of the Company's software from becoming part of the public domain is
difficult. The laws of certain countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States or
France. Under French law, the rights of the Company in its software are not
patentable but are protected under copyright law and infringements by third
parties can be enjoined. While the Company's competitive position may be
affected by its ability to protect its proprietary information, the Company
believes that factors such as the technical expertise and innovation skills of
its personnel, its name recognition and ongoing product support and
enhancement may be more significant in maintaining the Company's competitive
position.
The Company licenses its software products to customers on a non-exclusive,
non-transferable basis. License agreements typically provide that the licensed
product may be used solely for the customer's internal operations and for a
specified number of named or concurrent users. With respect to US customers,
the Company may rely on "shrink-wrap" license agreements for the protection of
its products. A "shrink-wrap" license agreement is a printed license agreement
included within the packaged software that sets forth the terms and conditions
under which the purchaser can use the products. Such licenses take effect upon
the opening of the product package.
The Company also licenses a portion of its technology to third parties.
Specifically SPSS Inc. and Alsoft have licensed the Business Objects query
technology and incorporated it into their products, BusinessQuery for SPSS
from SPSS Inc., and BusinessQuery for GeoConcept from Alsoft.
The Company licenses certain software from third parties for sub-licensing
by the Company to its customers, and also licenses certain software programs
from third parties and incorporates them in the
12
Company's software products. Generally, such agreements grant the Company non-
exclusive, worldwide licenses with respect to such software. The utilization
of such third party software involves risks additional to software developed
in-house. Third party providers may cease or alter their operations, terminate
the relationship, or be generally unable to fulfill their obligations. Such
events may require the Company to seek alternative technology which may or may
not be available on commercially reasonable terms.
In the future, it may be necessary or desirable to obtain licenses relating
to software programs from third parties, and there can be no assurance that
the Company will be able to obtain the necessary technology or similar
technology on commercially reasonable terms. Also, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products or that any such
assertions may not require the Company to enter into royalty arrangements or
result in costly litigation.
The Company has entered into source code escrow agreements with a limited
number of its distributors and end users requiring release of source code.
Such agreements provide that such parties will have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by
or against the Company, if the Company ceases to do business or if the Company
fails to meet its contractual obligations. The provision of source code escrow
agreements may increase the likelihood of misappropriation by third parties.
The Company is not aware of any infringement or claims of infringement by
its products on the proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim such infringement by the
Company with respect to current or future products. The Company expects that
software products will increasingly be subject to such claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products overlap. Any such claim, with or without merit, can
be time consuming and could result in costly litigation and require the
Company to enter into royalty and licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable by
the Company or at all.
EMPLOYEES
As of December 31, 1997, the Company had 757 full-time employees, including
116 in research and development, 401 in sales and marketing, 137 in customer
service and support and 103 in finance and administration. The Company's
employees are not represented by any collective bargaining organization, and
the Company has never experienced a work stoppage.
The Company's success depends to a significant extent upon a number of key
management and technical personnel, including Bernard Liautaud, its Chief
Executive Officer and Co-Founder, the loss of whom could adversely affect the
Company's business. The Company maintains a key person life insurance policy
with proceeds payable to the Company on the life of Mr. Liautaud. The loss of
the services of key personnel could have a material adverse effect on the
Company. In addition, the Company believes that its future success will also
depend in a large part on its 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 there can be no
assurance that the Company will be successful in attracting and retaining 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 the Company and to provide
appropriate information and documents relating thereto. As required under
French law, one employee representative is entitled to be present at meetings
of the Board of Directors of the Company, but does not have any voting rights.
FOREIGN AND DOMESTIC OPERATIONS
See Note 13 of Notes to Consolidated Financial Statements.
13
ITEM 2. DESCRIPTION OF PROPERTY
The Company's 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, the Company has
the option to cancel the lease without penalty in 2002. In addition, the
Company leases approximately 58,000 square feet in San Jose, California for
its U.S. headquarters under a lease expiring in 2001. The Company leases
additional facilities and offices in Puteaux, France; Maidenhead, England;
Koln, Germany; Utrecht, the Netherlands; Sydney, Australia; Tokyo, Japan;
Madrid, Spain; Stockholm, Sweden; Zaventem, Belgium; Rome and Milan, Italy;
Geneva and Zurich, Switzerland; Ontario, 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, the Company 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 the Company's United States Patent No. 5,555,403 by making,
using and selling its product known as BrioQuery Enterprise. The Company's
complaint requests that the defendant be enjoined from further infringing the
patent. See "Business Factors--Legal Proceedings".
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.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The ADSs are quoted on the Nasdaq National Market under the symbol "BOBJY".
Neither the ADSs nor the 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 Share) on the Nasdaq National Market for each full quarterly period within
the two most recent fiscal years.
HIGH LOW
------ ------
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
1996:
Fourth Quarter............................................... $20.25 $ 8.75
Third Quarter................................................ $41.50 $11.75
Second Quarter............................................... $55.50 $32.25
First Quarter................................................ $46.88 $18.75
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 Share. As of
February 27, 1998, there were 48 record holders of American Depositary
Receipts evidencing 13,412,210 ADSs. As of February 27, 1998, there were
approximately 91 holders of record of the Company's 16,784,154 Shares. The
Company has not, since its formation, declared or paid any dividends on its
common stock. The Company intends to employ all available funds for the
development of its business and, accordingly, does not intend to declare or
pay any cash dividends in the foreseeable future.
