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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 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
    
    77-0277772(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X]   No [   ] As of October 31, 2004, there were 38,989,188 shares of the registrants common
stock outstanding.




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HYPERION SOLUTIONS CORPORATION
FORM 10-Q PAGEPART I. FINANCIAL INFORMATIONItem 1
    
    Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004
    
    
    3Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4
    
    Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    25Item 2
    
    Unregistered Sales of Existing Securities and Use of Proceeds
    
    
    25Item 6
    

    Exhibits
    
    
    25Signatures
    
    
    26Exhibit Index
    
    
    27EXHIBIT 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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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS HYPERION SOLUTIONS CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS
   September 30,
    
    June 30,2004
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    359,530
    
    
    $
    365,181Short-term investments
    
    
    3,021
    
    
    
    2,994Accounts receivable, net of allowances of $9,314 and $8,758
    
    
    112,553
    
    
    
    133,491Deferred income taxes
    
    
    12,694
    
    
    
    12,348Prepaid expenses and other current assets
    
    
    18,251
    
    
    
    18,434TOTAL CURRENT ASSETS
    
    
    506,049
    
    
    
    532,448Property and equipment, net
    
    
    70,982
    
    
    
    72,020Goodwill
    
    
    140,803
    
    
    
    139,952Intangible assets, net
    
    
    31,528
    
    
    
    30,945Deferred income taxes
    
    
    25,277
    
    
    
    24,279Other assets
    
    
    4,529
    
    
    
    5,011TOTAL ASSETS
    
    $
    779,168
    
    
    $
    804,655LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    58,145
    
    
    $
    58,121Accrued employee compensation and benefits
    
    
    41,916
    
    
    
    51,267Income taxes payable
    

    
    9,925
    
    
    
    8,557Deferred revenue
    
    
    129,690
    
    
    
    136,286Other current liabilities
    
    
    5,777
    
    
    
    4,234TOTAL CURRENT LIABILITIES
    
    
    245,453
    
    
    
    258,465Other liabilities
    
    
    24,929
    
    
    
    26,619Commitments and contingencies (Note 3)Stockholders equity:Preferred stock - $0.001 par value; 5,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock - $0.001 par value; 300,000 shares authorized;
38,888 and 39,408 shares issued and outstanding
    
    
    39
    
    
    
    39Additional paid-in capital
    
    
    435,692
    
    
    
    434,584Deferred stock-based compensation
    
    
    (6,279
    )
    
    
    (7,494
    )Retained earnings
    
    
    80,549
    
    
    
    93,915Accumulated other comprehensive loss
    
    
    (1,215
    )
    
    
    (1,473
    )TOTAL STOCKHOLDERS EQUITY
    
    
    508,786
    
    
    
    519,571TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    779,168
    
    
    $
    804,655
 See accompanying notes to condensed consolidated financial statements. 3




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HYPERION SOLUTIONS CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
   Three Months EndedSeptember 30,2004
    
    2003REVENUESSoftware licenses
    
    $
    57,424
    
    
    $
    43,045Maintenance and services
    
    
    102,114
    
    
    
    80,507TOTAL REVENUES
    
    
    159,538
    
    
    
    123,552COSTS AND EXPENSESCost of revenues:Software licenses
    
    
    3,292
    
    
    
    3,059Maintenance and services
    
    
    37,341
    
    
    
    30,461Sales and marketing
    
    
    58,733
    
    
    
    42,442Research and development
    
    
    25,714
    
    
    
    19,784General and administrative
    
    
    14,869
    
    
    
    12,920Restructuring charges
    
    
    3,069
    
    
    
    TOTAL COSTS AND EXPENSES
    
    
    143,018
    
    
    
    108,666OPERATING INCOME
    
    
    16,520
    
    
    
    14,886Interest and other income
    
    
    1,357
    
    
    
    1,140Interest and other expense
    
    
    (12
    )
    
    
    (652
    )INCOME BEFORE INCOME TAXES
    
    
    17,865
    
    
    
    15,374Income tax provision
    
    
    6,252
    
    
    
    5,687NET INCOME
    
    $
    11,613
    
    
    $
    9,687Other comprehensive income
    
    
    258
    
    
    
    375COMPREHENSIVE INCOME
    
    $
    11,871
    
    
    $
    10,062Basic net income per share
    
    $
    0.30
    
    
    $
    0.27Diluted net income per share
    
    $
    0.29
    
    
    $
    0.26Shares used in computing basic
net income per share
    
    
    39,073
    
    
    
    35,898Shares used in computing diluted
net income per share
    
    
    40,603
    
    
    
    37,365
 See accompanying notes to condensed consolidated financial statements. 4




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HYPERION SOLUTIONS CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Three Months EndedSeptember 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    11,613
    
