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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended November 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________.
Commission file number: 0-14376
-----------------
Oracle Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2871189
(State or other (I.R.S. Employer
jurisdiction of Identification no.)
incorporation or
organization)
500 Oracle Parkway
Redwood City, California 94065
(Address of principal executive offices, including zip code)
(650) 506-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
The number of shares of registrant's common stock outstanding as of December
31, 2001 was 5,497,177,469.
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ORACLE CORPORATION
FORM 10-Q QUARTERLY REPORT
-----------------
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at November 30, 2001 and May 31, 2001.......... 3
Condensed Consolidated Statements of Operations for the three and six months ended
November 30, 2001 and November 30, 2000.............................................. 4
Condensed Consolidated Statements of Cash Flows for the six months ended November 30,
2001 and November 30, 2000........................................................... 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 23
Item 2. Changes in Securities and Use of Proceeds............................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.................................. 24
Signatures........................................................................... 25
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, May 31,
(in thousands, except share data) 2001 2001
----------------------------------------------------------------------------- ------------ -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents.................................................. $ 2,467,515 $ 4,449,166
Short-term cash investments................................................ 2,492,013 1,438,495
Trade receivables, net of allowance for doubtful accounts of $380,962 and
$403,305, respectively................................................... 1,812,618 2,432,131
Other receivables.......................................................... 214,766 281,782
Prepaid and refundable income taxes........................................ 449,385 272,742
Prepaid expenses and other current assets.................................. 150,349 88,834
----------- -----------
Total current assets................................................ 7,586,646 8,963,150
Long-term cash investments.................................................... 580,471 --
Property, net................................................................. 1,009,371 974,751
Long-term prepaid income taxes................................................ 398,153 376,030
Other assets.................................................................. 710,819 716,229
----------- -----------
Total assets........................................................ $10,285,460 $11,030,160
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt..................... $ 1,238 $ 2,849
Accounts payable........................................................... 265,725 270,112
Income taxes payable....................................................... 1,028,545 767,087
Accrued compensation and related benefits.................................. 496,041 734,705
Customer advances and unearned revenues.................................... 1,084,715 1,213,529
Value added tax and sales tax payable...................................... 61,304 165,210
Other accrued liabilities.................................................. 795,132 763,127
----------- -----------
Total current liabilities........................................... 3,732,700 3,916,619
Long-term debt................................................................ 300,731 300,847
Deferred income taxes......................................................... 332,417 327,788
Other long-term liabilities................................................... 214,480 207,135
----------- -----------
Total liabilities................................................... 4,580,328 4,752,389
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value--authorized: 1,000,000 shares;
outstanding: none........................................................ -- --
Common stock, $0.01 par value, and additional paid in capital--authorized:
11,000,000,000 shares; outstanding: 5,496,054,732 shares at November 30,
2001 and 5,592,360,823 shares at May 31, 2001............................ 4,946,882 4,820,869
Retained earnings.......................................................... 910,420 1,610,480
Accumulated other comprehensive loss....................................... (152,170) (153,578)
----------- -----------
Total stockholders' equity.......................................... 5,705,132 6,277,771
----------- -----------
Total liabilities and stockholders' equity.......................... $10,285,460 $11,030,160
=========== ===========
See notes to condensed consolidated financial statements
3
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ----------------------
(in thousands, except per share data) 2001 2000 2001 2000
-------------------------------------------------- ---------- ---------- ---------- ----------
Revenues:
Licenses and other.............................. $ 819,324 $1,118,238 $1,550,756 $1,925,476
Services........................................ 1,538,011 1,541,308 3,048,624 2,995,945
---------- ---------- ---------- ----------
Total revenues.............................. 2,357,335 2,659,546 4,599,380 4,921,421
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing............................. 571,152 640,865 1,106,633 1,213,829
Cost of services................................ 609,838 694,998 1,219,711 1,368,876
Research and development........................ 257,484 266,280 510,783 517,307
General and administrative...................... 98,917 111,402 196,531 217,367
---------- ---------- ---------- ----------
Total operating expenses.................... 1,537,391 1,713,545 3,033,658 3,317,379
---------- ---------- ---------- ----------
Operating income................................... 819,944 946,001 1,565,722 1,604,042
---------- ---------- ---------- ----------
Net investment gains (losses) related to equity
securities.................................... (3,388) (13,468) (6,689) 1,965
Other income, net............................... 28,770 33,348 71,904 136,117
---------- ---------- ---------- ----------
Income before provision for income taxes........... 845,326 965,881 1,630,937 1,742,124
Provision for income taxes...................... 295,864 343,069 570,828 618,635
---------- ---------- ---------- ----------
Net income......................................... $ 549,462 $ 622,812 $1,060,109 $1,123,489
========== ========== ========== ==========
Earnings per share:
Basic........................................... $ 0.10 $ 0.11 $ 0.19 $ 0.20
========== ========== ========== ==========
Diluted......................................... $ 0.10 $ 0.11 $ 0.18 $ 0.19
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic........................................... 5,528,372 5,584,428 5,554,092 5,594,243
========== ========== ========== ==========
Diluted......................................... 5,695,860 5,874,987 5,737,940 5,903,929
========== ========== ========== ==========
See notes to condensed consolidated financial statements
4
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
November 30,
- ------------------------
(in thousands) 2001 2000
------------------------------------------------------------------------------- ----------- -----------
Cash Flows From Operating Activities:
Net income....................................................................... $ 1,060,109 $ 1,123,489
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization................................................ 131,004 139,239
Amortization of purchase price in excess of net tangible assets acquired..... 29,890 36,804
Provision for doubtful accounts.............................................. 82,854 94,371
Net investment losses/(gains) related to equity securities................... 6,689 (1,965)
Changes in assets and liabilities:
Decrease in trade receivables............................................. 533,393 474,535
(Increase) decrease in prepaid expenses and other current assets.......... (172,164) 48,469
(Increase) decrease in long-term prepaid income taxes..................... (22,299) 32,755
Decrease in accounts payable.............................................. (4,167) (2,425)
Increase (decrease) in income taxes payable............................... 304,722 (1,847,776)
Decrease in accrued compensation and related benefits..................... (237,740) (199,093)
Decrease in customer advances and unearned revenues....................... (126,848) (64,075)
Decrease in value added tax and sales tax payable......................... (103,595) (61,290)
Increase (decrease) in other accrued liabilities.......................... 33,416 (28,085)
Decrease in deferred income taxes......................................... (12,973) (16,040)
Increase in other long-term liabilities................................... 7,364 5,251
----------- -----------
Net cash provided by (used for) operating activities............................. 1,509,655 (265,836)
----------- -----------
Cash Flows From Investing Activities:
Purchases of cash investments................................................ (3,503,483) (27,000)
Proceeds from maturities of cash investments................................. 1,869,494 249,317
Capital expenditures......................................................... (159,652) (153,997)
Proceeds from sales of marketable securities................................. 9,389 51,731
(Increase) decrease in other assets.......................................... (26,510) 2,360
----------- -----------
Net cash provided by (used for) investing activities............................. (1,810,762) 122,411
----------- -----------
Cash Flows From Financing Activities:
Payments for repurchase of common stock...................................... (1,857,865) (3,420,825)
Proceeds from issuance of common stock....................................... 189,287 341,829
Net payments under notes payable and long-term debt.......................... (1,742) (164)
----------- -----------
Net cash used for financing activities........................................... (1,670,320) (3,079,160)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents..................... (10,224) (40,931)
----------- -----------
Net decrease in cash and cash equivalents........................................ (1,981,651) (3,263,516)
Cash and cash equivalents at beginning of period................................. 4,449,166 7,429,206
----------- -----------
Cash and cash equivalents at end of period....................................... $ 2,467,515 $ 4,165,690
=========== ===========
See notes to condensed consolidated financial statements
5
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2001
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2001.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, (which include only normal, recurring adjustments)
which are, in the opinion of management, necessary to state fairly the results
for the interim periods presented. The results of operations for the interim
periods presented are not necessarily indicative of the operating results to be
expected for any subsequent interim period or for the full fiscal year ending
May 31, 2002.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed using the treasury stock method by
dividing net income by the weighted average number of common shares plus the
dilutive effect of outstanding stock options and shares issuable under the
employee stock purchase plan and a forward contract to sell 36.0 million shares
of the Company's Common Stock. Approximately 129.2 million and 125.2 million
outstanding stock options were excluded from the calculation of diluted
earnings per share for the three and six months ended November 30, 2001,
because they were anti-dilutive. However, these options could be dilutive in
the future.
