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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Fiscal Year Ended June 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period
from ____________ to ________ .   Commission File Number 000-26934 Hyperion Solutions Corporation  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    77-0277772
(I.R.S. Employer
Identification No.)
 1344 Crossman Avenue, Sunnyvale, California 94089
(Address of principal executive offices, including zip code) Registrants telephone number, including area code: (408) 744-9500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]   No [  ] Indicate by check mark 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 the 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. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes [X]   No [  ] The aggregate market value of the registrants common stock held by
non-affiliates on December 31, 2003, the last business day of the registrants
most recently completed second fiscal quarter, was approximately $944 million
(based on the closing sales price of the registrants common stock as reported
on the Nasdaq National Market on that date). Shares of the registrants common
stock held by each officer and director and each person who owns 5% or more of
the outstanding common stock of the registrant 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. As of July 31, 2004, there were 39,494,204 shares of the registrants common
stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders, scheduled to be held on November 10, 2004, are
incorporated by reference in Part III of this Form 10-K.




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HYPERION SOLUTIONS CORPORATION FORM 10-K PAGEPART I.Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    11Item 3.
    
    Legal Proceedings
    
    
    12Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    12PART II.Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    13Item 6.
    
    Selected Financial Data
    
    
    14Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    15Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    57Item 9A.
    
    Controls and Procedures
    
    
    57PART III.Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    58Item 11.
    
    Executive Compensation
    
    
    58Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    58Item 13.
    
    Certain Relationships and Related Transactions
    
    
    58Item 14.
    
    Principal Accounting Fees and Services
    
    
    58PART IV.Item 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    59Signatures
    
    
    
    
    60Exhibit Index
    
    
    
    
    62EXHIBIT 10.9EXHIBIT 10.17EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Hyperion, the Hyperion H logo and Hyperions product names are trademarks
of Hyperion Solutions Corporation. References to other companies and their
products use trademarks owned by the respective companies and are for reference
purposes only. 2




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FORWARD-LOOKING STATEMENTS Certain information contained in this report on Form 10-K is forward-looking in
nature. All statements included in this report on Form 10-K or made by
management of Hyperion Solutions Corporation and its subsidiaries, other than
statements of historical fact, are forward-looking statements. Examples of
forward-looking statements include statements regarding Hyperions future
financial results, operating results, business strategies, projected costs,
products, competitive positions and plans and objectives of management for
future operations. In some cases, forward-looking statements can be identified
by terminology such as may, will, should, would, expect, plan,
anticipate, intend, believe, estimate, predict, potential,
continue, or the negative of these terms or other comparable terminology.
Any expectations based on these forward-looking statements are subject to risks
and uncertainties and other important factors, including those discussed in the
section entitled Factors That May Affect Future Results. These and many
other factors could affect Hyperions future financial and operating results,
and could cause actual results to differ materially from expectations based on
forward-looking statements made in this document or elsewhere by Hyperion or on
its behalf. Hyperion does not undertake an obligation to update its
forward-looking statements to reflect future events or circumstances. 
 PART I 
 ITEM 1. BUSINESS OVERVIEW Hyperion Solutions Corporation is a leading provider of Business Performance
Management (BPM) software, which enables companies to translate strategies
into plans, monitor execution, and provide insight to manage and improve
financial and operational performance. Hyperion provides customers with
solutions that include analysis and reporting tools, a business intelligence
(BI) platform, packaged and tailored applications, and related services. Our
solutions support the enterprise-wide processes for proactively managing any
business toward optimal performance against goals and for anticipating and
forecasting results. Business Performance Management builds on business intelligence (commonly
referred to as query, reporting and analysis), which provides information
(including historic analysis, statistical predictions, and forecasts) that
helps managers understand how their business is performing at any moment in
time. Using data from transactional systems such as accounting, billings,
bookings, supply chain, sales force automation, and call centers, our Business
Performance Management solutions are used by employees at all levels across
organizations  in the finance department and beyond  to provide a single
version of the truth about an organizations performance. Organizations can
then leverage this information, which is presented in intuitive,
easy-to-understand graphical views, to support continuous performance
improvement and accountability. We use our online analytical processing (OLAP) technology, Hyperion Essbase,
as the analytic foundation for the Hyperion BI Platform. Components within
Hyperion Essbase can be used individually to create tailored applications, or
in conjunction with our packaged applications to support the entire Business
Performance Management process. On October 16, 2003, Hyperion completed the acquisition of Brio Software, Inc.,
a business intelligence software provider based in Santa Clara, California.
The integration of Brios business intelligence software into our product
portfolio has further enriched our platforms query and reporting ability to
access relational databases easily and quickly, and to support thousands of
users. The Brio tools complement our Business Performance Management offerings
and extend the use of business intelligence in the Business Performance
Management processes of our customers. Hyperion offers support and services from offices in 20 countries and works
with more than 600 partners to provide solutions to more than 9,000 customer
organizations worldwide. INDUSTRY BACKGROUND In response to todays renewed focus on corporate profitability, many
businesses are seeking systems that can support the full business cycle  from
strategy formulation, to the creation and adaptation of plans and operational
execution, as well as the monitoring and reporting of results. It is common
for organizations to have multiple general ledger, order entry, and partner and
customer interaction systems worldwide. Companies need to unlock the volumes of
transactional and operational information captured in these different
information systems and in different formats. With Business Performance
Management, organizations can consolidate their financial andoperational
systems information, turn the raw data from these systems into meaningful
business information, and use this information to optimize performance across
the entire enterprise. 3




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We see five business imperatives driving increased demand for Business
Performance Management solutions. These are the need to 1) increase
visibility, agility and measurable accountability across the enterprise; 2)
achieve necessary alignment among business and functional units for tight
strategy execution; 3) increase the quality of management reports and have
every manager work from the same set of facts; 4) prepare to comply with new
and more stringent regulations on a global scope; and 5) extend existing
information technology investments to make information accessible and
actionable throughout the organization with the aim of increasing the speed,
quality and accuracy of decision making. These imperatives are in contrast to the tactical manner in which some
organizations address analysis requirements today. Using siloed applications,
disconnected query and reporting tools and spreadsheets, for example, employees
in different functional areas conduct analyses that are potentially incomplete
or inaccurate. When organizations deploy pervasive Business Performance
Management applications, however, they obtain consistent information to create
and execute strategic, financial and operational plans that are accurate and
aligned. To be useful, all of the data must be accessed, cleansed, transformed,
extracted and then analyzed using an assortment of sophisticated quantitative
methods. This data must be summarized, visualized and presented in a variety of
formats  from spreadsheets and specialized financial report formats, to
multidimensional views and graphical Web-based presentations  that are
meaningful and intuitive to users throughout the organization. Since most
global organizations use multiple operational systems that capture data in
different formats, integrating and interpreting this enterprise data is an
increasingly critical requirement. In order to take full advantage of the value
of the data stored in existing systems and accelerate decision-making,
organizations require specific Business Performance Management applications
that provide data quality and integrity, scalability and ease-of-use across the
organization. STRATEGY Our objective is to profitably gain market share as the leading global provider
of Business Performance Management solutions. We will accomplish this by
continuing to address our customers pain points with our packaged
applications, tailored solutions, and query and reporting products. While some
customers buy our entire product suite, others adopt our Start Anywhere
approach, which enables them to implement Business Performance Management in a
step-by-step fashion. They begin by addressing one or two specific business
problems and add additional Hyperion solutions over time. This approach
shortens the time it takes for customers to recognize the value of our
solutions and allows them to absorb change gradually. Our leading market share in packaged applications for planning and for
financial consolidation and reporting has given us a strong presence in the
finance departments of our customer organizations. Our BI platform, greatly
strengthened with the additions of our query and reporting products (Hyperion
Performance Suite) and the June 2004 release of Hyperion Essbase 7.1, gives us
the flexibility to address business solutions beyond finance. Hyperion
Performance Suite enables new opportunities such as dashboarding (the face of
Business Performance Management), profitability management, risk management,
sales analysis, and workforce management. Performance Suite has brought us
into many new customer transactions during the past fiscal year, as query and
reporting can be the first steps companies take toward implementing broader
Business Performance Management initiatives. Hyperion will continue to focus on providing an interoperable suite of products
 products that are designed to exchange information and use the information
they exchange  as well as an enterprise-class solutions approach to Business
Performance Management. Interoperability enables customers to add applications
over time with confidence that the new applications will work well with
existing ones. It also ensures that our customers can work collaboratively
within a single environment, rather than having to move from one disconnected
application to another. Some features necessary for interoperability have the
added benefit of making our applications easier to install and use. This means
people with less technical knowledge can use our BPM applications, which will
help us expand to new users within customer organizations. In addition, we believe that high levels of customer service and satisfaction
are critical to the successful marketing and sale of our new and existing
products. We provide a broad range of worldwide consulting, training and
support services that help customers and partners implement, customize,
enhance, support, and extend their Business Performance Management solutions.
We are committed to maintaining a world-class workforce to deliver these
offerings. Hyperion will also continue to expand its network of partners who deliver
complementary products and services and meet a wide variety of customer
requirements. Partners offerings include packaged Business Performance
Management applications, unique data and application integration
technologies, tools, and training services. They leverage the Hyperion BI
Platform as theenterprise analytics infrastructure to deliver breakthrough
performance and advanced analytics. Our partner relationships increase the
network effects of our platform, enhance our market reach, and provide our
customers with greater flexibility and choice for their Business Performance
Management solutions. 4




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Key elements of our strategy include: Leverage Existing Market Position. We believe our key strengths include our
established distribution channels and comprehensive strategic technology. We
also believe that our proven domain expertise and credibility gained in the
financial area can be leveraged to capitalize upon the substantial market
opportunity in the adjacent operational analytics space. We have enhanced the
core component of our Hyperion BI Platform, Hyperion Essbase, to significantly
improve its ability to handle non-financial or sparse data. We intend to
continue to seek the co-development of vertical and horizontal applications
with outside organizations. We also intend to enable all of our packaged
applications to further exploit the Hyperion BI Platform, creating a key
differentiation from competing products. Deliver Enterprise-Class Solutions.Hyperions enterprise-class solutions
approach to Business Performance Management further accelerates the
time-to-benefit for our customers by addressing specific business challenges on
an enterprise-widebasis. Examples include profitability management;
dashboards for monitoring and enterprise-wide control, financial consolidation,
reporting and compliance; enterprise planning; and an enterprise-wide analytics
and business intelligence infrastructure. Increase Focus and Penetration of Key Markets.We plan to focus our
intellectual capital and leverage our partners to provide best-of-breed
Business Performance Management solutions in key markets. These solutions
include financial management, profitability management, risk management,
customer relationship management analysis, industry-specific solutions, general
OLAP-based solutions and data warehousing. Foster Strategic Partner Relationships.To accelerate the adoption of Business
Performance Management solutions, we have established relationships with more
than 600 partners, including the following:  -
    
    Consulting Partners include large systems integrators, regional
consulting firms, professional services organizations and value added
resellers (VARs). These partners deliver custom application
consulting and related implementation, integration and/or training
services.-
    
    Independent Software Vendor Partners integrate their products with our
core technology to develop business intelligence enhancements and
deliver added value with their solutions.-
    
    Original Equipment Manufacturer (OEM) Partners embed our products in
their own applications to form specialized analytical solutions for
vertical markets or functional applications.-
    
    Distribution Partners market, distribute and support our software
solutions in remote markets where we do not have a wholly owned
corporate presence.-
    
    Technology Partners offer tools and technologies that integrate with
our business intelligence platform and help customers build, use, and
manage our analytical and Business Performance Management solutions.-
    
    Alliance Partners cooperatively position and market the benefits of a
comprehensive, integrated, multi-vendor solution to the marketplace
based upon our Business Performance Management products. Our partner network enhances and expands our distribution channels and extends
our Business Performance Management solutions by providing a wider range of
choices for our customers. Leverage the Web for Ease-of-Implementation and Ease-of-Use.Our newer packaged
application products are designed to leverage Web-based technologies and
facilitate collaboration throughout the organization. By building scalable,
high performance applications that can be accessed via an intranet or the Internet,
corporations can improve their business processes, gain efficiencies, improve
agility to respond to changing market conditions, and improve bottom line
performance. By leveraging the Web browser as a user interface, a
corporations information technology department can deploy and maintain
applications more quickly and easily with reduced costs compared to
client-server and desktop implementations. Maintain Sales and Support Relationships.We license our products to customers
throughout the world through a direct sales force as well as through OEMs, VARs
and independent distributors. Together with our partners, we often provide
installation and post-sale consulting support to build long-term customer
relationships. Generate Follow-on Revenues.We generate revenues from existing customers
through licensing of additional users, the cross selling of licenses of new
products, annual maintenance fees, and sales of training and consulting
services. Follow-on revenues leverage sales and marketing resources and
strengthen relationships with our customers. 5




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PRODUCTS Hyperions Business Performance Management Applications Hyperions Business Performance Management suite is an interoperable group of
applications that delivers budgeting, planning and forecasting, consolidation
and reporting, dashboarding, performance scorecarding, modeling, and
optimization  on an open, scalable, secure and Web-based business intelligence
platform. Hyperion Planningis a Web-architected application that helps coordinate and
manage all the elements of the planning, forecasting and budgeting cycle. It
drives collaborative, integrated, event-based planning, forecasting, and
budgeting processes throughout the organization for a wide range of financial
and operational needs. Hyperion Planning provides a comprehensive approach that
can drive continuous profit improvement. Decision makers and front-line
managers communicate which course of action to take and get budget holders to
collaborate, so that all profitability improvements can be identified and acted
upon. Hyperion Financial Managementis a Web-based application that delivers
financial consolidation, reporting and analysis in a single, highly scalable
solution. Employees, subsidiaries, branch offices and partners operate from the
same page and with a single unified view of key financial data at any moment in
time. Hyperion Financial Management generates consolidated results for both
internal management and regulatory bodies and is used to facilitate compliance
with the Sarbanes-Oxley Act of 2002. Hyperion Business Modelingprovides advanced profitability analysis by
combining operational factors with supporting financial data to provide true
costs and profitability. It is a sophisticated enterprise-class modeling
solution that enables companies to test operational and financial planning
assumptions, optimize resources, and measure profitability. With Hyperion
Business Modelings powerful simulation environment, managers dynamically test
and compare alternate business scenarios and identify the optimal solution to
maximize business performance. Hyperion Strategic Financeis a strategic financial modeling application that
gives corporate development, finance and treasury executives real-time analysis
of alternative strategies. It enables them to analyze the financial impact of
critical business decisions and to choose the strategic path of greatest value
to deliver continuous performance improvement. Financial executives create
customized dashboards and report quickly and accurately to assess earnings and
demonstrate the quality of earnings in relation to cash flow. Hyperion Performance Scorecardis a Web-based Balanced Scorecard Collaborative
application that provides a strategic management infrastructure for measuring
and monitoring business performance. Hyperion Performance Scorecard can give
companies a clear understanding of corporate strategy, objectives and
accountability, including method and non-method based scorecards, while
proactively monitoring their actions and performance against targets and
industry benchmarks. Hyperion Enterpriseis a packaged application that can improve departmental
financial consolidation and reporting efficiency by streamlining the
collection, consolidation and reporting of financial results in a global
environment. It frees financial managers from spreadsheets and general ledgers,
enabling them to reduce the financial close cycle and improve the quality of
financial information. Hyperion Enterprise can be distributed and installed at
remote offices quickly and easily. It can be fully deployed by the finance
organization with limited IT support  even on a stand-alone PC. Hyperion Pillarcan improve departmental budgeting efficiency by streamlining
the distributed, financial budgeting process and increasing accountability. It
frees managers from budget mechanics, enabling them to focus on value-added
reporting and analysis. Hyperions Business Intelligence Platform Hyperion offers a foundation of enabling tools and technologies for the
deployment of business intelligence and development of Business Performance
Management applications. The Hyperion Business Intelligence Platform is a
combination of the Hyperion Essbase and Hyperion Performance Suite product
families. The combined capabilities make it the only enterprise scalable,
high-performance platform that is easy to deploy and to use, and that meets the
full range of enterprise business intelligence needs with advanced analytics
functionality, enterprise reporting tools, and personalized interactive
dashboards. 6




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Hyperion Essbaseis thesingle enterprise analytics infrastructure for all
analytics needs across the enterprise. Unlike other relational and OLAP
database products, Hyperion Essbase now provides the industrys first real-time
business intelligence platform. It meets the most demanding data scalability
requirements of sales, marketing, and supply chain users as well as the most
complex analytic requirements of finance managersall with a single
architecture. Hyperion Essbase 7.1 is the most scalable analytic solution
available today and the only analytic solution that can scale to terabytes of
sparse data, while providing sub-second response time to thousands of
concurrent users. It also delivers the first visual spreadsheet for querying
and navigating multidimensional data, enabling end users to have an intuitive
method for visualizing large data volumes across dozens of key business
dimensions. Hyperion Essbase reduces the total cost of ownership and increases
the return on investment compared to multiple solutions from several vendors,
by combining data integration, metadata management, online analytical
processing, query and reporting, ad hoc analysis and application development
tools into a comprehensive Business Performance Management solution. The Hyperion Essbase product familydelivers services to (1) access and
integrate data and metadata from a wide range of sources, (2) perform advanced
analytical processing and (3) deploy business performance applications across
the enterprise. Comprehensive platform services run on multiple operating
systems, leverage multiple relational databases, access data from diverse
transactional business systems and deliver high-performance financial and
operational reporting. With the Hyperion Essbase product family, businesses
leverage existing investments in technology and extend their analytical
capabilities across the enterprise.  
    
    Essbase Administration Servicescentralize the management of business
performance applications running on multiple servers and operating
systems in geographically dispersed locations. They also reduce
distribution and maintenance costs compared to decentralized
administration and management.
    
    Essbase Deployment Servicesextend the scalability and reliability of
analytic applications, and support thousands of concurrent users in
distributed environments with Web-based architectures. Connection
pooling, database clustering, load balancing and failover help ensure
applications are available 24X7.
    
    Essbase Integration Servicesprovide the tools and technologies to
reduce the time and expense of integrating operational data with
Hyperion Business Performance Management software. Specifically
designed to work in a mixed-vendor environment, Integration Services
provide a graphical environment to integrate data or metadata from
transactional business applications, relational databases, data
warehouses and legacy transactional systems as well as flat files,
spreadsheets and XML documents.
    
    Essbase Developer Tools, including Hyperion Objectsand Hyperion
Application Builder,provide a development environment for technical
workers to create tailored applications that are customized to suit
individual business needs. The Hyperion Developer Toolsenable the
rapid creation, management, and deployment of tailored analytic
applications  with or without programming knowledge. A comprehensive
set of value-added application programming interfaces (APIs),
drag-and-drop components and services accelerate the deployment of
tailored analysis applications that can grow and change with customer
needs.
    
    Essbase Analysis and Reporting Tools. Essbasealso offers a broad
range of user interfaces such as Essbase Spreadsheet Servicesfor
broad spreadsheet access across the extended enterprise, Hyperion
Reportsfor book-quality financial reporting, Hyperion Analyzerfor
interactive analysis across the enterprise, and Hyperion Visual
Explorerfor visual navigation and analysis of massive
multidimensional data sets. Hyperion Hubis a centralized metadata manager for Hyperions applications and
tools. It establishes links and manages data and metadata sharing across
Hyperion Financial Management, Hyperion Planning, Hyperion Essbase, Hyperion
Reports, and Hyperion Analyzer. A powerful interoperability tool, Hub gives
users a common set of dimensions, hierarchies, measures, business rules, and
reporting formats, regardless of the Business Performance Management process
they are involved in. This increases the overall consistency in metrics and
dramatically improves collaboration throughout the enterprise. 7




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Hyperion Performance Suiteis an enterprise-class and Web-based query,
analysis, and reporting software, based on a scalable foundation for
information delivery. It allows users to access, analyze, and distribute
information from disparate sources and to consolidate related information into
personalized interactive dashboard applications. Hyperion Performance Suite
offers a broad range of visualization options for report and dashboard designs
 pixel perfect, charts, multidimensional pivot tables, key performance
indicators (KPIs) and conditional formatting. Data exploratory capabilities,
such as the interactive drill-anywhere feature, enable users to instantly
expand their ad hoc analyses by adding items to their data set.
Enterprise-level reporting capabilities deliver presentation-quality reports to
end users, scheduled or on demand. The multiple output capability allows end
users to select from a broad range of output types such as HTML, PDF, and
Excel. The Web-based interface allows people to create, publish, and access
self-service reports, analysis and dashboard applications in a distributed
environment. Dashboardscreated with Hyperion Performance Suiteempower our customersfrom
the boardroom to line-of-business managersto monitor performance and make
smarter decisions by relying on measurable data and metrics via at-a-glance
summaries of KPIs. People in departments everywhere in the enterprise use the
dashboard interfaces via the client or the Web to quickly spot trends and
anomalies, select different views of data, and drill to the next level of
detail in order to gain valuable business insight and take the right action. Hyperion Metrics Builder, also part of the Hyperion Business Intelligence
Platform, delivers enterprise-wide metrics analysis and management capabilities
to business users via a Web-based dashboard environment. With Hyperion Metrics
Builder, our customers no longer have to wait for analysts to provide
business-critical performance indicators. Instead, managers from the boardroom
to any area of the business, can quickly and consistently identify, centralize,
personalize and monitor all company KPIs in one place. Hyperion Metrics
Builder enables customers to continuously monitor and analyze organizational
performance against commonly agreed objectives. Combining data from existing
information systems (such as ERP, SCM and CRM) with business decision
processes, Hyperion Metrics Builder gives executives, line of business
managers, and knowledge workers an interactive metrics analysis environment
that makes performance information meaningful and easy to understand. SALES AND MARKETING We market and sell our products in North America and Latin America (the
Americas), Europe, the Middle East and Africa (EMEA) and Asia Pacific (APAC)
through our direct sales force and through OEMs, VARs and independent
distributors. We support our sales force with lead generation and marketing
programs, which include telemarketing, public relations, direct mail,
advertising, seminars, trade shows, education, ongoing customer communication
programs, third-party alliances and user group conferences. Worldwide and
regional user conferences are held annually. Regional user meetings and
product-specific focus groups are also scheduled periodically. Sales cycles
generally last from three to nine months. We have dedicated sales, marketing
and technical alliance resources designed to optimize our partner
relationships. The direct sales force is compensated for direct sales as well
as sales made through channel partners to ensure appropriate cooperation with
our OEMs and VARs and independent distributors. We currently have more than
9,000 customers worldwide, many of which are multidivision and/or multilocation
organizations with diverse information management requirements. In fiscal
2004, 2003 and 2002, approximately 41%, 39% and 35%, respectively, of our total
revenues were derived from markets outside of North America. In the past three
fiscal years, no single customer accounted for more than 10% of total revenues. Our
sales and marketing organization consisted of 851 employees as of July 31,
2004, of which approximately 290 employees were quota-carrying sales
representatives. We have sales offices at our worldwide headquarters in
Sunnyvale, California and in more than 40 other locations throughout the
Americas, EMEA and APAC. Product support and training are also available in
many of these locations. We have been able to leverage sales and marketing through our partnering
strategy with channel partners that distribute or resell our products in their
respective markets. We have license and distribution agreements with
independent distributors in many countries worldwide. The distributors
generally maintain sales and services personnel dedicated to our products. The
distribution agreements generally provide for the right to offer our products
within a territory in return for royalties typically equal to 50% of license
and maintenance fees. License revenues derived from channel partners in fiscal 2004, 2003 and 2002
were 24%, 26% and 25% of total license revenues, respectively. Our channel
partners include such firms as American Management Systems, BearingPoint,
Deloitte & Touche LLP, Fujitsu Limited, Immix Inc., International Business
Machines Corporation, Lawson Associates, Inc., SPSS
Corporation, and Teradata. 8




