-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ITf05b6sYh10DwRJBoUoamdkbOM6EO1zdLdBPYkln0l0W/pbbOWyLhEpW8AIVbDt XW3eMM4VuOpjGjYqqycVaw== 0000950135-99-004559.txt : 19991227 0000950135-99-004559.hdr.sgml : 19991227 ACCESSION NUMBER: 0000950135-99-004559 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYPERION SOLUTIONS CORP CENTRAL INDEX KEY: 0001001113 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770277772 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26934 FILM NUMBER: 99719130 BUSINESS ADDRESS: STREET 1: 1344 CROSSMAN AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087449500 MAIL ADDRESS: STREET 1: 1344 CROSSMAN AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 FORMER COMPANY: FORMER CONFORMED NAME: ARBOR SOFTWARE CORP DATE OF NAME CHANGE: 19950919 10-K405 1 HYPERION SOLUTIONS CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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) Registrant's telephone number, including area code: (408) 744-9500 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.001 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of September 15, 1999, there were 30,893,002 shares of the registrant's Common Stock, $.001 par value, outstanding. The aggregate market value of the registrant's voting stock held by nonaffiliates as of September 15, 1999 was approximately $617 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders, scheduled to be held on November 10, 1999, are incorporated by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 HYPERION SOLUTIONS CORPORATION FORM 10-K CONTENTS
PAGE ---- Item 1. Business.................................................... 2 Item 2. Properties.................................................. 12 Item 3. Legal Proceedings........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 13 Item 5. Market for the Registrant's Common Equity and Related 14 Stockholder Matters......................................... Item 6. Selected Consolidated Financial Data........................ 15 Item 7. Management's Discussion and Analysis of Financial Condition 16 and Results of Operations................................... Item 8. Reports of Independent Accountants and Auditors, Financial 24 Statements and Supplementary Data........................... Item 9. Changes in and Disagreements with Accountants on Accounting 47 and Financial Disclosure.................................... Item 10. Directors and Executive Officers of the Registrant.......... 47 Item 11. Executive Compensation...................................... 47 Item 12. Security Ownership of Certain Beneficial Owners and 47 Management.................................................. Item 13. Certain Relationships and Related Transactions.............. 47 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 47 8-K ........................................................ Signatures............................................................ 50
For further information, refer to the Company's registration statement, amendment no. 2 to Form S-4 declared effective July 13, 1998. 3 PART I ITEM 1. BUSINESS GENERAL Founded in 1991, Hyperion Solutions Corporation (the "Company" or "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 (CRM) 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 more than 6,000 organizations in more than 100 countries around the world. The Company is headquartered in Sunnyvale, California. INDUSTRY BACKGROUND Organizations, including corporations, government and municipal organizations and non-profit institutions, generate significant amounts of data in the course of conducting ongoing business transactions within their accounting, manufacturing, human resources, and sales and marketing functions. To be useful to senior executives, managers and analysts, such transactional data must be extracted from a variety of financial and operational systems, analyzed using a sophisticated range of mathematical calculations, and then summarized and presented in a range of formats, from spreadsheets and specific financial report formats, to graphical web-based presentations, that are meaningful to multiple levels of business managers and knowledge workers throughout organizations. Because most organizations use multiple transactions systems throughout their global operations, integrating and delivering this enterprise data is critical. For most companies, existing transaction systems provide comprehensive processing capabilities. Yet, they do not provide even basic analytical capabilities, let alone provide a comprehensive picture of organizational performance. Those types of functions require specific analytic application software that interfaces with existing systems. The recognition that such analytic software is the next logical step in the evolution of corporate information systems has spawned an industry that will exceed $6 billion in the next five years, according to a range of industry analysts. Analytic application software offers a strategic framework to address business analysis requirements across the entire organization. This is in contrast to the tactical manner in which many organizations use isolated applications and standalone spreadsheets to address these requirements today. This broad analytic framework structures business processes and analysis in a consistent manner while delivering truly strategic end-user capabilities. This framework makes consistent data available to decision-makers who can then examine the organization's numbers, calculate new scenarios on the fly, drill into the granular detail, examine all possible strategies, model a variety of assumptions, and create strategic and operational plans. Analytic application software collects and integrates data from a wide range of sources including ERP and CRM systems, other packaged and internally developed transaction-processing systems, external data feeds, and data warehouses. Analytic application software extends the value of this data through sophisticated analytic processing and rapid delivery and presentation of accurate information to executives, managers, analysts, and other knowledge workers. Analytic applications, either packaged or custom-built using OLAP server technology and tools, help decision-makers quickly develop and revise plans to dramatically improve the effectiveness of the enterprise. Analytic applications support all aspects of the management cycle including reporting, analysis, modeling, and planning. 2 4 Analytic applications, either packaged or custom-built using OLAP server technology and tools, help decision-makers answer a range of critical questions, such as: GENERAL SPECIFIC - - How can we best increase earnings? - How can we best optimize our holiday - - What are our most profitable products marketing promotions? and services? - How can we satisfy the demand for - - Who are our most profitable customers? additional goods created by these - - How can we best align our ongoing promotions? line-of-business operations with our - How can we distribute these goods most long-term corporate objectives? cost effectively? - How can we best predict the resulting increase in revenues and net income?
Hyperion expects that the evolution of the analytic application software market will parallel that of the relational database market. The analytic application software market includes two significant segments: the "buy" market supported by packaged analytic applications, and custom built analytic applications supported by key analytic technologies that include OLAP servers, data and application integration technologies, and client-server and web-enabled reporting, analysis, presentation and application development tools. Enterprises demand both types of solution sets to accommodate their broad requirements. Companies today buy both ERP systems and relational database technologies; in the future they are expected to buy both packaged analytic applications and OLAP technologies. The Company believes that, as in the relational database market, applications drag technologies and create network effects. Network effects mean that the greater the number of solutions that are available on a platform, the exponentially more valuable that platform becomes to customers. To be successful in the analytic applications software market, companies must fully embrace partners and maximize the number of third party solutions available on these platforms. Hyperion's analytic platform is comprehensive and scalable and addresses the business analysis requirements of a workgroup, division or an extended enterprise. STRATEGY Hyperion's objective is to build on its position as the leading provider of analytic application software products and services which includes OLAP server and tools, data and application integration technologies and packaged analytic applications. The Company intends to extend its leadership as a provider of cross-platform OLAP engine and tools technology by delivering robust product functionality, expanding its alliance network and basing its analytic applications and services on its OLAP technology. Hyperion intends to expand upon its leadership in packaged analytic applications through expanded functionality and technology, and enter new and emerging analytic application markets, including customer relationship management and e-business markets, always focusing on business analysis. The Company will continue to provide a comprehensive suite of worldwide consulting, training and support services that help its customers and partners implement, customize, enhance, support and extend its analytic platform. Hyperion is committed to a growing family of more than 350 alliance partners that deliver additional packaged analytic applications, data and application integration technologies, tools, and implementation and training services, all of which drive its OLAP platform as an industry standard, broaden its market reach and provide its customers with solutions that deliver flexibility and choice. Key elements of the Company's strategy include: Leverage Existing Market Leadership Position. The Company will continue to enhance the Hyperion Essbase OLAP Server and tools, and its data and application integration products to enable the Company and Hyperion alliance partners to create compelling suites of analytic applications across key market areas. The 3 5 Company believes that its complementary set of analytic application software products and services provides the complete, consistent results executives need to run their businesses. The Hyperion analytic platform provides a complete analytic software solution; it is open, scalable and cross-platform, and it focuses entirely on delivering analytic application solutions. The Company believes that its established strength in providing solutions places it in a strong position to market its applications to both new and existing customers. Hyperion Enterprise Performance Management (EPM) is a complete, open, and integrated suite of packaged analytic applications for maximizing business performance. Increase Focus and Penetration of Key Markets. The Company will focus its internal intellectual capital and leverage partners to provide best of breed solutions in the Company's strategic markets, including enterprise performance management, customer relationship management, e-business, data warehousing and enterprise OLAP. Hyperion alliance partners will also provide additional solutions for markets outside of the areas of the Company's market focus, i.e., human resource analytics and industry-specific solutions. The Company's key strength is its ability to provide a broad strategic platform, but at the same time, the Company intends to deliver specific domain expertise. Foster Strategic Relationships. To accelerate the adoption of the Company's analytic application software products, including packaged analytic applications and OLAP server technology and tools, Hyperion has established strategic relationships with many providers of data warehousing, OLAP tools, services, ERP, packaged applications, and platform products. The Company's strategic relationships include the following: - Application Partners include developers of enterprise packaged applications that integrate with Hyperion products to deliver planning, analysis and reporting solutions and/or developers of horizontal or vertical analytic applications such as budgeting, sales forecasting, demand planning or profitability analysis using Hyperion products. - Tools Partners include developers of products and technologies that integrate with the Hyperion product family for enterprise information delivery and analysis. These tools include query and reporting, application development, spreadsheets, visualization, statistics, mapping and systems management. - Data Integration Partners include developers of software that work with the Company to provide integration with data marts, data warehouses or packaged application suites such as ERP and customer relationship management packages. - Platform Partners manufacture and/or develop hardware platforms, operating systems, and relational databases supported by the Hyperion products. - Service Partners include system integrators, consulting and education partners that sublicense Hyperion products and provide services which may include systems planning, analysis, design, development, implementation, customization, and training services to the Company's customers and partners. - Distribution Partners include worldwide and territory-specific organizations that sell and support Hyperion products in a specific geography. Hyperion's alliance partners enhance the distribution channels for Hyperion products, and enhance and extend the Hyperion analytic platform by providing additional choices for Hyperion customers. More than 50 packaged analytic applications and more than 40 tools are available today from Hyperion alliance partners. Design for Ease of Implementation and Ease of Use. The Company's products are designed for an end-user role in maintenance, with minimal training. Application expertise is built into products and is also provided by the Company through consulting services. Following implementation, customers are able to operate self-sufficiently with trained administrators at headquarters locations and independent end-users at headquarters and at remote sites. Maintain Sales and Support Relationships. Unlike many other software companies, the Company licenses its products throughout the world primarily through a direct sales force. Products also are licensed 4 6 through independent distributors and sales agents, including other technology and application software companies, and major accounting firms ("channel partners" or "alliance partners"). Hyperion and Hyperion alliance partners often provide installation and post-sale consulting support to build long-term customer relationships. Generate Follow-on Revenues. The Company generates revenues from existing customers through licensing for additional users, the introduction of new products and annual maintenance fees. In addition, sales of training and consulting services to existing customers represent a significant portion of the Company's total service revenues. Follow-on revenues leverage sales and marketing resources and strengthen the Company's relationships with its customers. PRODUCTS AND SERVICES Hyperion and its alliance partners deliver the most complete and integrated suite of flexible, scalable and open analytic application software. With custom built or packaged solutions, Hyperion allows organizations to take existing computing infrastructure -- web data; data warehouses; ERP, customer relationship management, human resources management, and supply chain systems; information purchased from third parties; and information shared with business partners -- and leverage it all as one integrated resource. Hyperion and its partners offer a comprehensive suite of worldwide consulting, training, and support services that help customers implement, customize, enhance, and extend the Hyperion analytic platform. Over 50 third party web and client/server tools have been integrated with Hyperion Essbase, giving customers flexibility and choice in their information and application delivery platforms. PRODUCTS ENTERPRISE PERFORMANCE MANAGEMENT Hyperion Enterprise Performance Management is a complete, open, and integrated suite of packaged analytic applications for maximizing business performance. It provides companies with a powerful array of analytical capabilities to optimize the deployment of enterprise resources, communicate strategic goals, maximize operational efficiency, and streamline complex business planning and financial consolidation processes. Hyperion Enterprise Performance Management includes analytic applications for Business Planning; Financial Consolidation, Reporting and Analysis; Performance Measurement and Activity Based Management. - - Business Planning Hyperion Pillar is an advanced packaged analytic application for enterprise-wide budgeting, planning and forecasting. It increases the reliability, efficiency, and speed of combined bottom-up and top-down budgeting, encourages participation of line managers and business activity experts, and allows rapid response to changing conditions with immediate budget revisions and financial statements. Hyperion Pillar 4.5 features a new, open architecture that eases customization and integration with third-party business applications such as spreadsheets, enabling organizations to increase usage and decrease total cost of ownership. - - Financial Consolidation, Reporting and Analysis Hyperion Enterprise is an advanced packaged analytic application for financial consolidation, reporting and analysis. Hyperion Enterprise simplifies the collection, consolidation and reporting of financial results in global business environments, reduces the time organizations spend on these activities, and enhances financial analysis and planning capabilities. In each of the past three years, the Company derived more than 40% of its worldwide total revenues from Hyperion Enterprise licenses and related services. Hyperion Reporting is an end-user financial reporting solution for management and statutory reporting. Hyperion's Spider-Man(TM) Web Application is an easy-to-use tool that gives users fast, secure, read/write access to dynamic reports via the Internet or corporate Intranet. 5 7 - - Performance Measurement Hyperion Performance Measurement is a packaged analytic application used to communicate organizational strategy and accountability while tracking progress towards business objectives. Organizations that deploy Hyperion Performance Measurement are able to bridge the gap between strategy and actions, engage a broader range of users and respond more proactively to changing business conditions. Hyperion Performance Measurement supports all leading performance measurement frameworks including the Balanced Scorecard. - - Activity Based Management Hyperion Activity Based Management is a leading activity-based management solution for optimizing the deployment of enterprise resources. Used by more than 300 organizations worldwide, Hyperion Activity Based Management is the first analytic application to combine activity-based costing, capacity planning, constraint checking, and scenario planning into one integrated, scalable enterprise solution. It delivers a comprehensive business-modeling environment that is applicable to a wide range of industries including manufacturing, processing, distribution, service, healthcare, government, education, and financial services. DATA WAREHOUSE AND APPLICATION INTEGRATION TECHNOLOGIES Hyperion provides solutions to complement an organization's existing investment in data warehousing technologies and packaged enterprise applications. These solutions allow companies to support large volumes of data and large numbers of concurrent users; provide fast query-response times for iterative, speed-of-thought analyses; provide immediate access to historical, projected and derived data; create a multi-user read-write environment for "what-if" analysis and planning; leverage OLAP data marts in a data warehousing architecture to deliver greater business value to end users; and automate and manage the deployment of custom data marts across the enterprise. These products also leverage a company's investments in third party integration tools from software companies such as Ardent, Acta Technology, Decisionism, and Informatica. Hyperion Integration Server is a suite of graphical tools and scalable data integration services that reduces the time and expense to create, deploy, and manage OLAP applications from relational data sources. Hyperion Application Link is a suite of graphical application integration services that reduces the time and expense to integrate ERP systems, transaction-processing applications, data warehouses and other sources with packaged analytic applications. ENTERPRISE OLAP Hyperion Essbase OLAP Server is a strategic platform optimized for enterprise management reporting, analysis, and planning applications. It supports multi-user read/write access, large-scale data capacity, robust analytical calculations, and sophisticated OLAP queries. Hyperion Essbase OLAP Server provides intuitive multidimensional data navigation, which reduces the time and effort involved in training new users, as well as consistent, rapid response times in network-centric computing environments. The Company derived approximately 31.2%, 21.8% and 17.5% of its worldwide total revenues from Hyperion Essbase OLAP Server licenses and related services in fiscal 1999, 1998 and 1997, respectively. Hyperion Wired for OLAP is an OLAP-centric presentation, analysis, and reporting tool suite that provides collaborative analytics, enterprise-wide deployability, and ease of use. Hyperion Objects is a family of OLAP-aware ActiveX controls for developing robust OLAP applications using leading integrated development environments such as Visual Basic and Visual C++. Hyperion Essbase Spreadsheet Add-in turns Microsoft Excel and Lotus 1-2-3 into tightly integrated Hyperion Essbase clients. Hyperion Web Gateway is a tool that allows developers to create scalable, thin-client applications with high-speed, interactive, read/write access to Hyperion Essbase over intranets, extranets, and the Internet for very large user communities. 6 8 Crystal Info for Essbase is an end-user tool that integrates a leading production report writer, reporting server, and scheduling system with the power of Hyperion Essbase to deliver a strong enterprise reporting system for OLAP applications. Hyperion Essbase Application Programming Interface (API) is a comprehensive library of more than 300 Hyperion Essbase functions that lets professional software developers create custom OLAP applications. Over 40 third party tools have leveraged this API to integrate with Hyperion Essbase, including Alphablox, ArcPlan, Brio Technology, Business Objects, Cognos, Microsoft, Seagate, and SPSS. SERVICES Hyperion believes that a high level of customer service is important to the successful marketing and sale of its products. The Company provides a comprehensive suite of worldwide training, consulting, and technical support services to implement, customize, and support its products. Consulting and training services are not included in software license fees, but are provided on a time and materials basis. Within the area of technical support, enhanced support offerings are not included in the software license fees. The customer's ability to select and customize the level of consulting, training, and technical support services to their needs permits the Company to provide high quality services on a profitable basis. Hyperion's services and support organization consisted of 588 employees as of June 30, 1999. Hyperion has also established a global network of partners who deliver implementation and training services. Under the terms of the Company's standard license agreement, customers, at their option, pay a maintenance fee annually. The annual fee charged to a customer is generally a fixed percentage of the then-current list prices for the licensed software used by the customer. This fee entitles customers to technical support, including telephone and web-based support, and to any updates and enhancements provided for their software. SALES AND MARKETING Hyperion markets and sells its products in the United States, Canada, Europe and Asia through its direct sales force and worldwide through original equipment manufacturers (OEMs), value-added resellers (VARs), independent distributors and sales agents. The Company supports its sales force with lead generation and marketing programs which include telemarketing, public relations, direct mail, advertising, seminars, trade shows, education, ongoing customer communication programs, third-party alliances and user group conferences. North American and European user conferences are held annually. This year's North American conference in Orlando drew more than 3,500 attendees and 400 partners. Regional user meetings and product-specific focus groups are also scheduled periodically. Sales cycles generally last from three to six months. Hyperion has dedicated sales, marketing and technical alliance resources designed to optimize its partner relationships. The direct sales force is compensated for sales made through indirect channel partners as well as direct sales to ensure appropriate cooperation with the Company's OEMs and VARs, independent distributors and sales agents. The Company has licensed its software to more than 6,000 organizations worldwide, many of which are multidivision and/or multilocation organizations with diverse information management requirements. In the past three fiscal years, no one customer accounted for more than 10% of total revenues. Hyperion's sales and marketing organization consisted of 712 employees as of June 30, 1999. The Company has sales offices at its headquarters in Sunnyvale, California and in other U.S. and international locations including Amsterdam, Atlanta, Baltimore, Boston, Brussels, Calgary, Charlotte, Chicago, Cincinnati, Cleveland, Copenhagen, Dallas, Denver, Detroit, Frankfurt, Hong Kong, Hamburg, Houston, Linz, London, Los Angeles, Madrid, Manchester, Melbourne, Milan, Milwaukee, Minneapolis, Montreal, Munich, Newark, New York City, Ottawa, Paris, Philadelphia, Pittsburgh, Rome, San Diego, San Francisco, Sao Paolo, Seattle, Seoul, Singapore, Stamford, St. Louis, Stockholm, Sydney, Tokyo, Toronto, Washington, D.C. and Zurich. Product support and training are available as well through many of these locations. Hyperion has been able to leverage sales and marketing through its partnering strategy with indirect channel partners that distribute or resell the Company's products in their respective markets. The Company has license and distribution agreements with independent distributors and sales agents in Argentina, Australia, 7 9 Brazil, Egypt, Finland, Greece, Hungary, Israel, Japan, Korea, Mexico, New Zealand, Poland, Singapore, South Africa, Taiwan, Turkey and Switzerland, as well as other territories of North America, Europe and Asia. The distributors generally maintain sales and services personnel dedicated solely to the Company's products. The distribution agreements generally provide for the right to offer the Company's products within a territory, in return for royalties typically equal to 50% of license and renewal fees. Revenues derived from channel partners for fiscal 1999, 1998 and 1997 were 14%, 10.7% and 6.8% of total revenues, respectively. Hyperion's indirect channel partners include, but are not limited to: Arthur Andersen LLP; The Baan Company; Comshare, Incorporated; DoubleClick Inc.; Ernst & Young Technologies, Inc.; Fujitsu Limited; GEAC; International Business Machines Corporation; i2 Technologies, Inc.; KPMG LLP; Lawson Associates, Inc.; Mincom, Inc.; Mitsubishi Corporation; PeopleSoft, Inc.; ShowCase Corporation; and Walker Interactive Systems, Inc. In each of its 1999, 1998 and 1997 fiscal years, approximately 37.6%, 31.7% and 32.1%, respectively, of the Company's total revenues were derived from markets outside of the United States. RESEARCH AND DEVELOPMENT To date, all of the Company's principal products have been developed by its internal staff except for initial versions of Hyperion Pillar, Hyperion Wired for OLAP, and Hyperion Performance Measurement and Hyperion Activity Based Management, which were acquired in connection with the Company's acquisitions of Pillar Corporation (November 1994), AppSource Corporation (December 1997) and Sapling Corporation (May 1999), respectively. When developing a new product or enhancement, the Company works closely with current and prospective customers to determine their requirements. A user product enhancement committee, comprised of representatives of certain Hyperion customers, meets quarterly and advises the Company of its priorities for product development and enhancement, as well as product support service. The Company's development efforts are focused on new products, as well as on maintaining the competitiveness of its current product line, including development of the next releases of Hyperion Enterprise, Hyperion Essbase OLAP Server, Hyperion Enterprise Performance Management and Hyperion Pillar. As of June 30, 1999, the Company's product development was performed by 630 employees primarily located at its Silicon Valley, California; Stamford, Connecticut; Orlando, Florida and Toronto, Ontario facilities. During fiscal 1999, 1998 and 1997, the Company's research and development expenses, which are net of capitalized development costs, were $63.8 million, $49 million and $40 million, or 15%, 13% and 14.8% of total revenues, respectively. In accordance with Statement of Financial Accounting Standards No. 86, the Company capitalizes certain software development costs. During fiscal 1999, 1998 and 1997, the Company capitalized $1.8 million, $2.7 million and $4.8 million, respectively, or 2.7%, 5.2% and 10.7% of total research and development expenditures (excluding acquired in-process technology). COMPETITION The markets in which Hyperion competes are intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. The Company's current and potential competitors offer a variety of planning, reporting and analysis software solutions and generally fall within three categories: (i) vendors of multidimensional database and analysis software; (ii) vendors of dedicated software applications for financial, marketing, sales and operational analytic software; and (iii) vendors of relational/OLAP database software. Hyperion also faces competition from a variety of analytic application vendors and software tool vendors, as well as from software developed by IT departments of potential customers. Many of the Company's existing and potential customers utilize legacy software developed internally for mainframes or minicomputers. The markets for client/server and internet/intranet-enabled corporate business analysis software are still emerging. As markets develop for products of the Company, additional competitors may enter or expand into those markets and competition may intensify. Hyperion has experienced, and it is anticipated that it will continue to experience, increased competition from current and potential competitors, many of whom have significantly greater financial, technical, 8 10 marketing and other resources than the Company. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than the Company. Also, certain current and potential competitors have greater name recognition or more extensive customer bases that could be leveraged, thereby gaining market share to the Company's detriment. Hyperion expects additional competition as other established and emerging companies enter into the enterprise software market and new products and technologies are introduced. In addition, as the Company develops and enhances its enterprise software and complementary products, the resulting new functionality may duplicate the functionality of, and thus compete with, other products offered by indirect 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 the Company's business, operating results and financial condition. Hyperion's future success will depend in part upon the availability of third party tools and applications that address customer requirements and work with Hyperion's Essbase through the Hyperion Essbase API. Failure by third parties to support the Company's API, or failure by the Company to maintain, develop and market competitive analytic applications or to adopt industry standard APIs, if and when they emerge, could materially adversely affect the Company's 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 the ability of their products to address the needs of Hyperion's existing and prospective customers. Further competitive pressures, such as those resulting from competitors' discounting of their products, may require the Company to reduce the price of its enterprise software and complementary products, which would materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that Hyperion will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, operating results and financial condition. PROPRIETARY RIGHTS AND LICENSES The Company relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. The Company seeks to protect its software documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Hyperion currently has four United States patents, two foreign patents and a number of patent applications pending in the United States and abroad. There can be no assurance that the Company's patents will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications, whether or not being currently challenged by applicable governmental patent examiners, will be issued with the scope of the claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or design around the patents owned by the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy is expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technology. The Company has entered into source code escrow agreements with a number of its customers and indirect channel partners requiring release of source code under certain conditions. Such agreements provide that such parties will have a limited, nonexclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do 9 11 business or if the Company fails to meet its contractual obligations. The provisions of source code may increase the likelihood of misappropriation by third parties. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology, the Company's business, operating results and financial condition would be materially adversely affected. The Company is engaged currently in litigation with Gentia Software concerning the enforcement and validity of U.S. Patent No. 5,359,724 (the "724 patent"). In addition, Gentia Software has filed two requests for reexamination of the '724 patent by the U.S. Patent and Trademark Office, both of which have been granted. The reexamination proceedings are currently pending. See "Item 3. Legal Proceedings." The Company relies upon certain software that it licenses from third parties, including software that is integrated with the Company's internally developed software and used in the Company's products to perform key functions. There can be no assurance that these third party software licenses will continue to be available to the Company on commercially reasonable terms. The loss of, or inability to maintain, any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated, which would materially adversely affect the Company's business, operating results and financial condition. In addition, there can be no assurance that third parties will not claim infringement by the Company with respect to the Company's products or enhancements thereto. The Company distributes its products under software license agreements which grant customers a nonexclusive, nontransferable license to the Company's products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of the Company's products. Generally, the Company does not provide end users with the source code for its products. Customers are billed an initial license fee for the software upon delivery and, subsequently, are billed an annual maintenance fee entitling them to routine support and product updates. This fee is typically calculated at a fixed percentage of the then-current list price of all licensed software used by the customer. The annual maintenance fee is optional; however, without payment, the licensee is entitled only to use the software in its then current form, without receiving future updates or product support. See "Services." Copyright 1999 Hyperion Solutions Corporation. All rights reserved. Hyperion, Essbase, Hyperion Pillar, Hyperion Reporting, LedgerLink, and Pillar are registered trademarks and the Hyperion Logo, Essbase-Ready, Hyperion Solutions, Hyperion Enterprise, 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. 10 12 EMPLOYEES As of July 31, 1999, the Company employed a total of 2,148 employees, including 706 in marketing and sales, 1,236 in research and development, services and customer support, and 206 in management, administration and finance. None of the Company's employees is represented by a labor union. The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Stephen V. Imbler...................... 47 President, Chief Executive Officer and Chief Financial Officer Mark J. Bilger......................... 40 Senior Vice President, Product Development Stephen L. Fioretti.................... 42 Vice President, Marketing
Stephen Imbler is Hyperion's interim President and Chief Executive Officer, and Chief Financial Officer. Prior to the merger between Arbor Software and Hyperion Software, Imbler held the position of Vice President and CFO at Arbor Software for three years. In this role, his responsibilities included the management of Arbor's overall financial and administrative operations. Imbler joined Arbor Software in 1995 from Gupta. During his role at Gupta, he served as Senior Vice President of Finance and Operations, and CFO, responsible for managing the Company's finance, investor relations, human resources, MIS and manufacturing facilities. During his career, Imbler has held a variety of senior-level positions, including Vice President and CFO at Quick Response Services, Inc.; several executive positions at Oracle Corporation, including Vice President, U.S. Finance and Operations, and Vice President, Finance (Oracle Corporate); and Senior Tax Manager at Peat Marwick, San Francisco. Imbler received a master's degree in public accounting from the University of Texas, is a Certified Public Accountant and holds a bachelor's degree in music from Wichita State University. Mark Bilger serves as Senior Vice President, Product Development for Hyperion. In this position, Bilger is responsible for all product development and quality assurance operations. Prior to the merger between Arbor Software and Hyperion Software, Bilger held the position of Senior Vice President, Product Development for Hyperion Software since 1997. He is a founder and former board member of Advanced Software Development Center (ASDC) -- a leading software firm in Beijing, China. Bilger holds a bachelor's degree with high honors from Wheaton College. In addition, at IBM, Bilger was elected a permanent member of the Academy of Technology, IBM's highest technical body consisting of the top 0.1 percent of its programmers, engineers and scientists. In addition, he is a member of the Association for Computing Machinery (ACM) and the Institute for Electrical and Electronics Engineers (IEEE). Stephen Fioretti serves as Vice President, Marketing for Hyperion. In this position, Fioretti is responsible for the unified product family, business development, and global marketing initiatives. Fioretti joined Arbor Software in 1995 as Director of Alliances Marketing and most recently was Vice President, Alliance Marketing and Business Development. In this role, he was responsible for the Company's partner strategy and programs, and strategic initiatives and acquisitions. During his career, Fioretti has held a variety of senior-level marketing, sales and management positions, including Director of Channels position at Sybase, and a variety of marketing and sales management positions at Hewlett-Packard. Fioretti holds a bachelor's degree in economics from UC Davis and a master of business administration from UCLA. The Company's future operating results depend in significant part upon the continued service of its key technical and senior management personnel. Hyperion's future success also depends on its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will retain its key managerial or technical personnel or attract such personnel in the future. Hyperion has at times experienced and continues to experience difficulty in recruiting qualified personnel and there can be no assurance that the Company will not experience such difficulties in the future. The Company, either directly or through personnel search firms, actively recruits qualified research and development, financial and sales personnel. If Hyperion is unable to hire and retain qualified personnel in the future, such inability could have a material adverse effect on the Company's 11 13 business, operating results and financial condition. The Company has engaged an executive search firm in connection with recruitment of a successor Chief Executive Officer. ITEM 2. PROPERTIES Hyperion's principal administrative, sales and services, marketing, and research and development facilities are split primarily between two locations. The Company occupies approximately 100,000 square feet at its headquarters in Sunnyvale, California pursuant to a lease which expires in December 2002. The Company also owns and occupies approximately 230,000 square feet in Stamford, Connecticut. The Stamford site permits future expansion of approximately 300,000 square feet of additional space. The Company also leases office space throughout the world for its local sales and services needs. Hyperion believes that its existing facilities are adequate for its current needs; however, if additional space is needed in the future, Hyperion believes that suitable additional or alternative space will be available on commercially reasonable terms as needed. ITEM 3. 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. A case management conference is presently scheduled for October 26, 1999 for the purpose of scheduling the case for trial. 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 12 14 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. 13 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq National Market under the symbol HYSL. The following table sets forth, for the periods indicated, the high and low sales prices of the common stock as reported on the Nasdaq National Market. - ------------------------------------------------------------------------------ FISCAL 1998: HIGH LOW - ------------------------------------------------------------------------------ First quarter............................................. $51 $33 3/4 Second quarter............................................ 53 1/4 27 3/16 Third quarter............................................. 47 1/4 32 1/2 Fourth quarter............................................ 50 3/4 30 3/8 - ------------------------------------------------------------------------------ FISCAL 1999: HIGH LOW - ------------------------------------------------------------------------------ First quarter............................................. $40 1/2 $19 3/4 Second quarter............................................ 36 1/8 12 Third quarter............................................. 21 7/16 12 1/4 Fourth quarter............................................ 18 1/4 9 7/8 - ------------------------------------------------------------------------------ FISCAL 2000: HIGH LOW - ------------------------------------------------------------------------------ First quarter (through September 15th).................... $24 3/8 $15 1/8
As of September 15, 1999, the Company had 331 stockholders of record and approximately 10,500 beneficial holders of its common stock. The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain all earnings to finance future growth and, therefore, does not anticipate paying any cash dividends in the foreseeable future. 14 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
FOR THE YEAR ENDED JUNE 30, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- STATEMENT OF INCOME DATA REVENUES Software licenses......................... $205,991 $214,297 $151,202 $111,842 $ 88,253 Maintenance and services.................. 218,894 162,796 119,011 86,116 60,408 -------- -------- -------- -------- -------- Total revenues.............................. 424,885 377,093 270,213 197,958 148,661 -------- -------- -------- -------- -------- COSTS AND EXPENSES Cost of revenues: Software licenses......................... 7,799 10,335 7,866 5,486 4,707 Maintenance and services.................. 115,265 93,829 72,929 54,167 36,863 Sales and marketing......................... 164,913 133,124 96,009 69,544 51,405 Research and development.................... 63,813 48,957 40,000 30,524 22,979 Acquired in-process technology.............. 3,000 2,000 General and administrative.................. 38,500 35,557 23,807 19,091 13,542 Merger costs................................ 19,473 Asset valuation and restructuring........... 4,400 -------- -------- -------- -------- -------- 409,763 324,802 245,011 180,812 129,496 -------- -------- -------- -------- -------- OPERATING INCOME............................ 15,122 52,291 25,202 17,146 19,165 Interest income............................. 11,029 5,031 3,430 2,252 1,659 Interest expense............................ (5,378) (641) (591) (547) (287) -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES.................. 20,773 56,681 28,041 18,851 20,537 Provision for income taxes.................. 12,800 21,924 10,337 6,516 8,024 -------- -------- -------- -------- -------- NET INCOME.................................. $ 7,973 $ 34,757 $ 17,704 $ 12,335 $ 12,513 ======== ======== ======== ======== ======== EARNINGS PER SHARE Basic..................................... $.26 $1.19 $.64 $.57 $.73 Diluted................................... $.26 $1.13 $.61 $.45 $.49 AVERAGE NUMBER OF SHARES OUTSTANDING Basic..................................... 30,196 29,121 27,537 21,728 17,041 Diluted................................... 30,855 30,770 29,261 27,544 25,352 CASH GENERATED BY OPERATING ACTIVITIES...... $ 43,159 $ 87,571 $ 49,703 $ 42,946 $ 30,032
JUNE 30, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- BALANCE SHEET DATA Cash and short-term investments............. $271,856 $257,347 $ 95,910 $ 79,024 $ 48,312 Working capital............................. 230,910 218,033 72,480 59,518 38,818 Total assets................................ 512,894 476,665 278,228 225,331 152,652 Deferred revenue............................ 81,089 63,724 50,573 40,613 31,845 Total long-term debt........................ 103,752 107,314 8,102 9,429 9,743 Stockholders' equity........................ 240,776 213,225 155,609 124,309 74,011
15 17 ITEM 7. 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
YEAR ENDED JUNE 30, ---------------------------------------------------- 1999 CHANGE 1998 CHANGE 1997 ---------------------------------------------------- (dollars in thousands) Software licenses........................ $205,991 (3.9)% $214,297 41.7% $151,202 Percentage of total revenues............. 48.5% 56.8% 56.0% - ----------------------------------------------------------------------------------------------- Maintenance and services................. $218,894 34.5% $162,796 36.8% $119,011 Percentage of total revenues............. 51.5% 43.2% 44.0% - -----------------------------------------------------------------------------------------------
Software license revenues declined in fiscal 1999 primarily as a result of a decrease in the number of licenses sold (unit volume) versus, for example, price decreases. Moreover, due primarily to merger related activities, including sales-marketing execution issues, 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, occurred in the December quarter, continued through year end and will likely continue at least into the December 1999 quarter. In fiscal 1998, software license revenues rose primarily as a result of an increase in the number of licenses sold. Demand for the Company's OLAP server and tools, and packaged analytic application products was strong. The increase in service and annual maintenance revenue is mainly attributable to the year-to-year growth of the Company's installed customer base. 16 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Revenues, including export sales, generated from markets outside the United States for fiscal 1999, 1998 and 1997 were $159.9 million, $119.6 million and $86.7 million, or 37.6%, 31.7% and 32.1% of total revenues, respectively. Revenue growth was particularly strong in France, Italy and the Netherlands in fiscal 1999, and in Canada, Germany, Southeast Asia and the United Kingdom in fiscal 1998. Revenues derived from channel partners for fiscal 1999, 1998 and 1997 were 14%, 10.7% and 6.8% of total revenues, respectively. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP"), which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. Effective July 1, 1998, the Company adopted the SOP, as amended, and the impact on operating results for the fiscal year 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
YEAR ENDED JUNE 30, -------------------------------------------------- 1999 CHANGE 1998 CHANGE 1997 -------------------------------------------------- (dollars in thousands) Software licenses.......................... $ 7,799 (24.5)% $10,335 31.4% $ 7,866 Gross profit percentage.................... 96.2% 95.2% 94.8% - ----------------------------------------------------------------------------------------------- Maintenance and services................... $115,265 22.8% $93,829 28.7% $72,929 Gross profit percentage.................... 47.3% 42.4% 38.7% - -----------------------------------------------------------------------------------------------
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 nonrecurring increase in the cost of software license revenues in fiscal 1998 principally reflects royalty fees related to third-party software distributed by the Company in 1998. The increases in the cost of maintenance and service revenues are due primarily to additional staffing expense for both installation and ongoing support services. OPERATING EXPENSES
YEAR ENDED JUNE 30, --------------------------------------------------- 1999 CHANGE 1998 CHANGE 1997 --------------------------------------------------- (dollars in thousands) Sales and marketing....................... $164,913 23.9% $133,124 38.7% $96,009 Percentage of total revenues.............. 38.8% 35.3% 35.5% - ----------------------------------------------------------------------------------------------- Research and development.................. $ 63,813 30.3% $ 48,957 22.4% $40,000 Percentage of total revenues.............. 15.0% 13.0% 14.8% - ----------------------------------------------------------------------------------------------- General and administrative................ $ 38,500 8.3% $ 35,557 49.4% $23,807 Percentage of total revenues.............. 9.1% 9.4% 8.8% - -----------------------------------------------------------------------------------------------
17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the most part, the increase in sales and marketing expenses in fiscal 1999 was due to a net increase in sales-marketing personnel. In 1998, sales and marketing expenses rose for the same reason and, as well, due to 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 fiscal 1999, 1998 and 1997, the Company capitalized $1.8 million, $2.7 million and $4.8 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 2.7%, 5.2% and 10.7% of total research and development expenditures (excluding acquired in-process technology). Capitalized software costs are amortized over the estimated economic life of the product, but generally not more than three years. In December 1997, the Company acquired all of the outstanding shares of AppSource Corporation, the Florida-based developer of Hyperion WIRED for OLAP, a presentation, analysis and query tool that works with the Hyperion Essbase OLAP Server. The total acquisition price of $6.7 million was funded from a combination of the Company's existing working capital and newly issued common stock. Approximately $3 million of the total purchase price represented the value of in-process technology that had not yet reached technological feasibility, had no alternative future uses and was charged to the Company's operations in the quarter ended March 31, 1998. The charge resulting from in-process technology is not deductible for income tax purposes. The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of AppSource are included in the accompanying financial statements from the date of acquisition. The increase in general and administrative expenses resulted, for the most part, from increases in personnel and professional services costs incurred to manage and support the growth of the Company's overall operations. Also, the increase in 1999 is net of the $1.2 million charge incurred in the first quarter of 1998 for additional support required by certain accounting product customers. The merger of Arbor Software Corporation (former name of the Company) and Hyperion Software Corporation was completed on August 24, 1998. The Company's financial statements have been restated for all periods presented to reflect the business combination, which was accounted for as a pooling of interests. The Company charged $19.5 million, $17.4 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 $5.6 million associated with combining the operations of the two companies, including $3.4 million for restructuring (more specifically, $1.9 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. On July 1, 1997, the Company joined forces with The Baan Company, a leading provider of enterprise-wide business management software to companies requiring manufacturing capabilities, engaging Baan to remarket certain Hyperion products and establishing a two-year joint venture development effort for accounting products. The definitive alliance is intended to leverage Baan's expertise in complex transactional Enterprise Resource Planning solutions and Hyperion's command of corporate financial planning, reporting and performance analysis. Under this alliance, as a Hyperion channel partner, Baan pays sales royalties to the Company. Hyperion incurred charges in its June 1997 quarter of $4.4 million for asset valuation and restructuring costs related to the joint development agreement. 18 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTEREST INCOME AND EXPENSE
YEAR ENDED JUNE 30, ----------------------------------------------- 1999 CHANGE 1998 CHANGE 1997 ----------------------------------------------- (dollars in thousands) - ----------------------------------------------------------------------------------------------- Interest income............................... $11,029 119.2% $5,031 46.7% $3,430 - ----------------------------------------------------------------------------------------------- Interest expense.............................. $(5,378) 739.0% $ (641) 8.5% $ (591) - -----------------------------------------------------------------------------------------------
Net interest income grew in fiscal 1999 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. Growth in the prior year was due to the increase, from operations, in cash available for investment. PROVISION FOR INCOME TAXES Excluding the impact of merger costs in fiscal 1999 and the write-off of acquired in-process technology in fiscal 1998, the Company's effective income tax rate has remained substantially unchanged at approximately 37%. NET INCOME As a result of the above factors, net income for 1999 decreased to $8 million, or by 77.1%, from $34.8 million for 1998. Net income increased 96.3% in 1998, from $17.7 million for 1997. Excluding the nonrecurring charges, the Company would have had net income of $25.4 million, $37.8 million and $20.5 million for the years ended June 30, 1999, 1998 and 1997, respectively. 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 AND QUARTERLY FINANCIAL INFORMATION Except for the historical information contained in this report on Form 10-K, 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 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 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) this Annual Report, and in the Company's proxy statement included in Form S-4 filed with the Securities and Exchange 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. 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. 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 20 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. MARKET RISKS At June 30, 1999, the Company's investment portfolio consisted of investment-grade debt securities, excluding those classified as cash equivalents, of $38.3 million (see Notes A and C of the accompanying financial statements). 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 June 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 (see Note G of the accompanying financial statements) 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. 21 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FACTORS THAT MAY AFFECT FUTURE RESULTS Generally, the Company operates with a nonmaterial amount of software licensing backlog; however, it had a backlog of approximately $15 million at June 30, 1999, which sales were completed in the September 1999 quarter upon shipment of product to customers. 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. 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. The following table sets forth certain unaudited operating results for each of the Company's eight most recent fiscal quarters. This information has been prepared by the Company on the same basis as its audited financial statements appearing elsewhere in this Annual Report and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly this information when read in conjunction with the Company's audited financial statements and notes thereto. The Company's operating results for any one quarter or series of quarters are not necessarily indicative of results for any future period.
