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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q ü
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .   Commission File Number 000-26934 Hyperion Solutions Corporation  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    77-0277772
(I.R.S. Employer
Identification No.)
 1344 Crossman Avenue, Sunnyvale, California 94089
(Address of principal executive offices, including zip code) (408) 744-9500
(Registrants telephone number, including area code) 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 ü Noo Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes ü Noo As of April 30, 2004, there were
 39,002,879 shares of the
Registrants common stock, $0.001 par value, 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 March 31, 2004 and June 30, 2003
    
    
    2Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended March 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4
    
    Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    24Item 2
    
    Changes in Securities and Use of Proceeds
    
    
    24Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    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. References to other companies and their products use trademarks
owned by the respective companies and are for reference purposes only. 1




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS HYPERION SOLUTIONS CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    June 30,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    329,107
    
    
    $
    398,040Short-term investments
    
    
    9,547
    
    
    
    18,514Accounts receivable, net of allowances of $9,263 and $8,231
    
    
    114,308
    
    
    
    98,774Deferred income taxes
    
    
    13,218
    
    
    
    12,890Prepaid expenses and other current assets
    
    
    20,667
    
    
    
    18,498TOTAL CURRENT ASSETS
    
    
    486,847
    
    
    
    546,716Property and equipment, net
    
    
    69,323
    
    
    
    67,533Goodwill
    
    
    140,143
    
    
    
    12,774Intangible assets, net
    
    
    32,969
    
    
    
    8,120Deferred income taxes
    
    
    22,546
    
    
    
    13,633Other assets
    
    
    5,288
    
    
    
    5,982TOTAL ASSETS
    
    $
    757,116
    
    
    $
    654,758LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    58,003
    
    
    $
    45,631Accrued employee compensation and benefits
    
    
    46,315
    
    
    
    41,637Deferred revenue
    
    
    135,296
    
    
    
    104,868Other current liabilities
    
    
    4,564
    
    
    
    3,931TOTAL CURRENT LIABILITIES
    
    
    244,178
    
    
    
    196,067Long-term debt
    
    
    
    
    
    
    50,040Other liabilities
    
    
    24,794
    
    
    
    11,326Commitments 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;
38,743 and 36,654 shares issued; 38,743 and 36,105 shares outstanding
    
    
    39
    
    
    
    37Additional paid-in capital
    
    
    413,082
    
    
    
    278,339Treasury stock, at cost: zero and 549 common shares
    
    
    
    
    
    
    (10,847
    )Deferred stock-based compensation
    
    
    (7,294
    )
    
    
    (2,893
    )Retained earnings
    
    
    83,618
    
    
    
    137,582Accumulated other comprehensive loss
    
    
    (1,301
    )
    
    
    (4,893
    )TOTAL STOCKHOLDERS EQUITY
    
    
    488,144
    
    
    
    397,325TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    757,116
    
    
    $
    654,758
 See accompanying notes to condensed consolidated financial statements. 2




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HYPERION SOLUTIONS CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003REVENUESSoftware licenses
    
    $
    65,108
    
    
    $
    50,449
    
    
    $
    167,854
    
    
    $
    146,176Maintenance and services
    
    
    101,036
    
    
    
    76,110
    
    
    
    277,978
    
    
    
    226,299TOTAL REVENUES
    
    
    166,144
    
    
    
    126,559
    
    
    
    445,832
    
    
    
    372,475COSTS AND EXPENSESCost of revenues:Software licenses
    
    
    3,400
    
    
    
    4,136
    
    
    
    9,867
    
    

    
    10,782Maintenance and services
    
    
    39,546
    
    
    
    34,119
    
    
    
    107,052
    
    
    
    98,654Sales and marketing
    
    
    60,617
    
    
    
    46,932
    
    
    
    161,314
    
    
    
    136,672Research and development
    
    
    26,329
    
    
    
    18,598
    
    
    
    69,686
    
    
    
    54,577General and administrative
    
    
    16,763
    
    
    
    10,412
    
    
    

    45,633
    
    
    
    34,231Restructuring charges
    
    
    162
    
    
    
    
    
    
    
    3,678
    
    
    
    596In-process research and development
    
    
    
    
    
    
    
    
    
    
    2,300
    
    
    
    TOTAL COSTS AND EXPENSES
    
    
    146,817
    
    
    
    114,197
    
    
    
    399,530
    
    
    
    335,512OPERATING INCOME
    
    
    19,327
    
    
    
    12,362
    
    
    
    46,302
    
    
    
    36,963Interest and other income
    
    
    893
    
    
    
    1,458
    
    
    
    3,156
    
    
    
    4,491Interest and other expense
    
    
    (20
    )
    
    
    (698
    )
    
    
    (1,092
    )
    
    
    (2,332
    )Gain (loss) on redemption of debt
    
    
    
    
    
    
    
    
    
    
    (936
    )
    
    
    478INCOME BEFORE INCOME TAXES
    
    
    20,200
    
    
    
    13,122
    
    
    

    47,430
    
    
    
    39,600Income tax provision
    
    
    7,474
    
    
    
    4,855
    
    
    
    18,399
    
    
    
    14,652NET INCOME
    
    $
    12,726
    
    
    $
    8,267
    
    
    $
    29,031
    
    
    $
    24,948Other comprehensive income
    
    
    253
    
    
    
    243
    
    
    
    3,592
    
    
    
    901COMPREHENSIVE INCOME
    
    $
    12,979
    
    
    $
    8,510
    
    
    $
    32,623
    
    
    $
    25,849Basic net income per share
    
    $
    0.33
    
    
    $
    0.24
    
    
    $
    0.77
    
    
    $
    0.73Diluted net income per share
    
    $
    0.32
    
    
    $
    0.23
    
    
    $
    0.74
    
    
    $
    0.71Shares used in computing basic
net income per share
    
    
    38,208
    
    
    
    34,795
    
    
    
    37,624
    
    
    
    34,119Shares used in computing diluted
net income per share
    
    
    39,871
    
    
    
    36,078
    
    
    
    39,307
    
    
    
    35,231
 See accompanying notes to condensed consolidated financial statements. 3




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HYPERION SOLUTIONS CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    29,031
    
    
    $
    24,948Adjustments to reconcile net income to net cash provided by operating activities:(Gain) loss on redemption of debt
    
    
    936
    
    
    
    (478
    )(Gain) loss on sale of assets
    
    
    87
    
    
    
    (35
    )Depreciation and amortization
    
    
    26,291
    
    
    
    21,113Provision for accounts receivable allowances
    
    
    7,611
    
    
    
    5,378Deferred income taxes
    
    
    (3,491
    )
    
    
    2,449Income tax benefit from exercise of stock options
    
    
    11,922
    
    
    
    4,946In-process research and development
    
    
    2,300
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,315
    )
    
    
    28,769Prepaid expenses and other current assets
    
    
    (3,569
    )
    
    
    (464
    )Other assets
    
    
    1,859
    
    
    
    (203
    )Accounts payable and accrued expenses
    
    
    (10,747
    )
    
    
    (10,760
    )Accrued employee compensation and benefits
    
    
    (5,523
    )
    
    
    (5,793
    )Income taxes payable
    
    
    5,325
    
    
    
    3,899Deferred revenue
    
    
    (383
    )
    
    
    3,183Other current liabilities
    
    
    524
    
    
    
    (3,810
    )Other liabilities
    
    
    (2,155
    )
    
    
    (297
    )Net cash provided by operating activities
    
    
    58,703
    
    
    
    72,845CASH FLOWS FROM INVESTING ACTIVITIESPurchases of investments
    
    
    (9,063
    )
    
    
    (12,093
    )Proceeds from maturities of investments
    
    
    31,937
    
    
    
    21,280Purchases of property and equipment
    
    
    (14,299
    )
    
    
    (13,635
    )Proceeds from sale of property and equipment
    
    
    91
    
    
    
    455Purchases of intangible assets
    
    
    (1,345
    )
    
    
    (1,647
    )Payments for acquisitions, net of cash acquired
    
    
    (6,531
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    790
    
    
    
    (5,640
    )CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on mortgage loan
    
    
    
    
    
    
    (2,298
    )Redemption of debt
    
    
    (50,683
    )
    
    
    (27,930
    )Purchases of common stock
    
    
    (124,942
    )
    