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SERVICES AND SUPPORT We believe that high levels of customer service and satisfaction are important
to the successful marketing and sale of our products. We offer an extensive
selection of worldwide training, consulting and technical support services to
install, implement and support our products. Consulting and training services
are not included in software license fees, but are generally provided on a time
and materials basis. Our services and support organization consisted of 755
employees as of July 31, 2004. We have also established a global network of
partners who deliver implementation and training services. Under the terms of
our standard license agreement, customers may, at their option, pay a
maintenance fee annually. This maintenance fee entitles customers to technical
support, including telephone and Web-based support, and to any updates and
enhancements provided for their software. RESEARCH AND DEVELOPMENT Our products have been developed by our internal staff, contract developers and
through strategic acquisitions. Our development efforts are focused on new
products, as well as on maintaining the competitiveness of our current product
line. As of July 31, 2004, our product development was primarily performed by
493 employees located at our U.S. facilities in Sunnyvale, California;
Stamford, Connecticut; Orlando, Florida; and Skokie, Illinois; and at our
Canadian facility located in Toronto, Ontario. In the fourth quarter of fiscal 2004, we signed an engineering consulting
agreement with a consulting firm based in Bangalore, India in an effort to
increase our multi-shore development capacity and capability. The expansion of
our multi-shore initiative will be gradual over fiscal 2005 and will ultimately
result in about 150 to 200 additional developers contributing to our
development efforts in India. As of July 31, 2004, we have
approximately 130
third-party contract developers contributing to our development efforts. These
contract developers are primarily located in Minsk, Belarus and Bangalore,
India. COMPETITION The markets in which we compete are intensely competitive, highly fragmented
and characterized by rapidly changing technology and evolving standards.
Current and potential competitors offer a variety of reporting, analysis,
modeling and planning software solutions and generally fall within four
categories: (1) vendors of packaged business analysis applications; (2) vendors
of enterprise software applications that deliver transaction processes and
front/back office automation; (3) vendors of OLAP server software that may also
be marketed as part of a platform offering; and (4) vendors of front-end
information access tools. As markets continue to develop for Business
Performance Management products, additional competitors may enter or expand
into those markets and competition may intensify. Competitors, some of whom have significantly greater financial, technical,
marketing and other resources than we do, may be better able to respond to new
or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than us.
Also, certain current and potential competitors may have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to our detriment. We expect additional competition as
other established and emerging companies enter into the enterprise software
market and new products and technologies are introduced. In addition, as we
develop and enhance our software and complementary products, the resulting new
functionality may duplicate the functionality of, and thus compete with, other
products offered by our channel partners. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which would materially adversely affect our business,
operating results and financial condition. Current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third-parties, thereby
increasing their ability to address the needs of our existing and prospective
customers. Further competitive pressures, such as those resulting from
competitors discounting of their products, may require us to reduce the price
of our software products, which would materially adversely affect our business,
operating results and financial condition. There can be no assurance that we
will be able to compete successfully against current and future competitors,
and the failure to do so would have a material adverse effect on our business,
operating results and financial condition. See the section entitled Factors
That May Affect Future Results in Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations. 9




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PROPRIETARY RIGHTS AND LICENSES We rely primarily on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary rights. Despite our efforts, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. Policing unauthorized use of our products is difficult and,
while we are unable to determine the extent to which piracy of our software
products exists, software piracy is expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. There can be no assurance
that our means of protecting our proprietary rights in the United States or
abroad will be adequate or that competitors will not independently develop
similar technology. We have entered into source code escrow agreements with a
number of our customers and channel partners requiring the release of our
source code under certain conditions. Generally, such agreements provide that
such parties will have a limited, nonexclusive right to use such code in the
event that there is an undismissed bankruptcy proceeding by or against us, if
we cease to do business or if we materially fail to meet our contractual
obligations. The release of source code may increase the likelihood of
misappropriation by third-parties. We currently have a small number of patents relating to our products, including
eight United States patents, three foreign patents and a number of patent
applications pending in the United States and abroad. There can be no assurance
that our patents will not be invalidated, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to us or that any
of our pending or future patent applications, whether or not being currently
challenged by applicable governmental patent examiners, will be issued with the
scope of the claims sought by us, if at all. Furthermore, there can be no
assurance that other companies will not develop technologies that are similar
or superior to our technology or design around the patents owned by us. We expect that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claim, with or without merit, could be time consuming to
defend, result in costly litigation, divert managements attention and
resources, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us, if at all. In the event of a
successful claim of product infringement against us and our failure or
inability to license the infringed or similar technology, our business,
operating results and financial condition would be materially adversely
affected. We rely upon certain software that we license from third-parties, including
software that is integrated with our internally developed software and used in
our products to perform key functions. There can be no assurance that these
third-party software licenses will continue to be available to us on
commercially reasonable terms. The loss of, or inability to maintain, any such
software licenses could result in shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated,
which would materially adversely affect our business, operating results and
financial condition. We distribute our products under software license agreements that grant
customers a nonexclusive, nontransferable license to use our products and
contain terms and conditions prohibiting the unauthorized reproduction or
transfer of our products. Generally, we do not provide end users with the
source code for our products except under the escrow arrangements described
above. EMPLOYEES As of July 31, 2004 we employed a total of 2,473 employees. None of our U.S.
employees is represented by a labor union. Certain foreign jurisdictions have
workers counsels that typically represent workers on matters generally
affecting terms of employment. We believe our relations with employees are
good. Our executive officers as of July 31, 2004 are as follows: Name
    
    Age
    
    PositionJeffrey R. Rodek
    
    50
    
    Executive ChairmanGodfrey R. Sullivan
    
    50
    
    President and Chief Executive OfficerDavid W. Odell
    
    41
    
    Chief Financial OfficerW. Russell Wayman
    
    60
    
    Vice President, General Counsel and SecretaryBurton Goldfield
    
    48
    
    Senior Vice President, Worldwide Field OperationsNazhin Zarghamee
    
    37
    
    Chief Marketing Officer
 Jeffrey R. Rodek has served as Executive Chairman of Hyperions Board of
Directors since July 2004, after serving as Chairman and Chief Executive
Officer since October 1999. He has been a member of Hyperions Board of
Directors since January 1998. Prior to joining Hyperion, Mr. Rodek served as
President and Worldwide Chief Operating Officer of Ingram Micro, a distributor
of electronic products, from January 1995 to October 1999. 10




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Godfrey R. Sullivan has served as Hyperions President and Chief Executive
Officer and as a member of the Board of Directors since July 2004. He joined
Hyperion in October 2001 as President and Chief Operating Officer. From
October 2000 to August 2001, Mr. Sullivan served as Chief Executive Officer of
Promptu Corporation, an enterprise marketing automation software company.
Previously, he spent eight years at AutoDesk, Inc., a design software and
digital media company, in various senior management positions. David W. Odell joined Hyperion as Chief Financial Officer and Corporate Vice
President in August 2000. He joined Hyperion from KPMG LLP, a public accounting
firm. He was with KPMG for over fifteen years, most recently as a partner in
the firms Sydney, Australia office. W. Russell Wayman joined Hyperion as Corporate Vice President, General Counsel
and Secretary in January 2001. Prior to that he was Vice President and General
Counsel of Etec Systems, Inc, a semiconductor manufacturing equipment company,
from 1998 to 2000. Burton Goldfield joined Hyperion as Senior Vice President of Worldwide Field
Operations in January 2004. Prior to joining Hyperion, Mr. Goldfield was
employed by IBM Corporation where he served as Vice President of Worldwide
Sales for the Rational software brand from February 2003 to December 2003.
From April 2001 to February 2003, he served in various senior management
positions at Rational Software Corporation, most recently as Senior Vice
President. From February 2000 to April 2001, he served as Vice President of
Worldwide Sales at Catapulse after its spin-off from Rational. Prior to that,
he served in various senior management positions at Rational Software
Corporation from August 1989 to February 2000. Nazhin Zarghamee joined Hyperion as Chief Marketing Officer in February 2002.
Before joining Hyperion, Ms. Zarghamee served as Vice President of Worldwide
Marketing at Documentum, an enterprise content management company, from October
1999 to October 2001. From April 1999 to October 1999, Ms. Zarghamee served as
Vice President of Marketing for The Business Network. From August 1994 to
April 1999, Ms. Zarghamee was employed by Oracle Corporation, most recently as
Senior Director of Worldwide Marketing. AVAILABLE INFORMATION We make available free of charge in the Investor Relations section of our
Internet website (www.hyperion.com) our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after they are electronically filed
with, or furnished to, the Securities and Exchange Commission. These filings
are also available on the Securities and Exchange Commissions website at
www.sec.gov. Information contained on our website is not part of this report. 
 ITEM 2. PROPERTIES Our current corporate headquarters consist of leased facilities totaling
approximately 100,000 square feet in Sunnyvale, California and approximately
140,000 square feet in Santa Clara, California. The Sunnyvale facility lease
expires in December 2006 and the Santa Clara facility lease expires in June
2010. We also own and occupy approximately 230,000 square feet in Stamford,
Connecticut. These facilities are used by our administrative, sales,
marketing, product development, customer support, and services groups. In connection with our acquisition of Brio Software, Inc. in October 2003, we
announced a plan to consolidate our two corporate headquarters buildings into a
single facility. As such, in June 2004 we entered into a lease agreement for a
new corporate headquarters facility located in Santa Clara, California. This
new headquarters facility totals approximately 220,000 square feet, and the
lease expires in December 2014. We expect to vacate our existing Sunnyvale and
Santa Clara buildings and move into this new corporate headquarters facility
during the second quarter of fiscal 2005. We are currently attempting to
secure subtenants for the facilities that will be vacated. Additional leased facilities in the United States include offices located in
Irvine, California; Orlando, Florida; Kennesaw, Georgia; Lisle and Skokie,
Illinois; Waltham, Massachusetts; Parsippany, New Jersey; Fairborn, Ohio; and
Dallas, Texas, which are primarily used for sales, marketing, and services.
Leased facilities located outside of the United States and used primarily for
sales, marketing, customer support and services include facilities located in
Toronto, Canada; Sao Paolo, Brazil; Egham and Manchester, England; Paris,
France; Frankfurt and Munich, Germany; Milan and Rome, Italy; Utrecht,
Netherlands; Madrid, Spain; Stockholm, Sweden; Zurich, Switzerland; North
Sydney, Australia; Hong Kong; Tokyo, Japan; Seoul, South Korea; and Singapore.
In addition, we lease executive office space throughout the world for our local
sales and services needs. 11




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We believe that our existing facilities are adequate for our current needs. If
additional space is needed in the future, we believe that suitable space will
be available on commercially reasonable terms. 
 ITEM 3. LEGAL PROCEEDINGS From time to time, in the normal course of business, various claims are made
against us. At this time, in the opinion of management, there are no pending
claims the outcome of which is expected to result in a material adverse effect
on our financial position, results of operations or cash flows. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders through the solicitation of proxies
or otherwise. 12




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PART II 
  ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES Our common stock trades on the Nasdaq National Market under the symbol HYSL.
The following table sets forth, for the periods indicated, the high and low
sales prices of our common stock as reported on the Nasdaq National Market. Fiscal 2004
    
    High
    
    LowFirst quarter
    
    $
    36.57
    
    
    $
    25.59Second quarter
    
    $
    35.50
    
    
    $
    28.35Third quarter
    
    $
    41.79
    
    
    $
    29.79Fourth quarter
    
    $
    44.25
    
    
    $
    36.08
 Fiscal 2003
    
    High
    
    LowFirst quarter
    
    $
    24.80
    
    
    $
    14.50Second quarter
    
    $
    30.00
    
    
    $
    17.55Third quarter
    
    $
    32.75
    
    
    $
    21.45Fourth quarter
    
    $
    38.06
    
    
    $
    23.80
 As of July 31, 2004, we had 262 stockholders of record and approximately 23,000
beneficial holders of our common stock. We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all earnings to finance future growth and,
therefore, we do not anticipate paying any cash dividends in the foreseeable
future. Issuer Purchases of Equity Securities The following table sets forth, for the periods indicated, our purchases of
common stock in the fourth quarter of fiscal 2004. Approximate DollarTotal Number of
    
    Value of SharesShares Purchased as
    
    that May Yet BeTotal Number of
    
    Average Price Paid
    
    Part of a Publicly
    
    Purchased Under thePeriod
    
    Shares Purchased
    
    per Share
    
    Announced Plan [1]
    
    Plan [1](In thousands, except per share data)May 1, 2004  May 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    75,000June 1, 2004  June 30, 2004
    
    
    153
    
    
    $
    39.96
    
    
    
    153
    
    
    $
    68,901153
    
    
    $
    39.96
    
    
    
    153
  [1]
    
    On May 20, 2004, we announced that our board
of directors had authorized a plan to repurchase
up to $75.0 million of our common stock. 13




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ITEM 6. SELECTED FINANCIAL DATA Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands, except per share data)Statement of Operations Data:Revenues:Software licenses
    
    $
    240,096
    
    
    $
    201,766
    
    
    $
    196,066
    
    
    $
    227,994
    
    
    $
    240,326Maintenance and services
    
    
    382,104
    
    
    
    308,692
    
    
    
    295,952
    
    
    
    300,017
    
    
    
    259,006Total revenues
    
    
    622,200
    
    
    
    510,458
    
    
    
    492,018
    
    
    
    528,011
    
    
    
    499,332Costs and expenses:Cost of software license revenues
    
    
    13,362
    
    
    
    15,419
    
    
    
    15,430
    
    
    
    16,334
    
    
    
    8,782Cost of maintenance and services revenues
    
    
    147,816
    
    
    
    132,510
    
    
    
    137,047
    
    
    
    161,016
    
    
    
    146,348Sales and marketing
    
    
    225,951
    
    
    
    190,025
    
    
    
    182,311
    
    
    
    208,336
    
    
    
    189,467Research and development
    
    
    96,240
    
    
    
    73,776
    
    
    
    72,206
    
    
    
    81,597
    
    
    
    70,154General and administrative
    
    
    63,621
    
    
    
    47,207
    
    
    
    64,843
    
    
    
    72,823
    
    
    
    44,423Restructuring and other charges
    
    
    4,202
    
    
    
    764
    
    
    
    107
    
    
    
    42,785
    
    
    
    2,066In-process research and development
    
    
    2,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Merger credits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (305
    )Total costs and expenses
    
    
    553,492
    
    
    
    459,701
    
    
    
    471,944
    
    
    
    582,891
    
    
    
    460,935Operating income (loss)
    
    
    68,708
    
    
    
    50,757
    
    
    
    20,074
    
    
    
    (54,880
    )
    
    
    38,397Interest and other income
    
    
    4,283
    
    
    
    5,848
    
    
    
    7,027
    
    
    
    12,987
    
    
    
    13,010Interest and other expense
    
    
    (1,230
    )
    
    
    (2,940
    )
    
    
    (4,635
    )
    
    
    (5,502
    )
    
    
    (5,588
    )Gain (loss) on redemption of debt
    
    
    (936
    )
    
    
    478
    
    
    
    941
    
    
    
    2,362
    
    
    
    Income (loss) before income taxes
    
    
    70,825
    
    
    
    54,143
    
    
    
    23,407
    
    
    
    (45,033
    )
    
    
    45,819Income tax provision (benefit)
    
    
    27,055
    
    
    
    20,033
    
    
    
    8,426
    
    
    
    (13,960
    )
    
    
    17,000Net income (loss)
    
    $
    43,770
    
    
    $
    34,110
    
    
    $
    14,981
    
    
    $
    (31,073
    )
    
    $
    28,819Basic net income (loss) per share
    
    $
    1.15
    
    
    $
    0.99
    
    
    $
    0.46
    
    
    $
    (0.95
    )
    
    $
    0.91Diluted net income (loss) per share
    
    $
    1.10
    
    
    $
    0.96
    
    
    $
    0.45
    
    
    $
    (0.95
    )
    
    $
    0.87Shares used in computing basic net income
(loss) per share
    
    
    37,988
    
    
    
    34,451
    
    
    
    32,836
    
    
    
    32,592
    
    
    
    31,665Shares used in computing diluted net income
(loss) per share
    
    
    39,754
    
    
    
    35,694
    
    
    
    33,491
    
    
    
    32,592
    
    
    
    33,107Balance Sheet Data:Cash, cash equivalents and short-term
investments
    
    $
    368,175
    
    
    $
    416,554
    
    
    $
    330,258
    
    
    $
    255,366
    
    
    $
    295,159Working capital
    
    
    273,983
    
    
    
    350,649
    
    
    
    281,501
    
    
    
    254,141
    
    
    
    297,745Total assets
    
    
    804,655
    
    
    
    654,758
    
    
    
    583,890
    
    
    
    570,393
    
    
    
    589,891Deferred revenue
    
    
    136,286
    
    
    
    104,868
    
    
    
    94,910
    
    
    
    100,234
    
    
    
    88,828Long-term debt
    
    
    
    
    
    
    50,040
    
    
    
    80,802
    
    
    
    91,045
    
    
    
    102,518Other liabilities
    
    
    26,619
    
    
    
    11,326
    
    
    
    11,743
    
    
    
    14,303
    
    
    
    Stockholders equity
    
    
    519,571
    
    
    
    397,325
    
    
    
    299,657
    
    
    
    267,319
    
    
    
    309,861
 14




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ITEM
7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW Hyperion Solutions Corporation is a leading provider of Business Performance
Management (BPM) software, which enables companies to translate strategies
into plans, monitor execution, and provide insight to manage and improve
financial and operational performance. Hyperion provides customers with
solutions that include analysis and reporting tools, a business intelligence
(BI) platform, packaged and tailored applications, and related services. Our
solutions support the enterprise-wide processes for proactively managing any
business toward optimal performance against goals and for anticipating and
forecasting results. Business Performance Management builds on business intelligence (commonly
referred to as query, reporting and analysis), which provides information
(including historic analysis, statistical predictions, and forecasts) that
helps managers understand how their business is performing at any moment in
time. Using data from transactional systems such as accounting, billings,
bookings, supply chain, sales force automation, and call centers, our Business
Performance Management solutions are used by employees at all levels across
organizations  in the finance department and beyond  to provide a single
version of the truth about an organizations performance. Organizations can
then leverage this information, which is presented in intuitive,
easy-to-understand graphical views, to support continuous performance
improvement and accountability. We use our online analytical processing (OLAP) technology, Hyperion Essbase,
as the analytic foundation for the Hyperion BI Platform. Components within
Hyperion Essbase can be used individually to create tailored applications, or
in conjunction with our packaged applications to support the entire Business
Performance Management process. On October 16, 2003, Hyperion completed the acquisition of Brio Software, Inc.,
a business intelligence software provider based in Santa Clara, California.
The integration of Brios business intelligence software into our product
portfolio has further enriched our platforms query and reporting ability to
access relational databases easily and quickly, and to support thousands of
users. The Brio tools complement our Business Performance Management offerings
and extend the use of business intelligence in the Business Performance
Management processes of our customers. Hyperion offers support and services from offices in 20 countries and works
with more than 600 partners to provide solutions to more than 9,000 customer
organizations worldwide. CRITICAL ACCOUNTING POLICIES Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require us
to make estimates and judgments that significantly affect the reported amounts
of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. Actual results could differ from those
estimates, and such differences could affect the results of operations reported
in future periods. We believe the following critical accounting policies
affect our most significant estimates and judgments used in the preparation of
our consolidated financial statements. Revenue Recognition We derive revenues from licensing our software products and providing
maintenance, consulting and training services. Our standard software license
agreement is a perpetual license to use our products on an end user, concurrent
user or central processing unit basis. We record revenue from licensing our software products to end users provided
there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection is reasonably assured and delivery of the product has
occurred, as prescribed by Statement of Position (SOP) No. 97-2, Software
Revenue Recognition. For arrangements with multiple elements, and for which
vendor specific objective evidence (VSOE) of fair value exists for the
undelivered elements, revenue is recognized for the delivered elements based
upon the residual method in accordance with SOP 98-9, Modifications of SOP
97-2 with Respect to Certain Transactions. Amounts billed or payments
received in advance of revenue recognition are recorded as deferred revenue. Maintenance agreements are generally twelve-month prepaid contracts that are
recognized ratably over the service period. VSOE of fair value for maintenance
is measured by the stated renewal rates included in the agreements. 15




