<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 SEPTEMBER 30, 1999
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 10, 1999, there were 31,174,758 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, 1999 and
June 30, 1999...........................................................2
Condensed Consolidated Statement of Operations--
Three Months Ended September 30, 1999 and 1998..........................3
Condensed Consolidated Statement of Cash Flows--
Three Months Ended September 30, 1999 and 1998..........................4
Notes to Condensed Consolidated Financial Statements--September 30, 1999..5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................16
Item 4. Submission of Matters to a Vote of Security Holders.................18
Item 5. Other Information...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................18
SIGNATURES..................................................................19
Copyright 1999 Hyperion Solutions Corporation. All rights reserved. Hyperion,
Essbase, Hyperion Enterprise, Hyperion Pillar, Hyperion Reporting, LedgerLink,
and Pillar are registered trademarks and the Hyperion Logo, Essbase-Ready,
Hyperion Solutions, Hyperion Essbase, Hyperion Objects, Hyperion
Integration Server, HyperionReady, Hyperion Web Gateway, and See the
Future First are trademarks of Hyperion Solutions Corporation.
Wired for OLAP is a trademark of Appsource Corporation, a
subsidiary 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 annual
report on Form 10-K for the year ended June 30, 1999.
<PAGE> 3
Hyperion Solutions Corporation
Condensed Consolidated Balance Sheet
(in thousands, except per share data)
SEPTEMBER 30, JUNE 30,
1999 1999
-------- --------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents $240,611 $233,515
Short-term investments 40,302 38,341
Accounts receivable--net of allowances of $11,400 and
$11,800 107,161 110,744
Prepaid expenses and other current assets 6,155 6,290
Deferred income taxes 9,999 10,386
-------- --------
TOTAL CURRENT ASSETS 404,228 399,276
Property and equipment--at cost, less accumulated
depreciation and amortization of $71,686 and
$65,444 71,817 75,456
Acquired technologies, goodwill and other intangible
assets--at cost, less accumulated amortization
of $19,181 and $17,186 25,071 26,522
Other assets 11,229 11,640
-------- --------
Total assets $512,345 $512,894
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 51,521 $ 55,012
Accrued employee compensation and benefits 22,955 29,920
Income taxes payable 4,136 2,345
Deferred revenue 85,141 81,089
-------- --------
TOTAL CURRENT LIABILITIES 163,753 168,366
Long-term debt 100,000 103,752
Stockholders' equity:
Preferred stock--$.001 par value; 5,000 shares
authorized; none issued
Common stock--$.001 par value; 300,000 shares
authorized; 30,901 and 30,842 shares issued
and outstanding 31 31
Additional paid-in capital 154,215 153,545
Retained earnings 96,942 90,917
Currency translation adjustments (2,596) (3,717)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 248,592 240,776
-------- --------
Total liabilities and stockholders' equity $512,345 $512,894
======== ========
Note: the balance sheet at June 30, 1999 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)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
REVENUES
Software licenses $ 46,401 $ 53,704
Maintenance and services 60,849 51,178
-------- --------
Total revenues 107,250 104,882
COSTS AND EXPENSES
Cost of revenues:
Software licenses 1,298 2,784
Maintenance and services 29,563 27,561
Sales and marketing 41,434 38,199
Research and development 16,292 15,377
General and administrative 10,426 8,744
Merger costs 21,800
-------- --------
99,013 114,465
-------- --------
OPERATING INCOME (LOSS) 8,237 (9,583)
Interest income 2,795 2,982
Interest expense (1,407) (1,332)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 9,625 (7,933)
Provision for income taxes 3,600 2,000
-------- --------
NET INCOME (LOSS) $ 6,025 $ (9,933)
======== ========
EARNINGS (LOSS) PER SHARE
Basic $ .20 $ (.33)
Diluted $ .19 $ (.33)
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 30,873 29,726
Diluted 31,556 29,726
See accompanying notes.
