<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 August 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-14376
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 number)
</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 September 30,
1999: 1,423,672,462
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ORACLE CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at August 31, 1999 and
May 31, 1999.................................................. 3
Condensed Consolidated Statements of Operations for the three
months ended August 31, 1999 and 1998......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended August 31, 1999 and 1998......................... 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.... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................. 21
Signatures.................................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $1,718,179 $1,785,715
Short-term cash investments............................. 1,003,570 777,049
Trade receivables, net of allowance for doubtful
accounts of $226,013 and $217,096, respectively........ 1,514,095 2,238,204
Other receivables....................................... 161,705 240,792
Prepaid and refundable income taxes..................... 296,471 299,670
Prepaid expenses and other current assets............... 94,561 105,844
---------- ----------
Total current assets................................. 4,788,581 5,447,274
---------- ----------
LONG-TERM CASH INVESTMENTS............................... 208,475 249,547
PROPERTY, net............................................ 966,098 987,482
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $16,502 and $54,381, respectively....... 99,192 98,870
INTANGIBLE AND OTHER ASSETS.............................. 517,053 476,481
---------- ----------
Total assets......................................... $6,579,399 $7,259,654
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt.. $ 3,580 $ 3,638
Accounts payable........................................ 255,369 283,896
Income taxes payable.................................... 157,267 277,700
Accrued compensation and related benefits............... 386,196 693,525
Customer advances and unearned revenues................. 1,089,684 1,007,149
Value added tax and sales tax payable................... 20,735 128,774
Other accrued liabilities............................... 636,491 651,741
---------- ----------
Total current liabilities............................ 2,549,322 3,046,423
---------- ----------
LONG-TERM DEBT........................................... 300,806 304,140
OTHER LONG-TERM LIABILITIES.............................. 71,151 77,937
DEFERRED INCOME TAXES.................................... 157,645 135,887
STOCKHOLDERS' EQUITY..................................... 3,500,475 3,695,267
---------- ----------
Total liabilities and stockholders' equity........... $6,579,399 $7,259,654
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES
Licenses and other...................................... $ 632,181 $ 582,464
Services................................................ 1,352,336 1,166,646
---------- ----------
Total revenues....................................... 1,984,517 1,749,110
---------- ----------
OPERATING EXPENSES
Sales and marketing..................................... 538,426 510,076
Cost of services........................................ 756,750 679,290
Research and development................................ 235,941 187,623
General and administrative.............................. 107,537 94,284
---------- ----------
Total operating expenses............................. 1,638,654 1,471,273
---------- ----------
OPERATING INCOME......................................... 345,863 277,837
Other income (expense), net............................. 18,347 22,166
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES................. 364,210 300,003
Provision for income taxes.............................. 127,474 105,001
---------- ----------
NET INCOME............................................... $ 236,736 $ 195,002
========== ==========
EARNINGS PER SHARE
Basic................................................... $ 0.17 $ 0.13
Diluted................................................. $ 0.16 $ 0.13
SHARES OUTSTANDING
Basic................................................... 1,430,460 1,459,341
Diluted................................................. 1,491,201 1,483,724
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 236,736 $ 195,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 76,813 73,183
Amortization of purchase price in excess of net
tangible assets acquired............................ 18,308 8,223
Provision for doubtful accounts...................... 15,789 19,890
Changes in assets and liabilities:
Decrease in trade receivables....................... 728,991 474,912
Decrease in prepaid and refundable income taxes..... 4,747 5,101
Decrease in prepaid expenses, other receivables and
other current assets............................... 100,253 56,665
Increase (decrease) in accounts payable............. (30,827) 7,527
Decrease in income taxes payable.................... (123,032) (57,815)
Increase in customer advances and unearned
revenues........................................... 70,703 85,402
Decrease in accrued compensation and related
benefits........................................... (313,563) (205,983)
Decrease in value added tax and sales tax payable... (109,442) (91,048)
Increase (decrease) in other accrued liabilities.... (11,155) 33,139
Decrease in other long-term liabilities............. (6,879) (1,311)
Decrease in deferred income taxes................... (1,326) (5,319)
---------- ----------
Net cash provided by operating activities............. 656,116 597,568
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of cash investments........................ (579,526) (252,847)
Proceeds from maturities of cash investments......... 394,073 214,128
Capital expenditures................................. (54,892) (88,319)
Capitalization of computer software development
costs............................................... (3,807) (7,140)
Increase in intangible and other assets.............. (8,875) (40,265)
---------- ----------
Net cash used for investing activities................ (253,027) (174,443)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under notes payable and long-term
debt................................................ (3,632) 920
Payment of capital leases............................ -- (378)
Proceeds from common stock issued.................... 87,190 20,696
Repurchase of common stock........................... (579,895) (81,064)
---------- ----------
Net cash used for financing activities................ (496,337) (59,826)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................ 25,712 (8,897)
---------- ----------
Net increase (decrease) in cash and cash equivalents.. (67,536) 354,402
CASH AND CASH EQUIVALENTS
Beginning of period................................... 1,785,715 1,273,681
---------- ----------
End of period......................................... $1,718,179 $1,628,083
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("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, 1999.