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Customers may also enter into arrangements that are typically on a time and
materials basis for consulting and training services. VSOE of fair value for
consulting and training services is based upon the standard hourly rate we
charge for such services when sold separately. Training services are generally
prepaid prior to rendering the service. Consulting and training revenues are
typically recognized as earned. Consulting revenues are generated primarily
from implementation services related to the installation of our products.
These arrangements are generally accounted for separately from the license
revenue because the arrangements qualify as service transactions as defined
in SOP 97-2. Our services are generally not essential to the functionality of
the software. Our products are fully functional upon delivery of the product
and implementation does not require significant modification or alteration.
Factors considered in determining whether the revenue should be accounted for
separately include, but are not limited to: degree of risk, availability of
services from other vendors, timing of payments and impact of milestones or
acceptance criteria on the realizability of the software license fee. Payments
related to the software product to which the services relate are typically
billed independently from the services and, therefore, are not coincident with
performance of such services. License agreements generally do not include
acceptance provisions. In the infrequent circumstance where an arrangement
does not qualify for separate accounting of the license and service elements,
license revenue is generally recognized together with the consulting services
using the percentage-of-completion method of contract accounting in accordance
with SOP 81-1, Accounting for Performance of Construction-Type and Certain
Product-Type Contracts and Accounting Research Bulletin No. 45, Long-Term
Construction-Type Contracts. If the fair value of any undelivered element included in a multiple-element
arrangement cannot be objectively determined, revenue is deferred until all
elements are delivered, services have been performed or until fair value can be
objectively determined. License revenue from resellers or distributors is
recognized upon sell-through to the end customer. If we determine that
collection of a license fee is not reasonably assured, the fee is deferred and
revenue is recognized at the time collection becomes reasonably assured, which
is generally upon receipt of cash. Accounts Receivable Allowances We make judgments as to our ability to collect outstanding receivables and
provide allowances for a portion of receivables when collection becomes
doubtful. Provisions are based upon a review of all significant outstanding
invoices. For those invoices not specifically reviewed, provisions are made at
differing rates, based upon the age of the receivable. In determining these
provisions, we analyze several factors, including: our historical collection
experience, customer concentrations, customer credit-worthiness and current
economic trends. If the historical data used to calculate the accounts
receivable allowances does not reflect our future ability to collect
outstanding receivables, we may record additional provisions for accounts
receivable allowances. We record the provision for accounts receivable
allowances in general and administrative expense and as a reduction of revenue
in order to match the underlying cause of the provision to the appropriate
classification in our statement of operations. Our accounts receivable allowance was $8.8 million at June 30, 2004 and $8.2
million at June 30, 2003. The total provision for accounts receivable
allowances was $8.1 million, $5.8 million and $20.9 million in fiscal 2004,
2003 and 2002, respectively. Of these provisions, $1.4 million, $1.4 million
and $4.1 million were recorded in general and administrative expense in fiscal
2004, 2003 and 2002, respectively, and $6.7 million, $4.4 million and $16.8
million were recorded as a reduction of revenue in fiscal 2004, 2003 and 2002,
respectively. Income Taxes Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in our financial statements or tax returns.
The measurement of current and deferred tax assets and liabilities are based on
provisions of the enacted tax law. The effects of future changes in tax laws
or rates are not anticipated. During the preparation of our consolidated financial statements, we estimate
our income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax expense together with assessing
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within the consolidated
balance sheet. We then assess the likelihood that our deferred tax assets will
be recovered from future taxable income, and, to the extent we believe that
recovery is not likely, a valuation allowance is established. To the extent we
establish a valuation allowance or increase this allowance in a period, an
expense is recorded within the tax provision in the statements of operations. 16




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Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against the net deferred tax assets. We have recorded a valuation
allowance due to uncertainties related to our ability to utilize some of our
deferred tax assets, primarily relating to foreign net operating losses carried
forward, before they expire. The valuation allowance is based on estimates of
taxable income by jurisdiction in which we operate and the period over which
the deferred tax assets will be recoverable. In the event that actual results
differ from these estimates, or these estimates are adjusted in future periods,
additional valuation allowances may need to be recorded, which could materially
impact our financial position and results of operations. Valuation of Goodwill, Intangibles, and Long-Lived Assets We account for goodwill under SFAS 142, Goodwill and Other Intangible Assets,
which requires us to review for impairment of goodwill on an annual basis, and
between annual tests whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. This impairment review involves a
two-step process as described in note 2 to our consolidated financial
statements. We have determined that we have only a single reporting unit, and
we are required to make estimates regarding the fair value of that reporting
unit when testing for potential impairment. We estimate the fair value of our
reporting unit using the market approach. Under the market approach, we
estimate the fair value based on our market capitalization. Our determination
that we have only a single reporting unit and the method used to estimate the
fair value of that reporting unit require significant judgment. We account for finite-lived intangibles and long-lived assets under SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
requires us to review for impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Factors considered important which could trigger an impairment
review include (i) significant underperformance relative to historical or
projected future operating results, (ii) significant changes in the manner of
use of the assets or the strategy for our overall business, (iii) significant
decrease in the market value of the assets and (iv) significant negative
industry or economic trends. Based upon the existence of one or more indicators of impairment, we measure
any impairment of intangibles or long-lived assets based on the estimated
future discounted cash flows using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. Our
estimates of cash flows require significant judgment based on our historical
results and anticipated results and are subject to many factors that may change
in the near term. RESULTS OF OPERATIONS We acquired Brio Software, Inc. on October 16, 2003. Brios results of
operations have been included in Hyperions results beginning on the date of
acquisition. In addition to the incremental revenue streams associated with
Brio products and services, our headcount increased by approximately 15% in the
second quarter of fiscal 2004 as a result of the acquisition. REVENUES Year Ended June 30,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    Revenue
    
    2002
    
    RevenueSoftware licenses
    
    $
    240,096
    
    
    
    39
    %
    
    $
    201,766
    
    
    
    40
    %
    
    $
    196,066
    
    
    
    40
    %Maintenance and services:Maintenance
    
    
    264,866
    
    
    
    42
    %
    
    
    212,157
    
    
    
    41
    %
    
    
    186,052
    
    
    
    38
    %Consulting and training
    
    
    117,238
    
    
    
    19
    %
    
    
    96,535
    
    
    
    19
    %
    
    
    109,900
    
    
    
    22
    %382,104
    
    
    
    61
    %
    
    
    308,692
    
    
    
    60
    %
    
    
    295,952
    
    
    
    60
    %Total revenues
    
    $
    622,200
    
    
    
    100
    %
    
    $
    510,458
    
    
    
    100
    %
    
    $
    492,018
    
    
    
    100
    %
 Total revenues increased 22% in fiscal 2004 compared to fiscal 2003 and
increased 4% in fiscal 2003 compared to fiscal 2002. The change in foreign currency exchange rates favorably affected total revenues
in fiscal 2004 compared to fiscal 2003 by approximately $19.5 million and
favorably affected total revenues in fiscal 2003 compared to fiscal 2002 by
approximately $21.2 million, in both cases primarily due to the strength of the
Euro against the U.S. dollar. Excluding the impact of foreign currency rate
changes, total revenues would have increased 18% in fiscal 2004 compared to
fiscal 2003 and would have declined slightly in fiscal 2003 compared to fiscal
2002. 17




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##### Table of Contents



Software license revenue.Software license revenues increased 19% to $240.1
million in fiscal 2004 from $201.8 million in fiscal 2003. While the fiscal
2004 license revenue growth was predominantly attributable to sales of Hyperion
Performance Suite, the former Brio products, we also experienced balanced
growth across our financial application product portfolio. These increases
were partially offset by decreases in sales of our platform products in fiscal
2004 compared to fiscal 2003. Software license revenues increased 3% to $201.8 million in fiscal 2003 from
$196.1 million in fiscal 2002. The increase in license revenue in fiscal 2003
was primarily due to increased revenues from two of our newer application
products, Hyperion Planning and Hyperion Financial Management. These two
products were still in the early stages of their product life cycles during
most of fiscal 2002, but they began making significant contributions to total
license revenue in the fourth quarter of fiscal 2002 and into fiscal 2003.
These increases in application product sales were offset to some extent by
declines in revenue from our older, standalone application products, Hyperion
Pillar and Hyperion Enterprise, and our platform products. We market our products through our direct sales force and through channel
partners. To date, we have generated the majority of our license revenue
through our direct sales force, but we continue to focus on complementing our
direct sales force with channel partners, which include original equipment
manufacturers, value added resellers, system integrators and independent
distributors. License revenue from channel partners comprised 24% of total
license revenues in fiscal 2004 compared to 26% in fiscal 2003 and 25% in
fiscal 2002. The percentage of license revenue derived from our channel
partners can fluctuate between periods, as it is sensitive to individual large
transactions that are neither predictable nor consistent in size or timing. No
single channel partner represented more than 10% of total revenues during the
periods presented. Maintenance and services revenue.Maintenance and services revenue increased
24% in fiscal 2004 compared to fiscal 2003, which was comprised of a 25%
increase in maintenance revenue and a 21% increase in consulting and training
services revenue. Maintenance and services revenue increased 4% in fiscal 2003
compared to fiscal 2002, which was comprised of a 14% increase in maintenance
revenue and a 12% decrease in consulting and training services revenue. The increase in maintenance revenue in fiscal 2004 was primarily attributable
to our acquisition of Brio in October 2003 and, to a lesser extent, to
year-over-year growth of our installed customer base and improvements in our
invoicing and collecting procedures for maintenance renewals, which was offset
slightly by cancelled maintenance contracts. The increase in consulting and
training services revenue in fiscal 2004 was principally due to our acquisition
of Brio in October 2003 and, to a lesser extent, to increased utilization rates
in our consulting organization. The increase in maintenance revenue in fiscal 2003 was primarily due to
additional sales of software to our customers and improvements in our invoicing
and collecting procedures for maintenance renewals, which was offset slightly
by cancelled maintenance contracts. During fiscal 2002 and fiscal 2003, we
analyzed our customer portfolio to identify customers who may have been
receiving maintenance services but were not paying for such services. This
initiative resulted in the recognition of maintenance revenues from billings to
customers in fiscal 2003 for maintenance services provided in prior periods.
The decrease in consulting revenue in fiscal 2003 was primarily due to our
continued focus on increasing the use of channel partners to provide consulting
services for our customers. As part of this effort, we reduced headcount in
our North American consulting organization by approximately 75 employees in the
fourth quarter of fiscal 2002 and further reduced consulting headcount by
approximately 25 employees during fiscal 2003. COST OF REVENUES Year Ended June 30,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofRelated
    
    
    
    
    
    Related
    
    
    
    
    
    Related(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    Revenue
    
    2002
    
    RevenueSoftware licenses
    
    $
    13,362
    
    
    
    6
    %
    
    $
    15,419
    
    
    
    8
    %
    
    $
    15,430
    
    
    
    8
    %Maintenance and services
    
    
    147,816
    
    
    
    39
    %
    
    
    132,510
    
    
    
    43
    %
    
    
    137,047
    
    
    
    46
    %
 Cost of software license revenue.Cost of software license revenue consists
primarily of royalty expenses, amortization of capitalized software development
costs, amortization of acquired technologies, and the cost of product packaging
and documentation materials. Cost of software license revenue decreased 13% to
$13.4 million in fiscal 2004 from $15.4 million in fiscal 2003 while software
license revenue increased 19%. This decrease was primarily due to a $2.3
million decrease in royalty expense resulting from a different mix of product
sales as well as the termination of our OEM relationship with Crystal
Decisions. Partially offsetting the decrease in royalty expense in fiscal 2004
was a slight increase in acquired technology amortization expense primarily
resulting from our acquisitions of Brio in October 2003 and The Alcar Group in
April 2003. 18




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##### Table of Contents



Cost of software license revenue remained relatively flat in fiscal 2003
compared to fiscal 2002 while software license revenue increased 3%. This was
primarily due to a $1.9 million decrease in royalty expenses due to a different
mix of product sales and a $0.8 million decrease in product packaging and
documentation material costs due to our increased use of electronic product
distribution. These decreases were substantially offset by a $1.5 million
increase in amortization of capitalized software development costs and a $1.1
million increase in amortization of acquired technologies. Gross margin on software license revenue was 94% in fiscal 2004 compared to 92%
in fiscal 2003 and fiscal 2002. In fiscal 2004, 2003 and 2002, we capitalized $2.2 million, $2.0 million, and
$2.5 million of software development costs, respectively, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. The
amounts capitalized relate to localization costs for our software products.
Capitalized software product development costs are amortized over the estimated
economic lives of the products, which is generally three years. The
amortization of capitalized software development costs begins upon the general
release of the software to customers. Cost of maintenance and services revenue.Cost of maintenance and services
revenue consists largely of compensation and benefits for support, consulting
and training personnel. Cost of maintenance and services revenue increased 12%
to $147.8 million in fiscal 2004 from $132.5 million in fiscal 2003. The
increase in cost of maintenance and services revenue in fiscal 2004 compared to
fiscal 2003 was principally due to a $7.8 million increase in employee expenses
and a $7.7 million increase in subcontractor and other external personnel
costs, both of which primarily resulted from our acquisition of Brio in October
2003. Maintenance and services headcount grew to 761 employees at June 30,
2004 from 743 employees at June 30, 2003, primarily due to the addition of
incremental Brio employees. Cost of maintenance and services revenue decreased 3% to $132.5 million in
fiscal 2003 from $137.0 million in fiscal 2002, primarily attributable to our
continued focus on leveraging our channel partners to perform consulting
services for our customers. As a result of this effort, we reduced headcount
in our North American consulting organization by approximately 75 employees in
the fourth quarter of fiscal 2002 and further reduced consulting headcount by
approximately 25 employees during fiscal 2003. This reduction in headcount
contributed to a $2.2 million decrease in employee expenses for maintenance and
services personnel in fiscal 2003 compared to fiscal 2002. Further, independent
contractor and temporary staffing expenses decreased $1.0 million in fiscal
2003 compared to fiscal 2002 primarily due to our decreased use of external
personnel for product implementations for customers. Gross margin on maintenance and services revenue was 61% in fiscal 2004
compared to 57% in fiscal 2003 and 54% in fiscal 2002. The increase in gross
margin on maintenance and services revenue in fiscal 2004 was due to increased
consulting utilization rates and, to a lesser extent, due to a higher mix of
maintenance revenue as a percentage of total maintenance and services revenues.
The increase in gross margin in fiscal 2003 was primarily due to the increase
in maintenance revenue as a percentage of total maintenance and services
revenue. Maintenance revenue as a percentage of total maintenance and services
revenue increased in fiscal 2003 due to maintenance revenue increases, as
discussed above, as well as consulting revenue decreases due to our increased
use of channel partners to provide consulting services. OPERATING EXPENSES Year Ended June 30,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    Revenue
    
    2002
    
    RevenueSales and marketing
    
    $
    225,951
    
    
    
    36
    %
    
    $
    190,025
    
    
    
    37
    %
    
    $
    182,311
    
    
    
    37
    %Research and development
    
    
    96,240
    
    
    
    15
    %
    
    
    73,776
    
    
    
    14
    %
    
    
    72,206
    
    
    
    15
    %General and administrative
    
    

    63,621
    
    
    
    10
    %
    
    
    47,207
    
    
    
    9
    %
    
    
    64,843
    
    
    
    13
    %Total operating expenses
    
    $
    385,812
    
    
    
    
    
    
    $
    311,008
    
    
    
    
    
    
    $
    319,360
 Sales and marketing.Sales and marketing expense increased 19% to $226.0
million in fiscal 2004 from $190.0 million in fiscal 2003. This increase was
mainly due to a $27.2 million increase in employee expenses that resulted
primarily from our acquisition of Brio in October 2003 and a higher effective
commission rate in fiscal 2004 compared to fiscal 2003. Sales and marketing
headcount grew to 835 employees at June 30, 2004 from 680 employees at June 30,
2003, primarily due to the addition of incremental Brio employees. 19




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Sales and marketing expense increased 4% to $190.0 million in fiscal 2003 from
$182.3 million fiscal 2002. This increase was primarily due to a $6.5 million
increase in marketing expenses resulting from a heavier focus on a wide variety
of demand generation activities. We also increased spending in the area of
brand building and the advancement of Business Performance Management thought
leadership. Research and development.Research and development expense increased 30% to
$96.2 million in fiscal 2004 from $73.8 million in fiscal 2003. This increase
was mainly attributable to a $16.9 million increase in employee expenses that
resulted primarily from our acquisition of Brio in October 2003. Research and
development headcount grew to 531 employees at June 30, 2004 from 438 employees
at June 30, 2003, primarily due to the addition of incremental Brio employees. Research and development expense increased 2% to $73.8 million in fiscal 2003
from $72.2 million in fiscal 2002. This increase is primarily attributable to a
$1.4 million increase in salaries and related employee expenses. General and administrative.General and administrative expense increased 35%
to $63.6 million in fiscal 2004 from $47.2 million in fiscal 2003. This
increase was principally due to an $11.6 million increase in employee expenses
that resulted primarily from our acquisition of Brio in October 2003. General
and administrative headcount grew to 370 employees at June 30, 2004 from 338
employees at June 30, 2003, primarily due to the addition of incremental Brio
employees. General and administrative expense decreased 27% to $47.2 million in fiscal
2003 from $64.8 million in fiscal 2002. This decrease was primarily
attributable to a $2.7 million decrease in bad debt expense resulting from
improvements in the quality of our accounts receivable portfolio, a $4.1
million decrease in outsourcing costs, as we ended the outsourcing of our North
American accounting department in the fourth quarter of fiscal 2002, a $4.4
million decrease in occupancy and equipment costs primarily due to a decrease
in depreciation and amortization expense, as many fixed assets became fully
depreciated during fiscal 2003, and a $1.5 million decrease in charges related
to property and sales tax audits. These decreases were partially offset by a
$3.2 million increase in salaries and related employee expenses resulting
primarily from headcount increases as we brought our North American accounting
function in-house. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges totaled $4.2 million, $0.8 million and $0.1
million in fiscal 2004, 2003 and 2002, respectively. In connection with the acquisition of Brio in October 2003, management approved
and initiated plans to restructure the operations of Hyperion to eliminate
certain duplicative activities and reduce the combined companys cost
structure. Consequently, we recorded restructuring charges totaling $3.6
million in fiscal 2004, including $3.4 million of employee severance costs and
$0.2 million of facility closure costs. In June 2001, we announced a corporate restructuring plan designed to bring
costs more in line with revenues and strengthen the financial performance of
the company, which resulted in a reduction of the workforce by approximately
300, or 12% of worldwide headcount. Employee groups impacted by the
restructuring included personnel involved in corporate services, product
business units, sales and customer support. In addition, we consolidated some
of our facilities and exited other facilities. In fiscal 2004, 2003 and 2002,
we made adjustments to the restructuring charges recorded in fiscal 2001
totaling $0.6 million, $0.8 million and $0.1 million, respectively. These
adjustments resulted primarily from changes to our estimates of sublease income
related to our facility exit costs and did not represent new restructuring
activities. A summary of restructuring and other charges and the related accrual balance is
as follows (in thousands): Severance
    
    Facilities
    
    Other
    
    TotalAccrual balance at June 30, 2001
    
    $
    5,537
    
    
    $
    17,227
    
    
    $
    5,266
    
    
    $
    28,030Adjustments
    
    
    (126
    )
    
    
    393
    
    
    
    (1,141
    )
    
    
    (874
    )Cash payments
    
    
    (5,058
    )
    
    
    (2,735
    )
    
    
    (751
    )
    
    
    (8,544
    )Accrual balance at June 30, 2002
    
    
    353
    
    
    
    14,885
    
    
    
    3,374
    
    
    
    18,612Adjustments
    
    
    
    
    
    
    764
    
    
    
    
    
    
    
    764Cash payments
    
    
    (353
    )
    
    
    (2,291
    )
    
    
    (1,524
    )
    
    
    (4,168
    )Accrual balance at June 30, 2003
    
    
    
    
    
    
    13,358
    
    
    
    1,850
    
    
    
    15,208Restructuring charges and adjustments
    
    
    3,410
    
    
    
    792
    
    
    
    
    
    
    
    4,202Cash payments
    
    
    (3,299
    )
    
    
    (2,073
    )
    
    
    (91
    )
    
    
    (5,463
    )Accrual balance at June 30, 2004
    
    $
    111
    
    
    $
    12,077
    
    
    $
    1,759
    
    
    $
    13,947
 20




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The remaining accrual balance at June 30, 2004 of $13.9 million relates
primarily to future lease obligations. Of this amount, $4.2 million is
included in other current liabilities and $9.7 million is included in other
liabilities on our consolidated balance sheet. Payments due under long-term
lease obligations will continue to be made over the remaining lives of the
leases. If we are unable to maintain a cost structure that is in appropriate
balance with revenue going forward, whether due to failure to increase revenue
adequately or failure to keep costs down, we could find it necessary to further
adjust our cost structure through the execution of additional restructuring
plans. In the fourth quarter of fiscal 2004, we signed an engineering consulting
agreement with a consulting firm based in Bangalore, India in an effort to
increase our multi-shore development capacity and capability. The expansion of
our multi-shore initiative will be gradual over fiscal 2005 and will ultimately
result in about 150 to 200 additional developers contributing to our
development efforts in India. Because of this initiative, in July 2004 we
reduced our U.S.-based development staff by approximately 50 employees, or
approximately 10% of our development headcount, and will record a restructuring
charge in the first quarter of fiscal 2005 of approximately $1.0 million. This
restructuring charge consists of severance and related benefits costs. In the fourth quarter of fiscal 2004, we signed a lease agreement for a new
corporate headquarters facility located in Santa Clara, California that will
accommodate all employees in our existing leased facilities in San Francisco,
Sunnyvale and Santa Clara, California. In July 2004, we vacated our San
Francisco facility and will record a restructuring charge in the first quarter
of fiscal 2005 of approximately $2.0 million. We expect to vacate our existing
Sunnyvale and Santa Clara facilities in the second quarter of fiscal 2005,
which will result in additional restructuring charges in the second quarter of
approximately $6.0 million. IN-PROCESS RESEARCH AND DEVELOPMENT During fiscal 2004, in connection with our acquisition of Brio, we recorded a
charge of $2.3 million related to the write-off of in-process research and
development costs. INTEREST AND OTHER INCOME Interest and other income consists primarily of interest earned on cash, cash
equivalent and short-term investment balances. Interest and other income
decreased 27% to $4.3 million in fiscal 2004 from $5.8 million in fiscal 2003
and decreased 17% to $5.8 million in fiscal 2003 from $7.0 million in fiscal
2002 due to declines in short-term interest rates. INTEREST AND OTHER EXPENSE Interest and other expense consists primarily of interest paid and amortization
of deferred issuance costs related to our convertible subordinated notes.
Interest and other expense decreased 58% to $1.2 million in fiscal 2004 from
$2.9 million in fiscal 2003. During the second quarter of fiscal 2004, we
redeemed our remaining convertible subordinated notes with face values totaling
$50.0 million, which significantly contributed to the decrease in interest and
other expense in fiscal 2004 compared to fiscal 2003. Interest and other expense decreased 37% to $2.9 million in fiscal 2003 from
$4.6 million in fiscal 2002. During the first and second quarters of fiscal
2003, we repurchased convertible subordinated notes with face values totaling
$28.7 million. In addition, we repurchased convertible subordinated notes with
face values totaling $10.0 million during the fourth quarter of fiscal 2002.
These repurchases significantly contributed to the decrease in interest and
other expense in fiscal 2003 compared to fiscal 2002. GAIN (LOSS) ON REDEMPTION OF DEBT During the second quarter of fiscal 2004, we redeemed our remaining convertible
subordinated notes with face values totaling $50.0 million. This redemption
resulted in the recognition of a loss of $0.9 million in fiscal 2004, which was
comprised of the 1.286% redemption premium paid as well as the write-off of
associated deferred issuance costs. During the first and second quarters of fiscal 2003, we repurchased convertible
subordinated notes with face values totaling $28.7 million for a total cost of
approximately $27.9 million, which resulted in the recognition of a gain, net
of the write-off of associated deferred issuance costs, of approximately $0.5
million. During the fourth quarter of fiscal 2002, we repurchased convertible
subordinated notes with face values totaling $10.0 million for a total cost of
$8.9 million, which resulted in the recognition of a gain, net of the write-off
of associated deferred issuance costs, of approximately $0.9 million. 21




