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SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-14376
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Oracle Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2871189
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 31, 1999 was $40,840,922,554. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
Number of shares of common stock outstanding as of July 31, 1999:
1,430,484,511.
Documents Incorporated by Reference:
Part III--Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's annual stockholders' meeting to be held on
October 18, 1999.
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ORACLE CORPORATION
FISCAL YEAR 1999 FORM 10-K ANNUAL REPORT
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TABLE OF CONTENTS
Page
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PART I.
Item 1. Business..................................................... 3
Item 2. Properties................................................... 9
Item 3. Legal Proceedings............................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......... 10
Item 4A. Executive Officers of the Registrant......................... 10
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 12
Item 6. Selected Financial Data...................................... 12
Item 7. Management's Discussion and Analysis of Financial Position
and Results of Operations.................................... 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 27
Item 8. Financial Statements and Supplementary Data.................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 29
PART III.
Item 10. Directors and Executive Officers of the Registrant........... 29
Item 11. Executive Compensation....................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 29
Item 13. Certain Relationships and Related Transactions............... 29
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.......................................................... 30
Signatures................................................... 60
2
Forward-Looking Statements
In addition to historical information, this Annual Report contains forward-
looking statements. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those reflected in these 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
Position 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 Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by the
Company in fiscal year 2000.
PART I
Item 1. Business
General
Oracle Corporation ("Oracle" or the "Company") is the world's leading supplier
of software for information management. The Company develops, manufactures,
markets and distributes computer software that helps corporations manage and
grow their businesses. The Company's software products can be categorized into
two broad categories: systems software and business applications software.
Systems software is a complete Internet platform to develop and deploy
applications for computing on the Internet and corporate Intranets. The
Internet platform includes database management systems and development tools,
which enable users to create, retrieve and modify the various types of data
stored in a computer system. Business applications software automates the
performance of specific business data processing functions for customer
relationship management, supply chain management, financial management,
procurement, project management, and human resources management. The Company's
principal products allow businesses to engage in commerce electronically and
run on a broad range of computers, including mainframes, minicomputers,
workstations, personal computers, laptop computers and information appliances
(such as hand held devices and cell phones) and over 85 different operating
systems, including UNIX, Windows, Windows NT, OS/390 and Linux. In addition to
computer software products, the Company offers consulting, education, support,
and systems integration services in support of its customers' use of its
products. For customers who choose not to install their own applications,
Oracle's Business On-Line offers a hosting service that delivers enterprise
applications across a network that can be accessed using a browser.
The Company was incorporated on October 29, 1986 in connection with a re-
incorporation of the Company's predecessor in Delaware, which was completed on
March 12, 1987. The Company's former primary operating subsidiary, Oracle
Corporation, a California corporation, was incorporated in June 1977. In May
1995, Oracle Corporation was merged into Oracle Systems Corporation, a
Delaware corporation, whose name was changed to Oracle Corporation. Unless the
context otherwise requires, the "Company" or "Oracle" refers to Oracle
Corporation, its predecessor and its subsidiaries. The Company is
headquartered in Redwood City, California with approximately 44,000 employees
worldwide. Its telephone number is (650) 506-7000.
Product Development Architecture
Oracle Internet Platform
Oracle's primary product development platform is based on an Internet
computing architecture. Internet computing is an architecture comprised of
data servers, application servers and computers or devices running a web
browser. Typically, data servers and application servers that store and
process the information are managed
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by professional information technology ("IT") managers. Internet computing
centralizes business information and applications, allowing them to be managed
more easily and efficiently. IT managers update data or applications in one
location, and from any client computer, the end users automatically gain
access to the most current business data and applications. This is in contrast
to a client-server architecture in which each client computer must run and
manage its own applications, and must be updated every time an application
changes. The Company believes that the design of its software for Internet
computing improves network performance and helps organizations decrease
installation, maintenance and training costs associated with information
technology. Oracle's Internet computing architecture is based on open
standards-based interfaces and protocols to promote flexibility.
Electronic Business
The Company believes that electronic commerce (the exchange of goods and
services electronically) is revolutionizing businesses by providing a
relatively low cost means of distributing products and expanding markets
globally, increasing efficiencies, and providing better, more personalized
customer services. As organizations are changing the way employees work,
communicate, share knowledge and deliver value, the Company believes that to
remain competitive, companies need to develop and deploy web-based business
and commerce applications on the Internet.
Research & Development
The Company continually enhances its existing products and develops new
products to meet its customers' changing requirements as well as to expand its
product base. Research and development expenditures were 10% of total revenues
in fiscal 1999 and 11% of total revenues in fiscal 1998 (in each case prior to
the effect of amounts capitalized in accordance with Statements of Financial
Accounting Standards ("SFAS") No. 86.) As a percentage of license revenues,
research and development expenditures were 24% in both fiscal 1999 and 1998
(prior to the effect of amounts capitalized in accordance with SFAS No. 86).
Major Product Families
Systems Software
The Oracle8i relational database management system ("DBMS"), the key component
of Oracle's Internet platform, enables storing, manipulating and retrieving
relational, object-relational, multi-dimensional and other types of data.
Oracle8i is a database specifically designed as a foundation for Internet
development and deployment, extending Oracle's technology in the areas of data
management, transaction processing and data warehousing to the new medium of
the Internet. Built directly inside the database, Internet features, such as a
Java Server (Jserver), Internet File System (iFS), Internet Directory,
Internet Security, Intermedia, help companies and developers build
applications that lower costs, enhance customer and supplier interaction, and
provide global information access across different computer architectures and
across the enterprise. In addition to Internet architecture, Oracle8i supports
traditional client/server applications and architecture.
In June 1997, the delivery of Oracle8 enhanced capabilities that allow users
to manage unstructured information such as text, spatial, video, messaging,
multi-dimensional data as well as object-relational information. Oracle8 is
based on an advanced scalable architecture and operates on a wide range of
hardware and operating systems. Key new features included object-relational
technology, data partitioning, server-managed back-up and recovery, advanced
queuing, heterogeneous services, index-only tables and binary large objects.
Oracle8i Lite is the Company's mobile database for Internet computing. This
gives customers a less complex database than Oracle8i that requires no
administration and can be used to temporarily store data and applications to
be replicated back to Oracle8i. Oracle8i Lite is a complete and comprehensive
platform for building, deploying and managing mobile applications that
principally run on laptops and information appliances such as hand held
devices, cell phones, smart phones, pagers, smart cards and television set top
boxes.
4
With the introduction of its Internet computing architecture, the Company
introduced Oracle Application Server, an open-software platform for
developing, deploying and managing distributed software application programs.
Oracle Application Server provides the infrastructure necessary to run today's
Internet-computing applications while based on all generation languages
(Enterprise Java Beans, Java CORBA server-side components, C/C++, Java,
PL/SQL, COBOL) applications. Oracle Application Server allows distributed
transaction processing with large numbers of users and data while improving
performance and lowering incremental deployment and maintenance costs.
Application Development Tools
The Company provides application development tools supporting different
approaches to software development for deployment running a web browser. For a
model-based approach to development, Oracle offers two products: Oracle
Designer and Oracle Developer. Oracle Designer allows business processes to be
visually modeled and enterprise database applications to be generated. Oracle
Developer is a fourth generation language development tool for building
database applications that can be deployed, unchanged, in both Internet-based
environments and client/server. For Java programmers, Oracle offers Oracle
Jdeveloper, a Java development tool suite for building enterprise applications
for use on the Internet. The Oracle Jdeveloper suite provides a complete Java
development environment for developing and deploying applications from Java
and HTML clients to server-based business components across the enterprise.
Oracle WebDB is a solution for building, deploying and monitoring web database
applications and content-driven Web sites. By combining an HTML interface with
a complete set of browser-based HTML tools, Oracle WebDB enables users to
develop Web database applications quickly and easily.
Internet Business Applications and Business Intelligence Tools
With the introduction of the Internet and Java-based programs, application
modules can be Internet-enabled to allow users to access information or use
the applications through a simple Internet browser on any client computer.
Oracle Applications Release 11.0 offers a fully Internet-enabled application.
Most application software automates just the "back office" (enterprise
resource planning ("ERP"): financial, manufacturing, supply chain, procurement
and human resources applications enabling a company to manage business
information) or just the "front office" (customer relationship management
("CRM"): customer interfacing applications for sales, marketing, service, and
call center functions). Oracle's Internet Business Solutions integrate the
back office and front office of a company's business and capture information
needed to provide a substantially complete view of a company's activities.
