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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
    FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 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.)
 5450 Great America Parkway, Santa Clara, California 95054  (408) 744-9500  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 þ
   Noo Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).Yes þ   Noo As of April 29, 2005, there were 40,387,508 shares of the registrants common stock
outstanding.




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Hyperion Solutions Corporation Form 10-Q PAGEPART I. FINANCIAL INFORMATIONItem 1 Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2005 and June 30, 2004
    
    
    2Condensed Consolidated Statements of Income and Comprehensive Income for the
three and nine months ended March 31, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended March 31,
2005 and 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4 Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    30Item 2 Unregistered Sales of Existing Securities and Use of Proceeds
    
    
    31Item 3 Defaults
    
    
    31Item 4 Submission of Matters to a Vote of Security Holders
    
    
    31Item 5 Other Information
    
    
    31Item 6 Exhibits
    
    
    31Signatures
    
    
    32Exhibit Index
    
    
    33EXHIBIT 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 are 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 30,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents (Note 1)
    
    $
    379,151
    
    
    $
    172,261Short-term investments (Note 1)
    
    
    47,575
    
    
    
    195,914Accounts receivable, net of allowances of $9,988 and $8,758
    
    
    143,786
    
    
    
    133,491Deferred income taxes
    
    
    8,729
    
    
    
    12,348Prepaid expenses and other current assets
    
    
    17,355
    
    
    
    18,434TOTAL CURRENT ASSETS
    
    
    596,596
    
    
    
    532,448Property and equipment, net
    
    
    76,583
    
    
    
    72,020Goodwill
    
    
    141,800
    
    
    
    139,952Intangible assets, net
    
    
    31,875
    
    
    
    30,945Deferred income taxes
    
    
    27,085
    
    
    
    24,279Other assets
    
    
    5,175
    
    
    
    5,011TOTAL ASSETS
    
    $
    879,114
    
    
    $
    804,655LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    60,536
    
    
    $
    58,121Accrued employee compensation and benefits
    
    
    47,488
    
    
    
    51,267Income taxes payable
    
    
    7,903
    
    
    
    8,557Deferred revenue
    
    
    139,081
    
    
    
    136,286Restructuring liabilities
    
    
    9,172
    
    
    
    4,234TOTAL CURRENT LIABILITIES
    
    
    264,180
    
    
    
    258,465Long-term restructuring liabilities and other
    
    
    26,311
    
    
    
    26,619TOTAL LIABILITIES
    
    
    290,491
    
    
    
    285,084Commitments 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;
40,433 and 39,408 shares issued and outstanding
    
    
    40
    
    
    
    39Additional paid-in capital
    
    
    492,315
    
    
    
    434,584Deferred stock-based compensation
    
    
    (5,164
    )
    
    
    (7,494
    )Retained earnings
    
    
    101,910
    
    
    
    93,915Accumulated other comprehensive loss
    
    
    (478
    )
    
    
    (1,473
    )TOTAL STOCKHOLDERS EQUITY
    
    
    588,623
    
    
    
    519,571TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    879,114
    
    
    $
    804,655
 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 31,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUESSoftware licenses
    
    $
    68,659
    
    
    $
    65,108
    
    
    $
    194,607
    
    
    $
    167,854Maintenance and services
    
    
    108,448
    
    
    
    101,036
    
    
    
    319,016
    
    
    
    277,978TOTAL REVENUES
    
    
    177,107
    
    
    
    166,144
    
    
    
    513,623
    
    
    
    445,832COSTS AND EXPENSESCost of revenues:Software licenses
    
    
    4,141
    
    
    
    3,400
    
    
    
    11,496
    
    
    
    9,867Maintenance and services
    
    
    40,492
    
    
    
    39,546
    
    
    
    117,710
    
    
    
    107,052Sales and marketing
    
    
    62,155
    
    
    
    60,617
    
    
    
    185,532
    
    
    
    161,314Research and development
    
    
    26,863
    
    
    
    26,329
    
    
    
    78,222
    
    
    
    69,686General and administrative
    
    
    18,408
    
    
    
    16,763
    
    
    
    48,803
    
    
    
    45,633Restructuring charges (credits)
    
    
    (1,842
    )
    
    
    162
    
    
    
    6,235
    
    
    
    3,678In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,300TOTAL COSTS AND EXPENSES
    
    
    150,217
    
    
    
    146,817
    
    
    
    447,998
    
    
    
    399,530OPERATING INCOME
    
    
    26,890
    
    
    
    19,327
    
    
    
    65,625
    
    
    
    46,302Interest and other income
    
    
    2,077
    
    
    
    893
    
    
    
    5,153
    
    
    
    3,156Interest and other expense
    
    
    (27
    )
    
    
    (20
    )
    
    
    (50
    )
    
    
    (1,092
    )Loss on redemption of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (936
    )INCOME BEFORE INCOME TAXES
    
    
    28,940
    
    
    
    20,200
    
    
    
    70,728
    
    
    
    47,430Income tax provision
    
    
    10,129
    
    
    
    7,474
    
    
    
    24,754
    
    
    
    18,399NET INCOME
    
    $
    18,811
    
    
    $
    12,726
    
    
    $
    45,974
    
    
    $
    29,031Other comprehensive income (loss)
    
    
    (1,299
    )
    
    
    253
    
    
    
    995
    
    
    
    3,592COMPREHENSIVE INCOME
    
    $
    17,512
    
    
    $
    12,979
    
    
    $
    46,969
    
    
    $
    32,623Basic net income per share
    
    $
    0.47
    
    
    $
    0.33
    
    
    $
    1.16
    
    
    $
    0.77Diluted net income per share
    
    $
    0.45
    
    
    $
    0.32
    
    
    $

    1.12
    
    
    $
    0.74Shares used in computing basic
net income per share
    
    
    40,141
    
    
    
    38,208
    
    
    
    39,504
    
    
    
    37,624Shares used in computing diluted
net income per share
    
    
    41,868
    
    
    
    39,871
    
    
    
    41,174
    
    
    
    39,307
 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 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    45,974
    
    
    $
    29,031Adjustments to reconcile net income to net cash provided by operating activities:Loss on redemption of debt
    
    
    
    
    
    
    936Loss on sale of assets
    
    
    66
    
    
    
    87Depreciation and amortization
    
    
    27,713
    
    
    
    26,291Provision for accounts receivable allowances
    
    
    4,288
    
    
    
    7,611Deferred income taxes
    
    
    2,040
    
    
    
    (3,491
    )Income tax benefit from exercise of stock options
    
    
    17,320
    
    
    
    11,922In-process research and development
    
    
    
    
    
    
    2,300Changes in operating assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    (11,331
    )
    
    
    (1,315
    )Prepaid expenses and other current assets
    
    
    1,566
    
    
    
    (3,569
    )Other assets
    
    
    917
    
    
    
    1,859Accounts payable and accrued liabilities
    
    
    646
    
    
    
    (10,747
    )Accrued employee compensation and benefits
    
    
    (4,684
    )
    
    
    (5,523
    )Income taxes payable
    
    
    (618
    )
    
    
    5,325Deferred revenue
    
    
    1,208
    
    
    
    (383
    )Restructuring liabilities
    
    
    4,948
    
    
    
    524Long-term restructuring liabilities and other
    
    
    (793
    )
    
    
    (2,155
    )Net cash provided by operating activities
    
    
    89,260
    
    
    
    58,703CASH FLOWS FROM INVESTING ACTIVITIESPurchases of investments
    
    
    (141,650
    )
    
    
    (135,339
    )Proceeds from sales and maturities of investments
    
    
    288,494
    
    
    
    210,596Purchases of property and equipment
    
    
    (20,996
    )
    
    
    (14,299
    )Proceeds from sale of property and equipment
    
    
    156
    
    
    
    91Purchases of intangible assets
    
    
    (4,355
    )
    
    
    (1,345
    )Payments for acquisitions, net of cash acquired
    
    
    (8,225
    )
    
    
    (6,531
    )Net cash provided by investing activities
    
    
    113,424
    
    
    
    53,173CASH FLOWS FROM FINANCING ACTIVITIESRedemption of debt
    
    
    
    
    
    
    (50,683
    )Purchases of common stock
    
    
    (52,548
    )
    
    
    (124,942
    )Proceeds from issuance of common stock
    
    
    55,431
    
    
    
    43,082Net cash provided by (used in) financing activities
    
    
    2,883
    
    
    
    (132,543
    )Effect of exchange rate on cash and cash equivalents
    
    
    1,323
    
    
    
    4,117INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    206,890
    
    
    
    (16,550
    )Cash and cash equivalents at beginning of period
    
    
    172,261
    
    
    
    167,362CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    379,151
    
    
    $
    150,812SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    25
    
    
    $
    2,559Cash paid for income taxes
    
    $
    5,109
    
    
    $
    4,375
 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, 2005
 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted pursuant to these rules and regulations. However, management believes that the disclosures
are adequate to ensure the information presented is not misleading. The balance sheet at June 30,
2004 has been derived from the audited financial statements, but it does not include all
disclosures required by generally accepted accounting principles. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited financial
statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended
June 30, 2004. We have reclassified auction rate securities from cash and cash equivalents to short-term
investments. This resulted in a reclassification from cash and cash equivalents to short-term
investments of $192.9 million on the June 30, 2004 condensed consolidated balance sheet. We also
made corresponding adjustments to the statement of cash flows for the nine months ended March 31,
2004 to reflect the gross purchases and sales and maturities of these securities as investing
activities rather than as a component of cash and cash equivalents. For the nine months ended
March 31, 2004, before this reclassification, net cash provided by investing activities related to
these investments of $52.4 million was included in cash and cash equivalents in the condensed
consolidated statement of cash flows. These reclassifications had no impact on the previously
reported net income or cash flow from operations. Short-term investments at March 31, 2005
consisted primarily of balances in interest-bearing demand deposit accounts, variable rate demand
notes, state and municipal bonds, U.S. government and agency obligations and other highly-liquid
securities. In the opinion of management, all adjustments, consisting only of normal recurring items,
considered necessary for a fair statement have been included in the accompanying unaudited
financial statements. The results of operations for the interim periods presented are not
necessarily indicative of the operating results to be expected for any subsequent interim period or
for the fiscal year ending June 30, 2005. 2. Significant Accounting Policies Revenue Recognition We derive revenues from licensing our software products and providing maintenance, consulting and
training services. Our standard software license agreement is a perpetual license to use our
products on an end user, concurrent user or central processing unit basis. We record revenue from licensing our software products to end users provided there is persuasive
evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and
delivery of the product has occurred, as prescribed by Statement of Position (SOP) No. 97-2,
Software Revenue Recognition. For arrangements with multiple elements, and for which vendor
specific objective evidence (VSOE) of fair value exists for the undelivered elements, revenue is
recognized for the delivered elements based upon the residual method in accordance with SOP 98-9,
Modifications of SOP 97-2 with Respect to Certain Transactions. Amounts billed or payments
received in advance of revenue recognition are recorded as deferred revenue. Maintenance agreements are generally twelve-month prepaid contracts that are recognized ratably
over the service period. VSOE of fair value for maintenance is measured by the stated renewal rates
included in the agreements. Customers may also enter into arrangements that are typically on a time and materials basis for
consulting and training services. VSOE of fair value for consulting and training services is based
upon the standard hourly rate we charge for such services when sold separately. Training services
are generally prepaid prior to rendering the service. Consulting and training revenues are
typically recognized as earned proportional to performance. Consulting revenues are generated
primarily from implementation services related to the installation of our products. These
arrangements are generally accounted for separately from the license revenue because the
arrangements qualify as service transactions as defined in SOP 97-2. Our services are generally
not essential to the functionality of the software. Our products are fully functional upon delivery
of the product and implementation does not require significant modification or alteration. Factors
considered in determining whether the revenue should be accounted for separately include, but are
not limited to: degree of risk, availability of services from other vendors, timing of payments and
impact of milestones or acceptance criteria on the realizability of the software license fee.
Payments related to the software product to which the services relate are typically billed
independently from the services and, therefore, are not 5




