<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
X
--- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.
--------------------------------
COMMISSION FILE NUMBER 0-26934
HYPERION SOLUTIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0277772
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1344 CROSSMAN AVENUE, SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices, including zip code)
(408) 744-9500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
As of November 13, 1998, there were 30,035,891 shares of the Registrant's common
stock, $.001 par value, outstanding.
- --------------------------------------------------------------------------------
<PAGE> 2
Hyperion Solutions Corporation
Form 10-Q
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet --
September 30, 1998 and June 30, 1998.......................................2
Condensed Consolidated Statement of Operations --
Three Months Ended September 30, 1998 and 1997.............................3
Condensed Consolidated Statement of Cash Flows --
Three Months Ended September 30, 1998 and 1997.............................4
Notes to Condensed Consolidated Financial Statements --
September 30, 1998.........................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................17
Item 4. Submission of Matters to a Vote of Security Holders..................18
Item 5. Other Information....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
SIGNATURES...................................................................21
Hyperion is a registered trademark and Hyperion Solutions is a trademark
of Hyperion Software Operations Inc., a wholly-owned subsidiary of Hyperion
Solutions Corporation. Essbase-Ready is a trademark of Hyperion Solutions
Corporation. All other trademarks and company names mentioned are
the property of their respective owners.
For further information, refer to the Hyperion Solutions Corporation report
on Form 8-K filed on October 13, 1998 and its registration statement,
amendment no. 2 to Form S-4 declared effective July 13, 1998.
<PAGE> 3
Hyperion Solutions Corporation
Condensed Consolidated Balance Sheet
(in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
---------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 197,613 $ 221,868
Short-term investments 59,340 35,479
Accounts receivable--net of allowances of $10,200 and $8,900 98,301 98,760
Prepaid expenses and other current assets 7,809 7,605
Deferred income taxes 9,051 10,447
--------------------------
TOTAL CURRENT ASSETS 372,114 374,159
Property and equipment--at cost, less accumulated depreciation
and amortization of $61,218 and $54,247 78,571 76,142
Product distribution rights and other intangible assets--at cost,
less accumulated amortization of $22,981 and $19,359 15,365 18,318
Other assets 9,900 8,046
--------------------------
Total assets $ 475,950 $ 476,665
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 56,616 $ 44,216
Accrued employee compensation and benefits 18,885 31,915
Income taxes payable 12,483 16,271
Deferred revenue 70,553 63,724
--------------------------
TOTAL CURRENT LIABILITIES 158,537 156,126
Long-term debt 107,173 107,314
Stockholders' equity:
Preferred stock--$.001 par value; 5,000 shares authorized;
none issued
Common stock--$.001 par value; 300,000 shares authorized;
29,783 and 29,574 shares issued and outstanding 30 30
Additional paid-in capital 137,945 135,172
Retained earnings 73,009 80,058
Currency translation adjustments (744) (2,035)
--------------------------
TOTAL STOCKHOLDERS' EQUITY 210,240 213,225
--------------------------
Total liabilities and stockholders' equity $ 475,950 $ 476,665
==========================
</TABLE>
Note: the balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date.
See accompanying notes.
-2-
<PAGE> 4
Hyperion Solutions Corporation
Condensed Consolidated Statement of Operations (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------------------------
<S> <C> <C>
REVENUES
Software licenses $ 53,704 $ 42,369
Maintenance and services 51,178 34,646
-------------------------
Total revenues 104,882 77,015
-------------------------
COSTS AND EXPENSES
Cost of revenues:
Software licenses 2,784 2,276
Maintenance and services 27,561 20,396
Sales and marketing 38,199 27,812
Research and development 15,377 10,374
General and administrative 8,744 8,667
Merger costs 21,800
-------------------------
114,465 69,525
-------------------------
OPERATING INCOME (LOSS) (9,583) 7,490
Interest income 2,982 908
Interest expense (1,332) (125)
-------------------------
INCOME (LOSS) BEFORE INCOME TAXES (7,933) 8,273
Provision for income taxes 2,000 3,022
-------------------------
NET INCOME (LOSS) $ (9,933) $ 5,251
=========================
EARNINGS (LOSS) PER SHARE
Basic $ (.33) $ .18
Diluted $ (.33) $ .17
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 29,726 28,658
Diluted 29,726 30,159
</TABLE>
See accompanying notes.