Oracle's flexible and open applications architecture enables customers to
tailor Oracle Applications with minimal programming and integrate them with
third party and legacy systems.
Oracle's Internet business applications for ERP consist of over 50 integrated
software modules to automate business functions such as financial management,
supply chain management, procurement, manufacturing, project systems and human
resources applications for large and midsized commercial and public sector
organizations throughout the world. These applications combine business
functionality with innovative technologies, such as workflow and data
warehousing, to build enterprise-wide solutions. In addition, Oracle currently
provides or is in the process of developing industry solutions for the
Consumer Packaged Goods, Energy, Telecommunications, Government/Higher
Education, Industrial, Financial Services and other industries.
Oracle's Internet business applications for the front office consist of more
than 35 integrated software modules for CRM. These applications help automate
and improve a company's business processes associated with managing customer
relationships in the areas of sales, marketing, customer service and support
and call centers. Oracle's CRM applications allow multi-channel customer
interactions over the Internet, such as through a call center, istore (an
internet-based storefront used for selling products and services directly to
customers over the web) and face-to-face, thereby helping to maximize the use
of technology to improve customer relationships. Integrated with Oracle's back
office applications, Oracle's CRM products also allow enterprises to
coordinate global sales forecasting and lead generation with order capture
capabilities to help increase the overall efficiency of running a business.
5
Oracle also provides a family of applications that have been specifically
designed for occasional users, Oracle Self-Service Applications. These
applications enable customers to lower the cost of their business operations
by providing their customers, suppliers and employees with self-service access
to both transaction processing and selected business information using open,
Internet standards. Some of these applications also automate the process of
procuring and managing inventories of goods and services that a business
requires.
In conjunction with Oracle Applications Release 11.0, Oracle's Business
Intelligence System offers integrated reporting, decision support, and a
corrective action system targeted to managers, business analysts and
executives. Using ad hoc reporting and focused analytical applications,
managers and analysts can discover business trends and enhance business
decision making to increase the likelihood of obtaining the desired outcome.
Oracle's Business Intelligence System works with Oracle's data warehousing
server products, business intelligence tools such as Discoverer and includes
products such as Oracle Financial Analyzer and Oracle Sales Analyzer.
Services
Consulting, Education and Support Services
In most of Oracle's sales offices around the world, the Company has trained
consulting and education personnel who offer consulting and education services
that help customers realize the potential of the Company's products in meeting
their information management needs. Consultants and instructors supplement the
Company's product offerings by providing services to assist customers in the
implementation of applications based on the Company's products and to ensure
that customers have the necessary training to use the Company's products.
Consulting revenues represented approximately 27%, 25% and 20% of total
revenues in fiscal 1999, 1998 and 1997, respectively and education revenues
represented approximately 5%, 6% and 6% of total revenues in fiscal 1999, 1998
and 1997, respectively.
The Company offers a wide range of support services that include on-site,
telephone or Internet access to support personnel as well as software updates.
Telephone support is provided by local offices, as well as Oracle's five
global support centers located around the world. Pricing of the Company's
support services is generally based on the level of support services provided
and the number of users authorized to access the Company's software products
and include update rights for products currently licensed. Support revenues
represented approximately 27%, 25% and 23% of total revenues in fiscal 1999,
1998 and 1997, respectively.
Marketing and Sales
Key Market Segments
The Company has identified two key market segments where its products are
sold; the enterprise business market and the general business market. The
enterprise business market segment is defined by the Company as those
businesses with total revenues of $500 million and above. In the enterprise
business market segment, the Company believes that the most important
considerations for end user software customers are performance, functionality,
product reliability, ease of use, quality of technical support and total cost
of ownership, including initial price and deployment costs as well as ongoing
maintenance costs. The general business market segment is defined by the
Company as those businesses with total revenues of $500 million and below. In
the general business market segment, the Company believes that the principal
competitive factors are strength in distribution and marketing, brand name
recognition, price/performance characteristics, ease of use, ability to link
with enterprise systems and product integration. The Company believes that it
competes effectively in each of these markets, although the competition is
intense in each market.
Direct and Indirect Sales Organization
In the United States, the Company markets its products and services primarily
through its own direct sales and service organization. Sales and service
groups are based in the Company's headquarters in Redwood City,
6
California, and in field offices that, as of May 31, 1999, were located in
approximately 90 metropolitan areas within the United States.
Outside the United States, the Company markets its products primarily through
the sales and service organizations of approximately 60 subsidiaries. These
subsidiaries license and support the Company's products both within their
local countries and certain other foreign countries where the Company does not
operate through a direct sales subsidiary.
The Company also markets its products through indirect channels, which are
called Oracle Alliance partners. The partners include value-added relicensors,
hardware providers, systems integrators and independent software vendors that
combine the Oracle relational DBMS, application development tools and business
applications with computer hardware or software application packages for
redistribution.
Additionally, the Company markets its products through independent
distributors in international territories not covered by its subsidiaries'
direct sales organizations.
As of May 31, 1999, in the United States, the Company employed 15,649 sales,
service and marketing employees, while the international sales, service and
marketing groups consisted of 18,401 employees.
Revenues from international customers (including end users and resellers)
amounted to approximately 49%, 50% and 53% of the Company's total revenues in
fiscal 1999, 1998 and 1997, respectively. See Note 11 of Notes to Consolidated
Financial Statements for a summary of the Company's operating segments and
geographic information.
Partner Program
The Oracle Partner Program allows Oracle to pursue new business opportunities
with partners as well as direct customers. The types of partners in the Oracle
Partner Program are consultants, education providers, Internet service
providers, network integrators, resellers, Independent Software vendors and
system integrators. Partners can join the Oracle Technology Network (OTN), a
program specifically designed for the Internet developer community. Oracle
provides the technology, education, and technical support that enable a
partner to effectively integrate Oracle products into its business. The
combination of Oracle technology and a partner's expertise broadens the
Company's exposure in new markets, such as the Internet.
Hosted Business Services
Oracle's Business On-Line is a new service that delivers enterprise
applications and technology across a network, hosted in a professionally
managed environment. With a simple browser and network connection, companies
can access Oracle's Internet applications at costs significantly lower than
traditional deployment. While the customer typically owns the applications,
Oracle owns the hardware, manages the application and server architecture,
maintains and upgrades software and provides customer support for back-end
operations.
Oracle's Business On-Line provides companies with immediate access to the
benefits of enterprise-class applications; allows companies to more
efficiently access enterprise applications by reducing customers' needs to
build and maintain complex technology; and, leverages Oracle's complete
software architecture and infrastructure for supporting applications hosting.
Competition
The computer software industry is intensely competitive and rapidly evolving.
Historically, the Company has competed in various markets including the
database, applications development tools, business applications and services
sectors. The principal software competitors in the enterprise DBMS marketplace
are International Business Machines Corporation, Sybase, Inc. and Informix
Corporation. In the workgroup and personal DBMS marketplace, the Company
competes with several desktop software vendors, including Microsoft
Corporation. In
7
the data warehousing market, the Company's On-Line Analytical Processing
("OLAP") products compete with those of Business Objects, S.A., Cognos, Inc.
and Hyperion Solutions. In the business applications software market,
competitors include J.D. Edwards, Baan, Peoplesoft Inc., and SAP
Aktiengeschellschaft. In the tools applications software market, competitors
include Microsoft Corporation, International Business Machines Corporation,
Sybase, Inc. and Rational Software Corporation. The Company continues to
compete in these traditional markets as well as in some new, rapidly expanding
markets like the CRM and Strategic Procurement marketplaces where Oracle
competes with Siebel Systems, Inc. and Ariba, Inc., respectively.
Product and Services Revenues
The Company's standard end user license agreement for the Company's products
provides for an initial fee to use the product in perpetuity up to a maximum
number of concurrent or named users. The Company also enters into other
license agreement types, typically with major end user customers, which allow
for the use of the Company's products, usually restricted by the number of
employees, the number of users, the license term or the number of power units
(processing power.) Fees from licenses are recognized as revenue upon
shipment, provided fees are fixed and determinable and collection is probable.
Fees from licenses sold together with consulting services are generally
recognized upon shipment provided that the above criteria have been met,
payment of the license fees is not dependent upon the performance of the
consulting services and the consulting services are not essential to the
functionality of the license software. In instances where the aforementioned
criteria have not been met, both the license and consulting fees are
recognized under the percentage of completion method of contract accounting.