15
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 Annual Report on Form 10-K. The selected statement of
operations data for each of the three years in the period ended December 31,
1997 and the balance sheet data at December 31, 1997 and 1996 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,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND PER ADS DATA)
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees.......... $ 78,478 $ 64,451 $ 48,782 $ 24,306 $ 11,563
Services.............. 35,775 20,686 11,824 5,881 2,540
---------- --------- --------- --------- ---------
Total revenues...... 114,253 85,137 60,606 30,187 14,103
Cost of revenues:
License fees.......... 3,773 3,235 2,107 1,466 944
Services.............. 13,107 6,780 4,044 1,619 724
---------- --------- --------- --------- ---------
Total cost of
revenues........... 16,880 10,015 6,151 3,085 1,668
---------- --------- --------- --------- ---------
Gross margin............ 97,373 75,122 54,455 27,102 12,435
Operating expenses:
Sales and marketing... 68,115 50,038 30,666 16,154 7,739
Research and
development.......... 14,050 10,634 8,071 4,299 2,353
General and
administrative....... 11,076 7,402 5,706 3,447 1,855
---------- --------- --------- --------- ---------
Total operating
expenses........... 93,241 68,074 44,443 23,900 11,947
---------- --------- --------- --------- ---------
Income from operations.. 4,132 7,048 10,012 3,202 488
Net interest income and
other.................. 1,673 1,849 1,999 383 120
---------- --------- --------- --------- ---------
Income before minority
interest and provision
for income taxes....... 5,805 8,897 12,011 3,585 608
Provision for income
taxes.................. (3,184) (3,737) (3,963) (1,208) (378)
Minority interest in
losses ................ 256 -- -- -- --
---------- --------- --------- --------- ---------
Net income.............. $ 2,877 $ 5,160 $ 8,048 $ 2,377 $ 230
========== ========= ========= ========= =========
Net income per Share and
ADS--basic............. $ 0.17 $ 0.32 $ 0.51 $ 0.18 $ 0.02
========== ========= ========= ========= =========
Net income per Share and
ADS--diluted........... $ 0.17 $ 0.30 $ 0.49 $ 0.17 $ 0.02
========== ========= ========= ========= =========
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash
equivalents and short-
term investments....... $ 39,013 $ 42,171 $ 46,702 $ 30,849 $ 3,658
Total current assets.... 80,020 70,057 66,669 40,915 9,509
Total assets............ 94,340 80,770 71,013 45,237 11,201
Total current
liabilities............ 43,541 28,915 24,431 10,435 6,652
Long term obligations... -- 19 121 93 164
Shareholders' equity.... 50,799 51,836 46,461 34,709 4,385
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those projected in the forward-looking statements as a
result of certain factors including those described in the line item
discussion of the Company's financial statements set forth below and in the
section titled "Additional Factors That Could Affect Operating Results". The
Company assumes no obligation to update the forward-looking information or
such factors.
OVERVIEW
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, including consulting, training and
maintenance. Revenue from product licensing is generally recognized on
shipment of the product, provided that no significant vendor or post support
obligations remain and that the collection of the receivable is deemed
probable by management. Consulting and training revenues are recognized upon
performance of the related services. The Company recognizes the revenue
associated with software maintenance contracts on a pro rata basis over the
life of the contract, which is typically one year.
In October 1997, the Financial Accounting Standards Board issued Statement
of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2). The Company
will be required to adopt this standard in its first quarter of fiscal year
1998. The criteria for recognizing revenue under SOP 97-2 are generally more
rigorous than the previous accounting standard and, in some cases,
significantly more rigorous. Due to uncertainties which exist with respect to
the appropriate interpretations and manner of implementation of SOP 97-2, the
effect on the Company is uncertain but could be significant.
Sales in the Company's various markets are subject to risks inherent in
international business activities, including, in particular, general economic
conditions in each such country, overlapping of differing tax structures,
managing an organization spread over various jurisdictions, unexpected changes
in regulatory requirements, complying with a variety of foreign laws and
regulations, and the longer accounts receivables payment cycles in Europe.
Other risks associated with international operations in general include import
and export licensing requirements, trade restrictions, and changes in tariff
and freight rates. See "Business Factors--Multinational Operations and
Currency Exchange Rate Fluctuation".
During April 1997, the Company acquired 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. The purchase agreement provides for a
call/put option that gives the Company the right to purchase and Datamat
Ingegneria dei Sistemi S.p.A. the right to require the Company to purchase an
additional 29% of the shares of the division in 1998 and the remaining 20% of
the shares in 1999 for an amount determined using a net asset and revenue
based formula. The Company has accounted for the acquisition using the
purchase method. Goodwill of approximately $1,539,000 was recorded as a result
of the initial purchase of shares, and is being amortized over three years.
The additional purchase price will be fully allocated to goodwill, and will be
amortized over a three-year period beginning with the month that the
incremental outstanding shares are purchased.
During May 1997, the Company acquired all the outstanding shares of its
Swiss distributor in exchange for approximately $900,000 in cash. The Company
has accounted for the acquisition using the purchase method. Goodwill of
approximately $1,058,000 was recorded as a result of the purchase, and is
being amortized over three years.
The Company operates on a multinational basis and a significant portion of
its business is conducted in currencies other than the U.S. dollar (mainly the
French franc, the British pound sterling, the Italian lira, the German mark
and the Japanese yen). Fluctuations in the value of currencies in relation to
the U.S. dollar have caused and will continue to cause dollar-translated
amounts to vary from one period to another. Due to the
17
number of currencies involved, the constantly changing currency exposures, and
the substantial volatility of currency exchange rates, the Company cannot
predict the effect of exchange rate fluctuations upon future operating
results. To date, the Company has not undertaken hedging transactions to cover
its currency transaction exposure.
The effect of inflation on the Company's financial position has not been
significant.
In view of the Company's significant growth in recent years, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of
future performance. In addition, the Company's revenues and operating results
can vary, sometimes substantially, from quarter to quarter as a result of
various factors. See "Business Factors."
