<PAGE> 1
================================================================================
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 DECEMBER 31, 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 February 3, 1999, there were 30,311,164 shares of the Registrant's common
stock, $.001 par value, outstanding.
================================================================================
<PAGE> 2
Hyperion Solutions Corporation
Form 10-Q
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -- December 31, 1998 and June 30, 1998.........................2
Condensed Consolidated Statement of Operations -- Three Months Ended
December 31, 1998 and 1997; Six Months Ended December 31, 1998 and 1997..........................3
Condensed Consolidated Statement of Cash Flows --
Six Months Ended December 31, 1998 and 1997......................................................4
Notes to Condensed Consolidated Financial Statements -- December 31, 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 5. Other Information.............................................................................18
Item 6. Exhibits and Reports on Form 8-K..............................................................18
SIGNATURES............................................................................................19
</TABLE>
Hyperion, Hyperion Enterprise and Hyperion Pillar are registered
trademarks and Hyperion Solutions and Essbase-Ready are trademarks
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>
DECEMBER 31, JUNE 30,
1998 1998
---------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 222,145 $ 221,868
Short-term investments 33,040 35,479
Accounts receivable--net of allowances of $11,000 and $8,900 109,046 98,760
Prepaid expenses and other current assets 6,549 7,605
Deferred income taxes 10,209 10,447
--------------------------
TOTAL CURRENT ASSETS 380,989 374,159
Property and equipment--at cost, less accumulated depreciation
and amortization of $66,825 and $54,247 79,444 76,142
Product distribution rights and other intangible assets--at cost,
less accumulated amortization of $24,515 and $19,359 14,251 18,318
Other assets 9,940 8,046
--------------------------
Total assets $ 484,624 $ 476,665
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 45,348 $ 44,216
Accrued employee compensation and benefits 26,053 31,915
Income taxes payable 7,000 16,271
Deferred revenue 71,361 63,724
--------------------------
TOTAL CURRENT LIABILITIES 149,762 156,126
Long-term debt 107,031 107,314
Stockholders' equity:
Preferred stock--$.001 par value; 5,000 shares authorized;
none issued
Common stock--$.001 par value; 300,000 shares authorized;
30,291 and 29,574 shares issued and outstanding 30 30
Additional paid-in capital 147,187 135,172
Retained earnings 81,658 80,058
Currency translation adjustments (1,044) (2,035)
--------------------------
TOTAL STOCKHOLDERS' EQUITY 227,831 213,225
--------------------------
Total liabilities and stockholders' equity $ 484,624 $ 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
REVENUES
Software licenses $ 51,886 $ 48,216 $ 105,590 $ 90,585
Maintenance and services 55,072 39,021 106,250 73,667
-------------------------- --------------------------
Total revenues 106,958 87,237 211,840 164,252
-------------------------- --------------------------
COSTS AND EXPENSES
Cost of revenues:
Software licenses 1,753 2,732 4,537 5,008
Maintenance and services 28,681 23,232 56,242 43,628
Sales and marketing 40,169 31,527 78,368 59,339
Research and development 14,889 11,570 30,266 21,944
General and administrative 9,342 8,996 18,086 17,663
Merger costs 21,800
-------------------------- --------------------------
94,834 78,057 209,299 147,582
-------------------------- --------------------------
OPERATING INCOME 12,124 9,180 2,541 16,670
Interest income 2,906 1,190 5,888 2,098
Interest expense (1,282) (136) (2,614) (261)
-------------------------- --------------------------
INCOME BEFORE INCOME TAXES 13,748 10,234 5,815 18,507
Provision for income taxes 5,100 3,766 7,100 6,788
-------------------------- --------------------------
NET INCOME (LOSS) $ 8,648 $ 6,468 $ (1,285) $ 11,719
========================== ==========================
EARNINGS (LOSS) PER SHARE
Basic $ .29 $ .22 $ (.04) $ .41
Diluted $ .28 $ .21 $ (.04) $ .38
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 30,073 29,043 29,900 28,851
Diluted 30,922 30,847 29,900 30,503
</TABLE>
See accompanying notes.
-3-
<PAGE> 5
Hyperion Solutions Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
--------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 3,873 $ 33,869
INVESTING ACTIVITIES
Office facility improvements and purchase of
equipment, furniture and software (15,408) (7,313)
Short-term investments, net 2,439 3,893
Intangible and other assets (1,038) (2,272)
--------------------------
Cash used by investing activities (14,007) (5,692)
FINANCING ACTIVITIES
Principal payments on notes payable (583) (678)
Exercise of stock options by employees 10,003 8,362
--------------------------
Cash provided by financing activities 9,420 7,684
Effect of exchange rate changes 991 (509)
--------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 277 35,352
Cash and cash equivalents at beginning of period 221,868 72,706
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 222,145 $ 108,058
==========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 17,267 $ 3,989
Interest 2,395 232
</TABLE>
See accompanying notes.
