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Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2008
Our software license agreements also generally include a warranty that our software products will substantially
operate as described in the applicable program documentation for a period of one year after delivery. We also warrant
that services we perform will be provided in a manner consistent with industry standards for a period of 90 days from
performance of the service. Warranty expense was not significant in fiscal 2008, fiscal 2007 or fiscal 2006.
We occasionally are required, for various reasons, to enter into agreements with financial institutions that provide
letters of credit on our behalf to parties we conduct business with in ordinary course. Such agreements have not had a
material effect on our results of operations, financial position or cash flows.
Derivative Financial Instruments
We use derivative financial instruments to manage certain foreign currency and interest rate risks.
Foreign Currency Forward Contracts
We transact business in various foreign currencies and have established a program that primarily utilizes foreign
currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under
this program, increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign
currency forward contracts, to mitigate the possibility of foreign currency transaction gains or losses. These foreign
currency exposures typically arise from intercompany sublicense fees and other intercompany transactions. Our
forward contracts generally have terms of 90 days or less. We do not use forward contracts for trading purposes. All
outstanding foreign currency forward contracts used in this program are marked to market at the end of the period
with unrealized gains and losses included in non-operating income, net. Our ultimate realized gain or loss with
respect to currency fluctuations depends upon the currency exchange rates and other factors in effect as the contracts
mature. Net foreign exchange transaction gains included in non-operating income, net in the accompanying
consolidated statements of operations were $17 million, $17 million and $15 million in fiscal 2008, 2007 and 2006,
respectively. The net unrealized gains of our outstanding foreign currency forward contracts were $3 million and
$5 million at May 31, 2008 and 2007, respectively.
Interest Rate Swap Agreements
In September 2007, we entered into two interest rate swap agreements that have the economic effect of modifying the
variable interest obligations associated with our New 2009 Notes and 2010 Notes (described in Note 6 above) so that
the interest payable on the senior notes effectively became fixed at a rate of 4.62% and 4.59%, respectively. The
critical terms of the interest rate swap agreements and the New 2009 Notes and 2010 Notes match, including the
notional amounts, interest rate reset dates, maturity dates and underlying market indices. The periodic interest
obligations related to the swap agreements, which occur at the same interval as the New 2009 Notes and 2010 Notes,
are recorded as interest expense. The fair values of the interest rate swaps totaled an unrealized loss of $24 million,
net of tax effects, at May 31, 2008. We are accounting for these swaps as hedges pursuant to Statement 133. The
unrealized losses on these interest rate swaps are included in accumulated other comprehensive income and the
corresponding fair value payables are included in other accrued liabilities and other long-term liabilities for the
current and non-current portions, respectively, in our consolidated balance sheet.
Net Investment Hedges
Periodically, we hedge the net assets of certain international subsidiaries (net investment hedges) using foreign
currency forward contracts to offset the translation and economic exposures related to our investments in these
subsidiaries. We measure the effectiveness of net investment hedges by using the changes in spot exchange rates
because this method reflects our risk management strategies, the economics of those strategies in our financial
statements and better manages interest rate differentials between different countries. Under this method, the change
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Source: ORACLE CORP, 10-K, July 02, 2008 Powered by Morningstar® Document Research℠