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of income as a percentage of total revenues for the periods
indicated.
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
Revenues:
License fees................................. 69% 76% 80%
Services..................................... 31 24 20
------- ------- -------
Total revenues............................. 100 100 100
Cost of revenues:
License fees................................. 3 4 3
Services..................................... 11 8 7
------- ------- -------
Total cost of revenues..................... 14 12 10
------- ------- -------
Gross margin................................... 86 88 90
Operating expenses:
Sales and marketing.......................... 60 59 51
Research and development..................... 12 12 13
General and administrative................... 10 9 9
------- ------- -------
Total operating expenses................... 82 80 73
------- ------- -------
Income from operations......................... 4 8 17
Net interest income and other.................. 1 2 3
------- ------- -------
Income before minority interest and provision
for income taxes.............................. 5 10 20
Provision for income taxes..................... (2) (4) (7)
Minority interest in losses.................... -- -- --
------- ------- -------
Net income..................................... 3% 6% 13%
======= ======= =======
Gross margin
License fees................................. 95% 95% 96%
Services..................................... 63% 67% 66%
REVENUES
1997 CHANGE 1996 CHANGE 1995
(DOLLARS IN THOUSANDS) -------- ------ ------- ------ -------
License fees.......................... $ 78,478 22% $64,451 32% $48,782
Percentage of total revenues.......... 69% 76% 80%
Services.............................. $ 35,775 73% $20,686 75% $11,824
Percentage of total revenues.......... 31% 24% 20%
Total revenues........................ $114,253 34% $85,137 40% $60,606
18
Total revenues increased to $114.3 in 1997 from $85.1 million in 1996 and
$60.6 million in 1995, representing increases of 34% from 1996 to 1997 and 40%
from 1995 to 1996. For all years, licenses from BusinessObjects represented
substantially all of the Company's license fees and the remaining portion of
the Company's total revenues were comprised of revenues from other products
and services related to licenses of BusinessObjects. In the future, any factor
adversely affecting licenses of BusinessObjects would have a material adverse
effect on the Company.
During the second quarter of 1996, the Company experienced a significant
negative impact in its operating performance from the introduction of a new
release, version 4.0, of its main product BusinessObjects. The product, built
on a 32 bit architecture only ran on Windows 95 and NT and did not run on
Windows 3.1, the predominant desktop operating system at the time. Also after
introduction, the product experienced a significantly longer period than
expected to achieve stability of operation, and contained a number of "bugs"
resulting from the significant rewriting and re-architecting of the product.
Version 4.0 reached an acceptable level of stability of operation on Windows
3.1 as well as Windows 95 and NT in the fourth quarter of 1996, in which
period the Company's revenues increased significantly from the third quarter
continuing on into 1997. During September 1997, the Company began shipping
version 4.1 of its BusinessObjects product.
LICENSE FEES. Revenues from license fees in 1997 increased approximately
$14.0 million or 22% over the prior year as compared with an increase of $15.7
million or 32% during 1996. These increases in license fees reflected
increased unit licenses of the Company's existing software products and the
expansion of the Company's product offerings, including an increase in the
number of relational databases supported by the Company's software. The
increase in license fees also resulted from growth in all major geographic
areas. European sales increased 25% from 1996 to 1997 as compared to a 35%
increase from 1995 to 1996. North American sales increased 11% during 1997 as
compared to 16% during 1996. License fees in the Asia Pacific region increased
57% during 1997 as compared to 219% during 1996.
The Company plans to continue to enhance its current software and develop
new products. As a result, the Company anticipates that license fees, which
represented approximately 69% of the Company's total revenues in 1997
(substantially all of which consisted of licenses of BusinessObjects), will
continue to represent a substantial majority of its 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 revenue exceeds the growth in license revenue. The Company expects
that the market penetration by, and number of the Company's competitors will
increase, and, as a result, the growth rate in the Company's license fees in
the future may not be as high as the growth rate in such license fees achieved
in the past.
SERVICES. Revenues from services consist of consulting revenue, training
revenue and maintenance revenue. Revenues from services in 1997 increased
approximately $15.1 million or 73% over the prior year as compared with an
increase of $8.9 million or 75% during 1996. The increase in revenues from
services during both years was due primarily to increases in maintenance
revenues related to increases in the Company's installed customer base and the
renewal of support contracts, and to a lesser extent increases in training and
consulting revenues. As market penetration by, and the number of competitors
increase, the growth rate of the Company's installed base and, consequently,
maintenance revenues may not be as high as growth rates achieved in the past.
The Company anticipates increasing its efforts in selling maintenance,
training and consulting services, and expects that service revenues should
continue to represent a significant portion of its total revenues.
COST OF REVENUES
1997 CHANGE 1996 CHANGE 1995
(DOLLARS IN THOUSANDS) ------- ------ ------- ------ ------
Cost of license fees.................... $ 3,773 17% $ 3,235 54% $2,107
Percentage of license fees revenues..... 5% 5% 4%
Cost of services........................ $13,107 93% $ 6,780 68% $4,044
Percentage of services revenues......... 37% 33% 34%
Total cost of revenues.................. $16,880 69% $10,015 63% $6,151
Percentage of total revenues............ 14% 12% 10%
19
LICENSE FEES. Cost of license fees, consisting primarily of materials,
packaging and freight, increased approximately $0.5 million or 17% in 1997
over the prior year as compared with an increase of $1.1 million or 54% during
1996. Cost of license fees as a percentage of revenue from license fees
remained relatively constant during 1997, 1996 and 1995.
SERVICES. Cost of services, consisting of the cost of providing consulting,
training and maintenance, increased approximately $6.3 million or 93% over the
prior year as compared with an increase of $2.7 million or 68% during 1996.