The Company receives sublicense fees from its Oracle Alliance partners (value-
added relicensors, hardware providers, systems integrators and independent
software vendors) based on the sublicenses granted by the Oracle Alliance
partner. Sublicense fees typically are based on a percentage of the Company's
list price and are generally recognized as they are reported by the reseller.
In general, the Company prices its support services based on the level of
support services provided and the number of users authorized to access the
Company's software products. Most customers purchase support initially and
renew their support agreements annually. Support usually consists of two
parts: (1) technical support, including telephone consultation on the use of
the products and problem resolution; and (2) updates for software products and
end user documentation. The Company generally bills support fees at the
beginning of each support period. Support revenues are recognized ratably over
the contract period.
Revenues related to consulting and education services to be performed by the
Company generally are recognized over the period during which the applicable
service is to be performed or on a services-performed basis.
The Company's quarterly revenues and expenses reflect distinct seasonality.
See "Management's Discussion and Analysis of Financial Position and Results of
Operations."
Product Protection
The Company relies on a combination of trade secret, copyright, patent,
trademark and other proprietary or intellectual property rights laws, license
agreements and technical measures to protect its rights in its software
products. The Company owns over 100 issued patents and has numerous patent
applications pending before the United States Patent and Trademark Office.
The Company has registered "ORACLE" as a trademark in the United States and in
over 110 foreign countries and has additional registrations pending. The
Company also has registered over 65 other trademarks in the United States for
other product names and also has registration applications pending for
products and services names in the United States and foreign countries.
The Company's products generally are licensed to end users on a "right to use"
basis pursuant to a nontransferable perpetual license that restricts the use
of the products to the customer's operations based on some
8
factor used to approximate the customer's usage of the products, such as the
number of computers or the number of users. Although the Company's license
agreements prohibit a customer from disclosing the proprietary information
contained in the Company's products to any other person, it is technologically
possible for competitors of the Company to copy aspects of the Company's
products in violation of the Company's rights. The Company's products are
generally licensed pursuant to signed license agreements, or may be licensed
pursuant to "shrink-wrap" licenses that are not signed by the licensee. The
enforceability of such shrink-wrap licenses has not been conclusively
determined in all jurisdictions. The Company also distributes certain of its
products through the Internet pursuant to on-line licenses that are
acknowledged by the licensee. The enforceability of such licenses has not yet
been determined by the courts. In addition, the laws of certain foreign
countries do not protect the Company's proprietary rights in its products to
the same extent as do the laws of the United States.
The Company believes that its trade secret, copyright, patent, trademark and
other proprietary and intellectual property rights are important. However,
because of the rapid pace of technological change in the computer software
industry, factors such as the knowledge, ability and experience of the
Company's personnel, brand recognition and ongoing product support may be more
significant in maintaining the Company's competitive advantages.
Employees
As of May 31, 1999, the Company employed 43,800 full-time persons, including
33,056 in sales and services, 994 in marketing, 5,781 in research and
development and 3,969 in general and administrative positions. Of such
employees, 21,670 were located in the United States and 22,130 were employed
in approximately 60 other countries.
None of the Company's employees is represented by a labor union. The Company
has experienced no work stoppages and believes that its employee relations are
good.
Item 2. Properties
The Company's headquarters facilities consist of approximately 2,300,000
square feet of office facilities in Redwood City, California, of which
1,700,000 square feet is located in seven buildings. The Company owns two of
the buildings, and as discussed in Footnote 2 of Notes to the Consolidated
Financial Statements, has recorded four buildings as capital leases and has an
option to acquire the remaining building. The Company also owns the land under
each of these seven buildings. The Company has purchased land in Belmont,
California, adjacent to the Company's headquarters facilities, and has started
construction of a 175,000 square feet facility.
In addition, the Company owns land in New Hampshire, the United Kingdom, India
and Australia and has constructed facilities of 72,000 square feet in New
Hampshire and 315,000 square feet for its United Kingdom headquarters.
Construction is underway for an additional 50,000 square feet in the United
Kingdom, 75,000 square feet in India and 113,000 square feet in Australia.
The Company has entered into a collateralized lease agreement with options to
purchase land and future or existing facilities in California, Virginia and
Colorado. Under these lease agreements, the Company leases a 260,000 square
foot building in Redwood City, California, a 100,000 square foot building in
Rocklin, California and a 200,000 square foot building in Reston, Virginia. A
facility is also under construction in Colorado Springs, Colorado, for 180,000
square feet. Additional land is available at all of the aforementioned sites
for future expansion.
The Company also leases office space in the United States and various other
countries under operating leases.
The Company believes that its facilities are adequate for its current needs
and that suitable additional or substitute space will be available as needed
to accommodate expansion of the Company's operations. See Notes 2 and 5 of
Notes to Consolidated Financial Statements for information regarding the
Company's lease obligations.
9
Item 3. Legal Proceedings
The material set forth in Footnote 13 of Item 14(a)(1) of this Form 10-K is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4A. Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Office(s)
---- ---------
Lawrence J. Ellison..... Chief Executive Officer and Chairman of the Board
Raymond J. Lane......... President, Chief Operating Officer and Director
Jeffrey O. Henley....... Executive Vice President, Chief Financial Officer and Director
Randall Baker........... Executive Vice President, Support Services
Gary Bloom.............. Executive Vice President
Pier Carlo Falotti...... Executive Vice President, Europe, Middle East and Africa
Jay H. Nussbaum......... Executive Vice President, Service Industries
George J. Roberts....... Executive Vice President, North American Sales
Edward J. Sanderson..... Executive Vice President, Consulting and Latin American Division
Daniel Cooperman........ Senior Vice President, General Counsel and Secretary
Jennifer L. Minton...... Vice President and Corporate Controller
Mr. Ellison, 54, has been Chief Executive Officer since he co-founded the
Company in May 1977. Mr. Ellison has been Chairman of the Board since June
1995 and served as Chairman of the Board from April 1990 until September 1992.
He also served as President of the Company from May 1977 to June 1996. Mr.
Ellison is co-chairman of California's Council on Information Technology. He
is also a director of Liberate Technologies, a computer software company,
SuperGen, Inc., a pharmaceutical company, as well as Apple Computer, Inc., a
computer company.
Mr. Lane, 52, has been President and Chief Operating Officer of the Company
since July 1996. Mr. Lane served as Executive Vice President of the Company
and President of Worldwide Operations from October 1993 to June 1996 and has
been a Director since June 1995. He served as a Senior Vice President of the
Company and President of Oracle USA from June 1992 to September 1993. Before
joining Oracle, Mr. Lane served as Senior Vice President and Managing Partner
of the Worldwide Information Technology Group at Booz-Allen & Hamilton from
July 1986 to May 1992. He served on the Booz-Allen & Hamilton Executive
Committee and its Board of Directors from April 1987 to May 1992. Mr. Lane is
also a member of the Board of Trustees of Carnegie Mellon University and
serves on the Board of Directors of Special Olympics International. Mr. Lane
is a director of Marimba, Inc., a computer software company.
Mr. Henley, 54, has been Executive Vice President and Chief Financial Officer
of the Company since March 1991 and has been a Director since June 1995. Prior
to joining Oracle, he served as Executive Vice President and Chief Financial
Officer of Pacific Holding Company, a privately held company with diversified
interests in manufacturing and real estate, from August 1986 to February 1991.
Mr. Henley is a director of Liberate Technologies, a computer software
company.
Mr. Baker, 55, has been Executive Vice President, Support Services since
October 1998, and Senior Vice President of Worldwide Customer Support of the
Company since June 1994. Prior to joining Oracle, Mr. Baker served as Vice
President of Worldwide Customer Support and Services for Tandem Computers. He
also worked at International Business Machines Corporation ("IBM") for 17
years where he held leadership positions in systems engineering, product
management and support divisions.
10
Mr. Bloom, 38, has been Executive Vice President (responsible for database and
application server development, marketing, education, partner programs,
information technology, and mergers and acquisitions) since May 1999 and the
Executive Vice President of the System Products Division from March 1998 to
May 1999. He has held various positions, including Senior Vice President of
the System Products Division from November 1997 to March 1998, Senior Vice
President of the Worldwide Alliances and Technologies Division from May 1997
to October 1997, Senior Vice President of the Product and Platform
Technologies Division from May 1996 to May 1997, and Vice President of the
Mainframe and Integration Technology Division and Vice President of the
Massively Parallel Computing Division from May 1992 to May 1996. Prior to
joining Oracle, Mr. Bloom worked at IBM and at Chevron Corporation where he
held various technical positions in their mainframe system areas.
