<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended February 29, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-14376
Oracle Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2871189
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
500 Oracle Parkway
Redwood City, California 94065
(Address of principal executive offices, including zip code)
(650) 506-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Number of shares of registrant's common stock outstanding as of March 31,
2000: 2,838,408,776
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ORACLE CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at February 29, 2000 and
May 31, 1999................................................... 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 29, 2000 and February 28,
1999........................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended February 29, 2000 and February 28, 1999 .......... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
Signatures..................................................... 22
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
February May 31,
29, 2000 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $2,267,705 $1,785,715
Short-term cash investments............................. 499,896 777,049
Trade receivables, net of allowance for doubtful
accounts of $235,467 and $217,096, respectively........ 1,848,721 2,238,204
Other receivables....................................... 183,742 240,792
Prepaid and refundable income taxes..................... 240,933 299,670
Prepaid expenses and other current assets............... 104,400 105,844
---------- ----------
Total current assets................................. 5,145,397 5,447,274
---------- ----------
LONG-TERM CASH INVESTMENTS............................... 120,000 249,547
PROPERTY, net............................................ 966,676 987,482
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $26,854 and $54,381, respectively....... 99,167 98,870
INTANGIBLE AND OTHER ASSETS.............................. 1,018,127 476,481
---------- ----------
Total assets......................................... $7,349,367 $7,259,654
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt.. $ 2,234 $ 3,638
Accounts payable........................................ 224,690 283,896
Income taxes payable.................................... 270,203 277,700
Accrued compensation and related benefits............... 501,084 693,525
Customer advances and unearned revenues................. 1,019,556 1,007,149
Value added tax and sales tax payable................... 85,947 128,774
Other accrued liabilities............................... 705,647 651,741
---------- ----------
Total current liabilities............................ 2,809,361 3,046,423
---------- ----------
LONG-TERM DEBT........................................... 304,772 304,140
OTHER LONG-TERM LIABILITIES.............................. 72,599 77,937
DEFERRED INCOME TAXES.................................... 178,347 135,887
STOCKHOLDERS' EQUITY..................................... 3,984,288 3,695,267
---------- ----------
Total liabilities and stockholders' equity........... $7,349,367 $7,259,654
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
February February February February
29, 2000 28, 1999 29, 2000 28, 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Licenses and other............... $1,071,373 $ 825,738 $2,606,186 $2,175,631
Services......................... 1,378,045 1,253,181 4,149,632 3,708,343
---------- ---------- ---------- ----------
Total revenues................ 2,449,418 2,078,919 6,755,818 5,883,974
---------- ---------- ---------- ----------
OPERATING EXPENSES
Sales and marketing.............. 594,696 566,756 1,764,555 1,668,586
Cost of services................. 707,261 792,023 2,217,181 2,251,160
Research and development......... 255,552 209,798 739,653 598,099
General and administrative....... 122,188 103,663 342,780 299,546
---------- ---------- ---------- ----------
Total operating expenses...... 1,679,697 1,672,240 5,064,169 4,817,391
---------- ---------- ---------- ----------
OPERATING INCOME.................. 769,721 406,679 1,691,649 1,066,583
Gain on sale of marketable
securities...................... 431,846 24,457 431,846 24,457
Other income, net................ 7,763 13,199 41,560 64,018
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................ 1,209,330 444,335 2,165,055 1,155,058
Provision for income taxes....... 446,154 151,074 780,659 392,720
---------- ---------- ---------- ----------
NET INCOME........................ $ 763,176 $ 293,261 $1,384,396 $ 762,338
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic............................ $ 0.27 $ 0.10 $ 0.49 $ 0.26
Diluted.......................... $ 0.25 $ 0.10 $ 0.46 $ 0.26
SHARES OUTSTANDING:
Basic............................ 2,818,939 2,880,704 2,846,250 2,896,968
Diluted.......................... 2,998,189 2,990,922 2,995,630 2,969,394
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
February February
29, 2000 28, 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................ $ 1,384,396 $ 762,338
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 236,389 233,918
Amortization of purchase price in excess of net
tangible assets acquired......................... 56,646 35,720
Provision for doubtful accounts................... 79,733 65,311
Gain on sale of marketable securities............. (431,846) (24,457)
Changes in assets and liabilities:
Decrease in trade receivables.................... 324,318 227,465
(Increase) decrease in prepaid and refundable
income taxes.................................... 59,838 (52,138)
Decrease in other receivables, prepaid expenses
and other current assets........................ 52,206 14,492
Increase (decrease) in accounts payable.......... (60,698) 15,786
Increase (decrease) in income taxes payable...... 231,211 (44,096)
Increase (decrease) in customer advances and
unearned revenues............................... 4,628 (58,790)
Decrease in accrued compensation and related
benefits........................................ (197,093) (99,328)
Decrease in value added tax and sales tax
payable......................................... (44,155) (58,927)
Increase in other accrued liabilities............ 57,990 46,087
Increase (decrease) in other long-term
liabilities..................................... (5,403) 350
Increase (decrease) in deferred income taxes..... (10,042) 7,304
----------- -----------
Net cash provided by operating activities.......... 1,738,118 1,071,035
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of cash investments...................... (876,571) (1,010,745)
Proceeds from maturities of cash investments...... 1,283,267 855,968
Capital expenditures.............................. (206,599) (258,959)
Capitalization of computer software development
costs............................................ (12,914) (24,186)
Proceeds from sale of marketable securities....... 441,363 24,969
Increase in intangible and other assets........... (181,077) (147,480)
----------- -----------
Net cash provided by (used for) investing
activities........................................ 447,469 (560,433)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under notes payable and
long-term debt................................... (1,160) (915)
Proceeds from common stock issued................. 324,466 220,686
Proceeds from subsidiary offering................. -- 248,811
Repurchase of common stock........................ (2,044,526) (747,932)
----------- -----------
Net cash used for financing activities............. (1,721,220) (279,350)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............. 17,623 (757)
----------- -----------
Net increase in cash and cash equivalents.......... 481,990 230,495
CASH AND CASH EQUIVALENTS
Beginning of period................................ 1,785,715 1,273,681
----------- -----------
End of period...................................... $ 2,267,705 $ 1,504,176
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common Stock dividend.............................. $ 14,161 $ 4,805
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1999.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments)
which are, in the opinion of management, necessary to state fairly the results
for the three and nine month periods ended February 29, 2000. The results for
the three and nine month periods ended February 29, 2000 are not necessarily
indicative of the results expected for the full fiscal year.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The Company will adopt SAB 101 as required in the first quarter of fiscal 2001
and is evaluating the effect that such adoption may have on its consolidated
results of operations and financial position.
2. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period. Diluted earnings per share is computed
on the basis of the weighted average number of common shares outstanding plus
the dilutive effect of outstanding stock options and the employee stock
purchase plan using the "treasury stock" method.
