<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 February 28, 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 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 February 28,
1999: 1,439,477,778
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 February 28, 1999 and
May 31, 1998................................................... 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28, 1999 and 1998........ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended February 28, 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..... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 24
Item 6. Exhibits and Reports on Form 8-K............................... 24
Signatures..................................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
February May 31,
28, 1999 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $1,504,176 $1,273,681
Short-term cash investments............................. 684,685 645,518
Trade receivables, net of allowance for doubtful
accounts of $196,606 and $195,609, respectively........ 1,563,853 1,857,480
Prepaid and refundable income taxes..................... 312,695 260,624
Other current assets.................................... 271,060 285,747
---------- ----------
Total Current Assets................................. 4,336,469 4,323,050
---------- ----------
LONG-TERM CASH INVESTMENTS............................... 302,121 186,511
PROPERTY, net............................................ 978,143 934,350
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $50,547 and $37,473..................... 98,990 99,012
INTANGIBLES AND OTHER ASSETS............................. 386,605 276,088
---------- ----------
Total Assets......................................... $6,102,328 $5,819,011
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt.. $ 2,603 $ 2,924
Accounts payable........................................ 255,388 239,698
Income taxes............................................ 137,107 181,354
Accrued compensation and related benefits............... 442,224 541,809
Customer advances and unearned revenues................. 817,895 877,087
Value added tax and sales tax payable................... 60,602 119,600
Other accrued liabilities............................... 561,994 521,693
---------- ----------
Total Current Liabilities............................ 2,277,813 2,484,165
---------- ----------
LONG-TERM DEBT........................................... 304,138 304,337
OTHER LONG-TERM LIABILITIES.............................. 71,840 57,095
DEFERRED INCOME TAXES.................................... 106,888 15,856
STOCKHOLDERS' EQUITY..................................... 3,341,649 2,957,558
---------- ----------
Total Liabilities and Stockholders' Equity........... $6,102,328 $5,819,011
========== ==========
</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 Nine Months Ended
February 28, February 28,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Licenses and other................ $ 825,738 $ 774,521 $2,175,631 $1,950,529
Services.......................... 1,253,181 974,236 3,708,343 2,780,784
---------- ---------- ---------- ----------
Total Revenues................. 2,078,919 1,748,757 5,883,974 4,731,313
---------- ---------- ---------- ----------
OPERATING EXPENSES
Sales and marketing............... 566,756 567,619 1,668,586 1,545,560
Cost of services.................. 792,023 586,398 2,251,160 1,603,196
Research and development.......... 209,798 184,106 598,099 526,990
General and administrative........ 103,663 92,361 299,546 249,258
Acquired in-process research and
development...................... -- -- -- 167,054
---------- ---------- ---------- ----------
Total Operating Expenses....... 1,672,240 1,430,484 4,817,391 4,092,058
---------- ---------- ---------- ----------
OPERATING INCOME................... 406,679 318,273 1,066,583 639,255
Other income, net................. 37,656 12,615 88,475 68,837
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................. 444,335 330,888 1,155,058 708,092
Provision for income taxes........ 151,074 115,811 392,720 297,220
---------- ---------- ---------- ----------
NET INCOME......................... $ 293,261 $ 215,077 $ 762,338 $ 410,872
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic............................. $ 0.20 $ 0.15 $ 0.53 $ 0.28
Diluted........................... $ 0.20 $ 0.14 $ 0.51 $ 0.27
SHARES OUTSTANDING:
Basic............................. 1,440,352 1,462,421 1,448,484 1,468,361
Diluted........................... 1,495,461 1,487,462 1,484,697 1,503,233
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
--------------------
1999 1998
---------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 762,338 $410,872
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 233,918 210,979
Amortization of purchase price in excess of net
tangible assets acquired.............................. 35,720 29,656
Write-off of acquired in-process research and
development........................................... -- 167,054
Provision for doubtful accounts........................ 65,311 63,686
Gain on sale of subsidiary stock....................... (24,457) --
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease in trade receivables......................... 227,465 119,901
(Increase) decrease in prepaid and refundable income
taxes................................................ (52,138) 10,375
Decrease in other current assets...................... 14,492 1,100
Increase in accounts payable.......................... 15,786 20,897
Decrease in income taxes.............................. (44,096) (105,359)
Increase (decrease) in customer advances and unearned
revenues............................................. (58,790) 75,352
Decrease in accrued compensation and related
benefits............................................. (99,328) (86,981)
Decrease in value added tax and sales tax payable..... (58,927) (45,423)
Increase in other accrued liabilities................. 46,087 59,219
Increase in other long-term liabilities............... 350 32,347
Increase in deferred income taxes..................... 7,304 15,262
---------- --------
Net cash provided by operating activities............... 1,071,035 978,937
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in cash investments........................... (154,777) (182,698)
Capital expenditures................................... (258,959) (240,581)
Capitalization of computer software development costs.. (24,186) (29,863)
Proceeds from sale of subsidiary stock................. 24,969 --
Increase in intangibles and other assets............... (147,480) (179,113)
---------- --------
Net cash used for investing activities.................. (560,433) (632,255)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under notes payable and long-term debt.. (915) 13,779
Proceeds from common stock issued...................... 220,686 121,209
Proceeds from subsidiary offering...................... 248,811 --
Repurchase of common stock............................. (747,932) (372,075)
---------- --------
Net cash used for financing activities.................. (279,350) (237,087)
---------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................. (757) (22,261)
---------- --------
Net increase in cash and cash equivalents............... 230,495 87,334
CASH AND CASH EQUIVALENTS
Beginning of period..................................... 1,273,681 890,162
---------- --------
End of period........................................... $1,504,176 $977,496
========== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock dividend.................................. $ 4,805 $ 3,266
========== ========
</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. 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 nine month period ended February 28, 1999. The results for the nine
month period ended February 28, 1999 are not necessarily indicative of the
results expected for the full fiscal year.
