<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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 the quarterly period ended November 30, 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 [_]
The number of shares outstanding of the registrant's common stock, par value
$0.01, as of December 31, 2000 was 5,585,918,334.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
ORACLE CORPORATION
FORM 10-Q QUARTERLY REPORT
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at November 30, 2000 and
May 31, 2000.................................................. 3
Condensed Consolidated Statements of Operations for the three
and six months ended November 30, 2000 and 1999............... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended November 30, 2000 and 1999....................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations..................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........... 23
Item 6. Exhibits and Reports on Form 8-K.............................. 23
Signatures.................................................... 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, May 31,
(in thousands, except share data) 2000 2000
--------------------------------------------------------- ------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $4,165,690 $ 7,429,206
Short-term cash investments............................ 190,475 332,792
Trade receivables, net of allowance for doubtful
accounts of $304,793 at November 30, 2000 and $272,203
at May 31, 2000....................................... 1,935,767 2,533,964
Prepaids and other current assets...................... 531,532 587,372
---------- -----------
Total current assets............................... 6,823,464 10,883,334
Long-term cash investments............................... 30,000 110,000
Property, net............................................ 941,793 934,455
Long-term prepaid income taxes........................... 289,624 322,379
Intangible and other assets.............................. 838,886 826,611
---------- -----------
Total assets....................................... $8,923,767 $13,076,779
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term
debt.................................................. $ 2,596 $ 2,691
Accounts payable....................................... 282,738 287,495
Accrued compensation and related benefits.............. 518,648 725,860
Value added tax and sales tax payable.................. 101,096 165,304
Income taxes payable................................... 526,492 2,821,776
Other accrued liabilities.............................. 682,246 725,630
Customer advances and unearned revenues................ 1,053,809 1,133,482
---------- -----------
Total current liabilities.......................... 3,167,625 5,862,238
Long-term debt........................................... 300,802 300,770
Deferred income taxes.................................... 337,620 266,130
Other long-term liabilities.............................. 191,257 186,178
---------- -----------
Total liabilities.................................. 3,997,304 6,615,316
---------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value--1,000,000 shares
authorized; no shares issued or outstanding at
November 30, 2000 or May 31, 2000..................... -- --
Common stock, $0.01 par value, and additional paid in
capital--11,000,000,000 shares authorized;
5,580,988,453 and 5,614,671,898 shares issued and
outstanding at November 30, 2000 and May 31, 2000,
respectively.......................................... 3,949,335 3,112,126
Retained earnings...................................... 1,062,520 3,343,857
Accumulated other comprehensive income (loss).......... (85,392) 5,480
---------- -----------
Total stockholders' equity......................... 4,926,463 6,461,463
---------- -----------
Total liabilities and stockholders' equity......... $8,923,767 $13,076,779
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
--------------------- ---------------------
(in thousands, except per share
data) 2000 1999 2000 1999
---------------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Licenses and other.............. $1,118,238 $ 902,632 $1,925,476 $1,534,813
Services........................ 1,541,308 1,419,251 2,995,945 2,771,587
---------- --------- ---------- ----------
Total revenues................ 2,659,546 2,321,883 4,921,421 4,306,400
---------- --------- ---------- ----------
Operating expenses:
Sales and marketing............. 640,865 631,433 1,213,829 1,169,859
Cost of services................ 694,998 753,170 1,368,876 1,509,920
Research and development........ 266,280 248,160 517,307 484,101
General and administrative...... 111,402 113,055 217,367 220,592
---------- --------- ---------- ----------
Total operating expenses...... 1,713,545 1,745,818 3,317,379 3,384,472
---------- --------- ---------- ----------
Operating income.................. 946,001 576,065 1,604,042 921,928
Net investment gains (losses)
related to marketable
securities..................... (13,468) (5,083) 1,965 (8,423)
Other income, net............... 33,348 20,533 136,117 42,220
---------- --------- ---------- ----------
Income before provision for income
taxes............................ 965,881 591,515 1,742,124 955,725
Provision for income taxes...... 343,069 207,031 618,635 334,505
---------- --------- ---------- ----------
Net income........................ $ 622,812 $ 384,484 $1,123,489 $ 621,220
========== ========= ========== ==========
Earnings per share:
Basic........................... $ 0.11 $ 0.07 $ 0.20 $ 0.11
========== ========= ========== ==========
Diluted......................... $ 0.11 $ 0.06 $ 0.19 $ 0.10