Mr. Falotti, 57, has been Executive Vice President, Europe, Middle East and
Africa since October 1998, and Senior Vice President of Europe, Middle East
and Africa of the Company since September 1996. Before joining Oracle, from
March 1994 to August 1996, Mr. Falotti served as Executive Vice President of
International Operations and President and Chief Executive Officer of Europe,
Middle East and Africa of AT&T. Prior to AT&T, Mr. Falotti served as President
and Chief Executive Officer of The ASK Group and Digital Equipment Corporation
where he spent 23 years in various roles. Mr. Falotti is a director of
FVC.COM, Inc., a video networking company and Logitech International, S.A., a
computer interface device company.
Mr. Nussbaum, 55, has been Executive Vice President, Oracle Service Industries
since October 1998, and Senior Vice President and General Manager of the
Company's Federal group since 1992. Prior to joining Oracle, Mr. Nussbaum
worked at Xerox Corporation where he held various management roles during his
twenty-four-year tenure, including President of Integrated Systems Operations.
Mr. Nussbaum is active in the education community and has served on several
key advisory boards for George Mason University, James Madison University and
the University of Maryland.
Mr. Roberts, 43, has been Executive Vice President, North America Sales since
June 1999 and served as Senior Vice President, North American Sales from June
1998 to May 1999. Mr. Roberts served as Senior Vice President, Business On-
Line from March 1998 to June 1998. He took a leave of absence from July 1997
to March 1998 and served as Group Vice President from December 1996 to June
1997. Mr. Roberts joined Oracle in March 1990 and from June 1990 to November
1996, served as Group Vice President, Central Commercial Sales.
Mr. Sanderson, 50, has been Executive Vice President, Consulting and Latin
American Division since June 1999, and Senior Vice President of Consulting and
the Latin American Division of the Company from July 1998 to May 1999. He
served as Senior Vice President of Americas Consulting for the Company from
July 1995 to July 1998. Before joining Oracle, Mr. Sanderson served as
President of Worldwide Information Services for Unisys Corporation from
February 1994 to June 1995. Prior to Unisys, he spent 18 years in the
consulting industry at McKinsey & Company and Andersen Consulting.
Mr. Cooperman, 48, has been Senior Vice President, General Counsel and
Secretary of the Company since February 1997. Prior to joining Oracle, Mr.
Cooperman had been associated with the law firm of McCutchen, Doyle, Brown &
Enersen since October 1977, and had served there as a partner since June 1983.
From September 1995 until February 1997, Mr. Cooperman was Chair of the law
firm's Business & Transactions Group, and from April 1989 through September
1995, he served as the Managing Partner of the law firm's San Jose Office.
Ms. Minton, 38, has been the Corporate Controller since November 1998 and a
Vice President of the Company since August 1995. From May 1989 to August 1995,
Ms. Minton held various positions in Oracle's finance organization including
Assistant Corporate Controller. Prior to joining Oracle, Ms. Minton held
various positions in the Audit Division of Arthur Andersen LLP, an
international public accounting firm, including Manager from September 1987 to
May 1989.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been traded in the over-the-counter market and
the NASDAQ National Market since the Company's initial public offering in
1986. According to records of the Company's transfer agent, the Company had
approximately 15,818 stockholders of record as of May 31, 1999. Because many
of such shares are held by brokers and other institutions on behalf of
stockholders, the Company is unable to estimate the total number of
stockholders represented by these record holders. The following table sets
forth the low and high sale price of the Company's Common Stock in each of the
Company's last eight fiscal quarters.
Low Sale Price High Sale Price
-------------- ---------------
Fiscal 1999:
Fourth Quarter............................ $21.00 $39.63
Third Quarter............................. 22.45 41.17
Second Quarter............................ 12.13 24.67
First Quarter............................. 13.20 19.00
Fiscal 1998:
Fourth Quarter............................ $15.63 $21.25
Third Quarter............................. 11.83 21.67
Second Quarter............................ 19.17 26.71
First Quarter............................. 20.45 28.09
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its Common Stock in the foreseeable future.
On February 26, 1999, the Company effected a three-for-two stock split in the
form of a Common Stock dividend distributed to stockholders of record as of
February 10, 1999. All share data and numbers of Common shares contained in
this Form 10-K have been retroactively adjusted to reflect the stock split.
Item 6. Selected Financial Data
Year Ended May 31,
------------------------------------------------------
(in thousands, except 1999 1998 1997 1996 1995
per share data) ---------- ---------- ---------- ---------- ----------
Revenues................ $8,827,252 $7,143,866 $5,684,336 $4,223,300 $2,966,878
Operating income........ 1,872,881 1,244,200 1,262,985 904,891 649,721
Net income.............. 1,289,758 813,695 821,457 603,279 441,518
Earnings per share--
basic.................. 0.89 0.55 0.55 0.41 0.31
Earnings per share--
diluted................ 0.87 0.54 0.54 0.40 0.29
Total assets............ 7,259,654 5,819,011 4,624,315 3,357,243 2,424,517
Short-term debt......... 3,638 2,924 3,361 5,623 9,599
Long-term debt.......... 304,140 304,337 300,836 897 81,721
Stockholders' equity.... 3,695,267 2,957,558 2,369,712 1,870,449 1,211,358
Item 7. Management's Discussion and Analysis of Financial Position and Results
of Operations
Results of Operations
The Company's revenue growth rate was 24%, 26% and 35% in fiscal 1999, 1998
and 1997, respectively. The lower overall revenue growth rate in fiscal 1999
as compared to fiscal 1998 was primarily due to lower services revenue growth
rates than those experienced in prior years partially offset by higher license
revenue growth. The lower overall revenue growth rate in fiscal 1998 as
compared to fiscal 1997 was primarily due to lower license revenue growth
rates than those experienced in the prior year. Sales and marketing expenses
continue to represent a large portion of operating expenses, constituting 30%,
33% and 35% of revenues in fiscal 1999, 1998 and 1997,
12
respectively, while cost of services as a percentage of total revenues
increased to 35% in fiscal 1999 from 32% in fiscal 1998 and 27% in fiscal
1997. The change in the sales and marketing and cost of services percentages
were primarily the result of the change in the mix of license versus services
revenues during the three year period, as well as an increase in consulting
revenues as a percentage of total service revenues. The Company's investment
in research and development amounted to 10% of revenues in fiscal 1999
compared to 11% of revenues in fiscal year 1998 and 10% of revenues in fiscal
1997, prior to the impact of capitalized software development costs. General
and administrative expenses as a percentage of revenues were 5% in fiscal
1999, 1998 and 1997. Overall, operating income as a percentage of revenues was
21%, 17% (20% prior to the charges for acquired in-process research and
development), and 22% (23% prior to the charges for acquired in-process
research and development), in fiscal 1999, 1998 and 1997, respectively.
Domestic revenues increased 27% in fiscal 1999 and 34% in fiscal 1998, while
international revenues increased 21% and 18% in fiscal 1999 and 1998,
respectively. International revenues were unfavorably affected in both fiscal
1999 and 1998 when compared to the corresponding prior year periods as a
result of the strengthening of the U.S. dollar against certain major
international currencies. International revenues expressed in local currency
increased by approximately 24% and 28% in fiscal 1999 and 1998, respectively.
Revenues from international customers were approximately 49%, 50% and 53% of
revenues in fiscal 1999, 1998 and 1997, respectively. Management expects that
the Company's international operations will continue to provide a significant
portion of total revenues. However, international revenues will be adversely
affected if the U.S. dollar continues to strengthen against certain major
international currencies.
Quarterly revenues reflect distinct seasonality. See "Quarterly Results of
Operations" below.
Revenues:
Fiscal Year 1999 Change Fiscal Year 1998 Change Fiscal Year 1997
(in thousands) ---------------- ------ ---------------- ------ ----------------
Licenses and Other...... $3,688,366 15% $3,193,490 10% $2,896,696
Percentage of revenues.. 41.8% 44.7% 51.0%
Services................ $5,138,886 30% $3,950,376 42% $2,787,640
Percentage of revenues.. 58.2% 55.3% 49.0%
Total Revenues........ $8,827,252 24% $7,143,866 26% $5,684,336
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 fiscal 1999, 1998
and 1997. License revenues, excluding other revenues, grew 16% and 9% in
fiscal 1999 and 1998, respectively. System software license revenues, which
include server and tools revenues, grew 16% and 8% in fiscal 1999 and 1998,
respectively. Applications license revenues grew 16% and 18% in fiscal 1999
and 1998, respectively. The higher license revenue growth rate experienced in
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.