On January 18, 2000, the Company effected a two-for-one stock split in the
form of a common stock dividend in the third quarter to stockholders of record
as of December 30, 1999. All per share data and numbers of common shares,
where appropriate, have been retroactively adjusted to reflect the stock
split.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
Feb 29, Feb 28, Feb 29, Feb 28,
(in thousands, except per share 2000 1999 2000 1999
data) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income........................ $ 763,176 $ 293,261 $1,384,396 $ 762,338
========== ========== ========== ==========
Weighted average shares
outstanding...................... 2,818,939 2,880,704 2,846,250 2,896,968
Dilutive effect of employee stock
options and employee stock
purchase plan.................... 179,250 110,218 149,380 72,426
---------- ---------- ---------- ----------
Diluted shares outstanding........ 2,998,189 2,990,922 2,995,630 2,969,394
========== ========== ========== ==========
Basic earnings per share.......... $ 0.27 $ 0.10 $ 0.49 $ 0.26
Diluted earnings per share........ $ 0.25 $ 0.10 $ 0.46 $ 0.26
</TABLE>
The gain on sale of marketable securities in the third quarters of fiscal 2000
and 1999 in the amounts of $431,846,000 and $24,457,000 relate to the sale of
existing shares in Liberate Technology and Oracle Japan, respectively.
Excluding the effects of these transactions on the quarters, the diluted
earnings per share would have been $0.17 and $0.09, respectively.
6
<PAGE>
3. COMPREHENSIVE INCOME
Comprehensive income includes foreign currency translation gains and losses
and unrealized gains and losses on equity securities that have been previously
excluded from net income and reflected instead in stockholders' equity.
The following table sets forth the calculation of comprehensive income on an
interim basis:
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
------------------ -------------------
Feb 29, Feb 28, Feb 29, Feb 28,
2000 1999 2000 1999
(in thousands) -------- -------- ---------- --------
<S> <C> <C> <C> <C>
Net income........................... $763,176 $293,261 $1,384,396 $762,338
Foreign currency translation gains
(losses)............................ (32,033) (8,893) 19,506 (2,153)
Unrealized gains (losses) on equity
securities.......................... 108,405 (7) 213,211 (26)
-------- -------- ---------- --------
Total comprehensive income........... $839,548 $284,361 $1,617,113 $760,159
======== ======== ========== ========
</TABLE>
4. STOCK TRANSACTIONS
In July 1999, Liberate Technologies, a partially owned subsidiary, issued and
sold 6,701,050 shares of Common Stock at approximately $16 per share in an
initial public offering. In connection with this offering, Liberate
Technologies received cash proceeds of $98,042,000, net of issuance costs of
$9,175,000. The Company's ownership interest in Liberate Technologies was
reduced from 59.20% to 48.24% following the offering. As a result of the
offering, the Company recorded an unrealized gain, net of tax, of $32,045,000
in stockholders' equity in the first quarter of fiscal 2000. Effective July 1,
1999, the Company began to account for its ownership interest in Liberate
Technologies using the equity method of accounting.
In February 2000, Liberate Technologies issued and sold 2,890,000 shares of
Common Stock at approximately $108 per share in a secondary public offering.
As a result, the Company's ownership interest in Liberate Technologies was
reduced from 47.43% to 40.90%. The Company has recorded an unrealized gain in
the amount of $73,579,000, net of deferred taxes of $46,061,000, in
stockholders' equity in the third quarter of fiscal 2000, in the accompanying
condensed balance sheet, reflecting the increased net assets of Liberate
Technologies stemming from the secondary public offering. Separately, the
Company sold 4,274,703 shares in Liberate Technologies, resulting in a gain on
sale of marketable securities in the amount of $431,846,000 and related tax of
$166,261,000.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
It requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met and
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000 and cannot be applied
retroactively. The Company is currently evaluating this statement, but does
not expect that it will have a material effect on the Company's financial
position or results of operations.
6. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in fiscal 1999. SFAS No. 131 established standards
for reporting information about operating segments in the Company's financial
statements. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision maker is the Chief Executive Officer of the Company.
7
<PAGE>
The Company is organized geographically and by line of business. The Company
has four major line of business operating segments: license, support,
education and consulting. While the Chief Executive Officer of the Company
evaluates results in a number of different ways, the line of business
management structure is the primary basis for which he assesses financial
performance and allocates resources.
The accounting policies of the line of business operating segments are the
same as those described in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1999. The Company does not track assets by operating
segments. Consequently, it is not practical to show assets by operating
segments.
The following table presents a summary of operating segments:
<TABLE>
<CAPTION>
Other
Distribution
License Support (4) Education Consulting Expenses (5) Total
(in thousands) ---------- ----------- --------- ---------- ------------ ----------
Three Months Ended
February 29, 2000
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated
customers (1).......... $1,054,456 $ 754,413 $126,238 $ 514,311 $ -- $2,449,418
Distribution expenses
(2).................... 478,253 198,598 78,952 417,718 175,017 1,348,538
---------- ---------- -------- ---------- --------- ----------
Distribution margin
(3).................... $ 576,203 $ 555,815 $ 47,286 $ 96,593 $(175,017) $1,100,880
========== ========== ======== ========== ========= ==========
<CAPTION>
February 28, 1999
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated
customers (1).......... $ 816,177 $ 582,596 $112,586 $ 567,560 $ -- $2,078,919
Distribution expenses
(2).................... 442,735 174,187 88,680 510,913 186,206 1,402,721
---------- ---------- -------- ---------- --------- ----------
Distribution margin
(3).................... $ 373,442 $ 408,409 $ 23,906 $ 56,647 $(186,206) $ 676,198
========== ========== ======== ========== ========= ==========
<CAPTION>
Other
Distribution
License Support (4) Education Consulting Expenses (5) Total
(in thousands) ---------- ----------- --------- ---------- ------------ ----------
Nine Months Ended
February 29, 2000
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated customers
(1).................... $2,568,110 $2,142,069 $375,963 $1,669,676 $ -- $6,755,818
Distribution expenses
(2).................... 1,406,412 579,073 246,245 1,342,714 531,536 4,105,980
---------- ---------- -------- ---------- --------- ----------
Distribution margin
(3).................... $1,161,698 $1,562,996 $129,718 $ 326,962 $(531,536) $2,649,838
========== ========== ======== ========== ========= ==========
<CAPTION>
February 28, 1999
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from
unaffiliated customers
(1).................... $2,154,061 $1,672,371 $350,222 $1,707,320 $ -- $5,883,974
Distribution expenses
(2).................... 1,316,500 470,828 273,821 1,447,496 526,167 4,034,812
---------- ---------- -------- ---------- --------- ----------
Distribution margin
(3).................... $ 837,561 $1,201,543 $ 76,401 $ 259,824 $(526,167) $1,849,162
========== ========== ======== ========== ========= ==========
</TABLE>
- --------
(1) Operating segment revenues differ from the external reporting
classification due to certain license products which are classified as
services revenues for management reporting purposes.