QUARTER ENDED --------------------------------------------------------------------------------------------- JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, 1999 1999 1998 1998 1998 1998 1997 1997 --------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Total revenues................... $111,399 $101,646 $106,958 $104,882 $124,077 $88,764 $87,237 $77,015 Operating income (loss).......... 9,657(a) 2,924 12,124 (9,583)(a) 29,779 5,842 9,180 7,490 Net income (loss)................ 6,679(a) 2,579 8,648 (9,933)(a) 19,667 3,371 6,468 5,251 Diluted earnings (loss) per share.......................... .22(a) .08 .28 (.33)(a) .63 .11 .21 .17
- --------------- (a) Excluding the $21.8 million ($18.7 million after tax) nonrecurring charge accrued in the September quarter for merger costs and the related $(2.3) million ($(1.3) million after tax) credit recorded in the June quarter, the Company would have had operating income of $12.2 million and $7.3 million, and net income of $8.8 million and $5.4 million or $.28 and $.17 per pro forma diluted share, for its first quarter ended September 30, 1998 and its fourth quarter ended June 30, 1999, respectively. 22 24 ITEM 7. 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 1999, 1998 and 1997, the Company generated positive cash flow from operations of $43.2 million, $87.6 million and $49.7 million, respectively. Cash used by investing activities amounted to $44.5 million for fiscal 1999, including $24.4 million primarily for purchases of computer equipment and software. On May 14, 1999, the Company acquired all of the outstanding shares of Sapling Corporation, the Toronto-based developer and marketer of business software for performance measurement and activity-based management. The acquisition was accounted for as a purchase transaction and, accordingly, the purchase price of $15.4 million, excluding contingent payments based on certain software sales targets for the year ending June 30, 2000, was allocated to identifiable assets and liabilities, based on their estimated fair values, and to goodwill. Under the purchase method of accounting, the results of operations of Sapling are included in the Company's financial statements from the date of acquisition. Pro forma statement of income data as if the acquisition had occurred on July 1, 1997 is not shown, as it would not differ significantly from reported results. Financing activities in fiscal 1999, including stock options exercised by employees and payments of indebtedness, generated cash of $14.7 million. In connection with the stock options exercised by certain of its employees (for a total of 1,268,000 common shares), the Company recognized (as a credit to additional paid-in capital) an income tax benefit of $2.9 million for the year ended June 30, 1999. As of June 30, 1999, the Company had cash, cash equivalents and short-term investments of $271.9 million, working capital of $230.9 million, and $103.8 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. 23 25 ITEM 8. REPORTS OF INDEPENDENT ACCOUNTANTS AND AUDITORS, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Hyperion Solutions Corporation In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 47 present fairly, in all material respects, the financial position of Hyperion Solutions Corporation and its subsidiaries at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 47 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Hyperion Software Corporation, which statements reflect total revenues of $222,830,000 for the year ended June 30, 1997. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Hyperion Software Corporation, is based solely on the report of other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. /S/ PRICEWATERHOUSECOOPERS LLP San Jose, California July 20, 1999 25 27 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders of Hyperion Software Corporation We have audited the consolidated statements of income, comprehensive income, stockholders' equity, and cash flows of Hyperion Software Corporation and subsidiaries for the year ended June 30, 1997 (not presented separately herein). Our audit also included Schedule II of Hyperion Software Corporation and subsidiaries for the year ended June 30, 1997 (not presented separately herein) which is included in the related schedule of Hyperion Solutions Corporation. These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements and schedule referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Hyperion Software Corporation and subsidiaries for the year ended June 30, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the financial statement schedule of Hyperion Software Corporation and subsidiaries referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Stamford, Connecticut July 17, 1997 26 28 HYPERION SOLUTIONS CORPORATION CONSOLIDATED BALANCE SHEET (in thousands, except per share data)
JUNE 30, 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $233,515 $221,868 Short-term investments.................................... 38,341 35,479 Accounts receivable -- net of allowances of $11,800 and $8,892................................................. 110,744 98,760 Prepaid expenses and other current assets................. 6,290 7,605 Deferred income taxes..................................... 10,386 10,447 -------- -------- TOTAL CURRENT ASSETS........................................ 399,276 374,159 Property and equipment -- at cost, less accumulated depreciation and amortization of $65,444 and $54,247... 75,456 76,142 Acquired technologies, goodwill and other intangible assets -- at cost, less accumulated amortization of $17,186 and $19,359.................................... 26,522 18,318 Other assets.............................................. 11,640 8,046 -------- -------- Total assets.............................................. $512,894 $476,665 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 55,012 $ 44,216 Accrued employee compensation and benefits................ 29,920 31,915 Income taxes payable...................................... 2,345 16,271 Deferred revenue.......................................... 81,089 63,724 -------- -------- TOTAL CURRENT LIABILITIES................................... 168,366 156,126 Long-term debt.............................................. 103,752 107,314 COMMITMENTS AND CONTINGENCIES -- Note H Stockholders' equity: Preferred stock -- $.001 par value; 5,000 shares authorized; none issued Common stock -- $.001 par value; 300,000 shares authorized; 30,842 and 29,574 shares issued and outstanding............................................ 31 30 Additional paid-in capital................................ 153,545 135,172 Retained earnings......................................... 90,917 80,058 Currency translation adjustments.......................... (3,717) (2,035) -------- -------- TOTAL STOCKHOLDERS' EQUITY.................................. 240,776 213,225 -------- -------- Total liabilities and stockholders' equity.................. $512,894 $476,665 ======== ========
See accompanying notes. 27 29 HYPERION SOLUTIONS CORPORATION CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data)
YEAR ENDED JUNE 30, 1999 1998 1997 -------- -------- -------- REVENUES Software licenses........................................ $205,991 $214,297 $151,202 Maintenance and services................................. 218,894 162,796 119,011 -------- -------- -------- Total revenues............................................. 424,885 377,093 270,213 -------- -------- -------- COSTS AND EXPENSES Cost of revenues: Software licenses........................................ 7,799 10,335 7,866 Maintenance and services................................. 115,265 93,829 72,929 Sales and marketing........................................ 164,913 133,124 96,009 Research and development................................... 63,813 48,957 40,000 Acquired in-process technology............................. 3,000 General and administrative................................. 38,500 35,557 23,807 Merger costs............................................... 19,473 Asset valuation and restructuring.......................... 4,400 -------- -------- -------- 409,763 324,802 245,011 -------- -------- -------- OPERATING INCOME........................................... 15,122 52,291 25,202 Interest income............................................ 11,029 5,031 3,430 Interest expense........................................... (5,378) (641) (591) -------- -------- -------- INCOME BEFORE INCOME TAXES................................. 20,773 56,681 28,041 Provision for income taxes................................. 12,800 21,924 10,337 -------- -------- -------- NET INCOME................................................. $ 7,973 $ 34,757 $ 17,704 ======== ======== ======== EARNINGS PER SHARE Basic.................................................... $.26 $1.19 $.64 Diluted.................................................. $.26 $1.13 $.61 AVERAGE NUMBER OF SHARES OUTSTANDING Basic.................................................... 30,196 29,121 27,537 Diluted.................................................. 30,855 30,770 29,261
See accompanying notes. 28 30 HYPERION SOLUTIONS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
COMMON STOCK --------------- ADDITIONAL CURRENCY PAR PAID-IN RETAINED TRANSLATION SHARES VALUE CAPITAL EARNINGS ADJUSTMENTS ------ ----- ---------- -------- ----------- Balance at June 30, 1996.................. 27,040 $27 $ 97,218 $27,597 $ (533) Exercise of stock options............... 1,407 1 10,456 Income tax benefit from exercise of stock options........................ 3,951 Currency translation effect............. (812) Net income.............................. 17,704 ------ --- -------- ------- ------- Balance at June 30, 1997.................. 28,447 28 111,625 45,301 (1,345) Exercise of stock options............... 1,031 2 13,158 Income tax benefit from exercise of stock options........................ 7,189 Issuance of common stock in connection with a business acquisition.......... 96 3,200 Currency translation effect............. (690) Net income.............................. 34,757 ------ --- -------- ------- ------- Balance at June 30, 1998.................. 29,574 30 135,172 80,058 (2,035) Exercise of stock options............... 1,268 1 15,508 Income tax benefit from exercise of stock options........................ 2,865 Credit reflecting change in fiscal year................................. 2,886 Currency translation effect............. (1,682) Net income.............................. 7,973 ------ --- -------- ------- ------- BALANCE AT JUNE 30, 1999.................. 30,842 $31 $153,545 $90,917 $(3,717) ====== === ======== ======= =======
------------------------ CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in thousands)
YEAR ENDED JUNE 30, ----------------------------- 1999 1998 1997 ------- ------- ------- Net income............................................ $ 7,973 $34,757 $17,704 Currency translation adjustments, net of tax.......... (1,009) (414) (512) ------- ------- ------- COMPREHENSIVE INCOME.................................. $ 6,964 $34,343 $17,192 ======= ======= =======
See accompanying notes. 29 31 HYPERION SOLUTIONS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
YEAR ENDED JUNE 30, 1999 1998 1997 -------- -------- -------- OPERATING ACTIVITIES Net income................................................. $ 7,973 $ 34,757 $ 17,704 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 33,963 28,616 23,338 Asset valuation and restructuring charges............. 4,142 Accounts receivable allowance provisions.............. 8,382 5,113 2,884 Deferred income taxes................................. (4,192) (5,364) (5,943) Acquired in-process technology........................ 3,000 Credit reflecting change in fiscal year............... 2,886 Changes in operating assets and liabilities: Accounts receivable................................. (19,138) (25,875) (20,413) Prepaid expenses and other assets................... 2,568 (2,962) (539) Accounts payable and accrued expenses............... 4,880 24,327 9,174 Income taxes payable................................ (10,891) 12,808 9,397 Deferred revenue.................................... 16,729 13,151 9,959 -------- -------- -------- Cash provided by operating activities...................... 43,160 87,571 49,703 -------- -------- -------- INVESTING ACTIVITIES Purchases of short-term investments, net................... (2,862) (12,275) 2,761 Purchases of property and equipment........................ (24,376) (28,355) (27,527) Intangible and other assets................................ (1,879) (2,725) (6,356) Business acquisitions...................................... (15,395) (2,965) (7,104) -------- -------- -------- Cash used by investing activities.......................... (44,512) (46,320) (38,226) -------- -------- -------- FINANCING ACTIVITIES Issuance of convertible subordinated notes, net............ 97,000 Principal payments on notes payable........................ (827) (1,292) (1,419) Exercise of stock options by employees..................... 15,508 12,893 10,401 -------- -------- -------- Cash provided by financing activities...................... 14,681 108,601 8,982 Effect of exchange rate changes............................ (1,682) (690) (812) -------- -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS...................... 11,647 149,162 19,647 Cash and cash equivalents at beginning of year............. 221,868 72,706 53,059 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR................... $233,515 $221,868 $ 72,706 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NONCASH ACTIVITIES Cash paid during the year for: Income taxes.......................................... $ 29,087 $ 14,205 $ 6,876 Interest.............................................. 4,871 420 568 Common stock issued in connection with a business acquisition........................................... 3,200
See accompanying notes. 30 32 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BUSINESS Hyperion Solutions Corporation (the "Company" or "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. A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Assets and liabilities denominated in foreign currencies are translated at the exchange rate on the balance sheet date. The related revenues, costs and expenses are translated at average rates of exchange prevailing during the reporting period. The resulting adjustments are charged or credited to stockholders' equity. Translation adjustments relating to operations abroad that are generally dependent on funding from the Company's U.S. operations are included in the statement of income. Revenue Recognition Software license revenues are recognized upon execution of the license agreement and delivery of the software. In all cases, however, collection of any related receivable must be probable and no significant post-contract obligations of the Company shall be remaining. Otherwise, software license fees are deferred until all of the requirements for revenue recognition have been satisfied. Maintenance fees for routine support and product updates are recognized ratably over the term of the license agreement, which is typically twelve months. Training and consulting service revenues are recognized as the services are performed. Allowances for estimated future returns and discounts are provided upon recognition of 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 operating results for the fiscal year 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. Equity Based Compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company generally prices its stock options at fair market value on the date of grant and, therefore, under Opinion 25, no compensation expense is recognized for stock options granted. 31 33 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Current Assets and Liabilities The Company considers highly liquid investment instruments with remaining terms of three months or less at the time of acquisition to be cash equivalents and those with remaining terms greater than three months but no more than a year are considered short-term investments. Cash equivalents are comprised primarily of investment-grade commercial paper, U.S. federal, state and political subdivision obligations. All of the Company's short-term investments are classified as available-for-sale (see Note C). All current assets and current liabilities, because of their short-term nature, are stated at cost, which approximates market value. The fair value of the Company's 4.5% convertible subordinated debt was approximately $71.4 million at June 30, 1999 based on quoted market price. The carrying amount of the Company's mortgage loan, which provides for interest at a floating rate, approximates market value (see Note G). Intangible Assets The carrying value of intangible assets is reviewed by management if and when the facts and circumstances suggest that the value(s) may be impaired. If this review indicates that the carrying amount(s) will not be recoverable, as determined based on the undiscounted cash flows attributable to such asset(s) over the remaining amortization period, management will reduce the carrying amount by the estimated shortfall of cash flows. The Company begins capitalizing product development costs, principally wages and contractor fees, only after establishing commercial and technical viability. Annual amortization of these costs represents the greater of the amount computed using (i) the ratio that current gross revenues for the product(s) bear to the total current and anticipated future gross revenues for the product(s), or (ii) the straight-line method over the remaining estimated economic life of the product(s); generally such deferred costs are amortized over three years. Amortization commences when the product is available for general release to customers. Depreciation/Amortization Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the applicable assets. Income Taxes The Company provides for taxes based on current taxable income, and the future tax consequences of temporary differences between the financial reporting and income tax carrying values of its assets and liabilities (deferred income taxes). Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 32 34 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and where necessary restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share ("EPS") (in thousands, except per share data):
YEAR ENDED JUNE 30, 1999 1998 1997 ------- ------- ------- Numerator -- net income............................... $ 7,973 $34,757 $17,704 ======= ======= ======= Denominator for basic EPS -- weighted-average shares.............................................. 30,196 29,121 27,537 Effect of dilutive securities: Stock option rights.............................. 659 1,649 1,724 ------- ------- ------- Denominator for diluted EPS -- adjusted weighted-average shares and assumed conversions..... 30,855 30,770 29,261 ======= ======= ======= Basic earnings per share.............................. $.26 $1.19 $.64 Diluted earnings per share............................ $.26 $1.13 $.61
Excluding the $19.5 million ($17.4 million after tax) nonrecurring charge for merger costs, the Company would have had net income for the year ended June 30, 1999 of $25.4 million or $.82 per diluted share. Because their effect would be antidilutive, certain stock option rights for 3.8 million common shares were excluded from the diluted EPS calculation for the year ended June 30, 1999. For the same reason, shares of common stock issuable upon conversion of the convertible subordinated notes due 2005 (see Note G) have been excluded from the diluted EPS calculation. Comprehensive Income In fiscal 1999, the Company adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income," which established the 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 an enterprise that results from recognized transactions and other economic events of a period other than transactions with owners in their capacity as owners. Derivative Instruments and Hedging Activities 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 is 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. 33 35 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) B. BUSINESS COMBINATIONS AND STRATEGIC ALLIANCE On May 14, 1999, the Company acquired all of the outstanding shares of Sapling Corporation, the Toronto-based developer and marketer of business software for performance measurement and activity-based management. The acquisition was accounted for as a purchase transaction and, accordingly, the purchase price of $15.4 million, excluding contingent payments based on certain software sales targets for the year ending June 30, 2000, was allocated to identifiable assets and liabilities, based on their estimated fair values, and to goodwill. Under the purchase method of accounting, the results of operations of Sapling are included in the Company's financial statements from the date of acquisition. Pro forma statement of income data as if the acquisition had occurred on July 1, 1997 is not shown, as it would not differ significantly from reported results. 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 statement of income, labeled June 30, 1998 and 1997, reflects the combination of the separate, historical annual financial statements of Arbor Software and Hyperion Software for each of the two years in the periods ended March 31, 1998 and June 30, 1998, 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, 1999 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. For the pre-merger periods indicated, revenues and net income of the Company and Hyperion Software are as follows (in thousands):
YEAR ENDED JUNE 30, 1998 1997 -------- -------- Revenues Hyperion Software.................................... $294,856 $222,830 Arbor Software....................................... 82,237 47,383 -------- -------- $377,093 $270,213 ======== ======== Net income Hyperion Software.................................... $ 27,841 $ 11,878 Arbor Software....................................... 6,916 5,826 -------- -------- $ 34,757 $ 17,704 ======== ========
The Company incurred charges to operations related to the merger of $19.5 million. These charges include direct transaction costs primarily for financial advisory services and legal fees of $13.9 million, and costs of $5.6 million associated with combining the operations of the two companies, including $3.4 million for restructuring (more specifically, $1.9 million for the closing of duplicate offices, employee severance and 34 36 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) B. BUSINESS COMBINATIONS AND STRATEGIC ALLIANCE (CONTINUED) relocations) and the write down of certain intangible assets. Included in accounts payable and accrued expenses at June 30, 1999 are unpaid merger costs of $.5 million. In December 1997, the Company acquired all of the outstanding shares of AppSource Corporation, the Florida-based developer of Hyperion WIRED for OLAP, a presentation, analysis and query tool that works with the Hyperion Essbase OLAP Server. Consideration for this purchase was $3.2 million in cash and .1 million shares of the Company's common stock. The total value attributed to the common stock issued by the Company was $3.2 million. The Company also incurred $.3 million in transaction costs. The acquisition was recorded under the purchase method of accounting and, accordingly, the results of operations of AppSource are included in the accompanying financial statements from the date of acquisition. The purchase price has been allocated to the assets and liabilities assumed based upon the fair market values as determined by the Company at the date of acquisition, as summarized below (in thousands): Cash and other current assets............................... $ 715 In-process technology....................................... 3,000 Goodwill and other intangible assets........................ 3,000 Current liabilities assumed................................. (65) ------ $6,650 ======
The amounts allocated to technology were estimated using a risk adjusted income approach applied to specifically identified technologies. In-process technology was expensed upon acquisition because technological feasibility had not been established and no alternative future uses existed. Amounts allocated to goodwill and other intangible assets, primarily existing technology, are being amortized on a straight-line basis over four years. Pro forma disclosure giving effect to the AppSource acquisition as if it had occurred at the beginning of fiscal 1997 has not been presented since the effect of the acquisition is not material to the Company's results of operations for either fiscal 1998 or 1997. On July 1, 1997, the Company joined forces with The Baan Company, a leading provider of enterprise-wide business management software to companies requiring manufacturing capabilities, engaging Baan to remarket certain Hyperion products and establishing a two-year joint venture development effort for accounting products. The definitive alliance is intended to leverage Baan's expertise in complex transactional Enterprise Resource Planning solutions and Hyperion's command of corporate financial planning, reporting and performance analysis. Under this alliance, as a Hyperion channel partner, Baan pays sales royalties to the Company. Hyperion incurred charges in its June 1997 quarter of $4.4 million for asset valuation (write-off of certain capitalized software costs, $3.5 million) and restructuring (employee and officer severance, and customer and professional services) costs related to the joint development agreement. In July 1996, the Company acquired the exclusive distribution and service rights to its corporate budgeting product in Belgium, France and the United Kingdom for $7.6 million. The acquisition was accounted for as a purchase transaction and, accordingly, the purchase price was allocated to identifiable intangible assets based on their estimated fair values. The net operating results of the acquired business from the date of purchase are included in the accompanying statement of income. Pro forma statement of income data as if the acquisition had occurred on July 1, 1996 is not shown, as it would not differ significantly from reported results. 35 37 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) C. SHORT-TERM INVESTMENTS The following table sets forth the Company's short-term investment portfolio at June 30:
1999 1998 -------- -------- (in thousands) State and municipal bonds................................... $ 6,245 $ 8,000 U.S. government and agency obligations...................... 4,999 10,777 Corporate bonds............................................. 26,092 12,254 Foreign debt securities..................................... 1,005 4,448 -------- -------- $ 38,341 $ 35,479 ======== ========
The portfolio of securities is classified as available-for-sale. Gross realized gains and losses from the sale of such securities were not material for the years ended June 30, 1999, 1998 and 1997. For the purpose of determining gross realized gains and losses, the cost of securities is based upon specific identification. D. PROPERTY AND EQUIPMENT Property and equipment consists of the following at June 30:
DEPRECIATION/ AMORTIZATION 1999 1998 PERIOD -------- -------- ------------- (in thousands) (years) Land............................................. $ 3,800 $ 3,800 Office and research facilities................... 31,434 30,475 39 Building improvements............................ 3,868 3,180 5 to 15 Furniture, equipment and software................ 91,965 84,187 2 to 7 Leasehold improvements........................... 9,833 8,747 lease term* -------- -------- 140,900 130,389 Less accumulated depreciation and amortization... 65,444 54,247 -------- -------- $ 75,456 $ 76,142 ======== ========
* Leasehold improvements are amortized over the lesser of the remaining life of the lease or the useful life of the improvements. Depreciation and amortization of these assets totaled $25.4 million, $21.5 million and $15.8 million for 1999, 1998 and 1997, respectively. 36 38 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) E. ACQUIRED TECHNOLOGIES, GOODWILL AND OTHER INTANGIBLE ASSETS Components of intangible assets, which relate primarily to business acquisitions, are as follows at June 30:
AMORTIZATION 1999 1998 PERIOD ------- ------- ------------ (in thousands) (years) Acquired technologies............................... $ 9,133 $ 2,139 2 to 6 Goodwill............................................ 11,386 6,187 4 to 20 Product distribution and service rights............. 8,623 9,123 3 to 7 Product development costs........................... 12,858 17,475 3 Customer base....................................... 1,019 3 to 5 Copyrights, trademarks and other.................... 1,708 1,734 3 to 4 ------- ------- 43,708 37,677 Less accumulated amortization....................... 17,186 19,359 ------- ------- $26,522 $18,318 ======= =======
Amortization of these assets totaled $8.5 million, $7.1 million and $7.5 million for 1999, 1998 and 1997, respectively. F. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of deferred tax assets and liabilities at June 30 are as follows:
1999 1998 -------- -------- (in thousands) Deferred income tax assets: Net operating loss carryforwards.......................... $ 4,045 $ 1,489 Deferred revenue.......................................... 1,056 2,362 Accounts receivable....................................... 5,053 4,258 Intangible assets......................................... 2,568 2,079 Property and equipment.................................... 5,017 3,000 Accrued expenses.......................................... 4,246 3,206 Other..................................................... 83 1,107 -------- -------- 22,068 17,501 Less valuation allowance.................................. 4,014 2,159 -------- -------- 18,054 15,342 -------- -------- Deferred income tax liabilities: Product development costs................................. 1,555 3,035 -------- -------- Net deferred income tax asset............................... $ 16,499 $ 12,307 ======== ========
37 39 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) F. INCOME TAXES (CONTINUED) The provision for income taxes consists of the following charges (credits):
1999 1998 1997 ------- ------- ------- (in thousands) Current: U.S................................................. $10,970 $19,450 $10,953 State............................................... 3,237 4,021 2,814 Other countries..................................... 2,785 3,817 2,513 ------- ------- ------- 16,992 27,288 16,280 ------- ------- ------- Deferred: U.S................................................. (3,282) (4,477) (4,195) State............................................... (821) (691) (1,748) Other countries..................................... (89) (196) ------- ------- ------- (4,192) (5,364) (5,943) ------- ------- ------- $12,800 $21,924 $10,337 ======= ======= =======
The effective income tax rate varied from the statutory U.S. federal tax rate as follows:
1999 1998 1997 ---- ---- ---- Statutory U.S. tax rate..................................... 35.0% 35.0% 35.0% State income taxes, net of U.S. tax benefit............... 8.0 3.8 3.5 Tax exempt interest....................................... (6.2) (1.3) (1.5) Goodwill.................................................. 1.9 .3 .2 Acquired in-process technology............................ 1.9 Nondeductible merger costs................................ 23.8 Non-U.S. operations, including export sales............... (2.3) (.6) 4.0 Change in valuation allowance............................. (.6) (.3) (5.2) Other -- net.............................................. 2.0 (.1) .9 ---- ---- ---- Effective income tax rate................................... 61.6% 38.7% 36.9% ==== ==== ====
The Company has non-U.S. net operating loss (NOL) carryforwards of $9.9 million of which $3.8 million is carried forward indefinitely and the rest expires as follows: $.6 million in 2003, $3.7 million in 2004, $.9 million in 2005 and $.9 million in 2006. G. LONG-TERM DEBT Long-term debt consists of the following at June 30:
1999 1998 -------- -------- (in thousands) 4.5% convertible subordinated notes.................... $100,000 $100,000 Mortgage payable....................................... 3,752 7,314 -------- -------- $103,752 $107,314 ======== ========
In March 1998, the Company issued $100 million of 4.5% convertible subordinated notes (the "Notes"), due 2005. The Notes are subordinated to all existing and future senior debt and are convertible into shares of 38 40 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) G. LONG-TERM DEBT (CONTINUED) the Company's common stock at a conversion price of $56.36 per share. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 20, 2001 at 104.5% of the principal amount initially, and thereafter at prices declining to 100% at maturity, in each case together with accrued interest. Each holder of these Notes has the right, subject to certain conditions and restrictions, to require the Company to offer to repurchase all outstanding Notes, in whole or in part, owned by such holder, at specified repurchase prices together with accrued interest upon the occurrence of certain events. The Company incurred $3.3 million of costs in connection with the issuance of the Notes which have been deferred and are included in other assets. These finance costs are being recognized as interest expense over the term of the Notes using the straight-line method, which approximates the effective interest method. Interest on the Notes began accruing March 16, 1998 and is payable semi-annually on March 15 and September 15. On January 20, 1995, the Company completed the purchase of an office and research facility in Stamford, Connecticut for $11.4 million. The purchase price was financed by the Connecticut Development Authority ("CDA," an agency of the State of Connecticut) through a $9.5 million mortgage loan, with Company funds used for the balance. In the interest of Connecticut-based jobs, the CDA agreed to such financing over a 15-year period at LIBOR minus 2%, subject to, among other things: (i) the creation of a specified number of new Connecticut-based jobs, (ii) a 10-year residency in the state, and (iii) the payment of the remaining unpaid principal at the end of year ten. Violations of certain such requirements, if any, would result in additional interest charges and/or a penalty payment. H. COMMITMENTS AND CONTINGENCIES The Company leases office and research facilities, and certain computer and other equipment under various operating lease agreements. The leases expire at various dates through 2006. Future minimum lease payments under all operating leases with noncancellable terms in excess of one year amount to $27.4 million as follows (in millions): $10.5 in 2000, $7.3 in 2001, $5.7 in 2002, $3 in 2003, $.7 in 2004 and $.2 thereafter. In addition, certain of the facility leases provide for contingent payments based on building operating expenses. Rental expense for the years ended June 30, 1999, 1998 and 1997 under all lease agreements was $11.9 million, $8.6 million and $6.9 million, respectively. 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. I. STOCK OPTION AND EMPLOYEE SAVINGS PROGRAMS Stock Option Programs In August 1995, the Company's Board of Directors (the "Board") adopted, and the stockholders subsequently approved, the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"). The 1995 Plan serves as the successor equity incentive program to the Company's 1992 Stock Option Plan (the "Predecessor Plan"). Outstanding options under the Predecessor Plan were incorporated into the 1995 Plan upon effectiveness of the initial public offering. No further option grants were made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms which are essentially the same as options granted under the Discretionary Option Grant Program described below. In connection with the merger with Hyperion Software Corporation on August 24, 1998 (see Note B), the Company assumed all of the outstanding stock options of Hyperion Software. Outstanding options assumed from Hyperion Software have terms of ten years and are generally exercisable at 25% per year commencing one year from the date of grant. No further option grants will be made under any of Hyperion Software plans. Under the 1995 Plan, the 39 41 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. STOCK OPTION AND EMPLOYEE SAVINGS PROGRAMS (CONTINUED) Company may grant options to purchase in the aggregate up to 8 million shares of common stock. At June 30, 1999, there were 3.5 million shares available for grant under the 1995 Plan. The 1995 Plan is divided into four separate components: (i) the Discretionary Option Grant Program, (ii) the Stock Issuance Program, (iii) the Salary Investment Option Grant Program, and (iv) the Automatic Option Grant Program. The 1995 Plan will terminate on September 30, 2005, unless terminated earlier by the Board. Options granted under the Discretionary Option Grant Program are for periods not to exceed ten years, and must be issued at prices not less than 100% and 85%, for incentive and nonqualified stock options, respectively, of the fair market value of the stock on the date of grant. Incentive stock options granted to stockholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. Twenty-five percent of the options granted under the Discretionary Option Grant Program are exercisable one year after the date of grant and the remainder exercisable ratably each month thereafter over the remaining thirty-six month period. The Discretionary Option Grant Program also provides for the grant of stock appreciation rights. Stock appreciation rights provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of the fair market value of the vested shares of common stock subject to each surrendered option over the aggregate exercise price payable for those shares. Such appreciation distribution may be made in cash or in shares of common stock. No stock appreciation rights had been granted under the 1995 Plan as of June 30, 1999. Under the Stock Issuance Program, individuals may be issued shares of common stock directly through the purchase of shares at a price per share not less than 85% of the fair market value at the time of issuance or as a fully paid bonus for services rendered to the Company. No shares had been issued under the Stock Issuance Program as of June 30, 1999. Under the Salary Investment Option Grant Program, each executive officer of the Company may elect, prior to the start of a calendar year, to reduce his or her base salary for that calendar year by a designated multiple of 1%, subject to a maximum dollar amount. In return, the officer will automatically be granted, on the first trading day in the calendar year for which the salary reduction is in effect, a nonstatutory option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two- thirds of the fair market value per share of common stock on the date of grant. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the date of grant. As a result, the total spread on the option shares at the time of grant will be equal to the salary reduction amount. The option will vest in a series of twelve equal monthly installments over the calendar year for which the salary reduction is in effect. No executive officer of the Company had elected to participate in the Salary Investment Option Grant Program through June 30, 1999. Under the Automatic Option Grant Program, each individual who becomes a nonemployee Board member will receive an option grant for 10,000 shares of common stock at the fair market value of the stock on the date he or she joins the Board. In addition, at each Annual Stockholder Meeting, each individual who is to continue to serve as a nonemployee Board member after the meeting will receive an option grant to purchase an additional 5,000 shares of common stock at the fair market value of the stock on the date of grant, provided such individual has served on the Board for at least six months. Each automatic option will have a term of ten years, subject to earlier termination following the optionee's cessation of Board service. The initial 10,000 share grant will vest in a series of four successive equal annual installments over the optionee's period of Board service measured from the grant date. Each additional 5,000 share grant shall vest and become exercisable immediately on the date of grant. 40 42 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. STOCK OPTION AND EMPLOYEE SAVINGS PROGRAMS (CONTINUED) In September 1999, the Board adopted the 1999 Stock Option Plan (the "1999 Plan"). Under the 1999 Plan, participation by officers, as defined, and members of the Board is prohibited, and only nonqualified stock options may be granted. Options granted under the 1999 Plan are for periods not to exceed ten years, and must be issued at prices not less than 85% of the fair market value of the stock on the date of grant. The 1999 Plan will terminate in September 2009, unless terminated earlier by the Board. No option rights had been granted, nor had any shares been reserved, under the 1999 Plan as of June 30, 1999. In recognition of the decline in the fair market value of the Company's common stock in fiscal 1997, the Company repriced options to purchase approximately 533,000 shares of common stock with exercise prices ranging from $33.25 to $42.75 on December 4, 1996 to an exercise price of $26.88, which was the fair market value of the Company's common stock on that date. The following table presents a summary of the Company's stock option activity for the years ended June 30 (in thousands, except per share amounts):