    
    $
    9,687Adjustments to reconcile net income to net cash provided by operating activities:Loss on sale of assets
    
    
    
    
    
    
    105Depreciation and amortization
    
    
    9,575
    
    
    
    6,471Provision for accounts receivable allowances
    
    
    1,367
    
    
    
    2,159Deferred income taxes
    
    
    (826
    )
    
    
    (1,469
    )Income tax benefit from exercise of stock options
    
    
    3,119
    
    
    
    1,655Changes in operating assets and liabilities:Accounts receivable
    
    
    19,888
    
    
    
    9,485Prepaid expenses and other current assets
    
    
    308
    
    
    
    (1,640
    )Other assets
    
    
    465
    
    
    
    974Accounts payable and accrued expenses
    
    
    (206
    )
    
    
    (4,762
    )Accrued employee compensation and benefits
    
    
    (9,472
    )
    
    
    (10,447
    )Income taxes payable
    
    
    1,409
    
    
    
    3,929Deferred revenue
    
    
    (6,779
    )
    
    
    (849
    )Other current liabilities
    
    
    1,543
    
    
    
    56Other liabilities
    
    
    (1,684
    )
    
    
    (627
    )Net cash provided by operating activities
    
    
    30,320
    
    
    
    14,727CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities of investments
    
    
    
    
    
    
    6,133Purchases of property and equipment
    
    
    (4,721
    )
    
    
    (3,732
    )Proceeds from sale of property and equipment
    
    
    24
    
    
    
    23Purchases of intangible assets
    
    
    (1,773
    )
    
    
    (540
    )Payments for acquisitions, net of cash acquired
    
    
    (2,838
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (9,308
    )
    
    
    1,884CASH FLOWS FROM FINANCING ACTIVITIESPurchases of common stock
    
    
    (35,183
    )
    
    
    (26,027
    )Proceeds from issuance of common stock
    
    
    8,475
    
    
    
    7,337Net cash used in financing activities
    
    
    (26,708
    )
    
    
    (18,690
    )Effect of exchange rate on cash and cash equivalents
    
    
    45
    
    
    
    181DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (5,651
    )
    
    
    (1,898
    )Cash and cash equivalents at beginning of period
    
    
    365,181
    
    
    
    398,040CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    359,530
    
    
    $
    396,142SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    8
    
    
    $
    1,270Cash paid for income taxes
    
    $
    1,970
    
    
    $
    1,267
 See accompanying notes to condensed consolidated financial statements. 5




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HYPERION SOLUTIONS CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER 30, 2004
 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to these rules and regulations. However,
management believes that the disclosures are adequate to ensure the information
presented is not misleading. The balance sheet at June 30, 2004 has been
derived from the audited financial statements, but it does not include all
disclosures required by generally accepted accounting principles. These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
our annual report on Form 10-K for the fiscal year ended June 30, 2004. In the opinion of management, all adjustments, consisting only of normal
recurring items, considered necessary for a fair statement have been included
in the accompanying unaudited financial statements. The results of operations
for the interim periods presented are not necessarily indicative of the
operating results to be expected for any subsequent interim period or for the
fiscal year ending June 30, 2005. 2. Significant Accounting Policies 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. 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 6




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We make judgments as to our ability to collect outstanding receivables and
provide allowances for a portion of receivables when collection becomes
doubtful. Allowances are based upon a review of all significant outstanding
invoices. For those invoices not specifically reviewed, allowances are made at
differing rates, based upon the age of the receivable. In determining these
allowances, 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 allowances for accounts
receivable does not reflect our future ability to collect
outstanding receivables, we may record additional allowances for accounts
receivable. We record the provision for accounts receivable
allowances either in general and administrative expense or as a reduction of revenue
based on the underlying cause of the provision to the appropriate
classification in our statement of operations. Our accounts receivable allowances totaled $9.3 million at September 30, 2004 and
$8.8 million at June 30, 2004. The total provision for accounts receivable
allowances was $1.4 million and $2.2 million for the three months ended
September 30, 2004 and 2003 respectively. Of these amounts, $0.1 million and
$0.5 million were recorded in general and administrative expense for the three
months ended September 30, 2004 and 2003, respectively, and $1.3 million and
$1.7 million were recorded as a reduction of revenues for the three months ended
September 30, 2004 and 2003, respectively. 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): Three Months EndedSeptember 30,2004
    
    2003Net income
    
    $
    11,613
    
    
    $
    9,687Shares used in computing basic
net income per share
    
    
    39,073
    
    
    
    35,898Effect of potentially dilutive securities
    
    
    1,530
    
    
    
    1,467Shares used in computing diluted
net income per share
    
    
    40,603
    
    
    