    
    Proceeds from issuance of common stock
    
    
    43,082
    
    
    
    29,064Net cash used in financing activities
    
    
    (132,543
    )
    
    
    (1,164
    )Effect of exchange rate on cash and cash equivalents
    
    
    4,117
    
    
    
    1,689INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (68,933
    )
    
    
    67,730Cash and cash equivalents at beginning of period
    
    
    398,040
    
    
    
    311,130CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    329,107
    
    
    $
    378,860SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    2,559
    
    
    $
    3,097Cash paid for income taxes
    
    $
    4,375
    
    
    $
    2,788
 See accompanying notes to condensed consolidated financial statements. 4




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HYPERION SOLUTIONS CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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, 2003 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, 2003. In the opinion of management, all adjustments, consisting only of normal
recurring items, considered necessary for a fair presentation 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, 2004. 2. Significant Accounting Policies Revenue Recognition Hyperion derives revenues from licensing its software products and providing
maintenance, consulting and training services. Hyperions standard software
license agreement is a perpetual license to use its products on an end user,
concurrent user or central processing unit basis. Hyperion records revenue from licensing its software products to end users
provided there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection is reasonably assured and delivery of the product has
occurred, as prescribed by Statement of Position (SOP) No. 97-2, Software
Revenue Recognition. For arrangements with multiple elements, and for which
vendor specific objective evidence (VSOE) of fair value exists for the
undelivered elements, revenue is recognized for the delivered elements based
upon the residual method in accordance with SOP 98-9, Modifications of SOP
97-2 with Respect to Certain Transactions. Amounts billed or payments
received in advance of revenue recognition are recorded as deferred revenue. Maintenance agreements are generally twelve-month prepaid contracts that are
recognized ratably over the service period. VSOE of fair value for maintenance
is measured by the stated renewal rates included in the agreements. Customers may also enter into arrangements that are typically on a time and
materials basis for consulting and training services. VSOE of fair value for
consulting and training services is based upon the standard hourly rate
Hyperion charges for such services when sold separately. Training services are
generally prepaid prior to rendering the service. Consulting and training
revenues are typically recognized as earned. Consulting revenues are generated
primarily from implementation services related to the installation of
Hyperions products. These arrangements are generally accounted for separately
from the license revenue because the arrangements qualify as service
transactions as defined in SOP 97-2. Hyperions services are generally not
essential to the functionality of the software. Hyperions products are fully
functional upon delivery of the product and implementation does not require
significant modification or alteration. Factors considered in determining
whether the revenue should be accounted for separately include, but are not
limited to: degree of risk, availability of services from other vendors, timing
of payments and impact of milestones or acceptance criteria on the
realizability of the software license fee. Payments related to the software
product to which the services relate are typically billed independently from
the services and, therefore, are not coincident with performance of such
services. License agreements generally do not include acceptance provisions.
In the infrequent circumstance where an arrangement does not qualify for
separate accounting of the license and service elements, license revenue is
generally recognized together with the consulting services using the
percentage-of-completion method of contract accounting in accordance with SOP
81-1, Accounting for Performance of Construction-Type and Certain Product-Type
Contracts and Accounting Research Bulletin No. 45, Long-Term
Construction-Type Contracts. If the fair value of any undelivered element included in a multiple-element
arrangement cannot be objectively determined, revenue is deferred until all
elements are delivered, services have been performed or until fair value can be
objectively determined. License revenue from resellers or distributors is
recognized upon sell-through to the end customer. If Hyperion determines that
collection of a license fee is not reasonably assured, the fee is deferred and
revenue is recognized at the time collection becomes reasonably assured, which
is generally upon receipt of cash. 5




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Accounts Receivable Allowances Hyperion makes judgments as to its ability to collect outstanding receivables
and provides allowances for a portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. For those invoices not specifically reviewed, provisions
are made at differing rates, based upon the age of the receivable. In
determining these provisions, Hyperion analyzes several factors, including: its
historical collection experience, customer concentrations, customer
credit-worthiness and current economic trends. If the historical data used to
calculate the accounts receivable allowances does not reflect Hyperions future
ability to collect outstanding receivables, Hyperion may record additional
provisions for accounts receivable allowances. Hyperion records the provision
for accounts receivable allowances in general and administrative expense and as
a reduction of revenue in order to match the underlying cause of the provision
to the appropriate classification in Hyperions statement of operations. Hyperions accounts receivable allowance was $9.3 million at March 31, 2004 and
$8.2 million at June 30, 2003. The total provision for accounts receivable
allowances was $3.4 million for the three months ended March 31, 2004. Of this
amount, $0.4 million was recorded in general and administrative expense and
$3.0 million was recorded as a reduction of revenue for the three months ended
March 31, 2004. The total provision for accounts receivable allowances was
$7.6 million and $5.4 million for the nine months ended March 31, 2004 and
2003, respectively. Of these provisions, $1.3 million and $1.1 million were
recorded in general and administrative expense for the nine months ended March
31, 2004 and 2003, respectively, and $6.3 million and $4.3 million were
recorded as a reduction of revenue for the nine months ended March 31, 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 Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    12,726
    
    
    $
    8,267
    
    
    $
    29,031
    
    
    $
    24,948Shares used in computing basic
net income per share
    
    
    38,208
    
    
    
    34,795
    
    
    
    37,624
    
    
    
    34,119Effect of potentially dilutive securities
    
    
    1,663
    
    
    
    1,283
    
    
    
    1,683
    
    
    
    1,112Shares used in computing diluted
net income per share
    
    
    39,871
    
    
    
    36,078
    
    
    
    39,307
    
    
    
    35,231Basic net income per share
    
    $
    0.33
    
    
    $
    0.24
    
    
    $
    0.77
    
    
    $
    0.73Diluted net income per share
    
    $
    0.32
    
    
    $
    0.23
    
    
    $
    0.74
    
    
    $
    0.71
 For the three and nine months ended March 31, 2004, stock option rights
totaling 0.7 million shares and 0.9 million shares of common stock have been
excluded from the diluted EPS calculations because their effect would have been
antidilutive. For the three and nine months ended March 31, 2003, stock option
rights totaling 2.3 million shares and 2.6 million shares, respectively, have
been excluded from the diluted EPS calculations because their effect would have
been antidilutive. For the nine months ended March 31, 2004, 0.5 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. For the three and nine months ended March 31, 2003, 0.9 million
shares and 1.2 million shares of common stock, respectively, issuable upon
conversion of the convertible subordinated notes have been excluded from the
diluted EPS calculations because their effect would have been antidilutive. 6




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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 Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    12,726
    
    
    $
    8,267
    
    
    $
    29,031
    
    
    $
    24,948Add: stock-based compensation expense
included in reported net income, net of tax
    
    
    331
    
    
    
    
    
    
    
    1,009
    
    
    
    Deduct: stock-based compensation expense
determined under the fair value method,
net of tax
    
    
    (4,496
    )
    
    
    (4,209
    )
    
    
    (13,190
    )
    
    
    (12,177
    )Net income, pro forma
    
    $
    8,561
    
    
    $
    4,058
    
    
    $
    16,850
    
    
    $
    12,771Net income per share:Basic  as reported
    
    $
    0.33
    
    
    $
    0.24
    
    
    $
    0.77
    
    
    $
    0.73Basic  pro forma
    
    $
    0.22
    
    
    $
    0.12
    
    
    $
    0.45
    
    
    $
    0.37Diluted  as reported
    
    $
    0.32
    
    
    $
    0.23
    
    
    $
    0.74
    
    
    $
    0.71Diluted  pro forma
    
    $
    0.22
    
    
    $
    0.11
    
    
    $
    0.43
    
    
    $
    0.37
 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. Comprehensive Income Comprehensive income includes net income, foreign currency translation
adjustments and unrealized gains and losses on available-for-sale securities.
To date, unrealized gains and losses on available-for-sale securities have not
been material. The components of accumulated other comprehensive loss are as
follows (in thousands): March 31,
    
    June 30,2004
    
    2003Cumulative translation adjustment
    
    $
    (1,325
    )
    
    $
    (4,967
    )Unrealized gains on available-for-sale
securities
    
    
    24
    
    
    
    74$
    (1,301
    )
    