-3-
<PAGE> 5
Hyperion Solutions Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES $ 10,736 $ 5,119
INVESTING ACTIVITIES
Purchases of property and equipment (2,673) (8,321)
Purchases of short-term investments, net (1,961) (23,861)
Intangible and other assets (489) (554)
-------- --------
Cash used by investing activities (5,123) (32,736)
FINANCING ACTIVITIES
Principal payments on notes payable (150) (386)
Exercise of stock options by employees 512 2,457
-------- --------
Cash provided by financing activities 362 2,071
Effect of exchange rate changes 1,121 1,291
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,096 (24,255)
Cash and cash equivalents at beginning of period 233,515 221,868
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $240,611 $197,613
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 1,117 $ 6,946
Interest 2,305 2,358
See accompanying notes.
-4-
<PAGE> 6
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1999
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, 1999 are not necessarily
indicative of the results that may be expected for the full year ending June 30,
2000. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended June 30, 1999 included in the Hyperion
Solutions Corporation (the "Company" or "Hyperion") report on Form 10-K filed on
September 28, 1999.
B. EARNINGS PER SHARE
Shares used in computing basic and diluted earnings (loss) per share are based
on the weighted average shares outstanding in each period. Basic earnings (loss)
per share excludes the effects of stock options, warrants and convertible
securities. Diluted earnings (loss) per share includes the dilutive effect of
the assumed exercise of stock option, warrant and/or convertible security rights
using the treasury stock method.
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,
1999 1998
------- -------
Numerator--net income (loss) $ 6,025 $(9,933)
======= =======
Denominator for basic EPS--weighted-average shares 30,873 29,726
Effect of dilutive securities:
Stock option rights 683
------- -------
Denominator for diluted EPS--adjusted weighted-
average shares and assumed conversions 31,556 29,726
======= =======
Basic earnings (loss) per share $ .20 $ (.33)
Diluted earnings (loss) per share $ .19 $ (.33)
-5-
<PAGE> 7
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
September 30, 1999
B. EARNINGS PER SHARE (CONTINUED)
Because their effect would be antidilutive, certain stock option rights for 3
million common shares were excluded from the diluted EPS calculation for the
three-month period ended September 30, 1999. For the same reason, shares of
common stock issuable upon conversion of the convertible subordinated notes due
2005 have been excluded from the diluted EPS calculation.
C. COMPREHENSIVE INCOME
Comprehensive income is a measure of all changes in equity of an 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,
1999 1998
------ -------
Net income (loss) $6,025 $(9,933)
Currency translation adjustments, net of tax 706 815
------ -------
Comprehensive income (loss) $6,731 $(9,118)
====== =======
D. 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.
E. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company has identified two reportable operating segments based on the
criteria of Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information": software licensing,
and maintenance and services. Software license fees are derived from the sale of
software product licenses. Maintenance and services revenues come from providing
product installation, support and training services.
The Company's President and Chief Operating Officer evaluates performance based
on measures of segment revenues, gross profit and company-wide operating
results. Employee headcount and operating costs and expenses are managed by
functional areas, rather than by revenue segments. Moreover, the Company does
not account for or report to the President and COO its assets or capital
expenditures by segments. The significant accounting policies of the reportable
segments are the same as those summarized in the Company's annual report on Form
10-K filed on September 28, 1999.