1999 1998 1997 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- Outstanding at beginning of year.......... 4,614 $22.33 4,000 $13.68 3,820 $ 8.41 Granted at market price................. 3,200 22.29 1,892 34.11 2,294 24.31 Exercised............................... (893) 9.32 (775) 9.61 (1,159) 5.48 Forfeited/exchanged..................... (1,566) 28.42 (503) 20.48 (955) 27.73 ------ ------ ----- ------ ------ ------ Outstanding at year-end................... 5,355 $22.69 4,614 $22.33 4,000 $13.68 ====== ====== ===== ====== ====== ====== Options exercisable at year-end........... 1,785 $21.69 1,657 $11.72 1,851 $ 7.29 ====== ====== ===== ====== ====== ======
The following table summarizes information about stock options outstanding at June 30, 1999 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING YEARS OF AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ------------------ -------------- ----------- -------------- $ .23 - 10.00 295 4.69 $ 4.74 292 $ 4.73 10.01 - 20.00 2,178 8.64 14.17 568 14.77 20.01 - 30.00 1,689 7.89 26.54 500 26.11 30.01 - 40.00 786 7.58 34.70 300 35.24 40.01 - 49.25 407 8.44 42.14 125 42.48 - -------------- ----- ---- ------ ----- ------ $ .23 - 49.25 5,355 8.02 $22.69 1,785 $21.69 ============== ===== ==== ====== ===== ======
Employee Stock Purchase Plan In August 1995, the Board adopted the 1995 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares of common stock for issuance to eligible employees. The Purchase Plan, as amended in August 1997, permits eligible employees to purchase common stock through periodic payroll deductions of up to 10% of their cash compensation. Each offering period will have a maximum duration of six months and shares of common stock will be purchased for each participant at the conclusion of each offering period. The price at which the common stock is purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the common stock on the participant's entry date into the offering period or the fair market 41 43 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. STOCK OPTION AND EMPLOYEE SAVINGS PROGRAMS (CONTINUED) value on the purchase date. In fiscal 1999, 1998 and 1997, a total of 360,000, 74,000 and 57,000 shares, respectively, were issued under the Purchase Plan. (Including shares sold under the former Hyperion Software employee stock purchase plan (see Note B), a total of 256,000 and 262,000 shares were issued in fiscal 1998 and 1997, respectively.) In August 1997 and 1998, the Company's stockholders approved amendments to increase the number of shares of common stock reserved for issuance under the Purchase Plan by a total of 1.1 million shares. Accordingly, .8 million shares are available for issuance under the Purchase Plan. Employee Savings Plans The Company maintains an employee savings plan that qualifies as a cash or deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer up to 15% of their pre-tax compensation, but not more than $10,000 per calendar year. The Company contributes to the plan, annually, up to a maximum of $1,000 per participant. Similar savings plans are maintained with respect to certain non-U.S. employees. In fiscal 1999, 1998 and 1997, the Company contributed $2.8 million, $1.2 million and $1.1 million, respectively, to the savings plans. Pro Forma Disclosure The Company has elected to continue to follow the provisions of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations for financial reporting purposes and has adopted the disclosure-only provisions of Statement No. 123, "Accounting for Stock-Based Compensation," issued by the Financial Accounting Standards Board. The weighted average estimated grant date fair value, as defined by Statement 123, for options granted under the Company's stock option plans in fiscal 1999, 1998 and 1997 was $9.13, $12.89 and $7.45 per share, respectively. The weighted average estimated grant date fair value, as defined by Statement 123, for purchase awards issued under the Company's employee stock purchase plan in fiscal 1999, 1998 and 1997 was $10.69, $6.91 and $6.26 per share, respectively. The estimated grant date fair value disclosed by the Company was calculated using the Black-Scholes model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated grant date fair value. The following weighted average assumptions are included in the estimated grant date fair value calculations for the Company's stock option and purchase awards:
YEAR ENDED JUNE 30, -------------------------------------------- 1999 1998 1997 ---- ---------------- ---------------- Stock option plans: Expected dividend yield................ 0% 0% 0% Expected stock price volatility........ 40% 25% to 60% 25% to 65% Risk free interest rate................ 5.83% 5.5% to 5.76% 6.28% to 6.4% Expected life (years).................. 4.4 2.79 to 5.1 2.41 to 5.5 Stock purchase plan: Expected dividend yield................ 0% 0% 0% Expected stock price volatility........ 40% 25% to 60% 25% to 65% Risk free interest rate................ 5.14% 5.19% to 5.39% 5.34% to 5.44% Expected life (years).................. .5 .5 .5 to .58
42 44 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. STOCK OPTION AND EMPLOYEE SAVINGS PROGRAMS (CONTINUED) Pro Forma Net Income and Earnings Per Share Had the Company recorded compensation based on the estimated grant date fair value, as defined by Statement 123, for awards granted under its stock option plans and stock purchase plan, the Company's net income and earnings per share would have been reduced to the pro forma amounts below for the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands, except per share amounts):
YEAR ENDED JUNE 30, ----------------------------- 1999 1998 1997 ------- ------- ------- Net income as reported................................ $ 7,973 $34,757 $17,704 Pro forma net income (loss)........................... (3,141) 25,305 11,581 Earnings per share as reported: Basic............................................... $.26 $1.19 $.64 Diluted............................................. .26 1.13 .61 Pro forma earnings (loss) per share: Basic............................................... $(.10) $.87 $.42 Diluted............................................. (.10) .82 .40
In accordance with provisions of Statement 123, the pro forma disclosures include only the effect of stock options granted in fiscal 1996, 1997, 1998 and 1999. These pro forma effects may not be representative of the effects of Statement 123 on future years because of the fact that options vest over several years and new grants are generally made each year. J. STOCKHOLDER RIGHTS PLAN In June 1998, the Company adopted a stockholder rights plan (the "Rights Plan") in which preferred stock purchase rights were distributed as a rights dividend at the rate of one right for each share of common stock held as of the close of business on July 3, 1998. The Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. The plan is intended to protect the interests of stockholders in the event the Company is confronted in the future with coercive or unfair takeover tactics. Each right will entitle holders of Company common stock to buy one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company at an exercise price of $250 per one one-thousandth of a preferred share. Generally, the rights will be exercisable only if a person or group acquires more than 15% of the common stock, or announces a tender or exchange offer which would result in its ownership of 15% or more of the common stock, or a person owning 10% or more of the common stock is determined by the board to be an Adverse Person, as defined in the Rights Plan. Under the Rights Plan, the ownership, tender offer and exchange offer thresholds of 15% increase to 25% for certain grandfathered stockholders and approximately 20.5% for one stockholder that held approximately 19.5% of the Company's issued and outstanding stock on July 3, 1998. If any person or group becomes the beneficial owner of 15% or more of the common stock (a "Flip-In Event"), each right not owned by such person or related parties will entitle its holder to purchase, at the then current exercise price of the right, common stock of the Company having a value of twice the right's exercise price (or, in certain circumstances, a combination of cash, property, common stock or other securities or a reduction in the exercise price having an aggregate value equal to the value of the common stock otherwise purchasable). After the occurrence of a Flip-In Event and before any person or affiliated group becomes the owner of 50% or more of the then outstanding common stock, the Company may also exchange one share of 43 45 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) J. STOCKHOLDER RIGHTS PLAN (CONTINUED) common stock for each right outstanding. In addition, if the Company is involved in a merger or other business combination transaction with another person in which its common stock is changed or converted, or sells or transfers more than 50% of its assets or earning power to another person, each right that has not previously been exercised will entitle its holder to purchase, at the then current exercise price of the right, shares of common stock of such other person having a value of twice the right's exercise price. The Company can redeem the rights at $.01 per right prior to the date the ownership thresholds are passed. The rights will expire on July 3, 2008, unless earlier redeemed or exchanged. K. SEGMENT AND GEOGRAPHICAL INFORMATION The Company adopted Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information" on July 1, 1998. Statement 131 establishes standards for the way in which public companies are to disclose certain information about operating segments in their financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has identified two reportable operating segments based on the criteria of Statement 131: 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 Executive 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 CEO its assets or capital expenditures by segments. The significant accounting policies of the reportable segments are the same as those summarized above in Note A. The accompanying statement of income discloses the financial information of the Company's reportable segments in accordance with Statement 131 for the fiscal years ended June 30, 1999, 1998 and 1997. 44 46 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) K. SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
OTHER U.S. U.K. INTERNATIONAL OPERATIONS OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED ---------- ---------- ------------- ------------ ------------ (in thousands) 1999 Revenues: Customers........................ $352,945 $29,276 $42,664 $424,885 Intercompany..................... 3,710 75 38,210 $(41,995) -------- ------- ------- -------- -------- Total..................... 356,655 29,351 80,874 (41,995) 424,885 ======== ======= ======= ======== ======== Operating income (loss)............ 12,798 (1,878) 4,202 15,122 ======== ======= ======= ======== ======== Identifiable assets................ $415,728 $15,203 $81,963 $512,894 ======== ======= ======= ======== ======== 1998 Revenues: Customers........................ $327,569 $26,756 $22,768 $377,093 Intercompany..................... 11,632 7,353 32,896 $(51,881) -------- ------- ------- -------- -------- Total..................... 339,201 34,109 55,664 (51,881) 377,093 ======== ======= ======= ======== ======== Operating income................... 46,989 4,972 330 52,291 ======== ======= ======= ======== ======== Identifiable assets................ $423,308 $21,288 $32,069 $476,665 ======== ======= ======= ======== ======== 1997 Revenues: Customers........................ $229,615 $21,664 $18,934 $270,213 Intercompany..................... 11,509 5,507 25,428 $(42,444) -------- ------- ------- -------- -------- Total..................... 241,124 27,171 44,362 (42,444) 270,213 ======== ======= ======= ======== ======== Operating income................... 20,255 3,662 1,285 25,202 ======== ======= ======= ======== ======== Identifiable assets................ $239,623 $14,714 $23,891 $278,228 ======== ======= ======= ======== ========
"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):
1999 1998 1997 -------- -------- ------- U.K. operations.......................................... $ 29,276 $ 26,756 $21,664 Other international operations........................... 42,664 22,768 18,934 Export................................................... 87,915 70,044 46,148 -------- -------- ------- $159,855 $119,568 $86,746 ======== ======== ======= Percentage of total revenues............................. 38% 32% 32% ======== ======== =======
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. 45 47 HYPERION SOLUTIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) L. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations for the two years ended June 30, 1999 (in thousands, except per share data): - ------------------------------------------------------------------------------------------------ FISCAL 1999 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 - ------------------------------------------------------------------------------------------------ Total revenues................................ $104,882 $106,958 $101,646 $111,399 Gross profit.................................. 74,537 76,524 71,392 79,368 Net income (loss)............................. (9,933)(a) 8,648 2,579 6,679(a) Diluted earnings (loss) per share............. (.33)(a) .28 .08 .22(a)
- ------------------------------------------------------------------------------------------------ FISCAL 1998 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 - ------------------------------------------------------------------------------------------------ Total revenues................................ $ 77,015 $ 87,237 $ 88,764 $124,077 Gross profit.................................. 54,343 61,273 62,939 94,374 Net income.................................... 5,251 6,468 3,371 19,667 Diluted earnings per share.................... .17 .21 .11 .63
- --------------- (a) Excluding the $21.8 million ($18.7 million after tax) nonrecurring charge accrued in the September quarter for merger costs and the related $(2.3) million ($(1.3) million after tax) credit recorded in the June quarter, the Company would have had net income of $8.8 million and $5.4 million or $.28 and $.17 per pro forma diluted share, for its first quarter ended September 30, 1998 and its fourth quarter ended June 30, 1999, respectively. 46 48 PART II (CONTINUED) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which are incorporated herein by reference to the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders. See also the section entitled "Employees" appearing in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION See the sections entitled "Director Compensation" and "Executive Compensation and Related Information," which are incorporated herein by reference to the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the section entitled "Stock Ownership of Certain Beneficial Owners and Management," which is incorporated herein by reference to the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) The consolidated financial statements of Hyperion Solutions Corporation are included in Item 8: Consolidated Balance Sheet as of June 30, 1999 and 1998 Consolidated Statement of Income for the years ended June 30, 1999, 1998 and 1997 Consolidated Statement of Stockholders' Equity for the years ended June 30, 1999, 1998 and 1997 Consolidated Statement of Comprehensive Income for the years ended June 30, 1999, 1998 and 1997 Consolidated Statement of Cash Flows for the years ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (2) Financial statement schedule, which is included at the end of this report: Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted since they are not required, not applicable or the information has been included in the consolidated financial statements or the notes thereto. 47 49 (3) Exhibits:
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1(a) -- Agreement and Plan of Merger dated May 25, 1998, by and among Registrant, Merger Sub and Hyperion 3.1(j) -- Registrant's Restated Certificate of Incorporation 3.2(i) -- Registrant's Amended and Restated Bylaws 4.1(b) -- Specimen Certificate of the Registrant's Common Stock 4.2(b) -- Amended and Restated Investor Rights Agreement between the Registrant and the Investors specified therein dated as of September 16, 1993 4.5(d) -- Indenture dated March 15, 1998 by and between Registrant and State Street Bank and Trust Company of California, N.A. 4.6(d) -- Registration Rights Agreement dated March 15, 1998 by and between the Registrant and Morgan Stanley & Co. Incorporated and BancAmerica Robertson Stephens 10.1(b) -- Master Lease Agreement and Warrant Agreement between the Registrant and Phoenix Leasing, dated as of June 30, 1993 10.2(b) -- 1992 Stock Option Plan 10.3(c) -- 1995 Stock Option/Stock Issuance Plan 10.4(c) -- Employee Stock Purchase Plan 10.5(b) -- Form of Indemnification Agreement 10.6(b) -- License Agreement dated December 23, 1993, between the Registrant and Comshare Incorporated 10.7(c) -- Real Property Lease between the Registrant and SBC&D & Company dated as of July 16, 1996 10.8(e) -- Hyperion Software Corporation 1991 Stock Plan 10.9(e) -- Hyperion Software Corporation 1991 Non-Employee Director Stock Option Plan 10.10(g) -- Agreement and Plan of Reorganization dated November 7, 1994 by and among IMRS Inc., IP Merger, Inc., Pillar Corporation and American Stock Transfer & Trust Company, as escrow Agent 10.11(g) -- Agreement and Plan of Merger dated November 29, 1994 among IMRS Inc., IP Merger, Inc. and Pillar Corporation 10.12(f) -- Loan Agreement with the Connecticut Development Authority, dated January 20, 1995, regarding financing of an office facility (including related Promissory Note and Mortgage Deed) 10.13(h) -- Employment Agreement with Mark J. Bilger, dated May 27, 1997 10.14(k) -- Employment Agreement with William Clark, dated August 24, 1998 10.15(k) -- Employment Agreement with Stephen V. Imbler, dated February 23, 1999 10.16(k) -- Employment Agreement with William B. Binch, dated February 23, 1999 10.17(k) -- Amended & Restated Employment Agreement with James A. Perakis, dated January 1, 1999 10.18 -- Share Purchase Agreement, dated April 14, 1999 by and among the Registrant, HSC Acquisition Co., and the shareholders of Sapling Corporation (filed herewith) 10.19 -- Separation Agreement with John M. Dillon, dated June 7, 1999 (filed herewith) 10.20 -- Separation Agreement with William B. Binch, dated June 16, 1999 (filed herewith) 22.1 -- List of subsidiaries of the Registrant (filed herewith) 23.1 -- Consent of PricewaterhouseCoopers LLP, independent accountants, (filed herewith)
48 50
EXHIBIT NO. DESCRIPTION - ----------- ----------- 23.2 -- Consent of Ernst & Young LLP, independent auditors (file herewith) 27 -- Financial Data Schedule (filed herewith)
- --------------- (a) Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K, dated May 25, 1998 (b) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form S-1, filed November 6, 1995 (file no. 33-97098), as amended (c) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K, dated June 28, 1997 (d) Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K, dated March 5, 1998 Incorporated by reference to the exhibits to a Hyperion Software Corporation Registration Statement or Current Report (file no. 0-19538): (e) Form S-1 file no. 33-42855 (f) Form 10-Q filed in February 1995 (g) Form 8-K filed in December 1994 (h) Form 10-K filed in September 1997 (i) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form S-4 (file no. 333-57197), as amended, filed on June 18, 1998 (j) Incorporated by reference to such exhibit as filed in the Registrant's Current Report on Form 8-K, dated August 24, 1998 and filed on October 13, 1998 (k) Incorporated by reference to the exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (b) Reports on Form 8-K: The Company filed a report on Form 8-K on May 17, 1999. 49 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 27, 1999 Hyperion Solutions Corporation (Registrant) By: /s/ STEPHEN V. IMBLER ------------------------------------ Stephen V. Imbler President, Chief Executive Officer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ STEPHEN V. IMBLER President, Chief Executive September 27, 1999 - --------------------------------------------------- Officer and Chief Stephen V. Imbler Financial Officer /s/ JAMES A. PERAKIS Chairman September 27, 1999 - --------------------------------------------------- James A. Perakis /s/ GARY G. GREENFIELD Director September 27, 1999 - --------------------------------------------------- Gary G. Greenfield /s/ HARRY S. GRUNER Director September 28, 1999 - --------------------------------------------------- Harry S. Gruner /s/ ALDO PAPONE Director September 28, 1999 - --------------------------------------------------- Aldo Papone /s/ MARK W. PERRY Director September 28, 1999 - --------------------------------------------------- Mark W. Perry /s/ JEFFREY R. RODEK Director September 28, 1999 - --------------------------------------------------- Jeffrey R. Rodek /s/ MICHAEL A. MANTO Vice President and Corporate September 27, 1999 - --------------------------------------------------- Controller Michael A. Manto
50 52 ITEM 14(a)(2) AND ITEM 14(d). FINANCIAL STATEMENT SCHEDULE HYPERION SOLUTIONS CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (in thousands)
ADDITIONS ------------------------- CHARGED BALANCE AT CHARGED TO TO OTHER DEDUCTIONS BALANCE BEGINNING COSTS AND ACCOUNTS -- (ADDITIONS) AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE(A) DESCRIBE OF PERIOD - ----------- ---------- ---------- ----------- ----------- --------- For the year ended June 30, 1997 Allowance for doubtful accounts, returns and discounts.......... $5,288 765 2,119 2,089(b) $ 6,083 Valuation allowance for deferred tax assets..................... 6,544 39 4,227(c) 2,356 For the year ended June 30, 1998 Allowance for doubtful accounts, returns and discounts.......... $6,083 1,297 4,000 2,488(b) $ 8,892 Valuation allowance for deferred tax assets..................... 2,356 129 326(c) 2,159 For the year ended June 30, 1999 Allowance for doubtful accounts, returns and discounts.......... $8,892 1,582 6,800 5,474(b) $11,800 Valuation allowance for deferred tax assets..................... 2,159 121 (1,734)(c) 4,014
- --------------- (a) Charged to revenues (b) Write-offs, returns and discounts, net of recoveries (c) Recognition and adjustments 51 EX-10.18 2 SHARE PURCHASE AGREEMENT 1 Exhibit 10.18 ================================================================================ SHAREHOLDERS OF SAPLING CORPORATION ARE ADVISED TO SEEK INDEPENDENT LEGAL ADVICE CONCERNING THEIR RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT. SEE SECTION 8.17 OF THIS AGREEMENT. ================================================================================ SHARE PURCHASE AGREEMENT This Agreement dated as of April 14, 1999 is made B E T W E E N HYPERION SOLUTIONS CORPORATION, a corporation incorporated under the laws of the State of Delaware and HSC ACQUISITION CO., an unlimited liability corporation incorporated under the laws of the province of Nova Scotia and THE SHAREHOLDERS OF SAPLING CORPORATION RECITALS WHEREAS Sapling Corporation ("SAPLING") is a corporation incorporated under the laws of the province of Ontario with authorized share capital consisting of an unlimited number of common shares and an unlimited number of non-voting redeemable preference shares of which Five Million, Seven Hundred and Fifty-Three Thousand, Four Hundred and Fifty-One (5,753,451) common shares will be issued and outstanding as fully-paid and non-assessable as at the Closing Time (defined below); AND WHEREAS the Shareholders (defined below) collectively own all of the issued and outstanding common shares of Sapling (the "SHARES"); AND WHEREAS Parentco (defined below) has caused the incorporation of the Purchaser (defined below) for the purpose of purchasing the Shares from the Shareholders; AND WHEREAS the Shareholders have agreed to sell and the Purchaser (defined below) has agreed to purchase the Shares from the Shareholders on the terms and conditions set forth in this agreement; NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the mutual covenants, agreements, representations and warranties of the parties hereinafter 2 -2- contained and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by each party), the parties agree as follows: --------------------- ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS. In this Agreement, the following terms shall have the meanings set out below unless the context requires otherwise: "AFFILIATE" has the meaning ascribed thereto under the OBCA. "AGREEMENT" means this Agreement, including the Exhibits and the Schedules to this Agreement, as it or they may be amended or supplemented from time to time, and the expressions "HEREOF", "HEREIN", "HERETO", "HEREUNDER", "HEREBY" and similar expressions refer to this Agreement and not to any particular Section or other portion of this Agreement. "ANNUAL EARN-OUT CONSIDERATION" has the meaning given in Section 2.4(1). "APPLICABLE EMPLOYEE BENEFIT LAWS" has the meaning given in Section 5.1(38). "APPLICABLE LAW" means, with respect to any Person, property, transaction, event or other matter, any law, rule, statute, regulation, order, judgment, decree, treaty or other requirement having the force of law (collectively, the "LAW") relating or applicable to such Person, property, transaction, event or other matter. Applicable Law also includes, where appropriate, any interpretation of the Law (or any part thereof) by any Person having jurisdiction over it, or charged with its administration or interpretation. "ARBITRATION" has the meaning given in Section 8.15. "ARBITRATION ACT" has the meaning given in Section 8.15. "ASSETS" means all the properties, assets, interests and rights of the Corporation as constituted at the Closing Date including the following: (a) all rights and interests of the Corporation to and in the Leased Premises and under the Premises Leases, including prepaid rents, security deposits and options to renew or purchase, rights of first refusal under the Premises Leases and all leasehold improvements owned by the Corporation and forming part of the Leased Premises; (b) the Personal Property; (c) the Inventories; (d) the Receivables; (e) all rights and interests of the Corporation under or pursuant to all warranties, representations and guarantees, express, implied or otherwise, of or made by suppliers or others in favour of the Corporation in connection with the Assets; 3 -3- (f) the Intellectual Property; (g) the Contracts; (h) the Licences and Permits; (i) the Books and Records; (j) all prepaid charges, deposits, sums and fees paid by the Corporation before the Closing Time; (k) all rights and interests of the Corporation in all goodwill of the Corporation including the present telephone numbers, internet domain addresses and other communications numbers and addresses of the Corporation; (l) all of the issued and outstanding shares of the Subsidiaries; and (m) all proceeds of any or all of the foregoing. "ASSOCIATE" has the meaning ascribed thereto under the OBCA. "AUDITORS" means PricewaterhouseCoopers LLP or such other firm of public accountants other than the Reviewing Accountants designated by the Purchaser from time to time. "B & E ESCROW AGREEMENT" means an agreement substantially in the form of Exhibit N and acceptable to Borden & Elliot. "BACKLOG" means any order for the licensing of Software Products that, as at the end of a period for which revenue is to be determined, would meet all conditions for recognition of software license fees by Parentco on a consolidated basis in accordance with US GAAP except for the condition that the Software Products be shipped. "BCG ESCROW AGREEMENT" means an agreement substantially in the form of Exhibit N and acceptable to Blake, Cassels & Graydon to which Blake, Cassels & Graydon, the Purchaser, Parentco and the Non-Resident Shareholders are party. "BOOKS AND RECORDS" means all rights and interests of the Corporation in all books, records, files and papers of the Corporation including drawings, engineering information, computer programs (including source code), software programs, manuals and data, sales and advertising materials, sales and purchases correspondence, trade association files, research and development records, lists of present and former customers and suppliers, personnel, employment and other records, and the minute and share certificate books of the Corporation, and all copies and recordings of the foregoing. "BREACHING SHAREHOLDER" has the meaning given in Section 4.2. "BUSINESS" means the business carried on by the Corporation which primarily involves the design, development and marketing of software for business modelling, activity-based costing/activity-based management and performance management, as well as related training, technical support and solutions expertise. 4 -4- "BUSINESS DAY" means any day except Saturday, Sunday or any day on which banks are generally not open for business in the City of Toronto. "CANADIAN DOLLARS" or "CDN. $" means the lawful currency of Canada. "CANADIAN GAAP" means those accounting principles which are recognized as being generally accepted in Canada from time to time as set out in the handbook published by the Canadian Institute of Chartered Accountants, consistently applied. "CANADIAN GAAS" means those auditing standards which are recognized as being generally accepted in Canada from time to time as set out in the handbook published by the Canadian Institute of Chartered Accountants, consistently applied. "CHANNEL SALES PROGRAMS" means arrangements for the licensing or sub-licensing of a software product of a Person by another Person that is not a Non-Arm's Length Party in relation to the first-mentioned Person, such as a value-added reseller or distributor, and that is commonly referred to as a "channel distributor". "CLAIM" has the meaning given in Section 6.1. "CLOSING" means the completion of the purchase and sale of the Shares in accordance with the provisions of this Agreement. "CLOSING AGREEMENTS" means the B & E Escrow Agreement, the BCG Escrow Agreement, the Non-Competition Agreement and Intellectual Property Assignments, the IP Assignments, and the releases referred to in Section 3.2(14). "CLOSING DATE" means April 21, 1999 or such earlier or later date as may be agreed upon in writing by the Purchaser, Parentco and the Shareholder Committee on behalf of the Shareholders. "CLOSING STATEMENT" has the meaning given in Section 2.7(1). "CLOSING STATEMENT ADJUSTMENTS" has the meaning given in Section 2.7(1). "CLOSING TIME" means the time of closing on the Closing Date provided for in Section 3.1. "COMMON SHAREHOLDERS' RIGHTS" has the meaning given in Section 2.13. "CONFIDENTIAL INFORMATION" has the meaning given in Section 7.3(4) "CONSENTS AND APPROVALS" means all consents and approvals of the Corporation and the Shareholders required to be obtained in connection with the execution and delivery of this Agreement and the completion of the transactions contemplated by this Agreement, as described in Schedule 5.1(30). "CONTRACTS" means all rights and interests of the Corporation in all pending and/or executory contracts, agreements, leases and arrangements, whether written or oral, to which the Corporation is a party or by which the Corporation or the Assets or the Business is bound including the Material Contracts and the Leases. 5 -5- "CORPORATION" means Sapling Corporation and each of its Subsidiaries collectively. "DEBENTURES" has the meaning given in Section 4.1. "DIRECT CLAIM" has the meaning given in Section 6.3. "DIRECT SALES" means the licensing of a software product by the direct sales force of a Person. "DIRECTOR" means a director of the Corporation; and "DIRECTORS" means every Director. "DISPUTE" means any dispute arising out of or in relation to this Agreement between any two or more Parties, one of which is the Purchaser or Parentco, excluding a dispute that involves or is reasonably likely to involve a Person other than a Party and excluding any dispute in respect of the Closing Statement or a Software Revenue Statement. "EARN-OUT THRESHOLD" has the meaning given in Section 2.4. "EARN-OUT YEAR" has the meaning given in Section 2.4(1). "EMPLOYEE" means an individual who is employed by the Corporation; and "EMPLOYEES" means every Employee. "EMPLOYEE CERTIFICATE" has the meaning given in Section 5.1(36). "EMPLOYEE PLANS" has the meaning given in Section 5.1(38). "ENTERPRISE MARKET" means the market for software products consisting of any Person, including any division or Affiliate thereof, which in aggregate has annual revenues, if based in North America of $300 million or more and, if based outside North America, of such dollar amounts less than $300 million as established from time to time by Parentco or an Affiliate of Parentco. "ENVIRONMENTAL LAWS" means Applicable Law in respect of the natural environment, public or occupational health or safety, and the manufacture, importation, handling, transportation, storage, disposal and treatment of Hazardous Substances. "ENVIRONMENTAL PERMITS" means all permits, certificates, approvals, consents, registrations and licences issued or required by any Environmental Laws or any court or governmental authority and relating to or required for the ownership and/or operation of the Business and/or the Assets. "ESTIMATED CLOSING STATEMENT" has the meaning given in Section 2.6. "ESTIMATED REDUCTION" has the meaning given in Section 2.6. "EXCHANGE RATE" means the spot rate of exchange for a currency, expressed in US Dollars, based on the rate of exchange published in The Wall Street Journal on the relevant date of determination. 6 -6- "FINANCIAL STATEMENTS" has the meaning given in Section 5.1(14). "FUNDING OF SHAREHOLDERS' RIGHTS" has the meaning given in Section 2.13. "HAZARDOUS SUBSTANCE" means any solid, liquid, gas, odour, heat, sound, vibration, radiation or combination of them that may impair the natural environment, injure or damage property or plant or animal life or harm or impair the health of any individual. "INCLUDING" means "including without limitation", and "INCLUDES" means "includes without limitation". "INDEMNIFIED PARTY" means a Person whom the Shareholders or the Purchaser, as the case may be, has agreed to indemnify under Article 6. "INDEMNIFYING PARTY" means, in relation to an Indemnified Party, the Party to this Agreement that has agreed to indemnify that Indemnified Party under Article 6. "INITIATING PARTY" has the meaning given in Section 8.15. "INTELLECTUAL PROPERTY" shall mean all rights of the Corporation in and to inventions (whether or not patentable), ideas, formulae, software (in source and object code form), including the Software Products, process engineering, art works, schematic drawings, processes, product plans, logos, trademarks, trademark applications, service marks, copyrights, trade names, trade secrets, know-how, technical information, patents, patent applications, databases, employee lists and customer files. "INTERIM PERIOD" means the period from the date of this Agreement to the Closing. "INVENTORIES" means all inventories of stock-in-trade and merchandise including materials, supplies, work-in-progress, finished goods, tooling, service parts and purchased finished goods owned by the Corporation. "INVESTORS" means Telesystem Software Ventures Limited Partnership and Stonebridge. "IP ASSIGNMENT" means an agreement in the form of Exhibit N. "JANUARY CREDIT FACILITY" has the meaning given in Section 4.1. "LEASED PREMISES" means all real property that is leased or occupied by the Corporation under the Premises Leases. "LEASES" means Personal Property Leases and Premises Leases. "LICENCES AND PERMITS" means all licences, permits, filings, authorizations, approvals or indicia of authority issued to the Corporation including the Environmental Permits. "LIEN" means any encumbrance, lien, charge, hypothec, pledge, mortgage, title retention agreement, security interest of any nature, adverse claim, exception, reservation, easement, right of occupation, any matter capable of registration against title, option, right of pre-emption, privilege or any contract to create any of the foregoing. 