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 responded to comments raised by 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. As a result of these discussions, the Company was requested by the SEC
to expand its disclosures regarding the aforementioned acquisitions in its
February 28, 1999 Form 10-Q. The Company has complied with the SEC's request,
and has expanded its disclosures regarding these acquisitions in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company was not required to change its previous accounting for
these acquisitions.
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.
On February 26, 1999, the Company effected a three-for-two stock split in the
form of a common stock dividend in the third quarter to stockholders of record
as of February 10, 1999. All per share data and numbers of common shares,
where appropriate, have been retroactively adjusted to reflect the stock
split.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
Feb. 28, Feb. 28, Feb. 28, Feb. 28,
(In thousands, except per share 1999 1998 1999 1998
data) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income..................... $ 293,261 $ 215,077 $ 762,338 $ 410,872
========== ========== ========== ==========
Weighted average shares
outstanding................... 1,440,352 1,462,421 1,448,484 1,468,361
Dilutive effect of employee
stock options and employee
stock purchase plan........... 55,109 25,041 36,213 34,872
---------- ---------- ---------- ----------
Diluted shares outstanding..... 1,495,461 1,487,462 1,484,697 1,503,233
========== ========== ========== ==========
Basic Earnings Per Share....... $ 0.20 $ 0.15 $ 0.53 $ 0.28
Diluted Earnings Per Share..... $ 0.20 $ 0.14 $ 0.51 $ 0.27
</TABLE>
6
<PAGE>
3. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," requires companies to report in their annual financial statements 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 on an interim basis:
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
------------------ ------------------
Feb. 28, Feb. 28, Feb. 28, Feb. 28,
1999 1998 1999 1998
(In thousands) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income......................... $293,261 $215,077 $762,338 $410,872
Foreign Currency Translation
Losses............................ (8,893) (14,079) (2,153) (23,529)
Unrealized Gains (Losses) on Equity
Securities........................ (7) 6 (26) 6
-------- -------- -------- --------
Total Comprehensive Income......... $284,361 $201,004 $760,159 $387,349
======== ======== ======== ========
</TABLE>
4. SUBSIDIARY STOCK TRANSACTIONS
During November 1997, Oracle Corporation Japan ("Oracle Japan"), a majority-
owned subsidiary of the Company issued and sold 944,200 new shares of its
common stock at approximately $26 per share to a third party. As part of the
stock purchase agreement, the third party was given an option to put these
shares to the Company in the event that an initial public offering did not
take place before December 1999. The put price was equal to the purchase price
plus interest, as defined in the stock purchase agreement. As a result of the
original put option, the Company recorded the proceeds from the sale as
minority interest. In conjunction with the initial public offering of Oracle
Japan, discussed in the following paragraph, the put option expired and the
Company recorded a credit to equity in the amount of $18,129,000, net of
deferred taxes of $10,000,000, in the accompanying condensed consolidated
balance sheets, reflecting the increase in its share of the net assets of
Oracle Japan related to the stock offering.
In February 1999, Oracle Japan, issued and sold 4,570,000 shares of common
stock at approximately $57 per share in an initial public offering in Japan.
In connection with this offering, Oracle Japan received cash proceeds of
$248,811,000, net of issuance costs of $13,833,000. The Company's ownership
interest in Oracle Japan was reduced from 90.78% to 84.94% following the
issuance and sale of the aforementioned shares. The Company has recorded a
credit to equity of $133,100,000, net of deferred taxes of $73,700,000, in the
accompanying condensed consolidated balance sheets reflecting the increase in
its share of the net assets of Oracle Japan related to the stock offering.
In February 1999, subsequent to the initial public offering, the Company sold
250,000 of its existing shares of Oracle Japan's common stock at approximately
$99 per share. In connection with this sale, the Company received cash
proceeds of $24,969,000. The Company's ownership interest in Oracle Japan was
reduced from 84.94% to 84.59% following the sale of the aforementioned shares.
The Company recorded a gain from this sale of $24,457,000 in the accompanying
condensed consolidated statement of operations.
5. 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.
7
<PAGE>
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.
6. 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 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 19% in the third quarter and 24% in the first nine
months of fiscal 1999 as compared to the corresponding periods in fiscal 1998.