-6-
<PAGE> 8
Hyperion Solutions Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
September 30, 1999
E. SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The accompanying statement of operations discloses the financial information of
the Company's reportable segments in accordance with Statement 131 for the three
months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Other
U.S. U.K. International
Operations Operations Operations Eliminations Consolidated
- ----------------------- ---------- ---------- ------------- ------------ ------------
(in thousands)
1999
Revenues:
<S> <C> <C> <C> <C> <C>
Customers $ 93,164 $ 6,478 $ 7,608 $107,250
Intercompany 3,234 6,069 $(9,303)
- ----------------------- -------- ------- ------- ------- --------
Total 96,398 6,478 13,677 (9,303) 107,250
======================= ======== ======= ======= ======= ========
Operating income (loss) 19,867 (3,292) (8,338) 8,237
======================= ======== ======= ======= ======= ========
Identifiable assets $426,471 $13,189 $72,685 $512,345
======================= ======== ======= ======= ======= ========
1998
Revenues:
Customers $ 87,198 $10,311 $ 7,373 $104,882
Intercompany 2,963 75 4,325 $(7,363)
- ----------------------- -------- ------- ------- ------- --------
Total 90,161 10,386 11,698 (7,363) 104,882
======================= ======== ======= ======= ======= ========
Operating income (loss) (6,351) 3,934 (7,166) (9,583)
======================= ======== ======= ======= ======= ========
Identifiable assets $400,369 $19,184 $56,397 $475,950
======================= ======== ======= ======= ======= ========
</TABLE>
"Other International Operations" relate to subsidiaries in Austria,
Belgium, Canada, Finland, France, Germany, Italy, Japan, the Netherlands,
Singapore, Spain, Sweden and Switzerland. Operating income from operations
outside the United States approximates income before income taxes of such
operations. Intercompany revenues between geographic areas are accounted
for at prices representative of unaffiliated party transactions of a
similar nature.
Revenues from markets outside the United States were as follows (dollars in
thousands):
Three Months Ended September 30, 1999 1998
--------------------------------- ------- -------
U.K. operations $ 6,478 $10,311
Other international operations 7,608 7,373
Export 22,861 20,120
--------------------------------- ------- -------
$36,947 $37,804
================================= ======= =======
Percentage of total revenues 34% 36%
================================= ======= =======
The majority of "Export" revenues, some of which are generated through
independent distributors and agents, results from product licenses and
services sold to customers throughout Europe.
-7-
<PAGE> 9
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
- --------------------------------------------------------------------------------
Hyperion develops, markets and supports enterprise analytic application software
that helps companies better understand, optimize and operate their businesses.
Hyperion's products complement software that companies use to capture and
organize data. Hyperion's products integrate with, extend and enhance
transaction processing applications, enterprise resource planning (ERP) and
customer relationship management packaged applications, and data warehouses. The
Company's offerings are based on Hyperion's enterprise-class analytic platform
and include packaged analytic applications, OLAP (on-line analytical processing)
server technology, data and application integration technologies, and a family
of robust tools for client-server and web-enabled reporting, analysis,
presentation and application development. Hyperion and its partners deliver
client/server and web-based products for a broad range of analytic applications
including budgeting and planning, financial consolidation and reporting,
activity-based management, performance management, campaign management analysis,
promotional analysis, sales forecasting, demand planning, e-business analysis
and industry-specific solutions. 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. In the event that 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, 1999 CHANGE 1998
- ---------------------------------------------------------------------
(dollars in thousands)
Software licenses $46,401 (13.6)% $53,704
Percentage of total revenues 43.3% 51.2%
- ---------------------------------------------------------------------
Maintenance and services $60,849 18.9% $51,178
Percentage of total revenues 56.7% 48.8%
- ---------------------------------------------------------------------
-8-
<PAGE> 10
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Software license revenues declined primarily as a result of a decrease in the
number of licenses sold (unit volume) versus, for example, price decreases.
Particularly within North America, the Company continues to be hampered by
sales-marketing execution issues that stem from the Company's August 1998
business combination. The decline in sales productivity, caused by the necessary
decision to combine and cross train the separate sales forces and other factors,
first occurred in the December 1998 quarter and will likely continue at least
through the December 1999 quarter.
The increase in maintenance and services 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, 1999 and 1998 were $36.9 million and
$37.8 million, or 34.4% and 36% of total revenues, respectively. The decline was
due to weakness in Germany and the United Kingdom.
Revenues derived from channel partners for the three months ended September 30,
1999 and 1998 were 15% and 12.9% of total revenues, respectively.