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##### Table of Contents



INCOME TAX PROVISION Our effective income tax rate was 38% in fiscal 2004 compared to 37% in fiscal
2003. Excluding the impact of the charge for in-process research and
development of $2.3 million, which is not deductible for tax purposes, our
effective income tax rate would have been 37% in fiscal 2004. Our effective income tax rate was 37% in fiscal 2003 compared to 36% in fiscal
2002. Our effective income tax rate increased slightly in fiscal 2003 compared
to fiscal 2002 due to a decrease in the impact of tax exempt interest and a
change in the geographical mix of income. NET INCOME We generated net income of $43.8 million, or $1.10 per diluted share, in fiscal
2004 compared to net income of $34.1 million, or $0.96 per diluted share, in
fiscal 2003 and net income of $15.0 million, or $0.45 per diluted share, in
fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES Year Ended June 30,(In thousands)
    
    2004
    
    2003
    
    2002Cash, cash equivalents and short-term investments
    
    $
    368,175
    
    
    $
    416,554
    
    
    $
    330,258Working capital
    
    
    273,983
    
    
    
    350,649
    
    
    
    281,501Net cash provided by operating activities
    
    
    86,461
    
    
    
    88,113
    
    
    
    84,210Net cash used in investing activities
    
    
    (2,200
    )
    
    
    (26,756
    )
    
    
    (14,625
    )Net cash provided by (used in) financing activities
    
    
    (121,354
    )
    
    
    20,144
    
    
    
    4,271
 At June 30, 2004, we had $365.2 million in cash and cash equivalents and $3.0
million in short-term investments, consisting primarily of balances in
interest-bearing demand deposit accounts, state and municipal bonds, U.S.
government and agency obligations and other highly-liquid securities. At June
30, 2004, our working capital was $274.0 million. In fiscal 2004, 2003 and 2002, we generated positive cash flow from operations
of $86.5 million, $88.1 million and $84.2 million, respectively. Our operating
cash flows in fiscal 2004 were primarily due to the net income generated during
the period and the positive impact of non-cash items reflected in net income
such as depreciation and amortization expense and the impact of the income tax
benefit from stock option exercises, partially offset by an increase in
accounts receivable. In fiscal 2003 and 2002, our operating cash flows were
primarily attributable to the net income generated during the periods and the
positive impact of non-cash items reflected in the net income amount such as
depreciation and amortization expense, as well as decreases in accounts
receivable. The decreases in accounts receivable in fiscal 2003 and 2002
resulted from our focus on invoicing and collection process improvements,
primarily for maintenance and consulting services. Net cash used in investing activities amounted to $2.2 million, $26.8 million
and $14.6 million in fiscal 2004, 2003 and 2002, respectively. The net cash
used in investing activities in fiscal 2004 resulted primarily from purchases
of property and equipment of $22.6 million and payments for acquisitions, net
of cash acquired, of $6.9 million, which were partially offset by proceeds from
maturities of investments, net of purchases, of $29.4 million. The net cash
used in investing activities in fiscal 2003 resulted primarily from purchases
of property and equipment of $19.8 million and payments for acquisitions of
$6.0 million. The net cash used in investing activities in fiscal 2002 was
primarily due to purchases of property and equipment of $13.5 million and
purchases of intangible assets of $5.8 million, primarily consisting of
acquired technologies. These cash outflows were partially offset by proceeds
from maturities of investments, net of purchases, of $5.4 million in fiscal
2002. Our capital expenditures in fiscal 2004, 2003 and 2002 consisted
primarily of purchases of resources to manage our operations, including
computer hardware and software and leasehold improvements. The payments for
acquisitions in
fiscal 2004 related primarily to our acquisition of Brio in October 2003, and
the payments for acquisitions in fiscal 2003 related to our acquisition of
Alcar in April 2003. 22




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##### Table of Contents



Net cash used in financing activities was $121.4 million in fiscal 2004
compared to net cash provided by financing activities of $20.1 million in
fiscal 2003 and $4.3 million in fiscal 2002. The cash used in financing
activities in fiscal 2004 resulted from $50.7 million paid to redeem our
remaining outstanding convertible subordinated notes, which was authorized by
our board of directors in October 2003, and $131.0 million of repurchases of
our common stock under repurchase programs authorized by our board in July 2003
and May 2004. These cash outflows were partially offset by $60.4 million of
proceeds from the issuance of common stock under our employee stock option and
stock purchase plans. The cash provided by financing activities in fiscal 2003
was due to $50.4 million of proceeds from the issuance of common stock under
our employee stock option and stock purchase plans, which was partially offset
by repurchases of convertible subordinated notes totaling $27.9 million. The
net cash provided by financing activities in fiscal 2002 was due to $13.4
million of proceeds from the issuance of common stock under our employee stock
option and stock purchase plans, which was partially offset by repurchases of
convertible subordinated notes totaling $8.9 million. As of June 30, 2004, we
are authorized to repurchase up to an additional $68.9 million of common stock
under the repurchase plan authorized by our board of directors in May 2004. We
expect to continue to repurchase shares of common stock under this plan in
fiscal 2005, subject to market conditions. We intend to fund our capital requirements, as well as our liquidity needs,
with existing cash, cash equivalent and short-term investment balances as well
as cash generated from future operations, if any. However, capital
requirements will depend on many factors, including our rate of revenue growth,
market acceptance of our products, the timing and extent of development
projects and increases in operating expenses, all of which are subject to
uncertainty. We believe that our existing cash, cash equivalent and short-term
investment balances, and cash generated from our future operations, if any,
will be sufficient to finance our business through at least June 30, 2005. To
the extent that existing cash, cash equivalent and short-term investment
balances and cash generated by operations are insufficient to fund future
activities, we may need to raise additional funds through public or private
debt or equity financing. Additional funds may not be available on terms
favorable to us or at all. In addition, our ability to generate positive cash
flows from operations will be impacted by changes in customer demand and
acceptance of our products as well as our ability to manage operating expenses
and achieve further operational efficiencies. The following table summarizes our contractual obligations as of June 30, 2004
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods: Year Ended June 30,(In thousands)
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalNon-cancellable
operating leases
    
    $
    27,652
    
    
    $
    24,119
    
    
    $
    21,159
    
    
    $
    18,451
    
    
    $
    14,217
    
    
    $
    45,859
    
    
    $
    151,457
 RECENT ACCOUNTING PRONOUNCEMENTS In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 (EITF
03-06), Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share. EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. We adopted EITF 03-06 on April 1, 2004, and the adoption did
not have a material impact on our financial position or results of operations. RELATED PARTY TRANSACTIONS In fiscal 2003 and 2002, Siebel Systems purchased approximately $0.2 million
and $1.0 million, respectively, of software, maintenance and services from us
for purposes of implementing an enterprise-wide financial planning system. In
addition, Siebel has a future option to purchase the same products in
accordance with normal contractual terms and conditions. The Chief Financial
Officer of Siebel was on our board of directors from June 2000 to February
2003. As of June 30, 2003, all amounts due from Siebel related to these
transactions had been received. In fiscal 2003 and 2002, we purchased approximately $0.8 million and $3.0
million, respectively, of software, maintenance and services from Siebel for
purposes of implementing a worldwide customer relationship management system.
As of June 30, 2003, we had a payable to Siebel in the amount of $0.2 million related to
these transactions, which was paid during fiscal 2004. 23




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FACTORS THAT MAY AFFECT FUTURE RESULTS We operate in a very competitive and rapidly changing environment that involves
numerous risks, some of which are beyond our control. The following discussion
highlights some of these risks. Product enhancement and new product introductions involve inherent risks. Hyperion competes in a market characterized by rapid technological advances in
hardware and software development, evolving standards in computer hardware and
software technology and frequent new product introductions and enhancements.
Hyperion continually seeks to expand and refresh its product offerings to
include newer features or products, and enter into agreements allowing
integration of third-party technology into Hyperions products. The
introduction of new products or updated versions of continuing products has
inherent risks, including, but not limited to:  
    
    product quality, including the possibility of software defects; 
    
    the fit of the new products and features with the customers needs;
 
    
    the successful adaptation of third-party technology into Hyperions products;
 
    
    educating Hyperions sales, marketing and consulting personnel to work with the new products and features;
 
    
    competition from earlier and more established entrants;
 
    
    market acceptance of initial product releases;
 
    
    marketing effectiveness; and
 
    
    the accuracy of assumptions about the nature of customer demand.
 Hyperions failure to successfully introduce, market and sell new products and
technologies, enhance and improve existing products in a timely manner, and
properly position and/or price Hyperions products, and undetected errors or
delays in new products or new versions of a product and/or the failure of
anticipated market growth could have a material adverse effect on Hyperions
business, results of operations or financial position. These risks tend to be
greater when newer products make up a larger portion of the overall product
mix. As more and more of these newer products are deployed, Hyperions service
and maintenance organizations, along with its partners, must rapidly increase
their ability to install and service these products, and Hyperion must rapidly
improve their ease-of-implementation and ease-of-use. The failure to
successfully increase these capacities and make these improvements could result
in significantly lower customer satisfaction, which could lead to lower
revenues and profits. For fiscal 2005, important newer products or product
enhancements include Performance Suite 8 and Essbase 7.1. Hyperion operates in a very competitive environment. The markets in which Hyperion competes are intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
standards. Hyperion has experienced, and expects it will continue to
experience, vigorous competition from current competitors and new competitors,
some of whom may have significantly greater financial, technical, marketing and
other resources than Hyperion does. Cognos competes with Hyperion across a
wide range of products, offering what they refer to as Corporate Performance
Management solutions, as do, generally, the major ERP vendors, including SAP,
Microsoft, Oracle and Peoplesoft. Many other companies compete in specific
areas of Hyperions business. SAS and PeopleSoft have OLAP products and
analytic applications, Business Objects and Cognos have query and reporting
products, and numerous smaller vendors offer specific applications that compete
with a single Hyperion product. Hyperion expects additional competition as
other established and emerging companies, including Microsoft, PeopleSoft, SAP
and Oracle, move further into both the application and platform parts of the
business performance management software market. This competition could result
in price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which would materially adversely affect Hyperions
business, operating results and financial condition. If Hyperion is unable to develop or acquire new and enhanced products that
achieve widespread market acceptance, Hyperion may be unable to recoup product
development costs, and Hyperions earnings and revenue may decline. Hyperions future success depends on its ability to address the rapidly
changing needs of its customers by developing or acquiring new products and
introducing such products, product updates and services on a timely basis.
Hyperion must also extend the operation of its products to new platforms and
keep pace with technological developments and emerging industry standards.
Hyperion commits substantial resources to developing new software products and
services. If the markets for these new products do not develop as anticipated, or demand for Hyperions
products and services in these markets does not materialize or occurs more
slowly than Hyperion expects, Hyperion will have expended substantial resources
and capital without realizing sufficient revenue, and Hyperions business and
operating results could be adversely affected. 24




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Failure to upgrade older products will adversely affect revenue. As newer products are introduced by Hyperion, or by its competition, the
markets demand for Hyperions older products declines. Declining demand
reduces revenue from additional licenses, and reduces maintenance revenue from
past purchasers of Hyperions software. We must continually upgrade Hyperions
older products in order for Hyperions customers to continue to see value in
Hyperions maintenance services. If Hyperion is unable to provide continued
improvements in functionality, or, alternatively, move customers from
Hyperions older products to Hyperions newer products, declining maintenance
and new license revenue from older products could have a material adverse
effect on Hyperions business. Hyperion typically has back-ended quarters. Quarterly revenues and operating results are highly dependent on the volume and
timing of the signing of licensing agreements and product deliveries during the
quarter, which are difficult to forecast. Significant portions of Hyperions
quarterly software licensing agreements are concluded in the last month of the
fiscal quarter, generally with a concentration of such revenues in the final
week of that month. Due to the relatively fixed nature of certain costs,
including personnel and facilities expenses, a decline or shortfall in
quarterly and/or annual revenues typically results in lower profitability or
may result in losses. Prior to the very end of any quarter, Hyperion must rely
on Hyperions forecasts of revenue for planning, modeling and other purposes.
However, forecasts are only estimates and may not correlate to revenues in a
particular quarter or over a longer period of time. Consequently, a
significant discrepancy between actual results and sales forecasts could cause
Hyperion to improperly plan or budget and thereby adversely affect Hyperions
business or results of operations. Any publicly stated revenue or earnings
projections by Hyperion are especially subject to this risk. A change in pricing or marketing could adversely affect Hyperions business. In an effort to simplify and clarify Hyperions product positioning and
marketing, Hyperion periodically makes changes to Hyperions product pricing or
product descriptions. Any product price reductions may not be offset by
sufficient increases in unit sales to maintain or increase license revenues,
and any broadly based changes to pricing or marketing messages could cause
customers to change or delay their purchasing decisions in response to such
revisions. Additional risks of such changes include delays in transactions as
Hyperions sales force learns how to deploy the new pricing or convey
Hyperions new marketing messages and delay or loss of revenues as the
competition reacts to the pricing and marketing changes, any of which could
have a material adverse effect on Hyperions business, results of operations or
financial position. Hyperion may not be able to continue its operational improvements. As part of Hyperions focus on improving its operating margins, Hyperion is
driving toward increased efficiencies in Hyperions sales force, as well as
Hyperions services, product development, product marketing, finance,
information technology, human resources and other administrative processes.
The ability to continue to realize current efficiencies and find ways to
improve on past performance is crucial to the improvement of operating margins.
Any increase in the relative cost of these functions, or failure to continue
to realize current efficiencies, could have a material adverse effect on
Hyperions profits. Reorganizations may adversely affect productivity. Hyperion has continued to make adjustments to Hyperions operations and
organization. These changes have historically resulted in productivity
declines in the short term. The revised operations and/or organization must
keep improving over past performance in order to provide better operating
margins and efficiencies. Failure to maintain or improve momentum and
productivity could materially adversely impact Hyperions revenue and profits. Hyperions international operations are subject to significant risks. Hyperion derives a substantial portion of its revenue from customers located
outside of the United States. Hyperions international operations are subject to risks, including:  
    
    potential loss of proprietary information due to piracy,
misappropriation or weaker laws regarding intellectual property
protection; 
    
    imposition of foreign laws and other governmental controls, including
trade and employment restrictions;
 
    
    fluctuations in currency exchange rates and economic instability such
as higher interest rates and inflation, which could reduce Hyperions
customers ability to obtain financing for software products or which
could make Hyperions products more expensive in those countries;
 25




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
    
    difficulties in hedging foreign currency transaction exposures; 
    
    longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;
 
    
    difficulties in staffing and managing its international operations,
including difficulties related to administering Hyperions stock option
plan in some foreign countries;
 
    
    difficulties in coordinating the activities of Hyperions
geographically dispersed and culturally diverse operations;
 
    
    competition from local suppliers;
 
    
    costs and delays associated with developing software in multiple languages; and
 
    
    political unrest, war or terrorism, particularly in areas in which Hyperion has facilities.
 Hyperion may not be able to successfully address each of these challenges. Exchange rate fluctuations may adversely affect results. Hyperion conducts a significant portion of its business in currencies other
than the United States dollar. Hyperions operating results are, therefore,
subject to fluctuations in foreign currency exchange rates. Hyperions
revenues and operating results are adversely affected when the United States
dollar strengthens relative to other currencies and are positively affected
when the United States dollar weakens. Changes in the value of major foreign
currencies, particularly the Euro, relative to the value of the United States
dollar positively affected revenues and operating results in fiscal 2004 and
2003. If the United States dollar strengthens relative to other currencies in
the future, our revenues, operating results and cash flows will be adversely
affected. There are significant risks related to any business combination. Hyperion has made, and may in the future make, acquisitions of, mergers with,
or significant investments in, businesses that offer complementary products,
services and technologies. There are risks involved in these activities,
including but not limited to:  
    
    the possibility that Hyperion pays more than the value it derives from the acquisition; 
    
    the difficulty of integrating the products, operations and personnel of the acquired businesses;
 
    
    the possibility that all aspects of the integration are not completed
or that all of the anticipated synergies of the acquisition are not
realized;
 
    
    difficulties in managing software development activities to define a
combined product roadmap, ensuring timely development of new products,
timely release of new products to market, and the development of
efficient integration and migration processes and tools;
 
    
    the difficulty of retaining key alliances on attractive terms with partners and suppliers;
 
    
    the difficulty of retaining and recruiting key personnel and maintaining employee morale;
 
    
    the potential product liability associated with selling the acquired companys products;
 
    
    the potential disruption of Hyperions ongoing business and the
distraction of management from Hyperions business; and
 
    
    the potential write-down of impaired goodwill and intangible and
other assets. In particular, Hyperion recorded approximately $126.7
million of goodwill related to the acquisition of Brio that will not be
amortized in the ordinary course of business. To the extent that the
business acquired in that transaction (primarily the Performance Suite
products) does not remain competitive, some or all of the goodwill
related to that acquisition could be charged against future earnings.
 These factors could have a material adverse effect on Hyperions business,
results of operations or financial position, especially in the case of a large
acquisition. Hyperion is subject to the possibility of infringement claims. Hyperion expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in Hyperions
industry segment grows and the functionality of products in different industry
segments overlaps. Hyperion has in the past been subjected to patent
infringement claims. Any such claims, with or without merit, could be time
consuming and costly to defend, divert managements attention and resources,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all, and may require the payment of
substantial amounts of money. In the event of a successful product
infringement claim against Hyperion, and Hyperions failure or inability to
license the infringed or similar technology, Hyperions business, operating
results, financial condition and cash flows could be materially adversely
affected. 26




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Enforcement of Hyperions intellectual property rights may be difficult. Hyperion relies primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect Hyperions proprietary rights. Hyperions means of protecting its
proprietary rights in the United States or abroad may not be adequate and could
be subject to challenge, such as the reexamination of one of our patents by the
United States Patent and Trademark Office. Hyperions stock price may be volatile. The market price of Hyperions common stock is subject to significant
fluctuations. The market price of Hyperions common stock may be significantly
affected by such factors as the announcement of new products, product
enhancements or technological innovation by Hyperion or Hyperions competitors,
announcements of acquisitions by Hyperion, changes in Hyperions or Hyperions
competitors results of operations, changes in revenue, revenue growth rates
and revenue mix, changes in earnings estimates by market analysts and general
market conditions or market conditions specific to particular industries.
Technology stocks have experienced wide fluctuations in prices, which sometimes
have been unrelated to their operating performance. The market price of
Hyperions common stock could be adversely affected by such fluctuations. Hyperion is dependent upon indirect channel partners. In addition to its direct sales force, Hyperion relies on indirect channel
partners such as OEMs, VARs and distributors for licensing and support of its
products in the United States and internationally. License revenue from
channel partners comprised 24% of Hyperions total license revenue for fiscal
2004. Indirect channel sales involve a number of special risks, including:  
    
    Hyperions lack of control over the delivery of its products to end-users; 
    
    Hyperions resellers and distributors may terminate their relationship with Hyperion on short notice; and
 
    
    Hyperions resellers and distributors may market and distribute competing products.
 Hyperions current indirect channel partners may not elect, or be able, to
market or support Hyperions products effectively or be able to release their
products embedded with Hyperion products in a timely manner. Hyperion may not
be able to effectively manage conflicts between its various indirect channel
and direct customers, and economic conditions or industry demand may adversely
affect indirect channel partners or indirect channel partners may devote
greater resources to marketing and supporting the products of other companies.
Revenues derived from indirect channel partners may fluctuate significantly in
subsequent periods. Hyperions most significant channel partner is IBM Corporation. Hyperion
signed an OEM agreement with IBM in September 1996. This agreement can be
terminated by IBM on 90 days notice anytime after September 27, 1996 and by
Hyperion on 90 days notice anytime after December 31, 2003. If this agreement
is terminated by either party, our revenues, operating results and cash flows
could be adversely affected. Hyperion is exposed to product liability claims. Hyperions license agreements with its customers typically contain provisions
designed to limit Hyperions exposure to potential product liability claims, and Hyperion carries insurance to protect
against such claims. It is possible, however, that the limitation of liability
provisions contained in Hyperions license agreements may not be effective as a
result of U.S. or foreign laws or ordinances or because of judicial decisions,
and that liability insurance may not be available, or that coverage for
specific claims may be denied. Although Hyperion has not experienced any
material product liability claims to date, the sale and support of business
performance management products by Hyperion entails the risk of such claims. A
successful product liability claim brought against Hyperion could have a
material adverse effect upon Hyperions business, operating results and
financial condition. Defects in Hyperions products could increase its costs, adversely affect its
reputation, diminish demand for its products and hurt its operating results. As a result of their complexity, Hyperions software products may contain
undetected errors or viruses. Errors in new products or product enhancements
might not be detected until after initiating commercial shipments, which could
result in additional costs, delays, possible damage to Hyperions reputation
and could cause diminished demand for Hyperions products. This could lead to
customer dissatisfaction and reduce the opportunity to renew maintenance or
sell new licenses. 27