The following table sets forth the computation of basic and diluted earnings
per share for the periods indicated:
Three Months Ended Six Months Ended
November 30, November 30,
--------------------- ---------------------
(in thousands, except per share data) 2001 2000 2001 2000
--------------------------------------------------- ---------- ---------- ---------- ----------
Net income......................................... $ 549,462 $ 622,812 $1,060,109 $1,123,489
========== ========== ========== ==========
Weighted average common shares outstanding......... 5,528,372 5,584,428 5,554,092 5,594,243
Dilutive effect of employee stock plans and forward
contract......................................... 167,488 290,559 183,848 309,686
---------- ---------- ---------- ----------
Diluted weighted average common shares outstanding. 5,695,860 5,874,987 5,737,940 5,903,929
========== ========== ========== ==========
Basic earnings per share........................... $ 0.10 $ 0.11 $ 0.19 $ 0.20
========== ========== ========== ==========
Diluted earnings per share......................... $ 0.10 $ 0.11 $ 0.18 $ 0.19
========== ========== ========== ==========
3. COMPREHENSIVE INCOME
Comprehensive income includes foreign currency translation gains and losses and
unrealized gains and losses on equity securities that are reflected in
stockholders' equity instead of net income.
6
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30, 2001
(unaudited)
3. COMPREHENSIVE INCOME (continued)
The following table sets forth the calculation of comprehensive income for the
periods indicated:
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ----------------------
(in thousands) 2001 2000 2001 2000
-------------------------------------------------- -------- -------- ---------- ----------
Net income........................................ $549,462 $622,812 $1,060,109 $1,123,489
Net unrealized gains (losses) on equity securities (98,261) (43,356) 17,561 (46,687)
Foreign currency translation losses............... (37,850) (41,267) (16,153) (44,185)
-------- -------- ---------- ----------
Total comprehensive income........................ $413,351 $538,189 $1,061,517 $1,032,617
======== ======== ========== ==========
The net unrealized gains/(losses) on equity securities for the three and six
months ended November 30, 2001 primarily reflect the marked to market
gains/(losses) for the Company's investment in Liberate Technologies. Effective
February 1, 2001, the Company began to account for this investment as available
for sale securities. See Footnote No. 6, Subsidiary Stock Transactions, in the
Company's Form 10-K for the fiscal year ended May 31, 2001, for further
information. As of November 30, 2001, the fair market value of the Company's
investment in Liberate Technologies was approximately $305.6 million, which was
recorded in Other Assets on the balance sheet, with approximately $1.9 million
unrealized loss recorded in stockholders' equity.
4. STOCK REPURCHASE PROGRAM
Since 1992, the Company's Board of Directors has cumulatively approved the
repurchase of 1.1 billion shares plus an additional amount of $3.0 billion to
reduce the dilutive effect of shares issued under its various employee stock
plans. During the three months ended November 30, 2001, approximately 82.5
million shares of Common Stock were repurchased for an aggregate price of
approximately $1.1 billion. As of November 30, 2001, the Company has
approximately $1.5 billion available for future repurchases.
5. RECENT ACCOUNTING PRONOUNCEMENTS
As indicated in the Company's Form 10-K for the fiscal year ended May 31, 2001,
the Company adopted Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and for Hedging Activities," as of June
1, 2001. Under this accounting pronouncement, a company is allowed to measure
the ineffectiveness of net investment hedges by using a method based on changes
in spot exchange rates or a method based on changes in forward exchange rates.
The Company initially elected to use the changes in forward exchange rates to
measure the ineffectiveness of net investment hedges. Upon further review, the
Company concluded that using the changes in spot exchange rates better meets
the Company's risk management strategies, better reflects the economics of
those strategies in the Company's financial statements, and better manages
interest rate differentials between different countries. Under this method, the
change in fair value of the forward contract attributable to the changes in
spot exchange rates ("the effective portion") is reported in the stockholders'
equity section to offset the translation results on the net investments. The
remaining change in fair value of the forward contract ("the ineffective
portion") is recognized in earnings. Accordingly, effective September 1, 2001,
the Company decided to use the changes in spot exchange rates to measure the
ineffectiveness of net investment hedges. The accounting impact for such change
in the methodology was immaterial and therefore, the cumulative amount was
recorded in the Other Income, net line in the quarter ended November 30, 2001
and no prior quarter restatement was deemed necessary. As of November 30, 2001,
the Company only had one outstanding forward contract in Japanese Yen
designated as a hedge for our net investment in Oracle Japan with a notional
amount of approximately $585.8 million and a fair value of approximately ($5.7
million).
7
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30, 2001
(unaudited)
5. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In July 2001, the Financial Accounting Standards Board ("FASB"), issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 provides new guidance on the accounting for a
business combination as of the date a business combination is completed.
Specifically, it requires use of the purchase method of accounting for all
business combinations initiated after June 30, 2001, thereby eliminating use of
the pooling-of-interests method. SFAS No. 142 establishes new guidance on how
to account for goodwill and intangible assets after a business combination is
completed. Among other things, it requires that goodwill and certain other
intangible assets will no longer be amortized and will instead be tested for
impairment at least annually and written down only when impaired. The Company
will adopt this statement beginning June 1, 2002. The Company is currently
evaluating these statements but does not expect that they will have a material
impact on the Company's financial position, results of operations, or cash
flows. As of November 30, 2001, the unamortized balance of goodwill and
acquired intangible assets was approximately $66.8 million, which was recorded
in Other Assets on the balance sheet. The majority of this amount represents
acquired intangible assets which would continue to be amortized upon adoption
of the new standard.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of." Although retaining many of the fundamental recognition and
measurement provisions of SFAS 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale. The
statement also supersedes certain provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," and will require expected
future operating losses from discontinued operations to be displayed in
discontinued operations in the period(s) in which the losses are incurred
rather than as of the measurement date, as presently required. As required by
SFAS No. 144, the Company will adopt this new statement on June 1, 2002. The
Company is currently evaluating this statement but does not expect that it will
have a material impact on the Company's financial position, results of
operations, or cash flows.
6. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in the Company's financial statements. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the Chief
Executive Officer of the Company.
The Company is organized geographically and by line of business. While the
Chief Executive Officer of the Company evaluates results in a number of
different ways, the line of business management structure is the primary basis
for which allocation of resources and financial performance are assessed. The
accounting policies of the line of business operating segments are the same as
those described in the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 2001. The Company does not track assets by operating segments.
Consequently, it is not practical to show assets by operating segments. The
Company has five major line of business operating segments: new license,
license updates, support, education and consulting. Effective June 1, 2001, the
Company expanded its operating segments to include license updates, which
represent the Company's
8
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30, 2001
(unaudited)
6. SEGMENT REPORTING (continued)
estimate of the portion of maintenance revenues that relate to license updates.
This estimate is based on the Company's current pricing model, which prices
license updates at 15% of net license price and product support at 7% of net
license price. While these license updates were included in the support
operating segment in the past, the Company believes that for business and
management evaluation purposes, license updates should be viewed separately
from support as they represent a subscription to future license product
versions, and their inclusion would distort the support margins as the majority
of the costs related to such updates are contained in the research and
development area.
The following table presents a summary of operating segments:/(1)/
Three Months Ended Six Months Ended
November 30, November 30,
--------------------- ---------------------
(in thousands) 2001 2000 2001 2000
-------------------------------------------------------- ---------- ---------- ---------- ----------
New license:
New license revenues from unaffiliated customers/(2)/... $ 805,690 $1,103,617 $1,527,421 $1,895,329
Distribution expenses................................... 427,365 480,300 832,180 900,946
---------- ---------- ---------- ----------
Distribution margin/(3)/................................ $ 378,325 $ 623,317 $ 695,241 $ 994,383
License updates:
Revenues from unaffiliated customers/(2)/............... 600,847 553,904 1,169,219 1,067,569
Distribution expenses................................... 3,760 8,379 9,240 12,281
---------- ---------- ---------- ----------
Distribution margin/(3)/................................ $ 597,087 $ 545,525 $1,159,979 $1,055,288
New license and license updates:
Revenues from unaffiliated customers/(2)/........ $1,406,537 $1,657,521 $2,696,640 $2,962,898
Distribution expenses............................ 431,125 488,679 841,420 913,227
---------- ---------- ---------- ----------
Distribution margin/(3)/......................... $ 975,412 $1,168,842 $1,855,220 $2,049,671
Support:/(4)/
Revenues from unaffiliated customers/(2)/............... $ 363,533 $ 321,826 $ 715,209 $ 650,239
Distribution expenses................................... 144,199 151,146 287,413 302,910
---------- ---------- ---------- ----------
Distribution margin/(3)/................................ $ 219,334 $ 170,680 $ 427,796 $ 347,329
Education:
Revenues from unaffiliated customers/(2)/............... $ 102,475 $ 126,502 $ 204,970 $ 227,796
Distribution expenses................................... 54,867 71,302 110,219 142,567
---------- ---------- ---------- ----------
Distribution margin/(3)/................................ $ 47,608 $ 55,200 $ 94,751 $ 85,229
Consulting:
Revenues from unaffiliated customers/(2)/............... $ 484,790 $ 553,697 $ 982,561 $1,080,488
Distribution expenses................................... 367,337 424,316 734,002 822,471
---------- ---------- ---------- ----------
Distribution margin/(3)/................................ $ 117,453 $ 129,381 $ 248,559 $ 258,017
Totals:
Revenues from unaffiliated customers/(2)/........ $2,357,335 $2,659,546 $4,599,380 $4,921,421
Distribution expenses............................ 997,528 1,135,443 1,973,054 2,181,175
---------- ---------- ---------- ----------
Distribution margin /(3)/........................ $1,359,807 $1,524,103 $2,626,326 $2,740,246
========== ========== ========== ==========
9
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 30, 2001
(unaudited)
6. SEGMENT REPORTING (continued)
--------
/(1)/ For business and management evaluation purposes, the Company from time to
time changes the underlying structure for its operating segments. Segment
data related to prior periods were reclassified, as required by SOFAS No.
131, to conform to the current organizational structure.
/(2)/ Operating segment revenues differ from the external reporting
classifications due to certain license products which are classified as
services revenues for management reporting purposes. Additionally, the
license updates revenues are classified as services revenues for external
reporting purposes.
/(3)/ The distribution margins reported reflect only the direct controllable
expenses of each line of business and do not represent the actual margins
for each operating segment since they do not contain an allocation for
product development and information technology, marketing and partner
programs, and corporate and general and administrative expenses incurred
in support of the line of business.
/(4)/ As indicated above, license updates revenues were previously reported
under support but are now separately stated.
Profit reconciliation
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ----------------------
(in thousands) 2001 2000 2001 2000
---------------------------------------------------------- ---------- ---------- ---------- ----------
Total distribution margin for reportable segments......... $1,359,807 $1,524,103 $2,626,326 $2,740,246
Product development and information technology
expenses................................................ (338,369) (363,744) (677,319) (704,613)
Marketing and partner program expenses.................... (102,195) (119,434) (193,100) (223,724)
Corporate and general and administrative expenses......... (81,390) (76,274) (153,538) (164,304)
Net investment gains (losses) related to equity securities (3,388) (13,468) (6,689) 1,965
Other income, net/(1)/.................................... 10,861 14,698 35,257 92,554
---------- ---------- ---------- ----------
Income before provision for income taxes............... $ 845,326 $ 965,881 $1,630,937 $1,742,124
========== ========== ========== ==========
--------
/(1)/ Other income, net differs from those stated on the Condensed Consolidated
Statements of Operations primarily due to the classification of certain
intangible amortization for management reporting purposes.
7. LEGAL PROCEEDINGS
Refer to Part II, Item 1 for a description of legal proceedings.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the SEC, including the
Annual Report on Form 10-K for the fiscal year ended May 31, 2001 and the
Quarterly Reports on Form 10-Q filed by the Company in fiscal 2002.
Results of Operations
Total revenues decreased 11% and 7% for the three and six month periods ended
November 30, 2001 from the corresponding prior year periods, respectively. The
decrease was primarily attributable to lower license revenues as a result of a
continued weakness in the economy, which was exacerbated by the recent
terrorist attacks on the United States during the second fiscal quarter. Sales
and marketing and cost of services expenses continue to represent significant
portions of operating expenses. Sales and marketing as a percentage of total
revenues was 24% for the three and six month periods ended November 30,
compared to 24% and 25% of total revenues for the corresponding prior year
periods, respectively. Cost of services as a percentage of total revenues was
26% and 27% for the three and six month periods ended November 30, 2001,
respectively, compared to 26% and 28% for the corresponding prior year periods,
respectively. Research and development expenses as a percentage of total
revenues was 11% for the three and six month periods ended November 30, 2001,
compared to 10% for the corresponding prior year periods. General and
administrative expenses as a percentage of total revenues remained constant at
4% for the three and six month periods ended November 30, 2001 and 2000.