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 three month period ended August 31, 1999. The results for the three
month period ended August 31, 1999 are not necessarily indicative of the
results expected for the full fiscal year.
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
August 31,
---------------------
1999 1998
(in thousands, except per share data) ---------- ----------
<S> <C> <C>
Net income......................................... $ 236,736 $ 195,002
========== ==========
Weighted-average shares outstanding................ 1,430,460 1,459,341
Dilutive effect of employee stock options and
employee stock purchase plan...................... 60,741 24,383
---------- ----------
Diluted shares outstanding......................... 1,491,201 1,483,724
========== ==========
Basic earnings per share........................... $ 0.17 $ 0.13
Diluted earnings per share......................... $ 0.16 $ 0.13
</TABLE>
3. COMPREHENSIVE 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 stockholders' equity. The
following table sets forth the calculation of comprehensive income on an
interim basis:
<TABLE>
<CAPTION>
Three Months
Ended
August 31,
-----------------
1999 1998
(in thousands) -------- --------
<S> <C> <C>
Net income............................................ $236,736 $195,002
Foreign currency translation gains (losses)........... 29,175 (10,946)
Unrealized losses on equity securities on equity
securities........................................... -- (62)
-------- --------
Total comprehensive income............................ $265,911 $183,994
======== ========
</TABLE>
6
<PAGE>
4. SUBSIDIARY STOCK TRANSACTIONS
In July 1999, Liberate Technologies, a partially owned subsidiary, issued and
sold 6,250,000 shares of Common Stock at approximately $16 per share in an
initial public offering. In connection with this offering, Liberate received
cash proceeds of $103,325,000, net of issuance costs of $9,175,000. The
Company's ownership interest in Liberate was reduced from 59.20% to 48.24%
following the offering. As a result of the offering, the Company recorded an
unrealized gain net of tax of $32,045,000 in stockholders' equity in the first
quarter of fiscal 2000. In addition, effective July 1st, the Company began to
account for its ownership interest in Liberate Technologies using the equity
method of accounting.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards ("SFAS") 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, 2000 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.
6. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in fiscal 1999. SFAS No. 131 established standards
for reporting information about operating segments in the Company's financial
statements. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision maker is the Chief Executive Officer of the Company.
The Company is organized geographically and by line of business. The Company
has four major line of business operating segments: license, support,
education and consulting. While the Chief Executive Officer of the Company
evaluates results in a number of different ways, the line of business
management structure is the primary basis for which he assesses financial
performance and allocates resources.
The accounting policies of the line of business operating segments are the
same as those described in the Company's form 10-K for the fiscal year ended
May 31, 1999. The Company does not track assets by operating segments.
Consequently, it is not practical to show assets by operating segments.
7
<PAGE>
The following table presents a summary of operating segments:
<TABLE>
<CAPTION>
Other
Distribution
License Support (4) Education Consulting Expenses (2) Total
(in thousands) -------- ----------- --------- ---------- ------------ ----------
Three Months Ended
August 31, 1999
- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated customers
(1).................... $623,676 $667,041 $117,116 $576,684 $ -- $1,984,517
Distribution expenses
(5).................... 423,076 184,066 82,855 478,401 192,837 1,361,235
-------- -------- -------- -------- --------- ----------
Distribution margin
(3).................... $200,600 $482,975 $ 34,261 $ 98,283 $(192,837) $ 623,282
======== ======== ======== ======== ========= ==========
<CAPTION>
August 31, 1998
- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated customers
(1).................... $576,397 $524,084 $111,996 $536,633 $ -- $1,749,110
Distribution expenses
(5).................... 406,099 135,752 93,225 437,605 153,929 1,226,610
-------- -------- -------- -------- --------- ----------
Distribution margin
(3).................... $170,298 $388,332 $ 18,771 $ 99,028 $(153,929) $ 522,500
======== ======== ======== ======== ========= ==========
</TABLE>
- --------
(1) Operating segment revenues differ from the external reporting
classification due to certain license products which are classified as
services revenues for management reporting purposes.