Total revenues in local currency increased 19% in the third quarter and 26% in
the first nine months of fiscal 1999 as compared to the corresponding periods
in fiscal 1998. Domestic revenues increased 14% and 28%, while international
revenues increased 23% and 21% in the third quarter and first nine months of
fiscal 1999, respectively, as compared to the corresponding periods in fiscal
1998. International revenues expressed in local currency increased by
approximately 23% and 24% in the third quarter and first nine months of fiscal
1999, respectively, as compared to the corresponding periods in fiscal 1998.
Revenues from international customers were approximately 52% and 50% of total
revenues in the third quarters of fiscal 1999 and 1998, respectively, and 51%
and 52% of total revenues in the first nine months 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
strengthens against certain major international currencies.
REVENUES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
Feb. 28, Feb. 28, Feb. 28, Feb. 28,
1999 Change 1998 1999 Change 1998
(In thousands) ---------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Licenses and other...... $ 825,738 7% $ 774,521 $2,175,631 12% $1,950,529
Percentage of revenues.. 39.7% 44.3% 37.0% 41.2%
Services................ $1,253,181 29% $ 974,236 $3,708,343 33% $2,780,784
Percentage of revenues.. 60.3% 55.7% 63.0% 58.8%
Total revenues........ $2,078,919 19% $1,748,757 $5,883,974 24% $4,731,313
</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% of total license and other revenues in the third quarters
of fiscal 1999 and 1998, respectively, and 3% and 4% of total license and
other revenues in the first nine months of fiscal 1999 and 1998, respectively.
License revenues, excluding other revenues, grew 7% and 13% in the third
quarters of fiscal 1999 and 1998, respectively,
8
<PAGE>
and 12% and 10% in the first nine months of fiscal 1999 and 1998,
respectively. Database license revenues, which include server and tools
revenues, grew 7% and 10% in the third quarters of fiscal 1999 and 1998,
respectively, and 13% and 5% in the first nine months of fiscal 1999 and 1998,
respectively. Applications revenues grew 5% and 30% in the third quarters of
fiscal 1999 and 1998, respectively, and 8% and 33% in the nine months ended
February 28, 1999 and 1998, respectively. The license revenue growth rate
decreased during the third quarter of fiscal 1999 as compared to the
corresponding period in fiscal 1998 due to unusually strong domestic license
revenues during the third quarter of fiscal 1998 and an overall decline in
demand in the Enterprise Resource Planning segment of the software industry.
The higher license revenue growth rate experienced in the first nine months of
fiscal 1999 is primarily due to stronger demand for the Company's database
products, the introduction and market positioning of new products and versions
which have stimulated demand for the Company's products, as well as a
stabilization of growth rates in certain Asian countries, partially offset by
the decline in growth rates in the Enterprise Resource Planning segment of the
software industry.
Services Revenues. Services revenues consist of support, consulting and
education services revenues which comprised 47%, 45% and 8% of total services
revenues, respectively, during the third quarters of fiscal 1999 and 45%, 46%
and 9%, respectively, during the first nine months of fiscal 1999. Support
revenues grew 30% and 35% in the third quarters of fiscal 1999 and 1998,
respectively, and 31% and 37% in the first nine months of fiscal 1999 and
1998, respectively. Consulting services revenues grew 31% and 51% in the third
quarters of fiscal 1999 and 1998, respectively, and 40% and 50% in the first
nine months of fiscal 1999 and 1998, respectively. Education services revenues
grew 8% and 31% in the third quarters of fiscal 1999 and 1998, respectively,
and 14% and 27% in the first nine months of fiscal 1999 and 1998,
respectively. The decrease in the support revenues growth rate is primarily
attributed to the decrease in the license revenue growth rate experienced in
fiscal 1998 and the first nine months of fiscal 1999 as compared to prior
periods. 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. The support revenues
growth rates will continue to be affected by the overall license revenue
growth rates. The decrease in the consulting and education services revenue
growth rates experienced in the third quarter and first nine months of fiscal
1999 is primarily due to the decrease in the applications license revenue
growth rates beginning in the second quarter of fiscal 1998. The consulting
and education revenue growth rates are expected to continue to decrease in the
fourth quarter of fiscal 1999 as compared to the prior year corresponding
period.
OPERATING EXPENSES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ----------------------------
Feb. 28, Feb. 28, Feb. 28, Feb. 28,
1999 Change 1998 1999 Change 1998
(In thousands) -------- ------ -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing .... $566,756 -- $567,619 $1,668,586 8% $1,545,560
Percentage of revenues.. 27.3% 32.5% 28.4% 32.7%
Cost of services........ $792,023 35% $586,398 $2,251,160 40% $1,603,196
Percentage of revenues.. 38.1% 33.5% 38.3% 33.9%
Research and development
(1).................... $209,798 14% $184,106 $ 598,099 13% $ 526,990
Percentage of revenues.. 10.1% 10.5% 10.2% 11.1%
General and
administrative......... $103,663 12% $ 92,361 $ 299,546 20% $ 249,258
Percentage of revenues.. 5.0% 5.3% 5.1% 5.3%
Acquired in-process
research and
development............ $ -- $ -- $ -- * $ 167,054
Percentage of revenues.. -- -- -- 3.5%
</TABLE>
--------
*Not meaningful
(1) Pursuant to SFAS No. 86, the Company capitalized software development
costs equal to 0.4% and 0.7% of total revenues during the third
quarters of fiscal 1999 and 1998, respectively, and 0.4% and 0.6% of
total revenues in the first nine months of fiscal 1999 and 1998,
respectively.