-3-
<PAGE> 5
Hyperion Solutions Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 5,119 $ 9,541
INVESTING ACTIVITIES
Office facility improvements and purchase of
equipment, furniture and software (8,321) (3,621)
Short-term investments, net (23,861) 4,061
Intangible and other assets (554) (1,235)
-------------------------
Cash used by investing activities (32,736) (795)
FINANCING ACTIVITIES
Principal payments on notes payable (386) (356)
Exercise of stock options by employees 2,457 3,683
-------------------------
Cash provided by financing activities 2,071 3,327
Effect of exchange rate changes 1,291 (127)
-------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,255) 11,946
Cash and cash equivalents at beginning of period 221,868 72,706
-------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 197,613 $ 84,652
=========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 6,946 $ 2,766
Interest 2,358 121
</TABLE>
See accompanying notes.
-4-
<PAGE> 6
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1998
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
have been included in the accompanying unaudited financial statements. Operating
results for the three-month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the full year ending June 30,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended June 30, 1998 included in the Hyperion
Solutions Corporation (the "Company" or "Hyperion") report on Form 8-K filed on
October 13, 1998.
B. MERGER
On August 24, 1998, the Company (the registrant, formerly named Arbor Software
Corporation) issued 18.2 million shares of its common stock in connection with
its merger with Hyperion Software Corporation. Hyperion Software, based in
Stamford, Connecticut, develops, markets and supports comprehensive, packaged
analytic applications. Its products, which are sold to large organizations
worldwide, draw data from multiple sources across an enterprise for applications
such as reporting, ad hoc analysis, consolidation, planning, and budgeting. The
business combination, which qualifies as a tax-free reorganization, has been
accounted for as a pooling of interests. Accordingly, the financial statements
have been restated for all periods presented to include Hyperion Software.
Further, all common share and per share data have been restated for the
pre-merger periods presented.
Hyperion Software had a fiscal year end of June 30, while Arbor used a March 31
year end. In connection with the merger, the Company changed its fiscal year end
from March 31 to June 30 and, accordingly, the accompanying financial
statements, labeled September 30, 1997, reflect the combination of the separate,
historical interim financial statements of Arbor Software and Hyperion Software
for the three-month periods ended June 30, 1997 and September 30, 1997,
respectively. The balance sheet at June 30, 1998 has been derived from the
combination of the audited financial statements of Hyperion Software at that
date and the audited financial statements of Arbor Software as of March 31,
1998. Accordingly, the exclusion of Arbor's net income for the three months
ended June 30, 1998 from stockholders' equity has been adjusted by a $2.9
million credit to retained earnings as of September 30, 1998.
-5-
<PAGE> 7
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
September 30, 1998
B. MERGER (CONTINUED)
For the pre-merger period indicated, revenues and net income of the Company and
Hyperion Software are as follows (in thousands):
Three Months Ended
September 30, 1997
------------------
Revenues
Hyperion Software $60,904
Arbor Software 16,111
-------
$77,015
=======
Net income
Hyperion Software $ 3,512
Arbor Software 1,739
-------
$ 5,251
=======
The Company incurred charges to operations related to the merger of $21.8
million, $18.7 million after taxes. These charges include direct transaction
costs primarily for financial advisory services and legal fees of $13.9 million,
and costs of $7.9 million associated with combining the operations of the two
companies, including $5 million for restructuring (closing of duplicate
offices, employee severance and relocations, $3.5 million) and the write down of
certain intangible assets. Included in accounts payable and accrued expenses at
September 30, 1998 are unpaid merger costs of $11.6 million.
C. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Earnings (loss) per share amounts for
both periods have been presented and where necessary restated to conform to the
Statement 128 requirements.