========== ========= ========== ==========
Weighted average common shares
outstanding:
Basic........................... 5,584,428 5,717,780 5,594,243 5,719,812
========== ========= ========== ==========
Diluted......................... 5,874,987 6,012,600 5,903,929 5,988,704
========== ========= ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
------------------------
(in thousands) 2000 1999
----------------------------------------------------- ----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income......................................... $ 1,123,489 $ 621,220
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization.................... 139,239 154,166
Amortization of purchase price in excess of net
tangible assets acquired........................ 36,804 37,377
Provision for doubtful accounts.................. 94,371 40,217
Net investment (gains) losses related to
marketable securities........................... (1,965) 8,423
Changes in assets and liabilities:
Decrease in trade receivables.................. 474,535 466,070
Decrease in prepaid and other current assets... 48,469 76,726
Decrease (increase) in long-term prepaid income
taxes......................................... 32,755 (21,298)
Decrease in accounts payable................... (2,425) (42,924)
Decrease in accrued compensation and related
benefits...................................... (199,093) (192,466)
Decrease in value added tax and sales tax
payable....................................... (61,290) (76,528)
Decrease in income taxes payable............... (1,847,776) (166,924)
Decrease in other accrued liabilities.......... (28,085) (32,881)
Decrease in customer advances and unearned
revenues...................................... (64,075) (100,294)
Decrease in deferred income taxes.............. (16,040) (11,240)
Increase (decrease) in other long-term
liabilities................................... 5,251 (4,427)
----------- -----------
Net cash provided by (used for) operating
activities........................................ (265,836) 755,217
----------- -----------
Cash Flows From Investing Activities:
Purchases of cash investments.................... (27,000) (780,326)
Proceeds from maturities of cash investments..... 249,317 796,836
Capital expenditures............................. (153,997) (124,460)
Proceeds from sale of marketable securities...... 51,731 --
Decrease (increase) in intangible and other
assets.......................................... 2,360 (30,315)
----------- -----------
Net cash provided by (used for) investing
activities........................................ 122,411 (138,265)
----------- -----------
Cash Flows From Financing Activities:
Payments for repurchase of common stock.......... (3,420,825) (1,371,792)
Proceeds from issuance of common stock........... 341,829 248,304
Net payments under notes payable and long-term
debt............................................ (164) (4,235)
----------- -----------
Net cash used for financing activities............. (3,079,160) (1,127,723)
Effect of exchange rate changes on cash............ (40,931) 42,205
----------- -----------
Net decrease in cash and cash equivalents.......... (3,263,516) (468,566)
Cash and cash equivalents at beginning of period... 7,429,206 1,785,715
----------- -----------
Cash and cash equivalents at end of period......... $ 4,165,690 $ 1,317,149
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 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 notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended May 31,
2000.
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 fiscal year ending
May 31, 2001.
On October 12, 2000, the Company effected a two-for-one stock split in the
form of a common stock dividend to stockholders of record as of September 25,
2000. The par value of the Company's common stock after the stock split
remained $0.01 per share, and retained earnings was reduced by the par value
of the additional shares issued. All share and per share information included
in the accompanying financial statements have been retroactively adjusted to
reflect this stock split.
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 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 using the
treasury stock method. Approximately 67.6 million outstanding stock options
were excluded from the calculation of diluted earnings per share for the three
months ended November 30, 2000 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------- --------------------
(in thousands, except per share data) 2000 1999 2000 1999
------------------------------------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net income........................... $ 622,812 $ 384,484 $1,123,489 $ 621,220
========= ========= ========== =========
Weighted average common shares
outstanding......................... 5,584,428 5,717,780 5,594,243 5,719,812
Dilutive effect of employee stock
plans............................... 290,559 294,820 309,686 268,892
--------- --------- ---------- ---------
Diluted weighted average common
shares outstanding.................. 5,874,987 6,012,600 5,903,929 5,988,704
========= ========= ========== =========
Basic earnings per share............. $ 0.11 $ 0.07 $ 0.20 $ 0.11
========= ========= ========== =========
Diluted earnings per share........... $ 0.11 $ 0.06 $ 0.19 $ 0.10
========= ========= ========== =========
</TABLE>
6
<PAGE>
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
3. COMPREHENSIVE INCOME
Comprehensive income includes foreign currency translation gains and losses
and unrealized gains and losses on equity securities that have been reflected
in stockholders' equity instead of net income.