(2) Other distribution expenses consist primarily of marketing, general and
administrative and other distribution expenses that are not directly
controlled by any particular line of business.
(3) The distribution margins reported reflect only the direct controllable
expenses of the line of business and do not represent the actual margins
for each operating segment since they do not contain an allocation for
marketing, general and administrative, corporate, development and other
expenses incurred in support of the line of business.
(4) Support includes update rights which, in certain sectors of the software
industry such as the "shrink wrap sector," would typically be classified
as license revenue.
(5) Certain functional areas managed by the lines of business in fiscal 1999
were, for management purposes, transferred to the corporate or development
organizations in fiscal 2000. As a result, line of business distribution
expenses for the first quarter of fiscal 2000 are not in all cases
comparable to the corresponding period in fiscal 1999.
Profit Reconciliation:
<TABLE>
<CAPTION>
Three Months
Ended
August 31,
------------------
1999 1998
(in thousands) -------- --------
<S> <C> <C>
Total distribution margin for reportable segments...... $623,282 $522,500
Corporate, development and other expenses.............. (277,419) (244,663)
Other income........................................... 18,347 22,166
-------- --------
Income before provision for income taxes........... $364,210 $300,003
======== ========
</TABLE>
7. LITIGATION
Refer to Part II, Item 1 for a description of legal proceedings.
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
8
<PAGE>
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, 1999 and the Quarterly Reports on Form 10-Q filed by the
Company in fiscal 2000.
Results of Operations
Total revenues increased 13% (14% in local currency) in the first quarter of
fiscal 2000 as compared to the corresponding period in fiscal 1999. Domestic
revenues increased 8% in the first quarter of fiscal 2000, while international
revenues increased 20% (21% in local currency) as compared to the
corresponding period in fiscal 1999. Revenues from international customers
were approximately 51% and 48% of total revenues in the first quarters of
fiscal 2000 and 1999, 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 strengthens against certain major international currencies.
REVENUES:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------------
1999 Change 1998
(in thousands) ---------- ------ ----------
<S> <C> <C> <C>
Licenses and other............................ $ 632,181 9% $ 582,464
Percentage of revenues........................ 31.9% 33.3%
Services...................................... $1,352,336 16% $1,166,646
Percentage of revenues........................ 68.1% 66.7%
---------- ----------
Total revenues.............................. $1,984,517 13% $1,749,110
========== ==========
</TABLE>
Licenses and Other Revenues. License revenues represent fees earned for
granting customers licenses to use the Company's software products. Licenses
and other revenues also include revenues from the Company's documentation
revenues and other miscellaneous revenues, which constituted 5% and 4% of
total license and other revenues in the first quarters of fiscal 2000 and
1999, respectively. License revenues, excluding other revenues, grew 8% and
10% in the first quarters of fiscal 2000 and 1999, respectively. Systems
license revenues, which include server and tools revenues, grew 7% and 13% in
the first quarters of fiscal 2000 and 1999, respectively. Applications
revenues grew 11% and 0% in the first quarters of fiscal 2000 and 1999,
respectively. The overall license revenue growth rate was adversely affected
by a sales force reorganization in the U.S., relatively lower license
transaction closure rates in the first quarter of fiscal 2000 than those
experienced in prior periods and continued weak demand in the Enterprise
Resource Planning segment of the Applications market, partially offset by
strong growth in the Customer Relationship Management segment of the
Applications market.
Services Revenues. Services revenues consist of support, consulting and
education services revenues which comprised 49%, 43% and 8% of total services
revenues, respectively, during the first quarter of fiscal 2000. Support
revenues grew 27% and 30% in the first quarters of fiscal 2000 and 1999,
respectively. Consulting services revenues grew 7% and 54% in the first
quarters of fiscal 2000 and 1999, respectively. Education services revenues
grew 4% and 23% in the first quarters of fiscal 2000 and 1999, respectively.
