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================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-14376
ORACLE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2871189
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
500 Oracle Parkway
Redwood City, California 94065
(Address of principal executive offices, including zip code)
(650) 506-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO
--- ---
Number of shares of registrant's common stock outstanding as of November 30,
1998: 959,711,744
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ORACLE CORPORATION
TABLE OF CONTENTS
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PAGE
----
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at November 30, 1998 and
May 31, 1998.................................................. 3
Condensed Consolidated Statements of Operations for the three
months and six months ended November 30, 1998 and 1997........ 4
Condensed Consolidated Statements of Cash Flows for the six
months ended November 30, 1998 and 1997....................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders........... 21
Item 6. Exhibits and Reports on Form 8-K.............................. 21
Signatures.................................................... 22
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................. $1,348,749 $1,273,681
Short-term cash investments........................... 559,318 645,518
Trade receivables, net of allowance for doubtful
accounts of $209,959 and $195,609, respectively...... 1,604,336 1,857,480
Prepaid and refundable income taxes................... 314,849 260,624
Other current assets.................................. 260,621 285,747
---------- ----------
Total Current Assets............................... 4,087,873 4,323,050
---------- ----------
LONG-TERM CASH INVESTMENTS............................. 152,128 186,511
PROPERTY, net.......................................... 976,662 934,350
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $41,787 and $37,473, respectively..... 98,867 99,012
OTHER ASSETS........................................... 331,061 276,088
---------- ----------
Total Assets....................................... $5,646,591 $5,819,011
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term
debt................................................. $ 7,878 $ 2,924
Accounts payable...................................... 296,963 239,698
Income taxes.......................................... 99,762 181,354
Accrued compensation and related benefits............. 435,955 541,809
Customer advances and unearned revenues............... 800,214 877,087
Value added tax and sales tax payable................. 57,628 119,600
Other accrued liabilities............................. 554,066 521,693
---------- ----------
Total Current Liabilities.......................... 2,252,466 2,484,165
---------- ----------
LONG-TERM DEBT......................................... 304,201 304,337
OTHER LONG-TERM LIABILITIES............................ 58,265 57,095
DEFERRED INCOME TAXES.................................. 16,349 15,856
STOCKHOLDERS' EQUITY................................... 3,015,310 2,957,558
---------- ----------
Total Liabilities and Stockholders' Equity......... $5,646,591 $5,819,011
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
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ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Licenses and other................ $ 767,428 $ 645,366 $1,349,893 $1,176,008
Services.......................... 1,288,516 968,361 2,455,162 1,806,548
---------- ---------- ---------- ----------
Total Revenues................. 2,055,944 1,613,727 3,805,055 2,982,556
---------- ---------- ---------- ----------
OPERATING EXPENSES
Sales and marketing............... 591,754 528,490 1,101,830 977,941
Cost of services.................. 779,847 548,631 1,459,137 1,016,798
Research and development.......... 200,678 183,217 388,301 342,884
General and administrative........ 101,598 81,383 195,883 156,897
Acquired in-process research and
development...................... -- -- -- 167,054
---------- ---------- ---------- ----------
Total Operating Expenses....... 1,673,877 1,341,721 3,145,151 2,661,574
---------- ---------- ---------- ----------
OPERATING INCOME................... 382,067 272,006 659,904 320,982
Other income, net................. 28,654 16,248 50,819 56,222
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................. 410,721 288,254 710,723 377,204
Provision for income taxes........ 136,645 100,930 241,646 181,409
---------- ---------- ---------- ----------
NET INCOME......................... $ 274,076 $ 187,324 $ 469,077 $ 195,795
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic............................. $ 0.28 $ 0.19 $ 0.48 $ 0.20
Diluted........................... $ 0.28 $ 0.19 $ 0.48 $ 0.19
SHARES OUTSTANDING:
Basic............................. 963,840 982,491 968,367 980,888
Diluted........................... 983,270 1,008,558 986,210 1,007,412
</TABLE>
See notes to condensed consolidated financial statements.
4
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ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 469,077 $ 195,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 170,264 155,694
Write-off of acquired in-process research and
development.......................................... -- 167,054
Provision for doubtful accounts....................... 56,696 53,523
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease in trade receivables........................ 207,863 149,176
(Increase) decrease in prepaid and refundable income
taxes............................................... (53,327) 6,961
Decrease in other current assets..................... 27,703 28,842
Increase in accounts payable......................... 56,010 22,903
Decrease in income taxes............................. (81,984) (75,790)
Increase (decrease) in customer advances and unearned
revenues............................................ (81,960) 19,306
Decrease in other current liabilities................ (144,181) (153,278)
Increase in other long-term liabilities.............. 1,103 33,135
Increase (decrease) in deferred income taxes......... (887) 14,495
---------- ---------
Net cash provided by operating activities.............. 626,377 617,816
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in cash investments............... 120,583 (220,632)
Capital expenditures.................................. (172,932) (155,294)
Capitalization of computer software development
costs................................................ (14,924) (17,337)
Increase in other assets.............................. (78,008) (169,898)
---------- ---------
Net cash used for investing activities................. (145,281) (563,161)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under notes payable and long-term
debt................................................. 4,474 10,332
Proceeds from common stock issued..................... 142,868 111,221
Repurchase of common stock............................ (560,866) (62,717)
---------- ---------
Net cash provided by (used for) financing activities... (413,524) 58,836
---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................. 7,496 (9,392)
---------- ---------
Net increase in cash and cash equivalents.............. 75,068 104,099
CASH AND CASH EQUIVALENTS
Beginning of period.................................... 1,273,681 890,162
---------- ---------
End of period.......................................... $1,348,749 $ 994,261
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock dividend................................. $ -- $ 3,266
========== =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In connection with the Company's filing of its Annual Report on Form 10-K for
the year ended May 31, 1998 and subsequent quarterly reports on Form 10-Q, the
Company is currently in discussions with the Securities and Exchange
Commission ("SEC") regarding the value ascribed to the technology acquired as
in-process research and development in three acquisitions undertaken in fiscal
1998 and 1997. In connection with these acquisitions, the Company recorded
acquired in-process research and development charges in the amount of
$141,300,000, net of minority interest, in the first quarter of fiscal 1998,
and $36,800,000 in the third quarter of fiscal 1997. The Company understands
that the SEC is engaged in similar discussions with other companies, and is
examining the basis for valuing in-process research and development charges
versus the SEC's recent informal guidance on the calculation of these charges.