The increases in costs during both years were primarily due to increases in
headcount to support the Company's consulting, training and maintenance
activities and, to a lesser extent, to the subcontracting of training
activities.
OPERATING EXPENSES
1997 CHANGE 1996 CHANGE 1995
(DOLLARS IN THOUSANDS) ------- ------ ------- ------ -------
Sales and marketing.................... $68,115 36% $50,038 63% $30,666
Percentage of total revenues........... 60% 59% 51%
Research and development............... $14,050 32% $10,634 32% $ 8,071
Percentage of total revenues........... 12% 12% 13%
General and administrative............. $11,076 50% $ 7,402 30% $ 5,706
Percentage of total revenues........... 10% 9% 9%
Total operating expenses............... $93,241 37% $68,074 53% $44,443
Percentage of total revenues........... 82% 80% 73%
SALES AND MARKETING. Sales and marketing expenses in 1997 increased
approximately $18.1 million or 36% over 1996 as compared with an increase of
$19.4 million or 63% during 1996. Sales and marketing expenses consist
primarily of salaries and other payroll related expenses such as commissions
and amounts paid for product promotion activities. The increase in absolute
dollars in sales and marketing expenses is attributable to the expansion of
the Company's sales and marketing organization that grew to 401 people at
December 31, 1997 from 298 people at December 31, 1996 and from 233 people at
December 31, 1995. The increase in headcount supported the opening of new
regional offices in the United States and offices in new subsidiaries, as well
as expansion of personnel in existing offices. Sales and marketing expenses
are expected to continue to increase in absolute dollars in the future but may
vary as a percent of revenue.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
approximately $3.4 million and $2.6 million during 1997 and 1996,
respectively, as compared to the prior year, representing year over year
increases in expense of 32% for both periods. Research and development
expenses consist primarily of salaries, related benefits, third party
consultant fees and other costs. The increase in absolute dollars in research
and development expenses is due to increased staffing and associated support
for software engineers required to expand and enhance the Company's product
line. From December 31, 1996 to December 31, 1997, the Company's research and
development organization grew from 104 to 116 people. As of December 31, 1997,
the Company had 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. See "Description of Business--
Product Development." Research and development expenses are expected to
continue to increase in absolute dollars in the future but may vary as a
percent of revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
approximately $3.7 million in 1997 or 50% over 1996 as compared with an
increase of $1.7 million or 30% during 1996. General and administrative
expenses consist primarily of salaries, related benefits, fees for
professional services including legal and accounting services and amortization
of goodwill. The increase in absolute dollars in general and administrative
expenses is primarily due to increases in staffing to support the Company's
growth, increases in reserves for accounts receivable, increases in
expenditures for legal and accounting services and from the amortization of
goodwill related to the acquisition of the Company's distributors in 1997.
Goodwill amortization
20
expense is included in general and administrative expenses and totaled $0.6
million in 1997 and $0.0 in 1996 and 1995. General and administrative expenses
are expected to increase in absolute dollars in the future but may vary as a
percent of revenue.
NET INTEREST INCOME AND OTHER
1997 CHANGE 1996 CHANGE 1995
(DOLLARS IN THOUSANDS) ------ ------ ------ ------ ------
Net interest income...................... $1,088 (30)% $1,556 (29)% $2,205
Net exchange gain (loss)................. $ 585 100% $ 293 -- $ (206)
Net interest income and other income totaled $1.7 million, $1.8 million and
$2.0 million in 1997, 1996 and 1995, respectively. The decrease in net
interest income in 1997 compared to 1996 was primarily due to a decrease in
the Company's cash available for short-term investing and a decline in
interest rates. The decrease in interest income in 1996 compared to 1995 was
predominantly due to lower interest rates. The increase in net exchange gains
(losses) in 1997 and 1996 was predominantly due to gains on dollar denominated
intercompany receivables caused by the general strengthening of the U.S.
dollar against the French franc.
INCOME TAXES
1997 CHANGE 1996 CHANGE 1995
(DOLLARS IN THOUSANDS) ------ ------ ------ ------ ------
Provision for income taxes............... $3,184 (15)% $3,737 (6)% $3,963
Effective tax rate....................... 55% 42% 33%
The Company had provisions for income taxes of $3.2 million, $3.7 million
and $4.0 million in 1997, 1996 and 1995, representing 55%, 42% and 33%,
respectively, of the Company's income before such provisions in the respective
periods. The lower effective tax rate in 1995 resulted from available research
credits in France and the utilization of tax loss carryforwards in the United
States. The increase in the effective tax rate in 1996 and 1997 was primarily
due to limitations on the Company's ability to offset net losses for tax
purposes in certain jurisdictions against taxable income in other
jurisdictions, as well as the unavailability of research credits. The
effective rate was also impacted in 1997 by an increase in the French
statutory tax rate from 36.7% to 41.7% effective January 1, 1997.
As of December 31, 1997, a valuation allowance of approximately $5.6 million
has been provided against a total net deferred tax asset of approximately $6.8
million, which consists primarily of the tax benefit of net operating loss
carryforwards and differences in the timing of items for tax and financial
reporting purposes. Approximately $3.5 million of the valuation allowance is
attributed to deductions for stock options, the benefit of which will be
credited to additional paid-in capital when realized. The Company's
expectation for realizing the remaining portion of this deferred tax asset is
based upon the existence of both taxable temporary differences and sufficient
taxable income in the carryforward period of certain jurisdictions. At the end
of 1997 and 1996, the Company had net deferred tax assets of $1.2 million and
$0.9 million respectively.