The decrease in the support revenues growth rate is primarily attributed to
the decrease in the license revenue growth rate experienced in the last
several quarters. While the support revenue growth rate has slowed, support
revenues overall have increased, reflecting the continued increase in the
installed base of the Company's products under support contracts. Support
revenues growth rates will continue to be affected by the overall license
revenue growth rates. The sharp declines in the consulting and education
services revenue growth rates are primarily due to the decrease in the
application
9
<PAGE>
license revenue growth rates in fiscal 1999 as compared to the corresponding
period in fiscal 1998. The consulting and education revenue growth rates are
expected to continue to decline in the second quarter of fiscal 2000 as
compared to the prior year corresponding period.
OPERATING EXPENSES:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------------
1999 Change 1998
(in thousands) -------- ------ --------
<S> <C> <C> <C>
Sales and marketing.............................. $538,426 6% $510,076
Percentage of revenues........................... 27.1% 29.2%
Cost of services................................. $756,750 11% $679,290
Percentage of revenues........................... 38.1% 38.8%
Research and development (1)..................... $235,941 26% $187,623
Percentage of revenues........................... 11.9% 10.7%
General and administrative....................... $107,537 14% $ 94,284
Percentage of revenues........................... 5.4% 5.4%
</TABLE>
- --------
(1) Pursuant to SFAS No. 86, the Company capitalized software development
costs equal to 0.2% and 0.4% of total revenues during the first quarters
of fiscal 2000 and 1999, respectively.
International expenses were favorably affected in the first quarter of fiscal
2000 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 6% and 13%
in the first quarters of fiscal 2000 and 1999, respectively. Sales and
marketing expenses as a percentage of both total revenues and license revenues
decreased in the first quarter of fiscal 2000 when compared to the
corresponding period in fiscal 1999. The decrease was due to efficiencies and
controls over headcount and headcount related expenditures and revisions made
in the first quarter of fiscal 2000 to certain prior fiscal year accruals that
resulted from changes in the amounts of estimated liabilities required.
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 56% and 58% in the first quarters of
fiscal 2000 and 1999, respectively. The decrease in the cost of services as a
percentage of services revenues was due primarily to efficiencies and controls
over headcount and headcount related expenses.
Research and Development Expenses. Research and development expenses would
have been 12% and 11% of total revenues in the first quarters of fiscal 2000
and 1999, respectively, without the capitalization of software development
costs in accordance with SFAS No. 86. Before considering the impact of
software capitalization, research and development expenses increased 23% and
19% in the first quarters of fiscal 2000 and 1999, respectively (26% and 18%,
respectively, after the adjustment for software capitalization). The higher
expense growth rate in the first quarter of fiscal 2000 as compared to the
first quarter of fiscal 1999 was due to increases in research and development
headcount throughout fiscal 1999. The Company capitalized $3,807,000 and
$7,140,000 of computer software development costs in the first quarters of
fiscal 2000 and 1999, respectively. Amortization of capitalized software
development costs is charged to sales and marketing expenses and totaled
$3,485,000 and $7,321,000 in the first quarters of fiscal 2000 and 1999,
respectively. 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.
10
<PAGE>
General and Administrative Expenses. General and administrative expenses as a
percentage of revenues were 5% in the first quarters of fiscal 2000 and 1999.
OTHER INCOME (EXPENSE), NET:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
-----------------------
1999 Change 1998
(in thousands) ------- ------ -------
<S> <C> <C> <C>
Other income (expense), net....................... $18,347 (17%) $22,166
Percentage of revenues............................ 0.9% 1.3%
</TABLE>
Changes in non-operating income (expense), net 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.
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------------
1999 Change 1998
(in thousands) -------- ------ --------
<S> <C> <C> <C>
Provision for income taxes....................... $127,474 21% $105,001
Percentage of revenues........................... 6.4% 6.0%
</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 was 35% in the first
quarters of fiscal 2000 and 1999.