7 -7- "MATERIAL ADVERSE CHANGE" means a change in the business, operations or capital of the Corporation which has had or could reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Corporation or the value of the Shares. "MATERIAL CONTRACT" means an agreement (whether oral or written) to which the Corporation is a party or by which the Corporation or any of the Assets or the Business is bound including all amendments thereto, except (i) the Leases and (ii) any agreement which involves or may reasonably be expected to involve the payment to or by the Corporation of less than $25,000 over the term of the agreement and which is not otherwise material to the operation of the Business. "MATERIAL PERSONAL PROPERTY LEASES" has the meaning given in Section 5.1(19). "MINORITY RESOLUTION" has the meaning given in Section 2.13. "MODULE" means any software that links to or works with, and shares resources such as libraries or subroutines with, any other software, but the source code for which is not integrated with the source code of such other software on a line by line basis. "NON-ARM'S LENGTH PARTY" has the meaning ascribed thereto under the Income Tax Act (Canada), and all regulations thereunder, as amended from time to time. "NON-COMPETITION AGREEMENT AND INTELLECTUAL PROPERTY ASSIGNMENT" means an agreement in the form of Exhibit E1 in the case of the Investors and Exhibit E2 in the case of Derek Sandison and Robin Alexander. "NON-RESIDENT SHAREHOLDER" has the meaning given in Section 2.10(1). "NON-RESIDENT'S PURCHASE PRICE" has the meaning given in Section 2.10(1). "NOTICES" means the notices required to be given by the Corporation and Shareholders to any Person under Applicable Law or pursuant to any Material Contract to which the Corporation is a party or by which the Corporation is bound or which is applicable in connection with the execution and delivery of this Agreement or the completion of the transactions contemplated by this Agreement by the Corporation and Shareholders, as set out in Schedule 5.1(31). "OBCA" means the Business Corporations Act (Ontario), as amended from time to time. "OBJECTION NOTICE" has the meaning given in Section 2.9. "OFFICER" means an officer of the Corporation; and "OFFICERS" means every Officer. "OPTION" means any agreement, any option, right or privilege (whether pre-emptive or contractual) capable of becoming an agreement, or any security, option, warrant, conversion right, subscription right or exchange right of any kind, whether written or oral. "PARENTCO" means Hyperion Solutions Corporation. 8 -8- "PARTY" means a party to this Agreement and any reference to a Party includes its successors and permitted assigns; and "PARTIES" means every Party. "PERMITTED LIENS" means: (a) Liens for Taxes if such Taxes are not due and payable; (b) mechanics', construction, carriers', workers', repairers', storers' or other similar liens (inchoate or otherwise) which individually or in the aggregate are not material, arising or incurred in the ordinary course of business which have not been filed, recorded or registered in accordance with Applicable Law or of which notice has not been given to the Corporation; and (c) the charges, security interests and other liens listed in Schedule 1.1(1). "PERSON" is to be broadly interpreted and includes an individual, a corporation, a partnership, a trust, an unincorporated organization, the government of a country or any political subdivision thereof or any agency or department of any such government, and the executors, administrators or other legal representatives of an individual in such capacity. "PERSONAL PROPERTY" means all machinery, equipment, furniture, motor vehicles and other chattels owned or leased by the Corporation (including those in possession of third parties). "PERSONAL PROPERTY LEASES" means all chattel leases, equipment leases, rental agreements, conditional sales contracts and other similar agreements in respect of Personal Property entered into by the Corporation, including all amendments thereto. "PREMISES LEASES" means all the leases, agreements to lease, subleases, licence agreements and occupancy or other agreements, including all amendments thereto, as described in Schedule 5.1(18). "PRIME RATE" means the prime rate of interest per annum quoted by Bank of Montreal from time to time as its reference rate of interest for Canadian dollar demand loans made to its commercial customers in Canada and which Bank of Montreal refers to as its "prime rate", as such rate may be changed from time to time. "PURCHASE PRICE" has the meaning given in Section 2.2. "PURCHASE PRICE INCREASE" has the meaning given in Section 2.7(1)(ii). "PURCHASE PRICE REDUCTION" has the meaning given in Section 2.7(1)(i). "PURCHASER" means HSC Acquisition Co. "PURCHASER'S SOLICITORS" means Blake, Cassels & Graydon and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. "RECEIVABLES" means all accounts receivable, bills receivable, trade accounts, book debts and insurance claims of the Corporation on a consolidated basis together with any unpaid interest 9 -9- accrued on such items and any security or collateral for such items, including recoverable deposits. "RELATED TO THE BUSINESS" means, directly or indirectly, used in, arising from or relating in any manner to the Business. "RELEASE" includes an actual or potential discharge, deposit, spill, leak, pumping, pouring, emission, emptying, injection, escape, leaching, seepage or disposal of a Hazardous Substance which is or may be in breach of any Environmental Laws. "REMITTANCE DATE" has the meaning given in Section 2.10(2). "REPRESENTATIVES" has the meaning given in Section 7.3(4). "RESPONDING PARTY" has the meaning given in Section 8.15(2). "REVENUE" has the meaning given in the definition of the term "Software Revenue". "REVIEWING ACCOUNTANTS" means any firm of chartered accountants having qualification to practice in both Canada and the United States as the Purchaser and the Shareholders delivering an Objection Notice, acting reasonably, mutually agree to and excluding each of PricewaterhouseCoopers LLP and Ernst & Young and any related or successor firm. "SAPLING" means Sapling Corporation and any successor corporation resulting from a merger, arrangement, amalgamation, business combination, continuance or similar transaction to which Sapling is a party. "SECTION 116 CERTIFICATE" has the meaning given in Section 2.10(1). "SHAREHOLDERS AGREEMENT" has the meaning given in Section 4.1. "SHARES" means all the issued and outstanding shares in the capital of Sapling as constituted at the Closing Time. "SHAREHOLDER COMMITTEE" has the meaning given in Section 2.13. "SHAREHOLDERS" means the Persons whose names and shareholdings are listed in Schedule 1.1(2). "SHAREHOLDERS AGREEMENT" means the Amended and Restated Shareholders' Agreement dated as of October 15, 1998 between, inter alia, the Corporation and each of the Investors, including any amendments thereto; "SHAREHOLDERS' SOLICITORS" means in the case of Derek Sandison, Integrated Business Modelling Corp., Susan Griggs, Robin Alexander, James Danziger and Philip Powell, Borden & Elliot, and in the case of the Investors, Morris Rose & Ledgett. "SOFTWARE PRODUCTS" means: 10 -10- (i) all existing software as at the Closing Date owned or controlled or created by or for the Corporation, or licensed pursuant to licenses in favour of the Corporation and referred to in Schedule 5.1(23), including software for business modelling, activity-based costing/activity-based management and performance management and including the computer software applications currently known as "NetProphet" and "NetScore"; and (ii) all prior and future versions thereof and corrections, updates, enhancements, reissuances and modifications thereto and all source code and other materials relating thereto, whether developed before or after the Closing Date. Notwithstanding any of the foregoing, Software Products shall exclude: (i) all Modules (other than those for which the primary functionality is activity-based costing/activity-based management or performance management) that link to or work with any of the foregoing that are owned or controlled or created by or for, or licensed in favour of, Parentco or any Affiliate of Parentco (other than the Corporation and its successors), including all prior versions thereof and corrections, updates, enhancements, reissuances and modifications thereto and all source code and other materials relating thereto, and in each case whether developed or acquired by Parentco or any other Person (other than the Corporation and its successors), other than any Module that constitutes a Web-based delivery mechanism for NetProphet or NetScore developed after the Closing Date; and (ii) all existing and future software owned or controlled or created by or for, or licensed in favour of Parentco or any Affiliate of Parentco (other than the Corporation and its successors) and any software substantially based thereon, and in each case including all prior versions thereof and corrections, updates, enhancements, reissuances and modifications thereto and all source code and other materials relating thereto, and in each case whether developed or acquired by Parentco or any other Person (other than the Corporation and its successors). "SOFTWARE REVENUE" means for the Earn-out Year or the Stub Period, as the case may be, subject to the terms of this provision, all software license fees and other revenue recognized by Parentco on a consolidated basis in accordance with US GAAP generated from the licensing and other exploitation of the Software Products ("REVENUE"), and without limiting the generality of the foregoing shall include: (i) a share of all software license fees attributable to Software Products with respect to licenses of applications bundled with, or multi-product sales including, the Software Products, in each case allocated in accordance with US GAAP; (ii) to the extent that any Revenue recognized by Parentco on a consolidated basis as a result of licensing or other exploitation of the Software Products to Non-Arm's Length Parties is less than the amount of the Revenue that would have been charged by Parentco to a Person other than a Non-Arm's Length Party, the amount of such deficiency; (iii) any amount deemed to be "Software Revenue" in accordance with Section 2.8(1); and (iv) an amount equal to the software license fees that would have been recognized by Parentco on a consolidated basis in accordance with US GAAP as a result of the shipment of 11 -11- any Backlog. To the extent that Revenue recognized by Parentco on a consolidated basis in accordance with US GAAP for Software Products is less than the following thresholds: (i) $35,000 in the case of any such revenue generated after the Closing Date by Direct Sales by Parentco or any Affiliate thereof of the first multi-user single server configuration of NetScore or NetProphet or any correction, update, enhancement, reissuance or modification thereto to any Person including a division or Affiliate thereof; (ii) $15,000 in the case of revenue generated after the Closing Date by Direct Sales by Parentco or any Affiliate thereof of any subsequent configuration of a product referred to in clause (i) to the same Person including a division or Affiliate thereof; and (iii) $10,000 in the case of any revenue generated after the Closing Date by the license or other disposition of a single user configuration of NetScore or NetProphet or any correction, update, enhancement, reissuance or modification thereto, then Software Revenue shall in each case include the amount necessary to increase such revenue recognized by Parentco to the applicable threshold amount referred to above. Notwithstanding any of the foregoing, Software Revenue shall exclude any revenue recognized by the Corporation prior to Closing or any revenue attributed to the provision of services or maintenance revenue, and shall be net of any payments made or accrued by Parentco on a consolidated basis to any Person, other than employees of Parentco or employees of any Affiliate of Parentco in respect of sales or product royalties, commissions or other similar compensation. "SOFTWARE REVENUE STATEMENTS" means the statements delivered in accordance with Sections 2.7(2) and 2.7(3). "SRED TAX CREDIT" means the amount in respect of the refundable scientific research and experimental development tax credits claimed or to be claimed in respect of any fiscal period or taxation year ending on or prior to the Closing Date by the Corporation under the Income Tax Act (Canada) and reflected in the Closing Statement. "STATEMENT OF DISPUTE" has the meaning given in Section 8.15(2). "STONEBRIDGE" means CIBC Trust and Merchant Bank (Barbados) Limited in its capacity as trustee of The Stonebridge Domestic Trust. "STUB PERIOD" means the period commencing on the Closing Date and terminating on June 30, 1999. "STUB PERIOD SOFTWARE REVENUE SHORTFALL" means the excess, if any, of the Stub Period Software Revenue Target over the Software Revenue for the Stub Period. "STUB PERIOD SOFTWARE REVENUE TARGET" means the product of (i) $1,127,610; and (ii) a fraction, the numerator of which is the number of days in the Stub Period and the denominator of which is 91. 12 -12- "SUBSIDIARIES" means the corporations listed in Schedule 5.1(11) other than Sapling. "TAXES OR TAX" means any and all taxes, charges, fees, levies, imposts and other assessments, including all income, sales, use, goods and services, value added, capital, capital gains, alternative, net worth, transfer, profits, withholding, payroll, employer health, excise, franchise, real property and personal property taxes, and any other taxes, customs duties, fees, assessments or similar charges in the nature of a tax including Canada Pension Plan and provincial pension plan contributions, unemployment insurance payments and workers' compensation premiums, together with any instalments with respect thereto, and any interest, fines and penalties imposed by any governmental authority (including federal, state, provincial, municipal and foreign governmental authorities), and whether disputed or not. Taxes shall also mean any liability for the payment of any amounts of the type described in the preceding sentence as a result of any express or implied obligation to indemnify any other person. "TELSOFT" has the meaning given in Section 4.3. "THIRD PARTY" has the meaning given in Section 6.5. "THIRD PARTY CLAIM" has the meaning given in Section 6.3. "US DOLLARS" or "$" means the lawful currency of the United States of America. "US GAAP" means those accounting principles which are recognized as being generally accepted in the United States of America from time to time, consistently applied and, for the purposes of this Agreement, shall mean that the currency of display is US Dollars. "WITHHELD AMOUNT" has the meaning given in Section 2.10(2). "YEAR 2000 COMPLIANT" has the meaning given in Section 5.1(26). 1.2 HEADINGS AND TABLE OF CONTENTS. The division of this Agreement into Articles and Sections, the insertion of headings, and the provision of any table of contents are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 1.3 NUMBER AND GENDER. Unless the context requires otherwise, words importing the singular include the plural and vice versa and words importing gender include all genders. 1.4 BUSINESS DAYS. If any payment is required to be made or other action is required to be taken pursuant to this Agreement on a day which is not a Business Day, then such payment or action shall be made or taken on the next Business Day. 1.5 CURRENCY AND PAYMENT OBLIGATIONS. Except as otherwise expressly provided in this Agreement: (1) all dollar amounts referred to in this Agreement are stated in US Dollars; (2) any payment contemplated by this Agreement shall be made by cash, certified cheque or any other method that provides immediately available funds; and 13 -13- (3) except in the case of any payment due on the Closing Date, any payment due on a particular day must be received and available not later than 2:00 p.m. (Toronto time) on the due date and any payment made after that time shall be deemed to have been made and received on the next Business Day. 1.6 CALCULATION OF INTEREST. In calculating interest payable under this Agreement for any period of time, the first day of such period shall be included and the last day of such period shall be excluded. 1.7 STATUTE REFERENCES. Any reference in this Agreement to any statute or any section thereof shall, unless otherwise expressly stated, be deemed to be a reference to such statute or section as amended, restated or re-enacted from time to time. 1.8 SECTION AND SCHEDULE REFERENCES. Unless the context requires otherwise, references in this Agreement to Sections, Exhibits or Schedules are to Sections, Exhibits or Schedules of this Agreement. The Exhibits and Schedules to this Agreement are as follows: EXHIBITS A Share Transfer Form B Shareholder's Bring-Down Certificate C Shareholder's Corporate Certificate C1 Investor's Certificate D Corporation's Corporate Certificate E1 Non-Competition Agreement and Intellectual Property Assignment E2 Non-Competition Agreement and Intellectual Property Assignment F Shareholder's Solicitors' Opinion G Resignation of Director/Officer H Shareholder's Release I Conditional Release J Bring-Down Certificate of Purchaser and Parentco K Corporate Certificate of Purchaser and Parentco L Purchaser's Solicitors' Opinion M IP Assignment N B & E Escrow Agreement SCHEDULES 1.1(1) Permitted Liens 1.1(2) Shareholders 2.7(1) Closing Statement Adjustments 2.14 Option Agreements 5.1(3) Debentures and Options 5.1(7) Litigation 5.1(11) Authorized Capital and Other Capital 5.1(14) Financial Statements 5.1(15) Assets 5.1(17) Personal Property 14 -14- 5.1(18) Premises Leases 5.1(19) Personal Property Leases 5.1(20) Material Contracts 5.1(23) Intellectual Property 5.1(25) Employees and Developers 5.1(27) Licences and Permits 5.1(29) Bank Accounts and Safety Deposit Boxes 5.1(30) Consents and Approvals 5.1(31) Notices 5.1(34) Insurance 5.1(35) Environmental Matters 5.1(36) Employees 5.1(37) Collective Agreements 5.1(38) Employee Plans 5.1(39) Customers and Suppliers 5.1(42) Intercompany Services 5.1(48) Absence of Certain Changes or Events --------------------- ARTICLE 2 PURCHASE OF SHARES 2.1 AGREEMENT TO PURCHASE AND SELL. At the Closing Time, subject to the terms and conditions of this Agreement, the Shareholders shall sell to the Purchaser, and the Purchaser shall purchase from the Shareholders, the Shares. 2.2 AMOUNT OF PURCHASE PRICE. The purchase price payable by the Purchaser to the Shareholders for the Shares (the "PURCHASE PRICE") shall be equal to the sum of: (1) subject to Section 2.7(1), Fifteen Million US Dollars ($15,000,000); (2) the Annual Earn-out Consideration, which earn-out consideration is intended to represent the value of a portion of the underlying goodwill which the Parties have been unable to quantify prior to the date hereof; and (3) the amount of any payments made by the Purchaser to the Shareholders under Section 2.11, less the aggregate amount of deductions and payments made under Section 2.11(3). 2.3 PAYMENT OF PURCHASE PRICE. (1) Subject to Sections 2.3(2) and (3) and Section 2.10, the Purchase Price shall be paid and satisfied as follows: (i) subject to Section 2.6, Section 2.7 and Section 2.12, an amount equal to Fifteen Million US Dollars ($15,000,000) shall be paid at the Closing; 15 -15- (ii) subject to Section 2.11(3), an amount equal to the Annual Earn-out Consideration, if any, shall be paid to the Shareholders in accordance with Section 2.4(1); and (iii) an amount equal to any payments required to be made by the Purchaser to the Shareholders under Section 2.11, in accordance with such Section. in each case with each Shareholder receiving a portion thereof based on the percentage of Shares beneficially owned by such Shareholder as at the Closing Time as set forth opposite the Shareholder's name in Schedule 1.1(2). (2) Subject to Section 2.3(3), each of the Shareholders hereby irrevocably directs the Purchaser to make all payments on account of the Purchase Price or otherwise to be made by the Purchaser to the Shareholders hereunder to Borden & Elliot on behalf of the Shareholders, to be disbursed to the Shareholders by Borden & Elliot in proportion to the percentage beneficial ownership interest in the Shares as at the Closing Time as set forth opposite the Shareholder's name in Schedule 1.1(2) against delivery of a receipt for such payment executed by or on behalf of the Shareholder. (3) In the event that the transactions contemplated by this Agreement are not completed by the Purchaser with any Breaching Shareholder in accordance with Section 4.2, all payments to be made pursuant to Section 2.3 or Section 2.4 or any other payment required to be made hereunder by the Purchaser to Borden & Elliot on behalf of the Shareholder or the Shareholders shall be reduced by a percentage equal to the percentage of Shares beneficially owned by the Breaching Shareholder as at the Closing Time as set forth opposite the Breaching Shareholder's name in Schedule 1.1(2). The full amount of any such reduction shall be for the account of the Breaching Shareholder and no payment shall be made by Borden & Elliot to such Breaching Shareholder until such time and in accordance with such written notice as may be delivered by the Purchaser and the Breaching Shareholder to Borden & Elliot authorizing payments hereunder to the Breaching Shareholder together with payment to Borden & Elliot by the Purchaser of the amount referred to in such notice. 2.4 PAYMENT OF EARN-OUT CONSIDERATION. (1) Subject to adjustment pursuant to Section 2.8 and Section 2.9 and any set-off pursuant to Section 6.9, the Purchaser shall pay to the Shareholders an amount on February 29, 2000 equal to 41.18% of Software Revenue in excess of the Stub Period Software Revenue Shortfall up to an amount equal to the sum of $17,000,000 and the amount of the Stub Period Software Revenue Shortfall (the "EARN-OUT THRESHOLD") for the period from July 1, 1999 to December 31, 1999. (2) Subject to adjustment pursuant to Section 2.8 and Section 2.9, the provisions as to payment in Section 2.11(3) and any set-off pursuant to Section 6.9, the Purchaser shall pay to the Shareholders the Annual Earn-out Consideration (defined below) on August 31, 2000 less an amount equal to the aggregate amount paid pursuant to Section 2.4(1). "ANNUAL EARN-OUT CONSIDERATION" means the aggregate of (i) an amount equal to 41.18% of Software Revenue in excess of the Stub Period Software 16 -16- Revenue Shortfall up to the Earn-out Threshold for the one (1) year period ending June 30, 2000 (the "EARN-OUT YEAR") and (ii) an amount equal to 20% of Software Revenue in excess of the Earn-out Threshold for the Earn-out Year. 2.5 SALES AND MARKETING. (1) Subject to Section 2.5(2), after the Closing Time Parentco and the Purchaser shall have complete and full discretion on pricing policy and sales and marketing investments in respect of the Business, including as they relate to exploitation of the Software Products, and each Shareholder acknowledges that any proposed pricing policy or sales and marketing investments in respect of the Business communicated by or on behalf of the Purchaser to any Shareholder or its representative prior to the Closing Time is subject to change at any time at the Purchaser's sole discretion based on its assessment from time to time of all factors deemed relevant by it including the state of the Business and the market for, or competitive position of, the Software Products. (2) During the period commencing on the Closing Date and ending on June 30, 2000, Parentco and the Purchaser agree to cause the Corporation or its successor to: (i) establish on the Closing Date and maintain for the period ending June 30, 2000, sales commissions plans for the Direct Sales of the Software Products at a percentage of revenue that is no less than the sales commissions plans as a percentage of revenue established from time to time by Parentco for the Direct Sales of the Hyperion Pillar and Hyperion Enterprise products, subject to exceptions for special compensation incentives established periodically out of the normal course of business in respect of the Hyperion Pillar or the Hyperion Enterprise products; (ii) undertake on the Closing Date and maintain for the period ending June 30, 2000, Channel Sales Programs for the Software Products on terms that are in the aggregate not less economically favourable to the Corporation than the terms for Channel Sales Programs undertaken by Parentco for Hyperion Pillar and Hyperion Enterprise undertaken by Parentco are for Parentco; and (iii) establish on the Closing Date and maintain for the period ending June 30, 2000, pricing guidelines similar to the pricing guidelines for the Software Products for markets other than the Enterprise Market on a basis that is substantially similar to the pricing for such markets established from time to time by Parentco for Hyperion Pillar and Hyperion Enterprise, and during such period, Parentco agrees that a standalone list price for the Software Products will be maintained on the price list of Parentco and any of its Affiliates to the extent that an Affiliate undertakes the sale of Software Products. (3) At the time of delivery of the Software Revenue Statements to the Shareholders pursuant to Section 2.7, Parentco agrees to deliver to the Shareholders a certificate of one or more officers of Parentco and an Affiliate of Parentco having an overall responsibility for the marketing of the Software Products certifying that Parentco and 17 -17- the Purchaser have caused the Corporation or its successor to take the actions referred to in Section 2.5(2). 2.6 ESTIMATED CLOSING STATEMENT. The Shareholders shall provide the Purchaser, at least five Business Days before the Closing Date, with an estimated consolidated balance sheet of the Corporation as at the Closing Time, prepared in accordance with Canadian GAAP using Canadian dollars as the currency of display and subject to reflecting the adjustments, reserves, information and accounting principles set forth in Schedule 2.7(1) (the "ESTIMATED CLOSING STATEMENT"). The amount of payment in respect of the Purchase Price payable pursuant to Section 2.3(1) shall be reduced by the excess, if any, of the total liabilities over the total assets, in each case as reflected in the Estimated Closing Statement and converted to US Dollars using the Exchange Rate in effect on the Business Day preceding the Closing Date (the "ESTIMATED REDUCTION"). 2.7 PREPARATION AND DELIVERY OF STATEMENTS. (1) The Purchaser shall cause the Auditors to review, at the expense of the Purchaser, the consolidated balance sheet of the Corporation as at the Closing Time, prepared in accordance with Canadian GAAP using Canadian Dollars as the currency of display, and shall cause the Corporation to deliver the results of such review to the Purchaser and the Shareholders, no later than July 31, 1999, subject to reflecting the adjustments, reserves, information and accounting principles set forth in Schedule 2.7(1) (the "CLOSING STATEMENT"), together with the report of the Auditors thereon prepared in accordance with Canadian GAAS. Subject to Section 2.9, the amount of the Purchase Price shall be: (i) reduced by the excess, if any, of the total liabilities over the total assets, in each case as reflected in the Closing Statement (the "PURCHASE PRICE REDUCTION"); and (ii) increased by the excess, if any, of the total assets over the total liabilities, in each case as reflected in the Closing Statement (the "PURCHASE PRICE INCREASE"), in each case converted to US Dollars using the Exchange Rate in effect on the Business Day preceding the Closing Date, and the amount of any reduction in the Purchase Price determined in accordance with clause (i) above shall be satisfied through the set-off by the Purchaser of such amount against the Annual Earn-out Consideration, if any, and shall otherwise be payable to the Purchaser by the Shareholders, subject to adjustment pursuant to Section 2.9, on August 31, 2000, pro rata to each Shareholder's percentage beneficial ownership interest in the Shares as at the Closing Time as set forth opposite the Shareholder's name in Schedule 1.1(2), and the amount of any increase in the Purchase Price determined in accordance with clause (ii) above shall be paid and satisfied through a payment of such amount by the Purchaser to the Shareholders within 30 days after the delivery by the Purchaser to the Shareholders of the Closing Statement, subject to the payment provisions in Section 2.11(3). The foregoing payments shall be adjusted to reflect any Estimated Reduction as follows: 18 -18- (A) If the Estimated Reduction is less than the Purchase Price Reduction, the excess of the Purchase Price Reduction over the Estimated Reduction shall be satisfied by set-off or paid by the Shareholders to the Purchaser, subject to adjustment pursuant to Section 2.9, on August 31, 2000, in accordance with the foregoing. (B) If the Estimated Reduction is greater than the Purchase Price Reduction, the excess of the Estimated Reduction over the Purchase Price Reduction shall be paid by the Purchaser to the Shareholders in accordance with the foregoing. (C) If there is a Purchase Price Increase, an amount equal to the sum of the Purchase Price Increase and the Estimated Reduction shall be paid by the Purchaser to the Shareholders in accordance with the foregoing. (2) The Purchaser shall cause the Auditors to review, in connection with the Auditors audit of Parentco's consolidated financial statements, at the expense of the Corporation, the Software Revenue for the Stub Period, and shall cause the Corporation to deliver to the Purchaser and the Shareholders, no later than August 31, 1999, a statement setting forth the Software Revenue for the Stub Period, together with the report of the Auditors thereon prepared in accordance with US GAAP. (3) The Purchaser shall cause the Auditors to review, in connection with the Auditors audit of Parentco's consolidated financial statements, at the expense of the Corporation, the aggregate Software Revenue for the period from July 1, 1999 to December 31, 1999 and for the Earn-out Year, and shall cause the Corporation to deliver to the Purchaser and the Shareholders, no later than February 14, 2000 and August 16, 2000, a statement setting forth the Software Revenue for each of such periods respectively, together with the report of the Auditors thereon prepared in accordance with US GAAP. (4) The Purchaser shall cause the Corporation or its successor to provide access to the Shareholder Committee or its representatives and the Reviewing Accountants to Parentco's consolidated books and records to the extent relevant for the purpose of reviewing, Software Revenue and related sales commissions in respect of Software Products, the Closing Statement and the Software Revenue Statements and the preparation of such statements, together with the Purchaser's calculations of any amounts set forth in such statements and, subject to execution of a non-disclosure agreement in the form prescribed by the Auditors, shall cause the Auditors to provide access to the working papers of the Auditors used in the preparation of its report in respect of such statements. 2.8 EARN-OUT ADJUSTMENTS. (1) In the event of the sale of 50% or more of the outstanding securities of the Corporation or its successor or the Purchaser, or the sale, lease, license, exchange or other disposition of all or a significant portion of the assets of the Corporation or its 19 -19- successor including the Software Products or any part thereof outside the ordinary course of business as conducted by the Corporation or its successor from time to time or a transaction relating to the co-development or co-marketing of products of or for the Corporation or its successor pursuant to a partnership, joint venture, strategic alliance or otherwise (a "JOINT VENTURE"), and excluding any transaction involving only a wholly-owned Affiliate of the Purchaser, an amount determined in accordance with the following shall be deemed to constitute Software Revenue in the period in which such transaction is closed: (i) if such transaction is other than a Joint Venture and is closed in the period from the Closing Date and terminating on September 30, 1999, the net present value, calculated using a discount rate equal to the Prime Rate as at the date of closing of such transaction, of the total consideration to Parentco on a consolidated basis from such transaction as recognized by Parentco on a consolidated basis in accordance with US GAAP; (ii) if such transaction is other than a Joint Venture and is closed in the period from October 1, 1999 and terminating on June 30, 2000, an amount equal to the product of: (A) the net present value, calculated using a discount rate equal to the Prime Rate as at the date of closing of such transaction of the total consideration to Parentco on a consolidated basis from such transaction as recognized by Parentco on a consolidated basis in accordance with US GAAP and (B) a fraction, the numerator of which is the number of days from the date of closing of such transaction to June 30, 2000 and the denominator of which is 273, and (iii) if such transaction is a Joint Venture, the net present value, calculated using a discount rate equal to the Prime Rate as at the date of closing of such transaction, of the consideration received by the Corporation or its successor from the other parties to the Joint Venture in respect of Software Products licensed or otherwise provided to such parties to the extent such consideration does not constitute Software Revenue. (2) In the event that a Person, in the period from the date of this Agreement to June 30, 2000 acquires, individually or acting jointly and in concert with other Persons, a number of voting securities of Parentco to which are attached in aggregate in excess of 50% of the number of votes attaching to all voting securities of Parentco outstanding at such time, the Purchaser agrees that Annual Earn-out Consideration for the period from the later of (i) the date of such acquisition and (ii) June 30, 1999 to June 30, 2000 shall be deemed to be not less than the product of (A) $7 million 20 -20- and (B) a fraction, the numerator of which is the number of days from the later of (i) the date of such acquisition and (ii) June 30, 1999 to June 30, 2000 and the denominator of which is 366. 2.9 OBJECTION TO STATEMENTS. In the event that the Shareholder Committee objects in good faith to the Closing Statement, the Software Revenue Statement delivered in accordance with Section 2.7(2) or the Software Revenue Statement for the Earn-out Year delivered in accordance with Section 2.7(3), the Shareholders shall so advise the Purchaser by delivery to the Purchaser of a written notice executed by such Shareholders (the "OBJECTION NOTICE") within 20 Business Days after the later of (i) delivery to the last of the Shareholders who are members of the Shareholder Committee of such statement, and (ii) the date that the Shareholder Committee had reasonable access to the relevant information supporting such statement in accordance with Section 2.7(4). The Objection Notice shall set out the reasons for the Shareholders' objection as well as the amount under dispute and reasonable details to the extent available of the calculation of such amount. In the event that the Parties agree on a resolution of the dispute set out in the Objection Notice, the Parties shall confirm the resolution in writing and shall thereafter be bound by such resolution and any adjustment to the Purchase Price required in accordance with Section 2.7(1) and Section 2.4 or any resulting payments shall be made within 10 Business Days of such resolution. In the event that the Parties are unable to settle any dispute set out in the Objection Notice within 30 days after the delivery by the Shareholders to the Purchaser of the Objection Notice, the dispute shall forthwith, and in any event within 45 days after the delivery by the Shareholders to the Purchaser of the Objection Notice, be referred to the Reviewing Accountants. The Reviewing Accountants shall finally settle the dispute between the Parties and no recourse may thereafter be had with regard to the referred dispute to any court or tribunal. In making a determination, the Reviewing Accountants shall act as experts and not as arbitrators. If the settlement of any dispute results in an adjustment to the Purchase Price in favour of the Shareholders of an aggregate amount that is less than the greater of (i) $25,000 and (ii) all costs of the Reviewing Accountants in respect of that dispute, then all costs of the Reviewing Accountants in respect of that dispute shall be borne by the Shareholders and shall be deducted by the Purchaser from any amount payable to the Shareholders pursuant to the Closing Statement or any of the Software Revenue Statements and remitted to the Reviewing Accountant in satisfaction of the amount owing in respect of such costs or, to the extent no such amount is payable, shall be payable by the Shareholders to the Reviewing Accountants; in all other circumstances the costs of the Reviewing Accountants in respect of that dispute shall be borne by the Purchaser. 