At the end of 1997, the Company had aggregate net operating loss
carryforwards of approximately $11.3 million. Approximately $7.6 million of
these net operating loss carryforwards were in the United States and will
expire in the years 1998 through 2013 if not utilized. Utilization of the U.S.
net operating losses may be subject to an annual limitation due to ownership
change limitations provided by the Internal Revenue Code and similar state tax
provisions. The net operating loss carryforwards in the United States are
primarily attributable to deductions for stock options, the benefit of which
will be credited to additional paid-in capital when realized. The Company has
German, Singaporian, Canadian and Italian net operating loss carryforwards of
approximately $2.5 million, $0.5million, $0.3million and $0.2 million,
respectively. These net operating loss carryforwards can be used only to
offset future operating income generated in the respective country. Tax losses
in Germany and Singapore can be carried forward indefinitely. Tax losses in
Canada and Italy can be carried forward for seven years and five years
respectively. Pursuant to the Singaporian Tax Code, use of the net operating
losses may be limited if certain changes in ownership occur. See Note 10 of
Notes to Consolidated Financial Statements.
21
The Company received notice from the French tax authorities in 1996
asserting deficiencies in French corporate income taxes for the Company's
taxable years 1993 and 1994. The Company contested the asserted deficiencies
through the administrative appeals process and has received official notice
from the tax authorities that most reassessments are cancelled. The amounts
ultimately assessed and accepted by the Company were insignificant to the
Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
1997 CHANGE 1996 CHANGE 1995
(DOLLARS IN THOUSANDS) ------- ------ ------- ------ -------
Working capital......................... $36,479 (11)% $41,142 (3)% $42,238
Cash, cash equivalents, and cash
investments............................ $39,013 (7)% $42,171 (10)% $46,702
Net cash provided by operating
activities............................. $ 8,919 118% $ 4,095 (70)% $13,699
Net cash provided by (used for)
investing activities................... $ 6,701 316% $ 1,611 134% $(4,744)
Net cash provided by financing
activities............................. $ 1,208 (40)% $ 2,025 676% $ 261
As of December 31, 1997, the Company had cash, cash equivalents and short-
term investments of $39.0 million, a decrease of $3.2 million from December
31, 1996. The Company provided cash from operations of $8.9 million in 1997,
as compared to $4.1 million in 1996. Net cash provided in 1997 primarily
resulted from net income and non-cash charges for depreciation and
amortization expense, and increases in accounts payable and accrued payroll
and deferred revenue, offset by increases in accounts receivable.
Accounts receivable increased to $35.1 million at December 31, 1997 from
$24.2 million at the end of 1996. The increases in accounts receivable
resulted primarily from the growth in revenues. Accounts receivable days'
sales outstanding (DSO) was 88 days at December 31, 1997 and 84 days at
December 31, 1996. 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, the Company anticipates that
accounts receivable and DSO will continue to be substantial in the future.
The Company's investing activities consisted primarily of the purchase and
sale of short-term investments, the acquisition of distributors totaling $2.6
million in 1997 and $0 in 1996, and expenditures for fixed assets totaling
$6.3 million in 1997 and $8.3 million in 1996. The Company has no significant
capital commitments and currently anticipates that additions to property and
equipment for the next year will be comparable to recent past years.
In 1997, the Company's financing activities provided $1.3 million from the
issuance of shares upon the exercise of employee stock options and the
issuance of shares under employee stock purchase plans. In 1996, the Company's
financing activities provided $2.2 million from the issuance of shares upon
the exercise of employee stock options and the sale of shares under employee
stock purchase plans. The Company used $93,000 and $170,000 for the repayment
of capital lease obligations during 1997 and 1996, respectively.
The Company believes that cash from operations together with existing cash
and cash equivalents and short-term investments will be sufficient to meet its
cash requirements for at least the next 12 months.
BUSINESS FACTORS
Statements contained in this Management Discussion of Financial Condition
and Results of Operations and elsewhere in this Annual Report on Form 10-K
include forward looking statements that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following:
Variability of Operating Results; Seasonality. The Company's revenues and
operating results can vary, sometimes substantially, from quarter to quarter.
License fees, which represented approximately 69% of total revenues in 1997,
are relatively difficult to forecast due to a number of reasons, including the
timing of the introduction of products or product enhancements, competition
and pricing in the computer software industry,
22
the size and timing of individual license transactions, variability of the
Company's sales cycle, customer order deferrals in anticipation of new
products and customers' budget changes. The Company's software products are
generally shipped as orders are received. As a result, license revenues in any
quarter are substantially dependent on orders booked and shipped in that
quarter. The Company has often recognized a substantial portion of its
revenues in the last month of a quarter, with these revenues frequently
concentrated in the last weeks of a quarter. Because the Company's operating
expenses are based on anticipated revenue levels and a high percentage of the
Company's expenses are relatively fixed, a minor delay in the recognition of
specific revenue can cause significant variations in operating results from
quarter to quarter and may result in losses. For example, the Company plans to
continue to increase its expenditures to fund greater levels of research and
development, a larger direct sales and marketing staff, development of new
distribution and resale channels, broader customer support capability and the
additional general and administrative staffing necessary to support these
functions. To the extent such expenses precede or are not subsequently
followed by increased revenues, the Company's results of operations and
financial condition could be materially and adversely affected.
Similar to many companies in the software industry, the Company generally
experiences a lower revenue growth (and may experience a decrease in revenue)
in the first quarter of the year than the immediately preceding quarter. The
Company believes that this seasonality in revenues has been primarily due to
the concentration by some customers of their larger capital purchases in the
fourth quarter of the calendar year, and their consequent lower purchasing
activity during the following quarter. In addition, the Company's European
operations generally have lower revenues in the summer months due to the
generally reduced economic activity in Europe at such time, and this serves to
build up a demand in the fourth quarter.