The following table sets forth the components of comprehensive income for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
-------------------- --------------------
(in thousands) 2000 1999 2000 1999
------------------------------------ --------- --------- ---------- --------
<S> <C> <C> <C> <C>
Net income.......................... $ 622,812 $ 384,484 $1,123,489 $621,220
Net unrealized gains (losses) on
equity securities.................. (43,356) 104,806 (46,687) 104,806
Foreign currency translation gains
(losses)........................... (41,267) 22,364 (44,185) 51,539
--------- --------- ---------- --------
Total comprehensive income.......... $ 538,189 $ 511,654 $1,032,617 $777,565
========= ========= ========== ========
</TABLE>
4. STOCK REPURCHASE PROGRAM
The Company's Board of Directors has approved the repurchase of its Common
Stock to reduce the dilutive effect of shares issued under its various
employee stock plans. During the three months ended November 30, 2000,
approximately 43.6 million shares of Common Stock were repurchased for an
aggregate price of approximately $1,425.4 million. In the first six months of
fiscal 2001, the Company repurchased approximately 95.4 million shares of
Common Stock for an aggregate price of approximately $3,420.8 million. As of
November 30, 2000, approximately 66.2 million shares remained available for
repurchase.
During fiscal 1999 and 1998, the Company, as part of its authorized stock
repurchase program, 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, entitled the holder to sell to the Company one share of its Common
Stock at a specified price. The call options entitled the Company to
repurchase Common Stock at a specified price. The eight million put warrants
that were outstanding as of August 31, 2000 expired unexercised during the
second quarter of fiscal 2001. In addition, the Company exercised call options
for four million shares at a price of $6.52 per share, which were included in
the stock repurchases discussed above. As of November 30, 2000, the Company
had no outstanding call options or put warrants.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of previously fixed stock options or awards, and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective as of July 1, 2000, but certain conclusions
in FIN 44 cover specific events that occurred after either December 15, 1998
or January 12, 2000. The Company adopted FIN 44 in the first quarter of fiscal
2001 and there was no material effect on the Company's consolidated financial
position, results of operations or cash flows.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements", providing the staff's views in
applying accounting principles generally accepted in the
7
<PAGE>
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
5. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
United States to certain revenue recognition issues. The Company is required
to adopt SAB No. 101, as amended, no later than the fourth quarter of fiscal
2001. The Company does not expect that the adoption of SAB No. 101 will have a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133, as amended, will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivative instruments
used to hedge will be identified specifically to assets, liabilities,
unrecognized firm commitments or forecasted transactions. The gains or losses
resulting from changes in the fair value of derivative instruments will either
be recognized in current earnings or in other comprehensive income, depending
on the use of the derivative and whether the hedging instrument is effective
or ineffective when hedging changes in fair value or cash flows. The Company
is required to adopt SFAS No. 133, as amended, no later than the first quarter
of fiscal 2002. Although the Company has not fully assessed the implications
of SFAS No. 133, the Company does not believe that the adoption of this
Statement will have a material effect on the Company's consolidated 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. 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 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, 2000. The Company does not track assets by operating
segments. Consequently, it is not practical to show assets by operating
segments.
8
<PAGE>
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
6. SEGMENT REPORTING (continued)
The following table presents a summary of operating segments:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------------ ------------------------
(in thousands) 2000 1999 2000 1999
--------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
License:
Revenues from
unaffiliated
customers(/1/).......... $ 1,106,871 $ 890,024 $ 1,901,703 $ 1,513,892
Distribution expenses.... (492,232) (502,214) (924,068) (923,967)
----------- ----------- ----------- -----------
Distribution
margin(/2/)............. $ 614,639 $ 387,810 $ 977,635 $ 589,925
Support(/3/):
Revenues from
unaffiliated
customers(/1/).......... $ 872,475 $ 720,603 $ 1,711,464 $ 1,387,655
Distribution expenses.... (158,070) (191,358) (313,047) (368,036)
----------- ----------- ----------- -----------
Distribution
margin(/2/)............. $ 714,405 $ 529,245 $ 1,398,417 $ 1,019,619
Education:
Revenues from
unaffiliated
customers(/1/).......... $ 126,502 $ 132,605 $ 227,765 $ 249,721
Distribution expenses.... (71,362) (81,399) (142,686) (161,365)
----------- ----------- ----------- -----------
Distribution
margin(/2/)............. $ 55,140 $ 51,206 $ 85,079 $ 88,356
Consulting:
Revenues from
unaffiliated
customers(/1/).......... $ 553,698 $ 578,651 $ 1,080,489 $ 1,155,132
Distribution expenses.... (427,217) (436,449) (830,362) (898,347)
----------- ----------- ----------- -----------
Distribution
margin(/2/)............. $ 126,481 $ 142,202 $ 250,127 $ 256,785
Totals:
Revenues from
unaffiliated
customers(/1/).......... $ 2,659,546 $ 2,321,883 $ 4,921,421 $ 4,306,400
Distribution expenses.... (1,148,881) (1,211,420) (2,210,163) (2,351,715)
----------- ----------- ----------- -----------
Distribution
margin(/2/)............. $ 1,510,665 $ 1,110,463 $ 2,711,258 $ 1,954,685
=========== =========== =========== ===========
</TABLE>
--------
(/1/) Operating segment revenues differ from the external reporting
classifications due to certain license products which are classified as
services revenues for management reporting purposes.