COST OF REVENUES
First Quarter Ended
September 30, 1999 CHANGE 1998
- --------------------------------------------------------------------------------
(dollars in thousands)
Software licenses $ 1,298 (53.4)% $ 2,784
Gross profit percentage 97.2% 94.8%
- --------------------------------------------------------------------------------
Maintenance and services $29,563 7.3% $27,561
Gross profit percentage 51.4% 46.1%
- --------------------------------------------------------------------------------
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 decrease
in the cost of software license revenues principally reflects a decrease 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.
-9-
<PAGE> 11
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
OPERATING EXPENSES
First Quarter Ended
September 30, 1999 CHANGE 1998
- -------------------------------------------------------------------------------
(dollars in thousands)
Sales and marketing $41,434 8.5% $38,199
Percentage of total revenues 38.6% 36.4%
- -------------------------------------------------------------------------------
Research and development $16,292 6.0% $15,377
Percentage of total revenues 15.2% 14.7%
- -------------------------------------------------------------------------------
General and administrative $10,426 19.2% $ 8,744
Percentage of total revenues 9.7% 8.3%
- -------------------------------------------------------------------------------
The increase in sales and marketing expenses is primarily due to a net increase
in sales-marketing personnel.
The increase in research and development expenses reflects additional personnel
costs associated with expanded product research and development activities. In
each of the quarters ended September 30, 1999 and 1998, the Company capitalized
$.5 million of software development costs 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 represent 3% 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 an increase in personnel costs incurred to manage and support the growth of
the Company's overall operations.
The merger of Arbor Software Corporation (former name of the Company) and
Hyperion Software Corporation was completed on August 24, 1998. In the quarter
ended September 30, 1998, the Company charged $21.8 million, $18.7 million after
taxes, to operations for nonrecurring costs incurred in connection with the
business combination.
PROVISION FOR INCOME TAXES
Excluding the impact of merger costs in the prior year, the Company's effective
income tax rate remained substantially unchanged at approximately 37%. The
Company's expected effective rate for the remainder of the fiscal year is 37%.
-10-
<PAGE> 12
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
NET INCOME
As a result of the above factors, the Company had net income of $6 million for
the three-month period ended September 30, 1999, compared to a net loss of $9.9
million for the corresponding period of 1998.
To date, the overall impact of inflation on the Company has not been material.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Statement 133
requires all derivative instruments (such as most foreign currency and interest
rate swaps, options, forwards, futures, collars, and warrants) to be recorded on
the balance sheet at fair value and establishes "special accounting" for the
following three different types of hedges: hedges of changes in the fair value
of assets, liabilities or firm commitments (fair value hedges), hedges of
variable cash flows of forecasted transactions (cash flow hedges), and hedges of
foreign currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges are
unique, they all result in recognizing offsetting changes in value or cash flows
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair value of derivatives that do not meet the criteria of one of these
three categories of hedges are to be included in earnings in the period of the
change. Statement 133, as amended, is effective for the Company beginning in
fiscal 2001, and the Company has not yet determined the impact, if any, the
adoption of the statement will have on its financial statements.
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; the impact of competitive products and pricing; and whether the
process of effecting the Company's May 1999 acquisition of Sapling Corporation
can be effectively managed to realize the synergies anticipated to result
therefrom. Any forward-looking statements should be considered in light of these
factors as well as other risks as detailed elsewhere in this quarterly report,
and in the Company's most recent annual report on Form 10-K. Further, readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.
-11-
<PAGE> 13
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 continues to assess 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 had to modify and/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 believes that all current versions of its 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, and 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
was obligated under its agreements with certain of these customers to provide
upgrades to this product set which are Year 2000 compliant. Beginning in the
quarter ended December 1998, the Company made available and to date has
delivered 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.
-12-
<PAGE> 14
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The Company has had 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 has received
information on all relevant outside system dependencies. 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 has achieved a sufficient level of Year
2000 compliance regarding these dependencies 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.