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Employee turnover could adversely impact revenue, costs and productivity. As employees leave Hyperion, it suffers loss of productivity while new
employees are hired, or promoted into vacant positions. There are also costs of
recruiting and re-locating new employees. New employees must learn the
Hyperion organization, products and procedures. Promoted employees must learn
new skills. All of this takes time, reduces productivity and increases cost.
The potential adverse impact of employee turnover is greater for situations
involving senior positions in the company. Turnover rates tend to increase as
economic conditions improve. If turnover increases, the adverse impacts of
turnover could materially affect Hyperions costs, productivity or ability to
respond quickly to the competitive environment. Some provisions in Hyperions charter documents and its stockholder rights plan
may prevent or deter an acquisition of Hyperion. Some of the provisions in Hyperions charter documents may deter or prevent
certain corporate actions, such as a merger, tender offer or proxy contest,
which could affect the market value of Hyperions securities. These provisions
include:  
    
    Hyperions board of directors is authorized to issue preferred stock
with any rights it may determine. Consequently, Hyperions board of
directors may issue preferred stock, without shareholder approval, that
has rights superior to the outstanding Hyperion common stock; 
    
    Hyperions board of directors is classified into three groups, with
each group of directors holding office for three years. The effect of
this classified board is that two annual meetings, not one, are required
to replace a majority of the board of directors;
 
    
    Hyperion stockholders are not entitled to cumulate votes for
directors; and
 
    
    special meetings of Hyperion stockholders may be called only by
Hyperions president or by the president or secretary upon written
request by a majority of the board of directors and may not be called by
Hyperions stockholders.
 Hyperion has in place a stockholder rights plan that is designed to discourage
coercive takeover offers. In general, Hyperions stockholder rights plan makes
it uneconomic for any person to acquire more than a 15% interest in Hyperion
without the consent of the Hyperion Board of Directors. Hyperions board of directors could utilize the provisions of its charter
documents and stockholder rights plan to resist an offer from a third party to
acquire Hyperion, including an offer to acquire Hyperion common stock at a
premium to its trading price or an offer that is otherwise considered favorable
by Hyperion stockholders. If requirements relating to the accounting treatment for employee stock options
are changed, Hyperions earnings may be adversely affected and we may be forced
to change our employee compensation and benefits practices. We currently account for the issuance of stock options under APB Opinion No.
25, Accounting for Stock Issued to Employees, under which we generally do not
record compensation expense related to employee stock options. On
March 31, 2004, the Financial Accounting Standards Board issued an Exposure Draft of
a proposed accounting standard that would require public companies to report
compensation expense related to stock options and other forms of stock-based
compensation based on the estimated fair value of the awards on the grant
dates. The final standard is expected to be issued in the fourth calendar
quarter of 2004 and could be effective beginning in our fiscal year 2006. If
the proposed standard is adopted in its current form, our earnings will be
negatively impacted. Also, we may consider changing our employee compensation
and benefits practices in a manner that could adversely impact our ability to
retain existing employees and attract qualified candidates. Failure to get approval for additional shares of common stock to be granted as
employee stock options or restricted stock could adversely affect our ability
to attract and retain employees. We are seeking to obtain stockholder approval for additional shares of common
stock that could be granted as employee stock options or restricted stock to
our employees and directors. We may not be able to secure approval for these
additional shares. If we do not get such approval, we will be forced to curtail
our option issuance, which will adversely impact our ability to retain existing
employees and attract qualified candidates. 28




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. The primary objective of our investment activities is to
preserve principal while maximizing yields, without significant risk. To
achieve this objective, we maintain our portfolio of cash equivalents and
short-term investments in a variety of high-quality, liquid securities. At
June 30, 2004 and June 30, 2003, our short-term investments consisted of
investment-grade debt securities with fair values totaling $3.0 million and
$18.5 million, respectively, consisting primarily of U.S. government and agency
obligations and state and municipal bonds. Due to the short duration of our
investment portfolio, an immediate 10% change in market interest rates would
not have a material impact on the value of our investment portfolio. FOREIGN CURRENCY EXCHANGE RATE RISK. We transact business in various foreign
currencies, primarily the Euro and British pound. Our exposure to foreign
currency exchange rate fluctuations arises in part from non-functional currency
denominated trade accounts receivable and intercompany receivables.
Intercompany receivables arise when software royalty fees and certain other
costs incurred in the United States are charged to our foreign sales
subsidiaries. These intercompany accounts are typically denominated in the
functional currency of the foreign subsidiary, which is generally their local
currency. From time to time, we utilize foreign currency forward exchange
contracts to offset the risk associated with the effects of these trade
receivables and certain intercompany receivables for which we anticipate
settlement in the foreseeable future. As a result, increases or decreases in
these accounts due to foreign exchange rate changes are offset by gains and
losses on the forward contracts. Our forward contracts generally have terms of
60 days or less. We do not use forward contracts for trading purposes. All
foreign currency balances and all outstanding forward contracts are
marked-to-market at the end of the period with unrealized gains and losses
included in our consolidated statements of operations. Our ultimate realized
gain or loss with respect to currency fluctuations will depend on the currency
exchange rates and other factors in effect as the contracts mature. Net foreign exchange transaction gains and losses were not material for fiscal
2004, 2003 and 2002. At June 30, 2004 and June 30, 2003, we had net forward
contracts to sell U.S. dollar equivalent of $33.5 million and $4.7 million,
respectively, in foreign currency. An immediate 10% change in currency
exchange rates affecting these contracts would not have a material impact on
our results of operations. 29




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    31Consolidated Financial Statements:Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    32Consolidated Statements of Operations for the years ended June 30,
2004, 2003 and 2002
    
    
    33Consolidated
Statements of Stockholders Equity and Comprehensive Income for the years ended June 30, 2004, 2003 and 2002
    
    
    34Consolidated Statements of Cash Flows for the years ended June 30,
2004, 2003 and 2002
    
    
    35Notes to Consolidated Financial Statements
    
    
    37Financial Statement Schedule:Schedule II  Valuation and Qualifying Accounts
    
    
    61
 30




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
     Hyperion Solutions Corporation: In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Hyperion Solutions Corporation and its subsidiaries at June 30,
2004 and 2003 and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. /s/ PricewaterhouseCoopers LLP San Jose, California
September 10, 2004 31




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HYPERION SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) June 30,
    
    June 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    365,181
    
    
    $
    398,040Short-term investments
    
    
    2,994
    
    
    
    18,514Accounts receivable, net of allowances of $8,758 and $8,231
    
    
    133,491
    
    
    
    98,774Deferred income taxes
    
    
    12,348
    
    
    
    12,890Prepaid expenses and other current assets
    
    
    18,434
    
    
    
    18,498TOTAL CURRENT ASSETS
    
    
    532,448
    
    
    
    546,716Property and equipment, net
    
    
    72,020
    
    
    
    67,533Goodwill
    
    
    139,952
    
    
    
    12,774Intangible assets, net
    
    
    30,945
    
    
    
    8,120Deferred income taxes
    
    
    24,279
    
    
    
    13,633Other assets
    
    
    5,011
    
    
    
    5,982TOTAL ASSETS
    
    $
    804,655
    
    
    $
    654,758LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    58,121
    
    
    $
    45,631Accrued employee compensation and benefits
    
    
    51,267
    
    
    
    41,637Income taxes payable
    
    
    8,557
    
    
    
    Deferred revenue
    
    
    136,286
    
    
    
    104,868Other current liabilities
    
    
    4,234
    
    
    
    3,931TOTAL CURRENT LIABILITIES
    
    
    258,465
    
    
    
    196,067Long-term debt
    
    
    
    
    
    
    50,040Other liabilities
    
    
    26,619
    
    
    
    11,326Commitments and contingencies (Note 11)Stockholders equity:Preferred
stock-$0.001 par value; 5,000 shares
authorized; none issued
    
    
    
    
    
    
    Common stock-$0.001 par value; 300,000 shares authorized;
39,408 and 36,654 shares issued; 39,408 and 36,105 shares
outstanding
    
    
    39
    
    
    
    37Additional paid-in capital
    

    
    434,584
    
    
    
    278,339Treasury stock, at cost: zero and 549 common shares
    
    
    
    
    
    
    (10,847
    )Deferred stock-based compensation
    
    
    (7,494
    )
    
    
    (2,893
    )Retained earnings
    
    
    93,915
    
    
    
    137,582Accumulated other comprehensive loss
    
    
    (1,473
    )
    
    
    (4,893
    )TOTAL STOCKHOLDERS EQUITY
    
    
    519,571
    
    
    
    397,325TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    804,655
    
    
    $
    654,758
 See accompanying notes to consolidated financial statements. 32




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HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Year Ended June 30,2004
    
    2003
    
    2002REVENUESSoftware licenses
    
    $
    240,096
    
    
    $
    201,766
    
    
    $
    196,066Maintenance and services
    
    
    382,104
    
    
    
    308,692
    
    
    
    295,952TOTAL REVENUES
    
    
    622,200
    
    
    
    510,458
    
    
    
    492,018COSTS AND EXPENSESCost of revenues:Software licenses
    
    
    13,362
    
    
    
    15,419
    
    
    
    15,430Maintenance and services
    
    
    147,816
    
    
    
    132,510
    
    
    
    137,047Sales and marketing
    
    
    225,951
    
    
    
    190,025
    
    
    
    182,311Research and development
    
    
    96,240
    
    
    
    73,776
    
    
    
    72,206General and administrative
    
    
    63,621
    
    
    
    47,207
    
    
    
    64,843Restructuring and other charges
    
    
    4,202
    
    
    
    764
    
    
    
    107In-process research and development
    
    
    2,300
    
    
    
    
    
    
    
    TOTAL COSTS AND EXPENSES
    
    
    553,492
    
    
    
    459,701
    
    
    
    471,944OPERATING INCOME
    
    
    68,708
    
    
    
    50,757
    
    
    
    20,074Interest and other income
    
    
    4,283
    
    
    
    5,848
    
    
    
    7,027Interest and other expense
    
    
    (1,230
    )
    
    
    (2,940
    )
    
    
    (4,635
    )Gain (loss) on redemption of debt
    
    
    (936
    )
    
    
    478
    
    
    
    941INCOME BEFORE INCOME TAXES
    
    
    70,825
    
    
    
    54,143
    
    
    
    23,407Income tax provision
    
    
    27,055
    
    
    
    20,033
    
    
    
    8,426NET INCOME
    
    $
    43,770
    
    
    $
    34,110
    
    
    $
    14,981Basic net income per share
    
    $
    1.15
    
    
    $
    0.99
    
    
    $
    0.46Diluted net income per share
    
    $
    1.10
    
    
    $
    0.96
    
    
    $
    0.45Shares used in computing basic net income per share
    
    
    37,988
    
    
    
    34,451
    
    
    
    32,836Shares used in computing diluted net income per share
    
    
    39,754
    
    
    
    35,694
    
    
    
    33,491
 See accompanying notes to consolidated financial statements. 33




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HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY & COMPREHENSIVE INCOME
(In thousands) Common Stock
    
    
    
    Treasury Stock
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    Deferred
    
    
    
    
    
    OtherPar
    
    Paid-in
    
    
    
    
    
    
    
    
    
    Stock-Based
    
    Retained
    
    ComprehensiveShares
    
    Value
    
    Capital
    
    Shares
    
    Cost
    
    Compensation
    
    Earnings
    
    Loss
    
    TotalBalance at June 30, 2001
    
    
    33,715
    
    
    $
    34
    
    
    $
    212,952
    
    
    
    1,355
    
    
    $
    (23,270
    )
    
    $
    
    
    
    $
    88,599
    
    
    $
    (10,996
    )
    
    $
    267,319Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,981
    
    
    
    
    
    
    
    14,981Currency translation effect,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,653
    
    
    
    2,653Unrealized gains on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,661Stock issued under equity plans
    
    
    947
    
    
    
    1
    
    
    
    13,378
    
    
    
    (11
    )
    
    
    173
    
    
    
    
    
    
    
    (108
    )
    
    
    
    
    
    
    13,444Income tax benefit from
exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    1,233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,233Balance at June 30, 2002
    
    
    34,662
    
    
    
    35
    
    
    
    227,563
    
    
    
    1,344
    
    
    
    (23,097
    )
    
    
    
    
    
    
    103,472
    
    
    
    (8,316
    )
    
    
    299,657Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,110
    
    
    
    
    
    
    
    34,110Currency translation effect,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,376
    
    
    
    3,376Unrealized gains on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,533Stock issued under equity plans
    
    
    1,992
    
    
    
    2
    
    
    
    41,277
    
    
    
    (795
    )
    
    
    12,250
    
    
    
    (3,157
    )
    
    
    
    
    
    
    
    
    
    
    50,372Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    264Income tax benefit from
exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    9,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,499Balance at June 30, 2003
    
    
    36,654
    
    
    
    37
    
    
    
    278,339
    
    
    
    549
    
    
    
    (10,847
    )
    
    
    (2,893
    )
    
    
    137,582
    
    
    
    (4,893
    )
    
    
    397,325Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,770
    
    
    
    
    
    
    
    43,770Currency translation effect,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,510
    
    
    
    3,510Unrealized losses on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    (90
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,190Stock and options issued in
connection with Brio acq.
    
    
    4,213
    
    
    
    4
    
    
    
    132,957
    
    
    
    
    
    
    
    
    
    
    
    (7,113
    )
    
    
    
    
    
    
    
    
    
    
    125,848Stock issued under equity plans
    
    
    2,481
    
    
    
    2
    
    
    
    51,658
    
    
    
    (549
    )
    
    
    10,847
    
    
    
    (1,839
    )
    
    
    (294
    )
    
    
    
    
    
    
    60,374Stock repurchased and retired
    
    
    (3,940
    )
    
    
    (4
    )
    
    
    (43,898
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,143
    )
    
    
    
    
    
    
    (131,045
    )Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,351
    
    
    
    
    
    
    
    
    
    
    
    4,351Income tax benefit from
exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    15,528
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,528Balance at June 30, 2004
    
    
    39,408
    
    
    $
    39
    
    
    $
    434,584
    
    
    
    
    
    
    $
    
    
    
    $
    (7,494
    )
    
    $
    93,915
    
    
    $
    (1,473
    )
    
    $
    519,571
 See accompanying notes to consolidated financial statements. 34




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HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended June 30,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    43,770
    
    
    $
    34,110
    
    
    $
    14,981Adjustments to reconcile net income to net cash
provided by operating activities:(Gain) loss on redemption of debt
    
    
    936
    
    
    
    (478
    )
    
    
    (941
    )(Gain) loss on sale of assets
    
    
    170
    
    
    
    (49
    )
    
    
    128Depreciation and amortization
    
    
    36,858
    
    
    
    27,888
    
    
    
    31,907Provision for accounts receivable allowances
    
    
    8,118
    
    
    
    5,797
    
    
    
    20,850Deferred income taxes
    
    
    (2,999
    )
    
    
    6,981
    
    
    
    (932
    )Income tax benefit from exercise of stock options
    
    
    15,528
    
    
    
    9,499
    
    
    
    1,233In-process research and development
    
    
    2,300
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (20,030
    )
    
    
    9,001
    
    
    
    31,856Prepaid expenses and other current assets
    
    
    (1,865
    )
    
    
    468
    
    
    
    3,932Other assets
    
    
    2,029
    
    
    
    (184
    )
    
    
    (621
    )Accounts payable and accrued expenses
    
    
    (9,631
    )
    
    
    (6,451
    )
    
    
    (6,290
    )Accrued employee compensation and benefits
    
    
    (26
    )
    
    
    1,546
    
    
    
    6,399Income taxes payable
    
    
    13,725
    
    
    
    (1,332
    )
    
    
    (28
    )Deferred revenue
    
    
    534
    
    
    
    6,447
    
    
    
    (8,892
    )Other current liabilities
    
    
    303
    
    
    
    (4,474
    )
    
    
    (6,812
    )Other liabilities
    
    
    (3,259
    )
    
    
    (656
    )
    
    
    (2,560
    )Net cash provided by operating activities
    
    
    86,461
    
    
    
    88,113
    
    
    
    84,210CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of investments
    
    
    (12,110
    )
    
    
    (24,520
    )
    
    
    (43,798
    )Proceeds from maturities of investments
    
    
    41,497
    
    
    
    25,180
    
    
    
    49,194Purchases of property and equipment
    
    
    (22,565
    )
    
    
    (19,846
    )
    
    
    (13,476
    )Proceeds from sale of property and equipment
    
    
    100
    
    
    
    644
    
    
    
    223Purchases of intangible assets
    
    
    (2,224
    )
    
    
    (2,227
    )
    
    
    (5,768
    )Payments for acquisitions, net of cash acquired
    
    
    (6,898
    )
    
    
    (5,987
    )
    
    
    (1,000
    )Net cash used in investing activities
    
    
    (2,200
    )
    
    
    (26,756
    )
    
    
    (14,625
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on mortgage loan
    
    
    
    
    
    
    (2,298
    )
    
    
    (242
    )Redemption of debt
    
    
    (50,683
    )
    
    
    (27,930
    )
    
    
    (8,931
    )Purchases of common stock
    
    
    (131,045
    )
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    60,374
    
    
    
    50,372
    
    
    
    13,444Net cash provided by (used in) financing activities
    
    
    (121,354
    )
    
    
    20,144
    
    
    
    4,271Effect of exchange rate on cash and cash equivalents
    
    
    4,234
    
    
    
    5,409
    
    
    
    4,370INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (32,859
    )
    
    
    86,910
    
    
    
    78,226Cash and cash equivalents at beginning of year
    
    
    398,040
    
    
    
    311,130
    
    
    
    232,904CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    365,181
    
    
    $
    398,040
    
    
    $
    311,130
 See accompanying notes to consolidated financial statements. 35




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HYPERION SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands) Year Ended June 30,2004
    
    2003
    
    2002SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    2,568
    
    
    $
    3,248
    
    
    $
    4,316Cash paid for income taxes
    
    $
    5,424
    
    
    $
    3,775
    
    
    $
    9,095NON-CASH FINANCING ACTIVITY:Value of stock issued for acquisitions
    
    $
    116,625
    
    
    $
    
    
    
    $
    Deferred stock-based compensation from restricted stock issuance
    
    $
    3,524
    
    
    $
    3,157
    
    
    $
    
 See accompanying notes to consolidated financial statements. 36




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HYPERION SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS Hyperion Solutions Corporation is a leading provider of Business Performance
Management (BPM) software, which enables companies to translate strategies
into plans, monitor execution, and provide insight to manage and improve
financial and operational performance. Hyperion provides customers with
solutions that include analysis and reporting tools, a business intelligence
(BI) platform, packaged and tailored applications, and related services. Its
solutions support the enterprise-wide processes for proactively managing any
business toward optimal performance against goals and for anticipating and
forecasting results. Business Performance Management builds on business intelligence (commonly
referred to as query, reporting and analysis), which provides information
(including historic analysis, statistical predictions, and forecasts) that
helps managers understand how their business is performing at any moment in
time. Using data from transactional systems such as accounting, billings,
bookings, supply chain, sales force automation, and call centers, our Business
Performance Management solutions are used by employees at all levels across
organizations  in the finance department and beyond  to provide a single
version of the truth about an organizations performance. Organizations can
then leverage this information, which is presented in intuitive,
easy-to-understand graphical views, to support continuous performance
improvement and accountability. Hyperion uses its online analytical processing (OLAP) technology, Hyperion
Essbase, as the analytic foundation for the Hyperion BI Platform. Components
within Hyperion Essbase can be used individually to create tailored
applications, or in conjunction with our packaged applications to support the
entire Business Performance Management process. On October 16, 2003, Hyperion completed the acquisition of Brio Software, Inc.,
a business intelligence software provider based in Santa Clara, California.
The integration of Brios business intelligence software into Hyperions
product portfolio has further enriched its platforms query and reporting
ability to access relational databases easily and quickly, and to support
thousands of users. The Brio tools complement Hyperions Business Performance
Management offerings and extend the use of business intelligence in the
Business Performance Management processes of its customers. Hyperion offers support and services from offices in 20 countries and works
with more than 600 partners to provide solutions to more than 9,000 customer
organizations worldwide. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of Hyperion and its
subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated. Certain prior period amounts
in the consolidated financial statements and notes thereto have been
reclassified to conform to the current period presentation. These
reclassifications had no effect on the prior periods total assets,
stockholders equity, net income or net cash flows. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and judgments that significantly affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Significant estimates include
those related to revenue recognition, accounts receivable allowances, income
taxes and valuation of long-lived assets, among others. Actual results could
differ from those estimates, and such differences could affect the results of
operations reported in future periods. Revenue Recognition Hyperion derives revenues from licensing its software products and providing
maintenance, consulting and training services. Hyperions standard software
license agreement is a perpetual license to use its products on an end user,
concurrent user or central processing unit basis. 37