Although the Company is consulting with its auditors, Arthur Andersen, LLP,
and believes that the purchase price allocations and related amortization
charges stemming from the acquisitions are in accordance with generally
accepted accounting principles, the Company is evaluating the informal
guidance provided by the SEC and cannot predict the outcome of its evaluation
at this time.
In the event that the Company concludes, as a result of these discussions,
that a portion of the amount of the in-process research and development
charges previously recorded should be capitalized, the Company would be
required to restate previously issued financial statements. The resultant
effect would be that net income for the fiscal years ended May 31, 1997 and
1998 would be increased, and any amounts capitalized would then be amortized
over approximately a three to five year period. Due to the nature of these
transactions, the amount of any goodwill amortized would not be tax deductible
and no tax benefit would be taken.
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the SEC. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate
to make the information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1998.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments)
which are, in the opinion of management, necessary to state fairly the results
for the six month period ended November 30, 1998. The results for the six
month period ended November 30, 1998 are not necessarily indicative of the
results expected for the full fiscal year.
6
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2. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period. Diluted earnings per share is computed
on the basis of the weighted average number of common shares outstanding plus
the dilutive effect of outstanding stock options and the employee stock
purchase plan using the "treasury stock" method. The following table sets
forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 1997 1998 1997
-------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Income......................... $274,076 $ 187,324 $469,077 $ 195,795
======== ========== ======== ==========
Weighted average shares
outstanding....................... 963,840 982,491 968,367 980,888
Dilutive effect of employee stock
options and employee stock
purchase plan..................... 19,430 26,067 17,843 26,524
-------- ---------- -------- ----------
Diluted shares outstanding......... 983,270 1,008,558 986,210 1,007,412
======== ========== ======== ==========
Basic Earnings Per Share........... $ 0.28 $ 0.19 $ 0.48 $ 0.20
Diluted Earnings Per Share......... $ 0.28 $ 0.19 $ 0.48 $ 0.19
</TABLE>
3. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," requires companies to report an additional measure of income on the
income statement or to create a new financial statement that shows the new
measure of income. Comprehensive income includes foreign currency translation
gains and losses and unrealized gains and losses on equity securities that
have been previously excluded from net income and reflected instead in equity.
The following table sets forth the calculation of comprehensive income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 1997 1998 1997
--------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Income........................ $ 274,076 $ 187,324 $469,077 $195,795
Foreign Currency Translation Gains
(Losses)......................... 17,685 (4,262) 6,739 (9,450)
Unrealized Gains (Losses) on
Equity Securities................ 43 -- (19) --
--------- --------- -------- --------
Total Comprehensive Income........ $ 291,804 $ 183,062 $475,797 $186,345
========= ========= ======== ========
</TABLE>
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. It
requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met and that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. The Company is currently evaluating this statement, but does
not expect that it will have a material effect on the Company's financial
position or results of operations.
5. LITIGATION
Refer to Part II, Item 1 for a description of legal proceedings.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains forward-
looking statements. The forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results
and Market Price of Stock." Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's opinions only
as of the date hereof. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the SEC, including
the Annual Report on Form 10-K for the fiscal year ended May 31, 1998 and the
Quarterly Reports on Form 10-Q filed by the Company in fiscal 1999.
RESULTS OF OPERATIONS
Total revenues increased 27% (28% in local currency) in the second quarter and
28% (30% in local currency) in the first half of fiscal 1999 as compared to
the corresponding periods in fiscal 1998. Domestic revenues increased 30% and
36%, while international revenues increased 25% and 20% in the second quarter
and first half of fiscal 1999, respectively, as compared to the corresponding
periods in fiscal 1998. International revenues expressed in local currency
increased by approximately 27% and 25% in the second quarter and first half of
fiscal 1999, respectively, as compared to the corresponding periods in fiscal
1998. Revenues from international customers were approximately 52% and 53% of
total revenues in the second quarters of fiscal 1999 and 1998, respectively,
and 50% and 53% of total revenues in the first half of fiscal 1999 and 1998,
respectively. Management expects that the Company's international operations
will continue to provide a significant portion of total revenues. However,
international revenues will be adversely affected if the U.S. dollar continues
to strengthen against certain major international currencies.
REVENUES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 CHANGE 1997 1998 CHANGE 1997
---------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Licenses and other...... $ 767,428 19% $ 645,366 $1,349,893 15% $1,176,008
Percentage of revenues.. 37.3% 40.0% 35.5% 39.4%
Services................ $1,288,516 33% $ 968,361 $2,455,162 36% $1,806,548
Percentage of revenues.. 62.7% 60.0% 64.5% 60.6%
Total revenues........ $2,055,944 27% $1,613,727 $3,805,055 28% $2,982,556
</TABLE>
LICENSES AND OTHER REVENUES. License revenues represent fees earned for
granting customers licenses to use the Company's software products. License
and other revenues also include revenues from the Company's systems
integration business, documentation revenues and other miscellaneous revenues,
which constituted 3% and 4% of total license and other revenues in the second
quarters of fiscal 1999 and 1998, respectively, and 3% of total license and
other revenues in the first half of both fiscal 1999 and 1998. License
revenues, excluding other revenues, grew 20% and 2% in the second quarters of
fiscal 1999 and 1998, respectively, and 16% and 7% in the first half of fiscal
1999 and 1998, respectively. Database license revenues, which include server
and tools revenues, grew 20% and 2% in the second quarters of fiscal 1999 and
1998, respectively, and 17% and 2% in the first half of fiscal 1999 and 1998,
respectively. Applications revenues grew 19% and 7% in the second quarters of
fiscal 1999 and 1998, respectively, and 10% and 36% in the first six months
ended November 30, 1998 and 1997, respectively. The higher license revenue
growth rate experienced in the second quarter and first half of fiscal 1999 is
primarily due to strong demand for the Company's database products, better
sales execution,
8
<PAGE>
the introduction and market positioning of new products which has stimulated
demand for the Company's products, as well as a stabilization of growth rates
in certain Asian countries.
SERVICES REVENUES. Services revenues consist of support, consulting and
education services revenues which comprised 44%, 47% and 9% of total services
revenues, respectively, during the second quarter and first half of fiscal
1999. Support revenues grew 32% and 35% in the second quarters of fiscal 1999
and 1998, respectively, and 31% and 38% in the first half of fiscal 1999 and
1998, respectively. Consulting services revenues grew 38% and 51% in the
second quarters of fiscal 1999 and 1998, respectively, and 45% and 50% in the
first half of fiscal 1999 and 1998, respectively. Education services revenues
grew 13% and 28% in the second quarters of fiscal 1999 and 1998, respectively,
and 17% and 26% in the first half of fiscal 1999 and 1998, respectively. The
decrease in the consulting and education services revenue growth rates
experienced in the second quarter and first half of fiscal 1999 is due, in
part, to a decrease in the growth of demand for these services due to the
lower applications license revenue growth rates experienced in fiscal 1998 and
the first half of fiscal 1999, as compared to the corresponding prior periods.