    $
    (4,893
    )
 Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. In general, a variable interest entity (VIE) is a corporation,
partnership, trust, or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a VIE to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
VIEs activities or is entitled to receive a majority of the VIEs residual
returns or both. The consolidation requirements of FIN 46 are effective
immediately for VIEs created after January 31, 2003. The consolidation
requirements for older VIEs are effective for financial statements of interim
or annual periods beginning after June 15, 2003. However, in October 2003, the
FASB deferred the effective date of FIN 46 for older VIEs to the end of the
first interim or annual period ending after December 15, 2003. Certain of the
disclosure requirements are effective for all financial statements issued after
January 31, 2003, regardless of when the VIE was established. Hyperion adopted
FIN 46 on February 1, 2003 for new entities and on December 31, 2003 for
entities created or acquired prior to February 1, 2003. The adoption did not
have a material impact on its financial position or results of operations. 7




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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 is currently assessing the impact of adopting EITF
03-06 but does not expect it will have a material impact on its financial
position or results of operations. 3. Commitments and Contingencies Guarantees and Indemnifications In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee or indemnification.
FIN 45 also requires additional disclosure by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees and
indemnifications. The initial recognition and measurement provisions of FIN 45
are applicable for guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. Hyperion adopted the
recognition and measurement provisions of FIN 45 prospectively to guarantees
issued or modified after December 31, 2002, and the adoption did not have a
material impact on its financial position or results of operations. The
following is a summary of the agreements that Hyperion has determined are
within the scope of FIN 45: As permitted under Delaware law, Hyperion has agreements whereby it indemnifies
its officers and directors for certain events or occurrences while the officer
or director is or was serving at Hyperions request in such capacity. The term
of the indemnification period is for the officers or directors lifetime. The
maximum potential amount of future payments Hyperion could be required to make
under these indemnification agreements is unlimited; however, Hyperion has a
director and officer insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid. As a result of the insurance
policy coverage, Hyperion believes the estimated fair value of these
indemnification agreements is minimal. Hyperion has no liabilities recorded
for these agreements as of March 31, 2004. Hyperion includes standard intellectual property indemnification clauses in its
software license agreements. Pursuant to these clauses, Hyperion holds
harmless and agrees to defend the indemnified party, generally Hyperions
business partners and customers, in connection with certain patent, copyright
or trade secret infringement claims by third parties with respect to Hyperions
products. The term of the indemnification clauses is generally perpetual any
time after execution of the software license agreement. In the event an
infringement claim against Hyperion or an indemnified party is successful,
Hyperion, at its sole option, agrees to do one of the following: (i) procure
for the indemnified party the right to continue use of the software; (ii)
provide a modification to the software so that its use becomes non-infringing;
(iii) replace the software with software which is substantially similar in
functionality and performance; or (iv) refund the residual value of the
software license fees paid by the indemnified party for the infringing
software. Hyperion believes the estimated fair value of these agreements is
minimal. Hyperion has no liabilities recorded for these agreements as of March
31, 2004. Hyperion generally warrants that its software products will perform in all
material respects in accordance with its standard published specifications in
effect at the time of delivery of the licensed products to the customer for a
period of ninety days following delivery. If necessary, Hyperion would provide
for the estimated cost of product warranties based on specific warranty claims
and claim history. Hyperion has not incurred significant expense under its
product warranties to date and, as a result, Hyperion believes the estimated
fair value of these warranties is minimal. Hyperion has no liabilities
recorded for these warranties as of March 31, 2004. Contingencies On July 11, 1997, Gentia Software filed a request for reexamination of
Hyperions U.S. Patent No. 5,359,724 (724 patent) with the United States
Patent and Trademark Office (PTO) arguing that the 724 patent was
anticipated and obvious in light of certain prior art references. On September
11, 1997, the PTO granted the request for reexamination. On February 27, 1998,
Gentia Software filed with the PTO a request for a second reexamination of the
724 patent based on additional prior art references. On May 22, 1998, the PTO
granted that request for reexamination, which was later consolidated with the
first reexamination. On March 31, 1999, the PTO issued a non-final office
action rejecting the claims of the 724 patent. Hyperion filed its response to
the office action on May 31, 1999. No final office action has been issued by
the PTO. Hyperion believes that the outcome of such action will not have a
material adverse effect on its financial position, results of operations or
cash flows. 8




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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 On October 16, 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 and the following weighted-average assumptions: Expected life (in years)
    
    
    3.56Expected volatility
    
    
    54
    %Risk free interest rate
    
    
    2.51
    %
 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 initially been allocated as follows (in
thousands): Current assets
    
    $
    48,353Property and equipment
    
    
    9,551Goodwill
    
    
    127,160Intangible assets
    
    
    30,000Deferred taxes
    
    
    5,710In-process research and development
    
    
    2,300Deferred compensation
    
    
    7,112Current liabilities
    
    
    (17,898
    )Deferred revenue
    
    
    (28,719
    )Restructuring costs
    
    
    (33,492
    )Total purchase price
    
    $
    150,077
 The purchase price allocation is preliminary and a final determination of
required purchase accounting adjustments will be made upon the completion of a
final analysis of fair values of the assets acquired and liabilities assumed. 9




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In performing this preliminary purchase price allocation, Hyperion considered,
among other factors, its intention for future use of the acquired assets,
analyses of historical financial performance and estimates of future
performance of Brios products. The fair values of intangible assets were
estimated using the income approach for capitalized software and maintenance
agreements, the royalty savings approach for patents and core technology, and
the cost approach for customer contracts and related relationships and value
added reseller relationships. The rates utilized to discount the net cash
flows to their present values were based upon Hyperions weighted average cost
of capital and range from 14% to 16%. These discount rates were determined
after consideration of Hyperions rate of return on debt capital and equity,
the weighted average return on invested capital and the risk associated with
achieving forecasted sales related to the technology and assets acquired from
Brio. Identifiable intangible assets purchased in the Brio acquisition consist
of the following (in thousands, except for useful life): Fair
    
    UsefulIdentifiable Intangible Assets
    
    Value
    
    LifeCapitalized software
    
    $
    15,500
    
    
    4 yearsPatents and core technology
    
    
    4,000
    
    
    6 yearsMaintenance agreements
    
    
    4,400
    
    
    5 yearsCustomer contracts and related relationships
    
    
    6,000
    
    
    4 yearsValue added reseller relationships
    
    
    100
    
    
    1 year$
    30,000
 In-process research and development (IPR&D) of $2.3 million was expensed in
the accompanying condensed consolidated statements of operations because the
purchased research and development had no alternative uses and had not reached
technological feasibility. The IPR&D relates to the Brio 8 product line. The
value assigned to IPR&D was determined utilizing the income approach. The
stage of completion for the project was estimated to determine the discount
rate to be applied to the valuation of the in-process technology. Based upon
the level of completion and the risk associated with the in-process technology,
a discount rate of 20% was deemed appropriate for valuing IPR&D. Pro Forma Financial Information The unaudited financial information in the table below summarizes the combined
results of operations of Hyperion and Brio, on a pro forma basis, as though the
companies had been combined as of the beginning of each period presented. The
impact of the acquisition-related IPR&D charge and restructuring charges
recorded in the second quarter of fiscal 2004 have been excluded. This pro
forma financial information is presented for informational purposes only and is
not necessarily indicative of the results of operations that would have been
achieved had the acquisition taken place at the beginning of each period
presented. The unaudited pro forma combined statement of operations data for
the three months ended March 31, 2004 represent the results of Hyperion for the
three months ended March 31, 2004, which include the post-acquisition results
of Brio for the full quarter. The unaudited pro forma combined statement of
operations data for the nine months ended March 31, 2004 combines (i) the
results of Hyperion for the nine months ended March 31, 2004, which include the
post-acquisition results of Brio for the period of October 16, 2003 to March
31, 2004 and (ii) the pre-acquisition results of Brio for the period of July 1,
2003 to October 15, 2003. The unaudited pro forma combined statement of
operations data for the three and nine months ended March 31, 2003 combine (i)
the results of Hyperion for the three and nine months ended March 31, 2003 and
(ii) the results of Brio for the three and nine months ended March 31, 2003.
The pro forma amounts are as follows (in thousands, except per share amounts): Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    166,144
    
    
    $
    153,216
    
    
    $
    476,681
    
    
    $
    449,406Net income (loss)
    
    
    12,726
    
    
    
    (6,616
    )
    
    
    25,139
    
    
    