During the past three fiscal years, the Company's customer and product base
has broadened as the Company has increased both the number of channels that it
uses to market its products, as well as the number of computers and operating
systems on which its products operate, and as additional software products
have been acquired or introduced. License revenues for software used on
computers utilizing the UNIX operating system decreased to 63% of license
revenues in fiscal year 1999 from 64% in fiscal 1998 and 70% in fiscal 1997.
License revenues for use on Windows platforms increased from 21% in fiscal
1997 to 30% in fiscal 1998 and 32% in fiscal 1999. License revenues from
software for use on computers utilizing proprietary and other desktop
platforms were 5%, 6% and 9% in fiscal 1999, 1998 and 1997, respectively.
13
Services Revenues. Services revenues consist of support, consulting and
education services revenues which comprised 45%, 46% and 9% of total services
revenues, respectively, during fiscal 1999. Support revenues grew 31% and 36%
in fiscal 1999 and 1998, respectively. Consulting services revenues grew 34%
and 53% in fiscal 1999 and 1998, respectively. Education services revenues
grew 12% and 26% in fiscal 1999 and 1998, respectively. The decrease in the
support revenue growth rate is primarily attributed to the decrease in the
license revenue growth rate experienced in fiscal 1998 and fiscal 1999 as
compared to prior periods, partially offset by higher levels of support
services being offered. The services 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 fiscal
1999 is primarily due to the decrease in the applications license revenue
growth rates during fiscal 1998. The consulting and education revenue growth
rates are expected to continue to decrease in fiscal 2000 as compared to the
prior year corresponding period.
Operating Expenses:
Fiscal Year 1999 Change Fiscal Year 1998 Change Fiscal Year 1997
(in thousands) ---------------- ------ ---------------- ------ ----------------
Sales and Marketing... $2,622,379 11% $2,371,306 20% $1,970,394
Percentage of
revenues............. 29.7% 33.2% 34.7%
Cost of Services...... $3,064,148 35% $2,273,607 47% $1,550,466
Percentage of
revenues............. 34.7% 31.8% 27.3%
Research and
Development(1)....... $ 841,406 17% $ 719,143 29% $ 555,476
Percentage of
revenues............. 9.5% 10.1% 9.8%
General and
Administrative....... $ 426,438 16% $ 368,556 20% $ 308,215
Percentage of
revenues............. 4.8% 5.2% 5.4%
Acquired In-Process
Research and
Development.......... -- * $ 167,054 * $ 36,800
Percentage of
revenues............. -- 2.3% 0.6%
- --------
* Not meaningful
(1) Pursuant to SFAS No. 86, the Company capitalized software development
costs equal to 0.4% of total revenues during fiscal 1999 and 0.5% of total
revenues during fiscal 1998 and 1997.
International expenses were favorably affected in both fiscal 1999 and 1998
when compared to the corresponding prior year periods due to the strengthening
of the U.S. dollar against certain major international currencies. The net
impact on operating margins, however, was unfavorable, 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 as well. Sales and marketing expenses as a
percentage of both total revenues and license revenues decreased in fiscal
1999 as compared to fiscal 1998. The decrease in fiscal 1999 was primarily due
to 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 increased to 60% in fiscal 1999 from 58%
in fiscal 1998. Increases in cost of services as a percentage of services
revenues were due primarily to lower consulting and education utilization
rates, as a result of slower than anticipated revenue growth. Consulting and
education services typically have lower margins than support.
Research and Development Expenses. Research and development expenses were 10%,
11% and 10% of total revenues in fiscal 1999, 1998 and 1997, respectively,
before the capitalization of software development costs in accordance with
SFAS No. 86. Before considering the impact of software capitalization,
research and development expenses increased 15% and 30% in fiscal 1999 and
1998, respectively, when compared to corresponding prior year periods (17% and
29% after the adjustment for software capitalization). The lower
14
expense growth rate in fiscal 1999 was due to controls over headcount growth
after a significant investment in research and development personnel during
the corresponding period in fiscal 1998. The Company capitalized $32,855,000,
$38,079,000 and $28,064,000 of computer software development costs in fiscal
1999, 1998 and 1997, respectively, which represented 4% of total expenditures
for research and development in fiscal 1999 and 5% in fiscal 1998 and 1997.
Amortization of capitalized software development costs is charged to sales and
marketing expenses and totaled $33,000,000, $38,035,000 and $28,156,000 in
fiscal 1999, 1998 and 1997, 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 were 5% in fiscal 1999, 1998 and 1997.
Acquired In-Process Research and Development. In fiscal 1997, the Company
acquired Datalogix International, Inc. ("Datalogix") for approximately
$82,000,000 in cash. In fiscal 1998, the Company completed the acquisition of
Treasury Services Corporation ("TSC") for approximately $110,000,000 in cash,
and converted the outstanding options to purchase TSC stock to options to
purchase the Company's stock at a value of approximately $8,967,000. In
addition, the Company also merged its subsidiary, Liberate Technologies
("Liberate"), previously Network Computer, Inc., 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 (See Note 6 of Notes to Consolidated
Financial Statements for further details on acquisitions).
Overall Valuation Methodology
Independent valuations of TSC, Navio and Datalogix 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 acquired in-process research and
development ("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. TSC, Navio and Datalogix, 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.
15
The following table presents the purchase price allocations associated with
these acquisitions:
TSC Navio Datalogix
(in thousands) -------- ------- ---------
In-process R&D................................ $ 91,500 $75,554 $36,800
Developed Technology.......................... 11,400 -- 13,500
Other Intangible Assets....................... 24,700 1,750 --
Installed Customer Base and Trade Names....... 7,200 -- 4,500
Assembled Workforce........................... 1,700 350 2,000
-------- ------- -------
Total Intangible Assets..................... 136,500 77,654 56,800
Net Tangible Assets........................... (17,533) (654) 25,200
-------- ------- -------
Total Purchase Price........................ $118,967 $77,000 $82,000
======== ======= =======
Purchased incomplete R&D 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
. Degree of leverage of the new technology on legacy technology
. Risks associated with project completion
. Assessment of types of efforts involved (hardware development and
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.
Rates used to discount net cash flows ranged from 20% to 50% and considered
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 R&D 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 R&D 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
16
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, R&D 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 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
17
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 R&D 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.
Other Income, net:
Fiscal Year 1999 Change Fiscal Year 1998 Change Fiscal Year 1997
(in thousands) ---------------- ------ ---------------- ------ ----------------
Other Income, net....... $109,197 31% $83,619 * $20,542
Percentage of revenues.. 1.2% 1.2% 0.4%
- --------
*Not meaningful
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 fiscal 1999. Excluding the effect of the sale of shares
of Oracle Japan, other income was $84,740,000 for fiscal 1999. The Company
still owns 84.59% of Oracle Japan. Other income in 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 for
fiscal 1998 was $57,893,000. The increase in other income during fiscal 1999
as compared to fiscal 1998 and fiscal 1998 as compared to fiscal 1997,
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
net interest income related to changes in cash and investment 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 fiscal 1998
related to the sale of certain securities.
Provision for Income Taxes:
Fiscal Year 1999 Change Fiscal Year 1998 Change Fiscal Year 1997
(in thousands) ---------------- ------ ---------------- ------ ----------------
Provision for Income
Taxes.................. $692,320 35% $514,124 11% $462,070
Percentage of revenues.. 7.8% 7.2% 8.1%
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 other than the federal statutory rate, as well as foreign
losses that could not be utilized. See Note 10 of Notes to Consolidated
Financial Statements. The effective tax rate was 35% in fiscal 1999, 35% in
fiscal 1998 (excluding the effect of the acquired research and development
charges for the TSC and Navio transactions, net of a credit of $25,726,000 for
minority interest) and 36% in fiscal 1997.
Net Income and Earnings Per Share:
Fiscal Year 1999 Change Fiscal Year 1998 Change Fiscal Year 1997
(in thousands) ---------------- ------ ---------------- ------ ----------------
Net Income.............. $1,289,758 59% $813,695 (1%) $821,457
Percentage of revenues.. 14.6% 11.4% 14.5%
Earnings Per Share--Ba-
sic.................... $ 0.89 62% $ 0.55 2% $ 0.56
Earnings Per Share--
Diluted................ $ 0.87 61% $ 0.54 -- $ 0.54
18
Quarterly Results of Operations
The Company believes that quarterly revenues and expenses are affected by a
number of seasonal factors, including the Company's sales compensation plans.