Dependence on Principal Product. The Company generated the majority of its
total revenues from licenses of BusinessObjects in 1997, and the Company
expects that revenues from such licenses will continue to represent a
substantial majority of its total revenues for the foreseeable future. The
remaining portion of the Company's total revenues is comprised of revenues
from other licensed products and services related to licenses of
BusinessObjects. As a result, any factor adversely affecting licenses of
BusinessObjects would have a material adverse effect on the Company. The
Company's future financial performance will depend in part on the Company's
successful development and introduction, and customer acceptance of new and
enhanced versions of BusinessObjects and other products. In addition,
competitive pressures or other factors may result in significant price erosion
for BusinessObjects that could have a material adverse effect on the Company's
results of operations and financial condition.
Competition. The Company's products are specifically targeted at the
decision support software tools market. The principal competitive factors
affecting the market for the Company's products are ease of use,
functionality, product architecture, price, product quality, breadth of
distribution, customer support, and name recognition. The Company's products
compete in four main market sectors, 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.
In the query and reporting market, the Company's main direct competitors
include Cognos Incorporated, Brio Technology Inc., Oracle Corp., and Seagate
Technology, Inc. In the multidimensional analysis or OLAP market, the Company
faces direct competition from Cognos and Andyne Computing Ltd., as well as
indirect competition from Oracle, Seagate Technology, Inc., Microstrategy,
Inc., Arbor Software Corp., and Microsoft Corp. Many of the Company's
competitors have longer operating histories and significantly greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and a larger installed base, than the Company. In addition,
many competitors, particularly relational database management system vendors,
have well-established relationships with customers of the Company. The
Company's competitors could in the future introduce products with more
features and lower prices than the Company's products. These companies could
also bundle existing or new products with other more established products in
order to compete with the Company. The Company's focus on decision support
tools may be a disadvantage in competing with vendors who offer a broader
range of products. Furthermore, as the decision support market develops, a
number of
23
companies with significantly greater resources than the Company could attempt
to increase their presence in this market by acquiring or forming strategic
alliances with competitors of the Company.
During 1997, the Company generated approximately 31% of its revenues from
its operations in North America. This market is highly competitive. The
Company believes that its continued success is partly dependent on its ability
to operate successfully in this geographic region. Marketing activities and
purchasing decisions made by companies in this region influence purchasing
decisions made by companies on a worldwide basis. The inability of the Company
to compete successfully in this region, or the ineffectiveness of its
marketing activities, could have a material adverse affect on the Company's
results of operations and financial condition.
Although the Company has recently been increasing its sales through indirect
channels, revenues from such sales channels currently represent a smaller
portion of the Company's total revenues than direct sales and there can be no
assurance that the Company will be able to continue to attract indirect
channels that will be able to market and support the Company's software
effectively. For the year ended December 31, 1997, the Company realized 58% of
its licensing revenues directly and 42% through indirect sales channels,
compared to 66% and 34%, respectively, for the year ended December 31, 1996.
Rapid Technological Change and New Products. The market for decision support
tools is characterized by frequent product introductions and rapid
technological change. In the second quarter of 1996, the Company introduced a
new release of its BusinessObjects product, version 4.0. The development of
this next generation of BusinessObjects required the implementation of
significant architectural changes and extensive rewriting of the product
source code. New products when first released by the Company, may contain
undetected errors or "bugs" that, despite testing by the Company, are
discovered only after a product has been installed and used by customers.
Products that have been extensively rewritten, such as version 4.0, may take
longer to achieve stability of operation, than products which have been less
extensively rewritten. In 1996, the Company experienced material adverse
effects on results of operations resulting from "bugs" and a significantly
longer period than expected to achieve stability of operation of its version
4.0. There can be no assurance that errors will not be discovered in the
future, causing delays in product introduction and shipments or requiring
design modifications which could adversely affect the Company's competitive
position and operating results. In addition, there can be no assurance that
new products or product enhancements developed by the Company will achieve
market acceptance.
During September 1997, the Company began shipping version 4.1 of its
BusinessObjects product. The new version includes enhancements to the core
product, new intelligent agent functionality and features to support the broad
range of users across an enterprise. Version 4.1 of BusinessObjects is
available for Microsoft Windows 3.1, Microsoft Windows 95 and Microsoft
Windows NT. The Company plans to have version 4.1 available for Unix Motif.
The delay between the availability of the Microsoft Windows versions and that
of the Unix Motif version could result in certain customers delaying their
purchase of, or not purchasing at all, the Company's current products, and
could have a material adverse impact on the Company's financial performance
and results of operations. The Company currently does not plan to make version
4.1 available for Apple Macintosh. The prior version of BusinessObjects was
available for Apple Macintosh. While less than 2% of the Company's installed
base is on this platform, the non-availability of version 4.1 for Apple
Macintosh could cause certain customers to not purchase the Company's current
products and could have a material adverse impact on the Company's financial
performance and results of operations.
Version 4.1 was designed primarily on and for use with Microsoft Windows 95
and Windows NT. The Company believes that Microsoft Windows 3.1, and not
Windows 95 or Windows NT is currently the predominant operating system used by
its existing and potential customers, and that the rate of adoption of Windows
95 and NT is slower than original industry forecasts. While the Company has
released version 4.1 for use with Windows 3.1, implementation is more
difficult, performance may be slower and its response times unacceptable to
users. Poor performance of version 4.1 on Windows 3.1 could have a material
adverse impact on the Company's financial performance and results of
operations. The efficient use of version 4.1 also requires a personal computer
with greater performance characteristics and Random Access Memory (RAM) than
is
24
required for the efficient use of version 3.1 of BusinessObjects. This could
impact the rate at which customers purchase and implement version 4.1 and
could have a material adverse impact on the Company's results of operations
and financial performance.