NET INCOME AND EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
------------------------
1999 Change 1998
(in thousands, except per share data) -------- ------ --------
<S> <C> <C> <C>
Net income........................................ $236,736 21% $195,002
Percentage of revenues............................ 11.9% 11.1%
Earnings per share
Basic............................................ $ 0.17 31% $ 0.13
Diluted.......................................... $ 0.16 23% $ 0.13
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
-----------------------------
1999 Change 1998
(in thousands) ---------- ------ ----------
<S> <C> <C> <C>
Working capital............................ $2,239,259 18% $1,899,611
Cash and cash investments.................. $2,930,224 17% $2,498,831
Cash provided by operating activities...... $ 656,116 10% $ 597,568
Cash used for investing activities......... $ (253,027) 45% $ (174,443)
Cash used for financing activities......... $ (496,337) * $ (59,826)
</TABLE>
- --------
* Not meaningful
Working capital increased in the first quarter of fiscal 2000 over the
corresponding period in fiscal 1999, due primarily to increased cash flow from
operations, which resulted in higher cash and cash investment levels.
11
<PAGE>
The Company generated higher positive cash flows from operations in the first
quarter of fiscal 2000 over fiscal 1999, due primarily to improved
profitability and higher cash collections.
Cash used for investing activities increased in the first quarter of fiscal
2000 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 274,000,000 shares of Common Stock (split adjusted) on the
open market to reduce the dilutive effect of the Company's stock plans.
Pursuant to this repurchase program, the Company repurchased 19,513,000 shares
of the Company's Common Stock for approximately $579,895,000 in the first
quarter of fiscal 2000. As of August 31, 1999, the Company has purchased a
total of 180,418,824 shares for approximately $2,998,613,000. The Company has
used cash flow from operations 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 August 31, 1999, the
Company also had other outstanding debt of approximately $3,581,000, primarily
in the form of other notes payable and capital leases.
The Company, as part of its authorized stock repurchase program, has sold put
warrants and purchased call options through private placements with
institutional investors. The transactions were exempt under Section 4(2) of
the Securities Act of 1933. 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. As of August 31,
1999, the Company had a maximum potential obligation under the put warrants to
buy back 25,220,000 shares of its Common Stock for prices ranging from $14.54
to $19.57 per share for an aggregate price of approximately $448,927,000. The
put warrants will expire at various dates through October 2000. As of August
31, 1999, the Company had the right to purchase under the call options up to a
maximum of 12,610,000 shares of its Common Stock at prices ranging from $17.46
to $26.67 per share for an aggregate price of approximately $291,816,000. The
call options will expire at various dates through October 2000. During the
first quarter of fiscal 2000, the Company exercised call options for 7,458,000
shares at an average price of $16.94.
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 may result in decreased revenues or lower growth
rates. 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 the Customer Relationship Management area of its
applications business where the market is growing more quickly than in the
Enterprise Resource Planning area. There can be no assurances that the Company
will be able to effectively promote future license revenue growth in its
applications business.
12
<PAGE>
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 was 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 continues
to review certain provisions of SOP No. 97-2, with the objective of providing
additional guidance on implementing its provisions. Depending upon the outcome
of these reviews and the issuance of implementation guidelines and
interpretations, the Company may be required to change its revenue recognition
policies and business practices, and such changes could have a material
adverse effect on the Company's business, results of operations or financial
position.
Competitive Environment. The computer software industry is an intensely
competitive industry with several large vendors that develop and market
databases, application development tools, business applications and business
intelligence 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 position. 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 or to sell other software or hardware
products. 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. Changes in the customer's use of the Company's products could
also result in lower license revenues if the Company's pricing model is not
adapted to such usage. 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.
Additionally, while the distribution of applications through application
service providers may provide a new market for the Company's products, these
new distribution methods could also reduce the price paid for the Company's
products or adversely affect other sales of the Company's products. 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
position if the Company cannot offset these price reductions with a
corresponding increase in sales volumes or lower spending.
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 becoming more intense due to lower overall unemployment
rates, the boom in information technology spending and private companies that
can offer equity incentives that provide the potential of greater compensation
in connection with an initial public offering. 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.
International Sales. A substantial portion of the Company's revenues is
derived from international sales and is therefore subject to the related
risks, including the general economic conditions in each country, the overlap
of
13
<PAGE>
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, longer payment cycles and
volatilities of exchange rates in certain 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.
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 quarter of fiscal 2000, particularly in Europe
and Latin America, and will continue to do so throughout fiscal 2000 if the
U.S. dollar strengthens relative to foreign 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.
Year 2000. This section is a Year 2000 Readiness Disclosure pursuant to the
Year 2000 Information and Readiness Disclosure Act of 1998.