2.10 SECTION 116 OF THE INCOME TAX ACT (CANADA) (1) Each of Stonebridge, Robin Alexander, Varsha Bhat, and David Kempa, none of which is a resident of Canada for purposes of the Income Tax Act (Canada) (a "NON-RESIDENT SHAREHOLDER"), shall on or before the Closing Date, deliver to the Purchaser a certificate issued by the Minister of National Revenue of Canada pursuant to subsection 116(2) of the Income Tax Act (Canada) (a "SECTION 116 CERTIFICATE") in respect of the proposed disposition by the Non-Resident Shareholder of the Shares owned by the Non-Resident Shareholder. The Section 116 Certificate delivered by a Non-Resident Shareholder shall specify a "certificate limit" in an amount no less than the Purchase Price attributable to the Shares owned by such 21 -21- Non-Resident Shareholder (the "NON-RESIDENT'S PURCHASE PRICE"). The Section 116 Certificate shall be deemed not to have been delivered in respect of any payment or part thereof on account of the Non-Resident's Purchase Price if, in the opinion of Blake, Cassels & Graydon, acting reasonably, it does not exonerate the Purchaser from liability under Section 116 of the Income Tax Act (Canada) in respect of such payment or part thereof on account of the Non-Resident's Purchase Price. (2) In the event that the Section 116 Certificate required under Section 2.9(1) has not been delivered by a Non-Resident Shareholder to the Purchaser on or before the Closing Date, or in the event that a Section 116 Certificate that is delivered by a Non-Resident Shareholder does not specify a "certificate limit" that is no less than the Non-Resident's Purchase Price, the Purchaser shall withhold from the Non-Resident's Purchase Price an amount equal to 33 1/3% of the Non-Resident's Purchase Price, or, if a Section 116 Certificate has been delivered by the Non-Resident Shareholder, an amount equal to 33 1/3% of the Non-Resident's Purchase Price less the certificate limit specified in the Section 116 Certificate (the "WITHHELD AMOUNT"). The Withheld Amount shall be deposited by Blake, Cassels & Graydon pursuant to an irrevocable direction of the Purchaser in an interest bearing trust account at a bank located in Ontario to be held for the benefit of the Non-Resident Shareholder to be disposed of as set out herein. The Withheld Amount shall be remitted by Blake, Cassels & Graydon to the Receiver General of Canada on the day that the Withheld Amount is required to be so remitted pursuant to subsection 116(5) of the Income Tax Act (Canada) (the "REMITTANCE DATE"). All interest earned on the Withheld Amount shall be for the account of the Non-Resident Shareholder and the full amount of such interest less any applicable taxes of any nature whatsoever applicable to such interest shall be paid by Blake, Cassels & Graydon to the Non-Resident Shareholder on the Remittance Date. (3) Notwithstanding the foregoing, if a Non-Resident Shareholder delivers a Section 116 Certificate to Blake, Cassels & Graydon at any time after the Closing Date and prior to the day that is two Business Days before the Remittance Date that in the opinion of Blake, Cassels & Graydon exonerates the Purchaser from liability under Section 116 of the Income Tax Act (Canada) in respect of any payment on account of the Non-Resident's Purchase Price in the amount of the "certificate limit" specified in the Section 116 Certificate, Blake, Cassels & Graydon shall pay to the Non-Resident Shareholder on account of the Non-Resident's Purchase Price an amount equal to the amount, if any, by which (a) the aggregate of (i) the Withheld Amount and (ii) the amount, if any, by which (A) the amount of interest received by Blake, Cassels & Graydon on the Withheld Amount 22 -22- exceeds (B) the amount of any tax payable by the Purchaser in respect of any interest on the Withheld Amount or which the Purchaser is required or entitled to withhold or deduct in respect of such interest exceeds (b) 33 1/3% of the amount, if any, by which (i) the Non-Resident's Purchase Price exceeds (ii) the "certificate limit" specified in the Section 116 Certificate. (4) In the event that a Non-Resident's Purchase Price is subsequently adjusted upward so that it exceeds the certificate limit of a Section 116 Certificate delivered by the Non-Resident Shareholder, the Non-Resident Shareholder shall deliver a revised Section 116 Certificate or the Purchaser will withhold 33 1/3% of the amount payable in respect of such adjustment and the provisions of this Section shall apply to such withheld amount, MUTATIS MUTANDIS. 2.11 RECEIVABLES. (1) During the period of two years after the Closing Date, the Purchaser agrees to cause the Corporation or its successor to use its commercially reasonable efforts to collect the Receivables reflected in the Closing Statement provided that such efforts shall not require a discount or other disadvantageous terms to be provided to the Person owing the Receivable to the Corporation in connection with exploitation of the Software Products after the Closing Date on a basis that is outside the ordinary course of the business conducted by the Corporation or its successor from time to time. (2) During the period of two years after the Closing Date, if: (i) the Corporation or its successor receives payment in respect of Receivables reflected on the Closing Statement; and (ii) the Purchaser, pursuant to Section 2.11(3), receives the benefit of one or more deductions from any amount payable to Shareholders pursuant to Section 2.4 or Section 2.7 or one or more payments from Shareholders, that in aggregate exceed the amount of Receivables net of reserves as set out in the Closing Statement, the amount of such excess, less any amounts previously paid pursuant to this Section 2.11(2), shall be paid on a quarterly basis by the Purchaser to the Shareholders in proportion to the percentage beneficial ownership in the Shares as at the Closing Time set forth opposite the Shareholder's name in Schedule 1.1(2). 23 -23- Notwithstanding the foregoing, no Shareholder shall have any claim or entitlement in respect of any Receivable for which the Corporation or its successor receives payment more than two years after the Closing Date. (3) Notwithstanding any other provision of this Agreement and in satisfaction of any breach of the representation and warranty of the Shareholders in Section 5.1(21), in the event that the aggregate amount of Receivables reflected in the Closing Statement collected by the Corporation or its successor in the period of 90 days after the Closing Date is less than the amount of Receivables net of reserves set forth in the Closing Statement then the Purchaser shall have the option with respect to each such Receivable that has not been collected by the Corporation or its successor, exercisable from time to time during the period of two years after the Closing Date, to: (i) have the Corporation or its successor assign all of the right, title and interest of the Corporation or its successor in and to such Receivable to the Shareholders in consideration for payment of $1.00 from the Shareholders to the Corporation or its successor, and the Purchaser shall deduct 100% of the amount of the full face value of such Receivable as at the Closing Date from any amount payable to the Shareholders pursuant to Section 2.4 or Section 2.7 or, to the extent no such amount is payable, to receive payment of such amount from the Shareholders; or (ii) deduct 50% of the amount of the full face value of such Receivable as at the Closing Date from any amount payable to the Shareholders pursuant to Section 2.4 or Section 2.7 or, to the extent no such amount is payable, to receive payment of such amount from the Shareholders, and the Corporation or its successor shall, subject to the provisions of this Section 2.11, retain all of its right, title and interest in and to such Receivable. (4) Upon the later of (i) the date that is 180 days after the Closing Date and (ii) the date that the Corporation or its successor receives the payment of Receivables plus the benefit of one or more deductions from any amount payable to Shareholders pursuant to Section 2.4 or Section 2.7 or payments from Shareholders in respect of Receivables reflected on the Closing Statement that in aggregate equal the amount of Receivables net of reserves set forth in the Closing Statement, the Purchaser shall, with respect to each Receivable reflected on the Closing Statement that has not been collected by the Corporation or its successor during that period, either: (i) cause all of the right, title and interest of the Corporation or its successor in and to such Receivable to be assigned to the Shareholders; or (ii) pay 100% of the amount of the full face value of such Receivable as at the Closing Date to the Shareholders, following which the Corporation or its successor shall retain all of its right, title and interest in and to such Receivable. 24 -24- (5) In the event that the Corporation or its successor receives, after the Closing Date, one or more cash payments in respect of the claims made or to be made under the Income Tax Act (Canada) for refundable scientific research and experimental development tax credits in respect of any fiscal period or taxation year ending on or prior to the Closing Date that in the aggregate exceed the amount of the SRED Tax Credit, the amount of such excess shall be paid by the Purchaser to the Shareholders in proportion to the percentage beneficial ownership in the Shares as at the Closing Time set forth opposite the Shareholder's name in Schedule 1.1(2). The Purchaser agrees to cause the Corporation or its successors to use its commercially reasonable efforts to collect the benefit of such scientific research and experimental development tax credits, to provide the Shareholders with reasonable access to its books and records to the extent relevant for the purpose of reviewing the status of the claims for such scientific research and experimental development tax credits and, provided that the Corporation or its successors are provided with reasonably satisfactory security for any incremental costs, to permit the Shareholders, acting reasonably, to participate in the efforts of the Corporation or its successors to collect the benefit of such scientific research and experimental development tax credits. Notwithstanding any other provision of this Agreement, once the SRED Tax Credit has been determined on the finalized Closing Statement, there shall be no further claim or adjustment against the Shareholders in respect of the SRED Tax Credit and notwithstanding that the same may not be collectible in its full amount, or subsequently determined to be a lesser amount. 2.12 PAYMENT OF ADVISOR'S FEES. Each of the Shareholders hereby irrevocably directs the Purchaser to deduct from the payment on account of the Purchase Price to be made pursuant to Section 2.3(1) an amount equal to the aggregate amount of the invoices delivered to the Purchaser on the Business Day preceding the Closing Date for services provided by the Shareholders' Solicitors and Ernst & Young in connection with the transactions contemplated by this Agreement, as approved and directed by the Shareholder Committee, and to make payment of such amounts to the Shareholders' Solicitors and Ernst & Young in satisfaction of such invoices. 2.13 SHAREHOLDER CONSENT . In the event that the Shareholders must exercise, or have an opportunity to exercise, one or more common rights, remedies, or elections under this Agreement (the "COMMON SHAREHOLDERS' Rights"), each such Common Shareholder's Right may be exercised on behalf of all Shareholders by a committee of the Shareholders (the "SHAREHOLDER COMMITTEE") consisting of one nominee of The Stonebridge Domestic Trust (presently, Mr. Frank van Luttikhuizen), one nominee of Telesystem Software Ventures Limited Partnership (presently, Mr. Robert Talbot), and one nominee of the Non-Investor Shareholders selected by a written instrument signed by Non-Investor Shareholders with beneficial ownership as of the Closing Time of a majority of the Shares held by all Non-Investor Shareholders as at such time as determined by reference to Schedule 1.1(2) (a "MINORITY RESOLUTION") (presently, Mr. Harvey Griggs). Any determination in respect of the Common Shareholders' Rights by the Shareholder Committee made in accordance with this section shall be binding upon all Shareholders and shall be conclusively and finally determined by all Parties by exclusive reference to any instrument executed by the Shareholder Committee in accordance with this Section 2.13 and delivered to Parentco or the Purchaser or any third party, as appropriate, on behalf of the Shareholder Committee and the Shareholders without further inquiry or investigation. Each of the Shareholders hereby irrevocably appoints, which appointment is a power coupled with an interest, each member of the Shareholder Committee, from 25 -25- time to time, as that Shareholder's duly authorized attorney, to do or cause to be done all such further acts or things as may be necessary to further that Shareholder's interest in the Common Shareholders' Rights in accordance with this Section 2.13 and each Shareholder hereby undertakes to ratify all such actions so taken. In addition: (a) The members of the Shareholder Committee shall determine their own procedures for meetings and decisions subject always to the requirements that: the members shall not receive compensation (other than reimbursement of out-of-pocket expenses properly incurred) for their services on the Shareholder Committee unless such compensation is approved by a Minority Resolution; all reasonable efforts shall be made to accommodate the attendance (in person or by phone) of all three members at all meetings of the Shareholder Committee and subject to the urgency of the deliberations required; the Shareholder Committee shall not institute a lawsuit on behalf of the Shareholders until such time as the proceeding is approved by at least two members of the Shareholder Committee and by Minority Resolution; a quorum for all meetings must include at least two of the three members, and that at least two members must support all decisions of the Shareholder Committee; (b) In the event that the prosecution of any Common Shareholders' Right requires further expenditures of money, the Shareholder Committee shall determine on a commercially reasonable basis the terms and conditions for funding the said process that are commensurate with the risk taken by the funding shareholders, which terms and conditions may, but need not, include borrowing from one or more of the Shareholders (the "FUNDING OF SHAREHOLDERS' RIGHTS"). The Shareholder Committee shall give all Shareholders a pre-emptive right to participate in the Funding of Shareholders' Rights in accordance with each Shareholder's percentage beneficial ownership in the Shares and provided that it does so, no Shareholder shall be entitled to question the commercial reasonableness of the terms and conditions of the particular Funding of Shareholders' Rights; (c) Reimbursement of any Funding of Shareholders' Rights shall be a first claim against the proceeds achieved from the exercise of those rights and shall be deducted therefrom prior to the distribution of net proceeds to the Shareholders in accordance with their pro rata participation. Subject to the foregoing: (i) the Shareholder Committee shall not have any power to bind or obligate any Shareholder to funding a pro rata share of any Funding of Shareholders' Rights without the written consent of each Shareholder to be so bound; and (ii) the Funding of Shareholders' Rights shall be a first charge against only the proceeds reasonably achieved from the exercise of those rights, and shall not be deducted from monies otherwise payable to the Shareholders under this Agreement that are unrelated to and are not dependent upon the exercise of the particular Common 26 -26- Shareholder's Right for which the subject Funding of Shareholders' Rights is required. (d) Subject to the foregoing, the Shareholder Committee shall provide reasonable reports to the Shareholders, shall provide access to relevant information and documents upon the request and at the expense of any Shareholder, and in all cases shall account to each of the Shareholders for each Shareholders' pro rata share in the net proceeds achieved, if any, from the exercise of each Common Shareholder Right in accordance with that Shareholder's beneficial interest in the Shares being sold to the Purchaser hereunder; (e) Acceptance by the Shareholder Committee and by each member thereof of their duties and obligations under this Section 2.13 is subject to the following terms and conditions which the Parties hereby agree shall govern and control with respect to each such person's rights, duties, liabilities and immunities in their capacity as a member of the Shareholder Committee: (i) the members of the Shareholder Committee shall be protected in acting upon any written notice, request, waiver, consent, receipt, statutory declaration or other paper or document furnished to them not only as to its due execution (if applicable) and the validity and effectiveness of its provisions, but also as to the truth and acceptability of any information therein contained, which the Shareholder Committee, in good faith, believes to be genuine and what it purports to be; (ii) except for acts of gross negligence or misconduct, the members of the Shareholder Committee shall not be liable for any acts done, or steps taken, or steps omitted by them in good faith, nor for any mistake of fact or law; (iii) the Shareholder Committee may consult with and obtain professional advice from legal counsel and others in the event of any question as to any of the provisions hereof or in respect of the Common Shareholders' Rights or their duties hereunder, and they shall incur no liability and shall be fully protected in acting in good faith in accordance with the opinion and instructions of such counsel and the costs of such services shall be paid out of the Funding of Shareholders' Rights; (iv) the exercise of each and every one of the Common Shareholders' Rights by the Shareholder Committee shall be determined in the sole discretion of the Shareholder Committee and, without limiting the generality of the foregoing, the Shareholder Committee may resolve to decline on behalf of the Shareholders to exercise any particular Common Shareholder's Right, or resolve to exercise any Common Shareholder's Right on a basis determined by the Shareholder Committee; or to refer the decision on any Common 27 -27- Shareholder Right to the Shareholders collectively by written notice to the Shareholders; and (v) the members of the Shareholder Committee shall have no duties or obligations under this Section 2.13 except those which are expressly set forth herein and they shall not be bound by any notice of claim or demand with respect thereto, or any waiver, modification, amendment, termination or recession of this section unless the same is received by them in writing and if their duties hereunder are affected, unless they shall have given their prior written consent thereto. 2.14 EXERCISE OF INVESTOR OPTIONS. Each Shareholder acknowledges that the Corporation granted options to the Investors to acquire an aggregate of 375,000 common shares in the capital of the Corporation on the terms and conditions set forth in the Option Agreements attached as Schedule 2.14. Each Shareholder acknowledges and agrees that the options under such Option Agreements shall be exercisable as a result of the transactions contemplated by this Agreement by agreement of the Corporation with each of the Investors in accordance with the provisions of such Option Agreements to permit the Investors to exercise the options granted thereunder, to acquire such shares, and that the Purchaser has agreed that such shares will constitute Shares for the purposes of this Agreement and will be purchased by the Purchaser from the Investors pursuant to this Agreement. --------------------- ARTICLE 3 CLOSING ARRANGEMENTS 3.1 CLOSING. The Closing shall take place at 10:00 a.m. on the Closing Date at the offices of Blake, Cassels & Graydon, or at such other time on the Closing Date or such other place as may be agreed to in writing by the Shareholders and the Purchaser. 3.2 CLOSING DELIVERIES OF SHAREHOLDERS. At the Closing, each of the Shareholders severally agrees with the Purchaser that the following documents are delivered to the Purchaser: (1) the certificates representing the Shares of the Shareholder, duly endorsed in blank for transfer (and the Shareholders shall cause the transfers of the Shares to be duly entered in the registers of the Corporation at Closing); (2) an assignment by the Shareholder of the Shares in the form of Exhibit A, duly executed by the Shareholder; (3) a certificate of the Shareholder (or if the Shareholder is not an individual, a certificate of the President or other senior officer of the Shareholders), dated as of the Closing Date in the form of Exhibit B; (4) a certificate of a senior officer of each corporate Shareholder in the form of Exhibit C and, in the case of the Investors, a certificate in the form of Exhibit C.1; (5) a certificate of a senior officer of the Corporation in the form of Exhibit D; 28 -28- (6) [intentionally deleted] (7) in the case of the Investors, a Non-Competition Agreement and Intellectual Property Assignment duly executed in the form of Exhibit E1 and in the case of Derek Sandison and Harvey Griggs, a Non-Competition Agreement and Intellectual Property Assignment duly executed in the form of Exhibit E; (8) an IP Assignment in the form of Exhibit M executed by TECHinspirations Inc., and each of the Shareholders other than the Investors, Derek Sandison and Harvey Griggs; (9) a counterpart of the B & E Escrow Agreement executed by the Shareholder and Borden & Elliot; (10) a counterpart of the BCG Escrow Agreement executed by the Shareholder; (11) an employment agreement in form reasonably satisfactory to the Purchaser executed by each of Derek Sandison and Robin Alexander and the Corporation; (12) an opinion of the Shareholders' Solicitors addressed to the Purchaser and the Purchaser's Solicitors substantially in the form of Exhibit F; (13) the written resignation and a release of all claims against the Corporation of each Director and Officer in the form of Exhibit G; (14) a release of claims against the Corporation, including any claims in respect of any obligations of the Corporation to the Shareholder or pursuant to any Option in respect of securities of the Corporation, in the form of Exhibit H, duly executed by the Shareholder; (15) the Employee Certificate; and (16) all such other assurances, consents, agreements, documents and instruments as may be reasonably required by the Shareholders to complete the transactions provided for in this Agreement. 3.3 PURCHASER'S CLOSING DELIVERIES. At the Closing, the Purchaser shall deliver or cause to be delivered to the Shareholders the following documents and payments: (1) a certificate of the President or other senior officer of each of the Purchaser and Parentco dated as of the Closing Date in the form of Exhibit J; (2) a certificate of a senior officer of each of the Purchaser and Parentco in the form of Exhibit K; (3) the payments referred to in Sections 2.3(1); (4) an irrevocable direction of the Purchaser to the Corporation to enter into an amendment to the employment agreement dated March 1, 1997 with Derek Sandison and an employment agreement with Robin Alexander, in each case on terms no less 29 -29- favourable in aggregate than those proposed to such individuals by the Purchaser prior to the date hereof and in form reasonably satisfactory to the Purchaser; (5) an opinion of the Purchaser's Solicitors addressed to the Shareholders substantially in the form of Exhibit L; and (6) all such other assurances, consents, agreements, documents and instruments as may be reasonably required by the Shareholders to complete the transactions provided for in this Agreement. 3.4 EMPLOYEE RELEASES. Each of the Shareholders severally agrees with the Purchaser to cause the Corporation to use its best efforts to settle all claims in respect of Options in respect of securities of the Corporation against the Corporation by, and to deliver on or prior to the Closing to the Purchaser a release in respect thereof executed by, each of Ralph Mills, Steven Brown, Scott Kennedy and William Fosina in the form of Exhibit I, subject to such modifications as are acceptable to the Purchaser, acting reasonably. --------------------- ARTICLE 4 CONDITIONS OF CLOSING 4.1 PURCHASER'S CONDITIONS. The Purchaser shall not be obliged to complete the purchase and sale of the Shares pursuant to this Agreement unless, at or before the Closing Time, each of the following conditions has been satisfied, it being understood that the following conditions are included for the exclusive benefit of the Purchaser and may be waived, in whole or in part, in writing by the Purchaser at any time; and each of the Shareholders severally agrees with the Purchaser to take all such actions, steps and proceedings as are commercially reasonable and within its control as may be necessary to ensure that the following conditions are fulfilled at or before the Closing Time: (1) Representations and Warranties of Shareholders. The representations and warranties of the Shareholders in Section 5.1 shall be true and correct at the Closing. (2) Shareholder Compliance. Each Shareholder shall have performed and complied with all of the terms and conditions of this Agreement on its part to be performed or complied with at or before Closing and shall have executed and delivered or caused to have been executed and delivered to the Purchaser at the Closing all the documents contemplated in Section 3.2 or elsewhere in this Agreement. (3) Material Adverse Change. During the Interim Period, there shall have been no Material Adverse Change. (4) No Litigation. There shall be no litigation or proceedings: (a) pending or threatened against any of the Parties or against any of their respective Affiliates or any of their respective directors or officers, for the purpose of enjoining, preventing or restraining the completion of the transactions contemplated by this Agreement; or 30 -30- (b) pending or threatened against the Corporation, any of the Parties, or against any of their respective Affiliates or any of their respective directors or officers, which if determined adversely to such Person could adversely affect the right of the Purchaser to acquire or retain the Shares or result in a Material Adverse Change. (5) Debentureholder Matters. Evidence of the conversion of the Convertible Secured Debentures dated as of October 15, 1998 and December 4, 1998 entered into by the Corporation with each of the Investors (the "DEBENTURES") in accordance with their terms, the right of the Corporation to make payment of all interest accrued under the Debentures as at the Closing Time without penalty, the discharge of the Debentures and all security under the Debentures and the termination of all related agreements; (6) January Loan. Amendment of the terms of the credit facility evidenced by the letter agreement dated as of January 25, 1999 between the Investors and the Corporation, together with the Credit Agreement dated January 18, 1999 between National Bank of Canada and the Corporation (collectively, the "JANUARY CREDIT FACILITY"), permitting the repayment without penalty of all obligations thereunder and the discharge of all security thereunder upon receipt of such payment, and the termination of all related credit agreements; (7) CIBC Discharge. Receipt of Discharge of Canadian Imperial Bank of Commerce in favour of the Corporation of all obligations and security therefor executed in favour of the Corporation by Canadian Imperial Bank of Commerce; and (8) Consulting Services Agreement. Receipt of the release and consent of TECHinspirations Inc. to termination at Closing and without penalty, of the Consulting Services Agreement dated as of July 16, 1998 between the Corporation and TECHinspirations Inc. 4.2 CONDITION NOT FULFILLED. If any condition in Section 4.1 has not been fulfilled at or before the Closing Time, then the Purchaser in its sole discretion may, without limiting any rights or remedies available to the Purchaser at law or in equity, either: (1) terminate this Agreement by notice to the Shareholders, in which event each of Parentco and the Purchaser shall be released from all of its respective obligations under this Agreement; or (2) waive compliance with any such condition without prejudice to its right of termination in the event of non-fulfilment of any other condition; provided that any such waiver may be granted by the Purchaser absolutely, or upon the Parties renegotiating certain terms of the Agreement and further provided that, in the case of each Shareholder, unless the Purchaser can show that the condition or conditions for the non-fulfilment of which the Purchaser has terminated this Agreement was as a result of the Shareholder not taking all such actions, steps and proceedings as are commercially reasonable and within its control as may be necessary to ensure that such condition was fulfilled at or before the Closing Time, then the Shareholder shall be released from its obligations under this Agreement. In the event that any condition in Section 4.1 has not been fulfilled at or before the Closing Time as a result of any action 31 -31- or failure to take action by a Shareholder (a "BREACHING SHAREHOLDER"), the Purchaser shall have the right, but shall not be obligated, to purchase all of the Shares held by each of the Shareholders other than any such Breaching Shareholder in accordance with the terms of this Agreement without limiting any rights or remedies available to the Purchaser at law or in equity under this Agreement or otherwise against or in respect of any Breaching Shareholder. 4.3 CONDITIONS OF THE SHAREHOLDERS. The Shareholders shall not be obliged to complete the transactions contemplated by this Agreement unless, at or before the Closing Time, each of the following conditions has been satisfied, it being understood that the following conditions are included for the exclusive benefit of the Shareholders, and may be waived by the Shareholders, in whole or in part, in writing by the Shareholders at any time; and the Purchaser agrees with the Shareholders to take all such actions, steps and proceedings as are commercially reasonable and within the Purchaser's control as may be necessary to ensure that the following conditions are fulfilled at or before the Closing Time: (1) Representations and Warranties. The representations and warranties of the Purchaser in Section 5.2 shall be true and correct at the Closing. (2) Purchaser's Compliance. The Purchaser shall have performed and complied with all of the terms and conditions in this Agreement on its part to be performed or complied with at or before the Closing Time and shall have executed and delivered or caused to have been executed and delivered to the Shareholders at the Closing Time all the documents and payments contemplated in Section 3.3 or elsewhere in this Agreement. (3) No Litigation. There shall be no litigation or proceedings: (a) pending or threatened against any of the Parties or against any of their respective Affiliates or any of their respective directors or officers, for the purpose of enjoining, preventing or restraining the completion of the transactions contemplated by this Agreement; or (b) pending or threatened against the Corporation, any of the Parties, or against any of their respective Affiliates or any of their respective directors or officers, which if determined adversely to such Person could adversely affect the right of the Purchaser to acquire or retain the Shares. (4) Accrued Liabilities. Tendering of payment by the Purchaser on behalf of the Corporation to Morris Rose Ledgett on behalf of the Investors and TECHinspirations Inc. of all accrued interest under the Debentures and the amounts outstanding to the Closing Date under the Consulting Services Agreement dated as of July 16, 1998 between the Corporation and TECHinspirations Inc., as applicable, in each case as at the Closing Time as accrued for in the Estimated Closing Statement. The amount of such payment shall constitute a debt owing by the Corporation to the Purchaser. (5) January Loan. Tendering of payment by the Purchaser on behalf of the Corporation to Morris Rose Ledgett (X) on behalf of Stonebridge of the amount of principal and interest owing to Stonebridge by the Corporation and (Y) on behalf of Telesystem Software Ventures Limited Partnership ("Telsoft") of any additional amounts owing 32 -32- to Telsoft by the Corporation, in each case under the January Credit Facility as at the Closing Time as reflected in the Estimated Closing Statement and delivery to Morris Rose Ledgett on behalf of Telsoft of a release of National Bank of Canada in respect of all security in favour of National Bank of Canada for the January Credit Facility established by Telesystem Software Ventures Limited Partnership. The amount of such payment shall constitute a debt owing by the Corporation to the Purchaser. 4.4 CONDITION NOT FULFILLED. If any condition in Section 4.3 shall not have been fulfilled at or before the Closing Time, then the Shareholders in its sole discretion may, without limiting any rights or remedies available to the Shareholders at law or in equity (except to the extent so limited by Section 2.3), either: (1) terminate this Agreement by notice to the Purchaser, in which event the Shareholders shall be released from all obligations under this Agreement; or (2) waive compliance with any such condition without prejudice to its right of termination in the event of non-fulfilment of any other condition, provided that unless the Shareholders can show that the condition or conditions for the non-fulfilment of which the Shareholders have terminated this Agreement are reasonably capable of being performed by the Purchaser, then Parentco and the Purchaser shall be released from its obligations under this Agreement. --------------------- ARTICLE 5 REPRESENTATIONS AND WARRANTIES 5.1 REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. As a material inducement to the Purchaser's entering into this Agreement and completing the transactions contemplated by this Agreement and acknowledging that the Purchaser is entering into this Agreement in reliance upon the representations and warranties of the Shareholders set out in this Section 5.1, each of the Shareholders severally but not jointly represents and warrants to the Purchaser as follows: (1) Ownership of Shares. The Shareholder (except Stonebridge) is or at the Closing Time will be the sole beneficial owner of and has or will have at the Closing Time good and marketable title to and in the case of Stonebridge will convey good and marketable title in, in each case the number of Shares set forth opposite the Shareholder's name in Schedule 1.1(2), free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any escrow arrangements or other restrictions on transfer, except such restrictions as shall have been satisfied by the Closing Time. (2) Authorization to Sell Shares. The Shareholder has or will have at the Closing Time full legal right, power and authorization to sell, assign, transfer and deliver the Shares set forth opposite the Shareholder's name in Schedule 1.1(2), Shareholder's Shares in the manner provided in this Agreement and upon delivery of and payment for such Shares hereunder, the Purchaser will acquire good and marketable title to such Shares, free and clear of any lien, claim, security interest, or other encumbrance. 33 -33- (3) No Restrictions on Sale of Share; Outstanding Securities. As at the date hereof and as at the Closing Time, no Person, except for the Purchaser, has or will have any Option in respect of any of the Shares set forth opposite the Shareholder's name in Schedule 1.1(2) other than as provided for in the Shareholders Agreement. Except for the Debentures and the Options listed in Schedule 5.1(3) and other than as provided for in the Shareholders Agreement, no Options in respect of any securities of the Corporation are outstanding. (4) Residence of Shareholder. The Shareholder (if not Stonebridge, Robin Alexander, Varsha Bhat or David Kempa) is not a non-resident of Canada for purposes of Section 116 of the Income Tax Act (Canada). (5) Binding Obligation of Shareholder. This Agreement, any Closing Agreement to which the Shareholder is party and any agreement, document, or instrument made or delivered pursuant to this Agreement or such Closing Agreement has been duly authorized (if a corporation), executed and delivered by the Shareholder and constitutes a valid and binding obligation of the Shareholder enforceable against such Shareholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting the rights of creditors generally and except as limited by the application of equitable principles when equitable remedies are sought, and by the fact that rights to indemnity, contribution and waiver, and the ability to sever unenforceable terms, may be limited by applicable law. (6) Absence of Conflicting Agreements. The execution and delivery of this Agreement, any Closing Agreement to which the Shareholder is party and any agreement, document, or instrument made or delivered pursuant to this Agreement or such Closing Agreement by the Shareholder, the sale of such Shareholder's Shares pursuant to this Agreement and the consummation of the transactions contemplated in this Agreement do not and will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under (whether after notice or lapse of time or both), any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Shareholder is a party or by which the Shareholder is or may be bound or to which any of the Shareholder's property or assets is subject, other than such agreements which terminate simultaneously with the Closing, which breach or violation or the consequences thereof would, alone or to the knowledge of the Shareholder in the aggregate, be material, nor does or will such action conflict with or violate any statute, law, rule, regulation, ruling, judgment, injunction, order or decree applicable to the Shareholder or to any property or assets of the Shareholder. (7) Litigation. Subject to Schedule 5.1(7), there is no action, suit, proceeding, claim, application, complaint or investigation in any court or before any arbitrator or before or by any regulatory body or governmental or non-governmental body pending or, to the knowledge of the Shareholder, threatened by or against the Corporation or the Shareholder Related to the Business or affecting the Business or the operations or capital of the Corporation or the transactions contemplated by this Agreement, and there is no factual or legal basis which could give rise to any such action, suit, proceeding, claim, application, complaint or investigation. 