The Company believes that these seasonal factors are common in the computer
software industry. Such factors historically have resulted in first quarter
revenues in any year being lower than revenues in the immediately preceding
fourth quarter. The Company expects this trend to repeat in the first quarter
of fiscal 2000. In addition, the Company's European operations generally
provide lower revenues in the summer months because of the generally reduced
economic activity in Europe during the summer.
The following table sets forth selected unaudited quarterly information for
the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments (which consisted only of normal recurring adjustments)
have been included in the amounts stated below to present fairly the results
of such periods when read in conjunction with the financial statements and
related notes included elsewhere herein.
Fiscal 1999 Quarter Ended
---------------------------------------------
(in thousands, except per August 31 November 30 February 28 May 31
share data) ---------- ----------- ----------- ----------
Revenues.................... $1,749,110 $2,055,944 $2,078,919 $2,943,278
Operating income............ $ 277,837 $ 382,067 $ 406,679 $ 806,299
Net income.................. $ 195,002 $ 274,076 $ 293,261 $ 527,420
Earnings per share--basic... $ 0.13 $ 0.19 $ 0.20 $ 0.37
Earnings per share--
diluted.................... $ 0.13 $ 0.19 $ 0.20 $ 0.36
Shares outstanding--basic... 1,459,341 1,445,760 1,440,352 1,436,898
Shares outstanding--
diluted.................... 1,483,724 1,474,905 1,495,461 1,482,809
Fiscal 1998 Quarter Ended
---------------------------------------------
(in thousands, except per August 31 November 30 February 28 May 31
share data) ---------- ----------- ----------- ----------
Revenues.................... $1,368,829 $1,613,727 $1,748,757 $2,412,553
Operating income............ $ 48,976 $ 272,006 $ 318,273 $ 604,944
Net income.................. $ 8,471 $ 187,324 $ 215,077 $ 402,822
Earnings per share--basic... $ 0.01 $ 0.13 $ 0.15 $ 0.28
Earnings per share--diluted
(1)........................ $ 0.01 $ 0.12 $ 0.14 $ 0.27
Shares outstanding--basic... 1,468,928 1,473,737 1,462,421 1,460,511
Shares outstanding--dilut-
ed......................... 1,509,399 1,512,837 1,487,462 1,488,654
- --------
(1) Earnings per share--diluted before the effect of the charge for acquired
in-process research and development was $0.10 per share in the first
quarter of fiscal 1998.
Liquidity and Capital Resources
Fiscal Year Ended May 31,
-----------------------------------------------
1999 Change 1998 Change 1997
(in thousands) ---------- ------ ---------- ------ ----------
Working capital........................ $2,400,851 31% $1,838,885 36% $1,348,957
Cash and cash investments.............. 2,812,311 34% 2,105,710 58% 1,329,527
Cash provided by operating activities.. 1,807,099 12% 1,614,579 57% 1,030,504
Cash used for investing activities..... 802,244 (13%) 922,521 19% 777,381
Cash used for financing activities..... 484,713 71% 282,846 395% 57,122
Working capital increased in fiscal 1999 and 1998 over the corresponding prior
year periods, due primarily to increased cash flow from operations, cash
received from the initial public offering of Oracle Japan, and the private
placement of Liberate (See Note 7 of Notes to Consolidated Financial
Statements), partially offset by
19
cash used for the repurchase of the Company's Common Stock and cash used for
other long-term investing activities.
The Company generated higher positive cash flows from operations in fiscal
1999 and 1998 over the corresponding prior year periods (excluding the effect
of the initial public offering of Oracle Japan in fiscal 1999 and the charges
for in-process research and development in fiscal 1998) due primarily to
improved profitability.
Cash used for investing activities decreased in 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
the private placement of Liberate, net of a higher level of cash used for
acquisitions. Cash used for investing activities increased in fiscal 1998 as
compared to the corresponding prior year period due to changes in the levels
and maturities of cash investments. In each period, the Company made
significant investments in capital expenditures. The Company expects to
continue to invest in capital and other assets to support its growth.
The Company's Board of Directors has approved the repurchase of up to
274,000,000 shares of Common Stock to reduce the dilutive effect of the
Company's stock plans. Pursuant to this repurchase program, the Company
purchased 54,656,519 shares of the Company's Common Stock for approximately
$1,086,953,000 in fiscal 1999, 27,669,159 shares of the Company's Common Stock
for approximately $489,823,000 in fiscal 1998, 28,816,875 shares of the
Company's Common Stock for approximately $528,209,000 in fiscal 1997 and
49,763,271 shares of the Company's Common Stock for approximately $313,733,000
prior to fiscal 1997. The Company used cash flow from operations and proceeds
from the issuance of Senior Notes in fiscal 1997 to repurchase the Company's
Common Stock and to invest in working capital and other assets to support its
growth.
During fiscal 1999 and fiscal 1998, the Company, as part of its authorized
stock repurchase program, sold put warrants and purchased call options through
private placements. As of May 31, 1999, the Company had a maximum potential
obligation under the put warrants to buy back 40,136,000 shares of its Common
Stock for prices ranging from $11.17 to $19.39 per share for an aggregate
price of approximately $648,887,000. The put warrants will expire from July
1999 through October 2000. As of May 31, 1999, the Company had the right to
purchase up to a maximum of 20,068,000 shares of its Common Stock at prices
ranging from $13.89 to $26.06 per share for an aggregate price of
approximately $416,393,000. The call options will expire at various dates
through October 2000.
During 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.
During fiscal 1997, the Company sold 13,500,000 warrants, each of which
entitles the holder to purchase one share of Common Stock at prices between
$34.22 and $34.47. These warrants expire in May 2000 and the proceeds of
$35,898,000 were credited to stockholders' equity.
At May 31, 1999, the Company also had other outstanding debt of approximately
$7,778,000, primarily in the form of other notes payable and capital leases.
The Company had no significant commitments for capital expenditures at May 31,
1999. 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 May 31, 2000.
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.
20
Revenue Growth and Economic Conditions. The revenue growth and profitability
of the Company's business depends on the overall demand for computer software
and services, particularly in the product segments in which the Company
competes. Because the Company's sales are primarily to major corporate and
government customers, the Company's business also depends on general economic
and business conditions. A softening of demand for computer software caused by
a weakening of the economy may result in decreased revenues or lower growth
rates. In particular, one of the challenges the Company continues to face in
promoting future growth in license revenues will be to refocus its marketing
and sales efforts in the CRM area of its applications business where the
market is growing more quickly than in the ERP area. There can be no
assurances that the Company will be able to effectively promote future license
revenue growth in its applications business.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition" which superseded SOP No. 91-1. SOP No. 97-2 was effective for the
Company's fiscal year beginning June 1, 1998, as amended by SOP No. 98-4 and
SOP No. 98-9, and provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. Based on the
Company's interpretation of the requirements of SOP No. 97-2, as amended,
application of this statement did not and is not expected to have a material
impact on the Company's revenue. However, the accounting profession continues
to review certain provisions of SOP No. 97-2, with the objective of providing
additional guidance on implementing its provisions. Depending upon the outcome
of these reviews and the issuance of implementation guidelines and
interpretations, the Company may be required to change its revenue recognition
policies and business practices, and such changes could have a material
adverse effect on the Company's business, results of operations or financial
position.
Competitive Environment. The computer software industry is an intensely
competitive industry with several large vendors that develop and market
databases, application development tools, business applications and business
intelligence products. Certain of these vendors have significantly more
financial and technical resources than the Company. The introduction of new
competitive products into one or more of the Company's various markets, the
addition of new functionality into an existing competitive product or the
acquisition by one of the Company's competitors of a product could have a
material adverse effect on the Company's business, results of operations or
financial position. In addition, new distribution methods (e.g., electronic
channels) and opportunities presented by the Internet and electronic commerce
have removed many of the barriers to entry historically faced by small and
start-up companies in the software industry. The Company expects to face
increasing competition in the various markets in which it competes.
Pricing. Intense competition in the various markets in which the Company
competes may put pressure on the Company to reduce prices on certain products,
particularly in the markets where certain vendors offer deep discounts in an
effort to recapture or gain market share or to sell other software or hardware
products. In addition, the bundling of software products for promotional
purposes or as a long-term pricing strategy or guarantees of product
implementations by certain of the Company's competitors could have the effect
over time of significantly reducing the prices that the Company can charge for
its products. Changes in the customer's use of the Company's products could
also result in lower license revenues if the Company's pricing model is not
adapted to such usage. Shifts toward the use of operating systems on which the
Company experiences relatively greater price competition could result in lower
average license prices, thereby reducing license revenues for the Company.