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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 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 for all undelivered elements. License
revenue from resellers or distributors is recognized upon sell-through to the end customer. If we
determine that collection of a license fee is not reasonably assured, the fee is deferred and
revenue is recognized at the time collection becomes reasonably assured, which is generally upon
receipt of cash. Accounts Receivable Allowances We make judgments as to our ability to collect outstanding receivables and provide allowances for a
portion of receivables when collection becomes doubtful. Allowances are based upon a review of all
significant outstanding invoices. For those invoices not specifically reviewed, allowances are made
at differing rates, based upon the age of the receivable. In determining these allowances, we
analyze several factors, including: our historical collection experience, customer concentrations,
customer credit-worthiness and current economic trends. If the historical data used to calculate
the allowances for accounts receivable does not reflect our future ability to collect outstanding
receivables, we may record additional allowances for accounts receivable. We record the provision
for accounts receivable allowances either in general and administrative expense or as a reduction
of revenue based on the underlying cause of the provision to the appropriate classification in our
condensed consolidated statements of income and comprehensive income. Our accounts receivable allowances totaled $10.0 million at March 31, 2005 and $8.8 million at June
30, 2004. The total provision for accounts receivable allowances was $2.2 million and $3.4 million
for the three months ended March 31, 2005 and 2004 respectively. Of these amounts, $0.2 million and
$0.4 million were recorded in general and administrative expense for the three months ended March
31, 2005 and 2004, respectively, and $2.0 million and $3.0 million were recorded as a reduction of
revenues for the three months ended March 31, 2005 and 2004, respectively. The total provision for
accounts receivable allowances was $4.3 million and $7.6 million for the nine months ended March
31, 2005 and 2004, respectively. Of these provisions, approximately $0.2 million and $1.3 million
were recorded in general and administrative expense for the nine months ended March 31, 2005 and
2004, respectively, and $4.1 million and $6.3 million were recorded as a reduction of revenues for
the nine months ended March 31, 2005 and 2004, 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. 6




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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 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    18,811
    
    
    $
    12,726
    
    
    $
    45,974
    
    
    $
    29,031Shares used in computing basic net
income per share
    
    
    40,141
    
    
    
    38,208
    
    
    
    39,504
    
    
    
    37,624Effect of potentially dilutive securities
    
    
    1,727
    
    
    
    1,663
    
    
    
    1,670
    
    
    
    1,683Shares used in computing diluted net
income per share
    
    
    41,868
    
    
    
    39,871
    
    
    
    41,174
    
    
    
    39,307Basic net income per share
    
    $
    0.47
    
    
    $
    0.33
    
    
    $
    1.16
    
    
    $
    0.77Diluted net income per share
    
    $
    0.45
    
    
    $
    0.32
    
    
    $
    1.12
    
    
    $
    0.74
 For the quarter ended March 31, 2005, stock option rights totaling 0.4 million shares of common
stock have been excluded from the diluted EPS calculations because their effect would have been
antidilutive. For the nine months ended March 31, 2005, stock option rights totaling 0.6 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, 2004, stock option
rights totaling 0.7 million shares and 0.9 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. In the second quarter of fiscal
2004, all remaining outstanding convertible subordinated notes were redeemed. 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 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    18,811
    
    
    $
    12,726
    
    
    $
    45,974
    
    
    $
    29,031Add: stock-based
compensation expense
included in reported
net income, net of tax
    
    
    339
    
    
    
    514
    
    
    
    1,221
    
    
    
    1,440Deduct: stock-based
compensation expense
determined under the
fair value method, net
of tax
    
    
    (4,334
    )
    
    
    (4,679
    )
    
    
    (13,181
    )
    
    
    (13,621
    )Net income, pro forma
    
    $
    14,816
    
    
    $
    8,561
    
    
    $
    34,014
    
    
    $
    16,850Net income per share:Basic  as reported
    
    $
    0.47
    
    
    $
    0.33
    
    
    $
    1.16
    
    
    $
    0.77Basic  pro forma
    
    $
    0.37
    
    
    $
    0.22
    
    
    $
    0.86
    
    
    $
    0.45Diluted  as reported
    
    $
    0.45
    
    
    $
    0.32
    
    
    $
    1.12
    
    
    $
    0.74Diluted  pro forma
    
    $
    0.36
    
    
    $
    0.22
    
    
    $
    0.83
    
    
    $
    0.43
 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. 7




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Comprehensive Income Comprehensive income includes net income, foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. The components of comprehensive income are as
follows (in thousands): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    18,811
    
    
    $
    12,726
    
    
    $
    45,974
    
    
    $
    29,031Translation adjustments
    
    
    (1,285
    )
    
    
    223
    
    
    
    929
    
    
    
    3,641Unrealized gains
(losses) on
available-for-sale
securities, net of tax
    
    
    (14
    )
    
    
    30
    
    
    
    66
    
    
    
    (49
    )Comprehensive income
    
    $
    17,512
    
    
    $
    12,979
    
    
    $
    46,969
    
    
    $
    32,623
 Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued a Statement,
Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 (SFAS 123R) that addresses
the accounting for share-based payment transactions in which a Company receives employee services
in exchange for either equity instruments of the Company or liabilities that are based on the fair
value of the Companys equity instruments or that may be settled by the issuance of such equity
instruments. The statement eliminates the ability to account for share-based compensation
transactions using the intrinsic method that Hyperion currently uses and generally requires that
such transactions be accounted for using a fair-value-based method and recognized as expense in the
condensed consolidated statements of income and comprehensive income. The effective date of the new
standard is for fiscal years beginning after June 15, 2005, which for Hyperion will be the first
quarter of fiscal 2006. The amounts disclosed within our footnotes are not necessarily indicative
of the amounts that will be expensed upon the adoption of SFAS 123R. Compensation expense
calculated under SFAS 123R may differ from amounts currently disclosed within our footnotes based
on changes in the fair value of our common stock, changes in the number of options granted or the
terms of such options, the treatment of tax benefits and changes in interest rates or other
factors. In addition, upon adoption of SFAS 123R, we may choose to use a different valuation model
to value the compensation expense associated with employee stock options and stock purchases under
our employee stock purchase plan. We are currently evaluating the potential impact of this
standard on our financial position and results of operations and alternative adoption methods. We
expect this standard to have a significant impact on the condensed consolidated statements of
income and comprehensive income. In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-8
The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share, that the
dilutive effect of contingent convertible debt instruments (CoCos) must be included in diluted
earnings per share regardless of whether the triggering contingency has been satisfied, if
dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would require restatement
of prior period diluted earnings per share, subject to certain transition provisions. It is
effective for all periods ending after December 15, 2004. The adoption of EITF 04-08 did not have a
material impact on our financial position or results of operations. In March 2004, the FASB issued Emerging Issues Task Force Issue (EITF) No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides new
guidance for assessing impairment losses on investments. In addition, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily impaired. In September
2004, the FASB delayed the accounting provisions of EITF 03-01; however, the disclosure
requirements remain effective for annual periods ending after June 15, 2004. Although we are
currently evaluating the impact of adopting EITF 03-01, we do not expect the adoption of this new
standard to have a material impact on our financial position or results of operations. Income Taxes Income taxes are accounted for using an asset and liability approach, which requires the
recognition of taxes payable or refundable for the current year and deferred tax assets and
liabilities for the future tax consequences of events that have been recognized in our financial
statements or tax returns. The measurement of current and deferred tax assets and liabilities are
based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are
not anticipated. During the preparation of our consolidated financial statements, we estimate our income taxes in
each of the jurisdictions in which we operate. This process involves estimating actual current tax
expense together with assessing temporary differences resulting from differing treatment of items,
such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within the consolidated balance sheet. We then assess
the likelihood that our 8




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deferred tax assets will be recovered from future taxable income, and, to the extent we believe
that recovery is not likely, a valuation allowance is established. To the extent we establish a
valuation allowance or increase this allowance in a period, an expense is recorded within the tax
provision in the statements of operations. Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded against the net deferred tax
assets. We have recorded a valuation allowance due to uncertainties related to our ability to
utilize some of our deferred tax assets, primarily relating to foreign net operating losses carried
forward, before they expire. The valuation allowance is based on estimates of taxable income by
jurisdiction in which we operate and the period over which the deferred tax assets will be
recoverable. In the event that actual results differ from these estimates, or these estimates are
adjusted in future periods, additional valuation allowances may need to be recorded, which could
materially impact our financial position and results of operations. Valuation of Goodwill, Intangibles, and Long-Lived Assets We account for goodwill under SFAS 142, Goodwill and Other Intangible Assets, which requires us
to review goodwill for impairment on an annual basis, and between annual tests whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. This impairment
review involves a two-step process and is performed annually in the fourth quarter of the fiscal
year. We have determined that we have only a single reporting unit, and we are required to make
estimates regarding the fair value of that reporting unit when testing for potential impairment. We
estimate the fair value of our reporting unit using the market approach. Under the market approach,
we estimate the fair value based on our market capitalization. Our determination that we have only
a single reporting unit and the method used to estimate the fair value of that reporting unit
requires significant judgment. The changes in the carrying amount of goodwill for the nine months ended March 31, 2005 are as
follows (in thousands): Balance at June 30, 2004
    
    $
    139,952Goodwill recorded during the period
    
    
    1,471Effect of foreign currency translation
    
    
    377Balance at March 31, 2005
    
    $
    141,800
 Intangible assets consists of the following (in thousands): March 31, 2005
    
    
    June 30, 2004Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueProduct development
costs
    
    $
    12,401
    
    
    $
    (6,541
    )
    
    $
    5,860
    
    
    $
    10,384
    
    
    $
    (7,008
    )
    
    $
    3,376Acquired technologies
    
    
    31,280
    
    
    
    (12,227
    )
    
    
    19,053
    
    
    
    25,433
    
    
    
    (6,652
    )
    
    
    18,781Other intangibles
    
    
    10,657
    
    
    
    (3,695
    )
    
    
    6,962
    
    
    
    10,731
    
    
    
    (1,943
    )
    
    
    8,788$
    54,338
    
    
    $
    (22,463
    )
    
    $
    31,875
    
    
    $
    46,548
    
    
    $
    (15,603
    )
    
    $
    30,945
 Amortization expense related to intangible assets was $3.4 million and $9.3 million for the three
and nine months ended March 31, 2005, respectively, and $2.8 million and $6.4 million for the three
and nine months ended March 31, 2004, respectively. Product development costs and
acquired technologies are generally amortized over three years, and other intangibles are amortized
over periods between one and six years. The total expected future annual amortization
expense for these intangible assets is as follows (in thousands): EstimatedAmortizationFiscal Year
    
    ExpenseRemainder of 2005
    
    $
    3,4502006
    
    
    12,0252007
    
    
    10,7682008
    
    
    4,5152009
    
    
    9232010
    
    
    194$
    31,875
 We account for finite-lived intangibles and long-lived assets under SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which requires us to review long-lived assets for
impairment whenever events or changes in circumstances 9