-6-
<PAGE> 8
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
September 30, 1998
C. EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted earnings
(loss) per share ("EPS") (in thousands, except per share data):
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-----------------------
Numerator--net income (loss) $ (9,933) $ 5,251
=======================
Denominator for basic EPS--weighted-average shares 29,726 28,658
Effect of dilutive securities:
Stock option rights 1,501
-----------------------
Denominator for diluted EPS--adjusted weighted-
average shares and assumed conversions 29,726 30,159
=======================
Basic earnings (loss) per share $ (.33) $ .18
Diluted earnings (loss) per share $ (.33) $ .17
Because their effect would be antidilutive, stock option rights (1.1 million
weighted-average common equivalent shares) were excluded from the diluted EPS
calculation for the three-month period ended September 30, 1998. Excluding the
$21.8 million ($18.7 million after tax) nonrecurring charge for merger costs,
the Company would have had net income of $8.8 million or $.28 per pro forma
diluted share (calculated using 30.8 million shares, 29.7 million average basic
shares plus 1.1 million average common equivalent shares). Substantially all
outstanding stock options were included in the computation of the 30.8 million
pro forma average dilutive shares outstanding. Shares of common stock issuable
upon conversion of the convertible subordinated notes due 2005 have been
excluded from the pro forma computation as their effect is antidilutive.
-7-
<PAGE> 9
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
September 30, 1998
D. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components as part of a complete set of
financial statements. Comprehensive income is a measure of all changes in equity
of any enterprise that results from recognized transactions and other economic
events of a period other than transactions with owners in their capacity as
owners. For the periods indicated, comprehensive income (loss) of the Company
was as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------------------
Net income (loss) $(9,933) $ 5,251
Currency translation adjustments, net of tax 815 (80)
----------------------
Comprehensive income (loss) $(9,118) $ 5,171
======================
E. CONTINGENCIES
From time to time, in the normal course of business, various claims are made
against the Company. At this time, in the opinion of management, there are no
pending claims the outcome of which is expected to result in a material adverse
effect on the financial position of the Company.
-8-
<PAGE> 10
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
- --------------------------------------------------------------------------------
Hyperion develops, markets and supports comprehensive analytic application
software for the workgroup, division, or extended enterprise. The Company's
offerings include packaged analytic applications that are quickly configured and
deployed, an industry leading OLAP (on-line analytical processing) server used
by IT and end-user departments to build fully customized analytic applications,
and a range of end-user reporting, analysis, and presentation tools. Packaged
analytic applications from Hyperion include the ability to draw data from
multiple sources across the enterprise for tasks such as reporting, ad hoc
analysis, consolidation, planning, and budgeting. The Company's solutions are
used by large organizations worldwide.
Hyperion derives revenues from licensing its software products and providing
related product installation, support and training services. Customers are
billed an initial fee for the software upon delivery. A maintenance fee
entitling customers to routine support and product updates is billed annually.
With operations in twenty-six countries, Hyperion licenses its products
throughout the world primarily through a direct sales force. Products also are
licensed through independent distributors and sales agents, including other
technology and application software companies, and major accounting firms
("channel partners"). The Company includes in revenues its net share of revenues
generated by distributors. When an agent has facilitated the sale and Hyperion
is the licensor, the license revenue is reported gross and a commission charge
is reflected.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
REVENUES
First Quarter Ended
September 30, 1998 CHANGE 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Software licenses $53,704 26.8% $42,369
Percentage of total revenues 51.2% 55.0%
- --------------------------------------------------------------------------------
Maintenance and services $51,178 47.7% $34,646
Percentage of total revenues 48.8% 45.0%
- --------------------------------------------------------------------------------
Software license revenues rose primarily as a result of an increase in the
number of licenses sold (unit volume) versus, for example, price increases. The
growth in software sales was led by strong demand for the Company's OLAP server
and tools.
-9-
<PAGE> 11
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The increase in service and annual maintenance revenue is mainly attributable to
the year-to-year growth of the Company's installed customer base.
Revenues, including export sales, generated from markets outside the United
States for the quarters ended September 30, 1998 and 1997 were $37.8 million and
$26 million, or 36% and 33.7% of total revenues, respectively. Revenue growth
was particularly strong in France, Germany, Italy and the United Kingdom.
Revenues derived from channel partners for the three months ended September 30,
1998 and 1997 were 12.9% and 12% of total revenues, respectively.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP"), which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. Effective July 1, 1998, the
Company adopted the SOP, as amended, and the impact on first quarter operating
results was not material. However, should the Company adopt new or change its
current licensing practices, in response to a preference from the market or
otherwise, then the Company's revenue recognition practices may be subject to
significant change to comply with the accounting requirements of the SOP, as
amended.