-13-
<PAGE> 15
Hyperion Solutions Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
MARKET RISKS
At September 30, 1999, the Company's investment portfolio consisted of
investment-grade debt securities, excluding those classified as cash
equivalents, of $40.3 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,
1999, 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 had a software licensing backlog of approximately $15 million at
June 30, 1999, which sales were completed in the September 1999 quarter upon
shipment of product to customers. The Company's backlog fluctuates from period
to period, however, the Company does not expect that during fiscal 2000 its
backlog will exceed the amount at June 30, 1999. The amount decreased in the
September 1999 quarter and the Company anticipates that it will continue to
decrease. Nonetheless, quarterly revenues and operating results are highly
dependent on the volume and timing of the signing of licensing agreements and
product deliveries during the quarter, which are difficult to forecast. 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 ability or inability
to retain qualified personnel, its overall hiring plans, the scheduling of sales
and marketing programs, new product development by the Company, its channel
partners 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 $107.3 million and $6 million, respectively, for the first
quarter of fiscal 2000, and $111.4 million and $6.7 million, respectively, for
the fourth 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.
-14-
<PAGE> 16
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 1997, 1998 and 1999, and
for the three months ended September 30, 1999, the Company generated positive
cash flow from operations of $49.7 million, $87.6 million, $43.2 million and
$10.7 million, respectively.
Cash used by investing activities amounted to $5.1 million for the three months
ended September 30, 1999, including $2.7 million primarily for purchases of
computer equipment and software, and $1.9 million for net purchases of
short-term investments.
Financing activities in the quarter ended September 30, 1999, including stock
options exercised by employees and payments of indebtedness, generated cash of
$.4 million. In connection with the stock options exercised by certain of its
employees (for a total of 59,000 common shares), the Company recognized (as a
credit to additional paid-in capital) an income tax benefit of $.2 million for
the three months ended September 30, 1999.
As of September 30, 1999, the Company had cash, cash equivalents and short-term
investments of $280.9 million, working capital of $240.5 million, and $100
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 2000 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.
-15-
<PAGE> 17
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. 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 which was later consolidated with the first reexamination. On
March 31, 1999, the PTO issued a non-final office action rejecting the claims of
the `724 patent. Hyperion filed its response to the office action on May 31,
1999. No final office action has been issued by the Patent Office.
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 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. On July 21, 1999, the Court issued an order tentatively construing the
disputed terms and phrases of the '724 patent. This order is expressly not a
final order and is subject to change if the Court so decides.
-16-
<PAGE> 18
Hyperion Solutions Corporation
Part II. Other Information (continued)
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 financial
position of the Company. 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.
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.
-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 November 10, 1999, the
following proposals were adopted by the margins indicated:
1. To reelect a member of the Board of Directors to serve for a three-year term
as Class I director.
Number of Shares
For Withheld
--------- --------------
Gary G. Greenfield 26,386,429 314,296
2. To ratify the Company's appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal year ending June 30,
2000.
For 26,622,069
Against 59,390
Abstain 19,266
ITEM 5. OTHER INFORMATION
Proposals of stockholders intended to be presented at the Company's 2000 annual
meeting of stockholders must be received at the Company's principal executive
offices not later than June 8, 2000 in order to be included in the Company's
proxy statement and form of proxy relating to the 2000 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 2000 annual meeting of
stockholders does not notify the Company of such proposal on or prior to August
31, 2000, 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 2000
proxy statement. At the present time, the Company expects to hold its 2000
annual meeting of stockholders in early November 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on July 27, 1999.
-18-
<PAGE> 20
Hyperion Solutions Corporation
Form 10-Q for the three-month period ended September 30, 1999
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/ Stephen V. Imbler 11/15/99
----------------------------------------------------
Stephen V. Imbler Date
President and Chief Operating Officer
-19-
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CONSOLIDATED FINANCIAL STATEMENTS OF HYPERION SOLUTIONS CORPORATION FOR THE
QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
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