    37,365Basic net income per share
    
    $
    0.30
    
    
    $
    0.27Diluted net income per share
    
    $
    0.29
    
    
    $
    0.26
 For the three months ended September 30, 2004 and 2003, stock option rights
totaling 1.1 million shares and 1.0 million shares of common stock,
respectively, have been excluded from the diluted EPS calculations because
their effect would have been antidilutive. For the three months ended September 30, 2003, 0.9 million shares of common
stock issuable upon conversion of the 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. 7




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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): Three Months EndedSeptember 30,2004
    
    2003Net income, as reported
    
    $
    11,613
    
    
    $
    9,687Add: stock-based compensation expense
included in reported net income, net of tax
    
    
    159
    
    
    
    Deduct: stock-based compensation expense
determined under the fair value method,
net of tax
    
    
    (4,298
    )
    
    
    (4,431
    )Net income, pro forma
    
    $
    7,474
    
    
    $
    5,256Net income per share:Basic  as reported
    
    $
    0.30
    
    
    $
    0.27Basic  pro forma
    
    $
    0.19
    
    
    $
    0.15Diluted  as reported
    
    $
    0.29
    
    
    $
    0.26Diluted  pro forma
    
    $
    0.19
    
    
    $
    0.14
 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. Recent Accounting Pronouncements In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue No. 04-8 The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share, that the dilutive effect of contingent convertible
debt instruments (CoCos) must be included in diluted earnings per share
regardless of whether the triggering contingency has been satisfied, if
dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would
require restatement of prior period diluted earnings per share, subject to
certain transition provisions. It is effective for all periods ending after
December 15, 2004. The adoption of EITF 04-08 is not expected to have a
material impact on our financial position or results of operations. 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. In March 2004, the FASB issued a proposed Statement, Share-Based Payment, an
amendment of FASB Statements Nos. 123 and 95, that addresses the accounting
for share-based payment transactions in which a Company receives employee
services in exchange for either equity instruments of the Company or
liabilities that are based on the fair value of the Companys equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using the intrinsic method that Hyperion currently
uses and generally would require that such transactions be accounted for using
a fair-value-based method and recognized as expense in the consolidated
statement of operations. The effective date of the proposed standard is for
periods beginning after June 15, 2005. It is expected that the final standard will be
issued before December 31, 2004 and should it be finalized in its current form,
it will have a significant impact on the consolidated statement of operations
as Hyperion will be required to expense the fair value of stock option grants
and stock purchases under employee stock purchase plan. 8




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In March 2004, the Financial Accounting Standards Board (FASB) approved the
consensus reached on the Emerging Issues Task Force Issue (EITF) No. 03-01,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-01 provides guidance on determining when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. EITF 03-01 also provides new disclosure
requirements for other-than-temporary impairments on debt and equity
investments. The adoption of EITF 03-01 is not expected to have a material
impact on our financial position or results of operations. 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. 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 4 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 requires 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. 3. Commitments and Contingencies Guarantees and Indemnifications Financial Accounting Standards Board Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(FIN 45), requires that Hyperion
recognize the fair value for guarantee and indemnification arrangements issued
or modified by Hyperion after December 31, 2002 if these arrangements are
within the scope of FIN 45. In addition, we must continue to monitor the
conditions that are subject to the guarantees and indemnifications, as required
under previously existing generally accepted accounting principles, in order to 9




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identify if a loss has occurred. If we determine it is probable that a loss has
occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. We have entered into agreements with some of
our customers that contain indemnification provisions relating to potential
situations where claims could be alleged that the Companys products infringe
the intellectual property rights of a third party. Another example of our
indemnification arrangements are indemnifications of our Board of Directors and
officers. We have not recorded a liability related to these indemnification and
guarantee provisions. We implemented the provisions of FIN 45 as of January 1,
2003 and it has not had any significant impact on our financial position,
results of operations or cash flows. 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. 4. Business Combination 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. 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 10




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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
 In-process research and development (IPR&D) of $2.3 million was expensed in
the second quarter of fiscal 2004 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. As of September 30, 2004, the Brio 8 product line is continuing to be developed. 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. 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 three months ended September 30, 2003
combine (i) the results of Hyperion for the three months ended September 30,
2003 and (ii) the results of Brio for the three months ended September 30,
2003. The pro forma amounts are as follows (in thousands, except per share
amounts): Three Months EndedSeptember 30,2003Revenues
    