9
<PAGE>
International expenses were favorably affected in the first nine months 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 as a percentage of
both total revenues and license revenues decreased in the third quarter and
first nine months of fiscal 1999 when compared to the corresponding periods in
fiscal 1998. The decrease in the third quarter of fiscal 1999 was primarily
due to revisions made in the third quarter of fiscal 1999 to certain prior
fiscal year compensation related and other sales related accruals that
resulted from changes in the amounts of estimated liabilities required. The
decrease in the first nine months of fiscal 1999 as compared to the prior
corresponding period was also affected by controls over headcount growth and
spending. 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 63% and 60% in the third quarter of
fiscal 1999 and 1998, respectively, and 61% and 58% in the first nine months
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. The Company expects that cost of services will continue to increase as
a percentage of service revenues in the fourth quarter of fiscal 1999 as
compared to the fourth quarter of fiscal 1998 primarily due to lower
consulting and education utilization rates.
Research and Development Expenses. Research and development expenses for the
third quarters of fiscal 1999 and 1998 would have been 11% of total revenues,
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
11% and 12% in the third quarter and first nine months of fiscal 1999 (14% and
13% after the adjustment for software capitalization), as compared to 36% and
35% in the corresponding periods in fiscal 1998 (33% and 35% after the
adjustment for software capitalization). The lower expense growth rate in the
third quarter and first nine months of fiscal 1999 was due to controls over
headcount growth after a significant investment in research and development
personnel during the corresponding periods in fiscal 1998 and fiscal 1997. The
Company capitalized $9,261,000 and $12,526,000 of software development costs
during the third quarter of fiscal 1999 and 1998, respectively, and
$24,186,000 and $29,863,000 in the first nine months of fiscal 1999 and 1998,
respectively. Amortization of capitalized software development costs is
charged to sales and marketing expenses and totaled $9,139,000 and $12,738,000
in the third quarter of fiscal 1999 and 1998, respectively, and $24,208,000
and $30,027,000 in the corresponding nine month period of fiscal 1999 and
1998, 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.
General and Administrative Expenses. General and administrative expenses as a
percentage of revenues decreased in the third quarter and first nine months of
fiscal 1999 as compared to the corresponding periods in fiscal 1998, primarily
due to higher revenue levels, controls over expenses and productivity
improvements.
Acquired In-Process Research and Development. In the third quarter of fiscal
1997, the Company acquired Datalogix International, Inc. ("Datalogix") for
approximately $82,000,000 in cash. In the first quarter of fiscal 1998, the
Company completed the acquisition of Treasury Services Corporation ("TSC") for
approximately
10
<PAGE>
$110,000,000 in cash, and converted the outstanding TSC stock options to stock
options to purchase the Company's stock at a value of approximately
$8,967,000. In addition, the Company also merged its subsidiary, Network
Computer, Inc. ("NCI") with Navio Communications, Inc. ("Navio"), a
development stage company, in a stock-for-stock exchange valued at
approximately $77,000,000. All of the acquisitions completed during fiscal
1997 and 1998 were accounted for using the purchase method. In connection with
these acquisitions, the Company recorded acquired in-process research and
development charges of $36,800,000 for Datalogix, $91,500,000 for TSC and
$75,554,000 for Navio. The Company is primarily responsible for estimating the
fair value of acquired in-process research and development. There have been no
acquisitions involving acquired in-process research and development charges in
fiscal 1999.
Overall Valuation Methodology
Independent valuations of Datalogix, TSC, and Navio were performed and used as
an aid in determining the fair value of the identifiable assets and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development ("in-
process R&D"). Assets identified for each transaction varied slightly, but
generally included in-process R&D, developed technology, assembled workforce,
installed customer base, and goodwill. Datalogix, TSC and Navio are
collectively referred to as the "Acquired Companies".
The valuation techniques employed in the appraisals were designed to properly
reflect all intellectual property rights in the intangible assets, including
core technology. The value of the developed technology was derived from direct
sales of existing products including their contribution to in-process R&D. In
this way, value was properly attributed to the engineering know-how embedded
in the existing products that will be used in developmental products. The
appraisals also considered the fact that the existing know-how diminishes in
value over time as new technologies are developed and changes in market
conditions render current products and methodologies obsolete.
Assets were identified through on-site interviews with management and a review
of data provided by the Company and the Acquired Companies' management
concerning the acquired assets, technologies in development, costs necessary
to complete the in-process R&D, market potential, historical financial
performance, estimates of future performance, and the assumptions underlying
these estimates.