34 -34- (8) Consents and Approvals. Under Applicable Law, no consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required for the sale of the Shares to be sold by the Shareholder as contemplated by this Agreement or the consummation by the Shareholder of the transactions contemplated in this Agreement or to permit the Corporation to carry on the Business after the Closing as the Business is currently being carried on by the Corporation, other than as may be required, and as have or will have been obtained prior to Closing, and other than any such consent, approval, authorization, order, registration or qualification imposed upon the Purchaser, Parentco and their respective Affiliates. (9) Shareholder Taxes. The Shareholder will pay all Taxes properly payable by the Shareholder, if any, on the transfer or sale by the Shareholder of such Shareholder's Shares to the Purchaser. (10) [Intentionally Deleted] (11) Organization of the Corporation. The information set out in Schedule 5.1(11) concerning the name and jurisdiction of incorporation, the authorized, issued and outstanding shares and the directors and officers of the Corporation and each Subsidiary is true and complete in all material respects and will be true and complete at the Closing Time. The Corporation is incorporated and validly subsisting under the laws of its jurisdiction of incorporation. The Corporation is licensed or qualified to do business under the laws of the jurisdictions specified in Schedule 5.1(11) and neither the character nor the location of the properties owned by the Corporation nor the nature of the business conducted by it requires licensing or qualification under the laws of any other jurisdiction. The Corporation has full corporate power to carry on its business and to own and operate its assets, properties and business as now carried on and owned and operated. (12) Corporate Records. The minute books of the Corporation contain true, correct and complete copies of its articles, its by-laws, the minutes of every meeting of its board of directors and every committee thereof and of its shareholders and every written resolution of its directors and shareholders. The share certificate book, register of shareholders, register of transfers and register of directors and officers of the Corporation are complete and accurate in all material respects. (13) Bankruptcy. The Corporation is not an insolvent person within the meaning of the Bankruptcy and Insolvency Act (Canada) or any comparable legislation to which it is subject nor has it made an assignment in favour of its creditors nor a proposal in bankruptcy to its creditors or any class thereof nor had any petition for a receiving order presented in respect of it. The Corporation has not initiated proceedings with respect to a compromise or arrangement with its creditors or for its winding up, liquidation or dissolution. No receiver has been appointed in respect of the Corporation or any of the Assets and no execution or distress has been levied upon any of the Assets. (14) Financial Statements. The annual audited consolidated financial statements of the Corporation for the fiscal year ended February 28, 1998 and, to the knowledge of the 35 -35- Shareholder and without the benefit of review by the Corporation's auditors, the annual unaudited consolidated financial statements of the Corporation for the fiscal year ended February 28, 1999, which are annexed as Schedule 5.1(14) (collectively, the "FINANCIAL STATEMENTS"), have been prepared in accordance with Canadian GAAP except as set forth in Schedule 5.1(14) and, in the case of the Financial Statements for the year ended February 28, 1999, for usual year-end adjustments and the absence of notes. The balance sheets contained in such Financial Statements fairly present the consolidated financial position of the Corporation as of their respective dates and the statements of earnings and retained earnings contained in the Financial Statements fairly present the consolidated results of operations for the periods indicated. (15) Title to Assets. The Corporation has good and marketable title to all the Assets other than the Intellectual Property, free and clear of any and all Liens, subject to Permitted Liens and the Leases. The Assets are sufficient to permit the continued operation of the Business in substantially the same manner as conducted in the year ended on the date of this Agreement. Schedule 5.1(15) sets out a complete and accurate list of all locations where the Assets are situate. There is no agreement, option or other right or privilege outstanding in favour of any Person for the purchase from the Corporation of the Business or of any of the Assets out of the ordinary course of business. (16) Real Property. With the exception of leasehold improvements located at the Leased Premises, the Corporation does not own any real property or any buildings or other improvements located on any real property. (17) Personal Property. Schedule 5.1(17) lists each item of Personal Property which had a book value in the accounting records of the Corporation, determined in accordance with Canadian GAAP at the date of the Corporation's most recently completed financial year, of more than Cdn.$10,000 or is otherwise material to the Business. All Personal Property constituting fixed assets reflected in the Closing Statement is in good operating condition and repair having regard to its book value as reflected in the Closing Statement, ordinary wear and tear excepted. (18) Leased Premises. Schedule 5.1(18) lists all the Premises Leases. Each Premises Lease is in full force and effect, unamended by oral or written agreement, and the Corporation is entitled to the full benefit and advantage of such Premises Lease in accordance with the terms thereof. Each Premises Lease is in good standing and there has not been any default by the Corporation or, to the knowledge of the Shareholder, any other party under any Premises Lease nor is there any dispute between the Corporation and any landlord under any of the Premises Leases. None of the Premises Leases has been assigned by the Corporation in favour of any Person. The current uses of the Leased Premises comply with Applicable Law. (19) Personal Property Leases. Schedule 5.1(19) lists all the Personal Property Leases which involve or may reasonably be expected to involve the payment by the Corporation of more than $25,000 over the term of the Personal Property Lease (collectively, the "MATERIAL PERSONAL PROPERTY LEASES") and identifies the ones which cannot be terminated by the Corporation without liability at any time upon less than 30 days' notice. Each Material Personal Property Lease is in full force and 36 -36- effect and has not been amended, and the Corporation is entitled to the full benefit and advantage of each Material Personal Property Lease in accordance with its terms. Each Material Personal Property Lease is in good standing and there has not been any material default by the Corporation or, to the knowledge of the Shareholder, any other party under any Material Personal Property Lease, nor any dispute between the Corporation and any other party under any Material Personal Property Lease. (20) Material Contracts. Schedule 5.1(20), Schedule 5.1(36) and the Employee Certificate list all the Material Contracts. The Corporation is not in default under any Material Contract and there has not occurred any event which, with the lapse of time or giving of notice or both, would constitute a default under any Material Contract by the Corporation or any other party to the Material Contract. Each Material Contract is in full force and effect, unamended by written or oral agreement, and the Corporation is entitled to the full benefit and advantage of each Material Contract in accordance with its terms. The Corporation has not received any notice of a default by the Corporation or a dispute between the Corporation and any other party in respect of any Material Contract. (21) Receivables. The Receivables net of reserves to be reflected in the Closing Statement are valid obligations which arose in the ordinary course of business and will be collectible net of such reserves in the period of 90 days after the Closing Date at their full face value as at the Closing Date. None of the Receivables is due from a Non-Arm's Length Party of the Corporation or the Shareholder. (22) Inventories. The Inventories to be reflected in the Closing Statement will consist of items that are current and of good and merchantable quality and not subject to any write-down or write-off. The portion of the Inventories consisting of finished products to be reflected in the Closing Statement will be saleable in the ordinary course of business at normal prices. The portion of the Inventories consisting of raw materials and work-in-progress to be reflected in the Closing Statement will be of a quality useable in the production of finished products. (23) Intellectual Property. (a) Schedule 5.1(23) describes the releases of the NetProphet and NetScore software applications and specifications, all internet website domains, domain names, business names and trade names related to the Business and related trademark, copyright and patent registrations comprising part of the Intellectual Property. Without limiting the generality of the foregoing, Schedule 5.1(23) lists and describes all software systems and applications related to the Business. All the registrations and applications for registration of the Intellectual Property listed in Schedule 5.1(23) are subsisting in good standing and are recorded in the name of the Corporation. No application for registration of any of the Intellectual Property has been rejected; (b) The Corporation has the exclusive right to use (subject to licenses in favour of customers entered into by the Corporation in the ordinary course of business), sell, license and dispose of, and has the right to bring actions for infringement of, the Intellectual Property. The Intellectual Property includes all patent 37 -37- rights, copyrights, trade secrets, information, and other proprietary rights and processes necessary to conduct the business of the Corporation as currently conducted; (c) Subject to the rights of licensors pursuant to licenses referred to in Schedule 5.1(23) and to the rights of customers pursuant to licenses entered into by the Corporation in the ordinary course of business, and to Permitted Liens, the Corporation is the sole owner of the Intellectual Property and is entitled to the exclusive and uninterrupted use of the Intellectual Property without payment of any royalty or other fees other than in respect of Hyperion software products and commercially available software listed in Schedule 5.1(23). The Corporation has diligently protected its legal rights to the extent commercially reasonable to the ownership of the Intellectual Property other than trade secrets and source code. Other than the Excel Spreadsheet Add-On delivered with NetProphet III and NetScore III which is in password protected source code form, all copies of any software forming a part of the Software Products have been distributed solely in object code form with notice containing the notations "(C)" or "(c)" and "copyright [year of publication] Sapling Corporation". Except for disclosures to the Purchaser and Parentco and to authorized Persons involved in development in each case pursuant to appropriate non-disclosure agreements, and except for disclosure of password protected source code as referred to above, there has been no disclosure of the Software Products other than through the licensing of object code versions of the Software Products. Each authorized copy of the Software Products object code is the subject of a valid and existing licence agreement in the form attached in Schedule 5.1(23)(a) or substantially in the form of Schedule 5.1(23)(b). The Corporation has not permitted or licensed any Person to use any of the Intellectual Property except pursuant to licenses and otherwise as disclosed in Schedule 5.1(23). All such licences referred to in Schedule 5.1(23) are in full force and effect and neither the Corporation nor, to the Shareholder's knowledge, the other party is in default of its obligations thereunder. Except for disclosure to the Purchaser and Parentco and except for disclosure to authorized Persons involved in development and except for off-site secure storage, in each case pursuant to appropriate non-disclosure agreements, the source code for the Software Products has not been delivered or disclosed or made available to any Person, the Corporation has not agreed to or undertaken to or in any way promised to provide such source code to any Person other than the Purchaser, and such source code is currently stored, and has never been removed from, the premises of the Corporation. The Corporation has not disclosed any trade secrets of the Corporation to any Person except pursuant to appropriate non-disclosure agreements. (d) Schedule 5.1(23) lists current litigation relating to the Intellectual Property; (e) Schedule 5.1(25) sets forth the name of any Person involved in the development of the Software Products and, except as indicated in Schedule 5.1(25), each such Person was so involved during the course of employment by the Corporation for the primary purpose of developing software for the 38 -38- Corporation. Except as set forth in Schedule 5.1(23), no shareholder, officer, director, employee or former employee of the Corporation or any other Person has any right, title or interest in any of the Intellectual Property, no Person has been involved in the development of the Software Products and each such Person has entered into non-disclosure agreements pursuant to which they have agreed to maintain the confidentiality of confidential Intellectual Property and, except in the case of Michelle Guthrie, Inna Naryznai, Oleg Proudnikov, Andreea Vasiliu, Jennifer Smith and Michael McKenna have assigned all rights they may have in the Intellectual Property to the Corporation and have waived any moral rights they may have for the benefit of the Corporation and anyone claiming through the Corporation; (f) All of the Corporation's permissions and licences to use the industrial or intellectual property of other Persons are disclosed in Schedule 5.1(23). Except as disclosed in Schedule 5.1(23), the Software Products neither contain nor embody nor use nor require any third party software, including development tools and utilities, and the Software Products contain all software necessary for the continued maintenance and use of the Software Products. With the exception of the agreements with Platinum Technologies Inc. and POET Software Corporation, all such permissions and licenses referred to in Schedule 5.1(23) are in full force and effect and neither the Corporation nor, to the Shareholder's knowledge, the other party is in default of its obligations thereunder; (g) No Person has challenged the validity of any registrations for the Intellectual Property or the Corporation's rights to any of the Intellectual Property; (h) Neither the manufacture, marketing, license, sale or use of any product currently manufactured, marketed, licensed, sold or used by the Corporation violates any license or agreement of the Corporation with any Person or infringes upon the industrial or intellectual property rights of any other Person, whether common law or statutory, including rights relating to defamation, rights of privacy or publicity and contractual rights. Neither the use of the Intellectual Property nor the conduct of the Business has infringed or currently infringes upon the industrial or intellectual property rights of any other Person or other than in respect of Hyperion software products and commercially available software listed in Schedule 5.1(23) requires the payment of any royalty, honoraria, fees or other payments to any other Person; (i) To the Shareholder's knowledge, no other Person has infringed the Corporation's rights to the Intellectual Property; (j) There is no governmental prohibition or restriction on the use of the Intellectual Property other than generally applicable U.S. government trade restrictions; (k) The computer software comprising NetProphet and NetScore is in good operating condition and functions in accordance with the specifications 39 -39- specified in the relevant software design documentation in all material respects and is free from errors and design and operating defects; save and except as experienced within generally applicable customer expectations and within generally acceptable industry experience for well developed software and, with respect to future experience with the said software as installed, at frequency and severity levels no greater than experienced by the Corporation with respect to such software to the date hereof. All source code for NetProphet and NetScore is written entirely in the programming environment specified in Schedule 5.1(23), and is sufficiently documented in the source code to enable a software developer reasonably skilled in such environment to understand, modify, compile and otherwise utilize all aspects of the related software without reference to other sources of information. The source code for the Software Products contains all information and software required to compile and run the Software Products in the application environment specified in Schedule 5.1(23) without additional hardware, software or other materials whatsoever; (l) Other than a 40 bit encryption routine for password protection in NetScore, the Software Products do not contain or otherwise make use of any encryption, enciphering or other similar technology, have any encryption capability or perform any encryption function. (24) No Disabling Mechanism. No portion of the Software Products contain or will contain any disabling mechanism or protection feature designed to prevent its use, computer virus, worm, software lock, drop dead device, Trojan-horse routine, trap door, time bomb or any other codes or instructions that may be used to access, modify, delete, damage or disable any of the Software Products or any computer system on which any of the Software Products is installed or in connection with which they may operate. (25) Employees and Developers. Schedule 5.1(25) lists, for each software application comprising part of the Software Products, under separate headings, the full names of (i) all the employees of the Corporation, (ii) all contractors of the Corporation and (iii) all other Persons, in each case involved in developing such Software Products together with, beside each name, the full residential address of each such Person. (26) Year 2000 Compliance. All of the Corporation's Software Products (including products currently under development), other than versions of NetProphet prior to NetProphet II version 5, record, store, process and calculate and present calendar year dates in a four digit format and the Software Products do not default to an assumed date beginning with "19--" rather than "20--" without providing the end user of the Software Product with either a notice or choice, and the Software Products can record, store, process and calculate and present calendar dates falling on and after January 1, 2000, and calculate any information dependent on or relating to such dates in the same manner and with the same functionality, data integrity and performance as the products record, store, process, calculate and present calendar dates on or before December 31, 1999, or calculate any information dependent on or relating to such dates (collectively "YEAR 2000 COMPLIANT"). All of the Corporation's material products will lose no functionality with respect to the introduction of records 40 -40- containing dates falling on or after January 1, 2000. All of the Corporation's internal computer systems, including its accounting systems, are Year 2000 Compliant in all material respects. To the knowledge of the Shareholders, there has been no action, suit, proceeding, claim (including warranty claim) instituted in any court or pending or, to the knowledge of the Shareholder, threatened by or against the Corporation in respect of any products of the Corporation including the Software Products that is based on such products not being Year 2000 Compliant. (27) Licences and Permits. Schedule 5.1(27) lists all the Licences and Permits and identifies the ones that by their terms are rendered invalid as a result of a change of control of the Corporation. All the Licences and Permits are in full force and effect, the Corporation is not in violation of any term or provision or requirement of any such Licences and Permits, and no Person has threatened to revoke, amend or impose any condition in respect of, or commenced proceedings to revoke, amend or impose conditions in respect of, any Licence or Permit. (28) Undisclosed Liabilities. The Corporation does not have any liabilities, obligations, indebtedness or commitments, whether accrued, absolute, contingent or otherwise, which will not be disclosed in the Closing Statement or referred to or disclosed herein (and for the purposes hereof, the Corporation's obligations under the Material Contracts and the Leases have been disclosed herein), other than liabilities, obligations and indebtedness (i) in respect of obligations to Employees for severance and payment in lieu of notice upon termination under common law or statute; (ii) incurred in the normal course of business and in accordance with the usual business practices of the Corporation and which do not exceed $25,000 in the aggregate other than pursuant to Contracts referred to in clause (iii); and (iii) Contracts entered into in the ordinary course of business by the Corporation in accordance with usual business practices of the Corporation with customers of and suppliers to the Corporation. (29) Safety Deposit Boxes/Powers of Attorney. Schedule 5.1(29) lists: (a) the name of each bank, trust company and other financial institution in which the Corporation holds accounts or safety deposit boxes and the names of every Person authorized to draw thereon or to have access thereto; and (b) the name of each Person holding a general or special power of attorney from the Corporation and a summary of the terms thereof. (30) Consents and Approvals. Except for the Consents and Approvals, no consent or approval of any Person is required in connection with the execution and delivery of this Agreement and the completion of the transactions contemplated by this Agreement or to permit the Corporation to carry on the Business after the Closing as the Business is currently carried on by the Corporation provided that the Shareholder makes no representation or warranty concerning any consent or approval required to be obtained by the Purchaser, Parentco or their respective Affiliates in such connection. (31) Notices. Except for the Notices, no notice is required to be delivered to any Person in connection with the execution and delivery of this Agreement and the completion of 41 -41- the transactions contemplated by this Agreement or to permit the Corporation to carry on the Business after the Closing as the Business is currently carried on by the Corporation provided that the Shareholder makes no representation or warranty concerning any notice required to be delivered by the Purchaser, Parentco or their respective Affiliates in such connection. (32) No Conflict for Corporation . The execution, delivery and performance of this Agreement by the Parties and the completion (with any required Consents and Approvals and Notices) of the transactions contemplated by this Agreement do not and will not result in or constitute any of the following: (a) a default, breach or violation or an event that, with notice or lapse of time or both, would be a default, breach or violation of any of the terms, conditions or provisions of the articles or by-laws of the Corporation or any contract; (b) an event which, pursuant to the terms of any Contract or Licence or Permit, causes any right or interest of the Corporation to come to an end or be amended in any way that is detrimental to the Business or entitles any other Person to terminate or amend any such right or interest; or (c) the creation or imposition of any Lien on any Asset. (33) [Intentionally Deleted] . (34) Insurance. Particulars of the policies of insurance maintained by the Corporation at the date of this Agreement are set out in Schedule 5.1(34). All such policies are in full force and effect and the Corporation is not in default, whether as to the payment of premiums or otherwise, under the terms of such policies. (35) Environmental Matters. (a) The Business and the Assets as carried on or used by the Corporation have been carried on and used and are currently carried on and used in compliance with all Environmental Laws. (b) The Corporation is not, and has not been, subject to any proceedings alleging the violation of any Environmental Law or to determine whether any remedial action is needed to respond to a Release or the presence of a Hazardous Substance on the Leased Premises. (c) The Corporation requires no Environmental Permits. (d) All Hazardous Substances used in connection with the Business at the Leased Premises and disposed of, treated or stored by the Corporation have been disposed of, treated and stored in compliance with all Environmental Laws. (e) There are no proceedings in which it is alleged that the Corporation is responsible for a clean-up or remediation of lands adjacent to or in the vicinity of the Leased Premises contaminated with Hazardous Substances 42 -42- emanating from the Leased Premises and arising from the operation of the Business or for any other remedial or corrective action under an Environmental Law. (f) The Corporation has maintained all environmental and operating documents and records in the manner and for the time periods required by any Environmental Law and have never conducted an environmental audit of the Business and Assets. For purposes of this Section, an environmental audit includes any evaluation, assessment, review or study performed at the request of or on behalf of the Corporation, a prospective purchaser of the Business or the Assets, a court or governmental authority. (g) The Corporation has not installed or caused to be installed any underground storage tanks located on the Leased Premises. (36) Employment Arrangements. A list certified by Derek Sandison and James Danziger on behalf of the Corporation and without personal liability except in their capacity as a Shareholder under this Agreement and circulated to the Shareholders' Solicitors and the Purchaser (the "EMPLOYEE CERTIFICATE") and Schedule 5.1(36) list all the Employees as of the date of this Agreement and the age, position, status and length of service of each of them, respectively. Except as set out in the Employee Certificate, Schedule 5.1(7), Schedule 5.1 (36) and Schedule 5.1(38), the Corporation is not a party to or bound by any contracts with any Employee or former employee or obligated under any requirements of Applicable Law to make any severance or termination payable to any Employee or former employee of the Corporation, including: (a) any contracts for the employment of any Employee or statutory requirement for re-employment of any Employee other than in respect of Susan Henderson and Vidy Babwah; or (b) any bonus, deferred compensation, profit sharing, pension, retirement, hospitalization insurance (other than mandatory public plans) or other plans or arrangements providing employee benefits, except for the plans providing employee benefits described in Schedule 5.1(38). (37) Collective Agreements. Except as set out in Schedule 5.1(37) and other than the current dispute with Ralph Mills, Scott Kennedy and William Fosina: (a) the Corporation is not a party to any collective bargaining agreement, contract or legally binding commitment to any trade union or employee organization or group in respect of or affecting Employees; (b) the Corporation is not currently engaged in any labour negotiation; (c) the Corporation is not a party to any application, complaint or other proceeding under any statute; 43 -43- (d) the Corporation has not engaged in any unfair labour practice and the Corporation is not aware of any pending or threatened complaint regarding any alleged unfair labour practices; (e) there is no strike, labour dispute, work slow down or stoppage pending or threatened against the Corporation; (f) there is no grievance or arbitration proceeding arising out of or under any collective bargaining agreement which is pending or threatened against the Corporation; (g) the Corporation has not experienced any material work stoppage; and (h) the Corporation is not the subject of any union organization effort. (38) Employee Plans. (a) Other than plans required to be maintained by all employers in respect of their employees in any relevant jurisdiction, Schedule 5.1(38) lists all the employee benefit, health, welfare, supplemental unemployment benefit, bonus, pension, profit sharing, deferred compensation, stock compensation, stock purchase, retirement, hospitalization insurance, medical, dental, legal, disability and similar plans or arrangements or practices relating to the Employees or former Employees which are currently maintained or were maintained at any time in the last four calendar years (the "EMPLOYEE PLANS"). (b) All of the Employee Plans are and have been established, registered, qualified, invested and administered in all respects in accordance with all laws, regulations, orders or other legislative, administrative or judicial promulgations applicable to the Employee Plans ("APPLICABLE EMPLOYEE BENEFIT LAWS"). (c) All financial obligations regarding the Employee Plans have been satisfied or will be accrued for and reflected in the Closing Statement, there are no outstanding defaults or violations by the Corporation or, to the knowledge of the Shareholder, any other party to any Employee Plan and no Taxes, penalties or fees are owing or eligible under any of the Employee Plans, except those Taxes, penalties and fees will be accrued for in the Closing Statement. (d) No Employee Plan, nor any related trust or other funding medium thereunder, is subject to any pending investigation, examination or other proceeding, action or claim initiated by any governmental agency or instrumentality, or by any other party (other than routine claims for benefits), and there exists no state of facts which after notice or lapse of time or both could reasonably be expected to give rise to any such investigation, examination or other proceeding, action or claim or to affect the registration of any Employee Plan required to be registered. 44 -44- (e) All contributions or premiums required to be made by the Corporation under the terms of each Employee Plan or by Applicable Employee Benefit Laws have been made in a timely fashion in accordance with Applicable Employee Benefit Laws and the terms of the Employee Plans, and the Corporation will not have any financial obligations with respect to any of the Employee Plans except as accrued for in the Closing Statement. (f) Except in the ordinary course of business, no amendments have been made to any Employee Plan and no improvements to any Employee Plan have been promised. No amendments or improvements to an Employee Plan will be made or promised by the Corporation before the Closing Time. (g) There have been no improper withdrawals, applications or transfers of assets from any Employee Plan or the trusts or other funding media relating thereto, and neither the Corporation nor any of its agents has been in breach of any fiduciary obligation with respect to the administration of the Employee Plans or the trusts or other funding media relating thereto. (h) The Shareholders have furnished or made available to the Purchaser true, correct and complete copies of all the Employee Plans as amended as of the date hereof together with all material documentation related thereto including funding agreements, actuarial reports, funding and financial information returns and statements, all professional opinions (whether or not internally prepared) with respect to each Employee Plan, copies of material correspondence with all regulatory authorities with respect to each Employee Plan and existing plan summaries, booklets and personnel manuals. (i) The Corporation has no pension plan or other funded Employee Plan. (j) None of the Employee Plans are registered under Applicable Employee Benefit Laws, nor have any advance tax rulings been sought or received in respect of the Employee Plans. (k) All employee data necessary to administer each Employee Plan has been provided or made available by the Corporation to the Purchaser and such data is true and correct in all material respects. (l) No insurance policy or any other contract or agreement affecting any Employee Plan requires or permits a retroactive increase in premiums or payments due thereunder. The level of insurance reserves under each insured Employee Plan is reasonable and sufficient to provide for all incurred but unreported claims. (m) Except as disclosed in Schedule 5.1(38), none of the Employee Plans provides benefits to retired employees or to the beneficiaries or dependants of retired employees. (n) Except as disclosed in Schedule 5.1(38) or in the Financial Statements, the Corporation has not during the period commencing March 1, 1998 accrued or 45 -45- paid any bonus, fee, distribution, remuneration or other compensation to any Employee (other than salaries, wages, bonuses, benefits (including Option entitlements) paid or payable to Employees in the ordinary course of business in accordance with current compensation levels and practices as set out in the Employee Certificate, Schedule 5.1(36) and Schedule 5.1(38)). (39) Customers and Suppliers. Schedule 5.1(39) lists the ten largest customers and the ten largest suppliers of the Corporation (or such additional customers or suppliers of the Corporation which are sufficient to constitute ten per cent or more of total sales or purchases, as the case may be) for the 12 month period ending February 28, 1999 determined by reference to payments to and from such parties, and the aggregate amount which each such customer was invoiced and each such supplier was paid during such period. With the exception of termination by the Corporation of its relationship with Quadstar International, the Shareholder is not aware of, nor has it received notice of, any intention on the part of any such customer or supplier to cease doing business with the Corporation or to modify or change in any material manner any existing arrangement with the Corporation for the purchase or supply of any products or services. There are no unresolved disputes with any such supplier, shipper or customer. (40) Product Warranties. There are no claims against the Corporation on account of product warranties or with respect to the production or sale of defective or inferior products and, to the knowledge of the Shareholder, there is no factual or legal basis for any such claim. (41) Affiliated Transactions. The Corporation is not liable in respect of advances, loans, guarantees to or on behalf of any Shareholder, officer, director, Employee or Affiliate of the Corporation or any other Person who is a Non-Arm's Length Party to the Corporation except those which are to be repaid, discharged or released prior to the Closing Time in accordance with the terms of this Agreement. (42) Intercompany Services. Except as disclosed in this Agreement, there are no Material Contracts and, to the knowledge of the Shareholder, no Contracts, in each case between the Corporation and any Person who is a Non-Arm's Length Party to the Corporation or the Shareholder. (43) Tax Filings. The Corporation has prepared and filed on time with all appropriate governmental bodies all tax returns, declarations, remittances, information returns, reports and other documents of every nature required to be filed by or on behalf of the Corporation in respect of any Taxes or in respect of any other provision in any domestic or foreign federal, provincial, municipal, state, territorial or other taxing statute for all fiscal periods ending prior to the date hereof, other than the federal and provincial tax returns for the one year ended February 28, 1998 which shall be delivered to the Purchaser at least five Business Days prior to the Closing Date. All such returns, declarations, remittances, information returns, reports and other documents, including the federal and provincial tax returns for the one year ended February 28, 1998, are correct and complete in all material respects, and no material fact has been omitted therefrom. No extension of time in which to file any such returns, declarations, remittances, information returns, reports or other documents is 46 -46- in effect. All Taxes shown on all such returns, or on any assessments or reassessments in respect of any such returns have been paid in full. (44) Taxes Paid. The Corporation has paid in full all Taxes required to be paid on or prior to the date hereof and will make adequate provision in the Closing Statement in accordance with Canadian GAAP for the payment of all Taxes in respect of all fiscal periods ending prior to the Closing Time. (45) Reassessments of Taxes. There are no reassessments of the Corporation's Taxes that have been issued and are outstanding and there are no outstanding issues which have been raised and communicated to the Corporation by any governmental body for any taxation year in respect of which a Tax return of the Corporation has been audited. Other than in respect of the SRED Tax Credit, there are no unresolved challenges, disputes or questions between the Corporation and any governmental body in respect of Taxes or of any returns, filings or other reports filed under any statute providing for Taxes. The Corporation is not negotiating any draft assessment or reassessment with any governmental body. The Shareholder is not aware of any contingent liabilities for Taxes or any grounds for an assessment or reassessment of the Corporation other than as disclosed in the Financial Statements or to be disclosed in the Closing Statement and other than those Taxes or grounds for assessment or reassessment arising in the ordinary course of business. Neither the Corporation nor the Shareholder has received any indication from any governmental body that an assessment or reassessment of the Corporation is proposed in respect of any Taxes, regardless of its merits. The Corporation has not executed or filed with any governmental body any agreement or waiver extending the period for assessment, reassessment or collection of any Taxes. (46) Withholdings and Remittances. The Corporation has withheld from each payment made to any of its present or former employees, officers and directors, and to all persons who are non-residents of Canada for the purposes of the Income Tax Act (Canada) all amounts required by law to be withheld, and furthermore, has remitted such withheld amounts within the prescribed periods to the appropriate governmental body. The Corporation has remitted or will make adequate provision in the Closing Statement for the remittance of all Canada Pension Plan contributions, provincial pension plan contributions, unemployment insurance premiums, employer health taxes and other Taxes payable by it in respect of its employees and has remitted or will make adequate provision in the Closing Statement for the remittance of such amounts to the proper governmental body within the time required under the applicable legislation. The Corporation has charged, collected and remitted on a timely basis all Taxes as required under applicable legislation on any sale, supply or delivery whatsoever, made by the Corporation. (47) [Intentionally deleted.] (48) Absence of Certain Changes or Events. Except as disclosed in Schedule 5.1(48), since February 28, 1999, the Corporation has not: (a) suffered any Material Adverse Change; 47 -47- (b) amended its articles; (c) except as contemplated by this Agreement, declared or made any payment of any dividend or other distribution in respect of its shares and has not redeemed, purchased or otherwise acquired any shares; (d) except as contemplated by this Agreement, issued or sold any Shares or other securities of the Corporation or any Option in respect of any securities of the Corporation; (e) sold, assigned, transferred, mortgaged, pledged or otherwise encumbered any of the Assets, except sales of Inventories in the normal course of its Business; (f) changed any accounting or costing systems or methods in any material respect; (g) except as contemplated by this Agreement, suffered any extraordinary loss or cancelled, other than in the ordinary course of business, or waived any debt, claim or other right; (h) except as contemplated by this Agreement, entered into any Material Contract or any other transaction that was not in any material respect consistent with the terms of Contracts entered into by the Corporation in the normal course of its Business; or (i) terminated, cancelled or modified in any material respect or received notice or a request for termination, cancellation or modification in any material respect of any Material Contract. (49) Brokerage Fees. The Shareholder has not entered into any agreement which would entitle any Person to any valid claim against the Corporation, the Purchaser or Parentco for a broker's commission, finder's fee or any like payment in respect of the purchase and sale of the Shares or any other matters contemplated by this Agreement. (50) Full Disclosure. No representation or warranty made by the Shareholder in this Agreement, and no statement made in any schedule, exhibit, certificate or other document furnished pursuant to this Agreement, contains, or will contain, any untrue statement of a material fact or omits, or will omit, to state any material fact necessary to make such representation or warranty or any such statement not misleading. The Shareholder does not know any fact which, if known to the Purchaser might reasonably be expected to either materially diminish the Purchaser's evaluation of the value of the Shares or the value of the Business or deter the Purchaser from consummating the transactions contemplated herein on the terms of this Agreement. 