(/2/) 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.
(/3/) 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.
9
<PAGE>
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
6. SEGMENT REPORTING (continued)
Profit Reconciliation
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ----------------------
(in thousands) 2000 1999 2000 1999
------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total distribution margin for
reportable segments.......... $1,510,665 $1,110,463 $2,711,258 $1,954,685
Product development and
information technology
expenses..................... (354,982) (335,949) (686,441) (651,045)
Marketing and partner program
expenses..................... (116,830) (91,876) (222,857) (185,276)
Corporate and general and
administrative expenses...... (74,200) (87,728) (154,356) (160,005)
Net investment gains (losses)
related to marketable
securities................... (13,468) (5,083) 1,965 (8,423)
Other income, net............. 14,696 1,688 92,555 5,789
---------- ---------- ---------- ----------
Income before provision for
income taxes............... $ 965,881 $ 591,515 $1,742,124 $ 955,725
========== ========== ========== ==========
</TABLE>
7. LEGAL PROCEEDINGS
Refer to Part II, Item 1 for a description of legal proceedings.
10
<PAGE>
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. These forward-looking statements are subject to a number
of 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
its Annual Report on Form 10-K for the fiscal year ended May 31, 2000 and the
Quarterly Reports on Form 10-Q filed by the Company in fiscal 2001.
Results of Operations
Overview
Total revenues increased 15% and 14% for the three and six month periods ended
November 30, 2000 over the corresponding prior year periods, respectively. The
increases were attributable to higher license and support revenues, partially
offset by lower consulting and education services revenues. 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 decreased to 24% and 25% for the three and six month periods ended
November 30, 2000, respectively, from 27% and 28% of total revenues for the
corresponding prior year periods, respectively. Cost of services as a
percentage of total revenues decreased to 26% and 28% for the three and six
month periods ended November 30, 2000, respectively, from 32% and 35% of total
revenues for the corresponding prior year periods, respectively. The decline
in sales and marketing and cost of services expenses as a percentage of total
revenues was primarily the result of increased license revenues and
productivity improvements that favorably affected headcount and headcount
related expenditures. Research and development expenses as a percentage of
total revenues remained fairly constant at 10% for the three and six month
periods ended November 30, 2000, compared to 11% for the respective
corresponding prior year periods. General and administrative expenses as a
percentage of total revenues remained fairly constant at 4% for the three and
six month periods ended November 30, 2000, compared to 5% for the respective
corresponding prior year periods. Overall, operating income as a percentage of
total revenues increased to 36% and 33% for the three and six month periods
ended November 30, 2000, respectively, compared to 25% and 21% for the
respective corresponding prior year periods. The Company anticipates that its
operating margins for the remainder of fiscal 2001 will remain comparable to
the margins experienced during the second quarter of fiscal 2001.
Domestic revenues increased 21% and 18% for the three and six month periods
ended November 30, 2000 over the corresponding prior year periods,
respectively. International revenues increased 8% and 10% for the three and
six month periods ended November 30, 2000 over the corresponding prior year
periods, respectively. International revenues were unfavorably affected during
the first half of fiscal 2001 as a result of the U.S. dollar strengthening
against certain major international currencies. Excluding the effect of
currency rate fluctuations, international revenues grew 21% and 20% for the
three and six month periods ended November 30, 2000, respectively. Excluding
the effect of currency rate fluctuations, total revenues grew 21% and 19% for
the three and six month periods ended November 30, 2000, respectively, as
compared to the reported growth rates of 15% and 14%, respectively.