    $
    150,992Net income
    
    
    2,087Basic net income per share
    
    
    0.05Diluted net income per share
    
    
    0.05
 QiQ Solutions Pty Limited In July 2004, we acquired certain assets and assumed certain liabilities of QiQ Solutions Pty
Limited, an Australian based developer of management and reporting tools for the enterprise
Business Intelligence market. 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 QiQ from the date of acquisition. QiQ Solutions markets several products that allow business users to build
interactive dashboards through a point and click wizard-driven interface in
the time it typically takes to build reports. Through customizable templates,
the products enhance dashboard consistency and user experience across the
enterprise, and reduce customers total cost of ownership. QiQ Solutions
tools supplement Hyperions Business Intelligence Platform by enabling
customers to deploy more dashboards faster and to better manage larger
enterprise-wide Hyperion Performance Suite implementations. The aggregate purchase price for the net assets of QiQ was cash of $2.0
million. Additionally, Hyperion may pay up to a maximum of $700,000 in
performance payments to the shareholders of QiQ subject to the achievement of
certain revenue targets established for the quarter ending December 31, 2004
through the quarter ending September 30, 2006. Of the $2.0 million purchase
price, approximately $1.7 million was allocated to acquired technologies, which
are being amortized over a three year period, and $0.3 million was allocated to
goodwill. 11




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5. Restructuring Accruals 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 recorded a restructuring
charge in the first quarter of fiscal 2005 of approximately $1.1 million. This
restructuring charge consists of severance and related benefits 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. 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 recorded 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. These costs will be accounted for under SFAS 146
and will be included as a charge to Hyperions results of operations. 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 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 sheets (in thousands): Severance
    
    Facilities
    
    Other
    
    TotalBalance at June 30, 2004
    
    $
    111
    
    
    $
    12,077
    
    
    $
    1,759
    
    
    $
    13,947Restructuring costs
    
    
    1,058
    
    
    
    2,011
    
    
    
    
    
    
    
    3,069Cash payments
    
    
    (984
    )
    
    
    (1,049
    )
    
    
    (4
    )
    
    
    (2,037
    )Balance at September 30, 2004
    
    $
    185
    
    
    $
    13,039
    
    
    $
    1,755
    
    
    $
    14,979
 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 sheets (in
thousands): Severance
    
    Facilities
    
    TotalBalance at June 30, 2004
    
    $
    1,504
    
    
    $
    22,407
    
    
    $
    23,911Restructuring costs
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (760
    )
    
    
    (1,448
    )
    
    
    (2,208
    )Balance at September 30, 2004
    
    $
    744
    
    
    $
    20,959
    
    
    $
    21,703
 12




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The restructuring costs recorded during the three months ended September 30,
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. 6. Stock Repurchases In May 2004, Hyperions board of directors authorized the company to repurchase
up to $75.0 million of its common stock. In the first quarter of fiscal 2005,
Hyperion repurchased 941,000 shares of its common stock under this program for
a total cost of $35.2 million. Of this amount, $10.4 million was recorded as a
reduction to additional paid-in capital and the remaining $24.8 million was
recorded as a reduction to retained earnings. 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. 7. 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): Three Months EndedSeptember 30,2004
    
    2003Revenues:Americas
    
    $
    97,085
    
    
    $
    74,942EMEA
    
    
    52,328
    
    
    
    41,836APAC
    
    
    10,125
    
    
    
    6,774$
    159,538
    
    
    $
    123,552
 September 30,
    
    June 30,2004
    
    2004Long-lived assets:Americas
    
    $
    63,382
    
    
    $
    63,936EMEA
    
    
    5,467
    
    
    
    5,680APAC
    
    
    2,133
    
    
    
    2,404$
    70,982
    
    
    $
    72,020
 The following table presents revenues for groups of similar products and
services (in thousands): Three Months EndedSeptember 30,2004
    
    2003Software licenses
    
    $
    57,424
    
    
    $
    43,045Maintenance and services:Maintenance
    
    
    71,430
    
    
    
    55,310Consulting and training
    
    
    30,684
    
    
    
    25,197102,114
    
    
    
    80,507Total revenues
    
    $
    159,538
    
    
    $
    123,552
 13




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain information contained in this report on Form 10-Q is forward-looking in
nature. All statements included in this report on Form 10-Q 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,
project, 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. OVERVIEW Hyperion provides business performance management software that enables
companies to translate strategies into plans, monitor execution and provide
insight to improve financial and operational performance. We combine a
complete set of interoperable applications with a business intelligence
platform to support and create business performance management solutions. In
addition, we offer support and services from offices in 20 countries and are
represented by distributors in an additional 25 countries. We work with over
600 partners to provide specialized solutions to more than 9,000 customer
organizations worldwide. Hyperion is headquartered in Sunnyvale, California
and employs approximately 2,500 people globally. 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% as a
result of the acquisition. REVENUES Three Months Ended September 30,Percent of
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    Total(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    RevenueSoftware licenses
    
