| HYPERION SOLUTIONS CORP ITEM 1A RISK FACTORS FACTORS THAT MAY AFFECT FUTURE RESULTS We operate in a very competitive and rapidly changing environment that involves numerous risks, some of which are beyond our control |
| The following discussion highlights some of these risks |
| Product enhancement and new product introductions involve inherent risks |
| Hyperion competes in a market characterized by rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology, and frequent new product introductions and enhancements |
| To succeed, we must continually expand and refresh our product offerings to include newer features or products, and enter into agreements allowing integration of third-party technology into Hyperion’s products |
| For example, System 9, Hyperion’s integrated BPM system which was released in September 2005, has been and continues to be a significant undertaking |
| The introduction of new products or updated versions of continuing products has inherent risks, including, but not limited to: • Product quality, including the possibility of software defects; • Delays in releasing new products; • Customers delaying purchase decisions in anticipation of new products to be released; • Customer confusion and extended evaluation and negotiation time; • The fit of the new products and features with the customer’s needs; 10 _________________________________________________________________ [57]Table of Contents • The successful adaptation of third-party technology into Hyperion’s products; • Educating Hyperion’s sales, marketing, and consulting personnel to work with the new products and features; • Competition from earlier and more established entrants; • Market acceptance of initial product releases; • Technological challenges involved in integrating Hyperion products into cohesive business performance management systems offerings; • Marketing effectiveness, including challenges in distribution; and • The accuracy of assumptions about the nature of customer demand |
| If we are unable to successfully introduce, market, and sell new products and technologies, enhance and improve existing products in a timely manner, and properly position and/or price our products, our business, results of operations, or financial position could be materially impacted |
| These risks tend to be greater when newer products make up a larger portion of the overall product mix |
| As more and more of these newer products are deployed, Hyperion’s service and maintenance organizations, along with our partners, must rapidly increase their ability to install and service these products, and we must rapidly improve our ease-of-implementation and ease-of-use |
| The failure to successfully increase these capacities and make these improvements could result in significantly lower customer satisfaction, which could lead to lower revenues and profits |
| Inadequate customer acceptance of Hyperion’s product and service initiatives would materially adversely affect Hyperion’s business, operating results, and financial condition |
| Fluctuations in our quarterly operating results may not be predictable and may result in significant volatility in our stock price |
| Our product revenue has fluctuated and our quarterly operating results may continue to fluctuate based on, among other things, the timing of the execution and termination of customer agreements in a given quarter |
| The announcement or introduction of new or enhanced products and services in our markets may create additional volatility in our operating results |
| We may not be able to accurately forecast our revenue or expenses |
| Because our staffing and operating expenses are based on anticipated revenue levels, and because a high percentage of our costs are fixed, small variations in the timing of the recognition of specific revenue could cause significant variations in operating results from quarter to quarter |
| In addition, many of our customers delay purchases of our products until the end of each quarter |
| Accordingly, any significant revenue shortfall would likely have an immediate negative effect on our operating results |
| Moreover, we believe the challenges and difficulties that we face with respect to our financial forecasts also apply to securities analysts that may publish estimates of our financial results |
| Our operating results may fail to meet our expectations or those of securities analysts or our investors due to a wide variety of factors, including fluctuations in financial ratios or other metrics used to measure performance |
| If this occurs, we would expect to experience an immediate and significant decline in the trading price of our stock |
| Hyperion operates in a very competitive environment |
| The markets in which Hyperion competes are intensely competitive, highly fragmented, and characterized by rapidly changing technology and evolving standards |
| Hyperion has experienced, and expects it will continue to experience, vigorous competition from current and new competitors, some of which may have significantly greater financial, technical, marketing, and other resources than Hyperion |
| Cognos and Business Objects compete with Hyperion across a wide range of products, offering what they refer to as corporate performance management and business intelligence solutions, as do, generally, the major enterprise software vendors, including SAP and Oracle |
| Many other companies compete in specific areas of Hyperion’s business |
| For example, SAS and Oracle have OLAP products and analytic applications; Business Objects and Cognos have query and reporting products; and numerous smaller vendors offer specific applications that compete with a single Hyperion product |
| Hyperion expects additional competition as other established and emerging companies, including Microsoft, SAP, and Oracle, move further into both the application and platform parts of the business performance management software market |