The decrease in the support revenues growth rate is primarily attributed to
the weaker license revenue growth rate experienced in fiscal 1998 and the
first half of fiscal 1999, as compared to the prior year corresponding
periods. While the support revenue growth has slowed, support revenues overall
have increased reflecting the continued increase in the installed base of the
Company's products under support contracts, as well as an increase in the
number of customers electing enhanced support offerings. The support revenues
growth rate will continue to be affected by the overall license revenue growth
rates.
OPERATING EXPENSES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ----------------------------
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 CHANGE 1997 1998 CHANGE 1997
-------- ------ -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing..... $591,754 12% $528,490 $1,101,830 13% $ 977,941
Percentage of revenues.. 28.8% 32.7% 29.0% 32.8%
Cost of services........ $779,847 42% $548,631 $1,459,137 44% $1,016,798
Percentage of revenues.. 37.9% 34.0% 38.3% 34.1%
Research and
development (1)........ $200,678 10% $183,217 $ 388,301 13% $ 342,884
Percentage of revenues.. 9.8% 11.4% 10.2% 11.5%
General and
administrative......... $101,598 25% $ 81,383 $ 195,883 25% $ 156,897
Percentage of revenues.. 4.9% 5.0% 5.1% 5.3%
Acquired in-process
research and
development............ $ -- -- $ -- $ -- * $ 167,054
Percentage of revenues.. -- -- -- 5.6%
</TABLE>
--------
* Not meaningful
(1) Pursuant to SFAS No. 86, the Company capitalized software development
costs equal to 0.4% and 0.8% of total revenues during the second
quarters of fiscal 1999 and 1998, respectively, and 0.4% and 0.6% of
total revenues in the second half of fiscal 1999 and 1998,
respectively.
International expenses were favorably affected in the second quarter and first
half of fiscal 1999 when compared to the corresponding period in the prior
year due to the strengthening of the U.S. dollar against certain major
international currencies. The net impact on operating margins, however, was
negative since the negative effect on revenues was greater than the positive
effect on expenses.
SALES AND MARKETING EXPENSES. The Company continues to place significant
emphasis, both domestically and internationally, on direct sales through its
own sales force. However, the Company also continues to market its products
through indirect channels. Sales and marketing expenses increased 12% and 13%
in the second quarters and first half of fiscal 1999, respectively, as
compared to 16% and 20% in the corresponding periods of fiscal 1998. The
decrease in the expense growth rate was due primarily to controls over
increases in headcount and headcount related expenditures. Sales and marketing
expenses as a percentage of license revenues decreased in
9
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the second quarter and first half of fiscal 1999, primarily related to
increased license revenues and the aforementioned controls over headcount and
headcount related expenditures. Included in sales and marketing expenses is
the amortization of capitalized software development costs (see below).
COST OF SERVICES. The cost of providing services consists largely of
consulting, education and support personnel expenses. As a percentage of
services revenues, cost of services was 61% and 57% in the second quarters of
fiscal 1999 and 1998, respectively, and 59% and 56% in first half of fiscal
1999 and 1998, respectively. The increase in the cost of services as a
percentage of services revenues was due primarily to lower consulting and
education utilization rates, as a result of slower than anticipated revenue
growth. In addition, consulting and education services have lower margins than
support.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
second quarters of fiscal 1999 and 1998 would have been 10% and 12% of total
revenues, respectively, without the capitalization of software development
costs in accordance with Statement of Financial Accounting Standards No. 86.
Before considering the impact of software capitalization, research and
development expenses increased 6% and 12% in the second quarter and first half
of fiscal 1999 (10% and 13% after the adjustment for software capitalization),
as compared to 37% and 34% in the corresponding periods in fiscal 1998. The
lower expense growth rate in the second quarter and first half of fiscal 1999
was due to planned reductions in headcount growth rates in order to improve
margins. The Company capitalized $7,783,000 and $12,895,000 of software
development costs during the second quarters of fiscal 1999 and 1998,
respectively, and $14,924,000 and $17,337,000 in the first six months of
fiscal 1999 and 1998, respectively. Amortization of capitalized software
development costs is charged to sales and marketing expenses and totaled
$7,749,000 and $12,804,000 in the second quarters of fiscal 1999 and 1998,
respectively, and $15,070,000 and $17,289,000 in the corresponding six month
periods. The Company believes that research and development expenditures are
essential to maintaining its competitive position and expects these costs to
continue to constitute a significant percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of revenues decreased in the second quarter and first half of
fiscal 1999 as compared to the corresponding periods in fiscal 1998, primarily
due to higher revenue levels and controls over expenses.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Based on the results of third-
party appraisals, the Company recorded charges of $91,500,000 and $75,554,000
in the first quarter of fiscal 1998 to expense in-process research and
development costs related to the acquisition of Treasury Services Corporation
("TSC") and the merger of Network Computer, Inc. ("NCI") and Navio
Communications, Inc. ("Navio"), respectively. In the opinion of management and
the appraiser, the acquired in-process research and development had not yet
reached technological feasibility and had no alternative future uses. As
discussed in Note 1 to the Notes to the Condensed Consolidated Financial
Statements, the Company is currently in discussions with the SEC regarding the
value ascribed to the technology acquired as in-process research and
development in connection with these acquisitions.
OTHER INCOME (EXPENSE):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 CHANGE 1997 1998 CHANGE 1997
-------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Other income (expense)... $28,654 76% $16,248 $50,819 (10)% $56,222
Percentage of revenues... 1.4% 1.0% 1.3% 1.9%
</TABLE>
Other income and expense in the first half of fiscal 1998 includes the
minority interest's share of the one-time acquired research and development
charge for NCI. Excluding this credit of $25,726,000, other income and expense
for the first half of fiscal 1998 was $30,496,000. Changes in non-operating
income and expense primarily reflect fluctuations in interest income and
expense related to changes in cash and debt balances and interest rates, as
well as foreign exchange and other miscellaneous items. The Company also
realized a gain of approximately $4,300,000 during the first half of fiscal
1998 related to the sale of certain securities.