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indicate that the carrying amount of an asset may not be recoverable. Factors considered important
which could trigger an impairment review include (i) significant underperformance relative to
historical or projected future operating results, (ii) significant changes in the manner of use of
the assets or the strategy for our overall business, (iii) significant decrease in the market value
of the assets and (iv) significant negative industry or economic trends. Based upon the existence of one or more indicators of impairment, we measure any impairment of
intangibles or long-lived assets based on the estimated future discounted cash flows using a
discount rate determined by our management to be commensurate with the risk inherent in our current
business model. Our estimates of cash flows require significant judgment based on our historical
results and anticipated results and are subject to many factors that may change in the near term. 3. Commitments and Contingencies Guarantees and Indemnifications Financial Accounting Standards Board Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45),
requires that Hyperion recognize the fair value for guarantee and indemnification arrangements
issued or modified by Hyperion after March 31, 2002 if these arrangements are within the scope of
FIN 45. In addition, we must continue to monitor the conditions that are subject to the guarantees
and indemnifications, as required under previously existing generally accepted accounting
principles, in order to identify if a loss has occurred. If we determine it is probable that a loss
has occurred then any such estimable loss would be recognized under those guarantees and
indemnifications. We have entered into agreements with some of our customers that contain
indemnification provisions relating to potential situations where claims could be alleged that our
products infringe the intellectual property rights of a third party. We also have indemnification
arrangements with our Board of Directors and officers. We have not recorded a liability related to
these indemnification and guarantee provisions, and we believe that the estimated fair value of
these arrangements is minimal. Contingencies In December 2004, Hyperion filed an action against OutlookSoft Corporation (OutlookSoft) in
Federal District Court for the Eastern District of Texas, charging that OutlookSoft is infringing
two Hyperion patents relating to our financial consolidation, reporting and analysis applications,
Hyperion Financial Management and Hyperion Enterprise. Hyperion is asking for damages for past
infringement, including treble damages for willful infringement, and an injunction against further
infringement. In January 2005, OutlookSoft answered the complaint by denying infringement and
challenging the validity and enforceability of the Hyperion patents. OutlookSoft also filed
counterclaims alleging that Hyperion infringes two of its patents, asked for damages for past
infringement, including treble damages for willful infringement, and an injunction against further
infringement. Hyperion intends to vigorously pursue the protection of our intellectual property,
and will vigorously defend the charges of patent infringement made against us. As we are unable to
predict the outcome of the litigation and we cannot estimate any possible gain or loss at this
time, we have not accrued for any estimated loss in our condensed consolidated financial
statements. Hyperion does not believe the outcome of the litigation will have a material effect on
our financial position, results of operations or cash flows. In November 2004, Hyperion filed a declaratory judgment action in Federal District Court for the
Northern District of California against HyperRoll, Inc. (HyperRoll) to establish that Hyperion
did not infringe any of HyperRolls patents. Additionally, Hyperion filed a request for
re-examination on one of HyperRolls patents with the United States Patent and Trademark Office,
citing a prior art reference not considered in the original examination of the HyperRoll patent.
In January 2005, HyperRoll Israel Ltd., a HyperRoll subsidiary, filed an action in Federal District
Court for the Eastern District of Texas against Hyperion claiming that Hyperion infringed two
HyperRoll patents relating to our multidimensional database product, Essbase, and claiming
violations of the Latham Act regarding claims made about its products, and a claim for patent
mis-marking. HyperRoll also filed a motion in the declaratory judgment action in Federal District
Court for the Northern District of California to dismiss the case because Hyperion had filed the
action against HyperRoll, claiming that the patents in issue were in-fact assigned to HyperRoll
Israel. Also in January 2005, the United States Patent and Trademark Office notified Hyperion that
it will re-examine the HyperRoll patent in light of the new prior art reference provided by
Hyperion. In January 2005, the court in Federal District Court for the Northern District
of California dismissed the declaratory judgment action, but allowed Hyperion to amend the action
to add HyperRoll Israel, which we have done. On May 4, 2005, the
Federal District Court for the Eastern District of Texas granted
Hyperions Motion of Transfer Action to the Federal District
Court for the Northern District of California. Hyperion will vigorously defend the claims made
against us. As we are unable to predict the outcome of the litigation and we cannot estimate any
possible loss at this time, we have not accrued for any estimated loss in our condensed
consolidated financial statements. Hyperion does not believe the outcome of the litigation will
have a material effect on our financial position, results of operations and cash flows. 10




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4. Business Combination Brio Software, Inc. In October 2003, Hyperion completed its acquisition of Brio Software, Inc., a business intelligence
software provider based in Santa Clara, California. Under the terms of the acquisition, Brio
stockholders received a combination of 0.109 of a share of Hyperion common stock and $0.363 in cash
in exchange for each share of Brio common stock, which resulted in the issuance of 4.2 million
shares of Hyperion common stock and $14.0 million in cash to the Brio stockholders. Additionally,
Hyperion reserved 1.1 million shares of its common stock for issuance in connection with the Brio
stock options assumed in the transaction. Brios results of operations have been included in
Hyperions results since the date of acquisition. Brio provides business intelligence software with advanced query, reporting and analysis
capabilities. Brios business intelligence tools supplement the Hyperion platform and complement
our Business Performance Management offering. Hyperion expects the acquisition will result in
greater integration of business intelligence into the Business Performance Management process. The aggregate purchase price was approximately $150.1 million, which consisted of approximately
$14.0 million in cash, $133.0 million in Hyperion common stock and options, and $3.1 million in
acquisition costs, which primarily consist of fees paid for financial advisory, legal, and
accounting services. The value of the stock issued to Brio stockholders was based upon the average
of the closing prices of one share of Hyperions common stock during the five trading days ending
July 25, 2003, which was $27.68. The fair value of Hyperions stock-based awards issued to
employees was estimated using a Black-Scholes option pricing model. The fair value of the
stock-based awards was estimated assuming no expected dividends, an expected stock price volatility
of 54%, a risk free interest rate of 2.51% and an expected term of 3.56 years. The intrinsic value allocated to unvested stock-based awards issued to employees was approximately
$7.1 million and has been recorded as deferred stock-based compensation. Deferred stock-based
compensation is being amortized over the remaining vesting periods of the awards. In accordance with SFAS 141, Business Combinations, Hyperion allocated the purchase price to
tangible assets, intangible assets, in-process research and development, deferred compensation, and
liabilities based on their estimated fair values. The excess purchase price over the fair values
was recorded as goodwill. The fair value assigned to intangible assets acquired was based on
estimates and assumptions determined by management. In accordance with SFAS 142, Goodwill and
Other Intangible Assets, goodwill and purchased intangibles with indefinite lives acquired after
June 30, 2001 are not amortized but will be reviewed periodically for impairment. Purchased
intangibles with finite lives are amortized on a straight-line basis over their respective useful
lives. The total purchase price has been allocated as follows (in thousands): Current assets
    
    $
    48,791Property and equipment
    
    
    9,493Goodwill
    
    
    126,671Intangible assets
    
    
    30,000Deferred taxes
    
    
    7,065In-process research and development
    
    
    2,300Deferred compensation
    
    
    7,113Current liabilities
    
    
    (16,565
    )Deferred revenue
    
    
    (28,717
    )Restructuring costs
    
    
    (36,074
    )Total purchase price
    
    $
    150,077
 11




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In performing the purchase price allocation, Hyperion considered, among other factors, its
intention for future use of the acquired assets, analyses of historical financial performance and
estimates of future performance of Brios products. The fair values of intangible assets were
estimated using the income approach for capitalized software and maintenance agreements, the
royalty savings approach for patents and core technology, and the cost approach for customer
contracts and related relationships and value added reseller relationships. The rates utilized to
discount the net cash flows to their present values were based upon Hyperions weighted average
cost of capital and range from 14% to 16%. These discount rates were determined after consideration
of Hyperions rate of return on debt capital and equity, the weighted average return on invested
capital and the risk associated with achieving forecasted sales related to the technology and
assets acquired from Brio. Identifiable intangible assets purchased in the Brio acquisition consist
of the following (in thousands, except for useful life): Fair
    
    
    UsefulIdentifiable Intangible Assets
    
    Value
    
    
    LifeCapitalized software
    
    $
    15,500
    
    
    4 yearsPatents and core technology
    
    
    4,000
    
    
    6 yearsMaintenance agreements
    
    
    4,400
    
    
    5 yearsCustomer contracts and related relationships
    
    
    6,000
    
    
    4 yearsValue added reseller relationships
    
    
    100
    
    
    1 yearTotal intangible assets
    
    $
    30,000
 In-process research and development (IPR&D) of $2.3 million was expensed in the second quarter of
fiscal 2004 because the purchased research and development had no alternative uses and had not
reached technological feasibility. The IPR&D relates to the Brio 8 product line. The value assigned
to IPR&D was determined utilizing the income approach. The stage of completion for the project was
estimated to determine the discount rate to be applied to the valuation of the in-process
technology. Based upon the level of completion and the risk associated with the in-process
technology, a discount rate of 20% was deemed appropriate for valuing IPR&D. As of March 31, 2005,
the Brio 8 product line is continuing to be developed. The unaudited financial information in the table below summarizes the combined results of
operations of Hyperion and Brio, on a pro forma basis, as though the companies had been combined as
of the beginning of each period presented. This pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the results of operations that
would have been achieved had the acquisition taken place at the beginning of the period presented.
The unaudited condensed consolidated statements of income and comprehensive income data for the
three months ended March 31, 2004 includes the post-acquisition results of Brio for the full
quarter. The unaudited pro forma combined condensed consolidated statements of income and
comprehensive income 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 pro forma amounts are as follows (in
thousands, except per share amounts): Nine Months EndedMarch 31,2004Revenues
    
    $
    476,681Net income
    
    
    25,139Basic net income per share
    
    
    0.64Diluted net income per share
    
    
    0.61
 Acquisitions in Fiscal Year 2005 From time to time, we will acquire other companies or assets to enhance our product offerings or
expand our distribution network. In July 2004, we acquired certain assets and assumed certain
liabilities of QiQ Solutions Pty Limited, an Australian based developer of management and reporting
tools for the enterprise Business Intelligence market. In January 2005, we acquired substantially
all of the assets of Razza Solutions, an Austin, Texas based private software company offering a
solution for synchronizing master data management across BPM including Business Intelligence
platforms, financial and analytical applications, and transaction systems. Both of these
acquisitions will enhance our offering of Business Intelligence products, a market in which we have
experienced solid growth. These acquisitions were accounted for using the purchase method of accounting in accordance with
SFAS 141, Business Combinations. Hyperions condensed consolidated statements of operations
include the results of both QiQ and Razza from the date of acquisition. In aggregate, we paid $8.2
million for these two companies during the nine months ended March 31, 2005. There was no IPR&D
expense incurred as a result of these acquisitions. 5. Restructuring Accruals In the fourth quarter of fiscal 2004, we signed a lease agreement for a new corporate headquarters
facility located in Santa Clara, California that accommodates all employees in the San Francisco
Bay area. In December 2004, we vacated facilities in Sunnyvale and Santa Clara, which resulted in a
restructuring charge in the second quarter of fiscal year 2005 of approximately $4.5 million and
$1.1 million, respectively. In July 2004, we vacated our San Francisco facility and recorded a
restructuring charge in the first quarter of fiscal 2005 of approximately $2.0 million. In the
third quarter of fiscal 2005, we reduced the restructuring accrual by $1.8 million. This
adjustment resulted from our buyout agreement to terminate the lease on our Sunnyvale facility and
the sublease of our Santa Clara facility for the remaining term of the lease, both of which were
completed during the third quarter of 12




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fiscal 2005. These restructuring costs, net of adjustments, were accounted for under SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities, and are included as a charge or
credit to Hyperions results of operations. In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a
consulting firm based in Bangalore, India in an effort to increase our multi-shore development
capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal
2005 and has resulted so far in about 140 additional developers contributing to our development
efforts in India. Because of this initiative, in July 2004 we reduced our U.S.-based development
staff by approximately 50 employees, or approximately 10% of our development headcount, and
recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $1.1 million.
This restructuring charge consists of severance and related benefits costs. These costs were
accounted for under SFAS 146 and have been included as a charge to Hyperions results of
operations. In connection with the acquisition of Brio in October 2003, management approved and initiated plans
to restructure the operations of Hyperion to eliminate certain duplicative activities and reduce
the combined companys cost structure. Consequently, Hyperion recorded restructuring charges
totaling $3.6 million in fiscal 2004, including $3.4 million of employee severance costs and $0.2
million of facility closure costs. These costs were accounted for under SFAS 146 and have been
included as a charge to Hyperions results of operations. As a result of the acquisition of Brio, Hyperion recorded $36.1 million of restructuring costs in
connection with exiting certain pre-acquisition activities of Brio, including $4.8 million of
employee severance costs, $26.6 million of facility closure costs, and $4.7 million of asset
impairments related to the facility closures. These costs have been recognized as liabilities
assumed in the purchase business combination in accordance with EITF 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination. In June 2001, Hyperion announced a corporate restructuring plan designed to bring costs more in
line with revenues and strengthen the financial performance of the company, which resulted in a
reduction of the workforce by approximately 300, or 12% of worldwide headcount. Employee groups
impacted by the restructuring included personnel involved in corporate services, product business
units, sales and customer support. In addition, Hyperion consolidated some of its facilities and
exited other facilities. The total restructuring and other charges recorded in June 2001 were $42.8
million and were accounted for under EITF 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring), which was subsequently superseded by SFAS 146. In second quarter of fiscal year
2005, Hyperion reduced the restructuring charges recorded in fiscal 2001 by $0.6 million. This
adjustment resulted primarily from a change to the estimate of sublease income related to our
facility exit costs and did not represent new restructuring activities. The following table sets forth the activity in Hyperions restructuring accruals accounted for
under SFAS 146 and EITF 94-3, which are included in Restructuring liabilities and Long-term
restructuring liabilities and other in the accompanying condensed consolidated balance sheets (in
thousands): AssetSeverance
    