(2) Certain functional areas managed by the lines of business in fiscal 1999
were, for management purposes, transferred to the corporate or development
organizations in fiscal 2000. As a result, line of business distribution
expenses for fiscal 2000 are not in all cases comparable to the
corresponding periods in fiscal 1999.
(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
marketing, general and administrative, corporate, development and other
expenses incurred in support of the line of business.
8
<PAGE>
(4) Support includes update rights which, in certain sectors of the software
industry such as the "shrink wrap sector," would typically be classified
as license revenue.
(5) Other distribution expenses consist primarily of marketing, general and
administrative and other distribution expenses that are not directly
controlled by any particular line of business.
Profit Reconciliation:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Feb 29, Feb 28, Feb 29, Feb 28,
2000 1999 2000 1999
(in thousands) ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Total distribution margin for
reportable segments........... $1,100,880 $ 676,198 $2,649,838 $1,849,162
Corporate, development and
other expenses................ (331,159) (269,519) (958,189) (782,579)
Other income, net.............. 439,609 37,656 473,406 88,475
---------- --------- ---------- ----------
Income before provision for
income taxes................ $1,209,330 $ 444,335 $2,165,055 $1,155,058
========== ========= ========== ==========
</TABLE>
7. LITIGATION
Refer to Part II, Item 1 for a description of legal proceedings.
8. SUBSEQUENT EVENTS
Subsidiary Secondary Public Offering: In April 2000, Oracle Japan, a partially
owned subsidiary, issued and sold 250,000 shares of Common Stock at
approximately $787 per share in a secondary public offering in Japan. As a
result of this offering, Oracle Japan received cash proceeds of $187,101,000,
net of issuance costs of $9,847,000. Separately, Oracle Corporation sold
8,700,000 shares in Oracle Japan, receiving proceeds of $6,504,210,000, net of
issuance costs of $342,690,000. If the underwriter's over allotment option is
exercised, Oracle Corporation may sell up to an additional 400,000 shares in
Oracle Japan.
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, 1999 and the
Quarterly Reports on Form 10-Q filed by the Company in fiscal 2000.
Results of Operations
Total revenues increased 18% (20% in local currency) in the third quarter and
15% (17% in local currency) in the first nine months of fiscal 2000 as
compared to the corresponding periods in fiscal 1999. Domestic revenues
increased 29% and 17%, while international revenues increased 7% and 13% in
the third quarter and first nine months of fiscal 2000, respectively, as
compared to the corresponding periods in fiscal 1999. International revenues
expressed in local currency increased by approximately 12% and 17% in the
third quarter and first nine months of fiscal 2000, respectively, as compared
to the corresponding periods in fiscal 1999. Revenues from
9
<PAGE>
international customers were approximately 47% and 52% of total revenues in
the third quarters and 50% and 51% of total revenues in the first nine months
of fiscal 2000 and 1999, respectively. Management expects that the Company's
international operations will continue to provide a significant portion of
total revenues. However, international revenues will be adversely affected if
the U.S. dollar continues to strengthen against certain major international
currencies.
REVENUES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
Feb 29, Feb 28, Feb 29, Feb 28,
2000 Change 1999 2000 Change 1999
(in thousands) ---------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Licenses and other...... $1,071,373 30% $ 825,738 $2,606,186 20% $2,175,631
Percentage of revenues.. 43.7% 39.7% 38.6% 37.0%
Services................ $1,378,045 10% 1,253,181 $4,149,632 12% $3,708,343
Percentage of revenues
....................... 56.3% 60.3% 61.4% 63.0%
Total revenues........ $2,449,418 18% $2,078,919 $6,755,818 15% $5,883,974
</TABLE>
Licenses and Other Revenues. License revenues represent fees earned for
granting customers licenses to use the Company's software products. License
and other revenues also include documentation revenues and other miscellaneous
revenues, which constituted 3% of total license and other revenues in the
third quarters and the first nine months of fiscal 2000 and 1999,
respectively. License revenues, excluding other revenues, grew 30% and 7% in
the third quarters of fiscal 2000 and 1999, respectively, and 20% and 12% in
the first nine months of fiscal 2000 and 1999, respectively. Database license
revenues, which include server and tools revenues, grew 28% and 7% in the
third quarters of fiscal 2000 and 1999, respectively, and 18% and 13% in the
first nine months of fiscal 2000 and 1999, respectively. Applications revenues
grew 35% and 5% in the third quarters of fiscal 2000 and 1999, respectively,
and 27% and 8% in the first nine months of fiscal 2000 and 1999, respectively.
The higher license revenue growth rate experienced in the third quarter of
fiscal 2000 was due in part to relatively weak license sales in the third
quarter of fiscal 1999.
Services Revenues. Services revenues consist of support, including update
rights, consulting and education services revenues which comprised 55%, 37%
and 8% of total services revenues, respectively, during the third quarter of
fiscal 2000 and 52%, 40% and 8%, respectively, during the first nine months of
fiscal 2000. Support revenues grew 29% and 30% in the third quarters of fiscal
2000 and 1999, respectively, and 28% and 31% in the first nine months of
fiscal 2000 and 1999, respectively, reflecting an increase in the overall
customer installed base. The support revenues growth rate will continue to be
affected by the overall license revenue growth rates. Consulting services
revenues declined 10% in the third quarter of fiscal 2000, as compared to a
31% growth rate in the third quarter of fiscal 1999. Consulting services
revenues declined 2% in the first nine months of fiscal 2000, as compared to a
40% growth rate in the first nine months of fiscal 1999. The decline in the
consulting services revenues experienced in the third quarter and first nine
months of fiscal 2000 is primarily due to a decrease in the growth of demand
for these services as a result of the following: i) a slowdown in the
Enterprise Resource Planning ("ERP") market, ii) the Company's strategy to
focus only on profitable business, 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 services revenues grew 10% and 8% in
the third quarters of fiscal 2000 and 1999, respectively, and 5% and 14% in
the first nine months of fiscal 2000 and 1999, respectively.