COST OF REVENUES
First Quarter Ended
September 30, 1998 CHANGE 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Software licenses $ 2,784 22.3% $ 2,276
Gross profit percentage 94.8% 94.6%
- --------------------------------------------------------------------------------
Maintenance and services $27,561 35.1% $20,396
Gross profit percentage 46.1% 41.1%
- --------------------------------------------------------------------------------
Cost of software license revenues consists primarily of the cost of product
packaging and documentation materials, amortization of capitalized software
costs, amortization of certain intangible assets related to business
acquisitions, and royalty expenses. The amortization of capitalized software
costs begins upon the general release of the software to customers. The increase
in the cost of software license revenues principally reflects an increase in
amortization of capitalized software costs.
The increase in the cost of maintenance and service revenues was due primarily
to additional staffing expense for both installation and ongoing support
services.
-10-
<PAGE> 12
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
OPERATING EXPENSES
First Quarter Ended
September 30, 1998 CHANGE 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Sales and marketing $38,199 37.3% $27,812
Percentage of total revenues 36.4% 36.1%
- --------------------------------------------------------------------------------
Research and development $15,377 48.2% $10,374
Percentage of total revenues 14.7% 13.5%
- --------------------------------------------------------------------------------
General and administrative $ 8,744 .9% $ 8,667
Percentage of total revenues 8.3% 11.3%
- --------------------------------------------------------------------------------
The increase in sales and marketing expenses is primarily due to a net increase
in sales-marketing personnel and an increase in commission costs directly
associated with the increase in software license revenues.
The increase in research and development expenses reflects additional personnel
costs associated with expanded product research and development activities. In
the quarters ended September 30, 1998 and 1997, the Company capitalized $.5
million and $.7 million of software development costs, respectively, in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
The amounts capitalized relate to the Company's development of enterprise-wide,
packaged analytic application solutions for client/server environments and
represented 3.2% and 6.1% of total research and development expenditures.
Capitalized software costs are amortized over the estimated economic life of the
product, but generally not more than three years.
The increase in general and administrative expenses resulted, for the most part,
from increases in personnel and professional services costs incurred to manage
and support the growth of the Company's overall operations. The increase is net
of the $1.2 million charge incurred in the September 1997 quarter for additional
support required by certain accounting product customers.
The merger of Arbor Software Corporation (former name of the registrant) and
Hyperion Software Corporation was completed on August 24, 1998. In connection
with the business combination, the Company charged $21.8 million, $18.7 million
after taxes, to operations for nonrecurring merger costs incurred. These charges
include direct transaction costs primarily for financial advisory services and
legal fees of $13.9 million, and costs of $7.9 million associated with combining
the operations of the two companies, including $5 million for restructuring
(closing of duplicate offices, employee severance and relocations, $3.5 million)
and the write down of certain intangible assets. For further details of the
merger, see Note B of the accompanying financial statements.
-11-
<PAGE> 13
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
INTEREST INCOME AND EXPENSE
Net interest income grew due to the increase in cash available for investment,
resulting from the issuance in March 1998 of $100 million of 4.5% convertible
subordinated notes and from operations.
PROVISION FOR INCOME TAXES
The provision for income taxes of $2 million reflects a $5.1 million accrual
based on pre-tax income of $13.9 million (excluding the charge for merger
costs) and a $3.1 million tax benefit attributable to merger costs. Excluding
merger costs, the effective tax rate was 36.8%, compared to 36.5% for the prior
year quarter ended September 30, 1997. The Company's expected effective rate
for the remainder of the fiscal year is 36.8%.
NET INCOME (LOSS)
As a result of the above factors, including the charge for merger costs, the
Company had a net loss of $9.9 million for the three-month period ended
September 30, 1998, compared to net income of $5.3 million for the corresponding
period of 1997. Excluding the $21.8 million ($18.7 million after tax)
nonrecurring charge for merger costs, the Company would have had net income of
$8.8 million for its first quarter ended September 30, 1998.
To date, the overall impact of inflation on the Company has not been material.