Overall, operating income as a percentage of total revenues was 35% and 34%
during the second quarter and first six months of fiscal 2002, compared to 36%
and 33% for the respective corresponding prior year periods.
The Company anticipates that its operating margins as a percentage of total
revenue for fiscal 2002 will remain comparable to the margins experienced in
fiscal 2001.
Domestic revenues decreased 18% and 11% during the three and six month periods
ended November 30, 2001 from the corresponding prior year periods,
respectively, due to weakening economic conditions in the United States.
International revenues decreased 5% and 2% during the second quarter and first
six months of fiscal 2002 from the corresponding prior year periods also due to
slower economic conditions overseas. Additionally, international revenues were
unfavorably affected during the second quarter and first six months of fiscal
2002 as a result of the U.S. dollar strengthening against certain major
international currencies. Excluding the effect of currency rate fluctuations,
international revenues decreased 3% and increased 2% for the second quarter and
first six months of fiscal 2002 as compared to the corresponding prior year
periods, respectively. Excluding the effect of currency rate fluctuations,
total revenues decreased 11% and 5% for the second quarter and first six months
of fiscal 2002 from the corresponding prior year periods. International
revenues represented 53% and 52% of total revenues for the second quarter and
first six months of fiscal 2002, as compared to 49% of total revenues for the
corresponding prior year periods. The Company expects that its international
operations will continue to generate a significant portion of total revenues,
and thus, its revenues may be adversely affected if the U.S. dollar continues
to strengthen relative to international currencies.
11
Revenues
Three Months Ended November 30, Six Months Ended November 30,
------------------------------ ----------------------------
Percent Percent
(in thousands) 2001 2000 Change 2001 2000 Change
-------------------- ---------- ---------- ------- ---------- ---------- -------
Licenses and other.. $ 819,324 $1,118,238 (27%) $1,550,756 $1,925,476 (20%)
Services............ 1,538,011 1,541,308 -- 3,048,624 2,995,945 2%
---------- ---------- ---------- ----------
Total revenues... $2,357,335 $2,659,546 (11%) $4,599,380 $4,921,421 (7%)
========== ========== ========== ==========
Percent of Revenues:
Licenses and other.. 35% 42% 34% 39%
Services............ 65% 58% 66% 61%
---------- ---------- ---------- ----------
Total revenues... 100% 100% 100% 100%
========== ========== ========== ==========
Licenses and Other Revenues. License revenues represent fees earned for
granting customers new licenses to use the Company's software products.
Licenses and other revenues also include documentation and other miscellaneous
revenues. Documentation revenues and other miscellaneous revenues constituted
2% of total licenses and other revenues for the second quarter and first six
months of fiscal 2002, compared to 2% and 3% of total licenses and other
revenues for the corresponding prior year periods, respectively. License
revenues, excluding documentation and other miscellaneous revenues, decreased
27% and 19% for the second quarter and first six months of fiscal 2002 from the
corresponding prior year periods, respectively. Systems software license
revenues, which include database server, application server and development
tools revenues, decreased 21% and 16% for the three and six month periods ended
November 30, 2001 from the corresponding prior year periods, respectively.
Business applications revenues decreased 42% and 29% for the three and six
month periods ended November 30, 2001 from the corresponding prior year
periods, respectively. The decrease in license revenues in the three and six
month periods ended November 30, 2001 was primarily due to uncertainty related
to weakening economic conditions, both domestically and internationally, as
well as the retrenchment of the dot market, that negatively impacted demand for
the Company's systems and business application products. Additionally, the
terrorist attacks on the United States in September, the first month of the
Company's fiscal second quarter, resulted in a significant negative impact on
new license deals throughout the quarter. As a percentage of revenues, licenses
and other revenues represented 35% and 34% of total revenues for the three and
six month periods ended November 30, 2001, as compared to 42% and 39% of total
revenues for the corresponding prior year periods, respectively.
Effective June 1, 2001, the Company expanded its operating segments to include
license updates which represent the Company's estimate of the portion of
maintenance revenues that relate to license updates. The Company believes that
for business and management evaluation purposes, license updates should be
viewed separately from support as they represent a subscription to future
license product versions, and their inclusion would distort the support margins
as the majority of the costs related to such updates are contained in the
research and development area. Had these license updates been reclassified out
of support revenues, license revenues including these license updates would
have decreased 15% and 9% in the second quarter and first six months of fiscal
2002 from the corresponding prior year periods, respectively. License updates
alone increased 8% and 10% for the second quarter and first six months of
fiscal 2002 over the corresponding prior year periods, respectively, reflecting
an increase in the overall customer installed base.
Services Revenues. Services revenues consist of support, consulting and
education services revenues which comprised 62%, 32% and 6% of total services
revenues, respectively, for the three month period ended November 30, 2001 and
61%, 33% and 6% of total services revenues for the six month period ended
November 30, 2001, respectively. Support revenues increased 10% and 9% for the
second quarter and first six months of fiscal 2002 from the corresponding prior
year periods, respectively, reflecting an increase in the overall customer
installed base. Support revenues excluding license updates increased 12% and 9%
for the three and six month periods ended November 30, 2001 from the
corresponding prior year periods, respectively. Consulting revenues decreased
12% and 8% for the three and six month periods ended November 30, 2001 from
12
the corresponding prior year periods, respectively. The decline in the
consulting services revenues experienced during the three and six month periods
ended November 30, 2001 was primarily due to a decrease in the demand for these
services as a result of the following: i) weakening economic conditions,
exacerbated by the September 2001 terrorist attacks, ii) a slowdown in the
business applications market, iii) a push towards a partner model, leveraging
third party consulting firms who provide consulting services to the Company's
customers and iv) shorter implementation engagements for Oracle's newer
generation of products. Education revenues decreased 23% and 13% for the three
and six month periods ended November 30, 2001 from the corresponding prior year
periods, respectively, primarily due to negative growth in license revenues, as
well as customers reducing discretionary spending due to the weak economic
conditions both domestically and internationally.