48 -48- 5.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents and warrants to the Shareholders as follows: (1) Incorporation and Power. The Purchaser is a corporation duly incorporated under the laws of the jurisdiction of its incorporation and is duly organized, validly subsisting and in good standing under such laws. (2) Due Authorization. The Purchaser has all necessary corporate power, authority and capacity to enter into this Agreement and all other agreements and instruments to be executed by it as contemplated by this Agreement and to carry out its obligations under this Agreement and such other agreements and instruments. The execution and delivery of this Agreement and such other agreements and instruments and the completion of the transactions contemplated by this Agreement and such other agreements and instruments have been duly authorized by all necessary corporate action on the part of the Purchaser. (3) Enforceability of Obligations. This Agreement constitutes a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms subject, however, to limitations on enforcement imposed by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and to the extent that equitable remedies such as specific performance and injunctions are only available in the discretion of the court from which they are sought. (4) Brokerage Fees. The Purchaser has not entered into any agreement which would entitle any Person to any valid claim against the Shareholders for a broker's commission, finder's fee or any like payment in respect of the purchase and sale of the Shares or any other matters contemplated by this Agreement. 5.3 REPRESENTATIONS AND WARRANTIES OF PARENTCO. Parentco represents and warrants to the Shareholders as follows: (1) Incorporation and Power. Parentco is a corporation duly incorporated under the laws of Delaware and is duly organized, validly subsisting and in good standing under such laws and the shares of common stock of Parentco are listed on Nasdaq. (2) Due Authorization. Parentco has all necessary corporate power, authority and capacity to enter into this Agreement and all other agreements and instruments to be executed by it as contemplated by this Agreement and to carry out its obligations under this Agreement and such other agreements and instruments. The execution and delivery of this Agreement and such other agreements and instruments and the completion of the transactions contemplated by this Agreement and such other agreements and instruments have been duly authorized by all necessary corporate action on the part of Parentco. (3) Enforceability of Obligations. This Agreement constitutes a valid and binding obligation of Parentco enforceable against Parentco in accordance with its terms subject, however, to limitations on enforcement imposed by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and to the extent that 49 -49- equitable remedies such as specific performance and injunctions are only available in the discretion of the court from which they are sought. (4) Brokerage Fees. Parentco has not entered into any agreement which would entitle any Person to any valid claim against the Shareholders for a broker's commission, finder's fee or any like payment in respect of the purchase and sale of the Shares or any other matters contemplated by this Agreement. 5.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (1) The representations and warranties of the Shareholders contained in Section 5.1, in any Closing Agreement or any other agreement, certificate or instrument delivered pursuant to this Agreement shall survive the Closing for a period of two years from the Closing Date except in the case of any representation and warranty relating to any Tax matter which shall survive the Closing for a period of one year after the limitation periods for reassessment or appeal under the applicable taxing statute have expired, and notwithstanding the Closing and any inspection or inquiries made by or on behalf of the Purchaser, shall continue in full force and effect for the benefit of the Purchaser for such time period, after which time the Shareholders shall be released from all obligations in respect of such representations and warranties except with respect to any Claims asserted by the Purchaser in writing (setting out in reasonable detail the nature of the Claim and the approximate amount of such Claim) before the expiration of such period, provided that there shall be no time limit on the representations and warranties of the Shareholders set out in Section 5.1 which relate to the incorporation of the Corporation, the due authorization of this Agreement by the Shareholders, the enforceability of the Shareholders' obligations under this Agreement, or to the title of any Shareholder to any Shares or on any representation involving fraud or fraudulent misrepresentations. (2) The representations and warranties of the Purchaser contained in Section 5.2 and of Parentco in Section 5.3, in any Closing Agreement or any other agreement, certificate or instrument delivered pursuant to this Agreement shall survive the Closing for a period of two years from the Closing Date, and notwithstanding the Closing, shall continue in full force and effect for the benefit of the Shareholders for such time period, after which time the Purchaser or Parentco shall be released from all obligations in respect of such representations and warranties except with respect to any Claims asserted by the Shareholder Committee in writing (setting out in reasonable detail the nature of the Claim and the appropriate amount thereof) before the expiration of such period, provided that there shall be no time limit on the representations and warranties of the Purchaser set out in Section 5.2 or of Parentco set out in Section 5.3 which relate to the incorporation of the Purchaser or Parentco respectively, the due authorization of this Agreement by the Purchaser or Parentco respectively and the enforceability of the Purchaser's or Parentco's respectively obligations under this Agreement or on any representation involving fraud or fraudulent misrepresentations. 5.5 PARENTCO SUPPORT. Parentco represents and warrants that the Purchaser, including for purposes of this Section 5.5 any permitted assignee of the Purchaser, is and at all relevant times shall be a wholly-owned direct or indirect subsidiary of Parentco. Parentco hereby covenants with 50 -50- each of the Shareholders to take such actions as may be necessary to cause the Purchaser or any permitted assignee of the Purchaser at all times to perform and discharge its obligations under this Agreement and under any agreement, document or instrument made or delivered pursuant to this Agreement; and if the Purchaser or any permitted assignee of the Purchaser shall at any time fail to do so, Parentco shall, or shall cause an Affiliate of Parentco to, perform and discharge such obligations. The foregoing covenants and obligations of Parentco are absolute, unconditional present and continuing covenants and obligations of a primary covenantor and are in no way conditional or contingent upon any event or circumstance, action or omission which might in any way discharge a guarantor or surety, provided that Parentco shall be entitled to the benefit of all rights, defences and remedies of the Purchaser under this Agreement. ----------- ARTICLE 6 INDEMNIFICATION 6.1 INDEMNITY BY THE SHAREHOLDERS. Each of the Shareholders shall severally indemnify and hold the Purchaser, its directors, officers, employees, agents, representatives and the Purchaser's Affiliates and their respective directors, officers, employees, agents and representatives harmless in respect of any claim, demand, action, cause of action, damage, loss, cost, liability or expense (hereinafter referred to as a "CLAIM") which may be made or brought against an Indemnified Party or which it may suffer or incur directly or indirectly as a result of, in respect of or arising out of: (1) subject to Section 5.4(1), any incorrectness in or breach of any representation or warranty of the Shareholder contained in this Agreement, any Closing Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; (2) any breach of or any non-fulfilment of any covenant or agreement on the part of the Shareholder under this Agreement, any Closing Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; or (3) any Claim made or brought against Parentco, the Purchaser, the Corporation or the Corporation's successors or their respective directors, officers, employees, agents, representatives and Affiliates by: (i) Ray Fowler or his Associates as a result of, in respect of or arising out of any matter existing prior to the Closing Time, excluding any Claim for a finder's fee in respect of licensing of Software Products after the Closing Date resulting in license fees being recognized by Parentco on a consolidated basis in accordance with the usual business practice of the Corporation; (ii) Tom Oliff or his Associates as a result of, in respect of or arising out of any matter referred to in Section 1 of Schedule 5.1(7); 51 -51- (iii) any of Ralph Mills, Scott Kennedy and William Fosina or any of their respective Associates as a result of, in respect of or arising out of any matter referred to in Section 3 of Schedule 5.1(7); and (iv) any of Michelle Guthrie, Inna Naryznai, Oleg Proudnikov, Andreea Vasiliu, Jennifer Smith and Michael McKenna or any of their respective Associates as a result of, in respect of or arising out of any right, title or interest in, or moral rights in respect of, in each case in existence at the Closing Time, the Software Products. 6.2 INDEMNITY BY THE PURCHASER. (1) The Purchaser shall indemnify and hold the Shareholders, their directors, officers, employees, agents and representatives, as the case may be, and the Shareholders' Affiliates and their respective directors, officers and employees, as the case may be, harmless in respect of any Claim which may be made or brought against an Indemnified Party or which it may suffer or incur directly or indirectly as a result of, in respect of or arising out of: (a) subject to Section 5.4(2), any incorrectness in or breach of any representation or warranty of the Purchaser contained in this Agreement, any Closing Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; or (b) any breach or non-fulfilment of any covenant or agreement on the part of the Purchaser under this Agreement, any Closing Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement. (2) Parentco shall indemnify and hold the Shareholders, their directors, officers, employees, agents, representatives, as the case may be, and the Shareholders' Affiliates and their respective directors, officers and employees, as the case may be, harmless in respect of any Claim which may be made or brought against an Indemnified Party or which it may suffer or incur directly or indirectly as a result of, in respect of or arising out of: (a) subject to Section 5.4(3), any incorrectness in or breach of any representation or warranty of Parentco contained in this Agreement, any Closing Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; or (b) any breach or non-fulfilment of any covenant or agreement on the part of Parentco under this Agreement, any Closing Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement. 6.3 NOTICE OF CLAIM. If an Indemnified Party becomes aware of a Claim in respect of which indemnification is provided for pursuant to either of Section 6.2 or 6.1, as the case may be, the Indemnified Party shall promptly give written notice of the Claim to the Indemnifying Party. Such 52 -52- notice shall specify whether the Claim arises as a result of a claim by a Person against the Indemnified Party (a "THIRD PARTY CLAIM") or whether the Claim does not so arise (a "DIRECT CLAIM"), and shall also specify with reasonable particularity (to the extent that the information is available): (a) the factual basis for the Claim; and (b) the amount of the Claim, if known. If, through the fault of the Indemnified Party, the Indemnifying Party does not receive notice of any Claim in time to effectively contest the determination of any liability susceptible of being contested, then the liability of the Indemnifying Party to the Indemnified Party under this Article shall be reduced by the amount of any losses incurred by the Indemnifying Party resulting from the Indemnified Party's failure to give such notice on a timely basis. 6.4 DIRECT CLAIMS. In the case of a Direct Claim, the Indemnifying Party shall have 60 days from receipt of notice of the Claim within which to make such investigation of the Claim as the Indemnifying Party considers necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the information relied upon by the Indemnified Party to substantiate the Claim, together with all such other information as the Indemnifying Party may reasonably request. If both parties agree at or before the expiration of such 60 day period (or any mutually agreed upon extension thereof) to the validity and amount of such Claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the Claim. 6.5 THIRD PARTY CLAIMS. In the case of a Third Party Claim, the Indemnifying Party shall have the right, at its expense, to participate in or assume control of the negotiation, settlement or defence of the Claim. If the Indemnifying Party elects to assume such control, the Indemnifying Party shall reimburse the Indemnified Party for all of the Indemnified Party's out-of-pocket expenses incurred as a result of such participation or assumption. The Indemnified Party shall have the right to participate in the negotiation, settlement or defence of such Third Party Claim and to retain counsel to act on its behalf, provided that the fees and disbursements of such counsel shall be paid by the Indemnified Party unless the Indemnifying Party consents to the retention of such counsel at its expense or unless the named parties to any action or proceeding include both the Indemnifying Party and the Indemnified Party and a representation of both the Indemnifying Party and the Indemnified Party by the same counsel would be inappropriate due to the actual or potential differing interests between them (such as the availability of different defences). The Indemnified Party shall cooperate with the Indemnifying Party so as to permit the Indemnifying Party to conduct such negotiation, settlement and defence and for this purpose shall preserve all relevant documents in relation to the Third Party Claim, allow the Indemnifying Party access on reasonable notice to inspect and take copies of all such documents and require its personnel to provide such statements as the Indemnifying Party may reasonably require and to attend and give evidence at any trial or hearing in respect of the Third Party Claim. If, having elected to assume control of the negotiation, settlement or defence of the Third Party Claim, the Indemnifying Party thereafter fails to conduct such negotiation, settlement or defence with reasonable diligence, then the Indemnified Party shall be entitled to assume such control and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim. If any Third Party Claim is of a nature such that (i) the Indemnified Party is required by Applicable Law or the order of any court, tribunal or regulatory body having jurisdiction, or (ii) it is necessary in the reasonable view of the 53 -53- Indemnified Party acting in good faith and in a manner consistent with reasonable commercial practices, in respect of (A) a Third Party Claim by a customer relating to products or services supplied by the Business or (B) a Third Party Claim relating to any Contract which is necessary to the ongoing operations of the Business or any material part thereof in order to avoid material damage to the relationship between the Indemnified Party and any of its major customers or to preserve the rights of the Indemnified Party under such an essential Contract, to make a payment to any person (a "THIRD PARTY") with respect to the Third Party Claim before the completion of settlement negotiations or related legal proceedings, as the case may be, then the Indemnified Party may make such payment provided that it is made in a manner that does not constitute an admission of liability and that preserves all defences to the Third Party Claim and the Indemnifying Party shall, promptly after demand by the Indemnified Party, reimburse the Indemnified Party for such payment. If the amount of any liability of the Indemnified Party under the Third Party Claim in respect of which such a payment was made, as finally determined, is less than the amount which was paid by the Indemnifying Party to the Indemnified Party, the Indemnified Party shall, promptly after receipt of the difference from the Third Party, pay the amount of such difference to the Indemnifying Party. 6.6 SETTLEMENT OF THIRD PARTY CLAIMS. If the Indemnifying Party fails to assume control of the defence of any Third Party Claim, the Indemnified Party shall have the exclusive right to contest, settle or pay the amount claimed. Whether or not the Indemnifying Party assumes control of the negotiation, settlement or defence of any Third Party Claim, the Indemnifying Party shall not settle any Third Party Claim without the written consent of the Indemnified Party, which consent shall not be unreasonably withheld or delayed; provided, however, that the liability of the Indemnifying Party shall be limited to the proposed settlement amount if any such consent is not obtained for any reason within a reasonable time after the request therefor. 6.7 INTEREST ON CLAIMS. The amount of any Claim submitted under Section 6.1 or Section 6.2 as damages or by way of indemnification shall bear interest from and including the date any Indemnified Party is required to make payment in respect thereof at the Prime Rate calculated from and including such date to but excluding the date reimbursement of such Claim by the Indemnifying Party is made, and the amount of such interest shall be deemed to be part of such Claim. 6.8 TAX ADJUSTMENTS. The amount of any Claim submitted under Section 6.1 or 6.2 as damages or by way of indemnification shall be determined on an after-Tax basis, and without limiting the generality of the foregoing shall: (a) be net of the net present value of any Tax benefits to the Indemnified Party resulting from the Claim, calculated using a discount rate equal to the Prime Rate on the Business Day immediately preceding the date of payment of the Claim; and (b) include the amount necessary to hold the Indemnified Party harmless after Tax. 6.9 SET-OFF. The Purchaser shall be entitled to set-off the amount of any Claim submitted under Section 6.1 against any other amounts payable by the Purchaser to the Shareholders whether under this Agreement or otherwise, provided that the amount of any set-off made by the Purchaser shall be based upon a commercially reasonable assessment of the merits of the Claim in consideration of advice of counsel; any uncertainties existing in respect of the Claim, including 54 -54- uncertainty as to the amount of the Claim, at the time set-off is to be made; and the risk to the Purchaser associated with collecting amounts payable to the Purchaser by each of the relevant Shareholders in the event of a disposition of the Claim in favour of the Purchaser. To the extent that the Purchaser sets-off any amount in respect of a Claim against an Indemnifying Party in accordance with the foregoing, and the amount set-off exceeds the amount finally determined by judicial process or arbitration, to be payable to the Purchaser by the Indemnifying Party, the Purchaser shall make a payment in an amount equal to such excess less any payment determined to be payable by the Purchaser to the Indemnifying Party by judicial process or arbitration in respect of a claim by the Indemnifying Party in respect of the monies set-off. 6.10 OTHER REMEDIES. The indemnification provisions set forth in this Part are in addition to, and not in derogation of, any statutory, equitable, or common law remedy any Party may have for any misrepresentation, breach of warranty or non-fulfilment of or failure to perform any covenant or agreement. 6.11 SPECIFIC PERFORMANCE. Each of the Parties hereto acknowledges and understands that breach or threatened breach by any other Party or non-performance or threatened non-performance of certain of the covenants contained herein may not be compensable in damages. Accordingly, each of the Parties agrees and accepts that the other Party may, in addition to any other remedy for relief, enforce the performance of any covenant in this Agreement (including the obligation to convey the Shares) or the performance of any action that is necessary to enforce this or the Closing Agreements by injunction or specific performance upon application to a court of competent jurisdiction without proof of actual damage to such Party or notwithstanding that damages may be readily quantifiable and each of the Parties agrees not to plead sufficiency of damages as a defence in any proceeding for such injunctive relief brought by the other Party. 6.12 MINIMUM CLAIM. No Party shall have any entitlement to indemnification pursuant to Sections 6.1 or 6.2 or relating to any breach of any of the representations and warranties contained in Sections 5.1 or 5.2 unless and until the accumulated aggregate amount of Claims of such Party against all other Parties exceeds Cdn.$100,000 following which all such accumulated Claims and all further Claims of such Party shall be recoverable as provided in this Agreement. 6.13 LIMITATION OF LIABILITY. No Shareholder shall have liability under this Agreement, the Closing Agreements or any other agreement, certificate or instrument delivered pursuant to this Agreement or the Closing Agreements pursuant to the indemnification provisions set forth in this Article 6 or pursuant to any other remedy of the Purchaser, including any remedies specified in Section 6.10, in excess of the amount received by the Shareholder on account of the Purchase Price. To the extent that any two or more Shareholders have the same liability in respect of a Claim arising out of the same incorrectness in or breach of any representation or warranty or breach or non-fulfilment of any covenant or agreement under this Agreement, any Closing Agreement or under any other agreement, certificate, or instrument executed and delivered pursuant to this Agreement, each Shareholder's liability shall be limited to its pro rata portion of such Shareholders' aggregate liability equal to the fraction, the numerator of which is the percentage of Shares beneficially owned by the Shareholder at the Closing Date as set forth opposite the Shareholder's name in Schedule 1.1(2) and the denominator of which is the aggregate percentage of Shares beneficially owned by each such Shareholder at the Closing Date as set forth opposite each such Shareholder's name in Schedule 1.1(2). Notwithstanding that any covenant or agreement of the Shareholders hereunder is expressed as a covenant or agreement of all Shareholders, in a situation where the covenant is personal to a particular Shareholder, the liability for the covenant is that Shareholder's alone. Notwithstanding the 55 -55- foregoing, such limitations shall not apply in any circumstance in which the Shareholder has undertaken fraud or fraudulently or intentionally breached any warranty or covenant hereunder or made any fraudulent or intentional misrepresentation. 6.14 TAX LOSSES. Notwithstanding any other provision in this Agreement, no representation and warranty is made by any Shareholder in respect of: (i) Tax losses of the Corporation incurred at any time after February 28, 1998; (ii) the availability of such losses for reduction of Tax liabilities of the Corporation; or (iii) any failure to recognize expenditures that would have created such Tax losses. 6.15 INSURANCE. In the event that the Corporation or its successor receives a payment pursuant to a policy of insurance in force as at or prior to the Closing Date in respect of the subject matter of a Claim, the Purchaser agrees to cause the Corporation or its successor to make payment to each Shareholder against which the Claim was made of an amount up to the amount received pursuant to such insurance policy pro rata to such Shareholder's percentage beneficial ownership interest in the Shares as at the Closing Date as set forth in Schedule 1.1(2), and not exceeding the aggregate amount received by the Purchaser from such Shareholders, less an amount equal to the net present value, calculated using a discount rate equal to the Prime Rate as at the date of receipt of such payment pursuant to such insurance policy, of the increase in premiums under such insurance policy or any replacement insurance policy reasonably estimated by the Purchaser to be attributable to the claim having been made under such insurance policy. ---------- ARTICLE 7 INTERIM PERIOD 7.1 INVESTIGATION. Until the Closing, the Purchaser and its representatives and advisers shall be permitted to make such investigations, inspections, surveys or tests of the properties and assets of the Corporation, its predecessor companies and its Affiliates and of their respective financial and legal condition as the Purchaser deems necessary or desirable to familiarize itself with such properties, assets and other matters. Without limiting the generality of the foregoing, the Purchaser shall, during normal business hours, be permitted complete access to all documents relating to information scheduled or required to be disclosed under this Agreement, to the Books and Records, the data processing system of the Corporation, the Contracts, the Leased Premises, the Employees, records regarding suppliers, customers and regulators and environmental reports, surveys, inspection reports and all other reports prepared by advisers of the Corporation, its predecessor companies and its Affiliates (and the Shareholders shall provide photocopies to the Purchaser of all such written information and documents as may be reasonably requested by the Purchaser). Any such investigations, inspections, surveys or tests shall not, however, affect or mitigate the representations and warranties of the Shareholders under this Agreement which shall continue in full force and effect as provided under this Agreement. 7.2 AUTHORIZATIONS. The Shareholders shall cause the Corporation to execute and deliver any authorizations required to permit the investigations, inspections, surveys or tests described in Section 7.1. 56 -56- 7.3 CONFIDENTIALITY. (1) Each Shareholder shall (and shall cause each of its Representatives (as defined below) to) hold in strictest confidence and not use in any manner, other than as expressly contemplated by this Agreement, any Confidential Information (as defined below) of the Purchaser. (2) Section 7.3(1) shall not apply to the disclosure of any Confidential Information where such disclosure is required by Applicable Law. In that case, the Shareholder (or whose Shareholder's Representative is required to disclose) shall, as soon as possible in the circumstances, notify the Purchaser of the requirement. Upon receiving such notification, the Purchaser may take any reasonable action to challenge the requirement, and the Shareholder shall (or shall cause the applicable Representative to), at the expense of the Purchaser, assist the Purchaser, in taking such reasonable action. (3) Following the termination of this Agreement in accordance with the provisions of either of Sections 4.1 or 4.2, each Shareholder shall (and shall cause each of its Representatives to) promptly, upon a request from the Purchaser, return to the Purchaser all copies of any tangible items (other than this Agreement), if any, which are or which contain Confidential Information of the Purchaser; provided that if a Shareholder or its Representatives have prepared summaries or analyses containing or concerning any Confidential Information, then such Shareholder may, instead of returning the summaries or analyses, destroy them and provide a certificate to that effect to the Purchaser. (4) For the purposes of this Section 7.3: "CONFIDENTIAL INFORMATION" means all information relating to the Business which, (i) at the time is of a confidential nature (whether or not specifically identified as confidential) and is known or should be known by the Shareholder or its Representatives as being confidential, and (ii) has been or is from time to time made known to or is otherwise learned by a Shareholder or any of its Representatives as a result of the matters provided for in this Agreement, including the following information: (iii) the terms of this Agreement; and (iv) the Purchaser's marketing and sales plans and its business records, but not including any information that at such time: (v) has become generally available to the public other than as a result of a disclosure by a Shareholder or any of its Representatives; 57 -57- (vi) was available to a Shareholder or its Representatives on a non-confidential basis before the date of this Agreement; or (vii) becomes available to a Shareholder or its Representatives on a non-confidential basis from a Person other than Purchaser or any of its Representatives who is not, to the knowledge of a Purchaser or its Representatives, otherwise bound by confidentiality obligations to the Purchaser in respect of such information or otherwise prohibited from transmitting the information to a Shareholder or its Representatives; and "REPRESENTATIVES" with respect to any party means its Affiliates and its and their respective directors, officers, employees, agents and other representatives and advisers. (5) Notwithstanding any other provision of this Section 7.3, the Shareholders shall be entitled to provide a copy of this Agreement to Revenue Canada or any other taxation authority if requested by that authority. 7.4 RISK OF LOSS. Until the Closing, the Shareholders shall cause the Corporation to maintain in force all the policies of property damage insurance under which any of the Assets is insured. If before the Closing any of the Assets is lost, damaged or destroyed and the loss, damage or destruction constitutes a Material Adverse Change, then: (1) the Purchaser may terminate this Agreement in accordance with the provisions of Section 4.2; or (2) the Purchaser may require the Shareholders to reduce the Purchase Price by the amount of the replacement cost of the Assets which were lost, damaged or destroyed less the amount of any proceeds of insurance payable as a result of the occurrence. 7.5 ACTION DURING INTERIM PERIOD. During the Interim Period, the Shareholders shall cause the Corporation: (1) not to make or agree to make any material change in the compensation of any Director, Officer or Employee and not to pay or agree to pay or set aside any bonus, profit sharing, retirement, insurance, death, severance or fringe benefit or other extra-ordinary or indirect compensation to, for or on behalf of any Director, Officer or Employee except as contemplated by this Agreement; (2) not to sell, assign, transfer, mortgage, pledge or otherwise encumber any of the Assets, except for sales of Inventories in the normal course of its Business; (3) not to enter into any Material Contract or any other transaction that is not in any material respect consistent with the terms of Contracts entered into by the Corporation in the normal course of its Business; (4) not to issue any Shares or other securities of the Corporation or any Option in respect of any securities of the Corporation except as contemplated by this Agreement; 58 -58- (5) not to declare or cause to be paid any dividend or make any other form of distribution or payment on the Shares or any other securities of the Corporation except as contemplated by this Agreement; (6) not to default in the performance of any term or condition of any Material Contract or Licenses and Permits; (7) not to cancel or amend any policy of insurance which relates to the Corporation or any of the Assets, except with the prior written consent of the Purchaser; (8) to maintain relations with the suppliers, customers and landlords of the Corporation in accordance with past custom and practice; (9) to pay before delinquency all Taxes and other obligations which become due and payable by the Corporation; (10) generally, to carry on the Business in the normal course; and (11) not to, without the consent of the Purchaser, (i) make any material Tax election other than in the ordinary course of business and consistent with past practice, (ii) change any material Tax election, (iii) adopt any Tax accounting method other than in the ordinary course of business and consistent with past practice, (iv) change any Tax accounting method, (v) file any Tax return (other than any estimated tax returns, immaterial information returns, payroll tax returns, sales or value-added tax returns) or amendment to a Tax return, (vi) enter into any closing agreement, settle any Tax claim or assessment or consent to any Tax claim or assessment, provided that Purchaser shall not unreasonably withhold or delay approval of any of the foregoing actions. 7.6 EXCLUSIVE DEALINGS. During the Interim Period, the Shareholders shall not take any action, directly or indirectly, to encourage, initiate or engage in discussions or negotiations with, or provide any information to, any Person, other than the Purchaser and its designated and authorized representatives, concerning any sale, transfer or assignment of the Shares or the Assets involving the Corporation. The Shareholders shall notify the Purchaser promptly if any such discussions or negotiations are sought or if any proposal for a sale, transfer or assignment of the Shares or the Assets is received or being considered. 7.7 CONSENTS AND APPROVALS, NOTICES. The Shareholders shall cause the Corporation to use its best efforts to obtain all Consents and Approvals and to deliver all Notices on or prior to the Closing Time or such earlier time as may be required by any Material Contract to which the Corporation is a party. ------------- ARTICLE 8 GENERAL 8.1 EXPENSES. Subject to Section 2.12, each Shareholder shall be responsible for the Shareholder's own legal, accounting, advisory and other expenses (including any Taxes imposed on 59 -59- such expenses) incurred in connection with the negotiation, preparation, execution, delivery and performance of this Agreement, including all fees of the Shareholders' Solicitors, and the transactions contemplated by this Agreement and for the payment of any broker's commission, finder's fee or like payment payable by the Shareholder in respect of the purchase and sale of the Shares pursuant to this Agreement. 8.2 PAYMENT OF TAXES. Except as otherwise provided in this Agreement, the Purchaser shall pay all Taxes applicable to, or resulting from transactions contemplated by this Agreement (other than Taxes payable under applicable legislation by the Shareholders) and any filing or recording fees payable in connection with the instruments of transfer provided for in this Agreement. 8.3 PUBLIC ANNOUNCEMENTS. The Shareholders shall not, and shall cause the Corporation not to, make any public announcement regarding this Agreement or the transactions contemplated by this Agreement unless otherwise consented to in writing by the Purchaser. 8.4 NOTICES. (1) Any notice, certificate, consent, determination or other communication required or permitted to be given or made under this Agreement shall be in writing and shall be given and made if (i) delivered personally, (ii) sent by prepaid overnight courier service, or (iii) sent prepaid by fax or other similar means of electronic communication, in each case to the applicable address set out below: (a) if to the Shareholders, to: Robin Alexander Susan Griggs 12 Brooks Road 251 Kenneth Avenue London, England Willowdale, Ontario W4 3BH M2N 2V8 Joel Berger Michael Haley 16720 McCowan Road 45 Brenda Drive Cedar Valley, Ontario Halifax, Nova Scotia L0G 1E0 B4B 1K1 Varsha Bhat Toby Hatch 83 Barrowgate Road 16720 McCowan Road Flat No. 1 Cedar Valley, Ontario Chiswick, England L0G 1E0 W4 4Q5 Joan Black Anita McArter c/o General Delivery 210-1180 Forestwood Drive Creemore, Ontario Mississauga, Ontario L0M 1G0 L5C 1H8 James Danziger Philip Powell 237 Greer Road 127 Timpson Drive Toronto, Ontario M5M 3N8 Aurora, Ontario L4G 5L4 60 -60- David Kempa Derek Sandison & 16734 S. Ashley Court Integrated Business Process Lockport, IL 60441 Modeling Corp. 466 Rattray Park Drive Mississauga, Ontario L5J 2N1 Firmin Associates Inc. Telsoft Ventures Inc. 26 Hiram Road 1000 de La Gauchetiere Street West Richmond Hill, Ontario 25th Floor L4C 9E5 Montreal, Quebec H3B 4W5 Attention: Tony Firmin Attention: Francois Gaouette/Robert Talbot Alan Fyfe The Stonebridge Domestic Trust 4172 Rayfield Court c/o TECHinspirations Inc. Mississauga, Ontario 2275 No.8 Sideroad, RR #2 L4Z 1E7 Milton, Ontario L9T 2X6 Attention: John van Leeuwen/Frank van Luttikhuizen Gay Gooderham Herman Troost 228 Spadina Road 4360 Latimer Crescent Toronto, Ontario M5R 2V1 Burlington, Ontario L7M 4R2 Goodwill Family Holdings Inc. Hugh Wallis 70 Kingsdale Avenue 478 Cam Fella Blvd. North York, Ontario M2N 3W4 Stouffville, ON L4A 7G8 Attention: David Goodwill Susan Greer Nadine Williamson 269 Heath Street East 10-125 Weldrick Road West Toronto, Ontario M4T 1T3 Richmond Hill, Ontario L4C 3V2 61 -61- in each case with copies to: Borden & Elliot 40 King Street West Scotia Plaza Toronto, Ontario M5H 3Y4 Tel: 416-367-6188 Fax: 416-361-7081 Attention: Jim Elder, Esq. and, if to the Investors, in each case with copies to: Morris Rose Ledgett Canada Trust Tower BCE Place, Suite 2700 161 Bay Street Toronto, Ontario M5J 2S1 Tel: (416) 981-9311 Fax: (416) 863-9500 Attention: Brian McKenna, Esq. (b) if to the Purchaser or Parentco, to: HSC Acquisition Co. c/o Hyperion Solutions Corporation 1344 Crossman Avenue Sunnyvale, California 94089 Tel: 408-744-9500 Fax: 408-744-0400 Attn: Stephen V. Imbler, Senior Vice President and Chief Financial Officer with copies to: HSC Acquisition Co. c/o Hyperion Solutions Corporation 900 Long Ridge Road Stamford, Connecticut 06902 Tel: 203-703-3500 Fax: 203-703-5050 Attn: David M. Weinberg, Vice-President, Finance and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 155 Constitution Drive 62 -62- Menlo Park, CA 94025 Tel: (650) 321-2400 Fax: (650) 321-2800 Attn: Steven M. Spurlock, Esq. and Blake, Cassels & Graydon Box 25, Commerce Court West Toronto, Ontario, M5L 1A9 Tel: (416) 863-2400 Fax: (416) 863-2653 Attn: Chris Hewat, Esq. (2) Any such communication so given or made shall be deemed to have been given or made and to have been received on the day of delivery if delivered, or on the day of faxing or sending by other means of recorded electronic communication, provided that such day in either event is a Business Day and the communication is so delivered, faxed or sent before 4:30 p.m. on such day. Otherwise, such communication shall be deemed to have been given and made and to have been received on the next following Business Day. Any such communication given or made in any other manner shall be deemed to have been given or made and to have been received only upon actual receipt. (3) Any Party may from time to time change its address under this Section by notice to the other Party given in the manner provided by this Section. 