10
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PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 CHANGE 1997 1998 CHANGE 1997
-------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Provision for income
taxes.................. $136,645 35% $100,930 $241,646 33% $181,409
Percentage of revenues.. 6.6% 6.3% 6.4% 6.1%
</TABLE>
The Company's effective tax rates have historically differed from the federal
statutory rate primarily because of tax credits, certain foreign sales
corporation income that is not taxed, state taxes, foreign income taxes
provided at rates greater than the federal statutory rate, as well as foreign
losses that could not be utilized. The effective tax rate for the second
quarter and first half of fiscal 1999 was 33% and 34%, respectively, as
compared to a 35% tax rate in the corresponding prior year periods (excluding
the effect of the acquired research and development charges for the TSC and
Navio transactions, net of a credit of $25,726 for minority interest in the
first quarter of fiscal 1998).
NET INCOME AND EARNINGS PER SHARE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1998 CHANGE 1997 1998 CHANGE 1997
-------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income................. $274,076 46% $187,324 $469,077 140% $195,795
Percentage of revenues .... 13.3% 11.6% 12.3% 6.6%
Earnings per share:
Basic.................... $ 0.28 47% $ 0.19 $ 0.48 140% $ 0.20
Diluted.................. $ 0.28 47% $ 0.19 $ 0.48 153% $ 0.19
</TABLE>
Net income and diluted earnings per share in the first half of fiscal 1998
would have been $337,123,000 and $0.33, respectively, excluding the financial
statement effects of the acquisitions of TSC and Navio. This represents an
increase of 39% and 45%, respectively, in the first half of fiscal 1999 over
the corresponding period in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
NOV. 30, NOV. 30,
1998 CHANGE 1997
---------- ------ ----------
<S> <C> <C> <C>
Working capital............................ $1,835,407 16 % $1,588,304
Cash and cash investments.................. $2,060,195 25 % $1,654,258
Cash provided by operating activities...... $ 626,377 1 % $ 617,816
Cash used for investing activities......... $ (145,281) (74)% $ (563,161)
Cash provided by (used for) financing
activities................................ $ (413,524) * $ 58,836
</TABLE>
--------
* Not meaningful
Working capital increased in the second quarter of fiscal 1999 over the
corresponding period in fiscal 1998, due primarily to increased cash flow from
operations and a decrease in cash used for investing activities, partially
offset by the repurchase of common stock.
The Company generated higher positive cash flows from operations in the first
half of fiscal 1999 over fiscal 1998 (excluding the effect of the charges for
in-process research and development) due primarily to improved profitability
as well as higher cash collections.
11
<PAGE>
Cash used for investing activities decreased in the second quarter of fiscal
1999 as compared to the corresponding prior year period due primarily to
changes in the levels and maturities of cash investments. In each period, the
Company made significant investments in capital expenditures. The Company
expects to continue to invest in capital and other assets to support its
growth.
Since July 1992, the Company's Board of Directors has approved the cumulative
repurchase of up to 126,000,000 shares of Common Stock on the open market to
reduce the dilutive effect of the Company's stock plans. Pursuant to this
repurchase program, the Company repurchased 18,294,500 shares of the Company's
Common Stock for approximately $479,802,000 during the second quarter of
fiscal 1999. As of November 30, 1998, the Company has repurchased a total of
92,377,370 shares of the Company's Common Stock for approximately
$1,892,631,000. The Company used cash flow from operations and proceeds from
the issuance of Senior Notes in fiscal 1997 to repurchase the Company's Common
Stock, and to invest in working capital and other assets to support its
growth.
During the third quarter of fiscal 1997, the Company issued $150,000,000 in
6.72% Senior Notes due in the year 2004 and $150,000,000 in 6.91% Senior Notes
due in the year 2007. The Senior Notes are unsecured general obligations of
the Company that rank on parity with all other unsecured and unsubordinated
indebtedness of the Company that may be outstanding.
At November 30, 1998, the Company also had other outstanding debt of
approximately $12,079,000, primarily in the form of other notes payable and
capital leases.
During fiscal 1998 and the first quarter of fiscal 1999, the Company, as part
of its authorized stock repurchase program, sold put warrants and purchased
call options through private placements. As of November 30, 1998, the Company
has a maximum potential obligation under the put warrants to buy back
25,381,000 shares of its Common Stock for prices ranging from $15.86 to $24.85
per share for an aggregate price of approximately $518,746,000. The put
warrants will expire from January 1999 through January 2000. The Company
purchased call options for 12,690,000 shares of its Common Stock at prices
ranging from $19.18 to $30.18 per share for an aggregate price of
approximately $317,292,000. The call options will expire from January 1999
through January 2000.
The Company anticipates that current cash balances, as well as anticipated
cash flows from operations, will be sufficient to meet its working capital and
capital expenditure needs at least through the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
The Company operates in a rapidly changing environment that involves numerous
risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
REVENUE GROWTH AND ECONOMIC CONDITIONS. The revenue growth and profitability
of the Company's business depends on the overall demand for computer software
and services, particularly in the product segments in which the Company
competes. Because the Company's sales are primarily to major corporate and
government customers, the Company's business also depends on general economic
and business conditions. A softening of demand for computer software, caused
by a weakening of the economy, as the Company experienced in the Asia Pacific
region in the past two years, may result in decreased revenues or lower growth
rates.
Although the Company experienced an increase in license revenue growth rates
in the second quarter and first half of fiscal 1999, the Company had
experienced a deceleration in license revenue growth rates in fiscal 1998 and
in the first quarter of fiscal 1999. There can be no assurances that such
growth rates will continue to increase or be sustainable in the near term.
In particular, one of the challenges the Company continues to face in
promoting future growth in license revenues will be to refocus its marketing
and sales efforts in its applications business where the Company experienced
12
<PAGE>
lower revenue growth than some of its competitors in the first half of fiscal
1999. Although the Company experienced higher license revenue growth in the
second quarter of fiscal 1999 as compared to the corresponding period in the
prior year, there can be no assurances that the Company will be able to
effectively promote future license revenue growth in its applications
business.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition" which superseded SOP No. 91-1. SOP No. 97-2 is effective for the
Company's fiscal year beginning June 1, 1998, as amended by SOP No. 98-4 and
SOP No. 98-9, and provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. Based on the
Company's interpretation of the requirements of SOP No. 97-2, as amended,
application of this statement did not and is not expected to have a material
impact on the Company's revenue. However, the accounting profession is
currently reviewing certain provisions of SOP 97-2, with the objective of
providing additional guidance on implementing its provisions. Depending upon
the outcome of this review and the issuance of implementing guidelines and
interpretations, the Company may be required to change its revenue recognition
polices and business practices, and such changes could have a material adverse
effect on the Company's business, results of operations or financial
condition.