International revenues represented 49% of total revenues for both the three
and six month periods ended November 30, 2000, as compared to 52% and 51% of
total revenues for the corresponding prior year periods, respectively. The
Company expects that its international operations will continue to provide 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
<PAGE>
Revenues
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
----------------------------- -----------------------------
Percent Percent
(in thousands) 2000 1999 Change 2000 1999 Change
------------------------ ---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Licenses and other...... $1,118,238 $ 902,632 24% $1,925,476 $1,534,813 25%
Services................ 1,541,308 1,419,251 9% 2,995,945 2,771,587 8%
---------- ---------- ---------- ----------
Total revenues........ $2,659,546 $2,321,883 15% $4,921,421 $4,306,400 14%
========== ========== ========== ==========
Percent of Revenues:
Licenses and other...... 42% 39% 39% 36%
Services................ 58% 61% 61% 64%
</TABLE>
Licenses and Other Revenues. License revenues represent fees earned for
granting customers 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% and 3% of total licenses and other revenues for the three and six month
periods ended November 30, 2000, respectively, as compared to 3% and 4% of
total licenses and other revenues for the corresponding prior year periods,
respectively. License revenues, excluding documentation and other
miscellaneous revenues, increased 25% and 26% for the three and six month
periods ended November 30, 2000 over the corresponding prior year periods,
respectively. Systems software license revenues, which include server and
development tools revenues, increased 15% and 19% for the three and six month
periods ended November 30, 2000 over the corresponding prior year periods,
respectively. Business applications revenues increased 66% and 57% for the
three and six month periods ended November 30, 2000 over the corresponding
prior year periods, respectively. The increase in license revenues in the
second quarter and first half of fiscal 2001 was due to increased demand for
the Company's systems and business application products.
As a percentage of revenues, licenses and other revenues represented 42% and
39% of total revenues for the three and six month periods ended November 30,
2000, respectively, as compared to 39% and 36% of total revenues for the
corresponding prior year periods, respectively. The increase in licenses and
other revenues as a percentage of total revenues during the interim periods of
fiscal 2001 was primarily caused by a slowdown in the consulting and education
services revenue growth rates.
Services Revenues. Services revenues consist of support, consulting and
education services revenues which comprised 57%, 36% and 7% of total services
revenues, respectively, for the three and six month periods ended November 30,
2000. Support revenues increased 21% and 23% for the three and six month
periods ended November 30, 2000 over the corresponding prior year periods,
respectively, reflecting an increase in the overall customer installed base.
The support revenue growth rate will continue to be affected by the overall
license revenue growth rates. Consulting revenues decreased 4% and 7% for the
three and six month periods ended November 30, 2000 from the corresponding
prior year periods, respectively. The decline in the consulting services
revenue growth rates was primarily a result of the following: i) a slowdown in
the business applications market during the first part of fiscal 2000, ii)
part of the business generated in fiscal 2000 related to Year 2000 upgrades,
iii) a push towards a partner model, leveraging third party consulting firms
who provide consulting services to the Company's customers, iv) a focus on
higher margin business at the expense of revenue growth, and v) shorter
implementation engagements for the Company's newer generation of products.
Education revenues decreased 7% and 12% for the three and six month periods
ended November 30, 2000 from the corresponding prior year periods,
respectively. The decrease in education revenues in the second quarter and
first half of fiscal 2001 was due in part to lower business applications
growth experienced during the first part of fiscal 2000. The Company believes
that the consulting and education revenue growth rates will gradually improve
over the remainder of fiscal 2001 due to increased demand for the Company's
business application products experienced in the last several quarters.
12
<PAGE>
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
----------------------------- -----------------------------
Percent Percent
(in thousands) 2000 1999 Change 2000 1999 Change
------------------------ ---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing..... $ 640,865 $ 631,433 1% $1,213,829 $1,169,859 4%
Cost of services........ 694,998 753,170 (8%) 1,368,876 1,509,920 (9%)
Research and
development............ 266,280 248,160 7% 517,307 484,101 7%
General and
administrative......... 111,402 113,055 (1%) 217,367 220,592 (1%)
---------- ---------- ---------- ----------
Total operating
expenses............. $1,713,545 $1,745,818 (2%) $3,317,379 $3,384,472 (2%)
========== ========== ========== ==========
Percent of Revenues:
Sales and marketing..... 24% 27% 25% 28%
Cost of services........ 26% 32% 28% 35%
Research and
development............ 10% 11% 10% 11%
General and
administrative......... 4% 5% 4% 5%
---------- ---------- ---------- ----------
Total operating
expenses............... 64% 75% 67% 79%
========== ========== ========== ==========
</TABLE>
Total Operating Expenses. Total operating expenses decreased 2% for the three
and six month periods ended November 30, 2000 from the corresponding prior
year periods, respectively. Operating expenses were favorably affected during
the first half of fiscal 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 increased 3% and 2% for
the three and six month periods ended November 30, 2000 over the corresponding
prior year periods, respectively.