    1,967Basic net income (loss) per share
    
    
    0.33
    
    
    
    (0.17
    )
    
    
    0.64
    
    
    
    0.05Diluted net income (loss) per share
    
    
    0.32
    
    
    
    (0.16
    )
    
    
    0.61
    
    
    
    0.05
 5. Restructuring Accruals 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 companys cost structure.
Consequently, Hyperion recorded restructuring charges totaling $3.2 million in
the three months ended December 31, 2003, of which $3.1 million related to
employee severance costs and $0.1 million related to facility closure costs,
and recorded an additional $0.2 million of restructuring charges in the three
months ended March 31, 2004, substantially all of which related to employee
severance 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. During the three months ended
December 31, 2003, Hyperion also recorded a restructuring charge of $0.3
million related to the restructuring activities initiated in June 2001. 10




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As a result of the acquisition of Brio, Hyperion recorded $33.5 million of
restructuring costs in connection with exiting certain pre-acquisition
activities of Brio including employee severance costs, facility closure costs,
and other costs. Accordingly, these costs have been recognized as a liability
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 business, which resulted in a reduction of the workforce by
approximately 300, or 12% of worldwide headcount. Employee groups impacted by
the restructuring include 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
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. The following table sets forth the activity in Hyperions restructuring
accruals, accounted for under SFAS 146 and EITF 94-3, for the nine months ended
March 31, 2004, which are included in Other current liabilities and Other
liabilities in the accompanying condensed consolidated balance sheet (in
thousands): Severance
    
    Facilities
    
    Other
    
    TotalBalance at June 30, 2003
    
    $
    
    
    
    $
    13,358
    
    
    $
    1,850
    
    
    $
    15,208Restructuring costs
    
    
    3,232
    
    
    
    446
    
    
    
    
    
    
    
    3,678Cash payments
    
    
    (2,777
    )
    
    
    (1,549
    )
    
    
    (91
    )
    
    
    (4,417
    )Balance at March 31, 2004
    
    $
    455
    
    
    $
    12,255
    
    
    $
    1,759
    
    
    $
    14,469
 The following table sets forth the activity in Hyperions restructuring
accruals, accounted for under EITF 95-3, for the nine months ended March 31,
2004, which are included in Accounts payable and accrued expenses, Accrued
employee compensation and benefits, and Other liabilities in the
accompanying condensed consolidated balance sheet (in thousands): Severance
    
    Facilities
    
    Asset Impairments
    
    TotalBalance at June 30, 2003
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring costs
    
    
    4,483
    
    
    
    24,046
    
    
    
    4,963
    
    
    
    33,492Non-cash items
    
    
    
    
    
    
    
    
    
    
    (4,963
    )
    
    
    (4,963
    )Cash payments
    
    
    (2,002
    )
    
    
    (2,695
    )
    
    
    
    
    
    
    (4,697
    )Balance at March 31, 2004
    
    $
    2,481
    
    
    $
    21,351
    
    
    $
    
    
    
    $
    23,832
 The restructuring costs recorded during the nine months ended March 31, 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 the pre-acquisition
Brio operations will be recorded as an adjustment to goodwill and any changes
to the estimated costs of restructuring the pre-acquisition Hyperion operations
will be reflected in Hyperions results of operations. 6. Debt Redemption In October 2003, Hyperions board of directors authorized the redemption of its
outstanding convertible subordinated notes of $50.0 million. The redemption
occurred in November 2003 and resulted in the recognition of a loss of $0.9
million, which comprised the 1.286% redemption premium paid as well as the
write-off of associated deferred issuance costs. 7. Stock Repurchases In July 2003, Hyperions board of directors authorized the repurchase of up to
$125.0 million of its outstanding common stock. Hyperion determined the timing
and amount of shares repurchased based upon market conditions and other
factors, and used its existing cash, cash equivalents and short-term
investments to finance the transactions. During the three months ended March
31, 2004, Hyperion repurchased and retired 1.0 million shares of its common
stock for a total cost of $33.0 million. Of this amount, $11.3 million was
recorded as a reduction of additional paid-in capital and the remaining $21.7
million was recorded as a reduction of retained earnings. During the nine
months ended March 31, 2004, Hyperion repurchased and retired 3.8 million
shares of its common stock for a total cost of $124.9 million. Of this amount,
$42.2 million was recorded as a reduction of additional paid-in capital and the
remaining $82.7 million was recorded as a reduction of retained
earnings. This stock repurchase plan was completed during the three
months ended March 31, 2004. 11




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8. 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 Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Revenues:Americas
    
    $
    100,057
    
    
    $
    78,762
    
    
    $
    270,512
    
    
    $
    232,960EMEA
    
    
    54,367
    
    
    
    40,963
    
    
    
    146,042
    
    
    
    118,557APAC
    
    
    11,720
    
    
    
    6,834
    
    
    
    29,278
    
    
    
    20,958$
    166,144
    
    
    $
    126,559
    
    
    $
    445,832
    
    
    $
    372,475
 March 31,
    
    June 30,2004
    
    2003Long-lived assets:Americas
    
    $
    61,914
    
    
    $
    59,857EMEA
    
    
    5,697
    
    
    
    6,360APAC
    
    
    1,712
    
    
    
    1,316$
    69,323
    
    
    $
    67,533
 The following table presents revenues for groups of similar products and
services (in thousands): Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Software licenses
    
    $
    65,108
    
    
    $
    50,449
    
    
    $
    167,854
    
    
    $
    146,176Maintenance and services:Maintenance
    
    
    70,975
    
    
    
    53,174
    
    
    
    194,528
    
    
    
    157,157Consulting and training
    
    
    30,061
    
    
    
    22,936
    
    
    
    83,450
    
    
    
    69,142101,036
    
    
    
    76,110
    
    
    
    277,978
    
    
    
    226,299Total revenues
    
    $
    166,144
    
    
    $
    126,559
    
    
    $
    445,832
    
    
    $
    372,475
 12




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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 completed our acquisition of Brio Software, Inc. on October 16, 2003.
Brios results of operations have been included in Hyperions results beginning
on the date of acquisition. In addition to the incremental revenue streams
associated with Brio products and services, our headcount increased by
approximately 15% in the second quarter of fiscal 2004 as a result of the
acquisition. REVENUES Three Months Ended March 31,
    
    Nine Months Ended March 31,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    Revenue
    
    2004
    
    Revenue
    
    2003
    
    RevenueSoftware licenses
    
    $
    65,108
    
    
    
    39
    %
    
    $
    50,449
    
    
    
    40
    %
    
    $
    167,854
    
    
    
    38
    %
    
    $
    146,176
    
    
    
    39
    %Maintenance and services:Maintenance
    
    
    70,975
    
    
    
    43
    %
    
    
    53,174
    
    
    
    42
    %
    
    
    194,528
    
    
    
    43
    %
    
    
    157,157
    
    
    
    42
    %Consulting and training
    
    
    30,061
    
    
    
    18
    %
    
    
    22,936
    
    
    
    18
    %
    
    
    83,450
    
    
    
    19
    %
    
    
    69,142
    
    
    
    19
    %101,036
    
    
    
    61
    %
    
    
    76,110
    
    
    
    60
    %
    
    
    277,978
    
    
    
    62
    %
    
    
    226,299
    
    
    
    61
    %Total revenues
    
    $
    166,144
    
    
    
    100
    %
    
    $
    126,559
    
    
    
    100
    %
    
    $
    445,832
    
    
    
    100
    %
    
    $
    372,475
    
    
    
    100
    %
 Total revenues increased 31% in the third quarter of fiscal 2004 compared to
the third quarter of fiscal 2003 and increased 20% in the first nine months of
fiscal 2004 compared to the first nine months of fiscal 2003. The change in foreign currency exchange rates favorably affected total revenues
in the third quarter of fiscal 2004 compared to the third quarter of fiscal
2003 by approximately $6.2 million and favorably affected total revenues in the
first nine months of fiscal 2004 compared to the first nine months of fiscal
2003 by approximately $16.1 million, in both cases 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
third quarter of fiscal 2004 and would have increased 15% in the first nine
months of fiscal 2004, compared to the same periods in fiscal 2003. 13