| This competition could result in price reductions, 11 _________________________________________________________________ [58]Table of Contents fewer customer orders, reduced gross margins, and loss of market share, any of which would materially adversely affect Hyperion’s business, operating results, and financial condition |
| In addition, as we develop and enhance our software and complementary products, the resulting new functionality may duplicate the functionality of, and thus compete with, other products offered by our channel partners |
| Increased competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share, any of which would materially adversely affect our business, operating results, and financial condition |
| Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to address the needs of our existing and prospective customers |
| Further competitive pressures, such as those resulting from competitors’ discounting of their products, may require us to reduce the price of our software products, which would materially adversely affect our business, operating results, and financial condition |
| Also, the enterprise software market may continue to consolidate through merger or acquisition |
| If one or more of our competitors merges or partners with another of our competitors, or if we became the subject of an unsolicited acquisition by another enterprise, such change in the competitive landscape could adversely affect our ability to compete |
| Our key partners may also consolidate with new and existing competitors, which could materially affect our ability to expand the market for our products |
| There can be no assurance that we will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect on our business, operating results, and financial condition |
| If Hyperion is unable to develop or acquire new and enhanced products that achieve widespread market acceptance, we may be unable to recoup product development costs, and our earnings and revenue may decline |
| Hyperion’s future success depends on our ability to address the rapidly changing needs of our customers by developing or acquiring new products and introducing such products, product updates, and services on a timely basis |
| We must also extend the operation of our products to new platforms and keep pace with technological developments and emerging industry standards that may fundamentally change the way enterprise software is sold |
| Hyperion commits substantial resources to developing new software products and services |
| If the markets for these new products do not develop as anticipated, or demand for our products and services in these markets does not materialize or occurs more slowly than Hyperion expects, Hyperion will have expended substantial resources and capital without realizing corresponding revenue, which would adversely affect our business, operating results, and financial condition |
| We also may be required to write off or write down assets or incur substantial restructuring charges, which would have a similar affect on our operating results and financial condition |
| Failure to support older products will adversely affect sales |
| As Hyperion or our competition introduces newer products, the market’s demand for Hyperion’s older products declines |
| Declining demand reduces revenue from additional licenses and reduces maintenance revenue from past purchasers of Hyperion’s software |
| We must continually support older products in order for customers to continue to see value in Hyperion’s maintenance services |
| If Hyperion is unable to provide continued improvements in functionality, or, alternatively, move customers from older to newer products, our license and maintenance revenue will decline or fail to grow consistent with our expectations, which would adversely affect our business, operating results, and financial condition |
| Also, in the long term, if too few customers migrate to System 9, Hyperion may need to continue to support older products or risk losing customers |
| Hyperion typically has back-ended quarters which may cause actual revenues in a quarter to vary from sales forecasts |
| Quarterly revenues and operating results are highly dependent on the volume and timing of the signing of licensing agreements and product deliveries during the quarter, which are difficult to forecast |
| Significant portions of Hyperion’s quarterly software licensing agreements are concluded in the last month of the fiscal quarter, generally with a concentration of orders in the final two weeks of that month |
| There also is greater uncertainty surrounding the ultimate signing of significant transactions with enterprise customers, whose 12 _________________________________________________________________ [59]Table of Contents sales cycles are typically longer in duration and may require several levels of approval |
| Due to the relatively fixed nature of certain costs, including personnel and facilities expenses, a decline or shortfall in quarterly and/or annual revenues typically results in lower profitability or may result in losses |
| Prior to the very end of any quarter, we must rely on our forecasts of revenue for planning, modeling, and other purposes |
| However, forecasts are only estimates and may not correlate to revenues in a particular quarter or over a longer period of time |
| Consequently, a significant discrepancy between actual results and sales forecasts could cause us to improperly plan or budget and to fail to meet our revenue or net income projections, causing the price of our common stock to fall substantially |
| A change in pricing or marketing could adversely affect Hyperion’s business |
| In an effort to simplify and clarify Hyperion’s product positioning and marketing, we periodically make changes to our product pricing, packaging, configuration, or product descriptions, as we have done in a comprehensive manner with System 9 |
| We may encounter additional risks in transitioning our pricing methods from existing solutions to the new System 9 platform |