    
    Facilities
    
    
    Impairments
    
    
    Other
    
    
    TotalBalance at June 30, 2004
    
    $
    111
    
    
    $
    12,077
    
    
    $
    
    
    
    $
    1,759
    
    
    $
    13,947Restructuring costs, net of adjustments
    
    
    1,058
    
    
    
    2,011
    
    
    
    
    
    
    
    
    
    
    
    3,069Cash payments
    
    
    (984
    )
    
    
    (1,049
    )
    
    
    
    
    
    
    (4
    )
    
    
    (2,037
    )Balance at September 30, 2004
    
    
    185
    
    
    
    13,039
    
    
    
    
    
    
    
    1,755
    
    
    
    14,979Restructuring costs, net of adjustments
    
    
    (8
    )
    
    
    3,308

    
    
    
    646
    
    
    
    
    
    
    
    3,946Non-cash items
    
    
    
    
    
    
    
    
    
    
    (646
    )
    
    
    
    
    
    
    (646
    )Cash payments
    
    
    (50
    )
    
    
    (1,231
    )
    
    
    
    
    
    
    
    
    
    
    (1,281
    )Balance at December 31, 2004
    
    
    127
    
    
    
    15,116
    
    
    
    
    
    
    
    1,755
    
    
    
    16,998Restructuring costs, net of adjustments
    
    
    
    
    
    
    (327
    )
    
    
    
    
    
    
    
    
    
    
    (327
    )Non-cash items
    
    
    (4
    )
    
    
    (125
    )
    
    
    
    
    
    
    
    
    
    
    (129
    )Cash payments
    
    
    (4
    )
    
    
    (4,199
    )
    
    
    
    
    
    
    
    
    
    
    (4,203
    )Balance at March 31, 2005
    
    $
    119
    
    
    $
    10,465
    
    
    $
    
    
    
    $
    1,755
    
    
    $
    12,339
 13




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The following table sets forth the activity in Hyperions restructuring accruals accounted for
under EITF 95-3 which are included in Restructuring liabilities and Long-term restructuring
liabilities and other in the accompanying condensed consolidated balance sheets (in thousands): Severance
    
    
    Facilities
    
    
    TotalBalance at June 30, 2004
    
    $
    1,504
    
    
    $
    22,407
    
    
    $
    23,911Restructuring costs, net of adjustments
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (760
    )
    
    
    (1,448
    )
    
    
    (2,208
    )Balance at September 30, 2004
    
    
    744
    
    
    
    20,959
    
    
    
    21,703Restructuring costs, net of adjustments
    
    
    
    
    
    
    1,062
    
    
    
    1,062Cash payments
    
    
    (154
    )
    
    
    (1,079
    )
    
    
    (1,233
    )Balance at December 31, 2004
    
    
    590
    
    
    
    20,942
    
    
    
    21,532Restructuring costs, net of adjustments
    
    
    
    
    
    
    (1,515
    )
    
    
    (1,515
    )Non-cash items
    
    
    (7
    )
    
    
    (103
    )
    
    
    (110
    )Cash payments
    
    
    (108
    )
    
    
    (1,851
    )
    
    
    (1,959
    )Balance at March 31, 2005
    
    $
    475
    
    
    $
    17,473
    
    
    $
    17,948
 Of the total $30.3 million of restructuring accruals, $9.2 million is accounted for in
Restructuring liabilities and $21.1 million is included in Long-term restructuring liabilities
and other in the accompanying condensed consolidated balance sheet as of March 31, 2005. The restructuring costs recorded during the three and nine months ended March 31, 2005 are based on
Hyperions restructuring plans that have been committed to by management and are subject to
refinement. 6. Stockholders Equity In May 2004, Hyperions board of directors authorized the company to repurchase up to $75.0 million
of its common stock. During the three months ended March 31, 2005, Hyperion repurchased and
retired 316,000 shares of its common stock for a total cost of $15.1 million. Of this amount, $3.8
million was recorded as a reduction of additional paid-in capital and the remaining $11.3 million
was recorded as a reduction of retained earnings. During the nine months ended March 31, 2005,
Hyperion repurchased and retired 1,309,300 shares of its common stock for a total cost of $52.5
million. Of this amount, $14.8 million was recorded as a reduction of additional paid-in capital
and the remaining $37.7 million was recorded as a reduction of retained earnings. 7. Segment and Geographic Information SFAS 131, Disclosures about Segments of an Enterprise and Related Information, established
standards for reporting information about operating segments in a companys financial statements.
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance. Hyperion
has identified one industry segment: the development and marketing of business performance
management software and related services. This segment operates in three geographic regions: the
Americas (United States, Canada and Latin America), EMEA (Europe, Middle East and Africa) and APAC
(Asia Pacific). Hyperions products are marketed internationally through Hyperions direct sales
force, independent distributors and application resellers. Enterprise-wide information is provided in accordance with SFAS 131. Geographic revenue information
is primarily based on the ordering location of the customer, and long-lived asset information is
based on the physical location of the assets. The following table presents revenues by geographic
region (in thousands): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Americas
    
    $
    105,816
    
    
    $
    100,057
    
    
    $
    309,553
    
    
    $
    270,512EMEA
    
    
    59,114
    
    
    
    54,367
    
    
    
    169,352
    
    
    
    146,042APAC
    
    
    12,177
    
    
    
    11,720
    
    
    
    34,718
    
    
    
    29,278$
    177,107
    
    
    $
    166,144
    
    
    $
    513,623
    
    
    $
    445,832
 14




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##### Table of Contents



The Americas region includes non-U.S. revenues of $6.2 million and $5.5 million for the quarter
ended March 31, 2005 and March 31, 2004, respectively. The Americas region includes non-U.S.
revenues of $18.0 million and $15.8 million for the nine months ended March 31, 2005 and March 31,
2004, respectively. The following table presents long-lived assets, which consist of tangible assets, by geographic
region (in thousands): March 31,
    
    
    June 30,2005
    
    
    2004Long-lived assets:Americas
    
    $
    69,152
    
    
    $
    63,936EMEA
    
    
    5,496
    
    
    
    5,680APAC
    
    
    1,935
    
    
    
    2,404$
    76,583
    
    
    $
    72,020
 The Americas region includes non-U.S. long-lived assets of $0.4 million as of March 31, 2005 and
June 30, 2004. The following table presents revenues for software licenses and maintenance and services (in
thousands): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Software licenses
    
    $
    68,659
    
    
    $
    65,108
    
    
    $
    194,607
    
    
    $
    167,854Maintenance and services:Maintenance
    
    
    75,232
    
    
    
    70,975
    
    
    
    221,845
    
    
    
    194,528Consulting and training
    
    
    33,216
    
    
    
    30,061
    
    
    
    97,171
    
    
    
    83,450108,448
    
    
    
    101,036
    
    
    
    319,016
    
    
    
    277,978Total revenues
    
    $
    177,107
    
    
    $
    166,144
    
    
    $
    513,623
    
    
    $
    445,832
 15




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##### Table of Contents



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 10,000 customer organizations worldwide. Hyperion is headquartered in Santa Clara, California
and employs approximately 2,600 people globally. RESULTS OF OPERATIONS 
 We acquired Brio Software, Inc. on October 16, 2003. Brios results of operations have been
included in Hyperions results beginning on the date of acquisition. In addition to the incremental
revenue streams associated with Brio products and services, our headcount increased by
approximately 15% as a result of the acquisition. REVENUES Three Months Ended March 31,
    
    
    Nine Months Ended March 31,Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total(In thousands)
    
    2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    2004
    
    
    RevenueSoftware licenses
    
    $
    68,659
    
    
    
    39
    %
    
    $
    65,108
    
    
    
    39
    %
    
    $
    194,607
    
    
    
    38
    %
    
    $
    167,854
    
    
    
    38
    %Maintenance and
services:Maintenance
    
    
    75,232
    
    
    
    42
    %
    
    
    70,975
    
    
    
    43
    %
    
    
    221,845
    
    
    
    43
    %
    
    
    194,528
    
    
    
    43
    %Consulting and
training
    
    
    33,216
    
    
    
    19
    %
    
    
    30,061
    
    
    
    18
    %
    
    
    97,171
    
    
    
    19
    %
    
    
    83,450
    
    
    
    19
    %108,448
    
    
    
    61
    %
    
    
    101,036
    
    
    
    61
    %
    
    
    319,016
    
    
    
    62
    %
    
    
    277,978
    
    
    
    62
    %Total revenues
    
    $
    177,107
    
    
    
    100
    %
    
    $
    166,144
    
    
    
    100
    %
    
    $
    513,623
    
    
    
    100
    %
    
    $
    445,832
    
    
    
    100
    %
 Three Months Ended March 31,
    
    
    Nine Months Ended March 31,Variance
    
    
    Variance
    
    
    
    
    
    
    
    
    
    
    Variance
    
    
    Variancein
    
    
    in
    
    
    
    
    
    
    
    
    
    
    in
    
    
    in(In thousands)
    
    2005
    
    
    2004
    
    
    Dollars
    
    
    Percent
    
    
    2005
    
    
    2004
    
    
    Dollars
    
    
    PercentSoftware licenses
    
    $
    68,659
    
    
    $
    65,108
    
    
    $
    3,551
    
    
    
    5
    %
    
    $
    194,607
    
    
    $
    167,854
    
    
    $
    26,753
    
    
    
    16
    %Maintenance and
services:Maintenance
    
    
    75,232
    
    
    
    70,975
    
    
    
    4,257
    
    
    
    6
    %
    
    
    221,845
    
    
    
    194,528
    
    
    
    27,317
    
    
    
    14
    %Consulting and
training
    
    
    33,216
    
    
    
    30,061
    
    
    
    3,155
    
    
    
    10
    %
    
    
    97,171
    
    
    
    83,450
    
    
    
    13,721
    
    
    
    16
    %108,448
    
    
    
    101,036
    
    
    
    7,412
    
    
    
    7
    %
    
    
    319,016
    
    
    
    277,978
    
    
    
    41,038
    
    
    
    15
    %Total revenues
    
    $
    177,107
    
    
    $
    166,144
    
    
    $
    10,963
    
    
    
    7
    %
    
    $
    513,623
    
    
    $
    445,832
    
    
    $
    67,791
    
    
    
    15
    %
 Total revenues increased 7% in the third quarter of fiscal 2005 compared to the third quarter of
fiscal 2004 and increased 15% in the first nine months of fiscal 2005 compared to the first nine
months of fiscal 2004. 16