10
<PAGE>
OPERATING EXPENSES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ----------------------------
Feb 29, Feb 28, Feb 29, Feb 28,
2000 Change 1999 2000 Change 1999
(in thousands) -------- ------ -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing..... $594,696 5% $566,756 $1,764,555 6% $1,668,586
Percentage of revenues.. 24.3% 27.3% 26.1% 28.4%
Cost of services........ $707,261 (11%) $792,023 $2,217,181 (2%) $2,251,160
Percentage of revenues
....................... 28.9% 38.1% 32.8% 38.3%
Research and development
(1).................... $255,552 22% $209,798 $ 739,653 24% $ 598,099
Percentage of revenues.. 10.4% 10.1% 10.9% 10.2%
General and
administrative......... $122,188 18% $103,663 $ 342,780 14% $ 299,546
Percentage of revenues
....................... 5.0% 5.0% 5.1% 5.1%
</TABLE>
- --------
(1) Pursuant to SFAS No. 86, the Company capitalized software development
costs equal to 0.2% and 0.4% of total revenues during the third quarters
and the first nine months of fiscal 2000 and 1999, respectively.
International expenses were favorably affected in the third quarter and first
nine months of fiscal 2000 when compared to corresponding periods in the prior
year due to the strengthening of the U.S. dollar against certain major
international currencies. The net impact on operating margins however was
unfavorable since the negative effect on revenues was greater than the
positive effect on the expenses.
Sales and Marketing Expenses. The Company continues to place significant
emphasis, both domestically and internationally, on direct sales through its
own sales force. However, the Company also continues to market its products
through indirect channels. Sales and marketing expenses increased 5% and 0% in
the third quarters of fiscal 2000 and 1999, respectively, and 6% and 8% in the
first nine months of fiscal 2000 and 1999, respectively. Sales and marketing
expenses as a percentage of license revenues decreased in the third quarter
and first nine months of fiscal 2000, primarily related to increased license
revenues and productivity improvements which favorably affected headcount and
headcount related expenditures. Included in sales and marketing expenses is
the amortization of capitalized software development costs (see below).
Cost of Services. The cost of providing services consists largely of
consulting, education and support personnel expenses. As a percentage of
services revenues, cost of services was 51% and 63% in the third quarters of
fiscal 2000 and 1999, respectively, and 53% and 61% in the first nine months
of fiscal 2000 and 1999, respectively. The decrease in the cost of services as
a percentage of services revenues was due primarily to efficiencies and
controls over headcount and headcount related expenditures in the education
and consulting lines of business as the Company continues to focus on margin
improvement.
Research and Development Expenses. Research and development expenses for the
third quarters of fiscal 2000 and 1999 would have been 11% of total revenues,
without the capitalization of software development costs in accordance with
Statement of Financial Accounting Standards No. 86. Before considering the
impact of software capitalization, research and development expenses increased
19% and 21% in the third quarter and first nine months of fiscal 2000,
respectively (22% and 24% after the adjustment for software capitalization),
as compared to 11% and 12% for the corresponding periods in fiscal 1999 (14%
and 13% after the adjustment for software capitalization). The higher expense
growth rate in the third quarter and first nine months of fiscal 2000 was due
to planned increases in research and development headcount in fiscal 2000. The
Company capitalized $5,159,000 and $9,261,000 of software development costs
during the third quarters of fiscal 2000 and 1999, respectively, and
$12,914,000 and $24,186,000 in the first nine months of fiscal 2000 and 1999,
respectively. Amortization of capitalized software development costs is
charged to sales and marketing expenses and totaled $5,328,000 and $9,139,000
in the third quarters of fiscal 2000 and 1999, respectively, and $12,616,000
and $24,208,000 in the corresponding nine month periods. The Company believes
that research and development expenditures are essential to maintaining its
competitive position and expects these costs to continue to constitute a
significant percentage of revenues.
General and Administrative Expenses. General and administrative expenses as a
percentage of revenues were 5% in the third quarter and first nine months of
fiscal 2000 and 1999, respectively.
11
<PAGE>
GAIN ON SALE OF MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Feb 29, Feb 28, Feb 29, Feb 28,
2000 Change 1999 2000 Change 1999
(in thousands) -------- ------ ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Gain on sale of marketable
securities................... $431,846 * $24,457 $431,846 * $24,457
</TABLE>
- --------
* Not Meaningful
The gain on sale of marketable securities in the third quarters and first nine
months of fiscal 2000 and 1999 relate to the sale of existing shares in
Liberate Technologies and Oracle Corporation Japan ("Oracle Japan"),
respectively.
In February 2000, Liberate Technologies issued and sold 2,890,000 shares of
Common Stock at approximately $108 per share in a secondary public offering.
As a result, the Company's ownership interest in Liberate was reduced from
47.43% to 40.90%. The Company has recorded an unrealized gain in the amount of
$73,579,000, net of deferred taxes of $46,061,000, in stockholders' equity in
the third quarter of fiscal 2000, in the accompanying condensed balance sheet,
reflecting the increased net assets of Liberate Technologies stemming from the
secondary public offering. Separately, the Company sold 4,274,703 shares in
Liberate Technologies, resulting in a gain on sale of marketable securities in
the amount of $431,846,000 and related tax of $166,261,000.
OTHER INCOME, NET:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Feb
29, Feb 28, Feb 29, Feb 28,
2000 Change 1999 2000 Change 1999
(in thousands) ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Other income, net................. $7,763 (41%) $13,199 $41,560 (35%) $64,018
Percentage of revenues ........... 0.3% 0.6% 0.6% 1.1%
</TABLE>
Other income, net includes interest income and expense, foreign currency
exchange gains and losses as well as the minority interest share in income and
losses of partially owned subsidiaries. The decrease in other income in the
third quarter and first nine months of fiscal 2000 is primarily related to the
Company's minority interest share of losses in Liberate Technologies. As
discussed in note 4 in the Notes to Condensed Consolidated Financial
Statements, Liberate Technologies issued and sold 6,701,050 shares of Common
Stock in July 1999, resulting in the Company's ownership interest being
reduced to 48.24% following the offering. As a result, effective July 1, 1999,
the Company began to account for its interest in Liberate Technologies using
the equity method of accounting.
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Feb 29, Feb 28, Feb 29, Feb 28,
2000 Change 1999 2000 Change 1999
(in thousand) -------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes... $446,154 195% $151,074 $780,659 99% $392,720
Percentage of revenues ...... 18.2% 7.3% 11.6% 6.7%
</TABLE>
The Company's effective tax rates have historically differed from the federal
statutory rate primarily because of tax credits, certain foreign sales
corporation income that is not taxed, state taxes, foreign income taxes
provided at rates greater than the federal statutory rate, as well as foreign
losses that could not be utilized. The effective tax rate was 37% in the third
quarter and 36% in the first nine months of fiscal 2000 and 34% in the third
quarter and first nine months of fiscal 1999. The provision for income taxes
for the third quarter of fiscal 2000 includes $166,261,000 of taxes on the
gain on sale of marketable securities in Liberate Technologies. Excluding this
transaction, the effective tax rate for the third quarter of fiscal 2000 would
have been 36%.