    $
    57,424
    
    
    
    36
    %
    
    $
    43,045
    
    
    
    35
    %Maintenance and services:Maintenance
    
    
    71,430
    
    
    
    45
    %
    
    
    55,310
    
    
    
    45
    %Consulting and training
    
    
    30,684
    
    
    
    19
    %
    
    
    25,197
    
    
    
    20
    %102,114
    
    
    
    64
    %
    
    
    80,507
    
    
    
    65
    %Total revenues
    
    $
    159,538
    
    
    
    100
    %
    
    $
    123,552
    
    
    
    100
    %
 Total revenues increased 29% in the first quarter of fiscal 2005 compared to
the first quarter of fiscal 2004. Total revenues declined approximately 10%
quarter-over-quarter, historically in line with seasonal declines associated
with the first quarter. Geographically, first quarter fiscal 2005 Americas,
EMEA and APAC revenues declined 12%, 3% and 17%, respectively, from fourth
quarter fiscal 2004. The change in foreign currency exchange rates favorably affected total revenues
in the first quarter of fiscal 2005 compared to the first quarter of fiscal
2004 by approximately $3.7 million primarily due to the strength of the Euro
against the U.S. dollar. Excluding the impact of foreign currency exchange
rate changes, total revenues would have increased 26% in the first quarter of
fiscal 2005 compared to the same period in fiscal 2004. 14




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Software licenses.Software license revenues increased 33% to $57.4 million in
the first quarter of fiscal 2005 from $43.0 million in the first quarter of
fiscal 2004. While this license revenue growth was predominantly attributable
to sales of Hyperion Performance Suite, the former Brio products, we also
experienced growth across our financial applications. 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 27% of total
license revenue in the first quarter of fiscal 2005 compared to 24% in the
first quarter of fiscal 2004. 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
revenue during the periods presented. Maintenance and services.Maintenance and services revenue increased 27% in
the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004,
which was comprised of a 29% increase in maintenance revenue and a 22% increase
in consulting and training services revenue. The increase in maintenance revenue in the first quarter of fiscal 2005 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. The
increase in consulting and training services revenue in the first quarter of
fiscal 2005 was principally due to our acquisition of Brio in October 2003 and,
to a lesser extent, to increased utilization rates in our consulting
organization. COST OF REVENUES Three Months Ended September 30,Percent of
    
    
    
    
    
    Percent ofRelated
    
    
    
    
    
    Related(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    RevenueSoftware licenses
    
    $
    3,292
    
    
    
    6
    %
    
    $
    3,059
    
    
    
    7
    %Maintenance and services
    
    
    37,341
    
    
    
    37
    %
    
    
    30,461
    
    
    
    38
    %
 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. Total cost of software licenses, as a percent of
revenues, declined slightly in the first quarter of fiscal 2005 compared to the
first quarter of fiscal 2004. Royalty expense in the first quarter of fiscal
2005 decreased $1.3 million compared to the same period in fiscal 2004
primarily due to a different mix of product sales as well as the termination of
an OEM relationship. Partially offsetting the decrease in royalty expense was
a $1.2 million increase in amortization expense primarily resulting from our
acquisition of Brio in October 2003. Gross margin on software license revenue was 94% in the first quarter of fiscal
2005 compared to 93% for the first quarter of fiscal 2004. In the first three months of fiscal 2005 and 2004, we capitalized $1.8 million
and $0.4 million of software product 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. The increased investment in localization costs can be attributed to the
addition of new localized products and modules to our product suite as well as expanding
our localization into new languages and increasing the scope of localization in current markets. Capitalized software product development costs are
amortized over the estimated economic lives of the products, which is generally
three years. The amortization of capitalized product 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 23%
to $37.3 million in the first quarter of fiscal 2005 from $30.5 million in the
first quarter of fiscal 2004. The increase in cost of maintenance and services
revenue in the first quarter of fiscal 2005 compared to the first quarter of
fiscal 2004 was principally due to a $2.5 million increase in employee expenses
and a $2.1 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 762 employees at September
30, 2004 from 737 employees at September 30, 2003, primarily due to the
addition of incremental Brio employees. Gross margin percent increased slightly to 63% in first quarter fiscal 2005
from 62% in the same quarter last year. OPERATING EXPENSES Total first quarter fiscal year 2005 operating expenses grew approximately 30%
over the same period last year. Our acquisition of Brio accounted for the
majority of the increase from the same quarter last year, primarily represented
by 15




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additional headcount related costs and facilities expenses. We expect second quarter fiscal year 2005 operating expenses to increase over
first quarter fiscal year 2005 due to higher compensation costs associated with
our October salary merit increase and due to continued investments in sales and
marketing activities. We expect to hire additional headcount in the field
organization and increase our field marketing efforts. Three Months Ended September 30,Percent of
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    Total(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    RevenueSales and marketing
    