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 1% and 4%
for the three and six month periods ended November 30, 2000 over the
corresponding prior year periods, respectively. As a percentage of licenses
and other revenues, sales and marketing expenses were 57% and 63% for the
three and six month periods ended November 30, 2000, respectively, compared to
70% and 76% for the corresponding prior year periods, respectively. The
decrease in sales and marketing expenses as a percentage of licenses and other
revenues was due primarily to increased revenues and productivity improvements
which favorably affected headcount and headcount related expenditures. The
Company anticipates sales and marketing expenses to increase slightly in
absolute terms for the remainder of fiscal 2001 as compared to the
corresponding prior year periods due to the need to add additional sales
capacity as a result of an increased demand for its products.
Cost of Services. The cost of providing services consists largely of
consulting, education and support personnel expenses. Cost of services
expenses decreased 8% and 9% for the three and six month periods ended
November 30, 2000 from the corresponding prior year periods, respectively. As
a percentage of services revenues, cost of services was 45% and 46% for the
three and six month periods ended November 30, 2000, respectively, compared to
53% and 54% 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. The decrease in
cost of services in absolute terms was due to a combination of the favorable
effect of currency rate fluctuations as well as increased productivity
efficiencies and controls over headcount and headcount related expenditures in
the support and consulting lines of business. The Company plans to increase
headcount in the consulting line of business for the remainder of fiscal 2001
as a result of increased demand for its implementation services.
13
<PAGE>
Research and Development Expenses. Research and development expenses increased
7% for the three and six month periods ended November 30, 2000 over the
corresponding prior year periods, respectively. As a percentage of total
revenues, research and development expenses remained relatively constant at
10% for both the second quarter and first half of fiscal 2001, as compared to
11% for each of the corresponding prior year periods. The Company believes
that research and development expenditures are essential to maintaining its
competitive position and expect these costs to continue to constitute a
significant percentage of revenues.
General and Administrative Expenses. General and administrative expenses
decreased 1% for the three and six month periods ended November 30, 2000 from
each of the corresponding prior year periods. As a percentage of revenues,
general and administrative expenses remained relatively constant at 4% for
both the second quarter and first half of fiscal 2001, as compared to 5% for
each of the corresponding prior year periods.
Net Investment Gains (Losses) Related To Marketable Securities
Net investment losses related to marketable securities for the three month
period ended November 30, 2000 was due to the Company's equity share in the
results of non-consolidated subsidiaries, partially offset by gains realized
from sales of marketable securities. Net investment gains related to
marketable securities for the six month period ended November 30, 2000 was due
to gains realized from sales of marketable securities, partially offset by the
Company's equity share in the results of non-consolidated subsidiaries.
Net investment losses related to marketable securities for the three and six
month periods ended November 30, 1999 were entirely due to the Company's
equity share in the results of non-consolidated subsidiaries as the Company
did not sell any marketable securities during these interim periods.
Other Income, Net
Other income, net consists primarily of interest income, interest expense,
foreign currency exchange gains and losses, and the minority interest share in
the net profits of Oracle Japan. Other income, net for the three and six month
periods ended November 30, 2000 increased 62% and 222% over the corresponding
prior year periods, respectively. The increases were primarily due to higher
interest income as a result of higher average cash investment balances,
partially offset by an increase in the minority interest share in the net
profits of Oracle Japan. The higher average cash investment balances were
primarily related to the sale of shares in Oracle Japan in April 2000,
partially offset by share repurchases during the first six months of fiscal
2001.
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
35.5% for the three and six month periods ended November 30, 2000, as compared
to 35% for each of the corresponding prior year periods.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Six Months Ended
November 30,
---------------------------------
Percent
(in thousands) 2000 1999 Change
-------------------------------------------- ----------- ----------- -------
<S> <C> <C> <C>
Working capital............................. $ 3,655,839 $ 1,929,134 90%
Cash and cash investments................... $ 4,386,165 $ 2,327,231 88%
Cash provided by (used for) operating
activities................................. $ (265,836) $ 755,217 (135%)
Cash provided by (used for) investing
activities................................. $ 122,411 $ (138,265) 189%
Cash used for financing activities.......... $(3,079,160) $(1,127,723) 173%
</TABLE>
14
<PAGE>
Working capital as of November 30, 2000 was 90% higher than at the end of the
corresponding prior year period, primarily attributable to higher cash and
cash investment balances. The increase in cash and cash investments was
primarily due to proceeds from the sale of stock in Oracle Japan and Liberate
Technologies during the last six months of fiscal 2000, partially offset by
stock repurchases since November 30, 1999.
The negative cash flows from operations incurred during the first six months
of fiscal 2001 primarily reflect the payment of taxes related to the gain on
sale of Oracle Japan stock that occurred in the fourth quarter of fiscal 2000,
partially offset by improved profitability and a decrease in trade
receivables. The positive cash flows generated from operations during the
first six months of fiscal 2000 primarily were attributable to improved
profitability and a decrease in trade receivables.