12
<PAGE>
NET INCOME AND EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ --------------------------
Feb 29, Feb 28, Feb 29, Feb 28,
(in thousand, except per 2000 Change 1999 2000 Change 1999
share data) -------- ------ -------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income................ $763,176 160% $293,261 $1,384,396 82% $762,338
Percentage of revenues ... 31.2% 14.1% 20.5% 13.0%
Earnings per share:
Basic.................... $ 0.27 170% $ 0.10 $ 0.49 88% $ 0.26
Diluted.................. $ 0.25 150% $ 0.10 $ 0.46 77% $ 0.26
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
Feb 29, Feb 28,
2000 Change 1999
(in thousands) ----------- ------ ----------
<S> <C> <C> <C>
Working capital............................... $ 2,336,036 13% $2,058,656
Cash and cash investments..................... $ 2,887,601 16% $2,490,982
Cash provided by operating activities......... $ 1,738,118 62% $1,071,035
Cash provided by (used for) investing
activities................................... $ 447,469 * $ (560,433)
Cash used for financing activities............ $(1,721,220) 516% $ (279,350)
</TABLE>
- --------
* Not Meaningful
Working capital increased in the first nine months of fiscal 2000 over the
corresponding period in fiscal 1999, due primarily to increased cash flow from
operations, which resulted in higher cash and cash investment levels.
The Company generated higher positive cash flows from operations in the first
nine months of fiscal 2000 over fiscal 1999, due primarily to improved
profitability.
Cash provided by investing activities increased in the first nine months of
fiscal 2000 as compared to the corresponding prior year period due primarily
to the proceeds from the sale of marketable securities and changes in the
levels and maturities of cash investments. In each period, the Company made
significant investments in capital expenditures and other assets. The Company
expects to continue to invest in capital and other assets to support its
growth.
Cash used for financing activities increased in the first nine months of
fiscal 2000 as compared to the corresponding prior year period due primarily
to repurchase of Common Stock for approximately $2,044,526,000 as compared to
$747,932,000 in the prior year period.
Since July 1992, the Company's Board of Directors has approved the cumulative
repurchase of up to 548,000,000 shares of Common Stock on the open market to
reduce the dilutive effect of the Company's stock plans. Pursuant to this
repurchase program, the Company repurchased 15,549,000 shares of the Company's
Common Stock for approximately $672,732,000 in the third quarter of fiscal
2000. As of February 29, 2000, the Company has repurchased a total of
813,926,296 shares for approximately $4,463,251,000. The Company has primarily
used cash flows from operations to repurchase the Company's Common Stock and
to invest in working capital and other assets to support its growth.
The Company, as part of its authorized stock repurchase program, has sold put
warrants and purchased call options through private placements with
institutional investors. The transactions were exempt under Section 4(2) of
the Securities Act of 1933. The put warrants, if exercised, would entitle the
holder to sell one share of Common Stock to the Company at a specified price.
Similarly, the call options entitle the Company to buy, on a specified day,
one share of the Company's Common Stock at a specified price. As of February
29, 2000, the Company had a maximum potential obligation under the put
warrants to buy back 28,000,000 shares of its Common Stock for prices ranging
from $9.70 to $9.78 per share for an aggregate price of approximately
13
<PAGE>
$273,602,000. The put warrants will expire at various dates through October
2000. As of February 29, 2000, the Company had the right to purchase under the
call options up to a maximum of 14,000,000 shares of its Common Stock at
prices ranging from $13.03 to $13.34 per share for an aggregate price of
approximately $186,099,800. The call options will expire at various dates
through October 2000. During the third quarter and first nine months of fiscal
2000, the Company exercised call options for 3,000,000 and 26,136,000 shares,
respectively, at an average price of $10.06 and $8.88, respectively.
During fiscal 1997, the Company sold 27,000,000 warrants, each of which
entitles the holder to purchase one share of Common Stock at prices between
$17.11 and $17.24. These warrants expire in May 2000.
During the third quarter of fiscal 1997, the Company issued $150,000,000 in
6.72% Senior Notes due in the year 2004 and $150,000,000 in 6.91% Senior Notes
due in the year 2007. The Senior Notes are unsecured general obligations of
the Company that rank on parity with all other unsecured and unsubordinated
indebtedness of the Company that may be outstanding. At February 29, 2000, the
Company also had other outstanding debt of approximately $7,006,000, primarily
in the form of other notes payable and capital leases.
The Company anticipates that current cash balances, as well as anticipated
cash flows from operations, will be sufficient to meet its working capital and
capital expenditure needs at least through the next twelve months.
Factors That May Affect Future Results and Market Price of Stock
The Company operates in a rapidly changing environment that involves numerous
risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
Revenue Growth and Economic Conditions. The revenue growth and profitability
of the Company's business depends on the overall demand for computer software
and services, particularly in the product segments in which the Company
competes. Because the Company's sales are primarily to major corporate and
government customers, the Company's business also depends on general economic
and business conditions. A softening of demand for computer software caused by
a weakening of the economy may result in decreased revenues or lower growth
rates. In particular, one of the challenges the Company continues to face in
promoting future growth in license revenues will be to refocus its marketing
and sales efforts in the Customer Relationship Management ("CRM") and Internet
procurement areas of its applications business where the market is growing
more rapidly than in the Enterprise Resource Planning area. There can be no
assurances that the Company will be able to effectively promote future license
revenue growth in its applications business.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition" which superseded SOP No. 91-1. SOP No. 97-2 was effective for the
Company's fiscal year beginning June 1, 1998, as amended by SOP No. 98-4 and
SOP No. 98-9, and provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. Based on the
Company's interpretation of the requirements of SOP No. 97-2, as amended,
application of this statement did not and is not expected to have a material
impact on the Company's revenue. However, the accounting profession continues
to review certain provisions of SOP No. 97-2, with the objective of providing
additional guidance on implementing its provisions. Depending upon the outcome
of these reviews and the issuance of implementation guidelines and
interpretations, the Company may be required to change its revenue recognition
policies and business practices, and such changes could have a material
adverse effect on the Company's business, results of operations or financial
position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The Company will adopt SAB 101 as required in the first quarter of fiscal 2001
and is evaluating the effect that such adoption may have on its consolidated
results of operations and financial position.
14
<PAGE>
Competitive Environment. The computer software industry is an intensely
competitive industry with several large vendors that develop and market
databases, application development tools, business applications and business
intelligence products. Certain of these vendors have significantly 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 the Company's competitors of a product could have a
material adverse effect on the Company's business, results of operations or
financial position. In addition, new distribution methods (e.g. electronic
channels) and opportunities presented by the Internet and electronic commerce
have removed many of the barriers to entry historically faced by small and
start-up companies in the software industry. The Company expects to face
increasing competition in the various markets in which it competes.