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Hyperion records revenue from licensing its software products to end users
provided there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection is reasonably assured and delivery of the product has
occurred, as prescribed by Statement of Position (SOP) No. 97-2, Software
Revenue Recognition. For arrangements with multiple elements, and for which
vendor specific objective evidence (VSOE) of fair value exists for the
undelivered elements, revenue is recognized for the delivered elements based
upon the residual method in accordance with SOP 98-9, Modifications of SOP
97-2 with Respect to Certain Transactions. Amounts billed or payments
received in advance of revenue recognition are recorded as deferred revenue. Maintenance agreements are generally twelve-month prepaid contracts that are
recognized ratably over the service period. VSOE of fair value for maintenance
is measured by the stated renewal rates included in the agreements. Customers may also enter into arrangements that are typically on a time and
materials basis for consulting and training services. VSOE of fair value for
consulting and training services is based upon the standard hourly rate
Hyperion charges for such services when sold separately. Training services are
generally prepaid prior to rendering the service. Consulting and training
revenues are typically recognized as earned. Consulting revenues are generated
primarily from implementation services related to the installation of
Hyperions products. These arrangements are generally accounted for separately
from the license revenue because the arrangements qualify as service
transactions as defined in SOP 97-2. Hyperions services are generally not
essential to the functionality of the software. Hyperions products are fully
functional upon delivery of the product and implementation does not require
significant modification or alteration. Factors considered in determining
whether the revenue should be accounted for separately include, but are not
limited to: degree of risk, availability of services from other vendors, timing
of payments and impact of milestones or acceptance criteria on the
realizability of the software license fee. Payments related to the software
product to which the services relate are typically billed independently from
the services and, therefore, are not coincident with performance of such
services. License agreements generally do not include acceptance provisions.
In the infrequent circumstance where an arrangement does not qualify for
separate accounting of the license and service elements, license revenue is
generally recognized together with the consulting services using the
percentage-of-completion method of contract accounting in accordance with SOP
81-1, Accounting for Performance of Construction-Type and Certain Product-Type
Contracts and Accounting Research Bulletin No. 45, Long-Term
Construction-Type Contracts. If the fair value of any undelivered element included in a multiple-element
arrangement cannot be objectively determined, revenue is deferred until all
elements are delivered, services have been performed or until fair value can be
objectively determined. License revenue from resellers or distributors is
recognized upon sell-through to the end customer. If Hyperion determines that
collection of a license fee is not reasonably assured, the fee is deferred and
revenue is recognized at the time collection becomes reasonably assured, which
is generally upon receipt of cash. Foreign Currency The functional currency of Hyperions international subsidiaries is their local
currency. The financial statements of these subsidiaries are translated into
United States dollars using the period-end exchange rates for assets and
liabilities, and average exchange rates for the period for revenues and
expenses. Foreign currency translation adjustments are recorded in accumulated
other comprehensive income (loss), a separate component of shareholders equity.
Foreign currency transaction gains and losses, derived from monetary assets
and liabilities stated in a currency other than the functional currency, are
recorded in the consolidated statements of operations. Foreign currency
transaction gains and losses were not significant for the periods presented. Hyperions intercompany accounts are typically denominated in the functional
currency of the foreign subsidiary. Gains and losses resulting from the
remeasurement of intercompany receivables that Hyperion considers to be of a
long-term investment nature are recorded in accumulated other comprehensive
income (loss), while gains and losses resulting from the remeasurement of
intercompany receivables from those international subsidiaries for which
Hyperion anticipates settlement in the foreseeable future are recorded in the
consolidated statements of operations. The net gains and losses recorded in
the consolidated statements of operations were not significant for the periods
presented. Stock-Based Compensation Hyperion accounts for employee stock-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, as permitted by SFAS 123, Accounting for Stock-Based Compensation, and SFAS 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. Had Hyperion accounted for employee stock-based
compensation based on the estimated grant date fair values, as defined by SFAS
123, Hyperions net income and net income per share would have been adjusted to
the following pro forma amounts (in thousands, except per share data): 38




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Year Ended June 30,2004
    
    2003
    
    2002Net income, as reported
    
    $
    43,770
    
    
    $
    34,110
    
    
    $
    14,981Add: stock-based compensation expense
included in reported net income, net of tax
    
    
    2,074
    
    
    
    
    
    
    
    Deduct: stock-based compensation expense
determined under fair value method, net of tax
    
    
    (18,407
    )
    
    
    (16,285
    )
    
    
    (16,108
    )Net income (loss), pro forma
    
    $
    27,437
    
    
    $
    17,825
    
    
    $
    (1,127
    )Net income (loss) per share:Basic  as reported
    
    $
    1.15
    
    
    $
    0.99
    
    
    $
    0.46Basic  pro forma
    
    $
    0.72
    
    
    $
    0.52
    
    
    $
    (0.03
    )Diluted  as reported
    
    $
    1.10
    
    
    $
    0.96
    
    
    $
    0.45Diluted  pro forma
    
    $
    0.70
    
    
    $
    0.51
    
    
    $
    (0.03
    )
 These pro forma amounts may not be representative of the effects for future
periods as options vest over several years and additional awards are generally
granted each year. The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted under Hyperions stock option plans in fiscal 2004, 2003
and 2002 was $15.89, $13.27 and $10.90 per share, respectively. The weighted
average estimated grant date fair value, as defined by SFAS 123, for stock
purchase awards issued under Hyperions employee stock purchase plan in fiscal
2004, 2003 and 2002 was $10.03, $9.03 and $6.67 per share, respectively. The
estimated grant date fair values were calculated using the Black-Scholes model. The following weighted average assumptions were used in the estimated grant
date fair value calculations for stock option and stock purchase awards: Year Ended June 30,2004
    
    2003
    
    2002Stock option plans:Expected dividend yield
    
    0%
    
    0%
    
    0%Expected stock price volatility
    
    53%
    
    59%
    
    70%Risk free interest rate
    
    2.29%
    
    2.26%
    
    4.53%Expected term (in years)
    
    5.0
    
    5.0
    
    4.2Stock purchase plan:Expected dividend yield
    
    0%
    
    0%
    
    0%Expected stock price volatility
    
    52%
    
    63%
    
    70%Risk free interest rate
    
    1.08%
    
    1.21%
    
    2.69%Expected term (in years)
    
    0.5
    
    0.5
    
    0.5
 The weighted average estimated fair value of the options assumed in the
acquisition of Brio Software, Inc. was $15.03 per share. These estimated fair
values were calculated using the Black-Scholes model assuming no expected
dividends, an expected stock price volatility of 54%, a risk free interest rate
of 2.51% and an expected term of 3.56 years. Cash and Cash Equivalents Hyperion classifies highly-liquid investments with remaining maturities of
three months or less at the time of purchase as cash equivalents. Cash
equivalents are comprised primarily of investment-grade commercial paper, and
U.S. federal, state and political subdivision obligations. 39




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Short-Term Investments Hyperions marketable investments are classified as available-for-sale
securities and are reported at fair value in accordance with SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities. Unrealized
holding gains and losses are reported, net of tax, in accumulated other
comprehensive income (loss), a separate component of shareholders equity,
until realized. To date, unrealized gains and losses have not been material.
Realized gains on available-for-sale securities are included in interest and
other income in Hyperions statements of operations. Realized losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in interest and other expense in Hyperions statements
of operations. The specific identification method is used to determine the
cost of securities sold. Hyperion views its available-for-sale portfolio as available for use in its
current operations. Accordingly, Hyperion has classified all marketable
investments as short-term investments, even though the stated maturity dates
may be one year or more beyond the current balance sheet date. Accounts Receivable Allowances Hyperion makes judgments as to its ability to collect outstanding receivables
and provide allowances for a portion of receivables when collection becomes
doubtful. Provisions are based upon a review of all significant outstanding
invoices. For those invoices not specifically reviewed, provisions are made at
differing rates, based upon the age of the receivable. In determining these
provisions, Hyperion analyzes several factors, including: its historical
collection experience, customer concentrations, customer credit-worthiness and
current economic trends. If the historical data used to calculate the accounts
receivable allowances does not reflect Hyperions future ability to collect
outstanding receivables, Hyperion may record additional provisions for accounts
receivable allowances. Hyperion records the provision for accounts receivable
allowances in general and administrative expense and as a reduction of revenue
in order to match the underlying cause of the provision to the appropriate
classification in our statement of operations. Hyperions accounts receivable allowance was $8.8 million at June 30, 2004 and
$8.2 million at June 30, 2003. The total provision for accounts receivable
allowances was $8.1 million, $5.8 million and $20.9 million in fiscal 2004,
2003 and 2002, respectively. Of these provisions, $1.4 million, $1.4 million
and $4.1 million were recorded in general and administrative expense in fiscal
2004, 2003 and 2002, respectively, and $6.7 million, $4.4 million and $16.8
million were recorded as a reduction of revenue in fiscal 2004, 2003 and 2002,
respectively. Fair Value of Financial Instruments All current assets and current liabilities are stated at cost, which
approximates fair value due to their short-term nature. Long-Lived Assets Hyperion evaluates the recoverability of its long-lived assets, including
property and equipment and certain identifiable intangible assets, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144
requires Hyperion to review for impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Factors considered important which could trigger an
impairment review include:  
    
    significant underperformance relative to historical or projected future operating results;
    
    significant changes in the manner of use of the assets or the strategy for our overall business;
    
    significant decrease in the market value of the assets; and
    
    significant negative industry or economic trends. When Hyperion determines that the carrying amount of long-lived assets may not
be recoverable based upon the existence of one or more of the above indicators,
it assesses the assets for impairment based on the estimated future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment loss is recorded for the excess
of the assets carrying amount over its fair value. Fair value is generally
determined based on the estimated future discounted cash flows over the
remaining useful life of the asset using a discount rate determined by our management to
be commensurate with the risk inherent in our current business model. The
assumptions supporting the cash flows, including the discount rates, are
determined using managements best estimates as of the date of the impairment
review. If these estimates or their related assumptions change in the future,
Hyperion may be required to record additional impairment charges for these
assets and future results of operations could be adversely affected. 40




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Goodwill Hyperion accounts for goodwill under SFAS 142, Goodwill and Other Intangible
Assets, which requires Hyperion to review for impairment of goodwill on an
annual basis, and between annual tests whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. This
impairment review involves a two-step process. Step 1- Compare the fair value of Hyperions single reporting unit to its
carrying amount. If the reporting units fair value exceeds its carrying
amount, no further work is performed and no impairment charge is
necessary. If the reporting units carrying amount exceeds its fair
value, step 2 is performed. Step 2- Compare the implied fair value of the reporting unit to its
carrying amount. If the carrying amount of the reporting units goodwill
exceeds its implied fair value, an impairment loss will be recognized in
an amount equal to that excess. Hyperion performed its goodwill impairment tests upon adoption of SFAS 142 and
also during the fourth quarters of fiscal 2004, 2003 and 2002 and was not
required to record any impairment losses on goodwill. Product Development Costs Hyperion begins capitalizing software product development costs only after
establishing technological feasibility, and capitalization of costs ceases when
the product is available for general release to customers. Amortization of
these costs begins upon general release and represents the greater of the
amount computed using (i) the ratio of current gross revenues for the products
to the total of current and anticipated future gross revenues for the products,
or (ii) the straight-line method over the remaining estimated economic lives of
the products. For fiscal 2004, 2003 and 2002, all of the costs capitalized relate to
localization costs for Hyperions software products. Advertising Costs Hyperions advertising costs are expensed as incurred. Advertising costs were
$3.5 million, $4.1 million and $2.0 million for fiscal 2004, 2003 and 2002,
respectively. Income Taxes Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in Hyperions financial statements or tax
returns. The measurement of current and deferred tax assets and liabilities
are based on provisions of the enacted tax law. The effects of future changes
in tax laws or rates are not anticipated. During the preparation of our consolidated financial statements, Hyperion
estimates its income taxes in each of the jurisdictions in which it operates.
This process involves estimating actual current tax expense together with
assessing temporary differences resulting from differing treatment of items,
such as deferred revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within the
consolidated balance sheet. Hyperion then assesses the likelihood that its
deferred tax assets will be recovered from future taxable income, and, to the
extent it believes that recovery is not likely, a valuation allowance is
established. To the extent Hyperion establishes a valuation allowance or
increase this allowance in a period, an expense is recorded within the tax
provision in the statements of operations. Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets.
Hyperion has recorded a valuation allowance due to uncertainties related to our
ability to utilize some of its deferred tax assets, primarily relating to
foreign net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in
which Hyperion operates and the period over which the deferred tax assets will
be recoverable. In the event that actual results differ from these estimates,
or these estimates are adjusted in future periods, additional valuation
allowances may need to be recorded, which could materially impact Hyperions
financial position and results of operations. 41




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Concentration of Credit Risk Financial instruments that potentially subject Hyperion to a concentration of
credit risk principally comprise cash and cash equivalents, short-term
investments and accounts receivable. Regarding cash equivalents and short-term
investments, Hyperion only invests in instruments with an investment credit
rating of AA and better. Hyperion places its investments for safekeeping with
high-credit-quality financial institutions and, by policy, limits the amount of
credit exposure from any one issuer. For fiscal 2004, 2003 and 2002, Hyperion had no customers that accounted for
10% or more of total revenues. As of June 30, 2004 and 2003, Hyperion had no
customers that accounted for 10% or more of gross accounts receivable.
Hyperion does not require collateral from its customers prior to granting
credit. Net Income Per Share Net income per share, which is also referred to as earnings per share (EPS),
is computed in accordance with Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. Basic net income per share is computed
by dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding and potentially
dilutive securities outstanding during the period. Potentially dilutive
securities include stock options, unvested restricted shares and shares
issuable upon conversion of Hyperions convertible subordinated notes.
Potentially dilutive securities are excluded from the computations of diluted
net income per share if their effect would be antidilutive. The following table sets forth the computations of basic and diluted net income
per share (in thousands, except per share data): Year Ended June 30,2004
    
    2003
    
    2002Net income
    
    $
    43,770
    
    
    $
    34,110
    
    
    $
    14,981Shares used in computing basic net income
per share
    
    
    37,988
    
    
    
    34,451
    
    
    
    32,836Effect of potentially dilutive securities
    
    
    1,766
    
    
    
    1,243
    
    
    
    655Shares used in computing diluted net income
per share
    
    
    39,754
    
    
    
    35,694
    
    
    
    33,491Basic net income per share
    
    $
    1.15
    
    
    $
    0.99
    
    
    $
    0.46Diluted net income per share
    
    $
    1.10
    
    
    $
    0.96
    
    
    $
    0.45
 For fiscal 2004, 2003 and 2002, stock option rights totaling 0.8 million
shares, 2.3 million shares and 5.7 million shares of common stock,
respectively, have been excluded from the diluted EPS calculations because
their effect would have been antidilutive. For fiscal 2004, 2003 and 2002, 0.4
million shares, 1.1 million shares and 1.4 million shares of common stock,
respectively, issuable upon conversion of Hyperions convertible subordinated
notes have been excluded from the diluted EPS calculations because their effect
would have been antidilutive. In the second quarter of fiscal 2004, all
remaining outstanding convertible subordinated notes were redeemed. 42




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Comprehensive Income Comprehensive income includes net income, foreign currency translation
adjustments and unrealized gains and losses on available-for-sale securities.
The components of accumulated other comprehensive income (loss) are as follows
(in thousands): June 30,2004
    
    2003
    
    2002Cumulative translation adjustments
    
    $
    (1,457
    )
    
    $
    (4,967
    )
    
    $
    (8,343
    )Unrealized gains (losses) on available-for-sale
securities, net of tax
    
    
    (16
    )
    
    
    74
    
    
    
    27$
    (1,473
    )
    
    $
    (4,893
    )
    
    $
    (8,316
    )
 Derivative Instruments and Hedging Activities Hyperion adopted SFAS 133, Accounting for Derivative Instruments and Hedging
Activities on July 1, 2000. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS 133
requires that changes in the derivatives fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivatives gains and losses to offset related
results on the hedged item in the income statement to the extent effective, and
requires that Hyperion formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. From time to time, Hyperion utilizes foreign currency forward exchange
contracts to offset the risk associated with the effects of certain
non-functional currency receivables. As a result, increases or decreases to
these receivable balances due to foreign exchange rate changes are offset by
gains and losses on the forward contracts. Hyperions forward contracts
generally have terms of 60 days or less. Hyperion does not use forward
contracts for trading purposes. All foreign currency balances and all
outstanding forward contracts are marked-to-market at the end of the period
with unrealized gains and losses included in Hyperions consolidated statements
of operations. Hyperions ultimate realized gain or loss with respect to
currency fluctuations will depend on the currency exchange rates and other
factors in effect as the contracts mature. Net foreign exchange transaction gains and losses were not material for fiscal
2004, 2003 and 2002. At June 30, 2004 and June 30, 2003, Hyperion had net
forward contracts to sell U.S. dollar equivalent of $33.5 million and $4.7
million, respectively, in foreign currency. Recent Accounting Pronouncements In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 (EITF
03-06), Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share. EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after

March 31, 2004. Hyperion adopted EITF 03-06 on April 1, 2004, and the adoption
did not have a material impact on its financial position or results of
operations.  3.
    
    BUSINESS COMBINATIONS Brio Software, Inc. In October 2003, Hyperion completed its acquisition of Brio Software, Inc., a
business intelligence software provider based in Santa Clara, California.
Under the terms of the acquisition, Brio stockholders received a combination of
0.109 of a share of Hyperion common stock and $0.363 in cash in exchange for
each share of Brio common stock, which resulted in the issuance of 4.2 million
shares of Hyperion common stock and $14.0 million in cash to the Brio
stockholders. Additionally, Hyperion reserved 1.1 million shares of its common stock for issuance in
connection with the Brio stock options assumed in the transaction. Brios
results of operations have been included in Hyperions results since the date
of acquisition. 43




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Brio provides business intelligence software with advanced query, reporting and
analysis capabilities. Brios business intelligence tools supplement the
Hyperion platform and complement our Business Performance Management offering.
Hyperion expects the acquisition will result in greater integration of business
intelligence into the Business Performance Management process. The aggregate purchase price was approximately $150.1 million, which consisted
of approximately $14.0 million in cash, $133.0 million in Hyperion common stock
and options, and $3.1 million in acquisition costs, which primarily consist of
fees paid for financial advisory, legal, and accounting services. The value of
the stock issued to Brio stockholders was based upon the average of the closing
prices of one share of Hyperions common stock during the five trading days
ending July 25, 2003, which was $27.68. The fair value of Hyperions
stock-based awards issued to employees was estimated using a Black-Scholes
option pricing model. The fair value of the stock-based awards was estimated
assuming no expected dividends, an expected stock price volatility of 54%, a
risk free interest rate of 2.51% and an expected term of 3.56 years. The intrinsic value allocated to unvested stock-based awards issued to
employees was approximately $7.1 million and has been recorded as deferred
stock-based compensation. Deferred stock-based compensation is being amortized
over the remaining vesting periods of the awards. In accordance with SFAS 141, Business Combinations, Hyperion allocated the
purchase price to tangible assets, intangible assets, in-process research and
development, deferred compensation, and liabilities based on their estimated
fair values. The excess purchase price over the fair values was recorded as
goodwill. The fair value assigned to intangible assets acquired was based on
estimates and assumptions determined by management. In accordance with SFAS
142, Goodwill and Other Intangible Assets, goodwill and purchased intangibles
with indefinite lives acquired after June 30, 2001 are not amortized but will
be reviewed periodically for impairment. Purchased intangibles with finite
lives are amortized on a straight-line basis over their respective useful
lives. The total purchase price has been allocated as follows (in thousands): Current assets
    
    $
    48,791Property and equipment
    
    
    9,493Goodwill
    
    
    126,671Intangible assets
    
    
    30,000Deferred taxes
    
    
    7,065In-process research and development
    
    
    2,300Deferred compensation
    
    
    7,113Current liabilities
    
    
    (16,565
    )Deferred revenue
    
    
    (28,717
    )Restructuring costs
    
    
    (36,074
    )Total purchase price
    
    $
    150,077
 In performing the purchase price allocation, Hyperion considered, among other
factors, its intention for future use of the acquired assets, analyses of
historical financial performance and estimates of future performance of Brios
products. The fair values of intangible assets were estimated using the income
approach for capitalized software and maintenance agreements, the royalty
savings approach for patents and core technology, and the cost approach for
customer contracts and related relationships and value added reseller
relationships. The rates utilized to discount the net cash flows to their
present values were based upon Hyperions weighted average cost of capital and
range from 14% to 16%. These discount rates were determined after
consideration of Hyperions rate of return on debt capital and equity, the
weighted average return on invested capital and the risk associated with
achieving forecasted sales related to the technology and assets acquired from
Brio. Identifiable intangible assets purchased in the Brio acquisition consist
of the following (in thousands, except for useful life):  Fair
    
    UsefulIdentifiable Intangible Assets
    
    Value
    
    LifeCapitalized software
    
    $
    15,500
    
    
    4 yearsPatents and core technology
    
    
    4,000
    
    
    6 yearsMaintenance agreements
    
    
    4,400
    
    
    5 yearsCustomer contracts and related relationships
    
    
    6,000
    
    
    4 yearsValue added reseller relationships
    
    
    100
    
    
    1 year$
    30,000
 44




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In-process research and development (IPR&D) of $2.3 million was expensed in
the accompanying condensed consolidated statements of operations because the
purchased research and development had no alternative uses and had not reached
technological feasibility. The IPR&D relates to the Brio 8 product line. The
value assigned to IPR&D was determined utilizing the income approach. The
stage of completion for the project was estimated to determine the discount
rate to be applied to the valuation of the in-process technology. Based upon
the level of completion and the risk associated with the in-process technology,
a discount rate of 20% was deemed appropriate for valuing IPR&D. Pro Forma Financial Information (Unaudited) The unaudited financial information in the table below summarizes the combined
results of operations of Hyperion and Brio, on a pro forma basis, as though the
companies had been combined as of the beginning of each period presented. The
impact of the acquisition-related IPR&D charge and restructuring charges
recorded in the second quarter of fiscal 2004 have been excluded. This pro
forma financial information is presented for informational purposes only and is
not necessarily indicative of the results of operations that would have been
achieved had the acquisition taken place at the beginning of each period
presented. The unaudited pro forma combined statement of operations data for
the year ended June 30, 2004 combines (i) the results of Hyperion for the year
ended June 30, 2004, which include the post-acquisition results of Brio for the
period of October 16, 2003 to June 30, 2004 and (ii) the pre-acquisition
results of Brio for the period of July 1, 2003 to October 15, 2003. The
unaudited pro forma combined statement of operations data for the year ended
June 30, 2003 combine (i) the results of Hyperion for the year ended June 30,
2003 and (ii) the results of Brio for the twelve months ended June 30, 2003.
The pro forma amounts are as follows (in thousands, except per share amounts): Year Ended June 30,2004
    
    2003Revenues
    
    $
    653,049
    
    
    $
    612,203Net income
    
    
    39,878
    
    
    
    7,618Basic net income per share
    
    
    1.02
    
    
    
    0.20Diluted net income per share
    
    
    0.97
    
    
    
    0.19
 The Alcar Group, Inc. In April 2003, Hyperion acquired substantially all of the assets and assumed
certain liabilities of The Alcar Group, Inc., a strategic financial modeling
software provider based in Skokie, Illinois. This acquisition was accounted
for using the purchase method of accounting in accordance with SFAS 141,
Business Combinations. Hyperions consolidated statements of operations
include the results of Alcar from the date of acquisition. Alcar provides strategic financial modeling solutions used by senior managers
in corporate finance and business development, treasury, strategy and risk
management. Alcars solution is used to analyze and model the financial impact
of critical business decisions, such as mergers, acquisitions, divestitures,
treasury activities, capital allocation and debt restructuring. Alcars
strategic modeling solution is an adjacent application that fills a customer
need and complements our Business Performance Management offering. Hyperion
expects the acquisition will result in greater integration of strategic
financial modeling in the Business Performance Management process. The aggregate purchase price for the net assets of Alcar was cash of $6.5
million, $0.5 million of which was deferred and was paid in fiscal 2004.
Additionally, Hyperion may pay up to a maximum of $1.5 million in performance
payments to the shareholders of Alcar through fiscal 2005, subject to the
achievement of certain revenue targets. Of the $6.5 million purchase price,
approximately $0.1 million was allocated to the net liabilities assumed,
approximately $2.3 million was allocated to acquired technologies, which are
being amortized over three years, and approximately $4.3 million was allocated
to goodwill. In fiscal 2004, Hyperion made a performance payment to the
shareholders of Alcar totaling $0.4 million, which was recorded as additional
goodwill. 45




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4.
    