The positive cash flows generated from investing activities during the first
six months of fiscal 2001 primarily reflect increased maturities of cash
investments, partially offset by investments in capital expenditures. The
negative cash flows from investing activities incurred during the first six
months of fiscal 2000 were due primarily to higher levels of cash investment
purchases and investments in capital expenditures, partially offset by
increased maturities of cash investments. 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 for the six
month periods ended November 30, 2000 and 1999, primarily reflecting Common
Stock repurchases. The Company's Board of Directors has approved the
cumulative repurchase of up to 1,096.0 million shares of its Common Stock on
the open market to reduce the dilutive effect of its stock plans. Pursuant to
this repurchase program, the Company repurchased 95.4 million shares for
approximately $3,420.8 million during the first six months of fiscal 2001 and
154.8 million shares for approximately $1,371.8 million during the first six
months of fiscal 2000. As of November 30, 2000, the Company has repurchased,
since inception, a total of approximately 1,029.8 million shares for an
aggregate amount of approximately $11,146.3 million. The Company has primarily
used cash flows from operations and investing activities to fund its
repurchases.
During the third quarter of fiscal 1997, the Company issued $150.0 million in
6.72% Senior Notes due in the year 2004 and $150.0 million in 6.91% Senior
Notes due in the year 2007. The Senior Notes are unsecured general obligations
that rank on parity with all of its other unsecured and unsubordinated
indebtedness that may be outstanding. As of November 30, 2000, the Company
also had other outstanding debt of approximately $3.4 million, primarily in
the form of other notes payable and capital leases.
The Company believes that its current cash and cash equivalents, short-term
cash investments and cash 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 major 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 may result in decreased revenues or 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 the Customer Relationship
Management ("CRM") and Internet procurement areas of its applications
business, as well as to the other products in its e-Business suite. 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.
15
<PAGE>
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 91-1. SOP 97-2 was effective for the
Company's fiscal year beginning June 1, 1998, as amended by SOP 98-4 and SOP
98-9, and provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. In December 1999,
the SEC issued SAB No. 101, "Revenue Recognition in Financial Statements",
which provides further revenue recognition guidance. 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. 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, 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, 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, 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
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.
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 changed its pricing model within the past
year 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 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.
16
<PAGE>
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 intense due to low overall unemployment rates, the
expansion in information technology spending, and the ability of private
companies to 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 its continued growth.
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 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 six months of fiscal 2001, particularly in
Europe, and will continue to do so throughout fiscal 2001 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.
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
17
<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 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.
Management of Growth. The Company has a history of rapid growth. However, the
Company has at times experienced slowing growth rates in a number of areas,
including consulting and education services. The Company's future operating
results will depend on its ability to manage growth, continuously hire and
retain significant numbers of qualified employees, 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. 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, financial condition, or cash flows.
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 assurances that the
Company will be able to provide a product offering that will satisfy new
customer demands in these areas. In addition, standards for network protocols,
as well as other industry adopted and de facto standards for the Internet, are
evolving rapidly. There can be no assurances 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 on-
line auctions, or exchanges, for a number of business procurement needs,
Internet/electronic commerce, on-line business services, wireless initiatives
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.
Sales Forecasts. The Company uses a "pipeline" system, a common industry
practice, to forecast sales and trends in its 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 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, a 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.
18
<PAGE>
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
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 fiscal year ending May 31, 2001 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.
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 that may not be offered or
19
<PAGE>
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 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
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 November 30, 2000.
Table of Investment Securities:
<TABLE>
<CAPTION>
Weighted
Principal Average
(in thousands) Amount Interest Rate
------------------------------------------------------- ---------- -------------
<S> <C> <C>
Cash and cash equivalents.............................. $4,165,690 5.29%
Short term investment (0-1 year)....................... 190,475 5.71%
Long term investment (1-2 years)....................... 30,000 5.67%
----------
Total cash and cash investments........................ $4,386,165
==========
</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 foreign currency
transactions and all outstanding forward contracts are marked-to-market at the
end of the period with unrealized gains and losses included in other income
(expense). As the foreign currency transactions are realized as cash flows
against the maturing forward contracts, the realized gains and losses are
recorded in net income as a component of other income (expense). The Company's
20
<PAGE>
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, 2000 was immaterial to the Company's consolidated
financial statements. The Company also hedges the net assets of certain of its
international subsidiaries.