| Any product price reduction may not be offset by sufficient increases in unit sales to maintain or increase license revenues, any price increase may lead to potential losses to the competition, and any broadly based changes to pricing or marketing messages may cause customers to change or delay their purchasing decisions in response to such revisions |
| Additional risks of such changes include delays in transactions as Hyperion’s sales force learns how to deploy the new pricing method or convey Hyperion’s new marketing messages and cause a delay in, or loss of, revenues as the competition reacts to the pricing and marketing changes, any of which could have a material adverse effect on Hyperion’s business, operating results, and financial condition |
| Employee turnover could adversely impact revenue, costs, and productivity |
| As employees leave Hyperion, we suffer loss of productivity while new employees are hired or promoted into vacant positions |
| The departure of highly skilled employees sometimes results in a loss of talent or knowledge that is difficult to replace |
| For example, Burton Goldfield, previously our Senior Vice President Worldwide Field Operations, resigned from Hyperion effective May 7, 2006 |
| Replacing Mr |
| Goldfield may take a significant amount of time and recruiting a suitable replacement may prove difficult |
| There are also costs of recruiting and relocating new employees |
| For example, the recruiting market for experienced enterprise software sales personnel is very competitive, and we may be limited in our ability to attract and retain key sales talent |
| New employees must learn the Hyperion organization, products, and procedures |
| Promoted employees must learn new skills |
| All of this takes time, reduces productivity, and increases cost |
| The potential adverse impact of employee turnover is greater for situations involving senior positions in the company |
| Turnover rates tend to increase as economic conditions improve |
| If turnover increases, the adverse impacts of turnover could materially affect Hyperion’s costs, productivity, or ability to respond quickly to the competitive environment |
| Exchange rate fluctuations may adversely affect results |
| We conduct a significant portion of our business in currencies other than the United States dollar |
| Hyperion’s operating results are, therefore, subject to fluctuations in foreign currency exchange rates |
| Hyperion’s revenues and operating results are adversely affected when the United States dollar strengthens relative to other currencies and are positively affected when the United States dollar weakens |
| If the United States dollar continues to strengthen relative to other currencies in the future, our revenues, operating results, and cash flows will be adversely affected |
| Hyperion may not be able to continue our operational improvements |
| As part of Hyperion’s focus on improving operating margins, we seek to increase efficiencies in our sales force, as well as Hyperion’s services, product development, product marketing, finance, IT, human resources and other administrative processes |
| The ability to continue to realize current efficiencies and find ways to improve on past performance is crucial to the improvement of operating margins |
| Any increase in the relative cost of these functions or failure to continue to realize current efficiencies could have a material adverse effect on Hyperion’s margins and operating results |
| Examples of potential operational risks include the possibility that we will encounter challenges with high volume order processing and in product fulfillment |
| 13 _________________________________________________________________ [60]Table of Contents Reorganizations may adversely affect productivity |
| We have made and may continue to make adjustments to our operations and organization |
| Such changes could result in productivity declines and have a negative effect on revenue in the short term |
| The revised operations and/or organization must keep improving over past performance in order to provide better operating margins and efficiencies |
| Failure to maintain or improve performance and productivity could materially adversely impact Hyperion’s margins and operating results |
| We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and are exposed to future risks of non-compliance |
| We are required to furnish a report by our management on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act |
| Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective |
| This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management |
| Such report must also contain a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal control |
| The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) provides a framework for companies to assess and improve their internal control systems |
| Auditing Standard Nodtta 2 provides the professional standards and related performance guidance for independent registered public accounting firms to attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting under Section 404 |
| Management’s assessment of internal control over financial reporting requires management to make subjective judgments, and particularly because Auditing Standard Nodtta 2 is newly effective, some of the judgments will be in areas that may be open to interpretation, and therefore, the report may be uniquely difficult to prepare, and our independent registered public accounting firm may not agree with our assessments |
| We completed the evaluation of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, for the fiscal year ended June 30, 2006 |
| Our assessment, testing, and evaluation resulted in our conclusion that as of June 30, 2006, our internal control over financial reporting was effective |
| However, our controls, nonetheless, may not prove to be adequate for the periods covered by that report and, in any event, we cannot predict the outcome of our testing in future periods |