Additionally, while the distribution of applications through application
service providers may provide a new market for the Company's products, these
new distribution methods could also reduce the price paid for the Company's
products or adversely affect other sales of the Company's products. Any such
price reductions and resulting lower license revenues could have a material
adverse effect on the Company's business, results of operations or financial
position if the Company cannot offset these price reductions with a
corresponding increase in sales volumes or lower spending.
Hiring and Retention of Employees. The Company's continued growth and success
depend to a significant extent on the continued service of its senior
management and other key employees and the hiring of new qualified employees.
Competition for highly-skilled business, product development, technical and
other personnel is becoming more intense due to lower overall unemployment
rates, the boom in information technology spending
21
and private companies that can offer equity incentives that provide the
potential of greater compensation in connection with an initial public
offering. Accordingly, the Company expects to experience increased
compensation costs that may not be offset through either improved productivity
or higher prices. There can be no assurances that the Company will be
successful in continuously recruiting new personnel and in retaining existing
personnel. In general, the Company does not have long-term employment or non-
competition agreements with its employees. The loss of one or more key
employees or the Company's inability to attract additional qualified employees
or retain other employees could have a material adverse effect on the
continued growth of the Company.
International Sales. A substantial portion of the Company's revenues is
derived from international sales and is therefore subject to the related
risks, including the general economic conditions in each country, the overlap
of 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. Changes in the value of major foreign currencies
relative to the value of the U.S. dollar adversely affected revenues and
operating results in fiscal 1999 and 1998, particularly in Asia Pacific and
Latin America, and will continue to do so in fiscal 2000 if the U.S. dollar
strengthens relative to foreign currencies.
Foreign currency transaction gains and losses are primarily related to
sublicense fee and other agreements between the Company and selling
distributors and subsidiaries. These gains and losses are charged against
earnings in the period incurred. The Company has reduced its transaction and
translation gains and losses associated with converting foreign currencies
into U.S. dollars by using forward foreign exchange contracts to hedge
transaction and translation exposures in major currencies. The Company finds
it impractical to hedge all foreign currencies in which it conducts business.
As a result, the Company will continue to experience foreign currency gains
and losses.
Year 2000. This section is a Year 2000 Readiness Disclosure pursuant to the
Year 2000 Information and Readiness Disclosure Act of 1998.
The Company has established a program to address the impact of the year 2000
date transition on its operations globally. In 1997, the Company established a
year 2000 program office, and a Global Program Manager was appointed to
coordinate existing projects and to oversee management and execution of the
Company's plan to address year 2000. The year 2000 program is sponsored by the
Chief Financial Officer; the Senior Vice President, Global, IT/Data Center;
and the General Counsel of the Company. This executive steering committee
regularly reviews progress with the Global Program Manager. Status is reported
regularly to the Finance, Audit Committee of the Company's Board of Directors
and the Product Development Management Committee.
State of Year 2000 Readiness. The Company believes it has adopted standard
industry practices in preparing its internal operations for the year 2000 date
change. The Company's year 2000 internal readiness program covers several
phases: taking inventory of hardware, software, and embedded systems;
assessing business and customer satisfaction risks associated with such
systems; creating action plans to address known risks; executing and
monitoring action plans; and contingency planning. Action plans generally
consist of assessing the year 2000 readiness of systems; repairing, replacing,
or retiring systems that are not year 2000 ready, or retaining low-risk
systems; and testing repaired or replaced systems. The readiness program
encompasses information technology
22
hardware and software systems such as communications systems, desktop PCs, and
custom-built software programs, as well as systems with embedded technology,
such as power generators, temperature controls, alarms, security systems, and
elevators.
As part of the above year 2000 program, the Company addresses third-party
vendors. Certain third-party services or products are critical to the
continued day-to-day operation of the Company, including telecommunications
services, electric power and other utilities, and shipping services. If such a
vendor suffers a business interruption from the year 2000 date change, it
could cause the Company to also suffer a business interruption. The Company
has asked vendors to certify the year 2000 readiness of the products and
services they supply, as well as their own internal compliance programs. If
the Company determines that a vendor's product will not be compliant, or that
the cost of a compliant solution is excessive, alternative solutions are
developed. In addition, the Company monitors the year 2000 compliance status
of third-party hardware and software products and will implement any required
year 2000 patches or updates that those vendors issue in the future.
The Company has substantially completed year 2000 readiness preparations as of
the end of June 1999, although the remediation of several internal IT systems
has been delayed until September 1999. Extensive testing will continue
throughout 1999. The status of the Company's readiness efforts, as described
above, is as follows: inventory--substantially complete; risk assessment--
substantially complete; readiness assessment of systems--substantially
complete; repair or replacement--substantially completed as of the end of June
1999, with exceptions noted above; testing--substantially completed as of the
end of June 1999, but expected to continue throughout calendar year 1999;
contingency planning--expected to be complete by the end of September 1999.
Costs of Addressing Year 2000 Issues. The Company is continually upgrading and
improving its information technology systems and facilities, and the costs of
addressing year 2000 issues are integrated into the budgets for each line of
business, and systems and facilities upgrade activities. The Company therefore
cannot provide any estimate as to costs, if any, it has incurred in addressing
year 2000 issues above and beyond those costs associated with its upgrade
program. In addition, the Company anticipates that it will incur significant
costs in connection with its contingency planning, but such costs cannot be
estimated until the contingency plan is complete. However, the Company does
not believe that any such additional costs will have a material impact on its
results of operations or financial position.
Risks Associated with Year 2000 Issues. A significant amount of the demand the
Company has experienced in recent years for applications software may have
been generated by customers replacing and upgrading applications in order to
accommodate the year 2000 date change. In addition, as the year 2000
approaches, customers may slow down computer software purchases as they devote
more time to preparing and testing their systems for year 2000 readiness,
versus evaluating and implementing new systems. Thus, the software industry
and the Company may experience a significant deceleration from the strong
annual growth rates historically experienced in the applications software
marketplace.
The Company has designed and tested the most current versions of its products
to be year 2000 compliant. Further, the Company's Applications division has
successfully completed the Information Technology Association of America's
year 2000 certification program. There can be no assurances, however, that the
Company's current products do not contain undetected year 2000 defects. The
most reasonably likely worst case scenarios caused by such a defect would
include the partial failure of a widely-sold Company product that is of
mission-critical importance to the Company's customers. Such a scenario could
expose the Company to litigation that could have a material adverse impact on
the Company. Some commentators have stated that a significant amount of
litigation will arise out of year 2000 compliance issues. However, because of
the unprecedented nature of such litigation, it is uncertain to what extent
the Company could be affected by it.
Although the Company does not believe that it will incur any material costs or
experience material disruptions in its business associated with preparing its
internal systems for the year 2000, there can be no assurances that the
Company will not experience serious unanticipated negative consequences caused
by undetected year 2000 defects in its internal systems, including third party
software and hardware products. The most reasonably likely
23
worst case scenarios would include: (i) corruption of data contained in the
Company's internal information systems, and (ii) failure of hardware,
software, or other information technology systems, causing an interruption or
failure of normal business operations. Such a scenario could have a material
adverse impact on the Company. In addition, there can be no assurances that
the Company will not experience serious unanticipated negative consequences
caused by the failure of services provided by third parties, such as
electrical power, telecommunications services, and shipping services. Due to
the impossibility of knowing what failures generally will result from the year
2000 date change (particularly outside of countries such as the United States
where year 2000 remediation has progressed the furthest), and what effects
such failures could have on third party vendors, the Company is unable to
assess the likelihood of a material adverse impact on its results of
operations, liquidity, or financial position due to such year 2000 failures.
Contingency Planning. The Company is preparing a 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
September 1999. However, the Company has already begun addressing potential
and expected effects of the year 2000 date change, such as planning for
increased customer support requests in late 1999 and early 2000. Such existing
activities and plans will be incorporated into the contingency plan.
The Company anticipates that it will experience a significant increase in
calls to customer support in late 1999 and early 2000 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 has developed a program to enable it to handle
the expected increase in calls. The Company does not expect that the costs of
implementing this program will have a material adverse impact on its results
of operations.