Operating expenses
Three Months Ended November 30, Six Months Ended November 30,
- ------------------------------ ----------------------------
Percent Percent
(in thousands) 2001 2000 Change 2001 2000 Change
--------------------------- ---------- ---------- ------- ---------- ---------- -------
Sales and marketing......... $ 571,152 $ 640,865 (11%) $1,106,633 $1,213,829 (9%)
Cost of services............ 609,838 694,998 (12%) 1,219,711 1,368,876 (11%)
Research and development.... 257,484 266,280 (3%) 510,783 517,307 (1%)
General and administrative.. 98,917 111,402 (11%) 196,531 217,367 (10%)
---------- ---------- ---------- ----------
Total operating expenses. $1,537,391 $1,713,545 (10%) $3,033,658 $3,317,379 (9%)
========== ========== ========== ==========
Percent of Revenues:
Sales and marketing......... 24% 24% 24% 25%
Cost of services............ 26% 26% 27% 28%
Research and development.... 11% 10% 11% 10%
General and administrative.. 4% 4% 4% 4%
---------- ---------- ---------- ----------
Total operating expenses. 65% 64% 66% 67%
========== ========== ========== ==========
Total Operating Expenses. Total operating expenses decreased 10% and 9% for
the three and six month periods ended November 30, 2001 from the corresponding
prior year periods. Operating expenses were favorably affected during the three
and six month periods ended November 30, 2001 as a result of the U.S. dollar
strengthening against certain major international currencies. Excluding the
effect of currency rate fluctuations, total operating expenses decreased 10% in
the three month period ended November 30, 2001 from the corresponding prior
year period and decreased 7% in the six month period ended November 30, 2001
from the corresponding prior year period. Total operating expenses for the
three and six month periods ended November 30, 2001 were favorably affected by
reduced compensation expenses as a result of the reversal of accruals for
bonuses which are not expected to be paid due to lower than planned Company
financial performance, as well as other cost cutting measures.
Sales and Marketing Expenses. The Company continues to place significant
emphasis, both domestically and internationally, on direct sales through its
own sales force. However, the Company also continues to market its products
through indirect channels. Sales and marketing expenses decreased 11% and 9%
for the three and six month periods ended November 30, 2001 from the
corresponding prior year periods, respectively. As a percentage of licenses and
other revenues, sales and marketing expenses were 70% and 71% for the three and
six month periods ended November 30, 2001 compared to 57% and 63% for the
corresponding prior year periods, respectively. The increase in sales and
marketing expenses as a percentage of licenses and other revenues in the three
and six month periods ended November 30, 2001 was due primarily to a decrease
in license revenues due to economic uncertainties. Excluding the effect of
currency rate fluctuations, sales and marketing expenses decreased 10% and 7%
for the three and six month periods ended November 30, 2001 from the
corresponding prior year periods, respectively. The decrease was primarily due
to lower commission related expenses as a result of lower sales.
13
Cost of Services. The cost of providing services consists largely of
consulting, education and support personnel expenses. Cost of services expenses
decreased by 12% and 11% in the three and six month periods ended November 30,
2001 from the corresponding prior year periods, respectively. As a percentage
of services revenues, cost of services was 40% for the three and six month
periods ended November 30, 2001, compared to 45% and 46% for the corresponding
prior year periods, respectively. The decrease in cost of services as a
percentage of services revenues was due primarily to support revenues, which
have relatively higher margins, constituting a higher percentage of total
services revenues. Excluding the effect of currency rate fluctuations, cost of
services decreased 12% and 9% for the three and six month periods ended
November 30, 2001 from the corresponding prior year periods, respectively. The
decrease was primarily due to increased productivity efficiencies and controls
over headcount and headcount related expenditures in the support, consulting,
and education lines of business. The decrease was also due in part to the
reversal of bonus accruals discussed previously.
Research and Development Expenses. Research and development expenses decreased
3% and 1% for the three and six month periods ended November 30, 2001 from the
corresponding prior year periods, respectively. Excluding the effect of
currency rate fluctuations, the decreases were the same for both periods. The
decrease was due primarily to reduced compensation expenses as a result of the
reversal of bonus accruals discussed previously, offset partially by increased
headcount. As a percentage of total revenues, research and development expenses
remained relatively constant at 11% for the three and six month periods ended
November 30, 2001 as compared to 10% for the corresponding prior year periods.
The Company believes that research and development expenditures are essential
to maintaining its competitive position and expects these costs to continue to
increase and constitute a significant percentage of revenues.
General and Administrative Expenses. General and administrative expenses
decreased 11% and 10% for the three and six month periods ended November 30,
2001 from the corresponding prior year periods, respectively. As a percentage
of revenues, general and administrative expenses remained relatively constant
at 4% for the three and six month periods ended November 30, 2001 and 2000.
Excluding the effect of currency rate fluctuations, general and administrative
expenses decreased 11% and 7% for the three and six month periods ended
November 30, 2001 from the corresponding prior year periods, respectively. The
decrease was primarily due to the reduction of compensation expenses discussed
previously, as well as savings from productivity efficiencies and cost cutting
measures.
Net Investment Gains (Losses) Related To Equity Securities
The net investment losses for the three and six month periods ended November
30, 2001 primarily reflect the provisions for losses related to investments in
other companies, partially offset by gains realized from sales of marketable
securities. The net investment loss for the three month period and the net
investment gain for the six month period ended November 30, 2000 also included
the Company's equity share in the results of Liberate Technologies. Effective
February 1, 2001, the Company began to account for this investment as available
for sale securities; therefore, no further equity share of results was
recorded. See Footnote No. 6, Subsidiary Stock Transactions, in the Company's
Form 10-K for the fiscal year ended May 31, 2001, for further information.
Other Income, Net
Other income, net, consists primarily of interest income, interest expense,
foreign currency exchange gains and losses, and the minority interest expense
in the net profits of Oracle Japan. Other income, net, for the three and six
month periods ended November 30, 2001 decreased 14% and 47% from the
corresponding prior year periods, respectively. The decrease was primarily due
to lower interest income as a result of lower average cash balances throughout
the three and six month periods ended November 30, 2001 and lower interest
rates in fiscal 2002.
Provision for Income Taxes
The Company's effective tax rates have historically differed from the federal
statutory rate primarily because of state taxes. The effective tax rate was
35.0% for the three and six month periods ended November 30, 2001, as compared
to 35.5% for the corresponding prior year periods.
14
Liquidity and Capital Resources:
Six Months Ended November 30,
- --------------------------------
Percent
(in thousands) 2001 Change 2000
------------------------------------------------ ----------- ------- -----------
Working capital................................. $ 3,853,946 5% $ 3,655,839
Cash and cash investments....................... 4,959,528 13% 4,386,165
Cash provided by (used for) operating activities 1,509,655 * (265,836)
Cash provided by (used for) investing activities (1,810,762) * 122,411
Cash used for financing activities.............. (1,670,320) (46%) (3,079,160)
--------
* not meaningful
Working capital as of November 30, 2001 was 5% higher than at the end of the
corresponding prior year period, due primarily to higher cash flows from
operations which was partially offset by cash used for the repurchase of the
Company's Common Stock and cash used for other long-term investing activities.
The positive cash flows generated from operations during the first six months
of fiscal 2002 were primarily attributable to the net income for the period and
a decrease in trade receivables. The negative cash flows from operations
incurred in the first six months of fiscal 2001 were primarily due to the
payment of taxes related to the gain on sale of Oracle Japan stock that
occurred in the fourth quarter of fiscal 2000.
The negative cash flows from investing activities during the first six months
of fiscal 2002 related to cash investment purchases and investments in capital
expenditures, partially offset by maturities of cash investments. The positive
cash flows generated from investing activities during the first six months of
fiscal 2001 primarily reflected increased maturities of cash investments,
partially offset by investments in capital expenditures. The Company expects to
continue to invest in capital and other assets to support its growth.