The following table presents the purchase price allocations associated with
these acquisitions:
<TABLE>
<CAPTION>
Datalogix TSC Navio
----------- ------------ -----------
<S> <C> <C> <C>
In-process R&D...................... $36,800,000 $ 91,500,000 $75,554,000
Developed Technology................ 13,500,000 11,400,000 --
Other Intangible Assets............. -- 24,700,000 1,750,000
Installed Customer Base and Trade
Names.............................. 4,500,000 7,200,000 --
Assembled Workforce................. 2,000,000 1,700,000 350,000
----------- ------------ -----------
Total Intangible Assets............. 56,800,000 136,500,000 77,654,000
Net Tangible Assets................. 25,200,000 (17,533,000) (654,000)
----------- ------------ -----------
Total Valuation..................... $82,000,000 $118,967,000 $77,000,000
=========== ============ ===========
</TABLE>
Purchased incomplete research and development projects were identified through
extensive interviews and detailed analysis of development plans provided by
management concerning the following:
. Uniqueness of developmental work and the costs incurred
. Critical tasks required to complete the project
. Opportunities which were expected to arise from the project
11
<PAGE>
. Degree of leverage of the new technology on legacy technology
. Risks associated with project completion
. Assessment of types of efforts involved (hardware development, software
development)
. Length of time project was expected to be useful, and
. Timing related to completion of projects and resources allocated to
completion, including associated expenses
None of the in-process R&D value was associated with routine on-going efforts
to enhance or otherwise improve on the qualities of the existing products. The
Acquired Companies' engineers were developing advanced, next generation
technologies that involved creating product designs and disparate technologies
to form superior products. The in-process R&D value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present value.
Discount rates which ranged from 20% to 50% consider the uncertainty
surrounding the successful development of the purchased in-process technology,
the useful life of such technology, the profitability levels of such
technology, and the uncertainty of technological advances that were
indeterminable at that time.
Stage of Completion
The appraisals included the valuation of each specific research and
development project underway at the respective acquisition dates. In the
months leading up to the purchases, the Acquired Companies had made
significant progress in their R&D programs. However, due to the substantial
time and effort necessary to produce these products in accordance with
functional specifications, technological feasibility of the research and
development projects had not yet been achieved. The acquired projects included
next-generation versions of Datalogix's GEMMS and CIMPRO product families,
TSC's TSER product family, as well as planned new products and technologies,
and development work associated with Navio's Internet browser software. The
efforts required to develop the purchased in-process technology of the
Acquired Companies into commercially viable products principally related to
the completion of planning, designing, prototyping, verification and testing
activities that were necessary to establish that the software could be
produced to meet its design specifications, including functions, features, and
technical performance requirements. Anticipated completion dates for the
projects in-process ranged from three to thirty months for Datalogix's
projects, six to thirty-six months for TSC projects, and three to thirty-six
months for Navio projects, at which dates the Acquired Companies expected to
begin selling the developed software products. Remaining R&D expenditures were
projected to be approximately $119,000,000 through the year 2000 ($36,000,000
for Datalogix, $49,000,000 for TSC, and $34,000,000 for Navio).
The resulting net cash flows from such projects were based on management's
estimates of product revenues, operating expenses, research and development
costs, and income taxes from such projects. The revenue projections used to
value the in-process R&D were based on estimates of relevant market sizes and
growth factors, expected trends in technology, and the nature and expected
timing of new product introductions by the Company and its competitors. The
Company's projections may ultimately prove to be incomplete or inaccurate, and
unanticipated events and circumstances are likely to occur. Therefore, no
assurance can be given that the underlying assumptions used to forecast
revenues and costs to develop such projects will transpire as estimated.
As of the acquisition date, Datalogix was in advanced stages on adding
functionality to the software's order entry system, logistics module, and
manufacturing module. Likewise, important progress had been made on adding
core functionality such as Internet capabilities, distributed database
templates, and wireless data collection. These projects were designed to
provide Datalogix with innovative product functionality and allow it to obtain
a competitive advantage in the process manufacturing software segment. The
existing technology, which was originally developed in the early 1990s, was
expected to play a minor role in the product line going forward due to
changing market and technological requirements. Costs related to the acquired
R&D of Datalogix over the
12
<PAGE>
18 months preceding the acquisition date totaled approximately $12,000,000,
and mostly related to development of the in-process GEMMS projects. Costs in
periods prior to June 1995 for the acquired R&D projects were not material.
In the case of TSC, changing market requirements and evolving Internet
standards forced TSC to undertake R&D projects to re-develop its product line
using a more flexible, three-tier software architecture. If successful, these
R&D projects would provide innovative functionality that would allow TSC a
substantial market advantage over its competition. As of the acquisition date,
TSC had re-engineered the interface components between its products and
completed preliminary designs and verification of the new architecture. Costs
incurred on the in-process R&D projects over the 12 months preceding the
acquisition date were approximately $10,000,000. Costs in periods prior to the
twelve months preceeding the acquisition date, for the acquired R&D projects
were immaterial. TSC was not able to leverage its developed technology to a
large extent due to limitations in the existing software's structure that
required fundamental re-development of all its software modules.