-4-
<PAGE> 6
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 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- and six-month periods ended December 31, 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 December 31, 1997, reflect the combination of the separate,
historical interim financial statements of Arbor Software and Hyperion Software
for the three- and six-month periods ended September 30, 1997 and December 31,
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 recorded in the three-month period ended
September 30, 1998.
-5-
<PAGE> 7
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
December 31, 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, 1997 December 31, 1997
------------------ -----------------
<S> <C> <C>
Revenues
Hyperion Software $ 69,230 $130,134
Arbor Software 18,007 34,118
-------- --------
$ 87,237 $164,252
======== ========
Net income
Hyperion Software $ 4,312 $ 7,824
Arbor Software 2,156 3,895
-------- --------
$ 6,468 $ 11,719
======== ========
</TABLE>
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 (more specifically, $3.5
million for the closing of duplicate offices, employee severance and
relocations) and the write down of certain intangible assets. Included in
accounts payable and accrued expenses at December 31, 1998 are unpaid merger
costs of $4.3 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
all 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)
December 31, 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
--------------------- -----------------------
<S> <C> <C> <C> <C>
Numerator--net income (loss) $ 8,648 $ 6,468 $ (1,285) $11,719
===================== =======================
Denominator for basic EPS--weighted-average shares 30,073 29,043 29,900 28,851
Effect of dilutive securities:
Stock option rights 849 1,804 -- 1,652
--------------------- -----------------------
Denominator for diluted EPS--adjusted weighted-
average shares and assumed conversions 30,922 30,847 29,900 30,503
===================== =======================
Basic earnings (loss) per share $ .29 $ .22 $ (.04) $ .41
Diluted earnings (loss) per share $ .28 $ .21 $ (.04) $ .38
</TABLE>
Because their effect would be antidilutive, stock option rights (1 million
weighted-average common equivalent shares) were excluded from the diluted EPS
calculation for the six-month period ended December 31, 1998. Excluding the
$21.8 million ($18.7 million after tax) nonrecurring charge for merger costs,
the Company would have had net income for the six months ended December 31, 1998
of $17.4 million or $.56 per pro forma diluted share (calculated using 30.9
million shares, 29.9 million average basic shares plus 1 million average common
equivalent shares). Substantially all outstanding stock options were included in
the computation of the 30.9 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)
December 31, 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---------------------- -----------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 8,648 $ 6,468 $(1,285) $ 11,719
Currency translation adjustments, net of tax (220) (225) 595 (305)
---------------------- -----------------------
Comprehensive income (loss) $ 8,428 $ 6,243 $ (690) $ 11,414
====================== =======================
</TABLE>
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
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
December 31, 1998 CHANGE 1997 1998 CHANGE 1997
- ------------------------------- ----------------------------- -----------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Software licenses $51,886 7.6% $48,216 $105,590 16.6% $90,585
Percentage of total revenues 48.5% 55.3% 49.8% 55.2%
- ------------------------------- ----------------------------- -----------------------------
Maintenance and services $55,072 41.1% $39,021 $106,250 44.2% $73,667
Percentage of total revenues 51.5% 44.7% 50.2% 44.8%
- ------------------------------- ----------------------------- -----------------------------
</TABLE>
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 demand for the Company's OLAP server and
tools. However, due to merger related activities, software sales were less than
the Company plan, particularly in North America. During the December quarter,
the two sales forces were integrated, sales territories were realigned, product
links were announced and time was spent cross training the Company's sales
representatives. The decline in sales productivity, caused by the necessary
decision to combine and cross train the sales forces and other factors, will
likely continue at least into the March 1999 quarter.
-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 first half of fiscal 1999 and 1998 were $73.9 million and $59.3
million, or 34.9% and 36.1% of total revenues, respectively. Revenue growth was
particularly strong in France, Italy and the Netherlands.
Revenues derived from channel partners for the three months ended December 31,
1998 and 1997 were 13.1% and 12.2% of total revenues, respectively. For the six
months ended December 31, 1998 and 1997, partner revenues were 13% and 12.1% of
total revenues.
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 and second 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
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
December 31, 1998 CHANGE 1997 1998 CHANGE 1997
- ---------------------------- ---------------------------------- ------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Software licenses $ 1,753 (35.8)% $ 2,732 $ 4,537 (9.4)% $ 5,008
Gross profit percentage 96.6% 94.3% 95.7% 94.5%
- ---------------------------- ---------------------------------- ------------------------------
Maintenance and services $28,681 23.5% $23,232 $56,242 28.9% $43,628
Gross profit percentage 47.9% 40.5% 47.1% 40.8%
- ---------------------------- ---------------------------------- ------------------------------
</TABLE>
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 decrease
in the cost of software license revenues principally reflects a decrease in
royalty fees.