    $
    58,733
    
    
    
    37
    %
    
    $
    42,442
    
    
    
    34
    %Research and development
    
    
    25,714
    
    
    
    16
    %
    
    
    19,784
    
    
    
    16
    %General and administrative
    
    
    14,869
    
    
    
    9
    %
    
    
    12,920
    
    
    
    10
    %Total operating expenses
    
    $
    99,316
    
    
    
    
    
    
    $
    76,146
 Sales and marketing.Sales and marketing expense increased 38% to $58.7
million in the first quarter of fiscal 2005 from $42.4 million in the first
quarter of fiscal 2004. This increase was mainly due to a $9.9 million
increase in employee expenses and $1.5 million increase in external personnel
cost resulting primarily from our acquisition of Brio in October 2003 and a
higher effective commission rate in the first quarter of fiscal 2005 compared
to the first quarter of fiscal 2004. Sales and marketing headcount grew to 851
employees at September 30, 2004 from 689 employees at September 30, 2003,
primarily due to the addition of incremental Brio employees. Research and development.Research and development expense increased 30% to
$25.7 million in the first quarter of fiscal 2005 from $19.8 million in the
first quarter of fiscal 2004. This increase was mainly attributable to a $3.2
million increase in employee expenses and $1.3 million increase in
subcontractors and external personnel cost, both of which primarily resulted
from our acquisition of Brio in October 2003. Research and development
headcount grew to 502 employees at September 30, 2004 from 432 employees at
September 30, 2003, primarily due to the addition of incremental Brio
employees. General and administrative.General and administrative expense increased 15%
to $14.9 million in the first quarter of fiscal 2005 from $12.9 million in the
first quarter of fiscal 2004. This increase was principally due to a $0.9
million increase in employee expenses that resulted from our acquisition of
Brio in October 2003. General and administrative headcount grew to 363
employees at September 30, 2004 from 343 employees at September 30, 2003,
primarily due to the addition of incremental Brio employees. RESTRUCTURING CHARGES 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 recorded a restructuring
charge in the first quarter of fiscal 2005 of approximately $1.1 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 recorded 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 $5.0 - $6.0 million. 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
increased 19% to $1.4 million in the first quarter of fiscal 2005 compared to
$1.1 million in the first quarter of fiscal 2004. 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 98% in the first quarter of fiscal 2005
compared to the first quarter of fiscal 2004 due to the redemption of all of
our remaining convertible notes in the second quarter of fiscal 2004. 16




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INCOME TAX PROVISION Our effective income tax rate was 35% and 37% for the first quarters of fiscal
2005 and 2004, respectively. We anticipate an income tax rate of 35% for all
of fiscal 2005. NET INCOME We generated net income of $11.6 million, or $0.29 per diluted share, in the
first quarter of fiscal 2005 compared to net income of $9.7 million, or $0.26
per diluted share, in the first quarter of fiscal 2004. We project total revenues in the second quarter of fiscal 2005 to be in the
range of $166.0 million to $170.0 million. We expect earnings per share for
the second quarter of fiscal 2005 to be in the range of $0.24 to $0.29 per
diluted share, assuming an effective tax rate of 35% and projected diluted
shares outstanding of approximately 40.5 million. LIQUIDITY AND CAPITAL RESOURCES September 30,(In thousands)
    
    2004
    
    2003Cash, cash equivalents and short-term investments
    
    $
    362,551
    
    
    $
    408,522Working capital
    
    
    260,596
    
    
    
    344,210
 Three Months Ended September 30,2004
    
    2003Net cash provided by operating activities
    
    $
    30,320
    
    
    $
    14,727Net cash provided by (used in) investing activities
    
    
    (9,308
    )
    
    
    1,884Net cash used in financing activities
    
    
    (26,708
    )
    