The net gains on equity hedges are recorded as a component of accumulated
other comprehensive income (loss) in stockholders' equity. The Company's
outstanding forward contracts and equity hedges as of November 30, 2000 are
presented in the tables below.
The tables below 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 November 30, 2000.
Table of Forward Contracts:
<TABLE>
<CAPTION>
Notional
Notional Weighted Average
(in thousands) Amount Exchange Rate
------------------------------------------------------ -------- ----------------
<S> <C> <C>
Functional Currency:
Australian Dollar................................... $ 4,081 0.52
Canadian Dollar..................................... 41,150 1.53
Danish Krone........................................ 7,836 8.70
Euro................................................ 73,659 0.86
Japanese Yen........................................ 2,625 108.54
Korean Won.......................................... 19,638 1,196.63
New Zealand Dollar.................................. 933 0.41
Norwegian Krone..................................... 3,540 9.41
Singapore Dollar.................................... 15,114 1.74
Swedish Krona....................................... 22,561 10.11
Swiss Franc......................................... 2,506 1.76
Thai Baht........................................... 10,624 43.30
UK Pound............................................ 124,977 1.42
--------
Total............................................. $329,244
========
</TABLE>
Table of Equity Hedges:
<TABLE>
<CAPTION>
Notional
Notional Weighted Average
(in thousands) Amount Exchange Rate
------------------------------------------------------ -------- ----------------
<S> <C> <C>
Functional Currency:
Japanese Yen........................................ $15,204 105.24
UK Pound............................................ 16,966 1.41
-------
Total............................................. $32,170
=======
</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,
entitled the holder to sell one share of Common Stock to the Company at a
specified price. Similarly, the call options entitled the Company to buy, on a
specified day, one share of the Company's Common Stock at a specified price.
The eight million put warrants that were outstanding as of August 31, 2000
expired unexercised during the second quarter of fiscal 2001. In addition, the
four million call options outstanding as of August 31, 2000 were
21
<PAGE>
exercised during the second quarter of fiscal 2001 at a price of $6.52 per
share for an aggregate price of approximately $26.1 million. As of November
30, 2000, the Company had no outstanding call options or put warrants.
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 former President and Chief Operating Officer on and after December
18, 1997. The class actions were 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. Discovery is ongoing in these actions. The
Company believes that it has meritorious defenses to these actions and is
vigorously defending 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 current and former 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 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 has filed a motion
requesting the Tax Court to certify the controlling legal issue in its case
for immediate appeal to the Ninth Circuit Court of Appeals, and the
Commissioner of Internal Revenue has filed a motion seeking to stay all
proceedings in the Company's case pending a final adjudication of the
Microsoft action. 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.
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 legal matters will have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
22
<PAGE>
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 16, 2000.
Proposal No. 1: The stockholders elected each of the following persons as a
director to hold office until the 2001 Annual Meeting of Stockholders or until
earlier retirement, resignation or removal.
<TABLE>
<CAPTION>
Director's Name Votes For Votes Withheld
--------------------------------------------------- ------------- --------------
<S> <C> <C>
Lawrence J. Ellison................................ 2,464,812,097 18,248,203
Donald L. Lucas.................................... 2,464,559,460 18,500,840
Michael J. Boskin.................................. 2,464,884,562 18,175,738
Jeffrey O. Henley.................................. 2,465,166,843 17,893,457
Jack F. Kemp....................................... 2,464,014,359 19,045,941
Jeffrey Berg....................................... 2,464,671,863 18,388,437
Richard McGinn..................................... 2,464,587,098 18,473,202
Kay Koplovitz...................................... 2,464,664,162 18,396,138
</TABLE>
Proposal No. 2: The stockholders approved the adoption of the Company's 2000
Long Term Equity Incentive Plan (with 1,665,940,658 affirmative votes,
808,002,018 negative votes, 9,117,624 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,
2001 (with 2,473,390,110 affirmative votes, 3,251,346 negative votes, and
6,418,844 votes abstaining).
Proposal No. 4: The proponent of this proposal, "U.S. Business Principles for
Human Rights of Workers in China", failed to timely present such proposal at
the Annual Meeting and, consequently, no official vote on this matter was
taken.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
10.11 2000 Long-Term Equity Incentive Plan, as approved on October 16, 2000
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
November 30, 2000.
23
<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: January 16, 2001 /s/ Jeffrey O. Henley
By:
----------------------------------
Jeffrey O. Henley
Executive Vice President and
Chief Financial Officer
Dated: January 16, 2001 /s/ Jennifer L. Minton
By:
----------------------------------
Jennifer L. Minton
Senior Vice President and
Corporate Controller
24