The Company believes that current customers and future potential customers
will require decision support products like BusinessObjects version 4.1 that
can be utilized over an intranet. The Company has recently released
WebIntelligence, which is deployable in an intranet environment, and utilizes
world wide web technology. The first release of WebIntelligence allows users
to execute queries and prepare reports directly from a Java enabled web
browser.
WebIntelligence requires development by the Company of server-based
components, an area in which the Company has not developed products in the
past. Development also requires the use of new emerging technologies such as
the Java programming language and IIOP (Internet Inter-Orb Protocol), which
may contain "bugs" or not yet operate properly. Additionally, the Company is
relying on certain software that it licenses from third parties that is
integrated with the Company's internally developed software to develop
WebIntelligence. There can be no assurance that this third party software will
not contain "bugs" or operate properly, and that the software will continue to
be available to the Company on commercially reasonable terms. The first
release of WebIntelligence supports Microsoft NT as the operating system for
its server-based components, rather than Unix, which is the current
predominant operating system for web servers.
Manufacturing. Substantially all of the Company's CD duplication, printing
of user manuals, packaging and manufacture of related materials are performed
to the Company's specifications by outside sources. To date, the Company has
not experienced any material difficulties or delays in manufacture by third
party suppliers. However, an interruption in production by a supplier or
suppliers could result in a delay in shipments of the Company's products and
adversely affect the Company's results of operations.
Patents and Intellectual Property Protection. The Company currently has one
patent issued in the United States, number 5,555,403 relating to a "Relational
Database Access System Using Semantically Dynamic Objects". The Company is
currently engaged in litigation asserting that one of its competitors
infringes this patent. See Item 3, Legal Proceedings. There can be no
assurance that any current or future patents will provide the Company with
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on the Company's ability to
do business. Furthermore, there can be no assurance that others will not
independently develop similar or competing technology or design around any
patents that may be issued to the Company. The Company believes that it owns
or has licensed all proprietary rights relating to its software. The Company
relies on a combination of the protections provided by applicable copyright,
trademark and trade secret laws, as well as on confidentiality procedures and
licensing arrangements, to establish and protect its rights in its software.
Despite the Company's efforts, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or reverse engineer
or obtain and use information that the Company regards as proprietary. In
addition, although the Company's name together with its logo is registered as
a trademark in France, the United States, and a number of other countries, it
may be difficult for the Company to assert ownership rights in the name
"Business Objects". Policing unauthorized use of the Company's products by
customers or preventing the name of the Company's software from becoming part
of the public domain is difficult. The laws of certain countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States or France. Under French law, the rights of the Company in
its software are not patentable but are protected under copyright law and
infringements by third parties can be enjoined. While the Company's
competitive position may be affected by its ability to protect its proprietary
information, the Company believes that factors such as the technical expertise
and innovation skills of its personnel, its name recognition and ongoing
product support and enhancement may be more significant in maintaining the
Company's competitive position.
25
The Company licenses its software products to customers on a non-exclusive,
non-transferable basis. License agreements typically provide that the licensed
product may be used solely for the customer's internal operations and for a
specified number of named or concurrent users. With respect to US customers,
the Company may rely on "shrink-wrap" license agreements for the protection of
its products. A "shrink-wrap" license agreement is a printed license agreement
included within the packaged software that sets forth the terms and conditions
under which the purchaser can use the products. Such licenses take effect upon
the opening of the product package.
The Company also licenses a portion of its technology to third parties.
Specifically SPSS Inc. and Alsoft have licensed the Business Objects query
technology and incorporated it into their products, BusinessQuery for SPSS
from SPSS Inc., and BusinessQuery for GeoConcept from Alsoft.
The Company licenses certain software from third parties for sub-licensing
by the Company to its customers, and also licenses certain software programs
from third parties and incorporates them in the Company's software products.
Generally, such agreements grant the Company non-exclusive, worldwide licenses
with respect to such software. The utilization of such third party software
involves risks additional to software developed in-house. Third party
providers may cease or alter their operations, terminate the relationship, or
be generally unable to fulfill their obligations. Such events may require the
Company to seek alternative technology which may or may not be available on
commercially reasonable terms.
In the future, it may be necessary or desirable to obtain licenses relating
to software programs from third parties, and there can be no assurance that
the Company will be able to obtain the necessary technology or similar
technology on commercially reasonable terms. Also, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products or that any such
assertions may not require the Company to enter into royalty arrangements or
result in costly litigation.
The Company has entered into source code escrow agreements with a limited
number of its distributors and end users requiring release of source code.
Such agreements provide that such parties will have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by
or against the Company, if the Company ceases to do business or if the Company
fails to meet its contractual obligations. The provision of source code escrow
agreements may increase the likelihood of misappropriation by third parties.
The Company is not aware of any infringement or claims of infringement by
its products on the proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim such infringement by the
Company with respect to current or future products. The Company expects that
software products will increasingly be subject to such claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products overlap. Any such claim, with or without merit, can
be time consuming and could result in costly litigation and require the
Company to enter into royalty and licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable by
the Company or at all.
Multinational Operations and Currency Exchange Rate Fluctuations. A
significant portion of the Company's business is conducted in currencies other
than the U.S. dollar, the currency in which its financial statements are
stated. The Company has historically recorded a majority of its expenses in
French francs, especially research and development expenses, with the
substantial majority of its revenues denominated in U.S. dollars, French
francs and British pounds sterling. Moreover, fluctuations in the value of the
currencies in which the Company conducts its business relative to the U.S.
dollar have caused and will continue to cause dollar-translated amounts to
change in comparison with previous periods. Due to the number of currencies
involved, the constantly changing currency exposures, and the substantial
volatility of currency exchange rates, the Company cannot predict the effect
of exchange rate fluctuations upon future operating results. To date, the
Company has not undertaken hedging transactions to cover its currency
transaction exposure.