The Company incurred negative cash flows from financing activities during the
first six months of fiscal 2002 and fiscal 2001, primarily reflecting Common
Stock repurchases. Since 1992 the Company's Board of Directors has cumulatively
approved the repurchase of 1.1 billion shares, plus an additional amount of
$3.0 billion to reduce the dilutive effect of shares issued under its various
employee stock plans. During the first six months of fiscal 2002, approximately
124.6 million shares of Common Stock were repurchased for an aggregate price of
approximately $1.9 billion. The Company repurchased approximately 95.4 million
shares for approximately $3.4 billion during the first six months of fiscal
2001. As of November 30, 2001, the Company has approximately $1.5 billion
available under existing Board authorization for future repurchases. The
Company has primarily used cash flows from operations and investing activities
to fund its repurchases.
The Company believes that its current cash and cash investment balances, as
well as anticipated cash flows generated from operations, will be sufficient to
meet its working capital, capital expenditure, and investment needs through at
least the next 12 months.
Factors That May Affect Future Results and Market Price of Stock
The Company operates in a rapidly changing environment that involves numerous
risks, some of which are beyond its control. The following discussion
highlights some of these risks.
Revenue Growth and Economic Conditions. The revenue growth and profitability
of the Company's business depends on the overall demand for computer software
and services, particularly in the product segments in which the Company
competes. Because the Company's sales are primarily to corporate and government
customers, its business also depends on general economic and business
conditions. A softening of demand for computer software caused by a weakening
of the economy has resulted in decreased revenues and may continue to result in
lower revenue growth rates. In particular, one of the challenges the Company
continues to face in promoting future growth in license revenues is the
successful refocusing of its marketing and sales efforts to its business
15
applications suite and internet application server products. In addition,
terrorist attacks upon the United States have added (or exacerbated) economic,
political and other uncertainties, which could adversely affect the Company's
revenue growth. There can be no assurances that the Company will be able to
effectively promote future revenue growth in its systems software and business
applications areas.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition" which superceded SOP No. 91-1. SOP No. 97-2, as amended by SOP No.
98-4 and SOP No. 98-9, provides guidance on applying generally accepted
accounting principles for software revenue recognition transactions. In
December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which provides further revenue
recognition guidance. The Company adopted SAB No. 101, as amended, in the
fourth quarter of fiscal 2001 as required. The adoption of SAB No. 101 did not
have a material effect on the Company's consolidated financial position,
results of operations or cash flows. The accounting profession continues to
review certain provisions of SOP No. 97-2 and SAB No. 101 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.
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, like Oracle9i database, Oracle 9iAS application
server, and Oracle eBusiness Suite. 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 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 to meet
market demands, could have a material adverse effect on the Company's business,
results of operations, financial condition or cash flows.
Significant undetected errors or delays in new products or new versions of a
product may affect market acceptance of the Company's products and could have a
material adverse effect on the Company's business, results of operations,
financial condition or cash flows. 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, financial condition or cash flows.
There can be no assurance that the Company's new products will achieve broad
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.
Sales Forecasts. Management uses a "pipeline" system, a common industry
practice, to forecast sales and trends in the Company's business. The Company's
sales personnel monitor the status of all proposals, such as the date when they
estimate that a customer will make a purchase decision and the potential dollar
amount of the sale. The Company aggregates these estimates periodically in
order to generate a sales pipeline. The Company compares the pipeline at
various points in time to look for trends in its business. While this pipeline
analysis may provide the Company with some guidance in business planning and
budgeting, these pipeline estimates are necessarily speculative and may not
consistently correlate to revenues in a particular quarter or over a longer
period of time. A variation in the conversion rate of the pipeline into
contracts or in the pipeline itself could cause the Company to improperly plan
or budget and thereby adversely affect its business or results of operations.
In particular, as was the case in the second half of fiscal 2001 and the first
half of fiscal 2002, a
16
slowdown in the economy may cause purchasing decisions to be delayed, reduced
in amount or cancelled which will therefore reduce the overall license pipeline
conversion rates in a particular period of time. There can be no assurances as
to when or if conversion of the sales pipeline into contracts will return to
historical rates when the economy begins to recover.
Management of Operating Margins. The Company's future operating results will
depend on its ability to accurately forecast revenues and control expenses. The
Company's future operating results may also be adversely impacted by external
factors, such as a slowing in demand for hardware used in conjunction with its
software. An unexpected decline in revenues without a corresponding and timely
slowdown in expense growth could have a material adverse effect on the
Company's business, results of operations, financial condition, or cash flows.
Competitive Environment. The computer software industry is an intensely
competitive industry with several large vendors that develop and market
databases, internet application server products, application development tools,
business applications and business intelligence products. Certain of these
vendors have significantly greater 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 its competitors of a product
could have a material adverse effect on the Company's business, results of
operations, financial condition or cash flows. 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 continue to face intense competition in the various markets in which
it competes.
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. There can be no assurances that the
Company will be able to successfully address each of these challenges. Other
risks associated with international operations include import and export
licensing requirements, trade restrictions and changes in tariff rates.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Changes in the value of major foreign currencies
relative to the value of the U.S. dollar adversely affected revenues and
operating results in the first half of fiscal 2002, particularly in Europe and
will continue to do so throughout fiscal 2002 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 its subsidiaries
and selling distributors. 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 foreign exchange forward 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. In
addition, while the Company has limited exposure to the political and economic
difficulties in Argentina, there can be no assurances about the magnitude and
timing of any future impact on the Company or that the difficulties will not
impact other regions.
Uncertainty of New Business Areas. The Company has in recent years expanded its
technology into a number of new business areas, including Internet/electronic
commerce, on-line business services, wireless initiatives, Internet computing,
on-line exchanges and electronic sourcing for a number of business procurement
needs. These areas are relatively new to the Company's product development and
sales and marketing personnel. There can be no assurances that the Company will
compete effectively or will generate significant revenues in these new areas.
In addition, despite tremendous growth in some of these new areas, the impact
on the Company of this growth is uncertain. There can be no assurances that the
Company will be able to provide a product offering that
17
will satisfy new customer demands in these areas and the growth patterns of
these areas may vary significantly. 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 assurances that standards
chosen by the Company will position its products to compete effectively for
business opportunities as they arise on the Internet and in other emerging
areas.
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 markets where certain vendors offer deep discounts in an effort
to recapture or gain market share or to sell other software or hardware
products. Moreover, the Company has recently changed its pricing model for its
system software products and any broadly based changes to the Company's prices
and pricing policies could lead to a decline or delay in sales and license
revenue as the Company's sales force implements and its customers adjust to the
new pricing policies. The bundling of software products for promotional
purposes or as a long-term pricing strategy or guarantees of prices and product
implementations by certain of the Company's competitors could, over time,
significantly reduce the prices that the Company can charge for its products.
Changes in customer 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 the Company's license revenues. 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 its products. Any such price reductions and resulting lower
license revenues could have a material adverse effect on the Company's
business, results of operations, financial condition, or cash flows if the
Company cannot offset these price reductions with a corresponding increase in
sales volumes or lower spending.