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Software Licenses. Software license revenues increased 29% to $65.1 million in
 the third quarter of fiscal 2004 from $50.4 million in the third quarter of fiscal 2003.
 While this license revenue growth was predominantly attributable to sales of Hyperion
 Performance Suite, the former Brio products, we also experienced balanced growth across
 our broader product portfolio, consisting of our financial applications and core Essbase
 platform. Software license revenues increased 15% to $167.9 million in the first nine months of fiscal 2004 from $146.2 million
 in the first nine months of fiscal 2003.  This growth was substantially attributable to
 sales of Hyperion Performance Suite. 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 29% of total
license revenue in the third quarter of fiscal 2004 compared to 30% in the
third quarter of fiscal 2003 and comprised 25% of total license revenue in the
first nine months of fiscal 2004 compared to 28% for the first nine months of
fiscal 2003. 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 33% in
the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003,
which was comprised of a 33% increase in maintenance revenue and a 31% increase
in consulting and training services revenue. Maintenance and services revenue
increased 23% in the first nine months of fiscal 2004 compared to the first
nine months of fiscal 2003, which was comprised of a 24% increase in
maintenance revenue and a 21% increase in consulting and training services
revenue. The increases in maintenance revenue in the third quarter and first nine months
of fiscal 2004 were primarily attributable to our acquisition of Brio in
October 2003 and, to a lesser extent, to year-over-year growth of our installed
customer base and improvements in our invoicing and collecting procedures for
maintenance renewals, offset slightly by cancelled maintenance contracts. The
increases in consulting and training services revenue in the third quarter and
first nine months of fiscal 2004 were 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 March 31,
    
    Nine Months Ended March 31,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofRelated
    
    
    
    
    
    Related
    
    
    
    
    
    Related
    
    
    
    
    
    Related(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    Revenue
    
    2004
    
    Revenue
    
    2003
    
    RevenueSoftware licenses
    
    $
    3,400
    
    
    
    5
    %
    
    $
    4,136
    
    
    
    8
    %
    
    $
    9,867
    
    
    
    6
    %
    
    $
    10,782
    
    
    
    7
    %Maintenance and services
    
    
    39,546
    
    
    
    39
    %
    
    
    34,119
    
    
    
    45
    %
    
    
    107,052
    
    
    
    39
    %
    
    
    98,654
    
    
    
    44
    %
 Cost of software license revenue.Cost of software license revenue consists
primarily of royalty expenses, amortization of capitalized software development
costs, amortization of acquired technologies, and the cost of product packaging
and documentation materials. Cost of software license revenues decreased 18%
in the third quarter of fiscal 2004 compared to the third quarter of fiscal
2003 primarily due to a $0.7 million decrease in royalty expense. Cost of
software license revenues decreased 8% in the first nine months of fiscal 2004
compared to the first nine months of fiscal 2003 also primarily due to a $0.7
million decrease in royalty expense. The decreases in royalty expense in the
third quarter and the first nine months of fiscal 2004 compared to the same
periods in fiscal 2003 are attributable to different mixes of product sales as
well as the termination of our OEM relationship with Crystal Decisions.
Partially offsetting the decreases in royalty expenses were slight increases in
amortization expense primarily resulting from our acquisitions of Brio in
October 2003 and The Alcar Group in April 2003. Gross margin on software license revenue was 95% for the third quarter of
fiscal 2004 compared to 92% for the third quarter of fiscal 2003. Gross margin
on software license revenue was 94% for the first nine months of fiscal 2004
compared to 93% for the same period in fiscal 2003. In the first nine months of fiscal 2004 and 2003, we capitalized $1.2 million
and $1.4 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. Capitalized software product development costs are
amortized over the estimated economic life 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. 14




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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 16%
in the third quarter of fiscal 2004 compared to the third quarter of fiscal
2003 and increased 9% in the first nine months of fiscal 2004 compared to the
first nine months of fiscal 2003. The increase in cost of maintenance and
services revenue in the third quarter of fiscal 2004 compared to the third
quarter of fiscal 2003 was principally due to a $2.1 million increase in
employee expenses and a $2.4 million increase in subcontractor and other
external personnel costs, both of which primarily resulted from our acquisition
of Brio in October 2003. The increase in cost of maintenance and services
revenue in the first nine months of fiscal 2004 compared to the first nine
months of fiscal 2003 was principally due to a $4.3 million increase in
employee expenses and a $4.9 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 773
employees at March 31, 2004 from 733 employees at March 31, 2003, primarily due
to the addition of incremental Brio employees. Gross margins on maintenance and services revenue were 61% for the third
quarter of fiscal 2004 compared to 55% for the third quarter of fiscal 2003.
Gross margins on maintenance and services revenue were 61% for the first nine
months of fiscal 2004 compared to 56% for the first nine months of fiscal 2003.
The increase in gross margins on maintenance and services revenue is primarily
due to increased consulting utilization rates combined with increases in
maintenance and services revenues. OPERATING EXPENSES Three Months Ended March 31,
    
    Nine Months Ended March 31,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total(In thousands)
    
    2004
    
    Revenue
    
    2003
    
    Revenue
    
    2004
    
    Revenue
    
    2003
    
    RevenueSales and marketing
    
    $
    60,617
    
    
    
    36
    %
    
    $
    46,932
    
    
    
    37
    %
    
    $
    161,314
    
    
    
    36
    %
    
    $
    136,672
    
    
    
    37
    %Research and development
    
    
    26,329
    
    
    
    16
    %
    
    
    18,598
    
    
    
    15
    %
    
    
    69,686
    
    
    
    16
    %
    
    
    54,577
    
    
    
    15
    %General and administrative
    
    
    16,763
    
    
    
    10
    %
    
    
    10,412
    
    
    
    8
    %
    
    
    45,633
    
    
    
    10
    %
    
    
    34,231
    
    
    
    9
    %Total operating expenses
    
    $
    103,709
    
    
    
    
    
    
    $
    75,942
    
    
    
    
    
    
    $
    276,633
    
    
    
    
    
    
    $
    225,480
 Sales and marketing.Sales and marketing expense increased 29% to $60.6
million in the third quarter of fiscal 2004 from $46.9 million in the third
quarter of fiscal 2003. This increase was mainly due to an $11.1 million
increase in employee expenses that resulted primarily from our acquisition of
Brio in October 2003 and a higher effective commission rate in the third
quarter of fiscal 2004 compared to the third quarter of fiscal 2003. Sales and
marketing headcount grew to 831 employees at March 31, 2004 from 681 employees
at March 31, 2003, primarily due to the addition of incremental Brio employees. Sales and marketing expense increased 18% to $161.3 million in the first nine
months of fiscal 2004 from $136.7 million in the first nine months of fiscal
2003. This increase was mainly due to a $20.0 million increase in employee
expenses that resulted primarily from our acquisition of Brio in October 2003
and a higher effective commission rate in the first nine months of fiscal 2004
compared to the first nine months of fiscal 2003. Research and development.Research and development expense increased 42% to
$26.3 million in the third quarter of fiscal 2004 from $18.6 million in the
third quarter of fiscal 2003. This increase was mainly attributable to a $5.4
million increase in employee expenses that resulted primarily from our
acquisition of Brio in October 2003. Research and development headcount grew
to 528 employees at March 31, 2004 from 417 employees at March 31, 2003,
primarily due to the addition of incremental Brio employees. Research and development expense increased by 28% to $69.7 million in the first
nine months of fiscal 2004 from $54.6 million in the first nine months of
fiscal 2003. This increase was primarily attributable to an $11.7 million
increase in employee expenses that resulted primarily from our acquisition of
Brio in October 2003. General and administrative.General and administrative expense increased 61%
to $16.8 million in the third quarter of fiscal 2004 from $10.4 million in the
third quarter of fiscal 2003. This increase was principally due to a $4.2
million increase in employee expenses that resulted from our acquisition of
Brio in October 2003. General and administrative headcount grew to 395
employees at March 31, 2004 from 336 employees at March 31, 2003, primarily due
to the addition of incremental Brio employees. General and administrative expense increased 33% to $45.6 million in the first
nine months of fiscal 2004 from $34.2 million in the first nine months of
fiscal 2003. This increase was principally due to a $7.2 million increase in
employee expenses that resulted primarily from our acquisition of Brio in
October 2003. 15