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##### Table of Contents



The change in foreign currency exchange rates favorably impacted total revenues in the third
quarter of fiscal 2005 compared to the third quarter of fiscal 2004 by approximately $3.0 million
and favorably impacted total revenues in the first nine months of fiscal 2005 compared to the first
nine months of fiscal 2004 by approximately $11.2 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 5% in the third quarter of fiscal 2005 and would
have increased 13% in the first nine months of fiscal 2005, compared to the same periods in fiscal
2004. Software licenses.Software license revenues increased 5% in the third quarter of fiscal 2005
compared to the third quarter of fiscal 2004 and increased 16% in the first nine months of fiscal
2005 compared to the first nine months of fiscal 2004. The increase in license revenue in the
third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 was primarily due to the
increase in licensing revenue from Hyperion Performance Suite, which was offset by a decrease in
licensing revenue from Essbase and Hyperion Financial Management. The increase in license revenue
in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 was
primarily attributable to increases in revenues from licensing of Hyperion Performance Suite,
Hyperion Planning, Hyperion Strategic Finance and Hyperion Financial Management. These increases
were partially offset by decreases in licensing revenue from Essbase and related platform products. We market our products through our direct sales force and through channel partners. To date, we
have generated the majority of our license revenue through our direct sales force, but we continue
to focus on complementing our direct sales force with channel partners, which include original
equipment manufacturers, value added resellers, system integrators and independent distributors.
License revenue from channel partners comprised 33% of total license revenue in the third quarter
of fiscal 2005 compared to 29% in the third quarter of fiscal 2004 and comprised 28% of total
license revenue in the first nine months of fiscal 2005 compared to 25% for the first nine months
of fiscal 2004. The percentage of license revenue derived from our channel partners can fluctuate
between periods, as it is sensitive to individual large transactions that are neither predictable
nor consistent in size or timing. No single channel partner represented more than 10% of total
revenue during the periods presented. Maintenance and services.Maintenance and services revenue increased 7% in the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004, which was comprised of a 6% increase in
maintenance revenue and a 10% increase in consulting and training services revenue. Maintenance
and services revenue increased 15% in the first nine months of fiscal 2005 compared to the first
nine months of fiscal 2004, which was comprised of a 14% increase in maintenance revenue and a 16%
increase in consulting and training services revenue. The increases in maintenance revenue in the third quarter and first nine months of fiscal 2005
compared to the same periods in fiscal 2004 were primarily attributable to additional license
revenue during the fiscal year. The increases in consulting and training services revenue in the
third quarter and first nine months of fiscal 2005 were principally due to our acquisition of Brio
in October 2003 and to increased sales of services resulting from an increase in licensing
contracts acquired during those periods. 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)
    
    2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    2004
    
    
    RevenueSoftware licenses
    
    $
    4,141
    
    
    
    6
    %
    
    $
    3,400
    
    
    
    5
    %
    
    $
    11,496
    
    
    
    6
    %
    
    $
    9,867
    
    
    
    6
    %Maintenance and services
    
    
    40,492
    
    
    
    37
    %
    
    
    39,546
    
    
    
    39
    %
    
    
    117,710
    
    
    
    37
    %
    
    
    107,052
    
    
    
    39
    %
 Three Months Ended March 31,
    
    
    Nine Months Ended March 31,Variance
    
    
    Variance
    
    
    
    
    
    
    
    
    
    
    Variance
    
    
    Variancein
    
    
    in
    
    
    
    
    
    
    
    
    
    
    in
    
    
    in(In thousands)
    
    2005
    
    
    2004
    
    
    Dollars
    
    
    Percent
    
    
    2005
    
    
    2004
    
    
    Dollars
    
    
    PercentSoftware licenses
    
    $
    4,141
    
    
    $
    3,400
    
    
    $
    741
    
    
    
    22
    %
    
    $
    11,496
    
    
    $
    9,867
    
    
    $
    1,629
    
    
    
    17
    %Maintenance and
services
    
    
    40,492
    
    
    
    39,546
    
    
    
    946
    
    
    
    2
    %
    
    
    117,710
    
    
    
    107,052
    
    
    
    10,658
    
    
    
    10
    %
 Cost of software license revenue.Cost of software license revenue consists primarily of royalty
expenses, amortization of capitalized software development costs, amortization of acquired
technologies, and the cost of product packaging and documentation materials. Total cost of
software license revenues, as a percentage of revenues, remained consistent in the three and nine
months of fiscal year 2005 as compared to the same periods in fiscal year 2004. While there has
been an overall
increase in the level of amortization expense primarily due to the acquisitions of The Alcar Group
in April 2003, Brio in October 2003, QiQ Solutions in July 2004, and Razza Solutions in January
2005, these increases have been offset by decreases in royalty expenses due to different mixes of
product sales. 17




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##### Table of Contents



Gross margins on software license revenue were 94% for the third quarter and first nine months of
fiscal year 2005. Gross margins on software license revenue were 95% for the third quarter of
fiscal year 2004 and 94% for the first nine months of fiscal year 2004. In the first nine months of fiscal 2005 and 2004, we capitalized $4.3 million and $1.2 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. The
significant increase in software product development costs in the first nine months of fiscal 2005
compared to the first nine months of fiscal year 2004 was principally due to increased activity
during this period to localize Hyperions products for international markets in conjunction with
our synchronized product release schedule. 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 2% in the third quarter of fiscal 2005 compared to the
third quarter of fiscal 2004 and increased 10% in the first nine months of fiscal 2005 compared to
the first nine months of fiscal 2004. The increase in cost of maintenance and services revenue in
the third quarter of fiscal year 2005 compared to the third quarter of fiscal year 2004 was
principally due to a $1.9 million increase in employee expenses, which was partially offset by a
$0.8 million decrease in information technology expenses and $0.3 million decrease in occupancy and
equipment expenses. The increase in cost of maintenance and services revenue in the first nine
months of fiscal year 2005 compared to the first nine months of fiscal year 2004 was principally
due to a $5.3 million increase in employee expenses, which, in turn, resulted mostly from increased
revenue year over year. In addition, subcontractor and external personnel costs increased by $2.9
million, and occupancy and equipment expenses increased by $0.8 million. Maintenance and services
headcount decreased from 773 employees at March 31, 2004 to 768 employees at March 31, 2005. Gross margins on maintenance and services revenue were 63% for the third quarter and first nine
months of fiscal 2005 up from 61% for the third quarter and first nine months of fiscal 2004. 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)
    
    2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    2004
    
    
    RevenueSales and marketing
    
    $
    62,155
    
    
    
    35
    %
    
    $
    60,617
    
    
    
    36
    %
    
    $
    185,532
    
    
    
    36
    %
    
    $
    161,314
    
    
    
    36
    %Research and development
    
    
    26,863
    
    
    
    15
    %
    
    
    26,329
    
    
    
    16
    %
    
    
    78,222
    
    
    
    15
    %
    
    
    69,686
    
    
    
    16
    %General and
administrative
    
    
    18,408
    
    
    
    10
    %
    
    
    16,763
    
    
    
    10
    %
    
    
    48,803
    
    
    
    10
    %
    
    
    45,633
    
    
    
    10
    %Total operating expenses
    
    $
    107,426
    
    
    
    
    
    
    $
    103,709
    
    
    
    
    
    
    $
    312,557
    
    
    
    
    
    
    $
    276,633
 Three Months Ended March 31,
    
    
    Nine Months Ended March 31,Variance
    
    
    Variance
    
    
    
    
    
    
    
    
    
    
    Variance
    
    
    Variancein
    
    
    in
    
    
    
    
    
    
    
    
    
    
    in
    
    
    in(In thousands)
    
    2005
    
    
    2004
    
    
    Dollars
    
    
    Percent
    
    
    2005
    
    
    2004
    
    
    Dollars
    
    
    PercentSales and marketing
    
    $
    62,155
    
    
    $
    60,617
    
    
    $
    1,538
    
    
    
    3
    %
    
    $
    185,532
    
    
    $
    161,314
    
    
    $
    24,218
    
    
    
    15
    %Research and development
    
    
    26,863
    
    
    
    26,329
    
    
    
    534
    
    
    
    2
    %
    
    
    78,222
    
    
    
    69,686
    
    
    
    8,536
    
    
    
    12
    %General and
administrative
    
    
    18,408
    
    
    
    16,763
    
    
    
    1,645
    
    
    
    10
    %
    
    
    48,803
    
    
    
    45,633
    
    
    
    3,170
    
    
    
    7
    %Total operating expenses
    
    $
    107,426
    
    
    $
    103,709
    
    
    $
    3,717
    
    
    
    
    
    
    $
    312,557
    
    
    $
    276,633
    
    
    $
    35,924
 Sales and marketing.Sales and marketing expense increased 3% to $62.2 million in the third
quarter of fiscal 2005 from $60.6 million in the third quarter of fiscal 2004. This increase was
mainly due to a $1.3 million increase in employee expenses and $0.3 million increase in
subcontractors and external personnel costs. Sales and marketing headcount grew to 906 employees
at March 31, 2005 from 831 employees at March 31, 2004. Sales and marketing expense increased 15% to $185.5 million in the first nine months of fiscal 2005
from $161.3 million in the first nine months of fiscal 2004. This increase was mainly due to a
$14.1 million increase in employee expenses and $2.8 million increase in subcontractor and external
personnel costs. 18




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##### Table of Contents



Research and development.Research and development expense increased 2% to $26.9 million in the
third quarter of fiscal 2005 from $26.3 million in the third quarter of fiscal 2004. The increase
was primarily due to a $0.7 million increase in employee expenses. Overall, research and
development headcount decreased from 528 employees at March 31, 2004 to 512 employees at March 31,
2005. Within our cost structure for research and development, we have engineering offshoring
contracts in India and Belarus that employ approximately 170 engineering consultants. These
individuals are not included in our headcount figure of 512 employees as of March 31, 2005. Research and development expense increased by 12% to $78.2 million in the first nine months of
fiscal 2005 from $69.7 million in the first nine months of fiscal 2004. This increase was primarily
attributable to a $3.8 million increase in employee expenses and $3.5 million increase in
subcontractor and external personnel costs. General and administrative.General and administrative expense increased 10% to $18.4 million in
the third quarter of fiscal 2005 from $16.8 million in the third quarter of fiscal 2004. This
increase was principally due to a $1.8 million increase in professional services related to various
legal matters and our compliance efforts associated with Section 404 of the Sarbanes-Oxley Act of
2002. General and administrative headcount decreased from 395 employees at March 31, 2004 to 368
employees at March 31, 2005. General and administrative expense increased 7% to $48.8 million in the first nine months of fiscal
2005 compared to $45.6 million in the first nine months of fiscal 2004. This increase was
principally due to a $1.6 million increase in employee expenses and a $2.6 million increase in
professional services related to legal matters and our compliance efforts associated with
Sarbanes-Oxley. RESTRUCTURING CHARGES In the fourth quarter of fiscal 2004, we signed a lease agreement for a new corporate headquarters
facility located in Santa Clara, California that accommodates all employees in the San Francisco
Bay area, which resulted in a restructuring charge in the second quarter of fiscal year 2005 of
approximately $5.6 million. In the third quarter of fiscal 2005, we reduced the restructuring
accrual by $1.8 million. This adjustment resulted from our buyout agreement to terminate the lease
on our Sunnyvale facility and the sublease of our Santa Clara facility for the remaining term of
the lease, both of which were completed during the third quarter of fiscal 2005. In July 2004, we
vacated our San Francisco facility and recorded additional restructuring charges in the first
quarter of fiscal 2005 of approximately $2.0 million. During the second quarter of fiscal 2005, we
also made an adjustment to the restructuring charges recorded in fiscal 2001 by reducing the
estimated charges by $0.6 million. This adjustment resulted primarily from a change to the estimate
of sublease income related to our facility exit costs and did not represent new restructuring
activities. In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a
consulting firm based in Bangalore, India in an effort to increase our multi-shore development
capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal
2005 and has resulted so far in about 140 additional developers contributing to our development
efforts in India. Because of this initiative, in July 2004 we reduced our U.S.-based development
staff by approximately 50 employees, or approximately 10% of our development headcount, and
recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $1.1 million.
This restructuring charge consists of severance and related benefits costs. 19




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##### Table of Contents



The following table sets forth the activity in Hyperions restructuring accruals accounted for
under SFAS 146 and EITF 94-3, which are included in Restructuring liabilities and Long-term
restructuring liabilities and other in the accompanying condensed consolidated balance sheets (in
thousands): AssetSeverance
    