Navio's development team had made significant technological and creative
strides in the development of its experimental Internet technologies as of
August 1997. Navio had expended in excess of $9,000,000 on the acquired R&D
since its inception in February 1996. As of the acquisition date, Navio was a
development stage company with minimal product revenues and large net losses.
Navio was entering the testing phase for two of its developmental products, NC
Navigator 3.0 and TV Navigator 1.1. Historical revenues represented services
and limited sales of a Netscape product sold as a test network computer
browser on an experimental basis. This product was superseded by Navio's NC
Navigator 3.0.
Alternative Future Use
Before the Company made the decision not to capitalize the value ascribed to
in-process R&D, the projects were evaluated individually to determine if
technological feasibility had been achieved and if there were any alternative
future uses. Such evaluation consisted of a specific review of the efforts,
including the overall objectives of the project, progress toward the
objectives, and uniqueness of the development efforts.
The Acquired Companies' technical activities were concentrated on the
development of new product knowledge having specific commercial objectives,
and efforts were focused on translating those applied research findings and
other scientific know-how into commercially viable software products. In the
case of Datalogix and TSC, the acquired R&D was related to software
applications using proprietary code and routines designed specifically for the
respective products. Likewise, Navio was developing experimental Internet
technologies for which no market existed at the time of the acquisition. Due
to their specialized nature, the in-process R&D projects had no alternative
future uses, either for re-deployment elsewhere in the business or in
liquidation, in the event the projects failed.
Continuing Efforts
The Company expects that the remaining acquired in-process research and
development will be successfully developed, however, there can be no assurance
that commercial viability of these projects will be achieved. If these
projects are not successfully developed, future revenue and profitability of
the Company may be adversely affected and the value of the intangible assets
relating to the acquisitions may become impaired. Commercial results will also
be subject to uncertain market events and risks that are beyond the Company's
control, such as trends in technology, government regulations, market size and
growth, and product introduction or other actions by competitors.
13
<PAGE>
OTHER INCOME, NET:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Feb. Feb. Feb. Feb.
28, 28, 28, 28,
1999 Change 1998 1999 Change 1998
(In thousands) ------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Other income, net............. $37,656 199% $12,615 $88,475 29% $68,837
Percentage of revenues........ 1.8% 0.7% 1.5% 1.5%
</TABLE>
In February 1999, Oracle Japan, a majority-owned subsidiary of the Company,
issued and sold Common Stock in an initial public offering in Japan.
Subsequent to Oracle Japan's initial public offering, the Company sold a
portion of its existing shares of Oracle Japan's common stock and recorded a
gain of $24,457,000 in the third quarter of fiscal 1999. Excluding the effect
of the sale of shares of Oracle Japan, other income, net was $13,199,000 and
$64,018,000 for the third quarter and first nine months of fiscal 1999,
respectively. Other income, net in the first nine months of fiscal 1998
includes the minority interest's share of the one-time acquired research and
development charge for Navio. Excluding this credit of $25,726,000, other
income, net for the first nine months of fiscal 1998 was $43,111,000. The
increase in other income, net in the third quarter and first nine months of
fiscal 1999 as compared to the corresponding periods in fiscal 1998, excluding
the effects of the gain on sale of Oracle Japan's stock and the minority
interest credit related to Navio, primarily relate to 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 nine months
of fiscal 1998 related to the sale of certain securities.
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Feb. 28, Feb. 28, Feb. 28, Feb. 28,
1999 Change 1998 1999 Change 1998
(In thousands) -------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Provisions for income
taxes................... $151,074 30% $115,811 $392,720 32% $297,220
Percentage of revenues... 7.3% 6.6% 6.7% 6.3%
</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 third
quarter and first nine months of fiscal 1999 was 34% 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 the credit of $25,726,000 for minority interest in the first quarter of
fiscal 1998).
NET INCOME AND EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Feb. 28, Feb. 28, Feb. 28, Feb. 28,
1999 Change 1998 1999 Change 1998
(In thousands) -------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income................. $293,261 36% $215,077 $762,338 86% $410,872
Percentage of revenues..... 14.1% 12.3% 13.0% 8.7%
Earnings per share:
Basic.................... $ 0.20 33% $ 0.15 $ 0.53 89% $ 0.28
Diluted.................. $ 0.20 43% $ 0.14 $ 0.51 89% $ 0.27
</TABLE>
Net income and diluted earnings per share in the first nine months of fiscal
1998 would have been $552,200,000 and $0.37 per share, respectively, excluding
the financial statement effects of the acquisitions of TSC and Navio. This
represents an increase of 38% for net income and diluted earnings per share in
the first nine months of fiscal 1999 over the corresponding period in fiscal
1998.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
Feb. 28, Feb. 28,
1999 Change 1998
(In thousands) ---------- ------ ----------
<S> <C> <C> <C>
Working capital.............................. $2,058,656 34 % $1,530,809
Cash and cash investments.................... $2,490,982 56 % $1,599,571
Cash provided by operating activities........ $1,071,035 9 % $ 978,937
Cash used for investing activities........... $ (560,433) (11)% $ (632,255)
Cash used for financing activities........... $ (279,350) 18 % $ (237,087)
</TABLE>
Working capital increased in the first nine months of fiscal 1999 over the
corresponding period in fiscal 1998, due to increased cash flow from
operations and cash received from the initial public offering of Oracle Japan
(See Note 4 of the Notes to the Condensed Consolidated Financial Statements),
partially offset by the repurchase of the Company's Common Stock and cash used
for other investing activities.