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RESTRUCTURING CHARGES In connection with our 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 companys cost structure.
Consequently, we recorded restructuring charges totaling $3.2 million in the
second quarter of fiscal 2004, of which $3.1 million related to employee
severance costs and $0.1 million related to facility closure costs, and
recorded an additional $0.2 million of restructuring charges in the third
quarter of fiscal 2004, substantially all of which related to employee
severance costs. During the second quarter of fiscal 2004, we also recorded a
restructuring charge of $0.3 million related to the restructuring activities
initiated in June 2001. During the second quarter of fiscal 2003, we recorded a restructuring charge of
$0.6 million related to the restructuring activities initiated in June 2001. IN-PROCESS RESEARCH AND DEVELOPMENT During the second quarter of fiscal 2004, in connection with our acquisition of
Brio, we recorded a charge of $2.3 million related to the write-off of
in-process research and development costs. INTEREST AND OTHER INCOME Interest and other income consists primarily of interest earned on cash, cash
equivalent and short-term investment balances. Interest and other income
decreased 39% in the third quarter of fiscal 2004 compared to the third quarter
of fiscal 2003 and decreased 30% in the first nine months of fiscal 2004
compared to the first nine months of fiscal 2003 due to declines in short-term
interest rates as well as lower average cash and investment balances. Average
cash and investment balances decreased in the third quarter and first nine
months of fiscal 2004 compared to the same periods in fiscal 2003 due to the
$124.9 million used to repurchase our common shares and the $50.7 million used
to redeem our convertible subordinated notes during the first nine months 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 97% in the third quarter of fiscal 2004
compared to the third quarter of fiscal 2003 and decreased 53% in the first
nine months of fiscal 2004 compared to the first nine months of fiscal 2003.
During the first and second quarters of fiscal 2003, we repurchased and retired
convertible subordinated notes with face values totaling $28.7 million, and,
during the second quarter of fiscal 2004, we redeemed the remaining convertible
subordinated notes with face values totaling $50.0 million. These repurchases
and redemptions significantly contributed to the decrease in interest and other
expense in the third quarter and first nine months of fiscal 2004 compared to
the third quarter and first nine months of fiscal 2003. GAIN (LOSS) ON REDEMPTION OF DEBT During the second quarter of fiscal 2004, we redeemed all of our outstanding
convertible subordinated notes, which had face values totaling $50.0 million.
This redemption resulted in the recognition of a loss of $0.9 million in the
second quarter of fiscal 2004, which comprised the 1.286% redemption premium
paid as well as the write-off of associated deferred issuance costs. During the first and second quarters of fiscal 2003, we repurchased convertible
subordinated notes with a face value of $28.7 million for a total cost of
approximately $27.9 million, which resulted in the recognition of a gain, net
of the write-off of associated deferred issuance costs, of approximately $0.5
million. INCOME TAX PROVISION Our effective income tax rate was 37% for the third quarters of fiscal 2004 and
2003. Our effective income tax rate was 39% for the first nine months of
fiscal 2004 compared to 37% for the first nine months of fiscal 2003.
Excluding the impact of the charge for in-process research and development of
$2.3 million, which is not deductible for tax purposes, our effective income
tax rate would have been 37% for the first nine months of fiscal 2004. NET INCOME We generated net income of $12.7 million, or $0.32 per diluted share, in the
third quarter of fiscal 2004 compared to net income of $8.3 million, or $0.23
per diluted share, in the third quarter of fiscal 2003. For the first nine
months of fiscal 2004, our net income was $29.0 million, or $0.74 per diluted
share, compared to net income of $24.9 million, or $0.71 per diluted share, for
the first nine months of fiscal 2003. 16




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We project total revenues in the fourth quarter of fiscal 2004 to be in the
range of $167.0 million to $171.0 million. We expect net income for the fourth
quarter of fiscal 2004 to be in the range of $11.9 million to $14.0 million, or
$0.29 to $0.34 per diluted share, assuming an effective tax rate of 37% and
projected diluted shares outstanding of approximately 41.2 million. LIQUIDITY AND CAPITAL RESOURCES Nine Months Ended March 31,(In thousands)
    
    2004
    
    2003Cash, cash equivalents and short-term investments
    
    $
    338,654
    
    
    $
    388,783Working capital
    
    
    242,669
    
    
    
    317,036Net cash provided by operating activities
    
    
    58,703
    
    
    
    72,845Net cash provided by (used in) investing activities
    
    
    790
    
    
    
    (5,640
    )Net cash used in financing activities
    
    
    (132,543
    )
    
    
    (1,164
    )
 At March 31, 2004, we had $329.1 million in cash and cash equivalents and $9.5
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 March
31, 2004, our working capital was $242.7 million. In the first nine months of fiscal 2004 and 2003, we generated positive cash
flow from operations of $58.7 million and $72.8 million, respectively. In the
first nine months of fiscal 2004, our 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, partially offset by decreases in accounts payable,
accrued expenses and accrued employee compensation and benefits. In the first
nine months of fiscal 2003, 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 provided by investing activities amounted to $0.8 million in the first
nine months of fiscal 2004 compared to net cash used in investing activities of
$5.6 million in the first nine months of fiscal 2003. The cash provided by
investing activities in the first nine months of fiscal 2004 resulted primarily
from proceeds from maturities of investments, net of purchases, of $22.9
million, partially offset by purchases of property and equipment of $14.3
million and payments for acquisitions, net of cash acquired, of $6.5 million.
In connection with our acquisition of Brio in October 2003, we paid a total of
$17.1 million, comprising $14.0 million paid to the Brio stockholders and $3.1
million in acquisition costs paid to various third parties, and acquired Brios
existing cash balance of $10.6 million. The cash used in investing activities
in the first nine months of fiscal 2003 was primarily due to purchases of
property and equipment of $13.6 million, partially offset by proceeds from
maturities of investments, net of purchases, of $9.2 million. Net cash used in financing activities was $132.5 million in the first nine
months of fiscal 2004 compared to $1.2 million in the first nine months of
fiscal 2003. The cash used in financing activities in the first nine months of
fiscal 2004 resulted from $50.7 million paid to redeem our remaining
outstanding convertible subordinated notes, which was authorized by our board
of directors in October 2003, and $124.9 million of repurchases of our common
stock, which was authorized by our board in July 2003. These cash outflows
were partially offset by $43.1 million of proceeds from the issuance of common
stock under our employee stock option and stock purchase plans. The net cash
used in financing activities in the first nine months of fiscal 2003 was due to
the repurchase of our convertible subordinated notes with face values totaling
$28.7 million for a total cost of approximately $27.9 million and the $2.3
million principal payment on our mortgage loan, partially offset by $29.1
million of proceeds from the issuance of common stock under our employee stock
option and stock purchase plans. We intend to fund our capital requirements, as well as our liquidity needs,
with existing cash, cash equivalent and short-term investment balances as well
as cash generated from future operations, if any. However, capital
requirements will depend on many factors, including our rate of revenue growth,
market acceptance of our products, the timing and extent of development
projects and increases in operating expenses, all of which are subject to
uncertainty. We believe that our existing cash, cash equivalent and short-term
investment balances, and cash generated from our future operations, if any,
will be sufficient to finance our business through at least March 31, 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. 17




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##### Table of Contents



The following table summarizes our contractual obligations as of March 31, 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)
    
    2004 [1]
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalNon-cancellable operating leases
    
    $
    8,028
    
    
    $
    21,387
    
    
    $
    14,785
    
    
    $
    13,200
    
    
    $
    10,871
    
    
    $
    27,312
    
    
    $
    95,583
  [1]
    
    For the year ended June 30, 2004, the table above includes only those
obligations to be settled between April 1, 2004 and June 30, 2004. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. In general, a variable interest entity (VIE) is a corporation,
partnership, trust, or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a VIE to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
VIEs activities or is entitled to receive a majority of the VIEs residual
returns or both. The consolidation requirements of FIN 46 are effective
immediately for VIEs created after January 31, 2003. The consolidation
requirements for older VIEs are effective for financial statements of interim
or annual periods beginning after June 15, 2003. However, in October 2003, the
FASB deferred the effective date of FIN 46 for older VIEs to the end of the
first interim or annual period ending after December 15, 2003. Certain of the
disclosure requirements are effective for all financial statements issued after
January 31, 2003, regardless of when the VIE was established. We adopted FIN
46 on February 1, 2003 for new entities and on December 31, 2003 for entities
created or acquired prior to February 1, 2003. The adoption did not 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. We are currently assessing the impact of adopting EITF 03-06
but do not expect it will 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 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. 18