The Company has established a program to address the impact of the year 2000
date transition on its operations globally. In 1997, the Company established a
year 2000 program office, and a Global Program Manager was appointed to
coordinate existing projects and to oversee management and execution of the
Company's plan to address year 2000. The year 2000 program is sponsored by the
Chief Financial Officer; the Senior Vice President, Global, IT/Data Center;
and the General Counsel of the Company. This executive steering committee
regularly reviews progress with the Global Program Manager. Status is reported
regularly to the Finance and Audit Committee of the Company's Board of
Directors and the Product Development Management Committee.
State of Year 2000 Readiness. The Company believes it has adopted standard
industry practices in preparing its internal operations for the year 2000 date
change. The Company's year 2000 internal readiness program covers several
phases: 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. Action plans generally
consist of assessing the year 2000 readiness of systems; repairing, replacing,
or retiring systems that are not year 2000 ready, or retaining low-risk
systems; and testing repaired or replaced systems. The readiness program
encompasses information technology hardware and software systems such as
communications systems, desktop PCs, and custom-built software programs, as
well as systems with embedded technology, such as power generators,
temperature controls, alarms, security systems, and elevators.
As part of the above year 2000 program, the Company addresses certain third-
party vendors. Certain third-party services or products are critical to the
continued day-to-day operation of the Company, including telecommunications
services, electric power and other utilities, and shipping services. If such a
vendor suffers a business interruption from the year 2000 date change, it
could cause the Company to also suffer a business interruption. The Company
has asked vendors to certify the year 2000 readiness of the products and
services they supply, as well as their own internal compliance programs. If
the Company determines that a vendor's product will not be compliant, or that
the cost of a compliant solution is excessive, alternative solutions are
developed. In addition, the Company monitors the year 2000 compliance status
of third-party hardware and software products and will implement any required
year 2000 patches or updates that those vendors issue in the future.
The Company has substantially completed year 2000 readiness preparations as of
the end of June 1999, although the remediation of several internal IT systems
has been delayed until October 1999. Extensive testing will
14
<PAGE>
continue throughout 1999. The status of the Company's readiness efforts, as
described above, is as follows: inventory--substantially complete; risk
assessment--substantially complete; readiness assessment of systems--
substantially complete; repair or replacement--substantially completed as of
the end of June 1999, with exceptions noted above; testing--substantially
completed as of the end of June 1999, but expected to continue throughout
calendar year 1999; contingency planning--expected to be complete by the end
of October 1999.
Costs of Addressing Year 2000 Issues. The Company is continually upgrading and
improving its information technology systems and facilities, and the costs of
addressing year 2000 issues are integrated into the budgets for each line of
business, and systems and facilities upgrade activities. The Company therefore
cannot provide any estimate as to costs, if any, it has incurred in addressing
year 2000 issues above and beyond those costs associated with its upgrade
program. In addition, the Company anticipates that it will incur significant
costs in connection with its contingency planning, but such costs cannot be
estimated until the contingency plan is complete. However, the Company does
not believe that any such additional costs will have a material impact on its
results of operations or financial position.
Risks Associated with Year 2000 Issues. A significant amount of the demand the
Company has experienced in recent years for applications software may have
been generated by customers replacing and upgrading applications in order to
accommodate the year 2000 date change. 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. Thus, the software industry
and the Company may experience a significant deceleration from the strong
annual growth rates historically experienced in the applications software
marketplace and a decline in sales of its products generally.
The Company has designed and tested the most current versions of its products
to be year 2000 compliant. Further, the Company's Applications division has
successfully completed the Information Technology Association of America's
year 2000 certification program. There can be no assurances, however, that the
Company's current products do not contain undetected year 2000 defects. The
most reasonably likely worst case scenarios caused by such a defect would
include the partial failure of a widely-sold Company product that is of
mission-critical importance to the Company's customers. Such a scenario could
expose the Company to litigation that could have a material adverse impact on
the Company. Some commentators have stated that a significant amount of
litigation will arise out of year 2000 compliance issues. However, because of
the unprecedented nature of such litigation, it is uncertain to what extent
the Company could be affected by it.