The Company generated higher positive cash flows from operations in the first
nine months of fiscal 1999 over the corresponding period of fiscal 1998
(excluding the effect of the initial public offering of Oracle Japan and the
charges for in-process research and development) due primarily to improved
profitability.
Cash used for investing activities decreased in the first nine months of
fiscal 1999 as compared to the corresponding prior year period due to changes
in the levels and maturities of cash investments, cash generated from the sale
of stock in Oracle Japan and cash used for acquisitions. 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 189,000,000 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 9,165,762 shares of the Company's
Common Stock for approximately $187,066,000 during the third quarter of fiscal
1999. As of February 28, 1999, the Company had repurchased a total of
147,731,817 shares of the Company's Common Stock for approximately
$2,079,697,000. In fiscal 1999, the Company has used cash flow from operations
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 February 28, 1999 the
Company also had other outstanding debt of approximately $6,741,000 primarily
in the form of other notes payable and capital leases.
During fiscal 1998 and the first quarter of fiscal 1999, as part of its
authorized stock repurchase program, the Company sold put warrants and
purchased call options through private placements. 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 February 28, 1999, the Company had a maximum potential
obligation under the put warrants to buy back 26,136,000 shares of its Common
Stock for prices ranging from $11.17 to $16.57 per share for an aggregate
price of approximately $375,285,000. The put warrants will expire at various
dates through January 2000. As of February 28, 1999, the Company had the right
to purchase under the call options up to a maximum of 13,068,000 shares of its
Common Stock at prices ranging from $13.89 to $20.12 per share for an
aggregate price of approximately $230,293,000. The call options will expire at
various dates through January 2000. During the third quarter of fiscal 1999,
the Company exercised call options for 5,968,000 shares at an average price of
$14.58.
15
<PAGE>
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.
The Company experienced a deceleration in license and services revenue growth
rates in the third quarter of fiscal 1999. There can be no assurances that
license or services revenue growth rates will not continue to decrease 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 has
experienced uneven revenue growth in the first three quarters of fiscal 1999.
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. SPO 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 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 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
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. Changes in the customer's
use of the Company's products could also result in lower
16
<PAGE>
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. 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.
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.
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,
longer payment cycles and volatilities of exchange rates 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. Although the Company has experienced
some recovery in revenue growth rates in the Asia Pacific region in fiscal
1999, 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. 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. Although changes in the value of major foreign
currencies relative to the value of the U.S. dollar did not adversely affect
revenues and operating results this quarter, changes in the value of major
foreign currencies relative to the value of the U.S. dollar have generally
adversely affected revenues and operating results in the past and could
continue to do so if the U.S. dollar strengthens 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.
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 Chief Information Officer, and the General
Counsel of the Company; this executive steering committee regularly reviews
progress
17
<PAGE>
with the Global Program Manager. Status is reported regularly to the Finance
and Audit Committee of the Company's Board of Directors.
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.
The Company's year 2000 program also addresses 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 sent detailed
questionnaires to vendors asking them to certify year 2000 readiness as to 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.
The Company expects to substantially complete year 2000 readiness preparations
by the end of June 1999, and to continue extensive testing 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 expected to be substantially complete by the end of June 1999;
testing expected to be substantially complete by the end of June 1999, but
expected to continue throughout calendar year 1999; contingency planning
expected to be complete by the end of August 1999.
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.
The Company has designed and tested the most current versions of its products
to be year 2000 compliant. Further, for several of its key product lines, the
Company has successfully completed, or is in the process of completing, the
year 2000 certification program administered by the Information Technology
Association of America. 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 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
18
<PAGE>
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 condition due to such Year 2000 failures.
The Company anticipates that it will experience a significant increase in
calls to customer support from customers seeking Year 2000 product
information; information on migrating from older, noncompliant products to
compliant products; and assistance in handling other Year 2000 issues. The
Company is currently developing a program to enable it to handle the expected
increase in calls. The Company may incur significant costs in connection with
this program. Among other things, the Company anticipates that it will be
required to reassign consultants to the customer support organization on an
interim basis, which could cause a decrease in consulting revenues. Such costs
or lost revenues cannot be estimated until the program planning is complete.
Contingency Planning. The Company is preparing a comprehensive contingency
plan to address failures caused by the year 2000 date change. The contingency
plan will address, among other things, access to alternative third party
vendors for services and products such as shipping and manufacturing
materials, manual "work-arounds" for software and hardware failures, and
substitution of hardware and software systems, if necessary. The Company is
currently in the process of preparing its plan, and expects to complete the
plan by the end of August 1999. However, the Company has already begun
addressing potential and expected effects of the year 2000 date change, such
as planning for increased support staffing in late 1999 and early 2000 for
issues that arise. Such existing activities and plans will be incorporated
into the contingency plan.