    INVESTMENTS Investments consist of the following (in thousands): June 30, 2004Amortized
    
    Gross Unrealized
    
    Gross Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueState and municipal bonds
    
    $
    206
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    204U.S. government and
agency obligations
    
    
    2,804
    
    
    
    
    
    
    
    (14
    )
    
    
    2,790$
    3,010
    
    
    $
    
    
    
    $
    (16
    )
    
    $
    2,994
 June 30, 2003Amortized
    
    Gross Unrealized
    
    Gross Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueState and municipal bonds
    
    $
    14,426
    
    
    $
    81
    
    
    $
    (10
    )
    
    $
    14,497U.S. government and
agency obligations
    
    
    4,014
    
    
    
    3
    
    
    
    
    
    
    
    4,017$
    18,440
    
    
    $
    84
    
    
    $
    (10
    )
    
    $
    18,514
 As of June 30, 2004, all available-for-sale debt securities classified as
short-term investments had contractual maturities of less than one year. Gross
realized gains and losses from the sale of investments were not material for
fiscal 2004, 2003 and 2002.  5.
    
    PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, less accumulated depreciation and
amortization. Upon disposal of property and equipment, the cost and
accumulated depreciation or amortization of the assets are removed from the
accounting records, and the related gain or loss on disposal is recognized in
the results of operations. Depreciation is generally computed using the
straight-line method over the estimated useful lives of the applicable assets.
Leasehold improvements are amortized over the lesser of the remaining term of
the lease or the useful life of the improvements. Repairs and maintenance
expenditures, which are not considered improvements and do not extend the
useful lives of the assets, are expensed as incurred. Property and equipment consist of the following (in thousands): June 30,
    
    June 30,
    
    Useful2004
    
    2003
    
    Life(in years)Land
    
    $
    3,800
    
    
    $
    3,800
    
    
    
    Building and building improvements
    
    
    35,003
    
    
    
    36,135
    
    
    
    5 - 39Leasehold improvements
    
    
    8,641
    
    
    
    15,641
    
    
    
    *Furniture and fixtures
    
    
    12,511
    
    
    
    15,076
    
    
    
    7Computer software
    
    
    40,709
    
    
    
    29,445
    
    
    
    3 - 5Computer equipment
    
    
    35,030
    
    
    
    41,281
    
    
    
    2Other equipment
    
    
    4,049
    
    
    
    6,036
    
    
    
    3 - 5139,743
    
    
    
    147,414Accumulated depreciation and amortization
    
    
    (67,723
    )
    
    
    (79,881
    )$
    72,020
    
    
    $
    67,533
 * Lesser of lease term or useful life Depreciation and amortization of property and equipment totaled $23.1 million,
$20.6 million and $26.1 million in fiscal 2004, 2003 and 2002, respectively. 46




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6.
    
    GOODWILL The changes in the carrying amount of goodwill consist of the following (in
thousands): June 30,
    
    June 30,2004
    
    2003Balance at beginning of year
    
    $
    12,774
    
    
    $
    8,171Goodwill recorded during the period
    
    
    127,156
    
    
    
    4,250Effect of foreign currency translation
    
    
    22
    
    
    
    353Balance at end of year
    
    $
    139,952
    
    
    $
    12,774
 7. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands): June 30, 2004
    
    June 30, 2003Gross Carrying
    
    Accumulated
    
    
    
    
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Book Value
    
    Amount
    
    Amortization
    
    Book ValueProduct development costs
    
    $
    10,384
    
    
    $
    (7,008
    )
    
    $
    3,376
    
    
    $
    9,889
    
    
    $
    (6,285
    )
    
    $
    3,604Acquired technologies
    
    
    25,433
    
    
    
    (6,652
    )
    
    
    18,781
    
    
    
    6,533
    
    
    
    (2,082
    )
    
    
    4,451Other intangibles
    
    
    10,731
    
    
    
    (1,943
    )
    
    
    8,788
    
    
    
    333
    
    
    
    (268
    )
    
    
    65$
    46,548
    
    
    $
    (15,603
    )
    
    $
    30,945
    
    
    $
    16,755
    
    
    $
    (8,635
    )
    
    $
    8,120
 During fiscal 2004, 2003 and 2002, Hyperion capitalized product development
costs of approximately $2.2 million, $2.0 million and $2.5 million,
respectively. Amortization of intangible assets totaled $9.3 million, $6.8
million and $4.9 million, of which $2.3 million, $3.4 million and $2.0 million
related to product development costs, for fiscal 2004, 2003 and 2002,
respectively. Product development costs and acquired technologies are
generally amortized over three years, and other intangibles are amortized over
periods between one and six years. The total expected future annual
amortization expense for these intangible assets is as follows (in thousands): Fiscal Year
    
    Estimated Amortization Expense2005
    
    $
    10,7092006
    
    
    8,6242007
    
    
    7,3802008
    
    
    3,1142009
    
    
    923Thereafter
    
    
    195$
    30,945
 47




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8.
    
    INCOME TAXES Income before income taxes and income tax provision consist of the following
(in thousands): Year Ended June 30,2004
    
    2003
    
    2002Income before income taxes:U.S.
    
    $
    46,106
    
    
    $
    29,788
    
    
    $
    14,144Non-U.S.
    
    
    24,719
    
    
    
    24,355
    
    
    
    9,263$
    70,825
    
    
    $
    54,143
    
    
    $
    23,407Income tax provision:Current-Federal
    
    $
    19,416
    
    
    $
    7,577
    
    
    $
    6,181State
    
    
    3,110
    
    
    
    1,246
    
    
    
    558Non-U.S.
    
    
    8,923
    
    
    
    4,244
    
    
    
    2,70631,449
    
    
    
    13,067
    
    
    
    9,445Deferred-Federal
    
    
    (3,846
    )
    
    
    6,526
    
    
    
    (571
    )State
    
    
    (336
    )
    
    
    917
    
    
    
    (240
    )Non-U.S.
    
    
    (212
    )
    
    
    (477
    )
    
    
    (208
    )(4,394
    )
    
    
    6,966
    
    
    
    (1,019
    )$
    27,055
    
    
    $
    20,033
    
    
    $
    8,426
 Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their tax bases. Significant components of deferred tax assets
and liabilities consist of the following (in thousands): June 30,
    
    June 30,2004
    
    2003Deferred income tax assets:Net operating loss carryforwards
    
    $
    31,140
    
    
    $
    7,081Accounts receivable
    
    
    3,185
    
    
    
    3,654Property and equipment
    
    
    11,703
    
    
    
    12,550Intangible assets
    
    
    
    
    
    
    1,987Accrued expenses
    
    
    9,164
    
    
    
    9,236Deferred stock-based compensation
    
    
    1,417
    
    
    
    Other
    
    
    940
    
    
    
    45157,549
    
    
    
    34,959Valuation allowance
    
    
    (16,364
    )
    
    
    (6,926
    )41,185
    
    
    
    28,033Deferred income tax liabilities:Product development costs
    
    
    1,293
    
    
    
    1,441Intangible assets
    
    
    3,265
    
    
    
    Deferred stock-based compensation
    
    
    
    
    
    
    694,558
    
    
    
    1,510Net deferred income tax assets
    
    $
    36,627
    
    
    $
    26,523
 48




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The effective income tax rate varied from the statutory U.S. federal tax rate
as follows: Year Ended June 30,2004
    
    2003
    
    2002Statutory U.S. tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of U.S. tax benefit
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    4.0
    %Tax exempt interest
    
    
    -1.2
    %
    
    
    -1.5
    %
    
    
    -2.6
    %Write-off of in-process R&D
    
    
    1.2
    %
    
    
    
    
    
    
    Non-U.S. operations, including export sales
    
    
    -1.3
    %
    
    
    -1.2
    %
    
    
    -4.0
    %Net operating losses
    
    
    0.3
    %
    
    
    0.1
    %
    
    
    3.3
    %Other, net
    
    
    0.2
    %
    
    
    0.6
    %
    
    
    0.3
    %Effective income tax rate
    
    
    38.2
    %
    
    
    37.0
    %
    
    
    36.0
    %
 As of June 30, 2004 and 2003, Hyperions non-U.S. net operating loss
carryforwards for income tax purposes were approximately $48.3 million and
$17.3 million, respectively. Hyperion does not believe it is more likely than
not that realization of the deferred tax assets is assured and has, therefore,
recorded a valuation allowance of $16.4 million and $6.9 million as of June 30,
2004 and 2003.  9.
    
    LONG-TERM DEBT In March 1998, Hyperion issued $100.0 million of 4.5% convertible subordinated
notes, due March 2005. The notes were subordinated to all existing and future
senior debt and were convertible into shares of Hyperions common stock at a
conversion price of $56.36 per share. The notes were also redeemable at the
option of Hyperion, in whole or in part, at any time on or after March 20,
2001, at 104.5% of the principal amount initially, and thereafter at prices
declining to 100% at maturity, in each case together with accrued interest.
Each holder of the notes had the right, subject to certain conditions and
restrictions, to require Hyperion to offer to repurchase all outstanding notes,
in whole or in part, owned by such holder, at specified repurchase prices
together with accrued interest upon the occurrence of certain events. Hyperion
incurred $3.3 million of costs in connection with the issuance of the notes,
which were deferred and included in other assets. These finance costs were
being recognized as interest expense over the term of the notes using the
straight-line method, which approximated the effective interest method.
Interest on the notes began accruing March 16, 1998 and was payable
semi-annually on March 15 and September 15. During fiscal 2004, Hyperion redeemed its outstanding convertible subordinated
notes with face values totaling $50.0 million. This redemption resulted in the
recognition of a loss of $0.9 million in fiscal 2004, which was comprised of
the 1.286% redemption premium paid as well as the write-off of associated
deferred issuance costs. During fiscal 2003 and 2002, Hyperion repurchased and retired $28.7
million and $10.0 million of the notes for a total cost of $27.9
million and $8.9 million, respectively. These repurchases
resulted in the recognition of gains, net of the write-off of associated
deferred issuance costs, of approximately $0.5 million and $0.9 million in fiscal 2003 and 2002, respectively.  10.
    
    RELATED PARTY TRANSACTIONS In fiscal 2003 and 2002, Siebel Systems purchased approximately $0.2 million
and $1.0 million, respectively, of software, maintenance and services from
Hyperion for purposes of implementing an enterprise-wide financial planning
system. In addition, Siebel has a future option to purchase the same products
in accordance with normal contractual terms and conditions. The Chief
Financial Officer of Siebel was on the board of directors of Hyperion from June
2000 to February 2003. As of June 30, 2003, all amounts due from Siebel
related to these transactions had been paid. In fiscal 2003 and 2002, Hyperion purchased approximately $0.8 million and $3.0
million, respectively, of software, maintenance and services from Siebel for
purposes of implementing a worldwide customer relationship management system.
As of June 30, 2003, Hyperion had a payable to Siebel in the amount of $0.2
million related to these transactions, which was paid during fiscal 2004. 49




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11.
    
    COMMITMENTS AND CONTINGENCIES Lease Commitments Hyperion leases office and research facilities and certain computer and other
equipment under operating lease agreements expiring at various dates through
2016. In addition to base rent, Hyperion is responsible for certain taxes,
utilities and maintenance costs. Additionally, several leases include rentals
based upon changes in the Consumer Price Index or the fair market rental value
of the property and options for renewal or purchase. Hyperion subleases some
of its facilities to third-party tenants. These subleases expire at various
dates through 2011. Future minimum lease payments under all non-cancellable operating leases with
terms in excess of one year and future sublease income were as follows at June
30, 2004 (in thousands): Future Lease
    
    Future Sublease
    
    Net Future LeaseFiscal Year
    
    Payments
    
    Income
    
    Payments2005
    
    $
    27,652
    
    
    $
    3,517
    
    
    $
    24,1352006
    
    
    24,119
    
    
    
    4,153
    
    
    
    19,9662007
    
    
    21,159
    
    
    
    3,921
    
    
    
    17,2382008
    
    
    18,451
    
    
    
    3,349
    
    
    
    15,1022009
    
    
    14,217
    
    
    
    2,500
    
    
    
    11,717Thereafter
    
    
    45,859
    
    
    
    2,377
    
    
    
    43,482$
    151,457
    
    
    $
    19,817
    
    
    $
    131,640
 Rental expense for fiscal 2004, 2003 and 2002 under all lease agreements was
$15.4 million, $16.0 million and $15.8 million, respectively. Sublease income
was $3.0 million, $2.8 million and $1.0 million for fiscal 2004, 2003 and 2002,
respectively. Guarantees and Indemnifications In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee or indemnification.
FIN 45 also requires additional disclosure by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees and
indemnifications. The initial recognition and measurement provisions of FIN 45
are applicable for guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. Hyperion adopted the
recognition and measurement provisions of FIN 45 prospectively to guarantees
issued or modified after December 31, 2002, and the adoption did not have an
impact on its financial position or results of operations. The following is a
summary of the agreements that Hyperion has determined are within the scope of
FIN 45: As permitted under Delaware law, Hyperion has agreements whereby it indemnifies
its officers and directors for certain events or occurrences while the officer
or director is or was serving at Hyperions request in such capacity. The term
of the indemnification period is for the officers or directors lifetime. The
maximum potential amount of future payments Hyperion could be required to make
under these indemnification agreements is unlimited; however, Hyperion has a
director and officer insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid. As a result of the insurance
policy coverage, Hyperion believes the estimated fair value of these
indemnification agreements is minimal. Hyperion has no liabilities recorded
for these agreements as of June 30, 2004. Hyperion includes standard intellectual property indemnification clauses in its
software license agreements. Pursuant to these clauses, Hyperion holds
harmless and agrees to defend the indemnified party, generally Hyperions
business partners and customers, in connection with certain patent, copyright
or trade secret infringement claims by third parties with respect to Hyperions
products. The term of the indemnification clauses is generally perpetual any
time after execution of the software license agreement. In the event an
infringement claim against Hyperion or an indemnified party is successful,
Hyperion, at its sole option, agrees to do one of the following: (i) procure
for the indemnified party the right to continue use of the software; (ii) provide a modification to the software so that its use becomes
non-infringing; (iii) replace the software with software which is substantially
similar in functionality and performance; or (iv) refund the residual value of
the software license fees paid by the indemnified party for the infringing
software. Hyperion believes the estimated fair value of these intellectual
property indemnification clauses is minimal. Hyperion has no liabilities
recorded for these clauses as of June 30, 2004. 50




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Hyperion generally warrants that its software products will perform in all
material respects in accordance with its standard published specifications in
effect at the time of delivery of the licensed products to the customer for a
period of ninety days following delivery. If necessary, Hyperion would provide
for the estimated cost of product warranties based on specific warranty claims
and claim history. Hyperion has not incurred significant expense under its
product warranties to date and, as a result, Hyperion believes the estimated
fair value of these warranties is minimal. Hyperion has no liabilities
recorded for these warranties as of June 30, 2004. Contingencies From time to time, in the normal course of business, various claims are made
against Hyperion. At this time, in the opinion of management, there are no
pending claims the outcome of which is expected to result in a material adverse
effect on the financial position, results of operations or cash flows of
Hyperion.  12.
    
    COMMON STOCK Stock Repurchases In fiscal 2004, Hyperions board of directors authorized the company to
repurchase up to $200.0 million of its common stock under two separate stock
repurchase programs. In fiscal 2004, Hyperion repurchased and retired a total
of 3,940,000 shares of its common stock under these programs for a total cost
of $131.0 million. Hyperion will determine the timing and amount of future
repurchases based upon market conditions and other factors, and will use
existing cash and short-term investments to finance the transactions. In fiscal 2001, Hyperion repurchased and held in treasury a total of 1,389,000
shares of its common stock for a total cost of $23.8 million. In fiscal 2004,
2003 and 2002, Hyperion reissued 549,000 shares, 795,000 shares and 11,000
shares of treasury stock, respectively, in connection with employee stock
option exercises and employee stock purchases. As of June 30, 2004, Hyperion
holds no shares of treasury stock. Restricted Stock In fiscal 2004, Hyperion issued 90,000 shares of restricted stock to some of
its executive officers for nominal consideration. Of these shares, 5,000
shares vest in equal annual installments over a three-year period, 25,000
shares vest in full on the fourth anniversary of the date of issuance, and
60,000 shares vest in full on the fourth anniversary of the date of issuance
but can vest earlier based on the achievement of specific performance-based
objectives as set forth in the restricted stock purchase agreements. Hyperion
recorded deferred stock-based compensation totaling $3.5 million related to the
issuance of these restricted shares, which is being amortized over the vesting
period of the shares. In fiscal 2003, Hyperion issued 125,000 shares of restricted stock to some of
its executive officers for nominal consideration. The restricted shares vest
in full on the fourth anniversary of the date of issuance, but can vest earlier
based on the achievement of performance-based objectives as set by the board of
directors. Hyperion recorded deferred stock-based compensation totaling $3.2
million related to the issuance of these restricted shares, which is being
amortized over the vesting period of the shares. In accordance with FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, the deferred
stock-based compensation relating to the restricted shares will be re-measured
on the date the performance objectives are defined or determined to have been
earned by the board of directors. In the event a holder of these restricted
shares leaves Hyperion prior to the fourth anniversary of the date of issuance
and retains vested shares that would have been forfeited absent the achievement
of the performance objectives, the re-measured deferred stock-based
compensation will be recorded as an expense in Hyperions statement of
operations. 51




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In October 1999, Hyperion issued 100,000 shares of restricted stock to its
Chairman and Chief Executive Officer for nominal consideration. The restricted
shares vested on a monthly basis over a four-year period. Hyperion recorded
deferred stock-based compensation totaling $1.9 million related to the issuance
of these restricted shares, which is being amortized over the vesting period of
the shares. This amount is not reflected as a separate component of
stockholders equity, but rather has been netted within additional paid-in
capital. In connection with the issuance of the restricted stock, Hyperion
provided a loan to this officer of $1.0 million. The loan matures in October
2005 and is secured by a pledge of such restricted stock. Interest accrues at
6.02% per annum and is due upon maturity. In January 2002, the CEOs
employment agreement was amended to provide for the forgiveness of a portion of
the loan annually based on the achievement of earnings per share targets set by
the compensation committee of the board of directors. Based on Hyperions
financial performance in fiscal 2004, the compensation committee forgave $0.3
million of the outstanding principal balance and $0.1 million of accrued
interest, which was recorded as an expense in Hyperions statement of
operations in fiscal 2004. Based on Hyperions financial performance in fiscal
2003, the compensation committee forgave $0.4 million of the outstanding
principal balance and $0.1 million of accrued interest, which was recorded as
an expense in Hyperions statement of operations in fiscal 2003.  13.
    
    STOCK OPTION, EMPLOYEE STOCK PURCHASE, AND EMPLOYEE SAVINGS PLANS Stock Option Plans As of June 30, 2004, Hyperion had an aggregate of 8.4 million shares reserved
for future issuance under its equity plans. The equity plans provide for the
issuance of common shares pursuant to stock option exercises, issuances of
restricted stock, and other equity-based awards. There were 1.1 million shares
available for grant under the equity plans as of June 30, 2004. Under the
equity plans, stock options and restricted stock can be issued to employees and
to non-employee directors. Stock options are granted under the equity plans with exercise prices equal to
the fair market value of the common stock on the date of grant and generally
vest over a period of four years. Options granted under the equity plans have
maximum terms of 6  10 years from the date of grant. Options provide for
accelerated vesting upon certain events, including an employees involuntary
termination, as defined in the plan, within eighteen months following a change
in control of Hyperion. The following table presents a summary of Hyperions stock option activity for
the years ended June 30 (shares in thousands): 2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    7,569
    
    
    $
    23.35
    
    
    
    9,102
    
    
    $
    21.89
    
    
    
    8,423
    
    
    $
    23.02Granted
    
    
    1,979
    
    
    
    33.38
    
    
    
    1,759
    
    
    
    25.67
    
    
    
    2,388
    
    
    
    18.99Assumed through acquisition
of Brio
    
    
    1,087
    
    
    
    21.07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (2,584
    )
    
    
    19.68
    
    
    
    (2,289
    )
    
    
    18.34
    
    
    
    (348
    )
    
    
    14.77Forfeited
    
    
    (747
    )
    
    
    27.28
    
    
    
    (1,003
    )
    
    
    25.56
    
    
    
    (1,361
    )
    
    
    25.66Outstanding at end of year
    
    
    7,304
    
    
    $
    26.63
    
    
    
    7,569
    
    
    $
    23.35
    
    
    
    9,102
    
    
    $
    21.89Exercisable at end of year
    
    
    3,658
    
    
    $
    25.30
    
    
    
    3,613
    
    
    $
    24.56
    
    
    
    4,304
    
    
    $
    23.47
 52




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##### Table of Contents



The following table summarizes information about stock options outstanding and
exercisable at June 30, 2004 (shares in thousands): Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Remaining Years of
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$  8.00
    19.99
    
    
    1,900
    
    
    
    6.14
    
    
    $
    15.76
    
    
    
    1,394
    
    
    $
    16.06$20.00     24.99
    
    
    1,328
    
    
    
    6.90
    
    
    $
    22.11
    
    
    
    785
    
    
    $
    21.96$25.00     29.99
    
    
    1,254
    
    
    
    5.04
    
    
    $
    26.92
    
    
    
    572
    
    
    $
    26.91$30.00     34.99
    
    
    1,909
    
    
    
    5.45
    
    
    $
    32.28
    
    
    
    285
    
    
    $
    31.75$35.00     49.99
    
    
    887
    
    
    
    5.33
    
    
    $
    41.69
    
    
    
    597
    
    
    $
    42.98$50.00
  345.33
    
    
    26
    
    
    
    5.48
    
    
    $
    110.74
    
    
    
    25
    
    
    $
    111.617,304
    
    
    
    
    
    
    
    
    
    
    
    3,658
 Employee Stock Purchase Plan Hyperion sponsors an employee stock purchase plan (ESPP) that is qualified
under Section 423 of the Internal Revenue Code. Under the ESPP, substantially
all employees may purchase Hyperion common stock through payroll deductions at
a price equal to 85% of the lower of the fair market value at the beginning or
end of each six-month offering period. Stock purchases under the ESPP are
limited to 10% of an employees eligible compensation, 1,000 shares per
offering period and a fair market value of $25,000 in any plan year. In fiscal
2004, 2003 and 2002, approximately 368,000 shares, 373,000 shares and 606,000
shares, respectively, were issued under the ESPP. At June 30, 2004,
approximately 1,729,000 shares were reserved for future issuance under the
ESPP. Employee Savings Plans Hyperion maintains an employee savings plan that qualifies as a cash or
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the plan, participating U.S. employees may defer up to 15% of their
pre-tax compensation, but generally not more than $13,000 in calendar year 2004
and $12,000 in calendar year 2003. Hyperion contributes to the plan quarterly,
up to a maximum of $500 per quarter, per participant. Similar savings plans are
maintained with respect to certain non-U.S. employees. In fiscal 2004, 2003 and
2002, Hyperion contributed $6.2 million, $3.8 million and $4.7 million,
respectively, to the savings plans.  14.
    