    
    Facilities
    
    
    Impairments
    
    
    Other
    
    
    TotalBalance at June 30, 2004
    
    $
    111
    
    
    $
    12,077
    
    
    $
    
    
    
    $
    1,759
    
    
    $
    13,947Restructuring costs, net of adjustments
    
    
    1,058
    
    
    
    2,011
    
    
    
    
    
    
    
    
    
    
    
    3,069Cash payments
    
    
    (984
    )
    
    
    (1,049
    )
    
    
    
    
    
    
    (4
    )
    
    
    (2,037
    )Balance at September 30, 2004
    
    
    185
    
    
    
    13,039
    
    
    
    
    
    
    
    1,755
    
    
    
    14,979Restructuring costs, net of adjustments
    
    
    (8
    )
    
    
    3,308
    
    
    
    646
    
    
    
    
    
    
    
    3,946Non-cash items
    
    
    
    
    
    
    
    
    
    
    (646
    )
    
    
    
    
    
    
    (646
    )Cash payments
    
    
    (50
    )
    
    
    (1,231
    )
    
    
    
    
    
    
    
    
    
    
    (1,281
    )Balance at December 31, 2004
    
    
    127
    
    
    
    15,116
    
    
    
    
    
    
    
    1,755
    
    
    
    16,998Restructuring costs, net of adjustments
    
    
    
    
    
    
    (327
    )
    
    
    
    
    
    
    
    
    
    
    (327
    )Non-cash items
    
    
    (4
    )
    
    
    (125
    )
    
    
    
    
    
    
    
    
    
    
    (129
    )Cash payments
    
    
    (4
    )
    
    
    (4,199
    )
    
    
    
    
    
    
    
    
    
    
    (4,203
    )Balance at March 31, 2005
    
    $
    119
    
    
    $
    10,465
    
    
    $
    
    
    
    $
    1,755
    
    
    $
    12,339
 The following table sets forth the activity in Hyperions restructuring accruals accounted for
under EITF 95-3 which are included in Restructuring liabilities, and Long-term restructuring
liabilities and other in the accompanying condensed consolidated balance sheets (in thousands): Severance
    
    
    Facilities
    
    
    TotalBalance at June 30, 2004
    
    $
    1,504
    
    
    $
    22,407
    
    
    $
    23,911Restructuring costs, net of adjustments
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (760
    )
    
    
    (1,448
    )
    
    
    (2,208
    )Balance at September 30, 2004
    
    
    744
    
    
    
    20,959
    
    
    
    21,703Restructuring costs, net of adjustments
    
    
    
    
    
    
    1,062
    
    
    
    1,062Cash payments
    
    
    (154
    )
    
    
    (1,079
    )
    
    
    (1,233
    )Balance at December 31, 2004
    
    
    590
    
    
    
    20,942
    
    
    
    21,532Restructuring costs, net of adjustments
    
    
    
    
    
    
    (1,515
    )
    
    
    (1,515
    )Non-cash items
    
    
    (7
    )
    
    
    (103
    )
    
    
    (110
    )Cash payments
    
    
    (108
    )
    
    
    (1,851
    )
    
    
    (1,959
    )Balance at March 31, 2005
    
    $
    475
    
    
    $
    17,473
    
    
    $
    17,948
 Of the total $30.3 million of restructuring accruals, $9.2 million is accounted for in
Restructuring liabilities and $21.1 million is included in Long-term restructuring liabilities
and other in the accompanying condensed consolidated balance sheet as of March 31, 2005. 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 increased 133% in the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004 and increased 63% in the first nine months
of fiscal 2005 compared to the first nine months of fiscal 2004 primarily due to increases in
interest rates and increases in balances of cash, cash equivalents and short-term investments. 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 increased
35% in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 due to
interest owed on foreign tax liabilities from previous years. Interest and other expense decreased
95% in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 due to
the redemption of all of our remaining convertible notes in the second quarter of fiscal 2004. 20




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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. INCOME TAX PROVISION Our effective income tax rate was 35% for the third quarter of fiscal 2005 compared to 37% for the
third quarter of fiscal 2004 and was 35% for the first nine months of fiscal 2005 compared to 39%
for the first nine months of fiscal 2004. 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. We anticipate an
income tax rate of 35% for all of fiscal 2005. NET INCOME We generated net income of $18.8 million, or $0.45 per diluted share, in the third quarter of
fiscal 2005 compared to net income of $12.7 million, or $0.32 per diluted share, in the third
quarter of fiscal 2004. For the first nine months of fiscal 2005, our net income was $46.0 million
or $1.12 per diluted share, compared to net income of $29.0 million or $0.74 per diluted share, for
the first nine months of fiscal 2004. We project total revenues in the fourth quarter of fiscal 2005 to be in the range of $183 million
to $188 million. We expect operating expenses in the fourth quarter of fiscal 2005 to increase
primarily due to higher variable compensation expenses associated with higher revenue as well as
continued increases in professional service costs associated with legal matters. Based upon the
cumulative factors noted above, we expect net income for the fourth quarter of fiscal 2005 to be in
the range of $17.7 million to $19.8 million, or $0.42 to $0.47 per diluted share, assuming an
effective tax rate of 35% and projected diluted shares outstanding of approximately 42.0 million. LIQUIDITY AND CAPITAL RESOURCES March 31,(In thousands)
    
    2005
    
    
    2004Cash, cash equivalents and short-term investments
    
    $
    426,726
    
    
    $
    338,654Working capital
    
    
    332,416
    
    
    
    242,669
 Nine Months Ended March 31,(In thousands)
    
    2005
    
    
    2004Net cash provided by operating activities
    
    $
    89,260
    
    
    $
    58,703Net cash provided by investing activities
    
    
    113,424
    
    
    
    53,173Net cash provided by (used in) financing activities
    
    
    2,883
    
    
    
    (132,543
    )
 At March 31, 2005, we had $379.1 million in cash and cash equivalents and $47.6 million in
short-term investments, consisting primarily of balances in interest-bearing demand deposit
accounts, variable rate demand notes, state and municipal bonds, U.S. government and agency
obligations and other highly-liquid securities. At March 31, 2005, our working capital was $332.4
million. We reclassified $192.9 million of auction rate securities from cash and cash equivalents to
short-term investments on the June 30, 2004 condensed consolidated balance sheet. We also made
corresponding adjustments to the statement of cash flows for the nine months ended March 31, 2004
to reflect the gross purchases and sales and maturities of these securities as investing activities
rather than as a component of cash and cash equivalents. For the nine months ended March 31, 2004,
before this reclassification, net cash provided by investing activities related to these
investments of $52.4 million was included in cash and cash equivalents in the condensed
consolidated statement of cash flows. These reclassifications had no impact on the previously
reported net income or cash flow from operations. In the first nine months of fiscal 2005 and 2004, we generated positive cash flow from operations
of $89.3 million and $58.7 million, respectively. In the first nine months of fiscal 2005, 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 and the income tax benefit from the exercise of stock options. These increases are
partially offset by decreases in accounts receivable and accrued employee compensation and
benefits. In the first nine months of fiscal 2004, our 21




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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 and the income tax benefit from the exercise of stock options. These increases are
partially offset by decreases in accounts payable and accrued liabilities and accrued employee
compensation and benefits. Net cash provided by investing activities amounted to $113.4 million in the first nine months of
fiscal 2005, compared to net cash provided by investing activities of $53.2 million in the first
nine months of fiscal 2004. The cash provided by investing activities in the first nine months of
fiscal 2005 resulted primarily from proceeds from sales and maturities of investments of $288.5
million, which was offset by purchases of investments of $141.7 million, purchases of property and
equipment of $21.0 million, purchases of intangible assets of $4.4 million, and payments for
acquisitions, net of cash acquired, of $8.2 million. The higher level of capital expenditures in
the first nine months of fiscal 2005 primarily related to leasehold improvements and purchases of
computer and office equipment for our new corporate headquarters facility in Santa Clara,
California. The cash provided by investing activities in the first nine months of fiscal 2004 was
primarily due to proceeds from sales and maturities of investments of $210.6 million, which was
partially offset by purchases of investments of $135.3 million and purchases of property and
equipment of $14.3 million. Furthermore, in connection with our acquisition of Brio in October
2003, we paid a total of $17.0 million, comprising $14.0 million paid to the Brio stockholders and
$3.0 million in acquisition costs paid to various third parties, and acquired Brios existing cash
balance of $10.5 million. Net cash provided by financing activities was $2.9 million in the first nine months of fiscal 2005,
and the net cash used in financing activities was $132.5 million in the first nine months of fiscal
2004. The cash provided by financing activities for the first nine months of 2005 resulted from
$55.4 million of proceeds from the issuance of common stock under our employee stock option and
stock purchase plans, which was offset by $52.5 million of repurchases of our common stock. The
cash used in financing activities in the first nine months of fiscal 2004 resulted from $124.9
million of repurchases of our common stock and $50.7 million paid to redeem our remaining
outstanding convertible subordinated notes, as authorized by our board of directors in October
2003, which were offset by $43.1 million of proceeds from the issuance of common stock under our
employee stock option and stock purchase plans. As of March 31, 2005, we are authorized to
repurchase up to an additional $16.4 million of common stock under the repurchase plan authorized
by our board of directors in May 2004. We expect to continue to repurchase shares of common stock
under this plan during the remainder of fiscal 2005, subject to market conditions and other
factors. We intend to fund our capital requirements, as well as our liquidity needs, with existing cash,
cash equivalent and short-term investment balances as well as cash generated from future
operations, if any. However, capital requirements will depend on many factors, including our rate
of revenue growth, market acceptance of our products, the timing and extent of development projects
and increases in operating expenses, all of which are subject to uncertainty. We believe that our
existing cash, cash equivalent and short-term investment balances, and cash generated from our
future operations, if any, will be sufficient to finance our business through at least March 31,
2006. To the extent that existing cash, cash equivalent and short-term investment balances and
cash generated by operations are insufficient to fund future activities, we may need to raise
additional funds through public or private debt or equity financing. Additional funds may not be
available on terms favorable to us or at all. In addition, our ability to generate positive cash
flows from operations will be impacted by changes in customer demand and acceptance of our products
as well as our ability to manage operating expenses and achieve further operational efficiencies. The following table summarizes our contractual obligations as of March 31, 2005 and the effect such
obligations are expected to have on our liquidity and cash flow in future periods. For the year
ended June 30, 2005, the table below includes only those obligations to be settled between April 1,
2005 and June 30, 2005. Year Ended June 30,(In thousands)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalNon-cancelable operating leases
    
    $
    5,924
    
    
    $
    19,225
    
    
    $
    16,399
    
    
    $
    14,106
    
    
    $
    10,685
    
    
    $
    41,629
    
    
    $
    107,968
 RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued a Statement, Share-Based Payment, an amendment of FASB
Statements Nos. 123 and 95, that addresses the accounting for share-based payment transactions in
which a Company receives employee services in exchange for either equity instruments of the Company
or liabilities that are based on the fair value of the Companys equity instruments or that may be
settled by the issuance of such equity instruments. The statement eliminates the ability to account
for share-based compensation transactions using the intrinsic method that Hyperion currently uses
and generally requires that such transactions be accounted for using a fair-value-based method and
recognized as expense in the condensed consolidated statements of income and comprehensive income.
The effective date of the proposed standard is for fiscal years beginning after June 15, 2005,
which for Hyperion will be the first quarter of fiscal 2006. The amounts disclosed within our
footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of
SFAS 123R. Compensation expense calculated under SFAS 123R may 22