COMPETITIVE ENVIRONMENT. The computer software industry is an intensely
competitive industry with several large vendors that develop and market
databases, applications, development tools and decision support products.
Certain of these vendors have significantly more financial and technical
resources than the Company. The introduction of new competitive products into
one or more of the Company's various markets, the addition of new
functionality into an existing competitive product or the acquisition by one
of the Company's competitors of a product could have a material adverse effect
on the Company's business, results of operations or financial condition. In
addition, new distribution methods (e.g., electronic channels) and
opportunities presented by the Internet and electronic commerce have removed
many of the barriers to entry historically faced by small and start-up
companies in the software industry. The Company expects to face increasing
competition in the various markets in which it competes.
PRICING. Intense competition in the various markets in which the Company
competes may put pressure on the Company to reduce prices on certain products,
particularly in the markets where certain vendors offer deep discounts in an
effort to recapture or gain market share. In addition, the bundling of
software products for promotional purposes or as a long-term pricing strategy
or guarantees of product implementations by certain of the Company's
competitors could have the effect over time of significantly reducing the
prices that the Company can charge for its products. Shifts toward the use of
operating systems on which the Company experiences relatively greater price
competition could result in lower average license prices, thereby reducing
license revenues for the Company. Any such price reductions and resulting
lower license revenues could have a material adverse effect on the Company's
business, results of operations or financial condition if the Company cannot
offset these price reductions with a corresponding increase in sales volumes
or lower spending.
INTERNATIONAL SALES. A substantial portion of the Company's revenues is
derived from international sales and is therefore subject to the risks
attendant thereto, including the general economic conditions in each country,
the overlap of different tax structures, the difficulty of managing an
organization spread over various countries, changes in regulatory
requirements, compliance with a variety of foreign laws and regulations and
longer payment cycles in certain countries. The Company experienced a large
decline in revenue growth rates in the Asia Pacific region during fiscal 1998
in part due to the economic difficulties that occurred throughout this region.
There can be no assurances that the economies in this region will recover in
the near term or that the Company's growth rates in this geographic region
will return to previous levels if the recovery occurs. The Company also has
experienced relatively slower growth rates in countries within its Europe,
Middle East and Africa (EMEA) division during the last several years,
primarily as a result of weaker economies relative to the rest of the world,
slower adoption of information technology and senior management changes in
several major countries. There can be no assurances that the Company will be
able to successfully address each of these challenges in the near term. Other
risks associated with international operations include import and export
licensing requirements, trade restrictions and changes in tariff rates.
13
<PAGE>
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Changes in the value of major foreign currencies
relative to the value of the U.S. dollar adversely affected revenues and
operating results in the first half of fiscal 1999, particularly in the Asia
Pacific region, and will continue to do so if the U.S. dollar continues to
strengthen relative to local currencies.
Foreign currency transaction gains and losses are primarily related to
sublicense fee and other agreements between the Company and selling
distributors and subsidiaries. These gains and losses are charged against
earnings in the period incurred. The Company has reduced its transaction and
translation gains and losses associated with converting foreign currencies
into U.S. dollars by using forward foreign exchange contracts to hedge
transaction and translation exposures in major currencies. The Company finds
it impractical to hedge all foreign currencies in which it conducts business.
As a result, the Company will continue to experience foreign currency gains
and losses.
HIRING AND RETENTION OF EMPLOYEES. The Company's continued growth and success
depend to a significant extent on the continued service of its senior
management and other key employees and the hiring of new qualified employees.
Competition for highly-skilled business, product development, technical and
other personnel is increasingly intense due to lower overall unemployment
rates and the boom in information technology spending. Accordingly, the
Company expects to experience increased compensation costs that may not be
offset through either improved productivity or higher prices. There can be no
assurances that the Company will be successful in continuously recruiting new
personnel and in retaining existing personnel. In general, the Company does
not have long-term employment or non-competition agreements with its
employees. The loss of one or more key employees or the Company's inability to
attract additional qualified employees or retain other employees could have a
material adverse effect on the continued growth of the Company.
SALES FORCE RESTRUCTURING AND VERTICAL MARKETS. The Company historically has
relied heavily on its direct sales force. In fiscal 1998, the Company
restructured its sales force to provide, among other things, specialized
expertise within certain vertical markets and certain product areas. This
transition resulted in a temporary lack of focus and reduced productivity by
the Company's sales force. Management has continued to address these
transition issues in fiscal 1999 by making additional adjustments within the
sales organization, though management believes that it has resolved the
primary issues relating to the transition. There can be no assurances that
transition issues associated with the restructuring will not recur or that
revenue growth rates will not be adversely affected in future quarters.
MANAGEMENT OF GROWTH. The Company has a history of rapid growth. The Company's
future operating results will depend on management's ability to manage growth,
continuously hire and retain significant numbers of qualified employees,
accurately forecast revenues and control expenses. A decline in the growth
rate of revenues without a corresponding and timely slowdown in expense growth
could have a material adverse effect on the Company's business, results of
operations or financial condition.
YEAR 2000. A significant amount of the demand the Company has experienced in
recent years for applications software may be generated by customers in the
process of replacing and upgrading applications in order to accommodate the
change in date to the year 2000. Once such customers have completed their
preparations, the software industry and the Company may experience a
significant deceleration from the strong annual growth rates recently
experienced in the applications software marketplace. In addition, as the year
2000 approaches, customers may slow down computer software purchases as they
devote more time to preparing and testing their systems for year 2000
readiness, versus evaluating and implementing new systems.
The Company has designed and tested the most current versions of its products
to be year 2000 compliant. However, some of the Company's customers are
running product versions that are not year 2000 compliant. The Company has
been encouraging its customers to migrate to current product versions. It is
possible that the Company may experience increased expenses in addressing
migration issues for such customers. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or
defects associated with year 2000 date functions that may result in material
costs to the Company. Some commentators have stated that a significant amount
of litigation will arise out of year 2000 compliance issues, and the Company
14
<PAGE>
is aware of a growing number of lawsuits against other software vendors.
Because of the unprecedented nature of such litigation, it is uncertain to
what extent the Company may be affected by it.