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##### Table of Contents



Hyperions failure to successfully introduce, market and sell new products and
technologies, enhance and improve existing products in a timely manner, and
properly position and/or price Hyperions products, and undetected errors or
delays in new products or new versions of a product and/or the failure of
anticipated market growth could have a material adverse effect on Hyperions
business, results of operations or financial position. These risks tend to be
greater when newer products, such as Hyperion Performance Suite 8, 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, will have to 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. 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 and Oracle. 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 and PeopleSoft, 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 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 and introducing new products,
product updates and services on a timely basis. Hyperion must also extend the
operation of its products to new platforms and keep pace with technological
developments and emerging industry standards. Hyperion commits substantial
resources to developing new software products and services. If the markets for
these new products do not develop as anticipated, or demand for Hyperions
products and services in these markets does not materialize or occurs more
slowly than Hyperion expects, Hyperion will have expended substantial resources
and capital without realizing sufficient revenue, and Hyperions business and
operating results could be adversely affected. Hyperion may face challenges in integrating Brios business and, as a result,
may not realize the expected benefits of the acquisition and the price of
Hyperion common stock may be adversely affected. Hyperion may not be successful in integrating Brios business. Achieving the
benefits of the acquisition will depend on many factors, including:  
    
    the successful and timely integration of the products, technology and
sales operations of the two companies; 
    
    managing software development activities to define a combined product
roadmap, ensure timely development of new products, ensure timely
release of new products to market, and the development of efficient
integration and migration processes and tools; 
    
    combining product offerings, platforms and technologies quickly and
effectively; 
    
    demonstrating to our existing and potential customers that the
acquisition will not result in adverse changes in customer service
standards or business focus; 
    
    retaining key alliances on attractive terms with partners and
suppliers; 
    
    coordinating and integrating sales and marketing efforts to
effectively communicate the capabilities of the combined company, cross
selling related products to each others customers, and managing the
combined sales force and distribution channels to avoid channel
conflict; 
    
    maintaining employee morale, assimilating key employees and managing
an increased number of employees over large geographic distances; 
    
    creating and effectively implementing uniform standards, controls, procedures, policies and information systems; and 
    
    retaining or recruiting key personnel. The successful execution of these tasks will involve considerable effort and
time, especially considering the highly technical and complex nature of each
companys products. Failure to achieve a successful and timely integration of
the respective businesses could impair relationships with employees, customers
and business partners as a result of the integration of management and other
key personnel and the potential disruption of the combined companys ongoing
business and distraction of its management. 19




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##### Table of Contents



The combined company may not succeed in addressing integration issues or other
problems encountered in connection with the acquisition, which could have a
material adverse effect on the business, financial condition and results of
operations of Hyperion, and on the price of shares of Hyperion common stock.
The diversion of the attention of management and any difficulties encountered
in the process of combining the companies could cause the disruption of, or a
loss of momentum in, the activities of the combined companys business. Failure to upgrade older products will adversely affect revenue. As newer products are introduced by Hyperion, or by its competition, the
markets demand for Hyperions older products declines. Declining demand
reduces revenue from additional licenses, and reduces maintenance revenue from
past purchasers of Hyperions software. We must continually upgrade Hyperions
older products in order for Hyperions customers to continue to see value in
Hyperions maintenance services. If Hyperion is unable to provide continued
improvements in functionality, or, alternatively, move customers from
Hyperions older products to Hyperions newer products, declining maintenance
and new license revenue from older products could have a material adverse
effect on Hyperions business. Hyperion typically has back-ended quarters. Quarterly revenues and operating results are highly dependent on the volume and
timing of the signing of licensing agreements and product deliveries during the
quarter, which are difficult to forecast. Significant portions of Hyperions
quarterly software licensing agreements are concluded in the last month of the
fiscal quarter, generally with a concentration of such revenues in the final
week of that month. Due to the relatively fixed nature of certain costs,
including personnel and facilities expenses, a decline or shortfall in
quarterly and/or annual revenues typically results in lower profitability or
may result in losses. Prior to the very end of any quarter, Hyperion must rely
on Hyperions forecasts of revenue for planning, modeling and other purposes.
However, forecasts are only estimates and may not correlate to revenues in a
particular quarter or over a longer period of time. Consequently, a
significant discrepancy between actual results and sales forecasts could cause
Hyperion to improperly plan or budget and thereby adversely affect Hyperions
business or results of operations. Any publicly stated revenue or earnings
projections by Hyperion are especially subject to this risk. A change in pricing or marketing could adversely affect Hyperions business. In an effort to simplify and clarify Hyperions product positioning and
marketing, Hyperion periodically makes changes to Hyperions product pricing or
product descriptions. Broadly based changes to pricing or marketing messages
could cause customers to change or delay their purchasing decisions in response
to such revisions. Additional risks of such changes include delays in
transactions as Hyperions sales force learns how to deploy the new pricing or
convey Hyperions new marketing messages and delay or loss of revenues as the
competition reacts to the pricing and marketing changes, any of which could
have a material adverse effect on Hyperions business, results of operations or
financial position. Hyperion may not be able to continue its operational improvements. As part of Hyperions focus on improving its operating margins, Hyperion is
driving toward increased efficiencies in Hyperions sales force, as well as
Hyperions services, product development, product marketing, finance, and other
administrative processes. The ability to continue to realize current
efficiencies and find ways to improve on past performance is crucial to the
improvement of operating margins. Any increase in the relative cost of these
functions, or failure to continue to realize current efficiencies, could have a
material adverse effect on Hyperions profits. Reorganizations may adversely affect productivity. Hyperion has continued to make adjustments to Hyperions operations and
organization. These changes have historically resulted in productivity
declines in the short term. The revised operations and/or organization must
keep improving over past performance in order to provide better operating
margins and efficiencies. Failure to maintain or improve momentum and
productivity could materially adversely impact Hyperions revenue and profits. 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:  
    
    potential loss of proprietary information due to piracy,
misappropriation or weaker laws regarding intellectual property
protection; 
    
    imposition of foreign laws and other governmental controls, including
trade and employment restrictions; 
    
    fluctuations in currency exchange rates and economic instability such
as higher interest rates and inflation, which could reduce Hyperions
customers ability to obtain financing for software products or which
could make Hyperions products more expensive in those countries; 
    
    difficulties in hedging foreign currency transaction exposures; 
    
    longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable; 
    
    difficulties in staffing and managing its international operations,
including difficulties related to administering Hyperions stock option
plan in some foreign countries; 
    
    difficulties in coordinating the activities of Hyperions geographically dispersed and culturally diverse operations; 
    
    competition from local suppliers; 
    
    costs and delays associated with developing software in multiple languages; and 
    
    political unrest, war or terrorism, particularly in areas in which Hyperion has facilities. Hyperion may not be able to successfully address each of these challenges. Exchange rate fluctuations may adversely affect results. Hyperion conducts a significant portion of its business in currencies other
than the United States dollar. Hyperions operating results are, therefore,
subject to fluctuations in foreign currency exchange rates. Hyperions
revenues and operating results are adversely affected when the United States
dollar strengthens relative to other currencies and are positively affected
when the United States dollar weakens. Changes in the value of major foreign
currencies, particularly the Euro, relative to the value of the United States
dollar positively affected revenues and operating results in the quarter. If
the United States dollar strengthens relative to other currencies in the
future, our revenues and operating results 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 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; 
    
    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. These factors could have a material adverse effect on Hyperions business,
results of operations or financial position, especially in the case of a large
acquisition. Hyperion is subject to the possibility of infringement claims. Hyperion expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in Hyperions
industry segment grows and the functionality of products in different industry
segments overlaps. Hyperion has in the past been subjected to patent
infringement claims. Any such claims, with or without merit, could be time
consuming and costly to defend, divert managements attention and resources,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all, and may require the payment of
substantial amounts of money. In the event of a successful product
infringement claim against Hyperion, and Hyperions failure or inability to
license the infringed or similar technology, Hyperions business, operating
results and financial condition could be materially adversely affected. 21