26
Countries in the Asia Pacific region, including Japan, have recently
experienced weaknesses in their currency, banking and equity markets. Although
this region accounted for only 6% of the Company's consolidated revenues
during 1997, these weaknesses could adversely affect demand for the Company's
product, the U.S. dollar value of the Company's foreign currency denominated
sales and ultimately the Company's consolidated results of operations.
In December 1996, the French parliament adopted a law that requires French
companies to pay French social contributions and certain salary-based taxes
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 employee disposes of the shares before the expiration of
a five-year period following the grant of the option. The total of the social
contributions and taxes may be up to 45% of the difference in value. The law
applies to all options, whatever the grant date, exercised after January 1,
1997.
The Company has not recorded a liability for social charges which may be
assessed for options granted as of December 31, 1996 as the liability, being
dependent on future trading values of the Company's shares and the timing of
employees' decisions to exercise options and sell the related shares, cannot
be estimated. The Company also does not consider that the liability is
probable at December 31, 1997 due to the income tax disincentives to employees
of exercising options and selling the shares in less than a five year period.
Options granted to French employees subsequent to December 31, 1996, are
subject to a minimum 5-year holding period on the underlying shares, whereby
France-based optionees will not be allowed to sell or dispose of the shares
before the expiration of a 5-year period from the grant date.
Product Distribution and Support. Although the Company has been increasing
its sales through indirect channels, revenues from such sales represent a
smaller portion of the Company's total revenues than direct sales and there
can be no assurance that the Company will be able to attract indirect channels
that will be able to market and support the Company's software effectively.
There can be no assurance that any VAR, system integrator, consulting partner,
distributor or reseller of the Company's products will continue to represent
the Company's products, and the inability to recruit or retain a significant
number of VARs, system integrators, consulting partners, distributors or
resellers could adversely affect the Company's results of operations.
Additionally, the inability of the Company to expand its sales and marketing
organization, to implement new indirect sales channels to penetrate different
and broader markets than those addressed by its existing direct sales force
and international distributors, and to expand its support organization
commensurate with the base of its installed products could adversely affect
the Company's results of operations and financial performance.
Impact of the Year 2000 Issue. Many installed computers systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these code fields will need to accept four digit
entries to distinguish 21st century dates from 20th century or earlier dates.
As a result, in less than two years, computer systems and/or software products
used by many companies may need to be upgraded to comply with such year 2000
requirements. The Company is currently expending sufficient resources to
review its products and services, as well as its internal management
information systems in order to identify and modify those products, services
and systems that are not year 2000 compliant. The Company expects such
modifications will be made on a timely basis and does not believe that the
cost of such modifications will have a material effect on the Company's
operating results. There can be no assurance, however, that the Company will
be able to modify timely and successfully such products, services and systems
to comply with year 2000 requirements, which could have a material adverse
effect on the Company's operating results. Based on the Company's assessment
to date, most newly introduced products and services of the Company are year
2000 compliant, however some of the Company's customers are running products
versions that are not year 2000 compliant. The Company has been encouraging
such customers to migrate to current product versions. In addition, the
Company faces risks to the extent that suppliers of products, services and
systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not have business systems or products that
comply with the year 2000 requirements. In the event any such third parties
cannot timely provide the Company with products, services or systems that meet
the year 2000 requirements, the Company's operating results could
27
be materially adversely affected. Furthermore, there can be no assurance that
these or other factors relating to the year 2000 compliance issues, including
litigation, will not have a material adverse effect on the Company's business,
operating results or financial condition.
Management of Growth. To date, the Company's business has grown rapidly.
Continued growth may place a significant strain on the Company's management
and operations. The Company's future operating results will depend on the
ability of its officers and key employees to continue to implement and improve
its operational and financial control systems and to expand, train, retain and
manage its employee base. The Company's inability to manage growth effectively
could have a material adverse effect on the Company's results of operations
and financial performance.
Legal Proceedings. During January 1997, the Company 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 the Company's United States Patent No.
5,555,403 by making, using and selling its product known as BrioQuery
Enterprise. The Company's complaint requests that the defendant be enjoined
from further infringing the patent.
In addition, the Company is involved in various legal proceedings arising in
the ordinary course of business.
28
QUARTERLY INFORMATION
The following tables set forth statements of income data for each of the
eight quarters in the period ended December 31, 1997 and the percentage of the
Company's total revenues represented by each item in the quarter. 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
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DEC. 31, SEPT. 30, JUNE 30 MARCH 31, DEC. 31, SEPT. 30, JUNE 30 MARCH 31,
1997 1997 1997 1997 1996 1996 1996 1996
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Revenues:
License fees........... $24,265 $19,442 $18,032 $16,739 $19,503 $13,113 $17,230 $14,605
Services............... 11,769 9,060 8,296 6,650 6,323 5,372 4,761 4,230
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Total revenues......... 36,034 28,502 26,328 23,389 25,826 18,485 21,991 18,835
Cost of revenues:
License fees........... 1,388 826 739 820 1,038 822 733 643
Services............... 4,377 3,505 2,859 2,366 1,994 1,763 1,704 1,319
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues. 5,765 4,331 3,598 3,186 3,032 2,585 2,437 1,962
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 30,269 24,171 22,730 20,203 22,794 15,900 19,554 16,873
Operating expenses:
Sales and marketing.... 19,744 17,095 17,135 14,141 14,748 11,853 12,664 10,773
Research and
development........... 4,132 3,503 3,279 3,136 2,936 2,712 2,525 2,