Uneven Patterns of Quarterly Operating Results and Revenues. 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) changes in the Company's pricing policies or those of its
competitors. 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 its 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.
In 2001, California experienced ongoing power system shortages, which resulted
in "rolling blackouts," and the bankruptcy filing by one of the major
California public utilities, may increase the number and severity of these
blackouts. These blackouts, blackouts in other regions or procedures
implemented to avert blackouts could cause disruptions to the Company's
operations and the operations of the Company's customers. Such disruptions,
particularly at the end of a quarter, could adversely affect quarterly revenues
and net income by delaying the closing of a number of licensing transactions.
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.
The Company expects substantial continued competition for highly-skilled
business,
18
product development, technical and other personnel. Accordingly, the Company
may 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 its
continued growth.
Future Acquisitions. As part of its business strategy, the Company has made and
expects to continue to make acquisitions of, or investments in, businesses that
offer complementary products, services and technologies. Any acquisitions or
investments will be accompanied by the risks commonly encountered in
acquisitions of businesses. Such risks include, among other things, the
possibility that the Company pays much more than the acquired company or assets
are worth, the difficulty of assimilating the operations and personnel of the
acquired businesses, the potential product liability associated with the sale
of the acquired company's products, 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 Company's financial and strategic
position, 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,
financial condition or cash flows, particularly in the case of a larger
acquisition. Consideration paid for future acquisitions, if any, could be in
the form of cash, stock, stock purchase rights or a combination thereof.
Dilution to existing stockholders and to earnings per share may result in
connection with any such future acquisitions.
Relative Product Profitability. Certain of the Company's revenues are derived
from products that, 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 the fiscal year ending May 31, 2002 include significant
investments in software research and development and related product
opportunities from which significant revenues are not anticipated for several
years.
Sales Force Restructuring. The Company historically has relied heavily on its
direct sales force. In many 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 temporary 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.
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 assurances 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.
19
Possibility of Infringement Claims. The Company from time to time receives
notices from third parties claiming infringement by the Company's products of
third party patent and other intellectual property rights. The Company expects
that software products will increasingly be subject to such claims as the
number of products and competitors in the Company's industry segments grows and
the functionality of products overlaps. In addition, the Company expects to
receive more patent infringement claims as companies increasingly seek to
patent their software, especially in light of recent developments in the law
that extend the ability to patent software. Regardless of its merit, responding
to any such claim could be time-consuming, result in costly litigation and
require the Company to enter into royalty and licensing agreements that may not
be 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, financial condition
or cash flows 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 Company's Common Stock may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological
innovation by the Company or its competitors, quarterly variations in the
Company's or its competitors' results of operations, changes in prices of the
Company's or its competitors' products and services, changes in revenue and
revenue growth rates for the Company as a whole or for specific geographic
areas, business units, products or product categories, changes in earnings
estimates by market analysts, speculation in the press or analyst community and
general market conditions or market conditions specific to particular
industries. The stock prices for many companies in the technology sector have
experienced wide fluctuations that often have been unrelated to their operating
performance. Such fluctuations may adversely affect the market price of the
Company's Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 adverse 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 amortized 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
amortized principal amount approximates fair value at November 30, 2001.
Table of Investment Securities:
Amortized
Principal Weighted Average
(in thousands) Amount Interest Rate
---------------------------------- ---------- ----------------
Cash and cash equivalents.......... $2,467,515 2.20%
Short-term investments (0-1 year).. 2,492,013 3.10%
Long-term investments (1-2 years).. 580,471 3.33%
----------
Total cash and cash investments. $5,539,999
==========
20
Foreign Currency Risk. The Company transacts business in various foreign
currencies. The Company has established a foreign currency hedging program,
which was approved by the Board of Directors, that primarily utilizes 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. These foreign currency
transactions typically arise from the accrual of sub license fees and other
intercompany activities. 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). The Company's ultimate realized
gain or loss with respect to currency fluctuations will depend on the currency
exchange rates and other factors in effect as the contracts mature. The
unrealized gain (loss) on the outstanding forward contracts at November 30,
2001 was immaterial to the Company's consolidated financial statements.
The Company also hedges the net assets of certain of its international
subsidiaries ("net investment hedges"). As indicated in the Company's Form 10-K
for the fiscal year ended May 31, 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and for Hedging Activities," as of June 1, 2001. Under this
accounting pronouncement, a company is allowed to measure the ineffectiveness
of net investment hedges by using a method based on changes in spot exchange
rates or a method based on changes in forward exchange rates. The Company
initially elected to use the changes in forward exchange rates to measure the
ineffectiveness of net investment hedges. Upon further review, the Company
concluded that using the changes in spot exchange rates better meets the
Company's risk management strategies, better reflects the economics of those
strategies in the Company's financial statements, and better manages interest
rate differentials between different countries. Under this method, the change
in fair value of the forward contract attributable to the changes in spot
exchange rates ("the effective portion") is reported in the stockholders'
equity section to offset the translation results on the net investments. The
remaining change in fair value of the forward contract ("the ineffective
portion") is recognized in earnings. Accordingly, effective September 1, 2001,
the Company decided to use the changes in spot exchange rates to measure the
ineffectiveness of net investment hedges. The gains or losses on these net
investment hedge contracts were not material to the Company's consolidated
financial statements. As of November 30, 2001, the Company only had one
outstanding forward contract in Japanese Yen designated as a hedge for our net
investment in Oracle Japan with a notional amount of approximately $585.8
million and a notional weighted average exchange rate of 123.94. The contract
matures on February 27, 2002.
21
The table below presents the notional amounts (at contract exchange rates) and
the weighted average contractual foreign currency exchange rates for the
Company's outstanding forward contracts as of November 30, 2001. 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,
New Zealand, UK and the Euro. The forward contracts mature in ninety days or
less as of November 30, 2001.
Table of Forward Contracts
Notional
Weighted
Notional Average
(in thousands) Amount Exchange Rate
---------------------- -------- -------------
Functional Currency:
Argentine Peso...... $ 11,639 1.21
Australian Dollar... 5,997 0.52
Brazilian Real...... 14,765 2.61
Canadian Dollar..... 25,212 1.59
Chilean Peso........ 6,348 685.30
Chinese Renminbi.... 71,793 8.28
Colombian Peso...... 4,172 2372.75
Danish Krone........ 16,181 8.42
Euro................ 94,350 0.88
Indian Rupee........ 9,824 48.70
Israeli Shekel...... 47,993 4.28
Japanese Yen........ 9,575 122.71
Korean Won.......... 20,598 1288.77
Mexican Peso........ 3,952 9.49
New Zealand Dollar.. 3,468 0.41
Norwegian Krone..... 12,281 9.06
Peruvian New Sol.... 4,065 3.47
Philippine Peso..... 12,673 53.30
Polish Zloty........ 12,500 4.18
Saudi Arabian Riyal. 24,433 3.75
Singapore Dollar.... 26,251 1.83
Slovakian Koruna.... 1,066 49.47
South African Rand.. 5,340 10.04
Swedish Krona....... 7,739 10.66
Swiss Franc......... 26,754 1.65
Taiwan Dollar....... 1,938 34.50
Thai Baht........... 7,013 44.24
UK Pound............ 121,603 1.42
--------
Total........... $609,523
========
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Shareholder class actions were filed in the United States District Court for
the Northern District of California against the Company and its Chief Executive
Officer on and after March 9, 2001. On June 20, 2001 the Court consolidated the
class actions into a single action and appointed lead plaintiff and class
counsel. A consolidated amended complaint adding the Chief Financial Officer
and an Executive Vice President as defendants was filed on August 3, 2001. The
consolidated amended complaint is brought on behalf of purchasers of the stock
of the Company during the period December 15, 2000 through March 1, 2001.