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
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
December 31, 1998 CHANGE 1997 1998 CHANGE 1997
- ---------------------------- ---------------------------------- ------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $40,169 27.4% $31,527 $78,368 32.1% $59,339
Percentage of total revenues 37.6% 36.1% 37.0% 36.1%
- ---------------------------- ---------------------------------- ------------------------------
Research and development $14,889 28.7% $11,570 $30,266 37.9% $21,944
Percentage of total revenues 13.9% 13.3% 14.3% 13.4%
- ---------------------------- ---------------------------------- ------------------------------
General and administrative $ 9,342 3.8% $ 8,996 $18,086 2.4% $17,663
Percentage of total revenues 8.7% 10.3% 8.5% 10.8%
- ---------------------------- ---------------------------------- ------------------------------
</TABLE>
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 first half of fiscal 1999 and 1998, the Company capitalized $1 million and
$1.4 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
3.1% and 5.9% 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 costs incurred to manage and support the growth of
the Company's overall operations. The increase relating to the six-month
comparison 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
(more specifically, $3.5 million for the closing of duplicate offices, employee
severance and relocations) 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 for the first half of fiscal 1999 of $7.1 million
reflects a $10.2 million accrual based on pre-tax income of $27.6 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
remained substantially unchanged at approximately 37%. The Company's expected
effective rate for the remainder of the fiscal year is 37%.
NET INCOME (LOSS)
As a result of the above factors, net income for the three-month period ended
December 31, 1998 increased to $8.6 million, or by 33.7%, from $6.5 million for
the corresponding period of 1997. Including the charge for merger costs, the
Company had a net loss of $1.3 million for the six-month period ended December
31, 1998, compared to net income of $11.7 million for the same period of the
prior year. Excluding the $21.8 million ($18.7 million after tax) nonrecurring
charge for merger costs, the Company would have had net income of $17.4 million
for the six months ended December 31, 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. In the quarter ended
December 1998, the Company made available to these customers a Year 2000
compliant release of its accounting software. 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 and received compliance
information from 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 gathered written
compliance information from a large majority of these third parties and expects
to receive information on all relevant outside system dependencies by June
1999. At this time, after having carefully reviewed the compliance data relating
to these third parties and their interaction with the Company, and based on
discussions with some of the other third parties, the Company expects to achieve
a sufficient level of Year 2000 compliance regarding these dependencies by
September 1999 without incurring significant costs. However, a failure by these
third parties to address adequately their Year 2000 readiness could have a
material adverse affect on the Company's business, operating results or
financial condition.
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 material Year 2000
compliance issues are discovered, the Company will evaluate the need for one or
more contingency plans relating to such issues.
In addition the Company is aware of the potential for claims against it and
other companies for damages arising from products and services that were not
Year 2000 ready. The Company continues to believe that any such claims against
it would be without merit.
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 December 31, 1998, the Company's investment portfolio consisted of
investment-grade debt securities, excluding those classified as cash
equivalents, of $33 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 December 31,
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 were $107 million
and $8.6 million, respectively, for the second quarter of fiscal 1999, and
$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. 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 six months ended December 31, 1998, the Company generated positive cash
flow from operations of $42.9 million, $49.7 million, $87.6 million and $3.9
million (net of $15.5 million paid to date for merger costs), respectively.
Cash used by investing activities amounted to $14 million for the first half of
fiscal 1999, including $15.4 million primarily for purchases of computer
equipment and software, net of $2.4 million from net sales of short-term
investments.
Financing activities in the first half of fiscal 1999, including stock options
exercised by employees and payments of indebtedness, generated cash of $9.4
million. In connection with the stock options exercised by certain of its
employees (for a total of 717 thousand common shares), the Company recognized
(as a credit to additional paid-in capital) an income tax benefit of $2 million
for the six months ended December 31, 1998.
As of December 31, 1998, the Company had cash, cash equivalents and short-term
investments of $255.2 million, working capital of $231.2 million, and $107
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. 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.
The fact discovery cut-off for this action was February 20, 1998, and the expert
discovery cut-off was May 15, 1998. Discovery has been completed by both parties
with the exception of three depositions that Hyperion will take of Gentia's
expert witnesses. No additional written discovery can be propounded by either
party, and no depositions can be noticed or subpoenaed. On September 11, 1998,
the Court granted Hyperion's motion to vacate the stay of this action, and
scheduled pre-trial proceedings. Pursuant to that schedule, on January 27, 1999,
the Court held a claims construction hearing for the purpose of interpreting
certain terms and phrases used in the claims of the '724 patent. An order has
not yet been issued setting forth the Court's interpretation of those terms and
phrases. If the Court does not enter judgment based on any dispositive motions,
a jury trial of this action is presently scheduled to begin on June 1, 1999.
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 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
The Company filed a report on Form 8-K during the three-month period ended
December 31, 1998. The report was filed on October 13, 1998.
-18-
<PAGE> 20
Hyperion Solutions Corporation
Form 10-Q
for the three-month period ended December 31, 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 2/11/99
--------------------------------------------------------------
Michael A. Manto Date
Vice President and Corporate Controller
/s/ Stephen V. Imbler 2/11/99
--------------------------------------------------------------
Stephen V. Imbler Date
Senior Vice President and Chief Financial Officer
-19-
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SUCH FINANCIAL STATEMENTS.
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