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differ from amounts currently disclosed within our footnotes based on changes in the fair value of
our common stock, changes in the number of options granted or the terms of such options, the
treatment of tax benefits and changes in interest rates or other factors. In addition, upon
adoption of SFAS 123R, we may choose to use a different valuation model to value the compensation
expense associated with employee stock options and stock purchases under our employee stock
purchase plan. We are currently evaluating the potential impact of this standard on our financial
position and results of operations and alternative adoption methods. We expect this standard to
have a significant impact on the condensed consolidated statements of income and comprehensive
income. In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-8
The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, that the
dilutive effect of contingent convertible debt instruments (CoCos) must be included in diluted
earnings per share regardless of whether the triggering contingency has been satisfied, if
dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would require restatement
of prior period diluted earnings per share, subject to certain transition provisions. It is
effective for all periods ending after December 15, 2004. The adoption of EITF 04-08 did not have a
material impact on our financial position or results of operations. In March 2004, the FASB issued Emerging Issues Task Force Issue (EITF) No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides new
guidance for assessing impairment losses on investments. In addition, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily impaired. In September
2004, the FASB delayed the accounting provisions of EITF 03-01; however, the disclosure
requirements remain effective for annual periods ending after June 15, 2004. Although we are
currently evaluating the impact of adopting EITF 03-01, we do not expect the adoption of this new
standard to have a material impact on our financial position or results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS We operate in a very competitive and rapidly changing environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights some of these risks. Product enhancement and new product introductions involve inherent risks. Hyperion competes in a market characterized by rapid technological advances in hardware and
software development, evolving standards in computer hardware and software technology and frequent
new product introductions and 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;
    delays in releasing new products;
    customers delaying purchase decisions in anticipation of new products to be released;
    the fit of the new products and features with the customers needs;
    the successful adaptation of third-party technology into Hyperions products;
    educating Hyperions sales, marketing and consulting personnel to work with the new products and features;
    competition from earlier and more established entrants;
    market acceptance of initial product releases;
    marketing effectiveness; and
    the accuracy of assumptions about the nature of customer demand. Hyperions failure to successfully introduce, market and sell new products and technologies,
enhance and improve existing products in a timely manner, and properly position and/or price its
products, as well as undetected errors or delays in new products or new versions of a product could
have a material adverse effect on Hyperions business, results of operations or financial position.
These risks tend to be greater when newer products make up a larger portion of the overall product
mix. As more and more of these newer products are deployed, Hyperions service and maintenance
organizations, along with its partners, must rapidly increase their ability to install and service
these products, and Hyperion must rapidly improve their ease-of-implementation and ease-of-use. The
failure to successfully increase these capacities and make these improvements could result in
significantly lower customer satisfaction, which could lead to lower revenues and profits. For
fiscal 2005, important newer products or product enhancements include Performance Suite 8.3,
Essbase 7X, Hyperion Financial Management 4.0, Hyperion Planning 4.0, and Applications Suite 4.0. Hyperion operates in a very competitive environment. 23




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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 Oracle 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, SAP and Oracle, move further into
both the application and platform parts of the business performance management software market.
This competition could result in price reductions, fewer customer orders, reduced gross margins and
loss of market share, any of which would materially adversely affect Hyperions business, operating
results and financial condition. Also, the enterprise software market may continue to consolidate through merger or acquisition. If
one or more of our competitors merges or partners with another of our competitors or if we became
the subject of an unsolicited acquisition by another enterprise, such change in the competitive
landscape could adversely affect our ability to compete. Our key partners may also consolidate
with new and existing competitors, which could materially affect our ability to expand the market
for our products. If Hyperion is unable to develop or acquire new and enhanced products that achieve widespread
market acceptance, Hyperion may be unable to recoup product development costs, and Hyperions
earnings and revenue may decline. Hyperions future success depends on its ability to address the rapidly changing needs of its
customers by developing or acquiring new products and introducing such products, product updates
and services on a timely basis. Hyperion must also extend the operation of its products to new
platforms and keep pace with technological developments and emerging industry standards. Hyperion
commits substantial resources to developing new software products and services. If the markets for
these new products do not develop as anticipated, or demand for its products and services in these
markets does not materialize or occurs more slowly than Hyperion expects, Hyperion will have
expended substantial resources and capital without realizing corresponding revenue, and Hyperions
business and operating results could be adversely affected. Failure to upgrade older products will adversely affect revenue. As newer products are introduced by Hyperion or by its competition, the markets demand for
Hyperions older products declines. Declining demand reduces revenue from additional licenses, and
reduces maintenance revenue from past purchasers of Hyperions software. We must continually
upgrade older products in order for customers to continue to see value in Hyperions maintenance
services. If Hyperion is unable to provide continued improvements in functionality, or,
alternatively, move customers from older to newer products, declining maintenance and new license
revenue from older products could have a material adverse effect on Hyperions business. Hyperion typically has back-ended quarters which may cause our actual revenues in a quarter to vary
from sales forecasts. 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. There also is greater uncertainty surrounding the ultimate signing of
significant transactions with enterprise customers, whose sales cycles are typically longer in
duration and may require several levels of approval. 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 its forecasts of revenue for planning, modeling and other
purposes. However, forecasts are only estimates and may not correlate to revenues in a particular
quarter or over a longer period of time. Consequently, a significant discrepancy between actual
results and sales forecasts could cause Hyperion to improperly plan or budget and thereby adversely
affect Hyperions business or results of operations. Any publicly stated revenue or earnings
projections by Hyperion are especially subject to this risk. A change in pricing or marketing could adversely affect Hyperions business. In an effort to simplify and clarify Hyperions product positioning and marketing, Hyperion
periodically makes changes to its product pricing or product descriptions. Any product price
reductions may not be offset by sufficient increases in unit sales to maintain or increase license
revenues, and any broadly based changes to pricing or marketing messages could cause customers to
change or delay their purchasing decisions in response to such revisions. Additional risks of such
changes include delays in transactions as Hyperions sales force learns how to deploy the new
pricing or convey Hyperions new marketing messages and 24




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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. 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 third quarter and first nine months of fiscal 2005. If the United States dollar
strengthens relative to other currencies in the future, our revenues, operating results and cash
flows will be adversely affected. Hyperion may not be able to continue its operational improvements. As part of Hyperions focus on improving its operating margins, Hyperion is driving toward
increased efficiencies in its sales force, as well as Hyperions services, product development,
product marketing, finance, information technology, human resources and other administrative
processes. The ability to continue to realize current efficiencies and find ways to improve on past
performance is crucial to the improvement of operating margins. Any increase in the relative cost
of these functions, or failure to continue to realize current efficiencies, could have a material
adverse effect on Hyperions profits. Reorganizations may adversely affect productivity. Hyperion has continued to make adjustments to its operations and organization. For example, during
the first fiscal quarter of 2005, we made changes to the structure of the North American sales
organization. These changes have historically resulted in productivity declines and could have a
negative effect on revenue in the short term. The revised operations and/or organization must keep
improving over past performance in order to provide better operating margins and efficiencies.
Failure to maintain or improve performance and productivity could materially adversely impact
Hyperions revenue and profits. While we believe we currently have adequate internal control over financial reporting, we are
required to evaluate our internal control over financial reporting under Section 404 of the
Sarbanes Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of
investor confidence in our financial reports and have an adverse effect on our stock price. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form
10-K for the fiscal year ending June 30, 2005, we will be required to furnish a report by our
management on our internal control over financial reporting. Such report will contain, among other
matters, an assessment of the effectiveness of our internal control over financial reporting as of
the end of our fiscal year, including a statement as to whether or not our internal control over
financial reporting is effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by management. Such report
must also contain a statement that our independent registered public accounting firm has issued an
attestation report on managements assessment of such internal controls. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework
for companies to assess and improve their internal control systems. Auditing Standard No. 2
provides the professional standards and related performance guidance for independent registered
public accounting firms to attest to, and report on, managements assessment of the effectiveness
of internal control over financial reporting under Section 404. Managements assessment of internal
controls over financial reporting requires management to make subjective judgments and,
particularly because Auditing Standard No. 2 is newly effective, some of the judgments will be in
areas that may be open to interpretation and therefore the report may be uniquely difficult to
prepare and our independent registered public accounting firm may not agree with our assessments. While we currently believe our internal control over financial reporting is effective, we are still
performing the system and process documentation and evaluation needed to comply with Section 404,
which is both costly and challenging. During this process, if our management identifies one or more
material weaknesses in our internal control over financial reporting, we will be unable to assert
such internal control is effective. If we are unable to assert that our internal control over
financial reporting is effective as of June 30, 2005 (or if our independent registered public
accounting firm is unable to attest that our managements report is fairly stated or they are
unable to express an opinion on the effectiveness of our internal controls), we could lose investor
confidence in the accuracy and completeness of our financial reports, which would have an adverse
effect on our stock price. While we currently anticipate being able to satisfy the requirements of Section 404 in a timely
fashion, we cannot be certain as to the timing of completion of our evaluation, testing and any
required remediation due in large part to the fact that there is no precedent available by which to
measure compliance with the new Auditing Standard No. 2. 25




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Hyperions international operations are subject to significant risks. Hyperion derives a substantial portion of its revenue from customers located outside of the United
States. Hyperions international operations are subject to risks, including:  
    fluctuations in currency exchange rates and economic instability such as higher interest
rates and inflation, which could reduce Hyperions customers ability to obtain financing
for software products or which could make Hyperions products more expensive in those
countries;
    difficulties in hedging foreign currency transaction exposures;
    potential loss of proprietary information due to piracy, misappropriation or weaker laws
regarding intellectual property protection;
    imposition of foreign laws and other governmental controls, including trade and employment restrictions;
    longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;
    difficulties in staffing and managing its international operations, including
difficulties related to administering Hyperions stock option plan in some foreign
countries;
    difficulties in coordinating the activities of Hyperions geographically dispersed and culturally diverse operations;
    competition from local suppliers;
    costs and delays associated with developing software in multiple languages; and
    political unrest, war or terrorism, particularly in areas in which Hyperion has facilities. Hyperion also has distributed research and development (R&D) across the United States in
California, Connecticut and Texas and in several countries including India, Australia and Belarus.
It may be difficult to manage significant projects across such distributed R&D centers due to risk
factors noted above, as well as, potential risks associated with disruptions of power and internet
network infrastructures located abroad. Hyperion may not be able to successfully address each of
these challenges. Hyperion has in excess of 600 partners worldwide. Some of the business practices in countries in
which our partners operate on our behalf may not conform fully with local or U.S. laws. While we
are diligent about monitoring the business practices affecting our foreign subsidiaries, we may not
be able to detect improper or unlawful conduct by our international partners which could put
Hyperion at risk regarding possible violations of such laws as the U.S. Foreign Corrupt Practices
Act (FCPA). Serious violations of the FCPA could result in fines or other criminal or civil
sanctions which could have a material impact on the Hyperions operating results or financial
condition. There are significant risks related to any business combination. Hyperion has made, and may in the future make, acquisitions of, mergers with, or significant
investments in, businesses that offer complementary products, services and technologies. There are
risks involved in these activities, including but not limited to:  
    the possibility that Hyperion pays more than the value it derives from the acquisition;
    the difficulty of integrating the products, operations and personnel of the acquired businesses;
    the possibility that all aspects of the integration are not completed or that all of the
anticipated synergies of the acquisition are not realized;
    difficulties in managing software development activities to define a combined product
roadmap, ensuring timely development of new products, timely release of new products to
market, and the development of efficient integration and migration processes and tools;
    the difficulty of retaining key alliances on attractive terms with partners and suppliers;
    the difficulty of retaining and recruiting key personnel and maintaining employee morale;
    the potential product liability associated with selling the acquired companys products;
    the potential disruption of Hyperions ongoing business and the distraction of
management from Hyperions business; and
    the potential write-down of impaired goodwill and intangible and other assets. In
particular, Hyperion recorded approximately $126.7 million of goodwill related to the
acquisition of Brio that will not be amortized in the ordinary course of business. To the
extent that the business acquired in that transaction (primarily the Performance Suite
products) does not remain competitive, some or all of the goodwill related to that
acquisition could be charged against future earnings. These factors could have a material adverse effect on Hyperions business, results of operations or
financial position, especially in the case of a large acquisition. Hyperion is subject to the possibility of infringement claims. 26