Plaintiffs allege that the defendants made false and misleading statements
about the Company's actual and expected financial performance and the
performance of certain of its applications products, while certain individual
defendants were selling Company stock, in violation of Federal securities laws.
Plaintiffs further allege that certain individual defendants sold Company stock
while in possession of material non-public information. The Company moved to
dismiss the consolidated action and a hearing was held on the motion to dismiss
on December 18, 2001. The Court has not yet issued its opinion. The Company
believes that it has meritorious defenses against these actions and intends to
vigorously defend them.
Shareholder derivative lawsuits were filed in the Superior Court of the State
of California, County of San Mateo and County of Santa Clara on and after March
12, 2001. Three similar shareholder derivative lawsuits were filed in the Court
of Chancery in the State of Delaware in and for New Castle County. A revised
amended consolidated complaint was filed on October 9, 2001. The derivative
suits were brought by Company stockholders, allegedly on behalf of the Company,
against all of the Company's directors. The derivative plaintiffs allege that
these directors breached their fiduciary duties to the Company by making or
causing to be made alleged misstatements about the Company's revenue, growth,
and the performance of certain of its applications products while certain
officers and directors sold Company stock and by allowing the Company to be
sued in the shareholder class actions. The derivative plaintiffs seek
compensatory and other damages, disgorgement of compensation received, and a
declaration that the defendants breached their fiduciary duties. The Company
has not yet responded to these complaints.
The Shareholder class actions filed in the Superior Court of the State of
California, County of San Mateo against the Company and its Chief Financial
Officer and former President and Chief Operating Officer on and after December
18, 1997 on behalf of purchasers of the stock of the Company during the period
April 29, 1997 through December 9, 1997 were voluntarily dismissed without any
payment or other concessions by the defendants on October 12, 2001. A related
shareholder derivative lawsuit filed in the Superior Court of the State of
California, County of San Mateo on November 17, 1998 was voluntarily dismissed
without any payment or other concessions by the defendants on December 10, 2001.
The Company filed petitions with the United States Tax Court on July 29, 1998,
challenging notices of deficiency issued by the Commissioner of Internal
Revenue that disallowed certain foreign sales corporation commission expense
deductions taken by the Company in its 1988 through 1991 tax years and assessed
additional taxes for those years in excess of $20 million, plus interest. In a
separate action filed by Microsoft Corporation, the Tax Court ruled on
September 15, 2000, in favor of the Commissioner of Internal Revenue on the
same legal issue presented in the Company's case. If allowed to stand and if
followed by the Tax Court in the Company's case, the Microsoft ruling may be
dispositive of that issue in the Company's case and could result in additional
Federal and State taxes up to $130 million, plus interest accruing at
applicable Federal and State rates, for the tax years at issue in the case and
for the Company's subsequent tax filings. The Company's case was reassigned to
the judge presiding in the Microsoft action and the Tax Court issued an order
staying the Company's case until a final adjudication of the same legal issue
in the Microsoft action. Microsoft filed a notice of appeal of the Tax Court's
decision in the U.S. Court of Appeals for the Ninth Circuit on September 21,
2001 and filed its opening brief on appeal on December 20, 2001. The Company
filed a motion for leave to file an amicus brief in the Microsoft appeal on
December 26, 2001. The Court has not yet ruled on the Company's motion. The
Company intends to defend its position vigorously and does not believe that the
final outcome will have a material adverse effect on its consolidated financial
position, results of operations or cash flows.
23
The Company is currently party to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, the Company
does not believe that the outcome of any of these or any of the above mentioned
legal matters will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the second quarter of fiscal 2002, the Company sold an aggregate of 11,142
shares of Common Stock to eligible employees of Oracle EMEA Limited, an
indirect subsidiary of the Company, who are participants in the Oracle Ireland
Approved Profit Sharing Scheme (the "Ireland APSS") at an aggregate purchase
price of approximately $167,000. There were no underwriting discounts or
commissions. The Ireland APSS permits an eligible employee to receive shares of
Common Stock in a tax efficient manner as a portion of such employee's bonus,
as well as to contribute a portion of their base salary towards the purchase of
additional shares in certain circumstances. The securities are held in trust
for the employees for a minimum of two years. The shares of Common Stock were
offered and sold in reliance upon Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"), and the safe harbor provided by Rule 903 of
Regulation S ("Reg. S") under the Securities Act, to employees of Oracle EMEA
Ltd who are not "U.S. Persons" as that term is defined in Reg. S.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Set forth below is information concerning each matter submitted to a vote at
the Annual Meeting of Stockholders on October 15, 2001.
Proposal No. 1: The stockholders elected each of the following persons as a
director to hold office until the 2002 Annual Meeting of Stockholders or until
earlier retirement, resignation or removal.
Votes
Directors Name Votes For Withheld
-------------- ------------- ----------
Lawerence J. Ellison 4,510,398,490 32,920,115
Donald L.Lucas...... 4,509,216,450 34,102,155
Michael J. Boskin... 4,509,046,790 34,271,815
Jeffrey O. Henley... 4,511,180,014 32,138,591
Jack F. Kemp........ 4,508,146,257 35,172,348
Jeffrey Berg........ 4,510,619,171 32,699,434
Safra Catz.......... 4,489,858,844 53,459,761
Hector Garcia-Molina 4,511,589,660 31,728,945
Joseph A. Grundfest. 4,511,292,150 31,826,455
Proposal No. 2: The stockholders approved the adoption of the Company's Fiscal
Year 2002 Executive Bonus Plan (with 4,366,797,557 affirmative votes,
127,200,659 negative votes, 49,320,389 votes abstaining, and no broker
non-votes).
Proposal No. 3: The stockholders ratified the appointment of Arthur Andersen
LLP as the Company's independent auditors for the fiscal year ended May 31,
2002 (with 4,457,992,849 affirmative votes, 65,266,303 negative votes, and
20,059,453 votes abstaining).
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Oracle
Corporation has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORACLE CORPORATION
Dated: January 14, 2002
/S/ JEFFREY O. HENLEY
By: _______________________________
Jeffrey O. Henley
Executive Vice President and
Chief Financial Officer
Dated: January 14, 2002
/S/ JENNIFER L. MINTON
By: _______________________________
Jennifer L. Minton
Senior Vice President,
Finance and Operations
25
[LOGO OF RECYCLE SYMBOL]
C14067-01