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 caused
by undetected year 2000 defects in its internal systems, including third party
software and hardware products. The most reasonably likely worst case
scenarios would include: (i) corruption of data contained in the Company's
internal information systems, and (ii) failure of hardware, software, or other
information technology systems, causing an interruption or failure of normal
business operations. Such a scenario could have a material adverse impact on
the Company. In addition, there can be no assurances that the Company will not
experience serious unanticipated negative consequences caused by the failure
of services provided by third parties, such as electrical power,
telecommunications services, and shipping services. Due to the impossibility
of knowing what failures generally will result from the year 2000 date change
(particularly outside of countries such as the United States where year 2000
remediation has progressed the furthest), and what effects such failures could
have on third party vendors, the Company is unable to assess the likelihood of
a material adverse impact on its results of operations, liquidity, or
financial position due to such year 2000 failures.
Contingency Planning. The Company has developed a Customer Service Continuity
Program ("CSC Program") to enable it to continue providing customer support
during late 1999 and early 2000 should there be an increase in calls to
customer support from customers seeking Year 2000 product information,
information on migrating from older, non-compliant products to compliant
products, or assistance in handling other Year 2000 issues, or should the
Company experience Year 2000-related failures. As part of the CSC Program, the
15
<PAGE>
Company's regional divisions are creating Millennium Operating Regimes ("MOR")
to identify and assess possible Year 2000 risk scenarios that may impact the
Company, and to develop operating procedures for the period from October 1999
through March 2000. Each MOR will adopt risk reduction measures if possible,
and if an identified risk cannot be reduced to an acceptable level, the MOR
will develop a contingency plan. The majority of the identified risks relate
to items that are outside the Company's control, such as power, external
communication networks, and supply chains. The Company expects to complete any
such contingency plans by the end of October 1999. The Company does not expect
that the costs of implementing the CSC Program will have a material adverse
impact on its results of operations.
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 have
historically caused and 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.
Management of Growth. The Company has a history of rapid growth. However, the
Company has experienced slowing growth rates in a number of areas, including
consulting and education services. 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
position.
Sales Force Restructuring and Vertical Markets. The Company historically has
relied heavily on its direct sales force. For the past several years, the
Company has restructured or made other adjustments to its sales force at least
once a year. These changes have generally resulted in a temporarily lack of
focus and reduced productivity by the Company's sales force that may have
affected revenues in a quarter. There can be no assurances that the Company
will not continue to restructure its sales force or that the related
transition issues associated with restructuring the sales force will not
recur.
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 possibility that the Company pays much more than the acquired
company or assets are worth, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential product liability
associated with the sale of the acquired company's products (including without
limitation year 2000 claims), 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 position, particularly in the case of a larger
acquisition. Consideration paid for future acquisitions, if
16
<PAGE>
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. 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 position.
Significant undetected errors or delays in new products or new versions of a
product, especially in the area of CRM, 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 position. 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 position.
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.
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, 2000 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. Despite tremendous growth in emerging areas
such as the Internet, on-line services and electronic commerce, the impact on
the Company of this growth 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 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 lower cost of ownership
17
<PAGE>
of Internet computing relative to client/server architecture, (ii) the ease of
use and administration relative to client/server architecture, and (iii) how
hardware and software vendors choose to compete in this market. 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. The Company relies
on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect its
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. There can also be no assurances that the Company's
intellectual property rights would survive a legal challenge to their validity
or provide significant protection for the Company. 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 grow and
the functionality of products overlaps. In addition, the Company expects to
receive more patent infringement claims as companies increasingly seek to
patent their software, especially in light of recent developments in the law
that extend the ability to patent software. 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 position 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.
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<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 August 31, 1999.
Table of Investment Securities:
<TABLE>
<CAPTION>
Principal Average
Amount Interest Rate
(in thousands) ---------- -------------
<S> <C> <C>
Cash and cash equivalents......................... $1,718,179 5.06%
Short term investments (0-1 years)................ $1,003,570 5.49%
Long term investments (1-2 years)................. $ 208,475 5.59%
----------
Total cash and investment securities.............. $2,930,224
==========
</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 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. 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 on the outstanding forward contracts at August 31, 1999 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.
See Note 3 in the Notes to Condensed Consolidated Financial Statements for
further discussion.
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<PAGE>
The Company's outstanding forward contracts and equity hedges as of August 31,
1999 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 August 31, 1999.