| If our internal controls are ineffective in future periods, our financial results or the market price of our stock could be adversely affected |
| In any event, we will incur additional expenses and commitment of management’s time in connection with further evaluations, which may adversely affect our future operating results and financial condition |
| Hyperion’s international operations are subject to significant risks |
| We derive a substantial portion of our revenue from customers located outside of the United States |
| Hyperion’s international operations are subject to risks, including: • Fluctuations in currency exchange rates and economic instability such as higher interest rates and inflation, which could reduce Hyperion’s customers’ ability to obtain financing for software products or which could make Hyperion’s products more expensive in those countries; • Difficulties in hedging foreign currency transaction exposures; • Potential loss of proprietary information due to piracy, misappropriation, or weaker laws regarding intellectual property protection; • Imposition of foreign laws and other governmental controls, including trade and employment restrictions; • Longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable; • Difficulties in staffing and managing our international operations, including increased turnover as economic opportunities increase in countries such as India and difficulties related to administering Hyperion’s stock option plan in some foreign countries; 14 _________________________________________________________________ [61]Table of Contents • Difficulties in coordinating the activities of Hyperion’s geographically dispersed and culturally diverse operations; • Competition from local suppliers; • Costs and delays associated with developing software in multiple languages; and • Political unrest, war, or terrorism, particularly in areas in which Hyperion has facilities |
| Hyperion also has distributed research and development across the United States in California, Connecticut, Florida, Illinois, Texas, and in several countries including India, Australia, Belarus, and Canada |
| We have also distributed our support obligation across the United States in California, Connecticut, Ohio, and in the country of India |
| It may be difficult to manage significant projects across such distributed centers due to risk factors noted above, as well as, potential risks associated with disruptions of power and internet network infrastructures located abroad |
| Hyperion may not be able to successfully address each of these challenges, which could adversely affect our business and operating results |
| Hyperion faces significant challenges and risks associated with compliance |
| Hyperion’s numerous office locations, high number of employees, and varied distribution methods, among other considerations, make it possible that our high standards of ethics, governance, and compliance with law may not always be met |
| Some of the business practices in countries in which our partners operate on our behalf may not conform fully with local or US laws |
| We may not be able to detect improper or unlawful conduct by our international partners which could put Hyperion at risk regarding possible violations of such laws as the US Foreign Corrupt Practices Act (“FCPA”) |
| Serious violations of local or US laws, such as the FCPA, could result in fines or other criminal or civil sanctions which could have a material impact on Hyperion’s business, operating results, and financial condition |
| There are significant risks related to any business combination and investment |
| Hyperion has made, and may in the future make, acquisitions of, mergers with, or investments in, businesses that offer complementary products, services, and technologies |
| For example, in May 2006, Hyperion acquired certain assets of UpStream Software, a privately-held software and services company based in Rochester, Michigan |
| There are risks involved in these business combination activities, including but not limited to: • The possibility that Hyperion pays more than the value derived from the acquisition; • The difficulty of integrating the products, operations, and personnel of the acquired business; • The possibility that all aspects of the integration are not completed or that all of the anticipated synergies of the acquisition are not realized; • Difficulties in managing software development activities to define a combined product roadmap, ensuring timely development of new products, timely release of new products to market, and the development of efficient integration and migration processes and tools; • The difficulty of retaining key alliances on attractive terms with partners and suppliers; • The difficulty of retaining customers and protecting maintenance revenues; • The difficulty of retaining and recruiting key personnel and maintaining employee morale; • The potential product liability associated with selling the acquired company’s products; • The potential that we do not detect a significant liability of the acquired business during the pre-acquisition due diligence process; • The possibility that businesses in which Hyperion invests ultimately fail, rendering our investment worthless; • The potential disruption of Hyperion’s ongoing business and the distraction of management from Hyperion’s business; and • The potential write-down of impaired goodwill, intangible assets, fixed assets, and other assets |
| As of June 30, 2006, Hyperion has recorded dlra157dtta2 million of goodwill related to a number of acquisitions 15 _________________________________________________________________ [62]Table of Contents that will not be amortized in the ordinary course of business |
| We are required under generally accepted accounting principles to review our goodwill for impairment at least annually or when events or changes in circumstances indicate the carrying value may not be recoverable |