Uneven Patterns of Quarterly Operating Results. The Company's revenues in
general, and its license revenues in particular, are relatively difficult to
forecast and vary from quarter to quarter due to various factors, including
the (i) relatively long sales cycles for the Company's products, (ii) size and
timing of individual license transactions, the closing of which tend to be
delayed by customers until the end of a fiscal quarter as a negotiating
tactic, (iii) introduction of new products or product enhancements by the
Company or its competitors, (iv) potential for delay or deferral of customer
implementations of the Company's software, (v) changes in customer budgets,
(vi) seasonality of technology purchases and other general economic conditions
and (vii) reductions in budgets for new software, as customers focus attention
on remediation of year 2000 issues. Accordingly, the Company's quarterly
results are difficult to predict until the end of the quarter, and delays in
product delivery or closing of sales near the end of a quarter have
historically caused and could cause quarterly revenues and net income to fall
significantly short of anticipated levels.
The Company's license revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter. Because the Company's operating
expenses are based on anticipated revenue levels and because a high percentage
of the Company's expenses are relatively fixed, a delay in the recognition of
revenue from even a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
cause net income to fall significantly short of anticipated levels.
Management of Growth. The Company has a history of rapid growth. However, the
Company has experienced slowing growth rates in a number of areas, including
consulting and education services. The Company's future operating results will
depend on management's ability to manage growth, continuously hire and retain
significant numbers of qualified employees, accurately forecast revenues and
control expenses. A decline in the growth rate of revenues without a
corresponding and timely slowdown in expense growth could have a material
adverse effect on the Company's business, results of operations or financial
position.
24
Sales Force Restructuring and Vertical Markets. The Company historically has
relied heavily on its direct sales force. For the past several years, the
Company has restructured or made other adjustments to its sales force at least
once a year. These changes have generally resulted in a temporarily lack of
focus and reduced productivity by the Company's sales force that may have
affected revenues in a quarter. There can be no assurances that the Company
will not continue to restructure its sales force or that the related
transition issues associated with restructuring the sales force will not
recur.
Future Acquisitions. As part of its business strategy, the Company has made
and expects to continue to make acquisitions of, or significant investments
in, businesses that offer complementary products, services and technologies.
Any acquisitions or investments will be accompanied by the risks commonly
encountered in acquisitions of businesses. Such risks include, among other
things, the possibility that the Company pays much more than the acquired
company or assets are worth, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential disruption of the
Company's ongoing business, the distraction of management from the Company's
business, the inability of management to maximize the financial and strategic
position of the Company, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
clients as a result of any integration of new management personnel. These
factors could have a material adverse effect on the Company's business,
results of operations or financial position, particularly in the case of a
larger acquisition. Consideration paid for future acquisitions, if any, could
be in the form of cash, stock, rights to purchase stock or a combination
thereof. Dilution to existing stockholders and to earnings per share may
result in connection with any such future acquisitions.
New Products. The markets for the Company's products are characterized by
rapid technological advances in hardware and software development, evolving
standards in computer hardware and software technology and frequent new
product introductions and enhancements. Product introductions and short
product life cycles necessitate high levels of expenditures for research and
development. To maintain its competitive position, the Company must enhance
and improve existing products and continue to introduce new products and new
versions of existing products that keep pace with technological developments,
satisfy increasingly sophisticated customer requirements and achieve market
acceptance. The Company's inability to port to or run on new or increasingly
popular operating systems, or the Company's failure to successfully enhance
and improve its products in a timely manner, and position and/or price its
products, could have a material adverse effect on the Company's business,
results of operations or financial position.
Significant undetected errors or delays in new products or new versions of a
product, especially in the area of CRM, may affect market acceptance of the
Company's products and could have a material adverse effect on the Company's
business, results of operations or financial position. If the Company were to
experience delays in the commercialization and introduction of new or enhanced
products, if customers were to experience significant problems with the
implementation and installation of products or if customers were dissatisfied
with product functionality or performance, this could have a material adverse
effect on the Company's business, results of operations or financial position.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development.
Relative Product Profitability. Certain of the Company's revenues are derived
from products which, as a percentage of revenues, currently require a higher
level of development, distribution and support expenditures compared to
certain of its other products. To the extent that revenues generated from such
products become a greater percentage of the Company's total revenues, the
Company's operating margins may be adversely affected, unless the expenses
associated with such products decline as a percentage of revenues.
Long-term Investment Cycle. Developing and localizing software is expensive
and the investment in product development often involves a long payback cycle.
The Company's plans for its fiscal year ending May 31, 2000 include
significant investments in software research and development and related
product opportunities from which significant revenues are not anticipated for
several years.
25
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 grow and
the functionality of products overlaps. In addition, the Company expects to
receive more patent infringement claims as companies increasingly seek to
patent their software, especially in light of recent developments in the law
that extend the ability to patent software. Regardless of its merit,
responding to any such claim could be time-consuming, result in costly
litigation and require the Company to enter into royalty and licensing
agreements which may not be offered or available on terms acceptable to the
Company. If a successful claim is made against the Company and the Company
fails to develop or license a substitute technology, the Company's business,
results of operations or financial position could be materially adversely
affected.
Possible Volatility of Stock Price. The market price of the Company's Common
Stock has experienced significant fluctuations and may continue to fluctuate
significantly. The market price of the Common Stock may be significantly
affected by factors such as the announcement of new products or product
enhancements by the Company or its competitors, technological innovation by
the Company or its competitors, quarterly variations in the Company's or its
competitors' results of operations, changes in prices of the Company's or its
competitors' products and services, changes in revenue and revenue growth
rates for the Company as a whole or for specific geographic areas, business
units, products or product categories, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. The stock
prices for many companies in the technology sector have experienced
26
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 7a. 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 amounts approximate fair value at May 31, 1999.
Table of Investment Securities:
Principal Average
Amount Interest Rate
(in thousands) ---------- -------------
Cash and cash equivalents......................... $1,785,715 3.82%
Short-term investments (0-1 years)................ 777,049 5.20%
Long-term investments (1-2 years)................. 249,547 5.32%
----------
Total cash and investment securities............ $2,812,311
==========
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 foreign currency
transactions and all outstanding forward contracts are marked-to-market at the
end of the period with unrealized gains and losses included in other income
(expense). As the foreign currency transactions are realized as cash flows
against the maturing forward contracts, the realized gains and losses are
recorded in net income as a component of other income (expense). The Company's
ultimate realized gain or loss with respect to currency fluctuations will
depend on the currency exchange rates and other factors in effect as the
contracts mature. The unrealized gain (loss) on the outstanding forward
contracts at May 31, 1999 was immaterial to the Company's consolidated
financial statements. The Company also hedges net assets of certain of its
international subsidiaries. The net gains on equity hedges are recorded as a
component of accumulated other comprehensive income (loss) in stockholders'
equity. See Note 1 in Notes to Consolidated Financial Statements for further
discussion. The Company's outstanding forward contracts and equity hedges as
of May 31, 1999 are presented in the tables below. The tables present the
notional amounts (at contract exchange rates) and the weighted average
contractual foreign currency exchange rates. Notional weighted average
exchange rates are quoted using market conventions where the currency is
expressed in currency units per U.S. dollar, except for Australia, Ireland,
New Zealand and the UK. All of these forward contracts and equity hedges
mature in ninety days or less from May 31, 1999.
27
Table of Forward Contracts:
Notional
Weighted Average
Functional Currency Notional Amount Exchange Rate
------------------- --------------- ----------------
Australian Dollar......................... $ 2,399,635 0.65
Canadian Dollar........................... 41,864,891 1.47
Danish Krone.............................. 7,071,036 7.07
Euro...................................... 165,024,495 1.06
Irish Punt................................ 460,194 1.34
Japanese Yen.............................. 10,222,160 120.45
New Zealand Dollar........................ 4,217,020 0.53
Norwegian Krone........................... 5,630,231 7.89
Singapore Dollar.......................... 2,503,202 1.72
Swedish Krona............................. 25,710,896 8.51
Swiss Franc............................... 12,697,780 1.50
Thai Baht................................. 4,579,741 37.12
UK Pound.................................. 117,857,813 1.59
------------
Total................................... $400,239,094
============
Table of Equity Hedges:
Notional
Weighted Average
Functional Currency Notional Amount Exchange Rate
------------------- --------------- ----------------
Hong Kong Dollars......................... $ 10,303,304 7.76
JapaneseYen............................... 30,588,835 117.69
Swedish Krona............................. 5,012,406 7.98
UK Pound.................................. 4,890,600 1.63
------------
Total................................... $ 50,795,145