Table of Forward Contracts:
<TABLE>
<CAPTION>
Notional
Notional Weighted Average
Functional Currency Amount Exchange Rate
------------------- ------------ ----------------
<S> <C> <C>
Australian Dollar.............................. $ 1,329,321 0.63
Canadian Dollar................................ 47,582,029 1.49
Danish Krone................................... 4,712,109 7.07
Euro........................................... 126,977,328 1.05
Irish Punt..................................... 2,403,330 1.34
Japanese Yen................................... 11,704,638 110.17
New Zealand Dollar............................. 6,420,375 0.51
Norwegian Krone................................ 8,013,867 7.96
Singapore Dollar............................... 30,342,850 1.67
Swedish Krona.................................. 35,183,464 8.28
Swiss Franc.................................... 10,301,449 1.51
Thai Baht...................................... 9,819,324 38.19
UK Pound....................................... 134,268,388 1.59
------------
Total.......................................... $429,058,472
============
</TABLE>
Table of Equity Hedges:
<TABLE>
<CAPTION>
Notional
Notional Weighted Average
Functional Currency Amount Exchange Rate
------------------- ----------- ----------------
<S> <C> <C>
Japanese Yen.................................... 40,266,271 116.72
Singapore Dollars............................... 17,067,912 1.67
Swedish Krona................................... 4,759,808 8.40
UK Pound........................................ 4,829,040 1.61
-----------
Total........................................... $66,923,031
===========
</TABLE>
Equity Price Risk. The Company, as part of its authorized stock repurchase
program, has sold put warrants and purchased call options through private
placements with institutional investors. The transactions were exempt under
Section 4(2) of the Securities Act of 1933. 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. As
of August 31, 1999, the Company had a maximum potential obligation under the
put warrants to buy back 25,220,000 shares of its Common Stock for prices
ranging from $14.54 to $19.57 per share for an aggregate price of
approximately $448,927,000. The put warrants will expire at various dates
through October 2000. As of August 31, 1999, the Company had the right to
purchase under the call options up to a maximum of 12,610,000 shares of its
Common Stock at prices ranging from $17.46 to $26.67 per share for an
aggregate price of approximately $291,816,000. The call options will expire at
various dates through October 2000. During the first quarter of fiscal 2000,
the Company exercised call options for 7,458,000 shares at an average price of
$16.94.
20
<PAGE>
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 August 31, 1999.
<TABLE>
<CAPTION>
1999 2000 Estimated
Maturity Maturity Fair Value
(in thousands, except stock prices) -------- -------- ----------
<S> <C> <C> <C>
Put Warrants:
Shares........................................ 8,220 17,000
Weighted average stock price.................. $ 15.28 $ 19.02
Contract amount............................... $125,625 $323,302 $ 6,856
Call Options:
Shares........................................ 4,110 8,500
Weighted average stock price.................. $ 18.38 $ 25.44
Contract amount............................... $ 75,536 $216,280 $204,746
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Shareholder class actions were filed in the Superior Court of the State of
California, County of San Mateo against the Company and its Chief Financial
Officer and Chief Operating Officer on and after December 18, 1997. The class
actions are 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
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 these
actions and intends to vigorously defend them. A nearly identical class action
filed against the same defendants in the United States District Court for the
Central District of California on December 7, 1998 was voluntarily dismissed
by the plaintiffs by court order dated July 30, 1999.
A related 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 state 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. On January 15, 1999, the Court entered a stipulation and
order staying the action until further notice.
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.
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: October 15, 1999 By: /s/ JEFFREY O. HENLEY
---------------------------------------
Jeffrey O. Henley
Executive Vice President and Chief
Financial Officer
Dated: October 15, 1999 By: /s/ JENNIFER L. MINTON
---------------------------------------
Jennifer L. 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>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 1,718,179
<SECURITIES> 1,003,570
<RECEIVABLES> 1,740,108
<ALLOWANCES> 226,013
<INVENTORY> 9,422
<CURRENT-ASSETS> 4,788,581
<PP&E> 2,063,473
<DEPRECIATION> 1,097,375
<TOTAL-ASSETS> 6,579,399
<CURRENT-LIABILITIES> 2,549,322
<BONDS> 0
0
0
<COMMON> 14,177
<OTHER-SE> 3,486,298
<TOTAL-LIABILITY-AND-EQUITY> 6,579,399
<SALES> 0
<TOTAL-REVENUES> 1,984,517
<CGS> 0
<TOTAL-COSTS> 756,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,789
<INTEREST-EXPENSE> 4,885
<INCOME-PRETAX> 364,210
<INCOME-TAX> 127,474
<INCOME-CONTINUING> 236,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,763
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.16
</TABLE>