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. The Company does not believe
that any such additional costs will have a material 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 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.
19
<PAGE>
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
condition.
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 temporarily 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.
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.
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.
20
<PAGE>
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 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 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 grows
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 condition could be materially adversely
affected.
21
<PAGE>
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.
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 February 28, 1999.
Table of Investment Securities:
<TABLE>
<CAPTION>
Principal Average
Amount Interest Rate
(In thousands) ---------- -------------
<S> <C> <C>
Cash and cash equivalents........................... $1,504,176 4.82%
Short term investments (0-1 years).................. $ 684,685 5.38%
Long term investments (1-2 years)................... $ 302,121 5.36%
----------
Total cash and investment securities................ $2,490,982
==========
</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, net 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, net. 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 February 28,
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 the Condensed Consolidated Financial Statements for
further discussion.
22
<PAGE>
The Company's outstanding forward contracts and equity hedges as of February
28, 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 February 28, 1999.
Table of Forward Contracts:
<TABLE>
<CAPTION>
Notional
Weighted
Notional Average
Functional Currency Amount Exchange Rate
------------------- ------------ -------------
<S> <C> <C>
Australian Dollar................................. $ 3,536,288 0.63
Canadian Dollar................................... 36,045,658 1.50
Danish Krone...................................... 4,856,381 6.80
Euro.............................................. 191,079,800 1.10
Irish Punt........................................ 1,121,163 1.40
Japanese Yen...................................... 6,082,892 120.34
New Zealand Dollar................................ 1,857,800 0.53
Norwegian Krone................................... 6,509,695 7.94
Singapore Dollar.................................. 1,281,305 1.72
Swedish Krona..................................... 16,852,546 8.11
Swiss Franc....................................... 23,199,193 1.44
Thai Baht......................................... 4,544,240 37.41
UK Pound.......................................... 100,848,313 1.60
------------
Total............................................. $397,815,274
============
Table of Equity Hedges:
<CAPTION>
Notional
Weighted
Notional Average
Functional Currency Amount Exchange Rate
------------------- ------------ -------------
<S> <C> <C>
Hong Kong Dollars................................. $ 10,035,501 7.97
Japanese Yen...................................... 14,966,106 113.59
Swedish Krona..................................... 12,520,973 7.99
UK Pound.......................................... 12,661,275 1.69
------------
Total............................................. $ 50,183,855
============
</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.
As of February 28, 1999, the Company had a maximum potential obligation under
the put warrants to buy back 26,136,000 shares of Common Stock at prices
ranging from $11.17 to $16.57 per share for an aggregate price of
approximately $375,285,000. The put warrants will expire at various dates
through January 2000.
As of February 28, 1999, the Company had the right to purchase up to a maximum
of 13,068,000 shares of its Common Stock at prices ranging from $13.89 to
$20.12 per share for an aggregate price of approximately $230,293,000. The
call options will expire at various dates through January 2000. During the
third quarter of fiscal 1999, the Company exercised call options for 5,968,000
shares at an average price of $14.58.
23
<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 February 28, 1999.
<TABLE>
<CAPTION>
Estimated
1999 2000 Fair
Maturity Maturity Value
(In thousands, except stock prices) -------- -------- ---------
<S> <C> <C> <C>
Put Warrants:
Shares......................................... 23,136 3,000
Weighted average stock price................... $ 14.07 $ 16.57
Contract amount................................ $325,584 $49,700 $ 3,201
Call Options:
Shares......................................... 11,568 1,500
Weighted average stock price................... $ 17.30 $ 20.12
Contract amount................................ $200,113 $30,180 $262,872
</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 these actions and intends
to vigorously defend them. The Company is seeking a stay of the state court
class actions pending resolution of the federal action.
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. 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
24
<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: April 13, 1999 By: /s/ JEFFREY O. HENLEY
---------------------------------------
Jeffrey O. Henley
Executive Vice President and Chief
Financial Officer
Dated: April 13, 1999 By: /s/ JENNIFER L. MINTON
---------------------------------------
Jennifer L. Minton
Vice President and Corporate
Controller
25
<PAGE>
Oracle Corporation
Index of Exhibits
<TABLE>
<CAPTION>
Exhibit # Exhibit Titles
--------- --------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,504,176
<SECURITIES> 684,685
<RECEIVABLES> 1,760,459
<ALLOWANCES> 196,606
<INVENTORY> 13,276
<CURRENT-ASSETS> 4,336,469
<PP&E> 1,962,410
<DEPRECIATION> 984,267
<TOTAL-ASSETS> 6,102,328
<CURRENT-LIABILITIES> 2,277,813
<BONDS> 0
0
0
<COMMON> 9,533
<OTHER-SE> 3,332,116
<TOTAL-LIABILITY-AND-EQUITY> 6,102,328
<SALES> 0
<TOTAL-REVENUES> 2,078,919
<CGS> 0
<TOTAL-COSTS> 792,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,615
<INTEREST-EXPENSE> 4,952
<INCOME-PRETAX> 444,335
<INCOME-TAX> 151,074
<INCOME-CONTINUING> 293,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,261
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