RISK FACTORS, INCLUDING YEAR 2000 COMPLIANCE
Except for the historical information contained in this report on Form 10-Q, the
matters discussed herein are forward-looking statements that involve risks and
uncertainties. Actual events and the Company's future results may vary
significantly based on a number of factors, including, but not limited to, those
discussed in the following paragraphs of this section; whether the process of
effecting the Arbor Software/Hyperion Software business combination can be
effectively managed to realize the synergies anticipated to result therefrom;
whether the merger itself causes uncertainty in the marketplace or customer
hesitation; and the impact of competitive products and pricing. Any
forward-looking statements should be considered in light of these factors as
well as other risks as detailed in the Company's most recent annual report on
Form 10-K, and its proxy statement included in Form S-4 filed with the
Commission on June 18, 1998, as amended. Further, readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
-12-
<PAGE> 14
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
State of Readiness of the Company's Year 2000 Issues
The Company has commenced its assessment of both the readiness of its internal
business information systems for handling the Year 2000 and the compliance of
products sold by the Company. The Company has determined that it will need to
modify or replace portions of its internal business information systems so that
the systems will function properly with respect to dates in the Year 2000 and
beyond. The Company anticipates that it will successfully address Year 2000
issues relating to its internal business information systems by the end of
fiscal 1999.
The Company believes that its current products are Year 2000 compliant. However,
prior versions of certain of these products currently installed at certain
customer sites will require upgrading or other modifications to become Year 2000
compliant. The Company believes that it is not legally responsible for costs
incurred by these customers to achieve Year 2000 compliance. However, there can
be no assurance that these customers will not assert claims against the Company
with respect to Year 2000 issues and, in the event such claims are asserted and
adjudicated in favor of these customers, the Company's liability could be
material. The Company is taking steps to identify affected customers, raise
customer awareness related to noncompliance of certain of the Company's older
products and assist its customers in assessing their risks. The Company may
incur increasing costs regarding customer satisfaction related to these actions
over the next few years. Since the Company's customer satisfaction programs are
currently ongoing, the scope of any resulting Year 2000 issues is not fully
known and potential liability resulting from these issues is unclear, the
potential impact on the Company's business, operating results and financial
condition with respect to these matters is not known at this time.
The Company's Hyperion accounting software, a product set formerly offered by
the Company, was not originally Year 2000 compliant. The Company is aware of a
limited number of customers who continue to use this product set. The Company is
obligated under its agreements with certain of these customers to provide
upgrades to this product set which are Year 2000 compliant. The Company expects
to make available to these customers a Year 2000 compliant release of its
accounting software prior to the end of December 1998. The Company has also made
available to these customers a migration path to a product offered pursuant to
the Company's alliance with Baan/Coda, which the Company believes is Year 2000
compliant. However, there can be no assurance that such product is Year 2000
compliant. The Company does not expect the cost associated with this compliance
effort, including planning, implementation and testing, to be material to its
financial condition, although there can be no assurance that the Company will
not be required to incur significant unanticipated costs in relation to its
compliance obligations. Such unanticipated costs, if incurred, could have a
material adverse effect on the Company's business, operating results and
financial condition.
-13-
<PAGE> 15
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Company has also initiated discussions with its significant vendors, service
providers and large customers to evaluate Year 2000 issues, if any, relating to
the interaction of their systems with the Company's internal systems. The
Company has received written compliance information from some of these third
parties and expects to receive all information on all outside system
dependencies by December 1998. At this time, despite the initiation of these
discussions, the Company does not possess the information necessary to estimate
the potential impact of Year 2000 compliance issues relating to these third
parties and their interaction with the Company, but expects to possess such
information prior to the end of December 1998.
Costs Associated with the Company's Year 2000 Issues
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. Most of its expenses
have related to the opportunity cost of time spent by employees of the Company
evaluating the Company's internal business information systems, the products
sold by the Company and the interaction of the Company's internal business
information systems with the internal systems of third parties. Although the
Company is not aware of any material operational issues or costs associated with
preparing its internal business information systems and its products for the
Year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences and/or material costs caused by
undetected errors or defects in the technology used in the Company's internal
business information systems or products the Company sells. Such unanticipated
negative consequences and/or material costs, if incurred, could have a material
adverse effect on the Company's business, operating results or financial
condition.
Contingency Plan Regarding the Company's Year 2000 Issues
As the Company is not aware of any material Year 2000 compliance issues, it has
not developed a Year 2000-specific contingency plan. If Year 2000 compliance
issues are discovered, the Company will evaluate the need for one or more
contingency plans relating to such issues.
While the Company believes that its planning efforts are adequate to address its
Year 2000 issues on a timely basis, there can be no assurance that there will
not be a delay in, or increased costs associated with, implementation of changes
to address any such issues, which could have a material adverse effect on the
Company's business, operating results or financial condition.