Hiring and Retention of Employees. The Company's continued growth and success
depend to a significant extent on the continued service of its senior
management and other key employees and the hiring of new qualified employees.
Competition for highly-skilled business, product development, technical and
other personnel is becoming more intense due to lower overall unemployment
rates, the boom in information technology spending and private companies that
can offer equity incentives that provide the potential of greater compensation
in connection with an initial public offering. Accordingly, the Company
expects to experience increased compensation costs that may not be offset
through either improved productivity or higher prices. There can be no
assurances that the Company will be successful in continuously recruiting new
personnel and in retaining existing personnel. In general, the Company does
not have long-term employment or non-competition agreements with its
employees. The loss of one or more key employees or the Company's inability to
attract additional qualified employees or retain other employees could have a
material adverse effect on the continued growth of the Company.
Pricing. Intense competition in the various markets in which the Company
competes may put pressure on the Company to reduce prices on certain products,
particularly in the markets where certain vendors offer deep discounts in an
effort to recapture or gain market share or to sell other software or hardware
products. Moreover, the Company has recently changed its pricing model and any
broadly based changes to the Company's prices and pricing policies could lead
to a decline or delay in sales as the Company's sales force 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
product implementations by certain of the Company's competitors could have the
effect over time of significantly reducing the prices that the Company can
charge for its products. Changes in the customer's use of the Company's
products could also result in lower license revenues if the Company's pricing
model is not adapted to such usage. Shifts toward the use of operating systems
on which the Company experiences relatively greater price competition could
result in lower average license prices, thereby reducing license revenues for
the Company. Additionally, while the distribution of applications through
application service providers may provide a new market for the Company's
products, these new distribution methods could also reduce the price paid for
the Company's products or adversely affect other sales of the Company's
products. Any such price reductions and resulting lower license revenues could
have a material adverse effect on the Company's business, results of
operations or financial position if the Company cannot offset these price
reductions with a corresponding increase in sales volumes or lower spending.
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 in the near term. Other risks associated with international
operations include import and export licensing requirements, trade
restrictions and changes in tariff rates.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Changes in the value of major foreign currencies
relative to the value of the U.S. dollar adversely affected revenues and
operating results in the second and third quarter of fiscal 2000, particularly
in Europe, and will continue to do so throughout fiscal 2000 if the U.S.
dollar strengthens relative to foreign currencies.
15
<PAGE>
Foreign currency transaction gains and losses are primarily related to
sublicense fee and other agreements between the Company and selling
distributors and subsidiaries. These gains and losses are charged against
earnings in the period incurred. The Company has reduced its transaction and
translation gains and losses associated with converting foreign currencies
into U.S. dollars by using forward foreign exchange contracts to hedge
transaction and translation exposures in major currencies. The Company finds
it impractical to hedge all foreign currencies in which it conducts business.
As a result, the Company will continue to experience foreign currency gains
and losses.
Year 2000. This section is a Year 2000 Readiness Disclosure pursuant to the
Year 2000 Information and Readiness Disclosure Act of 1998.
The Company established a program to address the impact of the year 2000 date
transition on its operations globally. In 1997, the Company established a year
2000 program office, and a Global Program Manager was appointed to coordinate
existing projects and to oversee management and execution of the Company's
plan to address year 2000. The year 2000 program was sponsored by the Chief
Financial Officer, the Senior Vice President Global, IT/Data Center, and the
General Counsel of the Company. This executive steering committee regularly
reviewed progress with the Global Program Manager. Status was reported
regularly to the Finance and Audit Committee of the Company's Board of
Directors and the Product Development Management Committee.
The Company currently knows of no significant year 2000-related failures which
occurred in either its products or its internal systems as a result of the
date change from December 31, 1999 to January 1, 2000.
New Products. The markets for the Company's products are characterized by
rapid technological advances in hardware and software development, evolving
standards in computer hardware and software technology and frequent new
product introductions and enhancements. Product introductions and short
product life cycles necessitate high levels of expenditures for research and
development. To maintain its competitive position, the Company must enhance
and improve existing products and continue to introduce new products and new
versions of existing products that keep pace with technological developments,
satisfy increasingly sophisticated customer requirements and achieve market
acceptance. The Company's inability to port to or run on new or increasingly
popular operating systems, or the Company's failure to successfully enhance
and improve its products in a timely manner, and position and/or price its
products, could have a material adverse effect on the Company's business,
results of operations or financial position.
Significant undetected errors or delays in new products or new versions of a
product, especially in the area of CRM, may affect market acceptance of the
Company's products and could have a material adverse effect on the Company's
business, results of operations or financial position. If the Company were to
experience delays in the commercialization and introduction of new or enhanced
products, if customers were to experience significant problems with the
implementation and installation of products, or if customers were dissatisfied
with product functionality or performance, this could have a material adverse
effect on the Company's business, results of operations or financial position.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development.
Uneven Patterns of Quarterly Operating Results. The Company's revenues in
general, and its license revenues in particular, are relatively difficult to
forecast and vary from quarter to quarter due to various factors, including
the (i) relatively long sales cycles for the Company's products, (ii) size and
timing of individual license transactions, the closing of which tend to be
delayed by customers until the end of a fiscal quarter as a negotiating
tactic, (iii) introduction of new products or product enhancements by the
Company or its competitors, (iv) potential for delay or deferral of customer
implementations of the Company's software, (v) changes in customer budgets,
(vi) seasonality of technology purchases and other general economic
conditions, and (vii) changes in the pricing policies of the Company or its
competitors. Accordingly, the Company's quarterly
16
<PAGE>
results are difficult to predict until the end of the quarter, and delays in
product delivery or closing of sales near the end of a quarter have
historically caused and could cause quarterly revenues and net income to fall
significantly short of anticipated levels.
The Company's license revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter. Because the Company's operating
expenses are based on anticipated revenue levels and because a high percentage
of the Company's expenses are relatively fixed, a delay in the recognition of
revenue from even a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
cause net income to fall significantly short of anticipated levels.
Management of Growth. The Company has a history of rapid growth. However, the
Company has experienced slowing growth rates in a number of areas, including
consulting and education services. The Company's future operating results will
depend on management's ability to manage growth, continuously hire and retain
significant numbers of qualified employees, accurately forecast revenues and
control expenses. A decline in the growth rate of revenues without a
corresponding and timely slowdown in expense growth could have a material
adverse effect on the Company's business, results of operations or financial
position.
Sales Force Restructuring. The Company historically has relied heavily on its
direct sales force. For the past several years, the Company has restructured
or made other adjustments to its sales force at least once a year. These
changes have generally resulted in a temporarily lack of focus and reduced
productivity by the Company's sales force that may have affected revenues in a
quarter. There can be no assurances that the Company will not continue to
restructure its sales force or that the related transition issues associated
with restructuring the sales force will not recur.