With respect to its internal information technology systems (including
information technology-based office facilities such as data and voice
communications, and building management and security systems), the Company has
adopted standard industry practices, as published by the British Standards
Institute, in preparing for the year 2000 date change. The Company's year 2000
internal readiness program primarily covers: taking inventory of hardware,
software and embedded systems, assessing business and customer satisfaction
risks associated with such systems, creating action plans to address known
risks, executing and monitoring action plans, and contingency planning. The
Company has sent detailed questionnaires to vendors and service providers to
certify year 2000 readiness and has conducted risk analysis and testing of the
core components of its business, software and hardware systems. The Company
expects to substantially complete year 2000 readiness preparations by the end
of June 1999 but to continue extensive testing through calendar 1999.
Although the Company does not believe that it will incur any material costs or
experience material disruptions in its business associated with preparing its
internal systems 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 its internal systems, which are composed of third party software, third
party hardware that contains embedded software and the Company's own software
products. The most reasonably likely worst case scenarios would include: (i)
corruption of data contained in the Company's internal information systems,
(ii) hardware failure, and (iii) the failure of infrastructure services
provided by government agencies and other third parties (e.g., electricity,
phone service, water, transport, Internet services, etc.). The Company is in
the process of implementing action plans for the remediation of high risk
areas and is scheduled to implement remediation plans for medium to low risk
areas during the remainder of fiscal 1999. The Company expects its contingency
plans to include, among other things, manual "work-arounds" for software and
hardware failures, as well as substitution of systems, if necessary.
FUTURE ACQUISITIONS. As part of its business strategy, the Company has made
and expects to continue to make acquisitions of, or significant investments
in, businesses that offer complementary products, services and technologies.
Any acquisitions or investments will be accompanied by the risks commonly
encountered in acquisitions of businesses. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired businesses, the potential disruption of the Company's ongoing
business, the distraction of management from the Company's business, the
inability of management to maximize the financial and strategic position of
the Company, the maintenance of uniform standards, controls, procedures and
policies and the impairment of relationships with employees and clients as a
result of any integration of new management personnel. These factors could
have a material adverse effect on the Company's business, results of
operations or financial condition, particularly in the case of a larger
acquisition. Consideration paid for future acquisitions, if any, could be in
the form of cash, stock, rights to purchase stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result in
connection with any such future acquisitions.
NEW PRODUCTS. The markets for the Company's products are characterized by
rapid technological advances in hardware and software development, evolving
standards in computer hardware and software technology and frequent new
product introductions and enhancements. Product introductions and short
product life cycles necessitate high levels of expenditures for research and
development. To maintain its competitive position, the Company must enhance
and improve existing products and continue to introduce new products and new
versions of existing products that keep pace with technological developments,
satisfy increasingly sophisticated customer requirements and achieve market
acceptance. For example, in order to remain competitive in the European
markets for applications products, the Company will be required to continue to
enhance certain of its applications products to meet the single European
currency reporting requirements as defined by the European Economic and
Monetary Union (EMU). The Company's inability to port to or run on new or
increasingly popular operating systems, or the Company's failure to
successfully enhance and improve its products in a timely manner, and position
and/or price its products, could have a material adverse effect on the
Company's business, results of operations or financial condition.
15
<PAGE>
Significant undetected errors or delays in new products or new versions of a
product may affect market acceptance of the Company's products and could have
a material adverse effect on the Company's business, results of operations or
financial condition. If the Company were to experience delays in the
commercialization and introduction of new or enhanced products, if customers
were to experience significant problems with the implementation and
installation of products or if customers were dissatisfied with product
functionality or performance, this could have a material adverse effect on the
Company's business, results of operations or financial condition.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS. The Company's revenues in
general, and its license revenues in particular, are relatively difficult to
forecast and vary from quarter to quarter due to various factors, including
the (i) relatively long sales cycles for the Company's products, (ii) size and
timing of individual license transactions, the closing of which tend to be
delayed by customers until the end of a fiscal quarter as a negotiating
tactic, (iii) introduction of new products or product enhancements by the
Company or its competitors, (iv) potential for delay or deferral of customer
implementations of the Company's software, (v) changes in customer budgets,
(vi) seasonality of technology purchases and other general economic conditions
and (vii) reductions in budgets for new software, as customers focus attention
on remediation of year 2000 issues. Accordingly, the Company's quarterly
results are difficult to predict until the end of the quarter, and delays in
product delivery or closing of sales near the end of a quarter could cause
quarterly revenues and net income to fall significantly short of anticipated
levels.
The Company's license revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter. Because the Company's operating
expenses are based on anticipated revenue levels and because a high percentage
of the Company's expenses are relatively fixed, a delay in the recognition of
revenue from even a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
cause net income to fall significantly short of anticipated levels.
RELATIVE PRODUCT PROFITABILITY. Certain of the Company's revenues are derived
from products which, as a percentage of revenues, currently require a higher
level of development, distribution and support expenditures compared to
certain of its other products. To the extent that revenues generated from such
products become a greater percentage of the Company's total revenues, the
Company's operating margins may be adversely affected, unless the expenses
associated with such products decline as a percentage of revenues.
LONG-TERM INVESTMENT CYCLE. Developing and localizing software is expensive
and the investment in product development often involves a long payback cycle.
The Company's plans for its fiscal year ending May 31, 1999 include
significant investments in software research and development and related
product opportunities from which significant revenues are not anticipated for
several years.
UNCERTAINTY OF EMERGING AREAS. The impact on the Company of emerging areas
such as the Internet, on-line services and electronic commerce is uncertain.
There can be no assurance that the Company will be able to provide a product
offering that will satisfy new customer demands in these areas. In addition,
standards for network protocols, as well as other industry adopted and de
facto standards for the Internet, are evolving rapidly. There can be no
assurance that standards chosen by the Company will position its products to
compete effectively for business opportunities as they arise on the Internet
and other emerging areas.
NEW BUSINESS AREAS. The Company has in recent years expanded its technology
into a number of new business areas to foster long-term growth, including
application servers, Internet/electronic commerce, interactive media, on-line
business services and Internet computing. These areas are relatively new to
the Company's product development and sales and marketing personnel. There is
no assurance that the Company will compete effectively or will generate
significant revenues in these new areas. The success of Internet computing
and, in
16
<PAGE>
particular, the Company's current Internet computing software products is
difficult to predict because Internet computing represents a method of
computing that is new to the entire computer industry. The successful
introduction of Internet computing to the market will depend in large measure
on (i) the commitment by hardware and software vendors to manufacture, promote
and distribute Internet access appliances, (ii) the lower cost of ownership of
Internet computing relative to client/server architecture, and (iii) the ease
of use and administration relative to client/server architecture. There can be
no assurances that sufficient numbers of vendors will undertake this
commitment, that the market will accept Internet computing or that Internet
computing will generate significant revenues for the Company. See "New
Products."