-14-
<PAGE> 16
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
MARKET RISKS
At September 30, 1998, the Company's investment portfolio consisted of
investment-grade debt securities, excluding those classified as cash
equivalents, of $59.3 million. The portfolio is invested predominantly in
short-term securities to minimize interest rate risk and for liquidity purposes
in the event of immediate cash needs. Accordingly, if market interest rates were
to increase immediately and uniformly by 10% from levels as of September 30,
1998, the decline in the fair value of the portfolio would not be material.
The Company's long-term debt bears interest, for the most part, at a fixed rate
and, therefore, relative to its long-term debt, an immediate 10% change in
market interest rates would not materially impact the Company's financial
statements.
Approximately one-third of the Company's sales, cost of sales and marketing is
transacted in local currencies. As a result, the Company's operations from
markets outside the United States are subject to foreign exchange rate
fluctuations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates with a minimal software licensing backlog. Therefore,
quarterly revenues and operating results are quite dependent on the volume and
timing of the signing of licensing agreements and product deliveries during the
quarter, which are difficult to forecast. The Company's future operating results
may fluctuate due to these and other factors, such as customer buying patterns,
the deferral and/or realization of deferred software license revenues according
to contract terms, the timing of new product introductions and product upgrade
releases, the Company's hiring plans, the scheduling of sales and marketing
programs, new product development by the Company or its competitors and currency
exchange rate movements. A significant portion of the Company's quarterly
software licensing agreements is concluded in the last month of the fiscal
quarter, generally with a concentration of such revenues earned in the final ten
business days of that month. The Company generally has realized lower revenues
in its first (September) and third (March) fiscal quarters than in the
immediately preceding quarters. Total revenues and net income (loss) were $104.9
million and $(9.9) million (excluding the nonrecurring charge for merger costs,
net income would have been $8.8 million), respectively, for the first quarter of
fiscal 1999, and $124.1 million and $19.7 million, respectively, for the fourth
quarter of fiscal 1998. The Company believes that these revenue fluctuations are
caused by customer buying patterns, including traditionally slow purchase
activity in the summer months and low purchase activity in the corporate
financial applications market during the March quarter, as many potential
customers are busy with their year-end closing and financial reporting. In any
case, 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.
-15-
<PAGE> 17
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
To date, the Company has financed its business through positive cash flow from
operations and, to a lesser extent, through the issuance of its capital stock
and convertible subordinated notes. For fiscal years 1996, 1997 and 1998, and
for the three months ended September 30, 1998, the Company generated positive
cash flow from operations of $42.9 million, $49.7 million, $87.6 million and
$5.1 million (net of $8.3 million paid to date for merger costs), respectively.
Cash used by investing activities amounted to $32.7 million for the three months
ended September 30, 1998, including $8.3 million primarily for purchases of
computer equipment and software, and $23.9 million for net purchases of
short-term investments.
Financing activities in the quarter ended September 30, 1998, including stock
options exercised by employees and payments of indebtedness, generated cash of
$2.1 million. In connection with the stock options exercised by certain of its
employees (for a total of 209 thousand common shares), the Company recognized
(as a credit to additional paid-in capital) an income tax benefit of $.3 million
for the three months ended September 30, 1998.
As of September 30, 1998, the Company had cash, cash equivalents and short-term
investments of $257 million, working capital of $213.6 million, and $107.2
million of long-term debt. Cash equivalents are comprised primarily of
investment-grade commercial paper, U.S. federal, state and political subdivision
obligations with varying terms of three months or less. The Company anticipates
capital expenditures of approximately $30 million for its 1999 fiscal year. The
Company intends to continue to review potential acquisitions and business
alliances that it believes would enhance its growth and profitability.
From time to time, in the normal course of business, various claims are made
against the Company. At this time, in the opinion of management, there are no
pending claims the outcome of which is expected to result in a material adverse
effect on the financial position of the Company.
The Company believes that its current cash and short-term investment balances,
and the funds generated from its operations, if any, will be sufficient to
finance the Company's business for at least the next year.
-16-
<PAGE> 18
Hyperion Solutions Corporation
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
On April 16, 1996, Gentia Software filed an action against the Company in the
United States District Court for the District of Massachusetts (the
"Massachusetts action") seeking a declaratory judgment that U.S. Patent No.