| We may be required to record a significant change to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined |
| This may adversely impact our results of operations |
| These factors could have a material adverse effect on Hyperion’s business, results of operations, or financial position, especially in the case of a large acquisition |
| Hyperion is subject to the possibility of infringement claims |
| We rely upon various intellectual property protections, including contractual provisions, patents, copyrights, trademarks, and trade secret laws to preserve our intellectual property rights |
| Despite our precautions, third parties may misappropriate our intellectual property causing us to lose potential revenue and competitive advantage |
| As well, we may ourselves from time to time become subject to claims by third parties that our technology infringes their intellectual property rights |
| In either case, we may incur expenditures to police, protect, and defend our interests and may become involved in litigation that could divert the attention of our management |
| Responding to such claims could result in substantial expense and result in damages, royalties, or injunctive relief, or require us to enter into licensing agreements on unfavorable terms, or redesign or stop selling affected products which could materially disrupt the conduct of our business |
| Hyperion may be subject to further infringement claims as the number of products and competitors in Hyperion’s industry segment grows and the functionality of products in different industry segments overlaps |
| In the past, Hyperion has been subjected to patent infringement claims |
| Any such claims, with or without merit, could be time consuming and costly to defend, divert management’s attention and resources, cause product shipments delays, or require us to enter into royalty or licensing agreements |
| Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all, and may require the payment of substantial royalties |
| In the event of a successful patent infringement claim against Hyperion, our failure or inability to license the infringed or similar technology could restrict our ability to sell certain products, which could adversely affect Hyperion’s business, operating results, financial condition and cash flows |
| In November 2004, Hyperion filed a declaratory judgment action in Federal District Court for the Northern District of California against HyperRoll, Inc |
| (“HyperRoll”) to establish that Hyperion did not infringe any of HyperRoll’s patents |
| While litigation in the HyperRoll matter is ongoing and Hyperion will vigorously defend the claims made against us, we may not succeed in our efforts to do so, in which case our business, operating results, or financial condition could be adversely affected |
| Enforcement of Hyperion’s intellectual property rights may be difficult |
| Our means of protecting our proprietary rights in the United States or abroad may not be adequate and could be subject to challenge, such as the reexamination of one of our patents by the United States Patent and Trademark Office |
| Despite our efforts, unauthorized parties may attempt to misappropriate our products or technology, or to obtain and use information that we regard as proprietary |
| Policing and identifying unauthorized use of our products is difficult |
| In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States |
| There can be no assurance that our means of protecting our intellectual property in the United States or abroad will be adequate or that competitors will not independently develop similar technology |
| We have entered into source code escrow agreements with a number of our customers and channel partners requiring the release of our source code under certain conditions |
| Generally, such agreements provide that such parties will have a limited, nonexclusive right to use such code in the event that there is an undismissed bankruptcy proceeding by or against us, if we cease to do business, or if we materially fail to meet our contractual obligations |
| The release of source code may increase the likelihood of misappropriation by third parties |
| 16 _________________________________________________________________ [63]Table of Contents In protecting our intellectual property rights, in December 2004, we filed an action against OutlookSoft Corporation (“OutlookSoft”) in Federal District Court for the Eastern District of Texas, charging that OutlookSoft is infringing two Hyperion patents relating to our financial consolidation, reporting, and analysis applications, Hyperion Financial Management and Hyperion Enterprise |
| While litigation in the OutlookSoft matter is ongoing, and Hyperion intends to vigorously pursue the protection of our intellectual property and will vigorously defend the counter claims alleging patent infringement, we may not succeed in our efforts to do so, in which case our business, operating results, or financial condition could be adversely affected |
| Hyperion’s stock price is volatile |
| The market price of Hyperion’s common stock is subject to significant fluctuations |
| The market price of Hyperion’s common stock may be significantly affected by many factors, including but not limited to, the announcement of new products, product enhancements, or technological innovation by Hyperion or Hyperion’s competitors, announcements of acquisitions by Hyperion, changes in Hyperion’s or Hyperion’s competitors’ results of operations, changes in revenue, revenue growth rates and revenue mix, changes in earnings estimates by market analysts, and general market conditions or market conditions specific to particular industries |
| Technology stocks have experienced wide fluctuations in prices, which sometimes have been unrelated to their operating performance |
| The market price of Hyperion’s common stock could be adversely affected by these factors and fluctuations |
| Hyperion is dependent upon indirect channel partners |