    
    (18,690
    )
 At September 30, 2004, we had $359.5 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
September 30, 2004, our working capital was $260.6 million. In the first quarter of fiscal 2005 and 2004, we generated positive cash flow
from operations of $30.3 million and $14.7 million, respectively. In the first
quarter of fiscal 2005, our operating cash flow was due to the net income
generated during the period, significant decrease in accounts receivable and
the impact of the non-cash charges reflected in the net income amount such as
depreciation and amortization expense, partially offset by decreases in accrued
employee compensation and benefits and deferred revenue. In the first quarter
of fiscal 2004, our positive operating cash flow was primarily due to the net
income generated during the period and the impact of the non-cash charges
reflected in the net income amount such as depreciation and amortization
expense, as well as a substantial decrease in accounts receivable due to our
focus on invoicing and collection process improvements in fiscal 2003. These
cash inflows were partially offset by decreases in accounts payable, accrued
expenses and accrued employee compensation and benefits. Net cash used in investing activities amounted to $9.3 million in the first
quarter of fiscal 2005 compared to net cash provided by investing activities of
$1.9 million in the first quarter of fiscal 2004. The cash used in investing
activities in the first quarter of fiscal 2005 resulted from purchases of
property and equipment of $4.7 million, purchase of intangible assets of $1.8
million and payment for acquisition, net of cash acquired, of $2.8 million.
The cash provided by investing activities in the first quarter of fiscal 2004
resulted primarily from proceeds from maturities of investments, net of
purchases, of $6.1 million, partially offset by purchases of property and
equipment of $3.7 million. Net cash used in financing activities was $26.7 million and $18.7 million in
the first quarter of fiscal 2005 and 2004, respectively. The cash used in
financing activities in the first quarter of fiscal 2005 primarily resulted
from $35.2 million repurchases of Hyperion common stock, which was partially
offset by $8.5 million of proceeds from issuance of common stock under employee
stock option and stock purchase plans. The cash used in financing activities in
the first quarter of fiscal 2004 resulted from $26.0 million of repurchases of
Hyperion common stock, partially offset by $7.3 million of proceeds from the
issuance of common stock under our employee stock option and stock purchase
plans. As of September 30, 2004, we are authorized to repurchase up to an
additional $33.7 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 during the remainder of fiscal 2005,
subject to market conditions and other factors. 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 17




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finance our business through at least September 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 September 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 [1]
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter

    TotalNon-cancellable operating leases
    
    $
    21,030
    
    
    $
    23,152
    
    
    $
    20,558
    
    
    $
    17,922
    
    
    $
    12,515
    
    
    $
    44,943
    
    
    $
    140,120
  [1]
    For the year ending June 30, 2005, the table above includes only those
obligations to be settled between October 1, 2004 and June 30, 2005. RECENT ACCOUNTING PRONOUNCEMENTS In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue No. 04-8 The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share, that the dilutive effect of contingent convertible
debt instruments (CoCos) must be included in diluted earnings per share
regardless of whether the triggering contingency has been satisfied, if
dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would
require restatement of prior period diluted earnings per share, subject to
certain transition provisions. It is effective for all periods ending after
December 15, 2004. The adoption of EITF 04-08 is not expected to have a
material impact on our financial position or results of operations. 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. In March 2004, the FASB issued a proposed Statement, Share-Based Payment, an
amendment of FASB Statements Nos. 123 and 95, that addresses the accounting
for share-based payment transactions in which a Company receives employee

services in exchange for either equity instruments of the Company or
liabilities that are based on the fair value of the Companys equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using the intrinsic method that Hyperion currently
uses and generally would require that such transactions be accounted for using
a fair-value-based method and recognized as expense in the consolidated statement of operations. The
effective date of the proposed standard is for periods beginning after June 15,
2005. It is expected that the final standard will be issued before December
31, 2004 and should it be finalized in its current form, it will have a
significant impact on the consolidated statement of operations as Hyperion will
be required to expense the fair value of stock option grants and stock
purchases under employee stock purchase plan. In March 2004, the Financial Accounting Standards Board (FASB) approved the
consensus reached on the Emerging Issues Task Force Issue (EITF) No. 03-01,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-01 provides guidance on determining when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. EITF 03-01 also provides new disclosure
requirements for other-than-temporary impairments on debt and equity
investments. The adoption of EITF 03-01 is not expected to have a material
impact on our financial position or results of operations. 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 18




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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 its products, as well as undetected errors or
delays in new products or new versions of a product 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
7X. 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 its 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 corresponding revenue, and
Hyperions business and operating results could be adversely affected. 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 older
products in order for 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 older to 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 19