5,359,724 (the "'724 patent"), owned by the Company, is invalid and not
infringed by Gentia Software's products. On April 18, 1996, the Company filed an
action against Gentia Software in the United States District Court for the
Northern District of California (the "California action") alleging that Gentia
Software infringes the '724 patent, and seeking a permanent injunction and
monetary damages, including treble damages. On May 8, 1996, Gentia Software
filed its answer in the California action, including a counterclaim seeking to
declare the '724 patent invalid. Gentia Software also filed a motion to dismiss,
stay or transfer the action to Massachusetts, which the California court denied
on December 12, 1996. On May 13, 1996, the Company filed a motion to transfer
the Massachusetts action to California, which was granted on November 18, 1996.
The Company filed its answer and a counterclaim for patent infringement in the
transferred case on December 12, 1996. On April 7, 1997, the Court consolidated
both actions into a single case pending in the United States District Court for
the Northern District of California. On July 11, 1997, Gentia Software filed a
request for reexamination of the '724 patent with the United States Patent and
Trademark Office (the "PTO"). On September 11, 1997, the PTO granted the request
for reexamination. The examination proceedings are currently pending. On
December 11, 1997, the court ordered that the litigation will not be set for
trial until after completion of the reexamination proceedings, but denied Gentia
Software's request to stay the entire litigation. The parties are presently
engaged in discovery. On February 27, 1998, Gentia Software filed a request for
a second reexamination of the '724 patent with the PTO. On May 22, 1998, the PTO
granted that request for reexamination. The reexamination proceedings are
currently pending. Hyperion believes that it has meritorious claims against
Gentia Software and meritorious defenses against Gentia Software's claims that
the '724 patent is invalid, and intends to pursue vigorously its claims and
defend against Gentia Software's claims. The outcomes of the Gentia Software
litigation and the patent reexamination proceedings are uncertain at this time
and no assurance can be given that the outcome of the litigation will be in the
Company's favor, or that the PTO will not declare the '724 patent invalid or
narrow the scope of its claims. Management believes that the outcome of the
Gentia Software litigation or the reexamination will not have a material adverse
effect on the Company's business, operating results or financial condition.
However, should the '724 patent be declared invalid or narrowed in scope,
competitors may be able to implement the technology described in the '724
patent, which could result in increased competition. Increased competition could
materially adversely affect the Company's future business. The preceding current
litigation and any future litigation against the Company or its employees,
regardless of the outcome, is expected to result in substantial costs and
expenses to the Company and significant diversion of attention by the Company's
management personnel.
-17-
<PAGE> 19
Hyperion Solutions Corporation
Part II. Other Information (continued)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on August 21, 1998, the
following proposals were adopted by the margins indicated:
1. To approve the merger proposal:
a) To issue shares of Arbor Software common stock in connection with the
merger (together with associated preferred stock purchase rights) of
Arbor Software Corporation and Hyperion Software Corporation.
For 8,033,384
Against 244,022
Abstain 7,757
Non-votes 2,068,418
b) To amend the Company's Certificate of Incorporation (i) to effect a
name change from "Arbor Software Corporation" to "Hyperion Solutions
Corporation," (ii) to increase the authorized amount of common stock
from 50,000,000 shares to 300,000,000 shares, and (iii) to divide the
Board of Directors into three classes of directors, with each class
serving a staggered three-year term.
For 6,173,211
Against 2,102,986
Abstain 8,966
Non-votes 2,068,418
c) To elect seven members to the Hyperion Solutions Corporation Board.
CLASS I DIRECTORS
Number of Shares
For Withheld
-----------------------
Gary G. Greenfield 6,956,608 138,975
Mark W. Perry 6,956,608 119,665
CLASS II DIRECTORS
Number of Shares
For Withheld
-----------------------
Harry S. Gruner 6,956,608 139,175
Aldo Papone 6,956,608 139,425
Jeffrey R. Rodek 6,956,608 137,798
-18-
<PAGE> 20
Hyperion Solutions Corporation
Part II. Other Information (continued)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
CLASS III DIRECTORS
Number of Shares
For Withheld
-----------------------
John M. Dillon 6,956,608 119,665
James A. Perakis 6,956,608 147,632
2. To amend the Company's 1995 Stock Option/Stock Issuance Plan to increase
the number of shares of common stock reserved for issuance thereunder by
5,000,000 shares.