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We rely upon various intellectual property protections, including contractual provisions, patents,
copyrights, trademarks, and trade secret laws to preserve our intellectual property rights.
Despite our precautions, third parties may misappropriate our intellectual property causing us to
lose potential revenue and competitive advantage. As well, we may ourselves from time to time
become subject to claims by third parties that our technology infringes their intellectual property
rights. In either case, we may incur expenditures to police, protect, and defend our interests and
may become involved in litigation that could divert the attention of our management. Responding to
such claims could result in substantial expense and result in damages, royalties, or injunctive
relief, or require us to enter into licensing agreements on unfavorable terms, or redesign or stop
selling affected products which could materially disrupt the conduct of our business. Hyperion may be subject to further 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 royalties. In the event of
a successful patent infringement claim against Hyperion, Hyperions failure or inability to license
the infringed or similar technology could restrict our ability to sell certain products, which
could adversely affect Hyperions business, operating results, financial condition and cash flows. In November 2004, Hyperion filed a declaratory judgment action in Federal District Court for the
Northern District of California against HyperRoll, Inc. (HyperRoll) to establish that Hyperion
did not infringe any of HyperRolls patents. Additionally, Hyperion filed a request for
re-examination on one of HyperRolls patents with the United States Patent and Trademark Office,
citing a prior art reference not considered in the original examination of the HyperRoll patent.
In January 2005, HyperRoll Israel Ltd., a HyperRoll subsidiary, filed an action in Federal District
Court for the Eastern District of Texas against Hyperion claiming that Hyperion infringed two
HyperRoll patents relating to our multidimensional database product, Essbase, and claiming
violations of the Latham Act regarding claims made about its products, and a claim for patent
mis-marking. HyperRoll also filed a motion in the declaratory judgment action in Federal District
Court for the Northern District of California to dismiss the case because Hyperion had filed the
action against HyperRoll, claiming that the patents in issue were in-fact assigned to HyperRoll
Israel. Also in January 2005, the United States Patent and Trademark Office notified Hyperion that
it will re-examine the HyperRoll patent in light of the new prior art reference provided by
Hyperion. In January 2005, the court in Federal District Court for the Northern District
of California dismissed the declaratory judgment action, but allowed Hyperion to amend the action
to add HyperRoll Israel, which we have done. On May 4, 2005, the
Federal District Court for the Eastern District of Texas granted
Hyperions Motion of Transfer Action to the Federal District
Court for the Northern District of California. Hyperion will vigorously defend the claims made
against us. 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. In protecting our intellectual property rights, in December 2004, we filed an action against
OutlookSoft Corporation (OutlookSoft) in Federal District Court for the Eastern District of
Texas, charging that OutlookSoft is infringing two Hyperion patents relating to our financial
consolidation, reporting and analysis applications, Hyperion Financial Management and Hyperion
Enterprise. Hyperion is asking for damages for past infringement, including treble damages for
willful infringement, and an injunction against further infringement. In January 2005, OutlookSoft
answered the complaint by denying infringement and challenging the validity and enforceability of
the Hyperion patents. OutlookSoft also filed counterclaims alleging that Hyperion infringes two of
its patents, asked for damages for past infringement, including treble damages for willful
infringement, and an injunction against further infringement. Hyperion intends to vigorously pursue
the protection of our intellectual property, and will vigorously defend the charges of patent
infringement made against us. 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 many factors, including but not
limited to, 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. 27




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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 33% of Hyperions total license
revenue for the third quarter of fiscal 2005. Indirect channel sales involve a number of special
risks, including:  
    Hyperions lack of control over the delivery of its products to end-users;
    Hyperions resellers and distributors may terminate their relationship with Hyperion on short notice; and
    Hyperions resellers and distributors may market and distribute competing products. Hyperions current indirect channel partners may not 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. In particular, the recruiting market
for experienced enterprise software sales personnel is very competitive and we may be limited in
our ability to attract and retain key sales talent. 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, but are not limited to:  
    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 28




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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. The accounting treatment for employee stock options has changed and will significantly impact
Hyperions earnings for periods beginning the first quarter of fiscal 2006. 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. In the second quarter of fiscal 2005, the Financial Accounting Standards
Board issued a Statement, Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95,
that requires 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. This accounting standard is effective for fiscal years beginning after June 15, 2005, which
for Hyperion will be the first quarter of fiscal 2006, and upon its adoption, our earnings will be
significantly affected. See also, Note 2, Significant Accounting Policies  Stock-based
Compensation, of Notes to Condensed Consolidated Financial Statements for current disclosures
regarding income statement treatment. Failure to obtain approval for additional shares of common stock to be granted as employee stock
options or restricted stock could adversely affect our ability to attract and retain employees. From time to time, we seek to obtain stockholder approval for additional shares of common stock
that could be granted as employee stock options or restricted stock to our employees and directors.
We may not be able to secure approval for these additional shares. If we do not get such approval,
we will be forced to curtail our option issuance, which will adversely impact our ability to retain
existing employees and attract qualified candidates. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY EXCHANGE RATE RISK. We transact business in various foreign currencies. Our
exposure to foreign currency exchange rate fluctuations arises in part from non-functional currency
denominated trade accounts receivable and intercompany accounts receivable. Intercompany accounts
receivable arise when software royalty fees and certain other costs incurred in the United States
are charged to our foreign sales subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary, which is generally their local
currency. From time to time, we utilize foreign currency forward exchange contracts to offset the
risk associated with the effects of these trade receivables and the effects of certain intercompany
receivables for which we anticipate settlement in the foreseeable future. As a result, increases or
decreases in these accounts due to foreign exchange rate changes are offset by gains and losses on
the forward contracts, so as to minimize foreign currency transaction gains and losses. Our forward
contracts generally have terms of 60 days or less. We do not use forward contracts for trading
purposes. All foreign currency balances and all outstanding forward contracts are marked-to-market
at the end of the period with unrealized gains and losses included in our consolidated statements
of operations. Our ultimate realized gain or loss with respect to currency fluctuations will depend
on the currency exchange rates and other factors in effect as the contracts mature. Net foreign exchange transaction gains and losses were not material for the third quarter of fiscal
2005. As of March 31, 2005, we had net forward contracts to sell U.S. dollar equivalent of $35.2
million in foreign currency. An immediate 10% change in currency exchange rates affecting our
foreign exchange transactions would not have a material impact on our results of operations. The change in foreign currency exchange rates favorably impacted total revenues in the third
quarter of fiscal 2005 compared to the third quarter of fiscal 2004 by approximately $3.0 million
and favorably impacted total revenues in the first nine months of fiscal 2005 compared to the first
nine months of fiscal 2004 by approximately $11.2 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 5% in the third quarter of fiscal 2005 and would
have increased 13% in the first nine months of fiscal 2005, compared to the same periods in fiscal
2004. 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, 2005, our short-term investments consisted of investment- 29




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grade debt securities with a fair value of $47.6 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. 
 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 In December 2004, Hyperion filed an action against OutlookSoft Corporation (OutlookSoft) in
Federal District Court for the Eastern District of Texas, charging that OutlookSoft is infringing
two Hyperion patents relating to our financial consolidation, reporting and analysis applications,
Hyperion Financial Management and Hyperion Enterprise. Hyperion is asking for damages for past
infringement, including treble damages for willful infringement, and an injunction against further
infringement. In January 2005, OutlookSoft answered the complaint by denying infringement and
challenging the validity and enforceability of the Hyperion patents. OutlookSoft also filed
counterclaims alleging that Hyperion infringes two of its patents, asked for damages for past
infringement, including treble damages for willful infringement, and an injunction against further
infringement. Hyperion intends to vigorously pursue the protection of our intellectual property,
and will vigorously defend the charges of patent infringement made against us. Hyperion does not
believe the outcome of the litigation will have a material effect on our financial position,
results of operations or cash flows. Hyperion discussed this litigation in our second fiscal
quarter Form 10-Q filed on February 9, 2005, for the quarter ended December 31, 2004. In November 2004, Hyperion filed a declaratory judgment action in Federal District Court for the
Northern District of California against HyperRoll, Inc. (HyperRoll) to establish that Hyperion
did not infringe any of HyperRolls patents. Additionally, Hyperion filed a request for
re-examination on one of HyperRolls patents with the United States Patent and Trademark Office,
citing a prior art reference not considered in the original examination of the HyperRoll patent.
In January 2005, HyperRoll Israel Ltd., a HyperRoll subsidiary, filed an action in Federal District
Court for the Eastern District of Texas against Hyperion claiming that Hyperion infringed two
HyperRoll patents relating to our multidimensional database product, Essbase, and claiming
violations of the Latham Act regarding claims made about its products, and a claim for patent
mis-marking. HyperRoll also filed a motion in the declaratory judgment action in Federal District
Court for the Northern District of California to dismiss the case because Hyperion had filed the
action against HyperRoll, claiming that the patents in issue were in-fact assigned to HyperRoll
Israel. Also in January 2005, the United States Patent and Trademark Office notified Hyperion that
it will re-examine the HyperRoll patent in light of the new prior art reference provided by
Hyperion. In January 2005, the court in Federal District Court for the Northern District
of California dismissed the declaratory judgment action, but allowed Hyperion to amend the action
to add HyperRoll Israel, which we have done. On May 4, 2005, the
Federal District Court for the Eastern District of Texas granted
Hyperions Motion of Transfer Action to the Federal District
Court for the Northern District of California. Hyperion will vigorously defend the claims made
against us. Hyperion does not believe the outcome of the litigation will have a material effect on
our financial position, results of operations or cash flows. Hyperion discussed this litigation in
our second fiscal quarter Form 10-Q filed on February 9, 2005, for the quarter ended December 31,
2004. 30




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth, for the periods indicated, our purchases of common stock. Total Number of
    
    
    ApproximateShares
    
    
    Dollar Value ofPurchased as
    
    
    Shares that MayTotal Number
    
    
    
    
    
    
    Part of Publicly
    
    
    Yet Beof Shares
    
    
    Average Price
    
    
    Announced Plan
    
    
    PurchasedPeriod
    
    Purchased [1]
    
    
    Paid per Share
    
    
    [2]
    
    
    Under the Plan(In thousands, except per share data)January 1, 2005  January 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    31,430February 1, 2005  February 28, 2005
    
    
    78
    
    
    $
    48.64
    
    
    
    78
    
    
    
    27,626March 1, 2005  March 31, 2005
    
    
    238
    
    
    $
    47.41
    
    
    
    238
    
    
    
    16,352
   [1]
    
    All stock repurchases during the three months ended March 31, 2005
were made in open-market transactions as part of our publicly
announced plan.[2]
    
    On May 20, 2004, we announced that our board of directors had
authorized a plan to repurchase up to $75.0 million of our common
stock. In total, we have purchased 1,461,900 shares since May 2004.
 
 ITEM 3. DEFAULTS None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS Exhibit No.
    
    Description31.1
    
    - Certification of Godfrey R. Sullivan pursuant to Rule 13a-14(a).31.2
    
    - Certification of David W. Odell pursuant to Rule 13a-14(a).32.1
    
    - Certification of Godfrey R. Sullivan pursuant to 18 U.S.C. Section
1350.32.2
    
    - Certification of David W. Odell pursuant to 18 U.S.C. Section 1350.
 31




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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, 2005
    
    Hyperion Solutions Corporation
(Registrant)By:
    
    /s/ DAVID W. ODELLDavid W. OdellChief Financial OfficerBy:
    
    /s/ WILLIAM B. DEWESWilliam B. DewesGlobal Controller(Principal Accounting Officer)
 32




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EXHIBIT INDEX Exhibit No.
    

Description31.1
    
    - Certification of Godfrey R. Sullivan pursuant to Rule 13a-14(a).31.2
    
    - Certification of David W. Odell pursuant to Rule 13a-14(a).32.1
    
    - Certification of Godfrey R. Sullivan pursuant to 18 U.S.C. Section
1350.32.2
    
    - Certification of David W. Odell pursuant to 18 U.S.C. Section 1350.
 33