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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 its 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 its 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 its 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 its operations and organization.
For example, we are currently making changes to the structure of the North
American sales organization. These changes have historically resulted in
productivity declines and could have a negative impact on revenue 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. While we believe we currently have adequate internal control over financial
reporting, we are required to evaluate our internal control over financial
reporting under Section 404 of the Sarbanes Oxley Act of 2002 and any adverse
results from such evaluation could result in a loss of investor confidence in our
financial reports and have an adverse effect on our stock price. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our
Annual Report on Form 10-K for the fiscal year ending June 30, 2005, we will be
required to furnish a report by our management on our internal control over
financial reporting. Such report will contain, among other matters, an
assessment of the effectiveness of our internal control over financial
reporting as of the end of our fiscal year, including a statement as to whether
or not our internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in our internal
control over financial reporting identified by management. Such report must
also contain a statement that our auditors have issued an attestation report on
managements assessment of such internal controls. The Committee of Sponsoring Organizations of the Treadway Commission
(COSO) provides a framework for companies to assess and improve their internal
control systems. Auditing Standard No. 2 provides the professional standards
and related performance guidance for auditors to attest to, and report on,
managements assessment of the effectiveness of internal control over financial
reporting under Section 404. Managements assessment of internal controls over
financial reporting requires management to make subjective judgments and,
particularly because Auditing Standard No. 2 is newly effective, some of the
judgments will be in areas that may be open to interpretation and therefore the
report may be uniquely difficult to prepare and our auditors may not agree with
our assessments. While we currently believe our internal control over financial reporting
is effective, we are still performing the system and process documentation and
evaluation needed to comply with Section 404, which is both costly and
challenging. During this process, if our management identifies one or more
material weaknesses in our internal control over financial reporting, we will
be unable to assert such internal control is effective. If we are unable to
assert that our internal control over financial reporting is effective as of
June 30, 2005 (or if our auditors are unable to attest that our managements
report is fairly stated or they are unable to express an opinion on the
effectiveness of our internal controls), we could lose investor confidence in
the accuracy and completeness of our financial reports, which would have an
adverse effect on our stock price. While we currently anticipate being able to satisfy the requirements of Section
404 in a timely fashion, we cannot be certain as to the timing of completion of
our evaluation, testing and any required remediation due in large part to the
fact that there is no precedent available by which to measure compliance with
the new Auditing Standard No. 2. 20




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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:  
    
    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;  
    
    difficulties in hedging foreign currency transaction exposures;  
    
    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;  
    
    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 the first quarter
of fiscal 2005. 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 21




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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. 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 27% of Hyperions total license revenue for the
first quarter of fiscal 2005. 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 22




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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. 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 second quarter of
fiscal 2005 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. 
 ITEM 3. 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 significantly increasing
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
September 30, 2004, our short-term investments consisted of 23




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investment-grade
debt securities with a fair value of $3.0 million. The portfolio is invested
in securities with relatively short maturities to minimize interest rate risk
and for liquidity purposes in the event of immediate cash needs. 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. Our exposure to foreign currency exchange rate fluctuations arises
in part from non-functional currency denominated trade accounts receivable and
intercompany accounts receivable. Intercompany accounts receivable 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 the effects of 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, so as to
minimize foreign currency transaction gains and losses. 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 the
first quarter of fiscal 2005. As of September 30, 2004, we had net forward
contracts to sell U.S. dollar equivalent of $31.7 million 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. 
 ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as
of the end of the period covered by this Quarterly Report on Form 10-Q, 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 first fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. 24




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##### Table of Contents



PART II - OTHER INFORMATION 
 ITEM 1. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth, for the periods indicated, our purchases of
common stock. ApproximateTotal
    
    
    
    
    
    Total Number of
    
    Dollar Value ofNumber of
    
    Average
    
    Shares Purchased as
    
    Shares that MayShares
    
    Price Paid
    
    Part of a Publicly
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    per Share
    
    Announced Plan [1]
    
    Under the 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
    
    
    $
    68,901July 1, 2004  July 31, 2004
    
    
    182
    
    
    $
    39.24
    
    
    
    182
    
    
    $
    61,759August 1, 2004  August 31, 2004
    
    
    425
    
    
    $
    36.91
    
    
    
    425
    
    
    $
    46,061September 1, 2004  September
30, 2004
    
    
    334
    
    
    $
    36.96
    
    
    
    334
    
    
    $
    33,7171,094
    
    
    $
    37.74
    
    
    
    1,094
  [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. 
 ITEM 6. EXHIBITS Exhibit No.
    
    
    
    Description31.1
    
    -
    
    Certification of Godfrey R. Sullivan pursuant to Rule 13a-14(a).31.2
    
    -
    
    Certification of David W. Odell pursuant to Rule 13a-14(a).32.1
    
    -
    
    Certification of Godfrey R. Sullivan pursuant to 18 U.S.C. Section
1350.32.2
    
    -
    
    Certification of David W. Odell pursuant to 18 U.S.C. Section 1350.
 25




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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: November 9, 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) 26




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EXHIBIT INDEX Exhibit No.
    
    
    
    Description31.1
    
    -
    
    Certification of Godfrey R. Sullivan pursuant to Rule 13a-14(a).31.2
    
    -
    
    Certification of David W. Odell pursuant to Rule 13a-14(a).32.1
    
    -
    
    Certification of Godfrey R. Sullivan pursuant to 18 U.S.C. Section
1350.32.2
    
    -
    
    Certification of David W. Odell pursuant to 18 U.S.C. Section 1350.
 27