    STOCKHOLDER RIGHTS PLAN In June 1998, Hyperion adopted a stockholder rights plan in which preferred
stock purchase rights were distributed as a rights dividend at the rate of one
right for each share of common stock held as of the close of business on July
3, 1998. The rights plan is designed to deter coercive or unfair takeover
tactics and to prevent an acquirer from gaining control of Hyperion without
offering a fair price to all of Hyperions stockholders. The plan is intended
to protect the interests of stockholders in the event Hyperion is confronted in
the future with coercive or unfair takeover tactics. Each right will entitle holders of Hyperions common stock to buy one
one-thousandth of a share of Series A Junior Participating Preferred Stock of
Hyperion at an exercise price of $250 per one one-thousandth of a preferred
share. Generally, the rights will be exercisable only if a person or group
acquires more than 15% of the common stock or announces a tender or exchange
offer which would result in its ownership of 15% or more of the common stock,
or a person owning 10% or more of the common stock is determined by the board
to be an adverse person, as defined in the rights plan. Under the rights plan,
the ownership, tender offer and exchange offer thresholds of 15% increase to
25% for certain grandfathered stockholders and approximately 20.5% for one
stockholder that held approximately 19.5% of Hyperions issued and outstanding
stock on July 3, 1998. 53




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##### Table of Contents



If any person or group becomes the beneficial owner of 15% or more of the
common stock, referred to as a flip-in event, each right not owned by such
person or related parties will entitle its holder to purchase, at the then
current exercise price of the right, common stock of Hyperion having a value of
twice the rights exercise price (or, in certain circumstances, a combination
of cash, property, common stock or other securities or a reduction in the
exercise price having an aggregate value equal to the value of the common stock
otherwise purchasable). After the occurrence of a flip-in event and before any
person or affiliated group becomes the owner of 50% or more of the then
outstanding common stock, Hyperion may also exchange one share of common stock
for each right outstanding. In addition, if Hyperion is involved in a merger or
other business combination transaction with another person in which its common
stock is changed or converted, or sells or transfers more than 50% of its
assets or earning power to another person, each right that has not previously
been exercised will entitle its holder to purchase, at the then current
exercise price of the right, shares of common stock of such other person having
a value of twice the rights exercise price. Hyperion can redeem the rights at $0.01 per right prior to the date the
ownership thresholds are passed. The rights will expire on July 3, 2008, unless
earlier redeemed or exchanged.  15.
    
    RESTRUCTURING AND OTHER CHARGES In connection with the acquisition of Brio in October 2003, management approved
and initiated plans to restructure the operations of Hyperion to eliminate
certain duplicative activities and reduce the combined companys cost
structure. Consequently, Hyperion recorded restructuring charges totaling $3.6
million in fiscal 2004, including $3.4 million of employee severance costs and
$0.2 million of facility closure costs. These costs were accounted for under
SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities
and have been included as a charge to Hyperions results of operations. As a result of the acquisition of Brio, Hyperion recorded $36.1 million of
restructuring costs in connection with exiting certain pre-acquisition
activities of Brio, including $4.8 million of employee severance costs, $26.6
million of facility closure costs, and $4.7 million of asset impairments
related to the facility closures. These costs have been recognized as
liabilities assumed in the purchase business combination in accordance with
EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination. In June 2001, Hyperion announced a corporate restructuring plan designed to
bring costs more in line with revenues and strengthen the financial performance
of the company, which resulted in a reduction of the workforce by approximately
300, or 12% of worldwide headcount. Employee groups impacted by the
restructuring included personnel involved in corporate services, product
business units, sales and customer support. In addition, Hyperion consolidated
some of its facilities and exited other facilities. The total restructuring
and other charges recorded in June 2001 were $42.8 million and were accounted
for under EITF 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring), which was subsequently superseded by SFAS 146. In fiscal
2004, 2003 and 2002, Hyperion made adjustments to the restructuring charges
recorded in fiscal 2001 totaling $0.6 million, $0.8 million and $0.1 million,
respectively. These adjustments resulted primarily from changes to estimates
of sublease income related to our facility exit costs and did not represent new
restructuring activities. The following table sets forth the activity in Hyperions restructuring
accruals accounted for under SFAS 146 and EITF 94-3, which are included in
Other current liabilities and Other liabilities in the accompanying
condensed consolidated balance sheet (in thousands): Severance
    
    Facilities
    
    Other
    
    TotalAccrual balance at June 30, 2001
    
    $
    5,537
    
    
    $
    17,227
    
    
    $
    5,266
    
    
    $
    28,030Adjustments
    
    
    (126
    )
    
    
    393
    
    
    
    (1,141
    )
    
    
    (874
    )Cash payments
    
    
    (5,058
    )
    
    
    (2,735
    )
    
    
    (751
    )
    
    
    (8,544
    )Accrual balance at June 30, 2002
    
    
    353
    
    
    
    14,885
    
    
    
    3,374
    
    
    
    18,612Adjustments
    
    
    
    
    
    
    764
    
    
    
    
    
    
    
    764Cash payments
    
    
    (353
    )
    
    
    (2,291
    )
    
    
    (1,524
    )
    
    
    (4,168
    )Accrual balance at June 30, 2003
    
    
    
    
    
    
    13,358
    
    
    
    1,850
    
    
    
    15,208Restructuring charges and adjustments
    
    
    3,410
    
    
    
    792
    
    
    
    
    
    
    
    4,202Cash payments
    
    
    (3,299
    )
    
    
    (2,073
    )
    
    
    (91
    )
    
    
    (5,463
    )Accrual balance at June 30, 2004
    
    $
    111
    
    
    $
    12,077
    
    
    $
    1,759
    
    
    $
    13,947
 54




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The following table sets forth the activity in Hyperions
restructuring accruals accounted for under EITF 95-3, which are included in
Accounts payable and accrued expenses, Accrued employee compensation and
benefits, and Other liabilities in the accompanying condensed consolidated
balance sheet (in thousands): AssetSeverance
    
    Facilities
    
    Impairments
    
    TotalAccrual balance at June 30, 2003
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring costs
    
    
    4,767
    
    
    
    26,588
    
    
    
    4,719
    
    
    
    36,074Non-cash items
    
    
    
    
    
    
    
    
    
    
    (4,719
    )
    
    
    (4,719
    )Cash payments
    
    
    (3,263
    )
    
    
    (4,181
    )
    
    
    
    
    
    
    (7,444
    )Accrual balance at June 30, 2004
    
    $
    1,504
    
    
    $
    22,407
    
    
    $
    
    
    
    $
    23,911
 The restructuring costs recorded during fiscal 2004 are based on Hyperions
restructuring plans that have been committed to by management and are subject
to refinement. Any changes to the estimates of executing the currently
approved plans of restructuring will be reflected in Hyperions results of
operations.  16.

    SEGMENT AND GEOGRAPHIC INFORMATION SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, established standards for reporting information about operating
segments in a companys financial statements. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing
performance. Hyperion has identified one industry segment: the development and
marketing of business performance management software and related services.
This segment operates in three geographic regions: the Americas (United States,
Canada and Latin America), EMEA (Europe, Middle East and Africa) and APAC (Asia
Pacific). Hyperions products are marketed internationally through Hyperions
direct sales force, independent distributors and application resellers. Enterprise-wide information is provided in accordance with SFAS 131.
Geographic revenue information is primarily based on the ordering location of
the customer, and long-lived asset information is based on the physical
location of the assets. The following table presents revenues and long-lived
assets by geographic region (in thousands): Year Ended June 30,2004
    
    2003
    
    2002Revenues:Americas
    
    $
    380,894
    
    
    $
    318,538
    
    
    $
    324,352EMEA
    
    
    199,780
    
    
    
    163,988
    
    
    
    141,423APAC
    
    
    41,526
    
    
    
    27,932
    
    
    
    26,243$
    622,200
    
    
    $
    510,458
    
    
    $
    492,018
 June 30,
    
    June 30,2004
    
    2003Long-lived assets:Americas
    
    $
    63,936
    
    
    $
    59,857EMEA
    
    
    5,680
    
    
    
    6,360APAC
    
    
    2,404
    
    
    
    1,316$
    72,020
    
    
    $
    67,533
 55




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The following table presents revenues for groups of similar products and
services (in thousands): Year Ended June 30,2004
    
    2003
    
    2002Software licenses
    
    $
    240,096
    
    
    $
    201,766
    
    
    $
    196,066Maintenance and services:Maintenance
    
    
    264,866
    
    
    
    212,157
    
    
    
    186,052Consulting and training
    
    
    117,238
    
    
    
    96,535
    
    
    
    109,900382,104
    
    
    
    308,692
    
    
    
    295,952Total revenues
    
    $
    622,200
    
    
    $
    510,458
    
    
    $
    492,018
  17.

    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) As previously discussed, Hyperion acquired Brio Software, Inc. in October 2003.
Brios results of operations have been included in Hyperions results
beginning on the date of acquisition. In addition to the incremental revenue
streams associated with Brio products and services, Hyperions headcount
increased by approximately 15% in the second quarter of fiscal 2004 as a result
of the acquisition, resulting in increased salaries and related costs.
Operating expenses in the second quarter of fiscal 2004 also included $3.2
million of restructuring charges and a $2.3 million charge for in-process
research and development related to the acquisition of Brio. The following is a summary of the unaudited quarterly results of operations for
fiscal 2004 and 2003 (in thousands, except per share data): Fiscal 2004
    
    Sep. 30
    
    Dec. 31
    
    Mar. 31
    
    Jun. 30Revenues
    
    $
    123,552
    
    
    $
    156,136
    
    
    $
    166,144
    
    
    $
    176,368Gross profit
    
    
    90,032
    
    
    
    115,683
    
    
    
    123,198
    
    
    
    132,109Net income
    
    
    9,687
    
    
    
    6,618
    
    
    
    12,726
    
    
    
    14,739Net income per share  diluted
    
    
    0.26
    
    
    
    0.16
    
    
    
    0.32
    
    
    
    0.36
 Fiscal 2003
    
    Sep. 30
    
    Dec. 31
    
    Mar. 31
    
    Jun. 30Revenues
    
    $
    119,879
    
    
    $
    126,037
    
    
    $
    126,559
    
    
    $
    137,983Gross profit
    
    
    84,450
    
    
    
    90,285
    
    
    
    88,304
    
    
    
    99,490Net income
    
    
    9,112
    
    
    
    7,569
    
    
    
    8,267
    
    
    
    9,162Net income per share  diluted
    
    
    0.27
    
    
    
    0.21
    
    
    
    0.23
    
    
    
    0.25
 56




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as
of the end of the period covered by this Annual Report on Form 10-K, our chief
executive officer and chief financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934) are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
significant changes in our internal control over financial reporting identified
in connection with our evaluation that occurred during our fourth fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 57




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to executive officers is set
forth in Part I of this Form 10-K. The information required by this item with
respect to directors is incorporated herein by reference to the section
entitled Election of Directors in our definitive Proxy Statement for our 2004
Annual Meeting of Stockholders. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to
the sections entitled Director Compensation and Executive Compensation and
Related Information in our definitive Proxy Statement for our 2004 Annual
Meeting of Stockholders. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to
the section entitled Stock Ownership of Certain Beneficial Owners and
Management in our definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to
the section entitled Certain Relationships and Related Transactions in our
definitive Proxy Statement for our 2004 Annual Meeting of Stockholders. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated herein by reference to
the section entitled Ratification of Independent Accountants  Fees Paid to
PricewaterhouseCoopers in our definitive Proxy Statement for our 2004 Annual
Meeting of Stockholders. 58




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report  (1)
    
    The following financial statements are filed as part of this annual
report: PageConsolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    32Consolidated Statements of Operations for the years ended June 30, 2004, 2003 and 2002
    
    
    33Consolidated
Statements of Stockholders Equity and Comprehensive Income for the years ended June 30, 2004, 2003 and 2002
    
    
    34Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002
    
    
    35Notes to Consolidated Financial Statements
    
    
    37
  (2)
    
    The following financial statement schedule is filed as part of this
annual report: PageSchedule II  Valuation and Qualifying Accounts
    
    
    61
  All other schedules have been omitted since they are either not required
or not applicable, or the required information is included in the
consolidated financial statements or notes thereto.  (3)
    
    The exhibits listed in the accompanying Exhibit Index are filed or
incorporated by reference as part of this annual report. (b) Reports on Form 8-K  On April 21, 2004, we filed a current report on Form 8-K in connection with
the issuance of a press release dated April 21, 2004 announcing the financial
results for our third fiscal quarter ended March 31, 2004.On July 21, 2004, we filed a current report on Form 8-K in connection with
the issuance of two press releases dated July 21, 2004 announcing the
financial results for our fourth fiscal quarter and year ended June 30, 2004
and announcing the appointment of Jeffrey Rodek as Executive Chairman and
Godfrey Sullivan as President and Chief Executive Officer of Hyperion. (c) Exhibits  See Item 15(a)(3) of this annual report. (d) Financial Statement Schedule  See Item 15(a)(2) of this annual report. 59




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. Date: September 10, 2004
    Hyperion Solutions Corporation(Registrant) By:
    /s/ David W. OdellDavid W. OdellChief Financial Officer By:
    /s/ William B. DewesWilliam B. DewesGlobal Controller
(Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Jeffrey R. Rodek
Jeffrey R. Rodek
    
    Executive Chairman
    
    September 10, 2004/s/ Godfrey R. Sullivan
Godfrey R. Sullivan
    
    Director, President and
Chief Executive Officer
    
    September 10, 2004/s/ Henry R. Autry
Henry R. Autry
    
    Director
    
    September 10, 2004/s/ Terry Carlitz
Terry Carlitz
    
    Director
    
    September 10, 2004/s/ Yorgen Edholm
Yorgen Edholm
    
    Director
    
    September 10, 2004/s/ Gary G. Greenfield
Gary G. Greenfield
    
    Director
    
    September 10, 2004/s/ Aldo Papone
Aldo Papone
    
    Director
    
    September 10, 2004/s/ John Riccitiello
John Riccitiello
    
    Director
    
    September 10, 2004
 60




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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands) AdditionsBalance at
    
    Charged to
    
    
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    at EndDescription
    
    of Period
    
    Expenses
    
    Additions
    
    Deductions
    
    of PeriodYear Ended June 30, 2004:Allowance for doubtful accounts
    
    $
    8,231
    
    
    
    1,364
    
    
    
    6,754
    (a)
    
    
    7,591
    (b)
    
    $
    8,758Valuation allowance for deferred tax assets
    
    
    6,926
    
    
    
    (935
    )
    
    
    10,373
    (c)
    
    
    
    
    
    
    16,364Year Ended June 30, 2003:Allowance for doubtful accounts
    
    $
    10,660
    
    
    
    1,357
    
    
    
    4,440
    (a)
    
    
    8,226
    (b)
    
    $
    8,231Valuation allowance for deferred tax assets
    
    
    6,894
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    6,926Year Ended June 30, 2002:Allowance for doubtful accounts
    
    $
    12,476
    
    
    
    4,038
    
    
    
    16,812
    (a)
    
    
    22,666
    (b)
    
    $
    10,660Valuation allowance for deferred tax assets
    
    
    6,075
    
    
    
    819
    
    
    
    
    
    
    
    
    
    
    
    6,894
  (a)
    
    Charged to revenues(b)
    
    Write-offs, net of recoveries(c)
    
    Impact of purchase accounting 61




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EXHIBIT INDEX ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger dated May 25, 1998, by and among
Registrant, Merger Sub and Hyperion Software Corporation
(incorporated by reference to the exhibits to the Registrants
Current Report on Form 8-K filed on May 29, 1998).2.2
    
    Share Purchase Agreement, dated April 14, 1999, by and among the
Registrant, HSC Acquisition Co., and the shareholders of Sapling
Corporation (incorporated by reference to the exhibits to the
Registrants Annual Report on Form 10-K filed on September 28,
1999).2.3
    
    Agreement and Plan of Merger and Reorganization among Hyperion
Solutions Corporation, T-Bird Acquisition, Inc., and Brio
Software, Inc., dated as of July 23, 2003 (incorporated by
reference to the exhibits to the Registrants Schedule 13D
Statement filed on August 4, 2003).3.1
    
    Restated Certificate of Incorporation (incorporated by reference
to the exhibits to the Registrants Current Report on Form 8-K
filed on October 13, 1998).3.2
    
    Amended and Restated Bylaws (incorporated by reference to the
exhibits to the Registrants Registration Statement on Form S-4,
as amended, filed on June 18, 1998).4.1
    
    Specimen Certificate of the Registrants Common Stock
(incorporated by reference to the exhibits to the Registrants
Registration Statement on Form S-1, as amended, filed on November
6, 1995).10.1
    
    1992 Stock Option Plan (incorporated by reference to the exhibits
to the Registrants Registration Statement on Form S-1, as
amended, filed on November 6, 1995).10.2
    
    1995 Stock Option/Stock Issuance Plan, as amended and restated
through November 14, 2002 (incorporated by reference to the
exhibits to the Registrants Registration Statement on Form S-8
filed on December 20, 2002).10.3
    
    1999 Stock Option Plan (incorporated by reference to the exhibits
to the Registrants Annual Report on Form 10-K filed on September
28, 2000).10.4
    
    Employee Stock Purchase Plan, as amended and restated as of
September 16, 2003 (incorporated by reference to the exhibits to
the Registrants Proxy Statement filed on October 6, 2003).10.5
    
    Hyperion Software Corporation 1991 Stock Plan (incorporated by
reference to the exhibits to Hyperion Software Corporations
Registration Statement on Form S-1).10.6
    
    Hyperion Software Corporation 1991 Non-Employee Director Stock
Option Plan (incorporated by reference to the exhibits to Hyperion
Software Corporations Registration Statement on Form S-1).10.7
    
    Form of Indemnification Agreement (incorporated by reference to
the exhibits to the Registrants Registration Statement on Form
S-1, as amended, filed on November 6, 1995).10.8
    
    Lease Agreement between the Registrant and SBC&D Co., Inc., dated
July 16, 1996 (incorporated by reference to the exhibits to the
Registrants Annual Report on Form 10-K filed on June 27, 1997).10.9
    
    Lease Agreement between the Registrant and Prentiss Properties
Acquisition Partners, L.P., dated June 16, 2004 (filed herewith).10.10
    
    Employment Agreement with Jeffrey R. Rodek, dated September 11,
2002 (incorporated by reference to the exhibits to the
Registrants Quarterly Report on Form 10-Q filed on November 12,
2002).10.11
    
    Restricted Stock Award Agreement with Jeffrey R. Rodek, dated
October 11, 1999 (incorporated by reference to the exhibits to the
Registrants Quarterly Report on Form 10-Q filed on February 14,
2000).
 62




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ExhibitNumber
    
    Description10.12
    
    Secured Promissory Note with Jeffrey R. Rodek, dated October 11, 1999 (incorporated by
reference to the exhibits to the Registrants Quarterly Report on Form 10-Q filed on
February 14, 2000).10.13
    
    Security and Pledge Agreement with Jeffrey R. Rodek, dated October 11, 1999
(incorporated by reference to the exhibits to the Registrants Annual Report on Form
10-K filed on September 28, 2000).10.14
    
    Employment Agreement with David W. Odell, dated December 6, 2000 (incorporated by
reference to the exhibits to the Registrants Annual Report on Form 10-K filed on
September 14, 2001).10.15
    
    Employment Agreement with W. Russell Wayman, dated January 22, 2001 (incorporated by
reference to the exhibits to the Registrants Annual Report on Form 10-K filed on
September 14, 2001).10.16
    
    Employment Agreement with Godfrey R. Sullivan, dated October 17, 2001 (incorporated by
reference to the exhibits to the Registrants Annual Report on Form 10-K filed on
September 25, 2002).10.17
    
    Employment Agreement with Burton Goldfield, dated January 1, 2004 (filed herewith).21.1
    
    List of subsidiaries of the Registrant (filed herewith).23.1
    
    Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm
(filed herewith).31.1
    
    Certification of Godfrey R. Sullivan pursuant to Rule 13a-14(a) (filed herewith).31.2
    
    Certification of David W. Odell pursuant to Rule 13a-14(a) (filed herewith).32.1
    
    Certification of Godfrey R. Sullivan pursuant to 18 U.S.C. Section 1350 (filed herewith).32.2
    
    Certification of David W. Odell pursuant to 18 U.S.C. Section 1350 (filed herewith).
 63