| In addition to our direct sales force, we rely on indirect channel partners such as OEMs, VARs, and independent distributors for licensing and support of our products in the United States and internationally |
| License revenue from channel partners comprised 22prca of Hyperion’s total license revenue for fiscal 2006 |
| Indirect channel sales involve a number of special risks, including: • Hyperion’s lack of control over the delivery of Hyperion’s products to end-users; • Hyperion’s resellers and distributors may terminate their relationship with Hyperion on short notice; and • Hyperion’s resellers and distributors may market and distribute competing products |
| Hyperion’s current indirect channel partners may not market or support Hyperion’s products effectively or be able to release their products embedded with Hyperion products in a timely manner |
| We may not be able to effectively manage conflicts between our various indirect channel and direct customers, and economic conditions or industry demand may adversely affect indirect channel partners, or indirect channel partners may devote greater resources to marketing and supporting the products of other companies |
| As a result, revenues derived from indirect channel partners may fluctuate significantly in subsequent periods, which may adversely affect our business, operating results, and financial condition |
| Hyperion is exposed to product liability claims |
| Our license agreements with our customers typically contain provisions designed to limit our exposure to potential liability related to Hyperion products or services |
| It is possible, however, that the limitation of liability provisions contained in Hyperion’s license agreements may not be effective as a result of US or foreign laws or ordinances or because of judicial decisions, and that Hyperion insurance may not cover specific claims |
| A successful product or services related damages claim against Hyperion could have a material adverse effect upon Hyperion’s business, operating results, and financial condition |
| Defects in Hyperion’s products could increase our costs, adversely affect our reputation, diminish demand for our products, and hurt our operating results |
| As a result of their complexity, Hyperion’s software products may contain undetected errors or viruses |
| Errors in new products or product enhancements might not be detected until after initiating commercial shipments, which could result in additional costs, delays, and possible damage to Hyperion’s reputation and could cause diminished demand for Hyperion’s products |
| This could lead to customer dissatisfaction and reduce the opportunity to renew maintenance or sell new licenses |
| 17 _________________________________________________________________ [64]Table of Contents Some provisions in Hyperion’s charter documents and our stockholder rights plan may prevent or deter an acquisition of Hyperion |
| Some of the provisions in Hyperion’s charter documents may deter or prevent certain corporate actions, such as a merger, tender offer, or proxy contest, which could affect the market value of Hyperion’s securities |
| These provisions include, but are not limited to: • Hyperion’s Board of Directors is authorized to issue preferred stock with any rights it may determine |
| Consequently, without shareholder approval, Hyperion’s Board of Directors may issue preferred stock that has rights superior to the outstanding Hyperion common stock; • Hyperion’s Board of Directors is classified into three groups, with each group of directors holding office for three years |
| The effect of this classified board is that two annual meetings, not one, are required to replace a majority of the Board of Directors; • Hyperion stockholders are not entitled to cumulate votes for directors; and • Special meetings of Hyperion stockholders may not be called by Hyperion’s stockholders |
| Hyperion has in place a stockholder rights plan that is designed to discourage coercive takeover offers |
| In general, Hyperion’s stockholder rights plan makes it uneconomic for any person to acquire more than a 15prca interest in Hyperion without the consent of Hyperion’s Board of Directors |
| Hyperion’s Board of Directors could utilize the provisions of its charter documents and stockholder rights plan to resist an offer from a third party to acquire Hyperion, including an offer to acquire Hyperion common stock at a premium to our trading price or an offer that is otherwise considered favorable by Hyperion stockholders |
| The accounting treatment for employee stock options changed and impacted Hyperion’s earnings for fiscal 2006 |
| On July 1, 2005, Hyperion adopted the Financial Accounting Standards Board Statement, “Share-Based Payment, an amendment of FASB Statements Nos |
| 123 and 95” (“SFAS 123(R)”), that requires public companies to report compensation expense related to stock options and other forms of stock-based compensation based on the estimated fair value of the awards on the grant dates |
| As a result, our earnings have been significantly adversely affected and may continue to be affected |
| See also, Note 2, “Summary of Significant Accounting Policies – Stock-based Compensation, of Notes to Consolidated Financial Statements” for current disclosures regarding the impact on our consolidated statements of operations |
| We are incurring substantial costs and devoting more management resources to comply with increasing regulation of corporate governance and disclosure |
| We have spent and continue to spend a significant amount of management time and resources to understand and comply with changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities Exchange Commission (“SEC”) regulations, and rules of the NASDAQ National Market, the market on which our shares are listed |
| Allocating the necessary resources to comply with evolving corporate governance and public disclosure standards has increased general and administrative expenses and caused a diversion of management’s time and attention to compliance activities |