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Enforcement of Hyperions intellectual property rights may be difficult. Hyperion relies primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect Hyperions proprietary rights. Hyperions means of protecting its
proprietary rights in the United States or abroad may not be adequate and could
be subject to challenge, such as the reexamination of one of our patents by the
United States Patent and Trademark Office. Hyperions stock price may be volatile. The market price of Hyperions common stock is subject to significant
fluctuations. The market price of Hyperions common stock may be significantly
affected by such factors as the announcement of new products, product
enhancements or technological innovation by Hyperion or Hyperions competitors,
announcements of acquisitions by Hyperion, changes in Hyperions or Hyperions
competitors results of operations, changes in revenue, revenue growth rates
and revenue mix, changes in earnings estimates by market analysts and general
market conditions or market conditions specific to particular industries.
Technology stocks have experienced wide fluctuations in prices, which sometimes
have been unrelated to their operating performance. The market price of
Hyperions common stock could be adversely affected by such fluctuations. Hyperion is dependent upon indirect channel partners. In addition to its direct sales force, Hyperion relies on indirect channel
partners such as OEMs, VARs and distributors for licensing and support of its
products in the United States and internationally. License revenue from
channel partners comprised 29% of Hyperions total license revenue for the
third quarter of fiscal 2004. Indirect channel sales involve a number of
special risks, including:  
    
    Hyperions lack of control over the delivery of its products to end-users; 
    
    Hyperions resellers and distributors may terminate their relationship with Hyperion on short notice; and 
    
    Hyperions resellers and distributors may market and distribute competing products. Hyperions current indirect channel partners may not elect, or be able, to
market or support Hyperions products effectively or be able to release their
products embedded with Hyperion products in a timely manner. Hyperion may not
be able to effectively manage conflicts between its various indirect channel
and direct customers, and economic conditions or industry demand may adversely
affect indirect channel partners or indirect channel partners may devote
greater resources to marketing and supporting the products of other companies.
Revenues derived from indirect channel partners may fluctuate significantly in
subsequent periods. Hyperion is exposed to product liability claims. Hyperions license agreements with its customers typically contain provisions
designed to limit Hyperions exposure to potential product liability claims,
and Hyperion carries insurance to protect against such claims. It is possible,
however, that the limitation of liability provisions contained in Hyperions
license agreements may not be effective as a result of U.S. or foreign laws or
ordinances or because of judicial decisions, and that liability insurance may
not be available, or that coverage for specific claims may be denied. Although
Hyperion has not experienced any material product liability claims to date, the
sale and support of business performance management products by Hyperion
entails the risk of such claims. A successful product liability claim brought
against Hyperion could have a material adverse effect upon Hyperions business,
operating results and financial condition. Defects in Hyperions products could increase its costs, adversely affect its
reputation, diminish demand for its products and hurt its operating results. As a result of their complexity, Hyperions software products may contain
undetected errors or viruses. Errors in new products or product enhancements
might not be detected until after initiating commercial shipments, which could
result in additional costs, delays, possible damage to Hyperions reputation
and could cause diminished demand for Hyperions products. This could lead to
customer dissatisfaction and reduce the opportunity to renew maintenance or
sell new licenses. 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. 22




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Some provisions in Hyperions charter documents and its stockholder rights plan
may prevent or deter an acquisition of Hyperion. Some of the provisions in Hyperions charter documents may deter or prevent
certain corporate actions, such as a merger, tender offer or proxy contest,
which could affect the market value of Hyperions securities. These provisions
include:  
    
    Hyperions board of directors is authorized to issue preferred stock
with any rights it may determine. Consequently, Hyperions board of
directors may issue preferred stock, without shareholder approval, that
has rights superior to the outstanding Hyperion common stock; 
    
    Hyperions board of directors is classified into three groups, with
each group of directors holding office for three years. The effect of
this classified board is that two annual meetings, not one, are required
to replace a majority of the board of directors; 
    
    Hyperion stockholders are not entitled to cumulate votes for
directors; and 
    
    special meetings of Hyperion stockholders may be called only by
Hyperions president or by the president or secretary upon written
request by a majority of the board of directors and may not be called by
Hyperions stockholders. Hyperion has in place a stockholder rights plan that is designed to discourage
coercive takeover offers. In general, Hyperions stockholder rights plan makes
it uneconomic for any person to acquire more than a 15% interest in Hyperion
without the consent of the Hyperion Board of Directors. Hyperions board of directors could utilize the provisions of its charter
documents and stockholder rights plan to resist an offer from a third party to
acquire Hyperion, including an offer to acquire Hyperion common stock at a
premium to its trading price or an offer that is otherwise considered favorable
by Hyperion stockholders. If requirements relating to the accounting treatment for employee stock options are changed,
 Hyperions earnings may be adversely affected and we may be forced to change our employee
 compensation and benefits practices. We currently account for the issuance of stock options under APB
Opinion No. 25, Accounting
 for Stock Issued to Employees, under which we generally do not record compensation expense
 related to employee stock options.  On March 31, 2004, the Financial Accounting Standards Board
 issued an Exposure Draft of a proposed accounting standard that would require public companies
 to report compensation expense related to stock options and other forms of stock-based
 compensation based on the estimated fair value of the awards on the grant dates.  The final
 standard is expected to be issued in the fourth calendar quarter of 2004 and could be effective
 beginning in our fiscal year 2006.  If the proposed standard is adopted in its current form,
 our earnings will be negatively impacted.  Also, we may consider changing our employee
 compensation and benefits practices in a manner that could adversely impact our ability to
retain existing employees and attract qualified candidates. 
 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
March 31, 2004, our short-term investments consisted of investment-grade debt
securities with a fair value of $9.5 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. 23




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Net foreign exchange transaction gains and losses were not material for the
third quarter and first nine months of fiscal 2004. As of March 31, 2004, we
had net forward contracts to sell U.S. dollar equivalent of $39.7 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 third fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS On July 11, 1997, Gentia Software filed a request for reexamination of our U.S.
Patent No. 5,359,724 (724 patent) with the United States Patent and
Trademark Office (PTO) arguing that the 724 patent was anticipated and
obvious in light of certain prior art references. On September 11, 1997, the
PTO granted the request for reexamination. On February 27, 1998, Gentia
Software filed with the PTO a request for a third reexamination of the 724
patent based on additional prior art references. On May 22, 1998, the PTO
granted that request for reexamination, which was later consolidated with the
first reexamination. On March 31, 1999, the PTO issued a non-final office
action rejecting the claims of the 724 patent. We filed our response to the
office action on May 31, 1999. No final office action has been issued by the
PTO. We believe that the outcome of such action will not have a material
adverse effect on our financial position, results of operations or cash flows. 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. CHANGES IN SECURITIES AND USE OF PROCEEDS 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]January 1, 2004  January 31, 2004
    
    
    750,200
    
    
    $
    32.56
    
    
    
    750,200
    
    
    $
    8,579,000February 1, 2004  February 29, 2004
    
    
    257,579
    
    
    $
    34.65
    
    
    
    246,000
    
    
    $
    March 1, 2004  March 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,007,779
    
    
    $
    33.09
    
    
    
    996,200
 [1] On July 23, 2003, we announced that our board of directors had
authorized a plan to repurchase up to $125.0 million of our common
stock. This plan was completed during the third quarter of fiscal
2004. 24




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No.
    
    Description31.1
    
    - Certification of Jeffrey R. Rodek pursuant to Rule 13a-14(a).31.2
    
    - Certification of David W. Odell pursuant to Rule 13a-14(a).32.1
    
    - Certification of Jeffrey R. Rodek pursuant to 18 U.S.C. Section
1350.32.2
    
    - Certification of David W. Odell pursuant to 18 U.S.C. Section 1350.
 (b) Reports on Form 8-K On April 21, 2004, we filed a current report on Form 8-K in connection with the
issuance of a press release dated April 21, 2004 announcing Hyperions
financial results for the third fiscal quarter ended March 31, 2004. On January 22, 2004, we filed a current report on Form 8-K in connection with
the issuance of a press release dated January 22, 2004 announcing Hyperions
financial results for the second fiscal quarter ended December 31, 2003. 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: May 10, 2004
    Hyperion Solutions Corporation
(Registrant)By:
    /s/ DAVID W. ODELLDavid W. OdellChief Financial Officer By:
    /s/ WILLIAM B. DEWESWilliam B. DewesGlobal Controller
(Principal Accounting Officer) 26




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