For 4,581,259
Against 3,690,178
Abstain 13,726
Non-votes 2,068,418
3. To amend the Company's Employee Stock Purchase Plan to increase the number
of shares of common stock reserved for issuance thereunder by 1,000,000
shares.
For 7,512,621
Against 743,757
Abstain 28,785
Non-votes 2,068,418
4. To ratify the Company's appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal year ending June
30,1999.
For 10,327,150
Against 17,098
Abstain 9,333
-19-
<PAGE> 21
Hyperion Solutions Corporation
Part II. Other Information (continued)
ITEM 5. OTHER INFORMATION
Proposals of stockholders intended to be presented at the Company's 1999 annual
meeting of stockholders must be received at the Company's principal executive
offices not later than June 17, 1999 in order to be included in the Company's
proxy statement and form of proxy relating to the 1999 annual meeting. Pursuant
to Rule 14a-4(c) of the Securities Exchange Act of 1934, as amended, if a
stockholder who intends to present a proposal at the 1999 annual meeting of
stockholders does not notify the Company of such proposal on or prior to August
31, 1999, then management proxies would be allowed to use their discretionary
voting authority to vote on the proposal when the proposal is raised at the
annual meeting, even though there is no discussion of the proposal in the 1999
proxy statement. At the present time, the Company expects to hold its 1999
annual meeting of stockholders in early November 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
- ----------- -----------
10.3(a) Hyperion Software Corporation 1991 Stock Plan.
10.5(a) Hyperion Software Corporation 1991 Non-Employee Director Stock
Option Plan.
10.26(b) Loan Agreement with the Connecticut Development Authority, dated
January 20, 1995, regarding financing of an office facility
(including related Promissory Note and Mortgage Deed).
10.48(c) Agreement and Plan of Reorganization dated November 7, 1994 by
and among IMRS Inc., IP Merger, Inc., Pillar Corporation and
American Stock Transfer & Trust Company, as escrow Agent.
10.49(c) Agreement and Plan of Merger dated November 29, 1994 among IMRS
Inc., IP Merger, Inc. and Pillar Corporation.
10.54(d) Employment Agreement with Mark J. Bilger, dated May 27, 1997.
10.1(e) Employment Agreement with James A. Perakis, dated November 1,
1997.
10.2(f) Employment Agreement with Craig M. Schiff, dated July 1, 1997.
27 Financial Data Schedule (filed herewith).
- ------------
Incorporated by reference to the exhibits to a Hyperion Software Corporation
Registration Statement or Current Report (file no. 0-19538):
(a) Form S-1 file no. 33-42855.
(b) Form 10-Q filed in February 1995.
(c) Form 8-K filed in December 1994.
(d) Form 10-K filed in September 1997.
(e) Form 10-Q filed in February 1998.
(f) Form 10-Q filed in May 1998.
The Company filed a report on Form 8-K during the three-month period ended
September 30, 1998. The report was filed on August 10, 1998. On October 13,
1998, the Company filed another report on Form 8-K.
-20-
<PAGE> 22
Hyperion Solutions Corporation
Form 10-Q
for the three-month period ended September 30, 1998
SIGNATURES
Pursuant to the requirements 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.
Hyperion Solutions Corporation
/s/ Michael A. Manto 11/12/98
---------------------------------------------------------------
Michael A. Manto Date
Vice President and Corporate Controller
/s/ Stephen V. Imbler 11/12/98
---------------------------------------------------------------
Stephen V. Imbler Date
Senior Vice President and Chief Financial Officer
-21-
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HYPERION SOLUTIONS CORPORATION FOR THE
QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 197,613
<SECURITIES> 59,340
<RECEIVABLES> 108,501
<ALLOWANCES> 10,200
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<CURRENT-ASSETS> 372,114
<PP&E> 139,789
<DEPRECIATION> 61,218
<TOTAL-ASSETS> 475,950
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0
<COMMON> 30
<OTHER-SE> 210,210
<TOTAL-LIABILITY-AND-EQUITY> 475,950
<SALES> 104,882
<TOTAL-REVENUES> 104,882
<CGS> 30,345
<TOTAL-COSTS> 114,465
<OTHER-EXPENSES> 84,120
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<INTEREST-EXPENSE> 1,332
<INCOME-PRETAX> (7,933)
<INCOME-TAX> 2,000
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