ENFORCEMENT OF THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS. Despite the
Company's efforts to protect its intellectual property rights, it may be
possible for unauthorized third parties to copy certain portions of the
Company's products or to reverse engineer or obtain and use technology or
other information that the Company regards as proprietary. In addition, the
laws of certain countries do not protect the Company's proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that the Company will be able to protect its proprietary
technology against unauthorized third party copying or use, which could
adversely affect the Company's competitive position.
POSSIBILITY OF INFRINGEMENT CLAIMS. The Company from time to time receives
notices from third parties claiming infringement by the Company's products of
third party patent and other intellectual property rights. The Company expects
that software products will increasingly be subject to such claims as the
number of products and competitors in the Company's industry segments grows
and the functionality of products overlaps. Regardless of its merit,
responding to any such claim could be time-consuming, result in costly
litigation and require the Company to enter into royalty and licensing
agreements which may not be offered or available on terms acceptable to the
Company. If a successful claim is made against the Company and the Company
fails to develop or license a substitute technology, the Company's business,
results of operations or financial condition could be materially adversely
affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock has experienced significant fluctuations and may continue to fluctuate
significantly. The market price of the Common Stock may be significantly
affected by factors such as the announcement of new products or product
enhancements by the Company or its competitors, technological innovation by
the Company or its competitors, quarterly variations in the Company's or its
competitors' results of operations, changes in prices of the Company's or its
competitors' products and services, changes in revenue and revenue growth
rates for the Company as a whole or for specific geographic areas, business
units, products or product categories, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. The stock
prices for many companies in the technology sector have experienced wide
fluctuations which often have been unrelated to their operating performance.
Such fluctuations may adversely affect the market price of the Company's
Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company places its investments with high credit quality issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in
its policy, the Company is averse to principal loss and seeks to preserve its
invested funds by limiting default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only high credit quality
securities that it believes to be low risk and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
17
<PAGE>
The table below presents the principal amount, related weighted average
interest rates and maturities for the Company's investment portfolio. Short
term and long term investments are all in fixed rate instruments. The
principal amount approximates fair value at November 30, 1998.
TABLE OF INVESTMENT SECURITIES:
<TABLE>
<CAPTION>
PRINCIPAL AVERAGE
AMOUNT INTEREST RATE
----------- -------------
<S> <C> <C>
Cash and cash equivalents.......................... $ 1,348,749 5.19%
Short term investments (0-1 years)................. $ 559,318 5.40%
Long term investments (1-2 years).................. $ 152,128 5.93%
-----------
Total cash and investment securities............... $ 2,060,195
===========
</TABLE>
FOREIGN CURRENCY RISK. The Company transacts business in various foreign
currencies and the Company has established a foreign currency hedging program,
utilizing foreign currency forward exchange contracts (forward contracts) to
hedge certain foreign currency transaction exposures. Under this program,
increases or decreases in the Company's foreign currency transactions are
offset by gains and losses on the forward contracts, so as to mitigate the
possibility of foreign currency transaction gains and losses. The Company does
not use forward contracts for trading purposes. All outstanding forward
contracts at the end of a period are marked-to-market with unrealized gains
and losses included in other income (expense), and thus are recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts mature, the realized gains and losses are recorded and are included
in net income as a component of other income (expense). The Company's ultimate
realized gain or loss with respect to currency fluctuations will depend on the
currency exchange rates and other factors in effect as the contracts mature.
The unrealized gain (loss) on the outstanding forward contracts at November
30, 1998 was immaterial to the Company's consolidated financial statements.
The Company also hedges net assets of certain of its international
subsidiaries. The net gains on equity hedges are recorded as a component of
accumulated foreign currency translation adjustments in stockholders' equity.
The Company's outstanding forward contracts and equity hedges as of November
30, 1998 are presented in the tables below. The tables present the notional
amounts (at contract exchange rates) and the weighted average contractual
foreign currency exchange rates. Notional weighted average exchange rates are
quoted using market conventions where the currency is expressed in currency
units per U.S. dollar, except for Australia, Ireland, New Zealand and the UK.
All of these forward contracts and equity hedges mature in ninety days or less
as of November 30, 1998.
18
<PAGE>
TABLE OF FORWARD CONTRACTS:
<TABLE>
<CAPTION>
NOTIONAL
WEIGHTED
NOTIONAL AVERAGE
FUNCTIONAL CURRENCY AMOUNT EXCHANGE RATE
------------------- ------------ -------------
<S> <C> <C>
Australian Dollar................................ $ 320,075 0.64
Austrian Schilling............................... $ 3,635,602 11.94
Belgian Franc.................................... $ 11,018,474 35.02
Canadian Dollar.................................. $ 38,426,272 1.54
Chinese Yuan..................................... $ 9 ,797,297 8.88
Danish Krone..................................... $ 4,061,149 6.48
European Community ECU........................... $ 4,914,718 1.16
Finnish Markka................................... $ 9,649,971 5.17
French Franc..................................... $ 15,927,030 5.70
German Mark...................................... $ 43,171,484 1.70
Italian Lira..................................... $ 28,674,070 1681.31
Japanese Yen..................................... $ 9,337,878 120.37
Netherlands Guilder.............................. $ 49,799,340 1.91
New Zealand Dollar............................... $ 904,910 0.53
Norwegian Krone.................................. $ 2,227,935 7.59
Portuguese Escudo................................ $ 5,437,211 174.12
Spanish Peseta................................... $ 5,904,011 44.50
Swedish Krona.................................... $ 7,514,663 8.18
Swiss Franc...................................... $ 26,687,204 1.40
Thai Baht........................................ $ 4,698,729 36.18
UK Pound......................................... $111,965,880 1.66
------------
Total............................................ $394,073,903
============
</TABLE>
TABLE OF EQUITY HEDGES:
<TABLE>
<CAPTION>
NOTIONAL
WEIGHTED
NOTIONAL AVERAGE
FUNCTIONAL CURRENCY AMOUNT EXCHANGE RATE
------------------- ------------ -------------
<S> <C> <C>
Hong Kong Dollars................................. $ 10,035,501 7.9717
Japanese Yen...................................... $ 12,916,952 131.61
Swedish Krona..................................... $ 12,727,504 7.857
UK Pound.......................................... $ 12,527,250 1.6703
------------
$ 48,207,207
============
</TABLE>
EQUITY PRICE RISK. The Company, as part of its authorized repurchase program,
has sold put warrants and purchased call options through private placements
involving institutional investors. The put warrants, if exercised, would
entitle the holder to sell one share of Common Stock to the Company at a
specified price. Similarly, the call options entitle the Company to buy on a
specified day one share of the Company's Common Stock at a specified price.