Future Acquisitions. As part of its business strategy, the Company has made
and expects to continue to make acquisitions of, or significant investments
in, businesses that offer complementary products, services and technologies.
Any acquisitions or investments will be accompanied by the risks commonly
encountered in acquisitions of businesses. Such risks include, among other
things, the possibility that the Company pays much more than the acquired
company or assets are worth, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential product liability
associated with the sale of the acquired company's products, the potential
disruption of the Company's ongoing business, the distraction of management
from the Company's business, the inability of management to maximize the
financial and strategic position of the Company, the maintenance of uniform
standards, controls, procedures and policies and the impairment of
relationships with employees and clients as a result of any integration of new
management personnel. These factors could have a material adverse effect on
the Company's business, results of operations or financial position,
particularly in the case of a larger acquisition. Consideration paid for
future acquisitions, if any, could be in the form of cash, stock, rights to
purchase stock or a combination thereof. Dilution to existing stockholders and
to earnings per share may result in connection with any such future
acquisitions.
Relative Product Profitability. Certain of the Company's revenues are derived
from products which, as a percentage of revenues, currently require a higher
level of development, distribution and support expenditures compared to
certain of its other products. To the extent that revenues generated from such
products become a greater percentage of the Company's total revenues, the
Company's operating margins may be adversely affected, unless the expenses
associated with such products decline as a percentage of revenues.
Long-term Investment Cycle. Developing and localizing software is expensive
and the investment in product development often involves a long payback cycle.
The Company's plans for its fiscal year ending May 31, 2000 include
significant investments in software research and development and related
product opportunities from which significant revenues are not anticipated for
several years.
Uncertainty of Emerging Areas. Despite tremendous growth in emerging areas
such as the Internet, on-line services and electronic commerce, the impact on
the Company of this growth is uncertain. There can be no assurance that the
Company will be able to provide a product offering that will satisfy new
customer demands in
17
<PAGE>
these areas. In addition, standards for network protocols, as well as other
industry adopted and de facto standards for the Internet, are evolving
rapidly. There can be no assurance that standards chosen by the Company will
position its products to compete effectively for business opportunities as
they arise on the Internet and other emerging areas.
New Business Areas. The Company has in recent years expanded its technology
into a number of new business areas to foster long-term growth, including
exchanges for a number of business procurement needs, Internet/electronic
commerce, interactive media, on-line business services and Internet computing.
These areas are relatively new to the Company's product development and sales
and marketing personnel. There is no assurance that the Company will compete
effectively or will generate significant revenues in these new areas. The
success of Internet computing and, in particular, the Company's current
Internet computing software products is difficult to predict because Internet
computing represents a method of computing that is new to the entire computer
industry. The successful introduction of Internet computing to the market will
depend in large measure on (i) the lower cost of ownership of Internet
computing relative to client/server architecture, (ii) the ease of use and
administration relative to client/server architecture, and (iii) how hardware
and software vendors choose to compete in this market. There can be no
assurances that sufficient numbers of vendors will undertake this commitment,
that the market will accept Internet computing or that Internet computing will
generate significant revenues for the Company. See "New Products."
Enforcement of the Company's Intellectual Property Rights. The Company relies
on a combination of copyright, patent, trademark, trade secrets,
confidentiality procedures and contractual procedures to protect its
intellectual property rights. Despite the Company's efforts to protect its
intellectual property rights, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or to reverse
engineer or obtain and use technology or other information that the Company
regards as proprietary. There can also be no assurances that the Company's
intellectual property rights would survive a legal challenge to their validity
or provide significant protection for the Company. In addition, the laws of
certain countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. Accordingly, there can be no
assurance that the Company will be able to protect its proprietary technology
against unauthorized third party copying or use, which could adversely affect
the Company's competitive position.
Possibility of Infringement Claims. The Company from time to time receives
notices from third parties claiming infringement by the Company's products of
third party patent and other intellectual property rights. The Company expects
that software products will increasingly be subject to such claims as the
number of products and competitors in the Company's industry segments grow and
the functionality of products overlaps. In addition, the Company expects to
receive more patent infringement claims as companies increasingly seek to
patent their software, especially in light of recent developments in the law
that extend the ability to patent software. Regardless of its merit,
responding to any such claim could be time-consuming, result in costly
litigation and require the Company to enter into royalty and licensing
agreements which may not be offered or available on terms acceptable to the
Company. If a successful claim is made against the Company and the Company
fails to develop or license a substitute technology, the Company's business,
results of operations or financial position could be materially adversely
affected.
Possible Volatility of Stock Price. The market price of the Company's Common
Stock has experienced significant fluctuations and may continue to fluctuate
significantly. The market price of the Common Stock may be significantly
affected by factors such as the announcement of new products or product
enhancements by the Company or its competitors, technological innovation by
the Company or its competitors, quarterly variations in the Company's or its
competitors' results of operations, changes in prices of the Company's or its
competitors' products and services, changes in revenue and revenue growth
rates for the Company as a whole or for specific geographic areas, business
units, products or product categories, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. The stock
prices for many companies in the technology sector have experienced wide
fluctuations which often have been unrelated to their operating performance.
Such fluctuations may adversely affect the market price of the Company's
Common Stock.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Disclosures About Market Risk
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company places its investments with high credit quality issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in
its policy, the Company is averse to principal loss and seeks to preserve its
invested funds by limiting default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only high credit quality
securities that it believes to be low risk and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
The table below presents the principal amount, related weighted average
interest rates and maturities for the Company's investment portfolio. Short-
term and long-term investments are all in fixed rate instruments. The
principal amount approximates fair value at February 29, 2000.
Table of Investment Securities:
<TABLE>
<CAPTION>
Principal Average
Amount Interest Rate
---------- -------------
<S> <C> <C>
Cash and cash equivalents....................... $2,267,705 3.95%
Short-term investment (0-1 years)............... 499,896 5.85%
Long-term investment (1-2 years)................ 120,000 5.91%
----------
Total cash and investment securities............ $2,887,601
==========
</TABLE>
Foreign Currency Risk. The Company transacts business in various foreign
currencies and the Company has established a foreign currency hedging program,
utilizing foreign currency forward exchange contracts (forward contracts) to
hedge certain foreign currency transaction exposures. Under this program,
increases or decreases in the Company's foreign currency transactions are
offset by gains and losses on the forward contracts, so as to mitigate the
possibility of foreign currency transaction gains and losses. The Company does
not use forward contracts for trading purposes. All outstanding forward
contracts at the end of a period are marked-to-market with unrealized gains
and losses included in other income and thus are recognized in income in
advance of the actual foreign currency cash flows. As these forward contracts
mature, the realized gains and losses are recorded and are included in net
income as a component of other income. The Company's ultimate realized gain or
loss with respect to currency fluctuations will depend on the currency
exchange rates and other factors in effect as the contracts mature. The
unrealized gain on the outstanding forward contracts at February 29, 2000 was
immaterial to the Company's consolidated financial statements.