8.5 TIME OF ESSENCE. Time shall be of the essence of this Agreement in all respects. 8.6 ENTIRE AGREEMENT. This Agreement (together with the Closing Agreements, the Confidentiality Agreement dated December 18, 1998 between the Corporation and Parentco and any other agreement, certificate or instrument executed and delivered pursuant to this Agreement), constitutes the entire agreement between the Parties pertaining to the subject matter of this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written. There are no conditions, warranties, representations or other agreements between the Parties in connection with the subject matter of this Agreement (whether oral or written, express or implied, statutory or otherwise) except as specifically set out in this Agreement, the Closing Agreements or the Confidentiality Agreement dated December 18, 1998 between the Corporation and Parentco and any other agreement, certificate or instrument executed and delivered pursuant to this Agreement. 8.7 WAIVER. A waiver of any default, breach or non-compliance under this Agreement is not effective unless in writing and signed by the party to be bound by the waiver. No waiver shall be inferred from or implied by any failure to act or delay in acting by a party in respect of any default, breach or non-observance or by anything done or omitted to be done by the other party. The waiver by a party of any default, breach or non-compliance under this Agreement shall not operate as a waiver of that party's rights under this Agreement in respect of any continuing or subsequent default, breach or non-observance (whether of the same or any other nature). 63 -63- 8.8 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such prohibition or unenforceability and shall be severed from the balance of this Agreement, all without affecting the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 8.9 NON-MERGER. Each party hereby agrees that all provisions of this Agreement, other than (a) the conditions in Article 4 and (b) the representations and warranties contained in Article 5 and the related indemnities in Sections 6.1 and 6.2 hereof (which shall be subject to the special arrangements provided in such Articles or Sections) shall forever survive the execution, delivery and performance of this Agreement, Closing and the execution, delivery and performance of any and all documents delivered in connection with this Agreement. 8.10 FURTHER ASSURANCES. Each Party shall promptly do, execute, deliver or cause to be done, executed and delivered all further acts, documents and things in connection with this Agreement that the other Party may reasonably require for the purposes of giving effect to this Agreement. 8.11 ATTORNMENT. Each Party agrees (i) that any action or proceeding relating to this Agreement or any Closing Agreement may (but need not) be brought in any court of competent jurisdiction in the Province of Ontario, and for that purpose now irrevocably and unconditionally attorns and submits to the jurisdiction of such Ontario court; (ii) not to oppose any such Ontario action or proceeding on the basis of forum non conveniens or for any other reason; and (iii) not to oppose the enforcement against it in any other jurisdiction of any judgment or order duly obtained from an Ontario court as contemplated by this Section. Each of the Parties irrevocably agrees that service of summons and any other legal process which may be served in any action, suit, proceeding or Arbitration may be served on the Party at the address of the Party specified or changed in accordance with Section 8.4. Such service may be made by mailing or delivering a copy of such process to the applicable Party at such address. Nothing in this Section will affect the rights of the Parties to serve legal process in any other manner permitted by law. 8.12 LANGUAGE. The Parties have required that this Agreement and all deeds, documents and notices relating to this Agreement be drawn up in the English language. Les parties aux presentes ont exige que le present contrat et tous autres contrats, documents ou avis afferents aux presentes soient rediges en langue anglaise. 8.13 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and shall be treated, in all respects, as an Ontario contract. 8.14 SUCCESSORS AND ASSIGNS. This Agreement shall enure to the benefit of, and be binding on, the Parties and their respective successors and permitted assigns provided that, subject to Section 5.4, the Purchaser may assign any or all of its rights under this Agreement to a wholly-owned direct or indirect subsidiary of Parentco. Subject to the foregoing, no Party may assign or transfer, whether absolutely, by way of security or otherwise, all or any part of its respective rights or obligations under this Agreement without the prior written consent of the other Parties. 64 -64- 8.15 ARBITRATION (1) Each of the Parties agrees to submit any Dispute to formal binding arbitration in accordance with this Section 8.15. (2) The arbitration shall be held before a single arbitrator mutually agreed to by the Parties to the Dispute or otherwise in accordance with the Arbitration Act (Ontario) (the "ARBITRATION ACT") (the "ARBITRATION"). Any Party or Parties (collectively the "INITIATING PARTY") may serve a notice on the other Party or Parties (a "RESPONDING PARTY") setting out a statement of the Dispute and the facts relating or giving rise thereto, in reasonable detail, (the "STATEMENT OF DISPUTE"). (3) Within thirty (30) days after receipt of such notice, each Receiving Party shall respond to the notice by agreeing or commenting on the Statement of Dispute, as the case may be. (4) Save as otherwise provided by this Section 9.03, the Arbitration shall be governed by the provisions of the "Arbitration Act", provided, however, that the Arbitration may be administered by any organization agreed upon by the Parties and that the Parties by agreement, may choose to be governed by the rules of such administering organization. The Parties expressly agree that the provisions of the International Commercial Arbitration Act (Ontario) shall not apply to any Arbitration between them. The Arbitrator may not amend or disregard any provision of this Section 8.15 without the consent of the Parties. (5) Qualified to Act. The Arbitrator selected to act hereunder shall be qualified by profession or occupation to decide the matter in dispute. (6) Submission of Written Statements. (a) Within fifteen (15) Business Days of the appointment of the Arbitrator, the Initiating Party shall submit written statements to the Arbitrator setting out in sufficient detail the facts and any contentions of law on which it relies and the relief the Initiating Party claims. Each Responding Party shall have ten (10) Business Days from the date on which the written statement is received to reply to the written statements submitted by any other Party setting out in sufficient detail which of the facts and contentions of law in the written statement of the Initiating Party it admits or denies, and the grounds and other facts and contentions of law on which it relies. (b) Within ten (10) Business Days of receipt of the Receiving Party's written statements, the Initiating Party may send the Responding Party a statement of reply. (c) After submission of all the statements, the Arbitrator may give directions for documentary production and discovery of each Party's case, and for further conduct of the Arbitration bearing in mind the desirability of having cost effective and expeditious dispute resolution on the merits of the case. In the absence of agreement between the Parties on production and discovery 65 -65- procedures within 30 days of the last day for delivery of the written statement described in Section 8.15(6)(a), Rules 30, 31, 32, 34 and 35 of the Ontario Rules of Civil Procedure regarding production and discovery will apply to the Arbitration, excepting that the Arbitrator shall exercise any powers or fulfil any duties set out in those Rules that would otherwise (in an action) be exercised or fulfilled by the court or a judge. (d) The Arbitrator may, upon application by any Party, modify or extend any time limit contained in this Section 8.15, including any time limit in the above Rules. (7) Confidentiality. Save and except as may be necessary in the course of the enforcement of an Arbitration award, the Arbitration process and all Persons participating therein shall be subject to the confidentiality provisions as set out in Section 7.3. The Arbitrator and all other Persons (not already bound by the provisions of such Section 7.3) participating in the Arbitration shall execute an undertaking to be bound by the confidentiality provisions set out in such Section 7.3. For greater certainty, the Parties agree that the Arbitration shall proceed in the event that any other Person refuses to sign a confidentiality undertaking or agreement. (8) Meetings and Hearings. (a) Meetings and hearings of the Arbitration shall take place in Toronto, Ontario or in such other place as the Parties shall agree upon in writing and such meetings and hearings shall be conducted in the English language unless otherwise agreed by such Parties and the arbitrators. Subject to the foregoing, the Arbitrator may at any time fix the date, time and place of meetings and hearings in the Arbitration, and will give all the Parties adequate notice of these. Subject to any adjournments which the Arbitrator allows, the final hearing will be continued on successive Business Days until it is concluded. (b) All meetings and hearings will be in private unless the Parties otherwise agree. (c) Any Party may be represented at any meetings or hearings by legal counsel. (d) At the Arbitration, each Party may examine and re-examine its own witnesses and may cross-examine the other Party's witnesses. (9) The Decision. (a) The Arbitrator will make and send a decision in writing to the Parties within thirty (30) days after the conclusion of all hearings referred to in Section 8.15(8) unless that time period is extended for a fixed period by the Arbitrator on written notice to each Party because of illness or other cause beyond the Arbitrator's control and, unless the Parties otherwise agree, will set out reasons for decision in the decision. 66 -66- (b) Except as provided in the Arbitration Act and as otherwise required by Law, the decision of the Arbitrator shall be final and binding on the Parties and shall not be subject to any appeal or review procedure, provided that the Arbitrator has proceeded in accordance with the principles of natural justice. 8.16 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall be deemed to constitute one and the same instrument. Counterparts may be executed either in original or faxed form and the Parties adopt any signatures received by a receiving fax machine as original signatures of the Parties; provided, however, that any Party providing its signature in such manner shall promptly forward to any other Party an original of the signed copy of this Agreement which was so faxed upon written request of the other Party. 8.17 INDEPENDENT LEGAL ADVICE. Each Shareholder hereby acknowledges and agrees that the Shareholder has had full opportunity to seek and receive independent legal advice with respect to this Agreement, any Closing Agreement to which the Shareholder is party and any agreement, document, or instrument made or delivered pursuant to this Agreement or such Closing Agreement and that if the Shareholder failed to seek or receive such independent legal advice before signing this Agreement, and any such Closing Agreement and any agreement, document, or instrument made or delivered pursuant to this Agreement, such Shareholder shall not rely on such failure as a defence to an argument that this Agreement and any agreement, document, or instrument made or delivered pursuant to this Agreement, or any part thereof, is valid or enforceable. 8.18 SHAREHOLDERS AGREEMENT. Each of the Shareholders agrees that, immediately following the completion of the transactions contemplated to be completed hereunder on the Closing Date, the Shareholders Agreement shall terminate and the Shareholder shall have no rights or obligations thereunder. Pending and subject to the completion of such transactions, each Shareholder hereby waives any right that the Shareholder may have to acquire any interest in the Shares or other securities of the Corporation and any other right pursuant to the Shareholders Agreement arising out of or resulting from the Parties entering into this Agreement. 8.19 AMEX INDEMNITY. The Purchaser shall indemnify each of Derek Sandison and James Danziger in respect of any claim made under or pursuant to guarantees or supporting covenants executed in respect of account 373321604652007 of AMEX Bank of Canada and account number 378344879253009 of AMEX, and shall cause the Corporation to arrange for discharge of such guarantees and supporting covenants following the completion of the transactions contemplated to be completed on the Closing Date. 8.20 EMPLOYMENT AGREEMENTS. Following the completion of the transactions contemplated to be completed on the Closing Date, the Purchaser agrees to cause the Corporation to comply with the direction referred to in Section 3.3(4). 67 -67- IN WITNESS WHEREOF the Parties have executed this Agreement. HSC ACQUISITION CO. By: /s/ Stephen Imbler --------------------------------------- Name: Stephen Imbler -------------------------------------- Its: Director --------------------------------------- HYPERION SOLUTIONS CORPORATION By: /s/ Stephen Imbler --------------------------------------- Name: Stephen Imbler -------------------------------------- Its: SVP and CFO --------------------------------------- 68 -68- Signed, Sealed and Delivered in the presence of /s/ Robin Alexander - ------------------------------------ -------------------------------------- Witness Robin Alexander Signed, Sealed and Delivered in the presence of /s/ Susan Griggs - ------------------------------------ -------------------------------------- Witness Susan Griggs Signed, Sealed and Delivered in the presence of /s/ Varsha Bhat - ------------------------------------ -------------------------------------- Witness Varsha Bhat Signed, Sealed and Delivered in the presence of /s/ Michael Haley - ------------------------------------ -------------------------------------- Witness Michael Haley Signed, Sealed and Delivered in the presence of /s/ David Kempa - ------------------------------------ -------------------------------------- Witness David Kempa Signed, Sealed and Delivered in the presence of /s/ Anita McArter - ------------------------------------ -------------------------------------- Witness Anita McArter Signed, Sealed and Delivered in the presence of /s/ Derek Sandison - ------------------------------------ -------------------------------------- Witness Derek Sandison 69 -69- Signed, Sealed and Delivered in the presence of /s/ Toby Hatch - ------------------------------------ -------------------------------------- Witness Toby Hatch Signed, Sealed and Delivered In the presence of /s/ Joan Black - ------------------------------------ -------------------------------------- Witness Joan Black 70 -70- Signed, Sealed and Delivered In the presence of /s/ Susan Greer - ------------------------------------ -------------------------------------- Witness Susan Greer Signed, Sealed and Delivered In the presence of /s/ Joel Berger - ------------------------------------ -------------------------------------- Witness Joel Berger Signed, Sealed and Delivered in the presence of /s/ James Danziger - ------------------------------------ -------------------------------------- Witness James Danziger Signed, Sealed and Delivered in the presence of /s/ Herman Troost - ------------------------------------ -------------------------------------- Witness Herman Troost Signed, Sealed and Delivered in the presence of /s/ Philip Powell - ------------------------------------ -------------------------------------- Witness Philip Powell Signed, Sealed and Delivered in the presence of /s/ Andrew Fyfe - ------------------------------------ -------------------------------------- Witness Andrew Fyfe Signed, Sealed and Delivered in the presence of /s/ Gay Gooderham - ------------------------------------ -------------------------------------- Witness Gay Gooderham 71 -71- Signed, Sealed and Delivered in the presence of /s/ Hugh Wallis - ------------------------------------ -------------------------------------- Witness Hugh Wallis Signed, Sealed and Delivered in the presence of /s/ Nadine Williamson - ------------------------------------ -------------------------------------- Witness Nadine Williamson 72 -72- GOODWILL FAMILY HOLDINGS INC. By: /s/ David J. Goodwill ------------------------------------ Name: David J. Goodwill ---------------------------------- Its: President ------------------------------------ INTEGRATED BUSINESS PROCESS MODELING CORP. By: /s/ Derek Sandison ------------------------------------ Name: Derek Sandison ---------------------------------- Its: President ------------------------------------ FIRMIN ASSOCIATES INC. By: /s/ Anthony Firmin ------------------------------------ Name: Anthony Firmin ---------------------------------- Its: President ------------------------------------ TELESYSTEM SOFTWARE VENTURES LIMITED PARTNERSHIP by its General Partner, TELSOFT VENTURES INC. By: /s/ Robert Talbot ------------------------------------ Name: Robert Talbot ---------------------------------- Its: President ------------------------------------ CIBC TRUST AND MERCHANT BANK (BARBADOS) LIMITED IN ITS CAPACITY AS TRUSTEE OF THE STONEBRIDGE DOMESTIC TRUST AND NOT IN ANY OTHER CAPACITY AND WITHOUT PERSONAL LIABILITY By: /s/ Robert N. Sallis ------------------------------------- By: /s/ Natalie S. Hodder ------------------------------------- EX-10.19 3 SEPARATION AGREEMENT - JOHN DILLON 1 Exhibit 10.19 June 7, 1999 Dear John: This letter (the "Agreement") is to confirm the agreement between you and Hyperion Solutions Corporation (the "Company") regarding your separation from the Company. 1. Effective immediately you have elected to resign as a member of the Company's Board of Directors (the "Board"). You understand and agree that on May 2, 1999 (the "Termination Date") the Board terminated your relationship as an employee and officer of the Company. Provided that you do not revoke this Agreement within the revocation period set forth in paragraph 15 below, the Company shall: a. within three (3) business days following the effective date of this Agreement, pay you a lump sum severance payment of Five Hundred Five Thousand Four Hundred Fourteen Dollars ($505,414.00), less all applicable withholdings; such payment shall be wire transferred to the account into which the Company has previously deposited your salary and other compensation payments; b. cause the following options to purchase 200,000 shares of the Company's Common Stock granted to you by the Company to become exercisable immediately for fully vested shares: (i) all 150,000 unexercised options granted to you prior to August 24, 1998; and (ii) 50,000 of the 250,000 options granted to you on September 9, 1998; and c. amend the options described in subparagraph b. above to cause such options to be exercisable at any time on or before August 15, 2000. You agree that the remaining 200,000 options granted to you on September 9, 1998, terminated on May 2, 1999, and will never become 2 exercisable. You further agree that the options described in subparagraph b. above will terminate on August 16, 2000. The Company will use its best efforts to, within five (5) business days of the effective date of this Agreement, present to the Board for its adoption Board resolutions regarding the Company's obligations set forth in subparagraphs (b) and (c) above. 2. You agree that you have been paid all of your accrued but unused vacation and all of your salary earned through your Termination Date, and except as expressly set forth herein, or in the Indemnification Agreement entered into between you and the Company in October 1998 (the "Indemnification Agreement"), a copy of which is attached hereto as Exhibit A, you are not entitled to any further money or benefits from the Company. 3. In consideration for the mutual promises and consideration described in this letter, you and the Company hereby waive and release and promise never to assert any claims or causes of action, whether or not now known, against the other party or his or its past or present predecessors, successors, subsidiaries, officers, directors, agents, employees, employee benefit plans and assigns, with respect to any matter, including but not limited to, any matter arising out of or connected with your employment with the Company or the termination of that employment, including without limitation, claims of wrongful discharge, emotional distress, defamation, fraud, breach of contract, breach of the covenant of good faith and fair dealing, any claims of discrimination or harassment based on sex, age, race, national origin, disability or on any other basis, under Title VII of the Civil Rights Act of 1964, as amended, the California Fair Employment and Housing Act, the Age Discrimination in Employment Act of 1967, as amended, and all other laws and regulations relating to employment. 4. You and the Company expressly waive and release any and all rights and benefits under Section 1542 of the Civil Code of the State of California (or any analogous law of any other state), which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which, if known by him, must have materially affected his settlement with the debtor." 5. Nothing contained in this letter shall constitute or be treated as an admission by you or the Company of liability, of any wrongdoing, or of any violation of law. 6. You confirm and agree that you have not delivered in the past, nor will you deliver in the future, a letter to the Company describing a 3 disagreement with the Company on any matter relating to the Company's operations, policies or practices and requesting that the matter be disclosed. 7. At all times in the future, you will remain bound by the Company's Proprietary Information and Invention Agreement signed by you, a copy of which is attached as Exhibit B. 8. At all times in the future, you agree not to make any derogatory statements regarding the Company or any of the members of the Board to any third party. The Company and Board also agree that neither the Board nor any individual member of the Board or present section 16 officer of the Company shall make any derogatory statements regarding you to any party outside the Company; provided, however, that nothing in this Agreement shall prohibit the parties from responding to any inquiry regarding your separation from the Company by stating that you and the Board had different views regarding the management of the Company. 9. You agree that during the two (2) year period commencing on the effective date of this Agreement, you shall not directly or indirectly, personally or on behalf of any other party, solicit or attempt to solicit either: a. any employee of the Company or any of the Company's affiliates to terminate the employee's employment with the Company; or b. the business of any customer of the Company or its affiliates with whom you had contact during your employment with the Company. 10. At all times in the future the Company and you will remain bound by the Indemnification Agreement, including, without limitation, the Company's obligation to indemnify you against all expenses and costs as expressly set forth in the Indemnification Agreement. 11. You agree that you will not disclose to others the fact or terms of this letter, except that you may disclose such information to: (a) your attorney or accountant in order for such individuals to render services to you; or (b) your spouse. You further agree that you will instruct such individuals that they may not disclose any such information to any other party at any time in the future. 12. You represent and warrant that, except for the IBM Thinkpad computer, which the Company hereby agrees may be retained by you, you have returned to the Company all of its property, including, but not limited to, any and all Company files, documents (including any written or electronic versions thereof) and physical property. 4 13. You and the Company agree that this Agreement, together with Exhibits A and B, constitutes the entire agreement between you and the Company regarding the subject matter of this Agreement, and that this Agreement may be modified only in a written document signed by you and a duly authorized officer of the Company. 14. This Agreement shall be construed and interpreted in accordance with the laws of the State of California. 15. You have up to twenty-one (21) days after receipt of this letter within which to review it, and to discuss it with an attorney of your own choosing regarding whether or not you wish to execute it. Furthermore, you have seven (7) days after you have signed this letter during which time you may revoke this Agreement. 16. If you wish to revoke this Agreement, you may do so by delivering a letter of revocation to me. Because of this revocation period, you understand that the agreement set forth in this letter shall not become effective or enforceable until the eighth day after the date you sign this letter. 17. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one agreement. Please indicate your agreement with the above terms by signing below. Sincerely, /s/ Larry Braverman ____________________________________________ Larry Braverman My agreement with the above terms is signified by my signature below. Furthermore, I acknowledge that I have read and understand this letter and that I sign this release of all claims voluntarily, with full appreciation that at no time in the future may I pursue any of the rights I have waived in this release. 6/16/99 /s/ John M. Dillon Dated:_________________________ ____________________________________________ John M. Dillon EX-10.20 4 SEPARATION AGREEMENT - WILLIAM BINCH 1 Exhibit 10.20 June 16, 1999 Dear Bill: This letter (the "Agreement") is to confirm the agreement between you and Hyperion Solutions Corporation (the "Company") regarding your separation from the Company. 1. You understand and agree that your employment with the Company terminated on June 2, 1999 (the "Termination Date"). Provided that you do not revoke this Agreement within the revocation period set forth in paragraph 14 below, the Company shall: (a) within three (3) business days following the effective date of this Agreement, pay you a lump sum severance payment of Two Hundred Thirty-Five Thousand One Hundred Sixty-Six and 67/100 Dollars ($235,166.67), less all applicable withholdings; such payment shall be wire transferred to the account into which the Company has previously deposited your salary and other compensation payments; (b) pay your COBRA payments through and until June 2, 2000 if you elect to continue medical insurance coverage for you, your wife and son pursuant to COBRA; and (c) cause all 80,000 unexercised options granted to you prior to August 24, 1998 to become exercisable immediately for fully vested shares. You agree that the remaining 50,000 options granted to you on September 9, 1998 and the 16,000 options granted to you on February 24, 1999 terminated on June 2, 1999, and will never become exercisable. You further agree that the options described in subparagraph (c) above will terminate on September 2, 1999. The Company will use its best efforts to, within five (5) business days of the effective date of this Agreement, present to the Board for its adoption Board resolutions regarding the Company's obligations set forth in subparagraph (c) above. 2. You agree that you have been paid all of your accrued but unused vacation and all of your salary and commissions earned through your Termination Date, and except as expressly set forth herein, or in the Indemnification Agreement entered into between you and the Company concurrent with the execution of this Agreement (the "Indemnification Agreement"), a 2 copy of which is attached hereto as Exhibit A, you are not entitled to any further money or benefits from the Company. 3. In consideration for the mutual promises and consideration described in this letter, you and the Company hereby waive and release and promise never to assert any claims or causes of action, whether or not now known, against the other party or his or its past or present predecessors, successors, subsidiaries, officers, directors, agents, employees, employee benefit plans and assigns, with respect to any matter, including but not limited to, any matter arising out of or connected with your employment with the Company or the termination of that employment, including without limitation, claims of wrongful discharge, emotional distress, defamation, fraud, breach of contract, breach of the covenant of good faith and fair dealing, any claims of discrimination or harassment based on sex, age, race, national origin, disability or on any other basis, under Title VII of the Civil Rights Act of 1964, as amended, the California Fair Employment and Housing Act, the Age Discrimination in Employment Act of 1967, as amended, and all other laws and regulations relating to employment. 4. You and the Company expressly waive and release any and all rights and benefits under Section 1542 of the Civil Code of the State of California (or any analogous law of any other state), which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which, if known by him, must have materially affected his settlement with the debtor." 5. Nothing contained in this letter shall constitute or be treated as an admission by you or the Company of liability, of any wrongdoing, or of any violation of law. 6. At all times in the future, you will remain bound by the Company's Proprietary Information and Invention Agreement signed by you, a copy of which is attached as Exhibit B. 7. At all times in the future, you agree not to make any derogatory statements regarding the Company or any of the members of the Board to any third party. The Company and Board also agree that neither the Board nor any individual member of the Board or present section 16 officer of the Company shall make any derogatory statements regarding you to any party outside the Company; provided, however, that nothing in this Agreement shall prohibit the parties from responding to any inquiry regarding your separation from the Company by stating that you and the Board had different views regarding the management of the Company. 2 3 8. You agree that during the two (2) year period commencing on the effective date of this Agreement, you shall not directly or indirectly, personally or on behalf of any other party: (a) engage in a Competitive Business Activity in any of the locations listed in Exhibit C attached hereto. The term "Competitive Business Activity" shall mean: (i) engaging in, or managing or directing persons engaged in, any business in which the Company or any of the Company's affiliates was engaged as of the Termination Date, whether independently or as an employee, agent, consultant, advisor, independent contractor, proprietor, partner, officer, director or otherwise; (ii) acquiring or having an ownership interest in any entity that derives more than 15% of its gross revenues from any business in which the Company or any of the Company's affiliates was engaged as of the Termination Date, except for ownership of 1% or less of any entity whose securities are freely tradable on an established market; (iii) participating in the financing, operation, management or control of any firm, partnership, corporation, entity or business described in Paragraph (ii) above; or (b) solicit or attempt to solicit either: (i) any employee of the Company or any of the Company's affiliates to terminate the employee's employment with the Company; or (ii) the business of any customer of the Company or its affiliates with whom you had contact during your employment with the Company. 9. At all times in the future the Company and you will remain bound by the Indemnification Agreement, including, without limitation, the Company's obligation to indemnify you against all expenses and costs as expressly set forth in the Indemnification Agreement. 10. You agree that you will not disclose to others the fact or terms of this letter, except that you may disclose such information to: (a) your attorney or accountant in order for such individuals to render services to you; or (b) your spouse. You further agree that you will instruct such individuals that they may not disclose any such information to any other party at any time in the future. 3 4 11. You represent and warrant that, except for the IBM Thinkpad computer, which the Company hereby agrees may be retained by you, you have returned to the Company all of its property, including, but not limited to, any and all Company files, documents (including any written or electronic versions thereof) and physical property. 12. You agree that except as expressly provided in this letter, this letter renders null and void any and all prior agreements between you and the Company. You and the Company agree that this Agreement, together with Exhibits A, B and C, constitutes the entire agreement between you and the Company regarding the subject matter of this Agreement, and that this Agreement may be modified only in a written document signed by you and a duly authorized officer of the Company. 13. This Agreement shall be construed and interpreted in accordance with the laws of the State of California. 14. You have up to twenty-one (21) days after receipt of this letter within which to review it, and to discuss it with an attorney of your own choosing regarding whether or not you wish to execute it. Furthermore, you have seven (7) days after you have signed this letter during which time you may revoke this Agreement. 15. If you wish to revoke this Agreement, you may do so by delivering a letter of revocation to me. Because of this revocation period, you understand that the agreement set forth in this letter shall not become effective or enforceable until the eighth day after the date you sign this letter. 16. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one agreement. Please indicate your agreement with the above terms by signing below. Sincerely, /s/ Larry Braverman ____________________________________________ Larry Braverman My agreement with the above terms is signified by my signature below. Furthermore, I acknowledge that I have read and understand this letter and that I sign this release of all claims voluntarily, with full appreciation that at no time in the future may I pursue any of the rights I have waived in this release. 6/16/99 /s/ William Binch Dated:_________________________ ____________________________________________ William Binch 4 EX-22.1 5 SUBSIDIARIES OF HYPERION 1 EXHIBIT 22.1 HYPERION SOLUTIONS CORPORATION SUBSIDIARIES OF THE COMPANY
JURISDICTION OF NAME INCORPORATION - ---- --------------- Hyperion Solutions Corporation.............................. Delaware Hyperion International Corporation.......................... Delaware AppSource Corporation....................................... Delaware Little Tree Acquisition Corporation......................... Delaware Hyperion Solutions Austria MbH.............................. Austria Hyperion Foreign Sales Corp. ............................... Barbados Hyperion Solutions BeLux N.V. .............................. Belgium Hyperion Solutions Nordic Oy................................ Finland Hyperion Solutions France SAS............................... France Hyperion Solutions Deutschland GmbH......................... Germany Hyperion Solutions Italia S.r.l. ........................... Italy Hyperion KK................................................. Japan HSC Acquisition Co.......................................... Nova Scotia Sapling Corporation......................................... Ontario Hyperion Solutions Corporation of Canada, Ltd. ............. Ontario Hyperion Solutions Asia Pte. Ltd. .......................... Singapore Hyperion Solutions Iberica, S.A. ........................... Spain Hyperion Solutions Nordic AB................................ Sweden Hyperion Solutions Schweiz AG............................... Switzerland Hyperion Solutions Nederland, B.V. ......................... The Netherlands Hyperion Solutions plc...................................... United Kingdom
EX-23.1 6 CONSENT OF PRICEWATERHOUSECOOPERS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-56765 and 333-61727) and in the Registration Statements on Form S-8 (Nos. 333-10697, 333-38871, and 333-62275) of Hyperion Solutions Corporation of our report dated July 20, 1999 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California September 27, 1999 EX-23.2 7 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated July 17, 1997, with respect to the consolidated financial statements and schedule of Hyperion Software Corporation and subsidiaries included in the Current Annual Report on Form 10-K and to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-56765 and 333-61727) and Registration Statements on Form S-8 (Nos. 333-10697, 333-38871 and 333-62275) of Hyperion Solutions Corporation of our report dated July 17, 1997, with respect to the consolidated financial statements and schedule of Hyperion Software Corporation and subsidiaries for the year ended June 30, 1997 included in this Current Annual Report on Form 10-K. /s/ Ernst & Young LLP Stamford, Connecticut September 27, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF HYPERION SOLUTIONS CORPORATION FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 1 233,515 38,341 122,544 11,800 0 399,276 155,197 65,444 512,894 168,366 0 0 0 31 240,745 512,894 424,885 424,885 123,064 409,763 286,699 0 5,378 20,773 12,800 0 0 0 0 7,973 .26 .26
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