19
<PAGE>
As of November 30, 1998, the Company had a maximum potential obligation under
the put warrants to buy back 25,381,000 shares of Common Stock at prices
ranging from $15.86 to $24.85 per share for an aggregate price of
approximately $518,746,000. The put warrants will expire at various dates
through January 2000.
As of November 30, 1998, the Company had the right to purchase up to a maximum
of 12,690,000 shares of its Common Stock at prices ranging from $19.18 to
$30.18 per share for an aggregate price of approximately $317,292,000. The
call options will expire at various dates through January 2000.
The table below presents the shares, the weighted average strike prices, the
contract amount and the estimated fair value of the put warrants and call
options at November 30, 1998.
<TABLE>
<CAPTION>
1999 2000 ESTIMATED
MATURITY MATURITY FAIR VALUE
-------- -------- ----------
<S> <C> <C> <C>
Put Warrants:
Shares........................................ 23,381 2,000
Weighted average stock price.................. $ 20.06 $ 24.85
Contract amount............................... $469,046 $49,700 $ 19,443
Call Options:
Shares........................................ 11,690 1,000
Weighted average stock price.................. $ 24.56 $ 30.18
Contract amount............................... $287,112 $30,180 $148,852
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Three related lawsuits arising out of the same events are currently pending
against the Company.
Shareholder class actions were filed in the California Superior Court for the
County of San Mateo against the Company and its Chief Financial Officer and
Chief Operating Officer on and after December 18, 1997. The same law firms
that filed these actions also filed a nearly identical action against the same
defendants in the United States District Court for the Central District of
California on December 7, 1998. The class actions are all brought on behalf of
purchasers of the stock of the Company during the period April 29, 1997
through December 9, 1997. Plaintiffs allege that the defendants made false and
misleading statements about the Company's actual and expected financial
performance, while selling Company stock, in violation of federal and state
securities laws. Plaintiffs further allege that the individual defendants sold
Company stock while in possession of material non-public information. The
Company believes that it has meritorious defenses to both of these actions and
intends to vigorously defend them.
A shareholder derivative lawsuit was filed in the Superior Court of the State
of California, County of San Mateo on November 17, 1998. The derivative suit
was brought by Company stockholders, allegedly on behalf of the Company,
against certain of the Company's officers and directors. The derivative
plaintiffs allege that these officers and directors breached their fiduciary
duties to the Company by making or causing to be made alleged misstatements
about the Company's revenue, growth, and financial status while certain
officers and directors sold Company stock and by allowing the Company to be
sued in the shareholder class actions. The derivative plaintiffs seek
compensatory and other damages, disgorgement of compensation received, and
temporary and permanent injunctions requiring the defendants to relinquish
their directorships. The Company has not yet responded to the complaint.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated results of operations or
consolidated financial position.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 19, 1998, the Company held its Annual Meeting of Stockholders. At
the meeting, the stockholders elected as directors Lawrence J. Ellison (with
887,511,715 affirmative votes, and 5,099,170 votes withheld), Raymond J. Lane
(with 887,776,634 affirmative votes, and 4,834,251 votes withheld), Jeffrey O.
Henley (with 887,772,640 affirmative votes, and 4,838,245 votes withheld),
Donald L. Lucas (with 887,596,061 affirmative votes, and 5,014,824 votes
withheld), Michael J. Boskin (with 887,074,592 affirmative votes, and
5,536,293 votes withheld), Jack F. Kemp (with 887,411,592 affirmative votes,
and 5,199,293 votes withheld), Jeffrey Berg (with 887,493,280 affirmative
votes, and 5,117,605 votes withheld) and Richard A. McGinn (with 887,210,355
affirmative votes, and 5,400,530 votes withheld).
In addition, the stockholders approved the adoption of the Company's Executive
Officers 1999 Bonus Plan (with 654,272,092 affirmative votes, 22,044,416
negative votes, 3,301,107 votes withheld and 212,993,270 broker non-votes).
The stockholders also approved an amendment to the Company's 1991 Long-Term
Equity Incentive Plan increasing the number of shares of the Company's Common
Stock reserved for issuance thereunder by 50,000,000 shares (with 410,624,899
affirmative votes, 253,774,717 negative votes, 2,969,140 votes withheld and
225,242,129 broker non-votes).
The stockholders also approved an amendment to the Company's Employee Stock
Purchase Plan (1992) increasing the number of shares of the Company's Common
Stock reserved for issuance thereunder by 30,000,000 shares (with 650,334,895
affirmative votes, 26,818,720 negative votes, 2,440,014 votes withheld and
213,017,256 broker non-votes).
The stockholders also ratified the appointment of Arthur Andersen LLP, as the
Company's independent public accountants for fiscal year 1999 (with
889,858,344 affirmative votes, 1,282,036 negative votes and 1,470,505 votes
withheld).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Oracle
Corporation has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORACLE CORPORATION
Dated: December 22, 1998 By: /s/ JEFFREY O. HENLEY
---------------------------------------
Jeffrey O. Henley
Executive Vice President and Chief
Financial Officer
Dated: December 22, 1998 By: /s/ JENNIFER MINTON
---------------------------------------
Jennifer Minton
Vice President and Corporate
Controller
22
<PAGE>
ORACLE CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLES
--------- --------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 1,348,749
<SECURITIES> 559,318
<RECEIVABLES> 1,814,295
<ALLOWANCES> 209,959
<INVENTORY> 13,722
<CURRENT-ASSETS> 4,087,873
<PP&E> 1,907,590
<DEPRECIATION> 930,928
<TOTAL-ASSETS> 5,646,591
<CURRENT-LIABILITIES> 2,252,466
<BONDS> 0
0
0
<COMMON> 9,597
<OTHER-SE> 3,005,713
<TOTAL-LIABILITY-AND-EQUITY> 5,646,591
<SALES> 0
<TOTAL-REVENUES> 2,055,944
<CGS> 0
<TOTAL-COSTS> 779,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 36,806
<INTEREST-EXPENSE> 4,429
<INCOME-PRETAX> 410,721
<INCOME-TAX> 136,645
<INCOME-CONTINUING> 274,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 274,076
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