The Company also hedges net assets of certain of its international
subsidiaries. The net gains on equity hedges are recorded as a component of
accumulated foreign currency translation adjustments in stockholders' equity.
The Company's outstanding forward contracts and equity hedges as of February
29, 2000 are presented in the tables below. The tables present the notional
amounts (at contract exchange rates) and the weighted average contractual
foreign currency exchange rates. Notional weighted average exchange rates are
quoted using market conventions where the currency is expressed in currency
units per U.S. dollar, except for Australia, Ireland, New Zealand and the UK.
All of these forward contracts and equity hedges mature in ninety days or less
as of February 29, 2000.
19
<PAGE>
Table of Forward Contracts:
<TABLE>
<CAPTION>
Notional
Notional Weighted Average
Functional Currency Amount Exchange Rate
------------------- ------------ ----------------
<S> <C> <C>
Australian Dollar............................ $ 18,058,448 0.62
Canadian Dollar.............................. 50,381,315 1.45
Danish Krone................................. 7,163,173 7.59
Euro......................................... 79,244,172 0.98
Irish Punt................................... 2,251,897 1.25
Japanese Yen................................. 2,524,458 109.37
New Zealand Dollar........................... 3,076,479 0.49
Norwegian Krone.............................. 5,562,780 8.31
Singapore Dollar............................. 19,626,333 1.70
Swedish Krona................................ 8,509,214 8.66
Swiss Franc.................................. 10,986,145 1.63
Thai Baht.................................... 11,594,203 37.95
UK Pound..................................... 140,246,480 1.59
------------
Total.................................... $359,225,097
============
Table of Equity Hedges:
<CAPTION>
Notional
Notional Weighted Average
Functional Currency Amount Exchange Rate
------------------- ------------ ----------------
<S> <C> <C>
Japanese Yen................................. $ 30,478,513 101.71
Singapore Dollar............................. 17,107,870 1.67
Swedish Krona................................ 4,741,303 8.44
UK Pound..................................... 14,621,940 1.62
------------
Total.................................... $ 66,949,626
============
</TABLE>
Equity Price Risk. The Company, as part of its authorized stock repurchase
program, has sold put warrants and purchased call options through private
placements with institutional investors. The transactions were exempt under
Section 4(2) of the Securities Act of 1933. The put warrants, if exercised,
would entitle the holder to sell one share of Common Stock to the Company at a
specified price. Similarly, the call options entitle the Company to buy, on a
specified day, one share of the Company's Common Stock at a specified price.
As of February 29, 2000, the Company had a maximum potential obligation under
the put warrants to buy back 28,000,000 shares of its Common Stock for prices
ranging from $9.70 to $9.78 per share for an aggregate price of approximately
$273,602,000. The put warrants will expire at various dates through October
2000. As of February 29, 2000, the Company had the right to purchase under the
call options up to a maximum of 14,000,000 shares of its Common Stock at
prices ranging from $13.03 to $13.34 per share for an aggregate price of
approximately $186,099,800. The call options will expire at various dates
through October 2000. During the third quarter and first nine months of fiscal
2000, the Company exercised call options for 3,000,000 and 26,136,000 shares,
respectively, at an average price of $10.06 and $8.88, respectively.
20
<PAGE>
The table below presents the shares, the weighted average strike prices, the
contract amount and the estimated fair value of the put warrants and call
options at February 29, 2000.
<TABLE>
<CAPTION>
Estimated
Fair
Maturity Value
(in thousands, except stock prices) -------- ---------
<S> <C> <C>
Put Warrants:
Shares................................................ 28,000
Weighted average stock price.......................... $ 9.77
Contract amount....................................... $273,602 $ 4
Call Options:
Shares................................................ 14,000
Weighted average stock price.......................... $ 13.29
Contract amount....................................... $186,100 $489,343
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Shareholder class actions were filed in the Superior Court of the State of
California, County of San Mateo against the Company and its Chief Financial
Officer and Chief Operating Officer on and after December 18, 1997. The class
actions are brought on behalf of purchasers of the stock of the Company during
the period April 29, 1997 through December 9, 1997. Plaintiffs allege that the
defendants made false and misleading statements about the Company's actual and
expected financial performance, while selling Company stock, in violation of
state securities laws. Plaintiffs further allege that the individual
defendants sold Company stock while in possession of material non-public
information. The Company believes that it has meritorious defenses to these
actions and intends to vigorously defend them.
A related shareholder derivative lawsuit was filed in the Superior Court of
the State of California, County of San Mateo on November 17, 1998. The
derivative suit was brought by Company stockholders, allegedly on behalf of
the Company, against certain of the Company's officers and directors. The
derivative plaintiffs allege that these officers and directors breached their
fiduciary duties to the Company by making or causing to be made alleged
misstatements about the Company's revenue, growth, and financial status while
certain officers and directors sold Company stock and by allowing the Company
to be sued in the shareholder class actions. The derivative plaintiffs seek
compensatory and other damages, disgorgement of compensation received and
temporary and permanent injunctions requiring the defendants to relinquish
their directorships. On January 15, 1999, the Court entered a stipulation and
order staying the action until further notice.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated results of operations or
consolidated financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Oracle
Corporation has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORACLE CORPORATION
Dated: April 14, 2000 By: /s/ JEFFREY O. HENLEY
---------------------------------------
Jeffrey O. Henley
Executive Vice President and Chief
Financial Officer
Dated: April 14, 2000 By: /s/ JENNIFER MINTON
---------------------------------------
Jennifer Minton
Vice President and Corporate
Controller
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> DEC-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 2,267,705
<SECURITIES> 499,896
<RECEIVABLES> 2,084,188
<ALLOWANCES> (235,467)
<INVENTORY> 13,549
<CURRENT-ASSETS> 5,145,397
<PP&E> 2,144,463
<DEPRECIATION> 1,177,787
<TOTAL-ASSETS> 7,349,367
<CURRENT-LIABILITIES> 2,809,361
<BONDS> 0
<COMMON> 28,188
0
0
<OTHER-SE> 3,956,100
<TOTAL-LIABILITY-AND-EQUITY> 7,349,367
<SALES> 0
<TOTAL-REVENUES> 2,449,418
<CGS> 0
<TOTAL-COSTS> 707,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 39,516
<INTEREST-EXPENSE> 23,114
<INCOME-PRETAX> 1,209,330
<INCOME-TAX> 446,154
<INCOME-CONTINUING> 763,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 763,176
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.25
</TABLE>
